Loans And The Allowance For Loan Losses | 4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES Loan Portfolio Composition The following table presents selected information on the composition of the Company’s loan portfolio as of the dates indicated: March 31, 2019 December 31, 2018 Mortgage loans on real estate: (in thousands) Residential mortgages $ 160,999 $ 158,404 Commercial and multi-family 608,384 592,507 Construction-Residential 194 113 Construction-Commercial 101,468 105,196 Home equities 69,777 70,546 Total real estate loans 940,822 926,766 Commercial and industrial loans 241,509 226,057 Consumer and other loans 1,438 1,520 Net deferred loan origination costs 1,660 1,587 Total gross loans 1,185,429 1,155,930 Allowance for loan losses (15,207) (14,784) Loans, net $ 1,170,222 $ 1,141,146 The Bank sells certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages. In the three month period ended March 31, 2019, the Bank sold mortgages to FNMA totaling $ 2.0 million. The Bank did no t sell any mortgages to FNMA in the three month period ended March 31, 2018. At March 31, 2019 and December 31, 2018, the Bank had a loan servicing portfolio principal balance of $73 million upon which it earned servicing fees. The value of the mortgage servicing rights for that portfolio was $0.6 million at March 31, 2019 and December 31, 2018. No loans were held for sale at March 31, 2019. At December 31, 2018 there were $ 0.4 million in residential mortgages held for sale. The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud. As noted in Note 1, these financial statements should be read in conjunction with the Audited Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018. Disclosures related to the basis for accounting for loans, the method for recognizing interest income on loans, the policy for placing loans on nonaccrual status and the subsequent recording of payments and resuming accrual of interest, the policy for determining past due status, a description of the Company’s accounting policies and methodology used to estimate the allowance for loan losses, the policy for charging-off loans, the accounting policies for impaired loans, and more descriptive information on the Company’s credit risk ratings are all contained in the Notes to the Audited Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Unless otherwise noted in this Form 10-Q, the policies and methodology described in the Annual Report for the year ended December 31, 2018 are consistent with those utilized by the Company in the three month period ended March 31 , 2019. Credit Quality Indicators The Bank monitors the credit risk in its loan portfolio by reviewing certain credit quality indicators (“CQI”). The primary CQI for its commercial mortgage and commercial and industrial (“C&I”) portfolios is the individual loan’s credit risk rating. The following list provides a description of the credit risk ratings that are used internally by the Bank when assessing the adequacy of its allowance for loan losses: · Acceptable or better · Watch · Special Mention · Substandard · Doubtful · Loss The Company’s consumer loans, including residential mortgages and home equities, are not individually risk rated or reviewed in the Company’s loan review process. Unlike commercial customers, consumer loan customers are not required to provide the Company with updated financial information. Consumer loans also carry smaller balances. Given the lack of updated information after the initial underwriting of the loan and small size of individual loans, the Company uses delinquency status as the primary credit quality indicator for consumer loans. However, once a consumer loan is identified as impaired, it is individually evaluated for impairment. The following tables provide data, at the class level, of credit quality indicators of certain loans for the dates specified: March 31, 2019 (in thousands) Corporate Credit Exposure – By Credit Rating Commercial Real Estate Construction Commercial and Multi-Family Mortgages Total Commercial Real Estate Commercial and Industrial Acceptable or better $ 58,782 $ 459,925 $ 518,707 $ 153,604 Watch 29,529 126,592 156,121 74,762 Special Mention 4,330 15,778 20,108 4,830 Substandard 8,827 6,089 14,916 8,313 Doubtful/Loss - - - - Total $ 101,468 $ 608,384 $ 709,852 $ 241,509 December 31, 2018 (in thousands) Corporate Credit Exposure – By Credit Rating Commercial Real Estate Construction Commercial and Multi-Family Mortgages Total Commercial Real Estate Commercial and Industrial Acceptable or better $ 65,932 $ 466,294 $ 532,226 $ 155,687 Watch 30,628 109,409 140,037 57,366 Special Mention - 10,583 10,583 4,105 Substandard 8,636 6,221 14,857 8,870 Doubtful/Loss - - - 29 Total $ 105,196 $ 592,507 $ 697,703 $ 226,057 Past Due Loans The following tables provide an analysis of the age of the recorded investment in loans that are past due as of the dates indicated: March 31, 2019 (in thousands) Current Non-accruing Total Balance 30-59 days 60-89 days 90+ days Loans Balance Commercial and industrial $ 237,850 $ 1,316 $ - $ - $ 2,343 $ 241,509 Residential real estate: Residential 158,734 609 - - 1,656 160,999 Construction 194 - - - - 194 Commercial real estate: Commercial 600,585 1,710 - - 6,089 608,384 Construction 83,095 9,546 - - 8,827 101,468 Home equities 68,219 461 25 - 1,072 69,777 Consumer and other 1,425 13 - - - 1,438 Total Loans $ 1,150,102 $ 13,655 $ 25 $ - $ 19,987 $ 1,183,769 Note: Loan balances do not in clude $ 1.7 million in net deferred loan origination costs as of March 31 , 2019. December 31, 2018 (in thousands) Current Non-accruing Total Balance 30-59 days 60-89 days 90+ days Loans Balance Commercial and industrial $ 217,625 $ 6,173 $ 565 $ - $ 1,694 $ 226,057 Residential real estate: Residential 154,063 2,546 332 - 1,463 158,404 Construction 113 - - - - 113 Commercial real estate: Commercial 582,016 4,546 - - 5,945 592,507 Construction 95,204 1,027 329 - 8,636 105,196 Home equities 69,094 123 76 - 1,253 70,546 Consumer and other 1,514 5 1 - - 1,520 Total Loans $ 1,119,629 $ 14,420 $ 1,303 $ - $ 18,991 $ 1,154,343 Note: Loan balances do not include $ 1.6 m illion in net deferred loan origination costs as of December 31, 2018. Allowance for loan losses The following tables present the activity in the allowance for loan losses according to portfolio segment for the three month periods ended March 31, 2019 and 2018: March 31, 2019 (in thousands) Commercial and Industrial Commercial Real Estate Mortgages* Consumer and Other Residential Mortgages* Home Equities Total Allowance for loan losses: Beginning balance $ 4,368 $ 8,844 $ 106 $ 1,121 $ 345 $ 14,784 Charge-offs (121) - (23) - - (144) Recoveries 22 - 7 - - 29 Provision (Credit) 485 205 21 (168) (5) 538 Ending balance $ 4,754 $ 9,049 $ 111 $ 953 $ 340 $ 15,207 Allowance for loan losses: Ending balance: Individually evaluated for impairment $ 499 $ 579 $ 22 $ 70 $ - $ 1,170 Collectively evaluated for impairment 4,255 8,470 89 883 340 14,037 Total $ 4,754 $ 9,049 $ 111 $ 953 $ 340 $ 15,207 Loans: Ending balance: Individually evaluated for impairment $ 4,293 $ 15,536 $ 22 $ 2,963 $ 1,661 $ 24,475 Collectively evaluated for impairment 237,216 694,316 1,416 158,230 68,116 1,159,294 Total $ 241,509 $ 709,852 $ 1,438 $ 161,193 $ 69,777 $ 1,183,769 * Includes construction loans Note: Loan balances do not include $ 1. 7 million in net deferred loan origination costs as of March 31, 2019 . March 31, 2018 (in thousands) Commercial and Industrial Commercial Real Estate Mortgages* Consumer and Other Residential Mortgages* Home Equities Total Allowance for loan losses: Beginning balance $ 5,204 $ 7,409 $ 109 $ 950 $ 347 $ 14,019 Charge-offs (67) - (34) - - (101) Recoveries 6 - 1 - 1 8 Provision (Credit) (28) 736 20 57 (18) 767 Ending balance $ 5,115 $ 8,145 $ 96 $ 1,007 $ 330 $ 14,693 Allowance for loan losses: Ending balance: Individually evaluated for impairment $ 292 $ 567 $ 24 $ 36 $ - $ 919 Collectively evaluated for impairment 4,823 7,578 72 971 330 13,774 Total $ 5,115 $ 8,145 $ 96 $ 1,007 $ 330 $ 14,693 Loans: Ending balance: Individually evaluated for impairment $ 2,485 $ 10,282 $ 24 $ 2,765 $ 1,960 $ 17,516 Collectively evaluated for impairment 242,773 641,284 1,541 138,146 67,422 1,091,166 Total $ 245,258 $ 651,566 $ 1,565 $ 140,911 $ 69,382 $ 1,108,682 * Includes construction loans Note: Loan balances do not include $ 1.3 million in net deferred loan origination costs as of March 31, 2018. Impaired Loans The following tables provide data, at the class level, for impaired loans as of the dates indicated: At March 31, 2019 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Foregone Interest Income Recognized With no related allowance recorded: (in thousands) Commercial and industrial $ 3,372 $ 3,581 $ - $ 3,545 $ 17 $ 36 Residential real estate: Residential 2,419 2,649 - 2,485 15 16 Construction - - - - - - Commercial real estate: Commercial 6,614 7,043 - 6,858 67 11 Construction 424 424 - 462 9 3 Home equities 1,661 1,832 - 1,739 18 9 Consumer and other - - - - - - Total impaired loans $ 14,490 $ 15,529 $ - $ 15,089 $ 126 $ 75 At March 31, 2019 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Foregone Interest Income Recognized With a related allowance recorded: (in thousands) Commercial and industrial $ 921 $ 962 $ 499 $ 982 $ 16 $ 3 Residential real estate: Residential 544 548 70 547 7 - Construction - - - - - - Commercial real estate: Commercial - - - - - - Construction 8,498 8,975 579 8,720 133 - Home equities - - - - - - Consumer and other 22 26 22 23 - - Total impaired loans $ 9,985 $ 10,511 $ 1,170 $ 10,272 $ 156 $ 3 At March 31, 2019 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Foregone Interest Income Recognized Total: (in thousands) Commercial and industrial $ 4,293 $ 4,543 $ 499 $ 4,527 $ 33 $ 39 Residential real estate: Residential 2,963 3,197 70 3,032 22 16 Construction - - - - - - Commercial real estate: Commercial 6,614 7,043 - 6,858 67 11 Construction 8,922 9,399 579 9,182 142 3 Home equities 1,661 1,832 - 1,739 18 9 Consumer and other 22 26 22 23 - - Total impaired loans $ 24,475 $ 26,040 $ 1,170 $ 25,361 $ 282 $ 78 At December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Foregone Interest Income Recognized With no related allowance recorded: (in thousands) Commercial and industrial $ 1,633 $ 2,611 $ - $ 1,785 $ 116 $ 65 Residential real estate: Residential 2,289 2,483 - 2,337 45 69 Construction - - - - - - Commercial real estate: Commercial 6,538 6,914 - 6,733 220 115 Construction 116 116 - 143 - 12 Home equities 1,887 2,058 - 1,952 71 43 Consumer and other - - - - - - Total impaired loans $ 12,463 $ 14,182 $ - $ 12,950 $ 452 $ 304 At December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Foregone Interest Income Recognized With a related allowance recorded: (in thousands) Commercial and industrial $ 2,068 $ 2,095 $ 249 $ 2,098 $ 17 $ 125 Residential real estate: Residential 525 556 85 520 22 3 Construction - - - - - - Commercial real estate: Commercial - - - - - - Construction 8,636 8,975 716 8,793 379 113 Home equities - - - - - - Consumer and other 23 27 23 23 - 2 Total impaired loans $ 11,252 $ 11,653 $ 1,073 $ 11,434 $ 418 $ 243 At December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Foregone Interest Income Recognized Total: (in thousands) Commercial and industrial $ 3,701 $ 4,706 $ 249 $ 3,883 $ 133 $ 190 Residential real estate: Residential 2,814 3,039 85 2,857 67 72 Construction - - - - - - Commercial real estate: Commercial 6,538 6,914 - 6,733 220 115 Construction 8,752 9,091 716 8,936 379 125 Home equities 1,887 2,058 - 1,952 71 43 Consumer and other 23 27 23 23 - 2 Total impaired loans $ 23,715 $ 25,835 $ 1,073 $ 24,384 $ 870 $ 547 Troubled debt restructurings The following tables summarize the loans that were classified as troubled debt restructurings as of the dates indicated: March 31, 2019 (in thousands) Total Nonaccruing Accruing Related Allowance Commercial and industrial $ 2,181 $ 231 $ 1,950 $ 81 Residential real estate: Residential 1,585 278 1,307 - Construction - - - - Commercial real estate: Commercial and multi-family 4,045 3,520 525 - Construction 8,593 8,498 95 578 Home equities 817 228 589 - Consumer and other 22 - 22 22 Total TDR loans $ 17,243 $ 12,755 $ 4,488 $ 681 December 31, 2018 (in thousands) Total Nonaccruing Accruing Related Allowance Commercial and industrial $ 2,282 $ 275 $ 2,007 $ 154 Residential real estate: Residential 1,617 266 1,351 14 Construction - - - - Commercial real estate: Commercial and multi-family 4,164 3,571 593 - Construction 8,753 8,637 116 716 Home equities 756 122 634 - Consumer and other 23 - 23 23 Total TDR loans $ 17,595 $ 12,871 $ 4,724 $ 907 Any TDR that is placed on non-accrual is not reverted back to accruing status until the borrower makes timely payments as contracted for at least six months and future collection under the revised terms is probable. All of the Company’s restructurings were allowed in an effort to maximize its ability to collect on loans where borrowers were experiencing financial difficulty. The reserve for a TDR is based upon the present value of the future expected cash flows discounted at the loan’s original effective interest rate or upon the fair value of the collateral less costs to sell, if the loan is deemed collateral dependent. This reserve methodology is used because all TDR loans are considered impaired. As of March 31, 2019, there were no commitments to lend additional funds to debtors owing on loans whose terms have been modified in TDRs. The Company’s TDRs have various agreements that involve deferral of principal payments, or interest-only payments, for a period (usually 12 months or less) to allow the borrower time to improve cash flow or sell the property. Other common concessions leading to the designation of a TDR are lines of credit that are termed-out and/or extensions of maturities at rates that are less than the prevailing market rates given the risk profile of the borrower. The following tables show the data for TDR activity by the type of concession granted to the borrower for the three month periods ended March 31 , 2019 and 2018: Three months ended March 31, 2019 Three months ended March 31, 2018 (Recorded Investment in thousands) (Recorded Investment in thousands) Troubled Debt Restructurings by Type of Concession Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Commercial and Industrial - $ - $ - - $ - $ - Residential Real Estate & Construction - - - - - - Commercial Real Estate & Construction: Extension of maturity - - - 1 181 181 Home Equities: - - - - - Extension of maturity and interest rate reduction 1 109 109 - - - Consumer and other loans - - - - - - The general practice of the Bank is to work with borrowers so that they are able to repay their loan in full. If a borrower continues to be delinquent or cannot meet the terms of a TDR and the loan is determined to be uncollectible, the loan will be charged-off to its collateral value. A loan is considered in default when the loan is 90 days past due. Loans which were classified as TDRs during the previous 12 months which defaulted during the three month periods ended March 31, 2019 and 2018 were not material. |