Loans Receivable and Allowance for Loan Losses

The composition of total loans receivable at December 31, 2019 and 2018 was as follows:



	At December 31, 2019		At December 31, 2018
	(In thousands)
Residential mortgage:
One-to-four family	$	130,966	$	143,391
Home equity	22,853		24,365
	153,819		167,756
Commercial and multi-family real estate	227,441		212,606
Construction	47,635		29,628
Commercial and industrial - Secured	63,462		60,426
Commercial and industrial - Unsecured	37,600		48,176
	376,138		350,836
Consumer:	432		540
Total loans receivable	530,389		519,132
Less:
Loans in process	16,109		10,677
Deferred loan fees	536		501
Allowance for loan losses	5,722		5,655
Total adjustments	22,367		16,833
Loans receivable, net	$	508,022	$	502,299

Allowance for Loan Losses

The Company's loan portfolio is comprised of the following segments: residential mortgage, commercial real estate, construction, commercial and industrial and consumer. Some segments of the Company's loan receivable portfolio are further disaggregated into classes which allow management to more accurately monitor risk and performance. Accordingly, the methodology and allowance calculation includes the segmentation of the total loan portfolio.

The residential mortgage loan segment is disaggregated into two classes: one-to-four family loans, which are primarily first liens, and home equity loans, which consist of first and second liens. The commercial real estate loan segment includes owner and non-owner occupied loans which have medium risk based on historical experience with these types of loans. The construction loan segment is further disaggregated into two classes: one-to-four family owner-occupied, which includes land loans, whereby the owner is known and there is less risk, and other, whereby the property is generally under development and tends to have more risk than the one-to-four family owner-occupied loans. The commercial and industrial loan segment consists of loans made for the purpose of financing the activities of commercial customers. The commercial and industrial loans carry a mix of loans secured by real estate and unsecured lines of credit some of which are for high net worth individuals. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments or principal or interest when due according to the contractual terms of the loan agreement. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these classes of loans, adjusted for qualitative factors. These qualitative risk factors include:


1.	Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.


2.	National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.


3.	Nature and volume of the portfolio and terms of loans.


4.	Experience, ability, and depth of lending management and staff.


5.	Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications.


6.	Quality of the Company's loan review system, and the degree of oversight by the Company's Board of Directors.


7.	Existence and effect of any concentrations of credit and changes in the level of such concentrations.


8.	Effect of external factors, such as competition and legal and regulatory requirements.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation.

Although management seeks to avoid intentionally creating an unallocated component, one will exist at times due to the dynamic interplay of balances, qualitative factors and other items that could impact management's estimate of probable losses. The unallocated component of the allowances reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The following tables provide an analysis of the allowance for loan losses and the loan receivable balances, by the portfolio segment segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2019 and 2018:



	Year Ended December 31, 2019
(in thousands)	Residential Mortgage			Commercial and Multi-Family Real Estate		Construction		Commercial and Industrial			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning	$	2,115		$	2,187	$	222	$	1,128		$	3		$	—	$	5,655
Provisions	(438		)	425		211		(199		)	1			—		—
Loans charged-off	—			—		—		—			(4		)	—		(4		)
Recoveries	69			—		—		—			2			—		71
Balance, ending	$	1,746		$	2,612	$	433	$	929		$	2		$	—	$	5,722
Period-end allowance allocated to:
Loans individually evaluated for impairment	$	234		$	74	$	—	$	—		$	—		$	—	$	308
Loans collectively evaluated for impairment	1,512			2,538		433		929			2			—		$	5,414
Ending balance	$	1,746		$	2,612	$	433	$	929		$	2		$	—	$	5,722
Period-end loan balances evaluated for:
Loans individually evaluated for impairment	$	10,199		$	2,337	$	—	$	24		$	—		$	—	$	12,560
Loans collectively evaluated for impairment	143,570			224,760		31,465		100,957			432			—		501,184
Ending balance	$	153,769		$	227,097	$	31,465	$	100,981		$	432		$	—	$	513,744



	Year Ended December 31, 2018
(in thousands)	Residential Mortgage		Commercial and Multi-Family Real Estate			Construction			Commercial and Industrial		Consumer			Unallocated			Total
Allowance for loan losses:
Balance, beginning	$	1,852	$	2,267		$	302		$	710	$	5		$	278		$	5,414
Provisions	255		(80		)	(80		)	418		5			(278		)	$	240
Loans charged-off	—		—			—			—		(8		)	—			$	(8	)
Recoveries	8		—			—			—		1			—			$	9
Balance, ending	$	2,115	$	2,187		$	222		$	1,128	$	3		$	—		$	5,655
Period-end allowance allocated to:
Loans individually evaluated for impairment	$	326	$	69		$	—		$	20	$	—		$	—		$	415
Loans collectively evaluated for impairment	1,789		2,118			222			1,108		3			—			5,240
Ending balance	$	2,115	$	2,187		$	222		$	1,128	$	3		$	—		$	5,655
Period-end loan balances evaluated for:
Loans individually evaluated for impairment	$	11,960	$	2,411		$	—		$	243	$	—		$	—		$	14,614
Loans collectively evaluated for impairment	155,746		209,879			18,905			108,270		540			—			493,340
Ending balance	$	167,706	$	212,290		$	18,905		$	108,513	$	540		$	—		$	507,954

Nonaccrual and Past Due Loans

For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or when management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. Certain loans may remain on accrual status if they are in the process of collection and are either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management's judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

The following table represents the classes of the loans receivable portfolio summarized by aging categories of performing loans and nonaccrual loans as of December 31, 2019 and 2018:



As of December 31, 2019	30-59 Days Past Due and Still Accruing		60-89 Days Past Due and Still Accruing		Greater than 90 Days and Still Accruing		Total Past Due and Still Accruing		Accruing Current Balances		Nonaccrual Loans		Total Loans Receivables
	(In thousands)
Residential Mortgage
One-to-four family	$	1,719	$	287	$	—	$	2,006	$	127,747	$	1,169	$	130,922
Home equity	160		—		—		160		21,744		943		22,847
Commercial and multi-family real estate	260		—		—		260		225,841		996		227,097
Construction	—		—		—		—		31,465		—		31,465
Commercial and industrial	—		—		—		—		100,981		—		100,981
Consumer	3		—		—		3		429		—		432
Total	$	2,142	$	287	$	—	$	2,429	$	508,207	$	3,108	$	513,744



As of December 31, 2018	30-59 Days Past Due and Still Accruing		60-89 Days Past Due and Still Accruing		Greater than 90 Days and Still Accruing		Total Past Due and Still Accruing		Accruing Current Balances		Nonaccrual Loans(1)		Total Loans Receivables
	(In thousands)
Residential Mortgage
One-to-four family	$	1,328	$	365	$	2	$	1,695	$	139,371	$	2,276	$	143,342
Home equity	1,602		75		—		$	1,677	22,079		608		24,364
Commercial and multi-family real estate	—		—		—		$	—	211,258		1,032		212,290
Construction	—		—		—		$	—	18,905		—		18,905
Commercial and industrial	—		—		—		$	—	108,298		215		108,513
Consumer	1		—		—		$	1	539		—		540
Total	$	2,931	$	440	$	2	$	3,373	$	500,450	$	4,131	$	507,954

Impaired Loans

Management evaluates individual loans in all of the loan segments (including loans in the residential mortgage and consumer segments) for possible impairment if the loan is either on nonaccrual status or is risk rated Substandard or worse or has been modified in a troubled debt restructuring ("TDR"). A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed.

Once the determination has been made that a loan is impaired, impairment is measured by comparing the recorded investment in the loan to one of the following: (a) the present value of expected cash flows (discounted at the loan's effective interest rate), (b) the loan's observable market price or (c) the fair value of collateral adjusted for expected selling costs. The method is selected on a loan by loan basis with management primarily utilizing the fair value of collateral method.

The estimated fair values of the real estate collateral are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

The estimated fair values of non-real estate collateral, such as accounts receivable, inventory and equipment, are determined based on the borrower's financial statements, inventory reports, accounts receivable aging schedules or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

The evaluation of the need and amount of the allowance for impaired loans and whether a loan can be removed from impairment status is made on a quarterly basis. The Company's policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The following tables provide an analysis of the impaired loans at December 31, 2019 and 2018 and the average balances of such loans for the years then ended:



(In Thousands)
December 31, 2019	Recorded Investment		Loans with No Related Reserve		Loans with Related Reserve		Related Reserve		Contractual Principal Balance		Average Loan Balances
Residential mortgage
One-to-four family	$	8,560	$	1,169	$	7,391	$	200	$	9,215	$	9,469
Home equity	1,639		1,267		372		34		1,740		1,750
Commercial and multi-family real estate	2,337		1,362		975		74		3,080		2,357
Construction	—		—		—		—		—		—
Commercial and industrial	24		24		—		—		25		153
Consumer	—		—		—		—		—		—
Total	$	12,560	$	3,822	$	8,738	$	308	$	14,060	$	13,729



(In Thousands)
December 31, 2018	Recorded Investment		Loans with No Related Reserve		Loans with Related Reserve		Related Reserve		Contractual Principal Balance		Average Loan Balances
Residential mortgage
One-to-four family	$	10,224	$	1,956	$	8,268	$	298	$	10,907	$	10,392
Home equity	1,736		609		1,127		28		1,827		1,484
Commercial and multi-family real estate	2,411		1,405		1,006		69		3,067		2,059
Construction	—		—		—		—		—		—
Commercial and industrial	243		223		20		20		262		149
Consumer	—		—		—		—		—		1
Total	$	14,614	$	4,193	$	10,421	$	415	$	16,063	$	14,085

As of December 31, 2019 and 2018, impaired loans listed above include $11.3 and $11.4 million, of loans previously modified in TDRs and as such are considered impaired under GAAP. As of December 31, 2019 and 2018, $9.5 and $10.5 million, respectively, of these loans have been performing in accordance with their modified terms for an extended period of time and as such were removed from nonaccrual status and considered performing. During the year ended December 31, 2019, interest income of $443,000 was recorded on impaired loans related to accruing TDRs. During the year ended December 31, 2018, interest income of $543,000 was recorded on impaired loans related to accruing TDRs.

Credit Quality Indicators

Management uses a nine point internal risk rating system to monitor the credit quality of the loans in the Company's commercial real estate, construction and commercial and industrial loan segments. The borrower's overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually or when credit deficiencies, such as delinquent loan payments, arise. The criticized rating categories utilized by management generally follow bank regulatory definitions.

The Bank's rating categories are as follows:

1 – 5: The first five risk rating categories are considered not criticized, and are aggregated as "Pass" rated.

6: "Special Mention" category includes assets that are currently protected, but are potentially weak, resulting in increased credit risk and deserving management's close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.

7: "Substandard" loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. This includes loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.

8: "Doubtful" loans have all the weaknesses inherent in loans classified "Substandard" with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.

9: "Loss" loans are considered uncollectible and subsequently charged off.

The following table presents the classes of the loans receivable portfolio summarized by the aggregate "Pass" and the criticized categories of "Special Mention", "Substandard", "Doubtful" and "Loss" within the internal risk rating system as of December 31, 2019 and 2018:



As of December 31, 2019	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(In thousands)
Commercial and multi-family real estate	$	223,975	$	1,490	$	1,632	$	—	$	—	$	227,097
Construction	31,465		—		—		—		—		31,465
Commercial and industrial	100,838		58		85		—		—		100,981
Total	$	356,278	$	1,548	$	1,717	$	—	$	—	$	359,543



As of December 31, 2018	Pass		Special Mention		Substandard		Doubtful		Loss		Total
	(In thousands)
Commercial and multi-family real estate	$	209,206	$	1,367	$	1,717	$	—	$	—	$	212,290
Construction	18,905		—		—		—		—		18,905
Commercial and industrial	108,025		69		419		—		—		108,513
Total	$	336,136	$	1,367	$	1,717	$	—	$	—	$	339,708

Management further monitors the performance and credit quality of the retail portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. These credit quality indicators are assessed in the aggregate in these relatively homogeneous portfolios. Loans greater than 90 days past due are generally considered nonperforming and placed on nonaccrual status.



	Residential mortgage				Consumer				Total Residential and Consumer
As of December 31,	2019		2018		2019		2018		2019		2018
	(In thousands)
Nonperforming	$	2,112	$	2,884	$	—	$	—	$	2,112	$	2,884
Performing	151,657		164,822		432		540		$	152,089	$	165,362
Total	$	153,769	$	167,706	$	432	$	540	$	154,201	$	168,246

Troubled Debt Restructurings

Loans whose terms are modified are classified as a TDR if, in connection with the modification, the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a TDR generally involve a reduction in interest rate below market rates given the associated credit risk, or an extension of a loan's stated maturity date or capitalization of interest and/or escrow. Nonaccrual TDRs are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as TDRs are designated as impaired until they are ultimately repaid in full or foreclosed and sold. The nature and extent of impairment of TDRs, including those which experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses.

The recorded investment balance of TDRs totaled $11.3 million at December 31, 2019 and $11.4 million at December 31, 2018. The majority of the Company's TDRs are on accrual status and totaled $9.5 million at December 31, 2019 versus $10.5 million at December 31, 2018. The total of TDRs on nonaccrual status was $1.8 million at December 31, 2019 and $915,000 at December 31, 2018.

For the year ended December 31, 2019, the terms of seven loans were modified into two TDRs. The Company restructured a one-to-four family adjustable rate mortgage, two home equity lines of credit and two commercial overdraft loans into one one-to-four family TDR and extended the maturity date. In addition, the Company refinanced a commercial overdraft loan and a commercial owner-occupied fixed rate loan into one commercial owner-occupied fixed rate TDR. For the year ended December 31, 2018, one loan was modified into a TDR. The Company refinanced a multi-family & commercial loan that was restructured to extend the maturity date and capitalize the interest.

The following tables summarize by class loans modified into TDRs during the year ended December 31, 2019 and 2018:



	Year Ended December 31, 2019
	Number of Contracts	Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
		(Dollars in thousands)

Residential Mortgage
One-to-four family	1	$	421	$	460
Commercial and multi-family real estate	1	794		791

Total	2	$	1,215	$	1,251



	Year Ended December 31, 2018
	Number of Contracts	Pre-Modification Outstanding Recorded Investments		Post-Modification Outstanding Recorded Investments
		(Dollars in thousands)

Commercial and multi-family real estate	1	374		392

Total	1	$	374	$	392

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.