Loans and the Allowance for Loan Losses

6 Months Ended

Jun. 30, 2019

8.	LOANS AND THE ALLOWANCE FOR LOAN LOSSES

The Company’s lending activities are conducted primarily in Eastern Massachusetts and New Hampshire. The Company grants single- and multi-family residential loans, commercial & industrial (“C&I”), commercial real estate (“CRE”), construction loans, and a variety of consumer loans. Most of the loans granted by the Company are secured by real estate collateral. Repayment of the Company’s residential loans are generally dependent on the health of the employment market in the borrowers’ geographic areas and that of the general economy with liquidation of the underlying real estate collateral being typically viewed as the primary source of repayment in the event of borrower default. The repayment of C&I loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral provided by the borrower. As borrower cash flow may be difficult to predict, liquidation of the underlying collateral securing these loans is typically viewed as the primary source of repayment in the event of borrower default. However, collateral typically consists of equipment, inventory, accounts receivable, or other business assets that may fluctuate in value, so the liquidation of collateral in the event of default is often an insufficient source of repayment. The Company’s CRE loans are primarily made based on the cash flow from the collateral property and secondarily on the underlying collateral provided by the borrower, with liquidation of the underlying real estate collateral typically being viewed as the primary source of repayment in the event of borrower default. The Company’s construction loans are primarily made based on the borrower’s expected ability to execute and the future completed value of the collateral property, with sale of the underlying real estate collateral typically being viewed as the primary source of repayment.

Loans outstanding are detailed by category as follows:

	June 30, 2019			December 31, 2018
	(dollars in thousands)
Residential mortgage
Mortgages - fixed rate	$	409,706		$	293,267
Mortgages - adjustable rate		498,694			309,656
Construction		28,437			—
Deferred costs net of unearned fees		1,722			1,408
Total residential mortgages		938,559			604,331

Commercial mortgage
Mortgages - nonowner occupied		788,982			654,394
Mortgages - owner occupied		64,520			59,335
Construction		51,816			44,146
Deferred costs net of unearned fees		124			82
Total commercial mortgages		905,442			757,957

Home equity
Home equity - lines of credit		79,814			63,421
Home equity - term loans		5,763			5,665
Deferred costs net of unearned fees		237			250
Total home equity		85,814			69,336

Commercial & industrial
Commercial & industrial		134,338			93,728
Deferred costs (fees) net of unearned fees		(31	)		(16	)
Total commercial & industrial		134,307			93,712

Consumer
Secured		31,380			33,252
Unsecured		1,035			1,171
Deferred costs net of unearned fees		13			13
Total consumer		32,428			34,436
Total loans	$	2,096,550		$	1,559,772

Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.

At June 30, 2019 and December 31, 2018, total loans outstanding to such directors and officers were $36,000 and $488,000, respectively. During the six months ended June 30, 2019, $67,000 of additions and $519,000 of repayments and other adjustments were made to these loans. There were $139,000 of additions and $167,000 of repayments during the year ended December 31, 2018. At June 30, 2019 and December 31, 2018, all of the loans to directors and officers were performing according to their original terms.

The following tables set forth information regarding non-performing loans disaggregated by loan category:

	June 30, 2019
	Residential Mortgages		Commercial Mortgages		Home Equity		Commercial & Industrial		Consumer		Total
	(dollars in thousands)
Non-performing loans:
Non-accrual loans	$	507	$	135	$	12	$	298	$	—	$	952
Loans past due >90 days, but still accruing		—		—		—		—		—		—
Troubled debt restructurings		105		—		—		—		—		105
Total	$	612	$	135	$	12	$	298	$	—	$	1,057

	December 31, 2018
	Residential Mortgages		Commercial Mortgages		Home Equity		Commercial & Industrial		Consumer		Total
	(dollars in thousands)
Non-performing loans:
Non-accrual loans	$	512	$	—	$	13	$	—	$	—	$	525
Loans past due >90 days, but still accruing		—		—		—		—		—		—
Troubled debt restructurings		111		—		—		6		—		117
Total	$	623	$	—	$	13	$	6	$	—	$	642

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2019 and December 31, 2018.

Troubled Debt Restructurings (“TDRs”)

Loans are considered restructured in a troubled debt restructuring when the Company has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Company by increasing the ultimate probability of collection.

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months or longer before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.

Troubled debt restructurings are classified as impaired loans. The Company identifies loss allocations for impaired loans on an individual loan basis.

There were no new TDRs during the three and six months ended June 30, 2019. At June 30, 2019, two loans were determined to be TDRs with a total carrying value of $105,000. One TDR loan was paid off during the first quarter of 2019. There were no TDR defaults during the three and six months ended June 30, 2019.

There were no new TDRs during the year ended December 31, 2018. At December 31, 2018, three loans were determined to be TDRs with a total carrying value of $117,000. There were no TDR defaults during the year ended December 31, 2018.

There were no specific allowances for TDRs at June 30, 2019 or December 31, 2018.

As of June 30, 2019 and December 31, 2018, there were no significant commitments to lend additional funds to borrowers whose loans were restructured.

Loans by Credit Quality Indicator. The following tables contain period-end balances of loans receivable disaggregated by credit quality indicator:

	June 30, 2019
	Residential Mortgages		Home Equity		Consumer
	(dollars in thousands)
Credit risk profile based on payment activity:
Performing	$	937,947	$	85,802	$	32,428
Non-performing		612		12		—
Total	$	938,559	$	85,814	$	32,428

			Commercial Mortgages		Commercial & Industrial
Credit risk profile by internally assigned grade:
1-6 (Pass)			$	895,336	$	125,763
7 (Special Mention)				9,571		3,487
8 (Substandard)				535		5,057
9 (Doubtful)				—		—
10 (Loss)				—		—
Total			$	905,442	$	134,307

	December 31, 2018
	Residential Mortgages		Home Equity		Consumer
	(dollars in thousands)
Credit risk profile based on payment activity:
Performing	$	603,708	$	69,323	$	34,436
Non-performing		623		13		—
Total	$	604,331	$	69,336	$	34,436

			Commercial Mortgages		Commercial & Industrial
Credit risk profile by internally assigned grade:
1-6 (Pass)			$	753,338	$	85,821
7 (Special Mention)				4,619		4,186
8 (Substandard)				—		3,705
9 (Doubtful)				—		—
10 (Loss)				—		—
Total			$	757,957	$	93,712

With respect to residential real estate mortgages, home equity, and consumer loans, the Bank utilizes the following categories as indicators of credit quality:

•

Performing – These loans are accruing and are considered having low to moderate risk.

•

Non-performing – These loans are on non-accrual, or are past due more than 90 days but are still accruing, or are restructured. These loans may contain greater than average risk.

With respect to commercial real estate mortgages and commercial loans, the Bank utilizes a 10 grade internal loan rating system as an indicator of credit quality. The grades are as follows:

•

Loans rated 1-6 (Pass) – These loans are considered “pass” rated with low to moderate risk.

•

Loans rated 7 (Special Mention) – These loans have potential weaknesses warranting close attention, which, if left uncorrected, may result in deterioration of the credit at some future date.

•

Loans rated 8 (Substandard) – These loans have well-defined weaknesses that jeopardize the orderly liquidation of the debt under the original loan terms. Loss potential exists but is not identifiable in any one customer.

•

Loans rated 9 (Doubtful) – These loans have pronounced weaknesses that make full collection highly questionable and improbable.

•

Loans rated 10 (Loss) – These loans are considered uncollectible and continuance as a bankable asset is not warranted.

Delinquencies

The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more. Loan delinquencies can be attributed to many factors, such as but not limited to, a continuing weakness in, or deteriorating, economic conditions in the region in which the collateral is located, the loss of a tenant or lower lease rates for commercial borrowers, or the loss of income for consumers and the resulting liquidity impacts on the borrowers.

The following tables contain period-end balances of loans receivable disaggregated by past due status:

	June 30, 2019
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater		Total Past Due		Current Loans		Total
	(dollars in thousands)
Residential Mortgages	$	2,093	$	721	$	385	$	3,199	$	935,360	$	938,559
Commercial Mortgages		1,943		—		—		1,943		903,499		905,442
Home Equity		—		12		—		12		85,802		85,814
Commercial & Industrial		425		—		159		584		133,723		134,307
Consumer loans		2		4		—		6		32,422		32,428
Total	$	4,463	$	737	$	544	$	5,744	$	2,090,806	$	2,096,550

	December 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater		Total Past Due		Current Loans		Total
	(dollars in thousands)
Residential Mortgages	$	1,034	$	121	$	351	$	1,506	$	602,825	$	604,331
Commercial Mortgages		—		—		—		—		757,957		757,957
Home Equity		—		—		—		—		69,336		69,336
Commercial & Industrial		—		—		—		—		93,712		93,712
Consumer loans		108		—		—		108		34,328		34,436
Total	$	1,142	$	121	$	351	$	1,614	$	1,558,158	$	1,559,772

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2019 and December 31, 2018.

Foreclosure Proceedings

Other Real Estate Owned (“OREO”)

During the quarter ended June 30, 2019, the Company recorded other real estate owned assets of $185,000. OREO consists of real estate properties, which have primarily served as collateral to secure loans that are controlled or owned by the Bank. These properties are recorded at fair value less estimated costs to sell at the date control is established, resulting in a new cost basis. The amount by which the recorded investment in the loan exceeds the fair value (net of estimated costs to sell) of the foreclosed asset is charged to the allowance for loan losses. Subsequent declines in the fair value of the foreclosed asset below the new cost basis are recorded through the use of a valuation allowance. Subsequent increases in the fair value are recorded as reductions in the valuation allowance, but not below zero. All costs incurred thereafter in maintaining the property are generally charged to noninterest expense.

In Process of Foreclosure

As of June 30, 2019, there were no loans in process of foreclosure. As of December 31, 2018, one loan secured by one- to four-family residential property with a carrying value of $351,000 was in process of foreclosure.

Impaired Loans

Impaired loans are loans for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreements and loans restructured in a troubled debt restructuring. The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal, and unamortized deferred loan origination fees and costs.

The following tables present information pertaining to impaired loans:

	For the Three Months Ended June 30, 2019
	Carrying Value		Average Carrying Value		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
	(dollars in thousands)
With no required reserve recorded:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—
Commercial mortgage		—		—		—		—		—
Residential mortgage		616		620		778		—		1
Home equity		96		97		133		—		—
Total		712		717		911		—		1
With required reserve recorded:
Commercial and industrial		—		—		—		—		—
Commercial mortgage		—		—		—		—		—
Residential mortgage		—		—		—		—		—
Home equity		—		—		—		—		—
Total		—		—		—		—		—
Total:
Commercial and industrial		—		—		—		—		—
Commercial mortgage		—		—		—		—		—
Residential mortgage		616		620		778		—		1
Home equity		96		97		133		—		—
Total	$	712	$	717	$	911	$	—	$	1

	For the Six Months Ended June 30, 2019
	Carrying Value		Average Carrying Value		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
	(dollars in thousands)
With no required reserve recorded:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—
Commercial mortgage		—		—		—		—		—
Residential mortgage		616		625		778		—		2
Home equity		96		97		133		—		1
Total		712		722		911		—		3
With required reserve recorded:
Commercial and industrial		—		—		—		—		—
Commercial mortgage		—		—		—		—		—
Residential mortgage		—		—		—		—		—
Home equity		—		—		—		—		—
Total		—		—		—		—		—
Total:
Commercial and industrial		—		—		—		—		—
Commercial mortgage		—		—		—		—		—
Residential mortgage		616		625		778		—		2
Home equity		96		97		133		—		1
Total	$	712	$	722	$	911	$	—	$	3

	For the Three Months Ended June 30, 2018
	Carrying Value		Average Carrying Value		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
	(dollars in thousands)
With no required reserve recorded:
Commercial and industrial	$	17	$	20	$	17	$	—	$	—
Commercial mortgage		213		213		227		—		—
Residential mortgage		845		848		1,051		—		—
Home equity		66		67		98		—		—
Total		1,141		1,148		1,393		—		—
With required reserve recorded:
Commercial and industrial		—		—		—		—		—
Commercial mortgage		—		—		—		—		—
Residential mortgage		—		—		—		—		—
Home equity		—		—		—		—		—
Total		—		—		—		—		—
Total:
Commercial and industrial		17		20		17		—		—
Commercial mortgage		213		213		227		—		—
Residential mortgage		845		848		1,051		—		—
Home equity		66		67		98		—		—
Total	$	1,141	$	1,148	$	1,393	$	—	$	—

	For the Six Months Ended June 30, 2018
	Carrying Value		Average Carrying Value		Unpaid Principal Balance		Related Allowance		Interest Income Recognized
	(dollars in thousands)
With no required reserve recorded:
Commercial and industrial	$	17	$	22	$	17	$	—	$	1
Commercial mortgage		213		213		227		—		—
Residential mortgage		845		851		1,051		—		—
Home equity		66		68		98		—		—
Total		1,141		1,154		1,393		—		1
With required reserve recorded:
Commercial and industrial		—		—		—		—		—
Commercial mortgage		—		—		—		—		—
Residential mortgage		—		—		—		—		—
Home equity		—		—		—		—		—
Total		—		—		—		—		—
Total:
Commercial and industrial		17		22		17		—		1
Commercial mortgage		213		213		227		—		—
Residential mortgage		845		851		1,051		—		—
Home equity		66		68		98		—		—
Total	$	1,141	$	1,154	$	1,393	$	—	$	1

Allowance for Loan Losses

The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, financial condition of borrowers, the value of collateral securing loans, and other relevant factors. We provide for loan losses based upon the consistent application of our documented allowance for loan loss methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio, including a review of our classified assets, and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with GAAP. The allowance for loan losses consists primarily of two components:

Specific allowances established for impaired loans, as defined by GAAP. The amount of impairment provided for as a specific allowance is measured based on the deficiency, if any, between the present value of expected future cash flows discounted at the loan’s effective interest rate at the time of impairment or, as a practical expedient, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral-dependent, and the carrying value of the loan; and

General allowances established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into homogenous pools by similar risk characteristics, primarily by loan type and regulatory classification. We apply an estimated incurred loss rate to each loan group. The loss rates applied are based upon our historical loss experience over a designated look back period adjusted, as appropriate, for the quantitative, qualitative, and environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.

Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.

The adjustments to historical loss experience are based on our evaluation of several quantitative, qualitative, and environmental factors, including:

•

the loss emergence period, which represents the average amount of time between when loss events occur for specific loan types and when such problem loans are identified and the related loss amounts are confirmed through charge-offs;

•

changes in any concentration of credit (including, but not limited to, concentrations by geography, industry, or collateral type);

•

changes in the number and amount of non-accrual loans and past due loans;

•

changes in national, state, and local economic trends;

•

changes in the types of loans in the loan portfolio;

•

changes in the experience and ability of personnel;

•

changes in lending strategies; and

•

changes in lending policies and procedures.

In addition, we may establish an unallocated allowance to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

We evaluate the allowance for loan losses based upon the combined total of the specific and general components. Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally, when the loan portfolio decreases, absent other factors, the allowance for loan losses methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease. Periodically, management conducts an analysis to estimate the loss emergence period for various loan categories based on samples of historical charge-offs. Model output by loan category is reviewed to evaluate the reasonableness of the reserve levels in comparison to the estimated loss emergence period applied to historical loss experience.

We evaluate the loan portfolio on a quarterly basis and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, will periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.

The following tables contain changes in the allowance for loan losses disaggregated by loan category June 30, 2019:

	For the Three Months Ended June 30, 2019
	Residential Mortgages		Commercial Mortgages			Home Equity			Commercial & Industrial			Consumer			Impaired		Total
	(dollars in thousands)
Allowance for loan losses:
Balance at March 31, 2019	$	5,256	$	9,369		$	534		$	1,245		$	248		$	—	$	16,652
Charge-offs		—		(55	)		—			(100	)		(9	)		—		(164	)
Recoveries		—		—			—			12			4			—		16
Provision for (Release of)		207		115			(3	)		288			(12	)		—		595
Balance at June 30, 2019	$	5,463	$	9,429		$	531		$	1,445		$	231		$	—	$	17,099

	For the Six Months Ended June 30, 2019
	Residential Mortgages		Commercial Mortgages			Home Equity		Commercial & Industrial			Consumer			Impaired		Total
	(dollars in thousands)
Allowance for loan losses:
Balance at December 31, 2018	$	4,946	$	9,626		$	517	$	1,415		$	264		$	—	$	16,768
Charge-offs		—		(55	)		—		(130	)		(20	)		—		(205	)
Recoveries		—		—			—		25			8			—		33
Provision for (Release of)		517		(142	)		14		135			(21	)		—		503
Balance at June 30, 2019	$	5,463	$	9,429		$	531	$	1,445		$	231		$	—	$	17,099

	For the Three Months Ended June 30, 2018
	Residential Mortgages		Commercial Mortgages			Home Equity		Commercial & Industrial			Consumer			Impaired			Total
	(dollars in thousands)
Allowance for loan losses:
Balance at March 31, 2018	$	4,692	$	8,937		$	570	$	1,145		$	298		$	90		$	15,732
Charge-offs		—		—			—		(6	)		(17	)		—			(23	)
Recoveries		—		—			—		12			3			—			15
Provision for (Release of)		187		(263	)		31		44			12			(90	)		(79	)
Balance at June 30, 2018	$	4,879	$	8,674		$	601	$	1,195		$	296		$	—		$	15,645

	For the Six Months Ended June 30, 2018
	Residential Mortgages			Commercial Mortgages		Home Equity			Commercial & Industrial			Consumer			Impaired			Total
	(dollars in thousands)
Allowance for loan losses:
Balance at December 31, 2017	$	5,047		$	8,289	$	630		$	946		$	315		$	93		$	15,320
Charge-offs		—			—		—			(11	)		(21	)		—			(32	)
Recoveries		—			—		—			22			5			—			27
Provision for (Release of)		(168	)		385		(29	)		238			(3	)		(93	)		330
Balance at June 30, 2018	$	4,879		$	8,674	$	601		$	1,195		$	296		$	—		$	15,645

The following tables contain period-end balances of the allowance for loan losses and related loans receivable disaggregated by impairment method:

	June 30, 2019
	Residential Mortgages		Commercial Mortgages		Home Equity		Commercial & Industrial		Consumer		Total
	(dollars in thousands)
Allowance for loan losses
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		5,463		9,429		531		1,445		231		17,099
Total	$	5,463	$	9,429	$	531	$	1,445	$	231	$	17,099

Loans receivable
Individually evaluated for impairment	$	616	$	—	$	96	$	—	$	—	$	712
Collectively evaluated for impairment		937,943		905,442		85,718		134,307		32,428		2,095,838
Total	$	938,559	$	905,442	$	85,814	$	134,307	$	32,428	$	2,096,550

	December 31, 2018
	Residential Mortgages		Commercial Mortgages		Home Equity		Commercial & Industrial		Consumer		Total
	(dollars in thousands)
Allowance for loan losses
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		4,946		9,626		517		1,415		264		16,768
Total	$	4,946	$	9,626	$	517	$	1,415	$	264	$	16,768

Loans receivable
Individually evaluated for impairment	$	647	$	—	$	88	$	5	$	—	$	740
Collectively evaluated for impairment		603,684		757,957		69,248		93,707		34,436		1,559,032
Total	$	604,331	$	757,957	$	69,336	$	93,712	$	34,436	$	1,559,772