3.LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Major categories of loans at December 31, 2016 and 2015 are summarized as follows:


	December 31, 2016		December 31, 2015
Mortgage loans on real estate:	(in thousands)
Residential mortgages	$	118,542	$	103,941
Commercial and multi-family		462,385		399,819
Construction-Residential		2,540		1,546
Construction-Commercial		93,240		60,892
Home equities		66,234		61,042
Total real estate loans		742,941		627,240

Commercial and industrial loans		197,371		144,330
Consumer and other loans		1,417		1,735
Net deferred loan origination costs		783		679
Total gross loans		942,512		773,984

Allowance for loan losses		(13,916)		(12,883)

Loans, net	$	928,596	$	761,101

Residential Mortgages: The Company originates adjustable-rate and fixed-rate, one-to-four-family residential real estate loans for the construction, purchase, or refinancing of a mortgage. These loans are collateralized by owner-occupied properties located in the Company’s market area and are amortized over a period of 10 to 30 years. Loans on one-to-four-family residential real estate are mostly originated in amounts of no more than 80% of the property’s appraised value or have private mortgage insurance. Mortgage title insurance and hazard insurance are normally required. Construction loans have a unique risk, because they are secured by an incomplete dwelling.

The Bank, in its normal course of business, sells certain residential mortgages which it originates to FNMA. The Company maintains servicing rights on the loans that it sells to FNMA and earns a fee thereon. The Bank determines with each origination of residential real estate loans which desired maturities, within the context of overall maturities in the loan portfolio, provide the appropriate mix to optimize the Bank’s ability to absorb the corresponding interest rate risk within the Company’s tolerance ranges. This practice allows the Company to manage interest rate risk, liquidity risk, and credit risk. At December 31, 2016 and 2015, the Company had approximately $75.7 million and $77.3 million, respectively, in unpaid principal balances of loans that it services for FNMA. For the years ended December 31, 2016 and 2015, the Company sold $9.7 million and $14.3 million, respectively, in loans to FNMA and realized gains on those sales of $93 thousand and $133 thousand, respectively. Gains or losses recognized upon the sale of loans are determined on a specific identification basis. The Company had a related asset of approximately $0.5 and $0.6 million for the servicing portfolio rights as of December 31, 2016 and 2015, respectively. There were $0.3 million in loans held for sale at December 31, 2016 compared with $0.5 million in loans held for sale at December 31, 2015. Loans held for sale are typically in the portfolio for less than a month. As a result, the carrying value approximates fair value. The Company has never been contacted by FNMA to repurchase any loans due to improper documentation or fraud.

Due to the lack of foreclosure activity and absence of any ongoing litigation at December 31, 2016 and 2015, the Company had no accrual for loss contingencies or potential costs associated with foreclosure-related activities at those dates.

Commercial and Multi-Family Mortgages and Commercial Construction Loans: Commercial real estate loans are made to finance the purchases of real estate with completed structures or in the midst of being constructed. These commercial real estate loans are secured by first liens on the real estate, which may include apartments, hotels, retail stores or plazas, healthcare facilities, and other non-owner-occupied facilities. These loans are generally less risky than commercial and industrial loans, since they are secured by real estate and buildings. The Company offers commercial mortgage loans with up to an 80% LTV ratio for up to 20 years on a variable and fixed rate basis. Many of these mortgage loans either mature or are subject to a rate call after three to five years. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower's financial condition, and the underlying cash flows. Construction loans have a unique risk, because they are secured by an incomplete dwelling.

As of December 31, 2016, there were $207 million in residential and commercial mortgage loans pledged to FHLBNY to serve as collateral for borrowings.

Home Equities: The Company originates home equity lines of credit and second mortgage loans (loans secured by a second lien position on one-to-four-family residential real estate). These loans carry a higher risk than first mortgage residential loans because they are in a second position with respect to collateral. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

Commercial and Industrial Loans: These loans generally include term loans and lines of credit. Such loans are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition of real estate, expansion, and improvements) and equipment purchases. As a general practice, a collateral lien is placed on equipment or other assets owned by the borrower. These loans generally carry a higher risk than commercial real estate loans based on the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable. To reduce the risk, management also attempts to secure real estate as collateral and obtain personal guarantees of the borrowers. To further reduce risk and enhance liquidity, these loans generally carry variable rates of interest, re-pricing in three- to five-year periods, and have a maturity of five years or less. Lines of credit generally carry floating rates of interest (e.g. prime plus a margin).

Consumer Loans: The Company funds a variety of consumer loans, including direct automobile loans, recreational vehicle loans, boat loans, home improvement loans, and personal loans (collateralized and uncollateralized). Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging up to five years, based upon the nature of the collateral and the size of the loan. The majority of consumer loans are underwritten on a secured basis using the underlying collateral being financed. A minimal amount of loans are unsecured, which carry a higher risk of loss. These loans included overdrawn deposit accounts classified as loans of less than $0.1 million and $0.2 million at December 31, 2016 and 2015, respectively.

The Company maintains an allowance for loan losses in order to capture the probable losses inherent in its loan portfolio. There is a risk that the Company may experience significant loan losses in 2017 and beyond which could exceed the allowance for loan losses. If the Company's assumptions and judgments prove to be incorrect or bank regulators require the Company to increase its provision for loan losses or recognize further loan charge-offs, the Company may have to increase its allowance for loan losses or loan charge-offs which could have a material adverse effect on the Company's operating results and financial condition. There can be no assurance that the Company's allowance for loan losses will be adequate to protect the Company against loan losses that it may incur.

Changes in the allowance for loan losses for the years ended December 31, 2016, 2015 and 2014 follow:




	2016		2015		2014
	(in thousands)
Balance, beginning of year	$	12,883	$	12,533	$	11,503
Provisions for loan losses		1,209		1,216		1,229
Recoveries		231		181		863
Loans charged-off		(407)		(1,047)		(1,062)
Balance, end of year	$	13,916	$	12,883	$	12,533

The following tables summarize the allowance for loan losses, as of December 31, 2016 and 2015, respectively, by portfolio segment. The segments presented are at the level management uses to assess and monitor the risk and performance of the portfolio.




2016

(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer**		Residential Mortgages*		Home Equities		Unallocated		Total
Allowance for loan
losses:
Beginning balance	$	4,383	$	7,135	$	85	$	909	$	371	$	-	$	12,883
Charge-offs		(360)		-		(47)		-		-		-		(407)
Recoveries		151		59		16		2		3		-		231
Provision (Credit)		639		696		42		(142)		(26)		-		1,209
Ending balance	$	4,813	$	7,890	$	96	$	769	$	348	$	-	$	13,916

Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment	$	492	$	1,471	$	43	$	1	$	20	$	-	$	2,027
Collectively evaluated
for impairment		4,321		6,419		53		768		328		-		11,889
Total	$	4,813	$	7,890	$	96	$	769	$	348	$	-	$	13,916

Loans:
Ending balance:
Individually evaluated
for impairment	$	3,148	$	7,613	$	43	$	2,584	$	1,753	$	-	$	15,141
Collectively evaluated
for impairment		194,223		548,012		1,374		118,498		64,481		-		926,588
Total	$	197,371	$	555,625	$	1,417	$	121,082	$	66,234	$	-	$	941,729

Note: Loan balances do not include $783 thousand in net deferred loan origination costs as of December 31, 2016.

* includes construction loans

** includes other loans




2015

(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer**		Residential Mortgages*		Home Equities		Unallocated		Total
Allowance for loan
losses:
Beginning balance	$	4,896	$	5,650	$	78	$	941	$	819	$	149	$	12,533
Charge-offs		(799)		(139)		(43)		(66)		-		-		(1,047)
Recoveries		126		44		9		2		-		-		181
Provision (Credit)		160		1,580		41		32		(448)		(149)		1,216
Ending balance	$	4,383	$	7,135	$	85	$	909	$	371	$	-	$	12,883

Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment	$	552	$	1,146	$	42	$	2	$	-	$	-	$	1,742
Collectively evaluated
for impairment		3,831		5,989		43		907		371		-		11,141
Total	$	4,383	$	7,135	$	85	$	909	$	371	$	-	$	12,883

Loans:
Ending balance:
Individually evaluated
for impairment	$	5,322	$	9,993	$	42	$	2,499	$	1,644	$	-	$	19,500
Collectively evaluated
for impairment		139,008		450,718		1,693		102,988		59,398		-		753,805
Total	$	144,330	$	460,711	$	1,735	$	105,487	$	61,042	$	-	$	773,305

Note: Loan balances do not include $679 thousand in net deferred loan origination costs as of December 31, 2015.

* includes construction loans

** includes other loans

A description of the Company’s accounting policies and the methodology used to estimate the allowance for loan losses, including a description of the factors considered in determining the allowance for loan losses, such as historical losses and existing economic conditions, is included in Note 1 to the Financial Statements.

The following table provides data, at the class level, of credit quality indicators of certain loans, as of December 31, 2016 and 2015, respectively:



2016
(in thousands)
Corporate Credit Exposure – By Credit Rating	Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
1-3	$	82,520	$	372,235	$	454,755	$	121,414
4		6,541		73,655		80,196		59,117
5		-		12,506		12,506		12,623
6		4,179		3,989		8,168		3,404
7		-		-		-		813
Total	$	93,240	$	462,385	$	555,625	$	197,371



2015
(in thousands)
Corporate Credit Exposure – By Credit Rating	Commercial Real Estate Construction		Commercial and Multi-Family Mortgages		Total Commercial Real Estate		Commercial and Industrial
1-3	$	42,383	$	340,837	$	383,220	$	80,379
4		13,098		40,019		53,117		47,509
5		1,224		11,772		12,996		8,973
6		4,187		7,191		11,378		7,350
7		-		-		-		119
Total	$	60,892	$	399,819	$	460,711	$	144,330

The Company’s risk ratings are monitored by the individual relationship managers and changed as deemed appropriate after receiving updated financial information from the borrowers or deterioration or improvement in the performance of a loan is evident in the customer’s payment history. Each commercial relationship is individually assigned a risk rating. The Company also maintains a loan review process that monitors the management of the Company’s commercial loan portfolio by the relationship managers. The Company’s loan review function reviews at least 40% of the commercial loan portfolio annually.

The Company’s consumer loans, including residential mortgages and home equity loans and lines of credit, are not individually risk rated or reviewed as part of 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 dollar balances. Given the lack of updated information since the initial underwriting of the loan and the small size of individual loans, the Company uses delinquency status as the primary credit quality indicator for consumer loans. Once a consumer loan reaches 60 days past due, management orders an independent appraisal of the underlying collateral and produces a credit report on the borrower. After discounting for potential selling costs and other factors specific to the property or borrower, the book value of the loan is then compared to the collateral value as determined by the appraisal. In situations where the Company holds a junior lien, management accounts for the amount of the senior liens held by other lenders, and the collateral value is more heavily discounted to account for the increased risk. If the loan is ultimately determined to be impaired, it is placed in non-accrual status. Unless the loan is well secured and in the process of collection, all consumer loans that are more than 90 days past due are placed in non-accrual status.

The following tables provide an analysis of the age of the recorded investment for loans that were past due as of December 31, 2016 and 2015, respectively:



2016
(in thousands)

							Total Past		Current		Total		90+ Days		Non-accruing
	30-59 days		60-89 days		90+ days		Due		Balance		Balance		Accruing		Loans

Commercial and industrial	$	6,772	$	2,966	$	1,150	$	10,888	$	186,483	$	197,371	$	-	$	3,106
Residential real estate:
Residential		868		123		567		1,558		116,984		118,542		-		862
Construction		-		-		-		-		2,540		2,540		-		-
Commercial real estate:
Commercial		6,319		1,522		2,357		10,198		452,187		462,385		483		1,874
Construction		257		-		4,417		4,674		88,566		93,240		239		4,178
Home equities		481		119		679		1,279		64,955		66,234		-		1,261
Consumer and other		15		10		5		30		1,387		1,417		-		17
Total Loans	$	14,712	$	4,740	$	9,175	$	28,627	$	913,102	$	941,729	$	722	$	11,298



2015
(in thousands)

							Total Past		Current		Total		90+ Days		Non-accruing
	30-59 days		60-89 days		90+ days		Due		Balance		Balance		Accruing		Loans

Commercial and industrial	$	160	$	224	$	66	$	450	$	143,880	$	144,330	$	40	$	5,312
Residential real estate:
Residential		822		402		569		1,793		102,148		103,941		-		1,400
Construction		-		-		-		-		1,546		1,546		-		-
Commercial real estate:
Commercial		1,919		963		457		3,339		396,480		399,819		457		3,574
Construction		-		-		-		-		60,892		60,892		-		4,187
Home equities		253		236		267		756		60,286		61,042		-		1,058
Consumer and other		8		-		-		8		1,727		1,735		-		14
Total Loans	$	3,162	$	1,825	$	1,359	$	6,346	$	766,959	$	773,305	$	497	$	15,545

The following table provides data, at the class level, of impaired loans:




		At December 31, 2016
		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	$	1,304	$	1,604	$	-	$	1,455	$	125	$	51
Residential real estate:
Residential		2,513		2,720		-		2,542		39		78
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		2,123		2,168		-		2,181		33		89
Construction		257		257		-		404		2		28
Home equities		1,559		1,621		-		1,606		51		30
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	7,756	$	8,370	$	-	$	8,188	$	250	$	276




		At December 31, 2016
		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	$	1,844	$	1,913	$	492	$	1,898	$	62	$	53
Residential real estate:
Residential		71		72		1		72		2		1
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		1,054		1,083		296		1,062		50		-
Construction		4,179		4,201		1,175		4,180		194		-
Home equities		194		206		20		195		9		1
Consumer and other		43		68		43		45		3		3
Total impaired loans	$	7,385	$	7,543	$	2,027	$	7,452	$	320	$	58




		At December 31, 2016
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
Total:		(in thousands)
Commercial and industrial	$	3,148	$	3,517	$	492	$	3,353	$	187	$	104
Residential real estate:
Residential		2,584		2,792		1		2,614		41		79
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		3,177		3,251		296		3,243		83		89
Construction		4,436		4,458		1,175		4,584		196		28
Home equities		1,753		1,827		20		1,801		60		31
Consumer and other		43		68		43		45		3		3
Total impaired loans	$	15,141	$	15,913	$	2,027	$	15,640	$	570	$	334




		At December 31, 2015
		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	$	1,750	$	1,811	$	-	$	1,945	$	58	$	47
Residential real estate:
Residential		2,444		2,555		-		2,474		90		63
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		3,888		3,908		-		3,930		27		179
Construction		834		834		-		834		-		31
Home equities		1,644		1,711		-		1,661		40		52
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	10,560	$	10,819	$	-	$	10,844	$	215	$	372




		At December 31, 2015
		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	$	3,572	$	3,835	$	552	$	3,966	$	255	$	9
Residential real estate:
Residential		55		55		2		55		1		2
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		1,083		1,083		235		1,083		4		42
Construction		4,188		4,201		911		4,188		29		166
Home equities		-		-		-		-		-		-
Consumer and other		42		57		42		45		2		6
Total impaired loans	$	8,940	$	9,231	$	1,742	$	9,337	$	291	$	225




		At December 31, 2015
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
Total:		(in thousands)
Commercial and industrial	$	5,322	$	5,646	$	552	$	5,911	$	313	$	56
Residential real estate:
Residential		2,499		2,610		2		2,529		91		65
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		4,971		4,991		235		5,013		31		221
Construction		5,022		5,035		911		5,022		29		197
Home equities		1,644		1,711		-		1,661		40		52
Consumer and other		42		57		42		45		2		6
Total impaired loans	$	19,500	$	20,050	$	1,742	$	20,181	$	506	$	597

There were $7.8 million in impaired loans with no related allowance at December 31, 2016 and $10.6 million in impaired loans with no related allowance at December 31, 2015. As management identifies impaired loans that are collateral dependent, new appraisals are ordered to determine the fair value of the collateral. It should also be noted that when estimating the fair value of collateral for the purpose of performing an impairment test, management further reduces the appraised value of the collateral to account for estimated selling or carrying costs, age of the appraisal, if applicable, or any other perceived market or borrower-specific risks to the value of the collateral.

The interest income in the preceding table was interest income recognized on accruing TDRs and interest paid prior to loans being identified as non-accrual. The interest income foregone in the preceding table represents interest income that the Company did not recognize on those loans while they were on non-accrual.

The Bank had no loan commitments to borrowers in non-accrual status at December 31, 2016 and 2015.

Troubled debt restructurings (“TDRs”)

The Company had $5.1 million in loans that were restructured and deemed to be TDRs at December 31, 2016 with $1.3 million of those balances in non-accrual status. Any new TDR is placed on non-accrual is and not returned 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 restructurings were allowed in an effort to maximize the Company’s 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 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.

The following table presents the Company’s TDR loans as of December 31, 2016, and 2015, respectively:



		December 31, 2016
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	574	$	532	$	42	$	147
Residential real estate:
Residential		1,949		227		1,722		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		1,617		313		1,304		-
Construction		257		-		257		-
Home equities		667		175		492		1
Consumer and other loans		26		-		26		26
Total troubled restructured loans	$	5,090	$	1,247	$	3,843	$	174



		December 31, 2015
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	517	$	508	$	9	$	165
Residential real estate:
Residential		1,789		689		1,100		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		1,732		334		1,398		-
Construction		834		-		834		-
Home equities		867		281		586		-
Consumer and other loans		28		-		28		28
Total troubled restructured loans	$	5,767	$	1,812	$	3,955	$	193

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 customer time to improve cash flow or sell the property. Other common types of concessions leading to the designation of a TDR are lines of credit that are termed-out and extensions of maturities at rates that are less than prevailing market rates given the risk profile of the borrower.

The following tables show the data for TDR activity by type of concession granted to the borrower during 2016 and 2015:



	Year ended December 31, 2016			Year ended December 31, 2015
	(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:
Deferral of principal	-	-	-	3	$	541	$	541
Extension of maturity	2	121	121	-		-		-
Term-out line of credit	1	20	20	-		-		-
Residential Real Estate & Construction:
Extension of maturity	1	95	95	-		-		-
Extension of maturity and
interest rate reduction	1	109	109	-		-		-
Commercial Real Estate & Construction	-	-	-	-		-		-
Home Equities:	-	-	-	-		-		-
Combination of concessions	-	-	-	2		166		166
Consumer and other loans	-	-	-	-		-		-

Modifications made to loans in a troubled debt restructuring did not have a material impact on the Company’s net income for the years ended December 31, 2016 and 2015. All of the C&I and commercial real estate TDRs were already considered impaired and sufficiently reserved for prior to being identified as a TDR.

At December 31, 2016, there were no commitments to lend additional funds to debtors owing loans or leases whose terms have been modified in TDRs.

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 or lease is 90 days past due or is charged-off. The following table presents loans which were classified as TDRs during the preceding twelve months and which subsequently defaulted during the twelve month periods ended December 31, 2016 and 2015, respectively:




	Year ended December 31, 2016			Year ended December 31, 2015
	(Recorded Investment in thousands)			(Recorded Investment in thousands)
Troubled Debt Restructurings	Number of	Recorded		Number of	Recorded
That Subsequently Defaulted	Contracts	Investment		Contracts	Investment
Commercial and industrial	-		-	-		-
Residential real estate	-		-	-		-
Commercial real estate	-		-	-		-
Home equities	-		-	1	$	66
Consumer and other loans	-		-	-		-