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:




	September 30, 2017		December 31, 2016
Mortgage loans on real estate:	(in thousands)
Residential mortgages	$	125,946	$	118,542
Commercial and multi-family		492,692		462,385
Construction-Residential		1,850		2,540
Construction-Commercial		100,446		93,240
Home equities		67,343		66,234
Total real estate loans		788,277		742,941

Commercial and industrial loans		207,110		197,371
Consumer and other loans		1,521		1,417
Net deferred loan origination costs		1,097		783
Total gross loans		998,005		942,512

Allowance for loan losses		(14,182)		(13,916)

Loans, net	$	983,823	$	928,596

The Bank sells certain fixed rate residential mortgages to FNMA while maintaining the servicing rights for those mortgages. In the three month period ended September 30, 2017, the Bank sold mortgages to FNMA totaling $4.4 million, compared with $1.7 million in the three month period ended September 30, 2016. During the nine month periods ended September 30, 2017 and 2016, the Bank sold $9.7 million and $5.2 million, respectively, to FNMA. At September 30, 2017, the Bank had a loan servicing portfolio principal balance of $80 million upon which it earned servicing fees, compared with $76 million at December 31, 2016. The value of the mortgage servicing rights for that portfolio was $0.6 million at September 30, 2017 and $0.5 million at December 31, 2016. At September 30, 2017 there were $0.1 million in residential mortgages held for sale compared with $0.3 million at December 31, 2016. 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, 2016. 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, 2016. Unless otherwise noted in this Form 10-Q, the policies and methodology described in the Annual Report for the year ended December 31, 2016 are consistent with those utilized by the Company in the three and nine month periods ended September 30, 2017.

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:

1-3-Pass

4-Watch

5-O.A.E.M. (Other Assets Especially Mentioned) or Special Mention

6-Substandard

7-Doubtful

8-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:




September 30, 2017
(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	$	74,627	$	374,371	$	448,998	$	133,588
4		25,819		94,204		120,023		59,199
5		-		10,417		10,417		8,122
6		-		13,700		13,700		4,572
7		-		-		-		1,629
Total	$	100,446	$	492,692	$	593,138	$	207,110




December 31, 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

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:



September 30, 2017
(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	$	3,491	$	912	$	2,012	$	6,415	$	200,695	$	207,110	$	1	$	2,363
Residential real estate:
Residential		829		105		825		1,759		124,187		125,946		-		1,146
Construction		-		-		-		-		1,850		1,850		-		-
Commercial real estate:
Commercial		168		2,301		1,488		3,957		488,735		492,692		-		8,788
Construction		6,929		452		-		7,381		93,065		100,446		-		-
Home equities		538		381		570		1,489		65,854		67,343		-		1,081
Consumer and other		7		12		10		29		1,492		1,521		-		10
Total Loans	$	11,962	$	4,163	$	4,905	$	21,030	$	975,878	$	996,908	$	1	$	13,388

Note: Loan balances do not include $1.1 million in net deferred loan origination costs as of September 30, 2017.



December 31, 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

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

Allowance for loan losses

The following tables present the activity in the allowance for loan losses according to portfolio segment for the nine month periods ended September 30, 2017 and 2016:




September 30, 2017

(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	4,813	$	7,890	$	96	$	769	$	348	$	13,916
Charge-offs		(51)		(127)		(50)		-		(1)		(229)
Recoveries		335		-		22		-		2		359
Provision (Credit)		(74)		21		41		143		5		136
Ending balance	$	5,023	$	7,784	$	109	$	912	$	354	$	14,182

Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment	$	808	$	877	$	35	$	17	$	-	$	1,737
Collectively evaluated
for impairment		4,215		6,907		74		895		354		12,445
Total	$	5,023	$	7,784	$	109	$	912	$	354	$	14,182

Loans:
Ending balance:
Individually evaluated
for impairment	$	2,898	$	13,693	$	35	$	2,545	$	1,577	$	20,748
Collectively evaluated
for impairment		204,212		579,445		1,486		125,251		65,766		976,160
Total	$	207,110	$	593,138	$	1,521	$	127,796	$	67,343	$	996,908

* Includes construction loans

Note: Loan balances do not include $1.1 million in net deferred loan origination costs as of September 30, 2017.




September 30, 2016

(in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	4,383	$	7,135	$	85	$	909	$	371	$	12,883
Charge-offs		(122)		-		(36)		-		-		(158)
Recoveries		78		59		11		-		1		149
Provision (Credit)		571		538		47		(322)		4		838
Ending balance	$	4,910	$	7,732	$	107	$	587	$	376	$	13,712

Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment	$	720	$	1,109	$	46	$	3	$	11	$	1,889
Collectively evaluated
for impairment		4,190		6,623		61		584		365		11,823
Total	$	4,910	$	7,732	$	107	$	587	$	376	$	13,712

Loans:
Ending balance:
Individually evaluated
for impairment	$	6,408	$	7,663	$	46	$	2,602	$	1,583	$	18,302
Collectively evaluated
for impairment		181,032		538,466		1,485		110,297		62,555		893,835
Total	$	187,440	$	546,129	$	1,531	$	112,899	$	64,138	$	912,137

* Includes construction loans

Note: Loan balances do not include $715 thousand in net deferred loan origination costs as of September 30, 2016.

The following tables present the activity in the allowance for loan losses according to portfolio segment for the three month periods ended September 30, 2017 and 2016:



September 30, 2017
($ in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	4,970	$	7,899	$	104	$	832	$	373	$	14,178
Charge-offs		(18)		(127)		(17)		-		(1)		(163)
Recoveries		4		-		1		-		1		6
Provision (Credit)		67		12		21		80		(19)		161
Ending balance	$	5,023	$	7,784	$	109	$	912	$	354	$	14,182



September 30, 2016
($ in thousands)	Commercial and Industrial		Commercial Real Estate Mortgages*		Consumer and Other		Residential Mortgages*		Home Equities		Total
Allowance for loan
losses:
Beginning balance	$	4,195	$	7,308	$	101	$	763	$	406	$	12,773
Charge-offs		(89)		-		(13)		-		-		(102)
Recoveries		23		8		4		-		-		35
Provision (Credit)		781		416		15		(176)		(30)		1,006
Ending balance	$	4,910	$	7,732	$	107	$	587	$	376	$	13,712

*Includes construction loans

Impaired Loans

The following tables provide data, at the class level, for impaired loans as of the dates indicated:



		At September 30, 2017
		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	$	751	$	876	$	-	$	822	$	33	$	6
Residential real estate:
Residential		2,447		2,607		-		2,472		33		63
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		1,968		2,086		-		2,078		98		15
Construction		197		197		-		226		-		11
Home equities		1,577		1,677		-		1,613		48		16
Consumer and other		-		-		-		-		-		-
Total impaired loans	$	6,940	$	7,443	$	-	$	7,211	$	212	$	111


		At September 30, 2017
		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	$	2,147	$	2,374	$	808	$	2,192	$	101	$	16
Residential real estate:
Residential		98		98		17		98		3		1
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		11,528		11,586		877		11,612		85		366
Construction		-		-		-		-		-		-
Home equities		-		-		-		-		-		-
Consumer and other		35		60		35		38		2		1
Total impaired loans	$	13,808	$	14,118	$	1,737	$	13,940	$	191	$	384


		At September 30, 2017
		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Foregone		Interest Income Recognized
Total:		(in thousands)
Commercial and industrial	$	2,898	$	3,250	$	808	$	3,014	$	134	$	22
Residential real estate:
Residential		2,545		2,705		17		2,570		36		64
Construction		-		-		-		-		-		-
Commercial real estate:
Commercial		13,496		13,672		877		13,690		183		381
Construction		197		197		-		226		-		11
Home equities		1,577		1,677		-		1,613		48		16
Consumer and other		35		60		35		38		2		1
Total impaired loans	$	20,748	$	21,561	$	1,737	$	21,151	$	403	$	495



		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

Troubled debt restructurings

The Company had $12.7 million and $5.1 million in loans that were restructured in a troubled debt restructuring (“TDR”) at September 30, 2017 and December 31, 2016, respectively. Of those balances, $5.3 million and $1.2 million were in non-accrual status at September 30, 2017 and December 31, 2016, respectively. 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 September 30, 2017, there were no commitments to lend additional funds to debtors owing on loans whose terms have been modified in TDRs.

The following tables summarize the loans that were classified as troubled debt restructurings as of the dates indicated:



		September 30, 2017
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	1,525	$	990	$	535	$	433
Residential real estate:
Residential		1,664		265		1,399		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		8,623		3,915		4,708		368
Construction		197		-		197		-
Home equities		625		129		496		-
Consumer and other		25		-		25		25
Total troubled restructured loans	$	12,659	$	5,299	$	7,360	$	826



		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		26		-		26		26
Total troubled restructured loans	$	5,090	$	1,247	$	3,843	$	174

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 and nine month periods ended September 30, 2017 and 2016:


	Three months ended September 30, 2017					Three months ended September 30, 2016
	(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	1	$	874	$	874	-	$	-	$	-
Residential Real Estate & Construction:
Extension of maturity	1		133		151	-		-		-
Extension of maturity and
interest rate reduction	-		-		-	1		109		109
Commercial Real Estate & Construction:
Combination of concessions	1		4,179		3,397	-		-		-
Home Equities	-		-		-	-		-		-
Consumer and other loans	-		-		-	-		-		-



	Nine months ended September 30, 2017					Nine months ended September 30, 2016
	(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	1	$	874	$	874	-	$	-	$	-
Extension of maturity	-		-		-	1		24		24
Term-out line of credit	1		180		180	1		20		20
Residential Real Estate & Construction:
Extension of maturity	1		133		151	1		95		95
Extension of maturity and
interest rate reduction	-		-		-	1		109		109
Commercial Real Estate & Construction:
Extension of maturity	3		5,073		5,073	-		-		-
Combination of concessions	1		4,179		3,397	-		-		-
Home Equities:
Extension of maturity and
interest rate reduction	1		20		20	-		-		-
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. There were no loans which were classified as TDRs during the previous 12 months which defaulted during each of the three month and nine month periods ended September 30, 2017 and 2016, respectively.