3.LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Major categories of loans at December 31, 2017 and 2016 are summarized as follows:


	December 31, 2017		December 31, 2016
Mortgage loans on real estate:	(in thousands)
Residential mortgages	$	131,208	$	118,542
Commercial and multi-family		519,902		462,385
Construction-Residential		2,134		2,540
Construction-Commercial		107,274		93,240
Home equities		69,745		66,234
Total real estate loans		830,263		742,941

Commercial and industrial loans		232,211		197,371
Consumer and other loans		1,654		1,417
Net deferred loan origination costs		1,187		783
Total gross loans		1,065,315		942,512

Allowance for loan losses		(14,019)		(13,916)

Loans, net	$	1,051,296	$	928,596

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, 2017 and 2016, the Company had approximately $78 million and $76 million, respectively, in unpaid principal balances of loans that it services for FNMA. For the years ended December 31, 2017 and 2016, the Company sold $11 million and $10 million, respectively, in loans to FNMA and realized gains on those sales of $156 thousand and $93 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 $0.6 and $0.5 million for the servicing portfolio rights as of December 31, 2017 and 2016, respectively. No loans were held for sale at December 31, 2017 compared with $0.3 million in loans held for sale at December 31, 2016. 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, 2017 and 2016, 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, 2017, there were $228 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 at December 31, 2017 and 2016.

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 2018 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, 2017, 2016 and 2015 follow:




	2017		2016		2015
	(in thousands)
Balance, beginning of year	$	13,916	$	12,883	$	12,533
Provisions for loan losses		738		1,209		1,216
Recoveries		350		231		181
Charge-offs		(985)		(407)		(1,047)
Balance, end of year	$	14,019	$	13,916	$	12,883

The following tables summarize the allowance for loan losses, as of December 31, 2017 and 2016, respectively, by portfolio segment. The segments presented are at the level management uses to assess and monitor the risk and performance of the portfolio.




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		(791)		(127)		(66)		-		(1)		(985)
Recoveries		323		-		24		-		3		350
Provision (Credit)		859		(354)		55		181		(3)		738
Ending balance	$	5,204	$	7,409	$	109	$	950	$	347	$	14,019

Allowance for loan
losses:
Ending balance:
Individually evaluated
for impairment	$	372	$	643	$	34	$	28	$	-	$	1,077
Collectively evaluated
for impairment		4,832		6,766		75		922		347		12,942
Total	$	5,204	$	7,409	$	109	$	950	$	347	$	14,019

Loans:
Ending balance:
Individually evaluated
for impairment	$	2,263	$	9,212	$	34	$	2,611	$	1,785	$	15,905
Collectively evaluated
for impairment		229,948		617,964		1,620		130,731		67,960		1,048,223
Total	$	232,211	$	627,176	$	1,654	$	133,342	$	69,745	$	1,064,128

Note: Loan balances do not include $1.2 million in net deferred loan origination costs as of December 31, 2017.

* includes construction loans




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		(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

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, 2017 and 2016, respectively:



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	$	83,203	$	418,819	$	502,022	$	158,181
4		24,071		87,746		111,817		57,827
5		-		4,106		4,106		13,247
6		-		9,231		9,231		2,134
7/8		-		-		-		822
Total	$	107,274	$	519,902	$	627,176	$	232,211



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

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.

A summary of current, past due, and nonaccrual loans as of December 31, 2017 and 2016 follows:



2017
(in thousands)

		Current							Non-accruing		Total
		Balance	30-59 days		60-89 days		90+ days		Loans		Balance

Commercial and industrial	$	225,915	$	4,019	$	163	$	365	$	1,749	$	232,211
Residential real estate:
Residential		129,251		731		-		-		1,226		131,208
Construction		2,134		-		-		-		-		2,134
Commercial real estate:
Commercial		508,044		2,611		-		309		8,938		519,902
Construction		102,109		3,239		1,926		-		-		107,274
Home equities		68,415		171		40		-		1,119		69,745
Consumer and other		1,628		11		6		-		9		1,654
Total Loans	$	1,037,496	$	10,782	$	2,135	$	674	$	13,041	$	1,064,128



2016
(in thousands)

		Current							Non-accruing		Total
		Balance	30-59 days		60-89 days		90+ days		Loans		Balance

Commercial and industrial	$	184,872	$	6,567	$	2,826	$	-	$	3,106	$	197,371
Residential real estate:
Residential		116,876		751		53		-		862		118,542
Construction		2,540		-		-		-		-		2,540
Commercial real estate:
Commercial		452,187		6,319		1,522		483		1,874		462,385
Construction		88,566		257		-		239		4,178		93,240
Home equities		64,868		105		-		-		1,261		66,234
Consumer and other		1,387		3		10		-		17		1,417
Total Loans	$	911,296	$	14,002	$	4,411	$	722	$	11,298	$	941,729

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




			At December 31, 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	$		1,023		$		1,917		$		-		$		1,704		$		92		$		28
Residential real estate:
Residential			2,415				2,594				-				2,456				46				83
Construction			-				-				-				-				-				-
Commercial real estate:
Commercial			2,336				2,469				-				2,449				134				32
Construction			187				187				-				218				-				13
Home equities			1,785				1,892				-				1,828				62				33
Consumer and other			-				-				-				-				-				-
Total impaired loans	$		7,746		$		9,059		$		-		$		8,655		$		334		$		189




			At December 31, 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	$		1,240		$		1,431		$		372		$		1,279		$		79		$		12
Residential real estate:
Residential			196				196				28				196				6				3
Construction			-				-				-				-				-				-
Commercial real estate:
Commercial			6,689				6,819				643				6,755				156				129
Construction			-				-				-				-				-				-
Home equities			-				-				-				-				-				-
Consumer and other			34				59				34				37				3				2
Total impaired loans	$		8,159		$		8,505		$		1,077		$		8,267		$		244		$		146




			At December 31, 2017
			Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Foregone				Interest Income Recognized
Total:			(in thousands)
Commercial and industrial	$		2,263		$		3,348		$		372		$		2,983		$		171		$		40
Residential real estate:
Residential			2,611				2,790				28				2,652				52				86
Construction			-				-				-				-				-				-
Commercial real estate:
Commercial			9,025				9,288				643				9,204				290				161
Construction			187				187				-				218				-				13
Home equities			1,785				1,892				-				1,828				62				33
Consumer and other			34				59				34				37				3				2
Total impaired loans	$		15,905		$		17,564		$		1,077		$		16,922		$		578		$		335




				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

There were $7.7 million in impaired loans with no related allowance at December 31, 2017 and $7.8 million in impaired loans with no related allowance at December 31, 2016. 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, 2017 and 2016.

Troubled debt restructurings (“TDRs”)

The Company had $7.3 million in loans that were restructured and deemed to be TDRs at December 31, 2017 with $4.4 million of those balances in non-accrual status. Any new TDR that is placed on non-accrual is 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, 2017, and 2016, respectively:



		December 31, 2017
		(in thousands)
		Total		Nonaccruing		Accruing		Related Allowance
Commercial and industrial	$	734	$	220	$	514	$	8
Residential real estate:
Residential		1,656		271		1,385		-
Construction		-		-		-		-
Commercial real estate:
Commercial and multi-family		3,854		3,767		87		236
Construction		187		-		187		-
Home equities		794		128		666		-
Consumer and other		25		-		25		24
Total TDR loans	$	7,250	$	4,386	$	2,864	$	268



		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 TDR 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 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 2017 and 2016:



	Year ended December 31, 2017					Year ended December 31, 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	-		-		-	2		121		121
Term-out line of credit	1		180		180	1		20		20
Residential Real Estate & Construction:
Extension of maturity	2		254		272	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	-		-		-	-		-		-
Deferral of principal	1		175		175	-		-		-
Extension of maturity and
interest rate reduction	1		20		20	-		-		-
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, 2017 and 2016. 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, 2017, there were no commitments to lend additional funds to debtors owing loans 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 is 90 days past due. 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, 2017 and 2016, respectively:


	Year ended December 31, 2017			Year ended December 31, 2016
	(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	1	$	107	-	$	-
Residential real estate	1		151	-		-
Commercial real estate	-		-	-		-
Home equities	-		-	-		-
Consumer and other loans	-		-	-		-