3. LOANS

Loans outstanding, excluding those held for sale, by general ledger classification, as of September 30, 2018 and December 31, 2017, consisted of the following:

			% of					% of
	September 30,		Totals			December 31,		Total
(Dollars in thousands)	2018		Loans			2017		Loans
Residential mortgage	$	562,620		14.81	%	$	576,356		15.56	%
Multifamily mortgage		1,285,816		33.85			1,388,958		37.49
Commercial mortgage		644,900		16.98			626,656		16.92
Commercial loans (including equipment financing)		1,180,414		31.08			958,294		25.87
Home equity lines of credit		59,930		1.58			67,497		1.82
Consumer loans, including fixed rate home equity loans		64,478		1.69			86,277		2.33
Other loans		432		0.01			402		0.01
Total loans	$	3,798,590		100.00	%	$	3,704,440		100.00	%

In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on federal call report codes. The following portfolio classes have been identified as of September 30, 2018 and December 31, 2017:

			% of					% of
	September 30,		Totals			December 31,		Total
(Dollars in thousands)	2018		Loans			2017		Loans
Primary residential mortgage	$	592,283		15.61	%	$	605,569		16.35	%
Home equity lines of credit		59,929		1.58			67,497		1.82
Junior lien loan on residence		7,531		0.20			7,073		0.19
Multifamily property		1,285,816		33.88			1,388,958		37.51
Owner-occupied commercial real estate		249,170		6.57			253,492		6.85
Investment commercial real estate		901,820		23.76			874,098		23.61
Commercial and industrial		479,763		12.64			316,294		8.54
Lease financing		151,189		3.98			90,052		2.43
Farmland/agricultural production		152		—			160		0.01
Commercial construction loans		88		—			92		0.01
Consumer and other loans		67,489		1.78			99,247		2.68
Total loans	$	3,795,230		100.00	%	$	3,702,532		100.00	%
Net deferred costs		3,360					1,908
Total loans including net deferred costs	$	3,798,590				$	3,704,440

The following tables present the loan balances by portfolio class, based on impairment method, and the corresponding balances in the allowance for loan and lease losses (ALLL) as of September 30, 2018 and December 31, 2017:

	September 30, 2018
	Total		Ending ALLL		Total		Ending ALLL
	Loans		Attributable		Loans		Attributable
	Individually		To Loans		Collectively		To Loans
	Evaluated		Individually		Evaluated		Collectively				Total
	For		Evaluated for		For		Evaluated for		Total		Ending
(Dollars in thousands)	Impairment		Impairment		Impairment		Impairment		Loans		ALL
Primary residential mortgage	$	9,103	$	358	$	583,180	$	3,774	$	592,283	$	4,132
Home equity lines of credit		266		—		59,663		197		59,929		197
Junior lien loan on residence		44		—		7,487		16		7,531		16
Multifamily property		1,269		385		1,284,547		7,270		1,285,816		7,655
Owner-occupied commercial real estate		1,934		—		247,236		2,387		249,170		2,387
Investment commercial real estate		18,729				883,091		12,791		901,820		12,791
Commercial and industrial		—		—		479,763		8,185		479,763		8,185
Lease financing		—		—		151,189		1,549		151,189		1,549
Farmland/agricultural production		—		—		152		2		152		2
Commercial construction loans		—		—		88		1		88		1
Consumer and other loans		—		—		67,489		378		67,489		378
Total ALLL	$	31,345	$	743	$	3,763,885	$	36,550	$	3,795,230	$	37,293

	December 31, 2017
	Total		Ending ALLL		Total		Ending ALLL
	Loans		Attributable		Loans		Attributable
	Individually		To Loans		Collectively		To Loans
	Evaluated		Individually		Evaluated		Collectively				Total
	For		Evaluated for		For		Evaluated for		Total		Ending
(In thousands)	Impairment		Impairment		Impairment		Impairment		Loans		ALLL
Primary residential mortgage	$	9,802	$	482	$	595,767	$	3,603	$	605,569	$	4,085
Home equity lines of credit		27		—		67,470		221		67,497		221
Junior lien loan on residence		52		—		7,021		12		7,073		12
Multifamily property		—		—		1,388,958		10,007		1,388,958		10,007
Owner-occupied commercial real estate		2,503		—		250,989		2,385		253,492		2,385
Investment commercial real estate		10,681		40		863,417		11,893		874,098		11,933
Commercial and industrial		—		—		316,294		6,563		316,294		6,563
Lease financing		—		—		90,052		884		90,052		884
Farmland/agricultural production		—		—		160		—		160		-
Commercial construction loans		—		—		92		1		92		1
Consumer and other loans		—		—		99,247		349		99,247		349
Total ALLL	$	23,065	$	522	$	3,679,467	$	35,918	$	3,702,532	$	36,440

Impaired loans include nonaccrual loans of $10.7 million at September 30, 2018 and $13.5 million at December 31, 2017. Impaired loans also include performing TDR loans of $19.3 million at September 30, 2018 and $9.5 million at December 31, 2017. At September 30, 2018, the allowance allocated to TDR loans totaled $267 thousand, of which $164 thousand was allocated to nonaccrual loans. At December 31, 2017, the allowance allocated to TDR loans totaled $423 thousand of which $173 thousand was allocated to nonaccrual loans. All accruing TDR loans were paying in accordance with restructured terms as of September 30, 2018. The Company has not committed to lend additional amounts as of September 30, 2018 to customers with outstanding loans that are classified as TDR loans.

The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2018 and December 31, 2017 (The average impaired loans on the following tables represent year to date impaired loans.):

	September 30, 2018
	Unpaid						Average
	Principal		Recorded		Specific		Impaired
(In thousands)	Balance		Investment		Reserves		Loans
With no related allowance recorded:
Primary residential mortgage	$	9,287	$	7,985	$	—	$	7,909
Owner-occupied commercial real estate		2,768		1,934		—		2,102
Investment commercial real estate		20,254		18,729		—		12,444
Home equity lines of credit		268		266		—		79
Junior lien loan on residence		106		44		—		47
Total loans with no related allowance	$	32,683	$	28,958	$	—	$	22,581
With related allowance recorded:
Primary residential mortgage	$	1,139	$	1,118	$	358	$	1,136
Multifamily property		1,269		1,269		385		141
Total loans with related allowance	$	2,408	$	2,387	$	743	$	1,277
Total loans individually evaluated for Impairment	$	35,091	$	31,345	$	743	$	23,858

	December 31, 2017
	Unpaid						Average
	Principal		Recorded		Specific		Impaired
(In thousands)	Balance		Investment		Reserves		Loans
With no related allowance recorded:
Primary residential mortgage	$	9,607	$	8,388	$	—	$	10,847
Owner-occupied commercial real estate		3,238		2,503		—		1,568
Investment commercial real estate		9,564		9,500		—		9,971
Home equity lines of credit		29		27		—		38
Junior lien loan on residence		110		52		—		92
Total loans with no related allowance	$	22,548	$	20,470	$	—	$	22,516
With related allowance recorded:
Primary residential mortgage	$	1,435	$	1,414	$	482	$	1,399
Investment commercial real estate		1,181		1,181		40		1,198
Total loans with related allowance	$	2,616	$	2,595	$	522	$	2,597
Total loans individually evaluated for impairment	$	25,164	$	23,065	$	522	$	25,113

Interest income recognized on impaired loans for the quarters ended September 30, 2018 and 2017 was not material. The Company did not recognize any income on nonaccruing impaired loans for the three and nine months ended September 30, 2018 and 2017.

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2018 and December 31, 2017:

	September 30, 2018
			Loans Past Due
			Over 90 Days
			And Still
(In thousands)	Nonaccrual		Accruing Interest
Primary residential mortgage	$	5,045	$	—
Home equity lines of credit		246		—
Junior lien loan on residence		44		—
Owner-occupied commercial real estate		1,934		—
Investment commercial real estate		3,453		—
Total	$	10,722	$	—

	December 31, 2017
			Loans Past Due
			Over 90 Days
			And Still
(In thousands)	Nonaccrual		Accruing Interest
Primary residential mortgage	$	6,056	$	—
Home equity lines of credit		6		—
Junior lien loan on residence		52		—
Owner-occupied commercial real estate		2,503		—
Investment commercial real estate		4,913		—
Total	$	13,530	$	—

The following tables present the aging of the recorded investment in past due loans as of September 30, 2018 and December 31, 2017 by class of loans, excluding nonaccrual loans:

	September 30, 2018
	30-59		60-89		Greater Than
	Days		Days		90 Days		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	1,492	$	669	$	—	$	2,161
Commercial and industrial		353		—		—		353
Consumer and other		14		—		—		14
Total	$	1,859	$	669	$	—	$	2,528

	December 31, 2017
	30-59		60-89		Greater Than
	Days		Days		90 Days		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	216	$	—	$	—	$	216
Consumer and other loans		30		—		—		30
Total	$	246	$	—	$	—	$	246

Credit Quality Indicators:

The Company places all commercial loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt. The assessment considers numerous factors including, but not limited to, debt service capacity, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information and current economic trends. This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy.

In addition, the Bank has engaged an independent loan review firm to validate risk ratings and to ensure compliance with our policies and procedures. This review of the following types of loans is performed quarterly:

•

A majority of relationships or new lending to existing relationships greater than $1,000,000;

•

All criticized and classified rated borrowers with relationship exposure of more than $500,000;

•

A random sample of borrowers with relationships less than $1,000,000;

•

All leveraged loans;

•

At least two borrowing relationships managed by each commercial banker;

•

Any new Regulation “O” loan commitments over $1,000,000;

•

Any other credits requested by Bank senior management or a member of the Board of Directors and any borrower for which the reviewer determines a review is warranted based upon knowledge of the portfolio, local events, industry stresses etc.

The Company uses the following regulatory definitions for criticized and classified risk ratings:

Special Mention: These loans have a potential weakness that deserves Management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

Substandard: These loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

Loans that are considered to be impaired are individually evaluated for potential loss and allowance adequacy. Loans not deemed impaired are collectively evaluated for potential loss and allowance adequacy.

As of September 30, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special
(In thousands)	Pass		Mention		Substandard		Doubtful
Primary residential mortgage	$	582,172	$	952	$	9,159	$	—
Home equity lines of credit		59,663		—		266		—
Junior lien loan on residence		7,487		—		44		—
Multifamily property		1,275,518		6,444		3,854		—
Owner-occupied commercial real estate		242,898		574		5,698		—
Investment commercial real estate		851,037		19,051		28,279		3,453
Commercial and industrial		471,323		7,046		1,394		—
Lease financing		151,189		—		—		—
Farmland/agricultural production		152		—		—		—
Commercial construction loans		—		88		—		—
Consumer and other loans		67,253		—		236		—
Total	$	3,708,692	$	34,155	$	48,930	$	3,453

As of December 31, 2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special
(In thousands)	Pass		Mention		Substandard		Doubtful
Primary residential mortgage	$	594,846	$	866	$	9,857	$	—
Home equity lines of credit		67,470		—		27		—
Junior lien loan on residence		7,021		—		52		—
Multifamily property		1,371,825		16,755		378		—
Owner-occupied commercial real estate		249,003		837		3,652		—
Investment commercial real estate		827,558		23,377		23,163		—
Commercial and industrial		306,341		7,488		2,465		—
Lease financing		90,052		—		—		—
Farmland/agricultural production		160		—		—		—
Commercial construction loans		—		92		—		—
Consumer and other loans		97,135		—		2,112		—
Total	$	3,611,411	$	49,415	$	41,706	$	—

At September 30, 2018, $27.8 million of substandard loans were also considered impaired compared to December 31, 2017, when $21.8 million of substandard loans were also impaired.

The activity in the allowance for loan and lease losses for the three months ended September 30, 2018 is summarized below:

	July 1,										September 30,
	2018										2018
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	4,382	$	(10	)	$	—	$	(240	)	$	4,132
Home equity lines of credit		190		—			3		4			197
Junior lien loan on residence		17		—			6		(7	)		16
Multifamily property		8,259		—			—		(604	)		7,655
Owner-occupied commercial real estate		2,525		—			—		(138	)		2,387
Investment commercial real estate		13,659		(1,335	)		4		463			12,791
Commercial and industrial		7,356		—			85		744			8,185
Lease financing		1,311		—			—		238			1,549
Farmland/agricultural production		2		—			—		—			2
Commercial construction loans		1		—			—		—			1
Consumer and other loans		364		(27	)		1		40			378
Total ALLL	$	38,066	$	(1,372	)	$	99	$	500		$	37,293

The activity in the allowance for loan and lease losses for the three months ended September 30, 2017 is summarized below:

	July 1,										September 30,
	2017										2017
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	4,223	$	(261	)	$	59	$	323		$	4,344
Home equity lines of credit		211		—			2		16			229
Junior lien loan on residence		14		—			6		(7	)		13
Multifamily property		11,606		—			—		(360	)		11,246
Owner-occupied commercial real estate		2,147		(30	)		—		153			2,270
Investment commercial real estate		11,727		—			1		229			11,957
Commercial and industrial		5,333		—			9		(107	)		5,235
Lease financing		178		—			—		97			275
Farmland/agricultural production		2		—			—		—			2
Commercial construction loans		1		—			—		—			1
Consumer and other loans		309		(24	)		2		56			343
Total ALLL	$	35,751	$	(315	)	$	79	$	400		$	35,915

The activity in the allowance for loan and lease losses for the nine months ended September 30, 2018 is summarized below:

	January 1,										September 30,
	2018										2018
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	4,085	$	(87	)	$	139	$	(5	)	$	4,132
Home equity lines of credit		221		—			7		(31	)		197
Junior lien loan on residence		12		—			61		(57	)		16
Multifamily property		10,007		—			—		(2,352	)		7,655
Owner-occupied commercial real estate		2,385		(64	)		66		-			2,387
Investment commercial real estate		11,933		(1,335	)		4		2,189			12,791
Commercial and industrial		6,563		(46	)		107		1,561			8,185
Lease financing		884		—			—		665			1,549
Farmland/agricultural production		—		—			—		2			2
Commercial construction loans		1		—			—		—			1
Consumer and other loans		349		(52	)		3		78			378
Total ALLL	$	36,440	$	(1,584	)	$	387	$	2,050		$	37,293

The activity in the allowance for loan and lease losses for the nine months ended September 30, 2017 is summarized below:

	January 1,										September 30,
	2017										2017
	Beginning							Provision			Ending
(In thousands)	ALLL		Charge-offs			Recoveries		(Credit)			ALLL
Primary residential mortgage	$	3,666	$	(591	)	$	128	$	1,141		$	4,344
Home equity lines of credit		233		(23	)		61		(42	)		229
Junior lien loan on residence		16		(57	)		19		35			13
Multifamily property		11,192		—			—		54			11,246
Owner-occupied commercial real estate		1,774		(30	)		—		526			2,270
Investment commercial real estate		10,909		—			23		1,025			11,957
Commercial and industrial		4,164		(25	)		61		1,035			5,235
Lease financing		—		—			—		275			275
Farmland/agricultural production		2		—			—		—			2
Commercial construction loans		9		—			—		(8	)		1
Consumer and other loans		243		(62	)		3		159			343
Total ALLL	$	32,208	$	(788	)	$	295	$	4,200		$	35,915

Troubled Debt Restructurings:

The Company has allocated $267 thousand and $423 thousand of specific reserves on TDRs to customers whose loan terms have been modified in TDRs as of September 30, 2018 and December 31, 2017, respectively. There were no unfunded commitments to lend additional amounts to customers with outstanding loans that are classified as TDRs.

The terms of certain loans were modified as TDRs when one or a combination of the following occurred: a reduction of the stated interest rate of the loan was reduced; the maturity date was extended; or some other modification or extension occurred which would not be readily available in the market.

The following table presents loans by class modified as TDRs during the three-month period ended September 30, 2018:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		1	$	766	$	766
Total		1	$	766	$	766

The following table presents loans by class modified as TDRs during the nine-month period ended September 30, 2018:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		1	$	766	$	766
Investment commercial real estate		1		15,351		15,351
Total		2	$	16,117	$	16,117

There were no loans modified as TDRs during the three-month period ended September 30, 2017.

The following table presents loans by class modified as TDRs during the nine-month period ended September 30, 2017:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		5	$	1,148	$	1,148
Total		5	$	1,148	$	1,148

The identification of the TDRs did not have a significant impact on the allowance for loan and lease losses.

There were no loans that were modified as TDRs for which there was a payment default, within twelve months of modification, during the three and nine months ended September 30, 2018 and September 30, 2017.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy. The modification of the terms of such loans may include one or more of the following: (1) a reduction of the stated interest rate of the loan to a rate that is lower than the current market rate for new debt with similar risk; (2) an extension of an interest only period for a predetermined period of time; (3) an extension of the maturity date; or (4) an extension of the amortization period over which future payments will be computed. At the time a loan is restructured, the Bank performs a full re-underwriting analysis, which includes, at a minimum, obtaining current financial statements and tax returns, copies of all leases, and an updated independent appraisal of the property. A loan will continue to accrue interest if it can be reasonably determined that the borrower should be able to perform under the modified terms, that the loan has not been chronically delinquent (both to debt service and real estate taxes) or in nonaccrual status since its inception, and that there have been no charge-offs on the loan. Restructured loans with previous charge-offs would not accrue interest at the time of the TDR. At a minimum, six months of contractual payments would need to be made on a restructured loan before returning it to accrual status. Once a loan is classified as a TDR, the loan is reported as a TDR until the loan is paid in full, sold or charged-off. In rare circumstances, a loan may be removed from TDR status if it meets the requirements of ASC 310-40-50-2.