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Note 3 - Loans Receivable and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2015

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 3: Loans Receivable and Allowance for Loan Losses

A summary of the Company’s loan portfolio at March 31, 2015 and December 31, 2014 is as follows:

(in thousands)	March 31,			December 31,
	2015			2014
Commercial	$	52,476		$	53,973
Commercial Real Estate		281,387			254,505
Construction		7,024			3,096
Construction to permanent		9,988			10,627
Residential		102,521			108,543
Consumer		45,963			46,164
Total Loans		499,359			476,908
Allowance for loan losses		(5,193	)		(4,924	)
Loans receivable, net	$	494,166		$	471,984

The Company's lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County in New York. The Company originates commercial real estate loans, commercial business loans, construction loans and a variety of consumer loans. In addition, the Company previously had originated loans on residential real estate. All residential and commercial mortgage loans are collateralized primarily by first or second mortgages on real estate. The ability and willingness of borrowers to satisfy their loan obligations is dependent to some degree on the status of the regional economy as well as upon the regional real estate market. Accordingly, the ultimate collectability of a substantial portion of the loan portfolio and the recovery of a substantial portion of any resulting real estate acquired is susceptible to changes in market conditions.

The Company has established credit policies applicable to each type of lending activity in which it engages, evaluates the creditworthiness of each customer and, in most cases, extends credit of up to 75% of the market value of the collateral for commercial real estate at the date of the credit extension depending on the Company's evaluation of the borrowers' creditworthiness and type of collateral and up to 80% for multi–family real estate. In the case of construction loans, the maximum loan-to-value is 75% of the “as completed” appraised value. The appraised value of collateral is monitored on an ongoing basis and additional collateral is requested when warranted. Real estate is the primary form of collateral. Other important forms of collateral are accounts receivable, inventory, other business assets, marketable securities and time deposits.

Risk characteristics of the Company’s portfolio classes include the following:

Commercial Real Estate Loans – In underwriting commercial real estate loans, the Company evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loans. Repayment of such loans may be negatively impacted should there be a substantial decline in the value of the property securing the loan or decline in general economic conditions. Where the owner occupies the property, the Company also evaluates the business ability to repay the loan on a timely basis. In addition, the Company may require personal guarantees, lease assignments and/or the guarantee of the operating company when the property is owner occupied.

Commercial and Industrial Loans – The Company’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are usually made to finance accounts receivable, the purchase of inventory or new or used equipment and for other short or long-term working capital purposes. These loans are generally secured by business assets, but are also occasionally offered on an unsecured basis. In granting this type of loan, the Company primarily looks to the borrower’s cash flow as the source of repayment with collateral and personal guarantees when obtained, as a secondary source. Payments on such loans are often dependent upon the successful operation of the underlying business. Repayment of such loans may therefore be negatively impacted by adverse changes in economic conditions, management’s inability to effectively manage the business, claims of others against the borrower’s assets which may take priority over the Company’s claims against assets, death or disability of the borrower or loss of market share for the borrower’s products or services.

Residential Real Estate Loans – Home equity loans secured by real estate properties are offered by the Company. The Company no longer offers residential mortgages, having exited this business in 2013. Repayment of residential real estate loans may be negatively impacted should the borrower have financial difficulties, should there be a significant decline in the value of the property securing the loan or should there be a decline in general economic conditions.

Construction Loans – Construction loans are short-term loans (generally up to 18 months) secured by land for either residential or commercial development. The loans are generally made for acquisition and improvements. Funds are disbursed as phases of construction are completed. Construction loans are generally personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by the builders’ inability to complete construction, by a downturn in the new construction market, by a significant increase in interest rates or by a decline in general economic conditions.

Other/Consumer Loans – The Company also offers installment loans, credit cards, consumer overdraft and home equity lines of credit to individuals. Repayments of such loans are often dependent on the personal income of the borrower which may be negatively impacted by adverse changes in economic conditions. The Company does not place a high emphasis on originating these types of loans.

The Company does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burdened ratios.

The following table sets forth activity in our allowance for loan losses, by loan type, for the three months ended March 31, 2015. The following table also details the amount of loans receivable that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment.

(in thousands)
Three months ended March 31, 2015	Commercial			Commercial Real Estate		Construction		Construction to Permanent			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	1,918		$	1,419	$	63	$	215		$	831		$	478		$	-	$	4,924
Charge-offs		-			-		-		-			(3	)		(7	)		-		(10	)
Recoveries		16			-		-		5			-			8			-		29
Provision		(637	)		605		159		(29	)		(98	)		232			18		250
Ending Balance	$	1,297		$	2,024	$	222	$	191		$	730		$	711		$	18	$	5,193
Ending balance: individually evaluated for impairment	$	-		$	-	$	-	$	-		$	-		$	-		$	-	$	-
Ending balance: collectively evaluated for impairment		1,297			2,024		222		191			730			711			18		5,193

Total Allowance for Loan Losses	$	1,297		$	2,024	$	222	$	191		$	730		$	711		$	18	$	5,193

March 31, 2015
Total Loans ending balance	$	52,476		$	281,387	$	7,024	$	9,988		$	102,521		$	45,963		$	-	$	499,359


Ending balance: individually evaluated for impairment	$	-		$	8,272	$	-	$	-		$	3,406		$	552		$	-	$	12,230


Ending balance: collectively evaluated for impairment	$	52,476		$	273,115	$	7,024	$	9,988		$	99,115		$	45,411		$	-	$	487,129

The following table sets forth activity in our allowance for loan losses, by loan type, for the three months ended March 31, 2014. The following table also details the amount of loans receivable that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment.

(in thousands)
Three months ended March 31, 2014	Commercial			Commercial Real Estate			Construction		Construction to Permanent		Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	2,285		$	1,585		$	260	$	25	$	795		$	534		$	197	$	5,681
Charge-offs		(9	)		-			-		-		(178	)		(30	)		-		(217	)
Recoveries		-			-			-		-		15			1			-		16
Provision		95			(265	)		-		9		72			34			55	$	-
Ending Balance	$	2,371		$	1,320		$	260	$	34	$	704		$	539		$	252	$	5,480
Ending balance: individually evaluated for impairment	$	1,500		$	17		$	260	$	-	$	21		$	2		$	-	$	1,800
Ending balance: collectively evaluated for impairment		871			1,303			-		34		683			537			252		3,680

Total Allowance for Loan Losses	$	2,371		$	1,320		$	260	$	34	$	704		$	539		$	252	$	5,480

March 31, 2014
Total Loans ending balance	$	38,838		$	217,674		$	260	$	12,718	$	103,766		$	47,347		$	-	$	420,603


Ending balance: individually evaluated for impairment	$	6,052		$	8,855		$	260	$	-	$	5,192		$	588		$	-	$	20,947


Ending balance: collectively evaluated for impairment	$	32,786		$	208,819		$	-	$	12,718	$	98,574		$	46,759		$	-	$	399,656

The following table details for the year ended December 31, 2014 the amount of loans receivable that were evaluated individually, and collectively, for impairment, and the related portion of the allowance for the loans losses that was allocated to each loan portfolio segment:

(in thousands)
December 31, 2014	Commercial		Commercial Real Estate		Construction		Construction to Permanent		Residential		Consumer		Total
Ending balance: individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	7	$	7
Ending balance: collectively evaluated for impairment		1,918		1,419		63		215		831		471		4,917

Total Allowance for Loan Losses	$	1,918	$	1,419	$	63	$	215	$	831	$	478	$	4,924


Total Loans ending balance	$	53,973	$	254,505	$	3,096	$	10,627	$	108,543	$	46,164	$	476,908

Ending balance: individually evaluated for impairment		2		7,398		-		-		3,764		560		11,724

Ending balance: collectively evaluated for impairment	$	53,971	$	247,107	$	3,096	$	10,627	$	104,779	$	45,604	$	465,184

The Company monitors the credit quality of its loans receivable in an ongoing manner. Credit quality is monitored by reviewing certain credit quality indicators and trends, including but not limited to, loan to value ratios, debt service coverage ratios, debt to worth ratios, profitability ratios, cash flows, and credit scores.

Appraisals on properties securing non-performing loans and Other Real Estate Owned (“OREO”) are updated annually. We update our impairment analysis monthly based on the most recent appraisal as well as other factors (such as senior lien positions, property taxes, etc.).

The majority of the Company’s impaired loans have been resolved through courses of action other than via liquidations of real estate collateral through OREO. These include normal loan payoffs, the traditional workout process, triggering personal guarantee obligations, and troubled debt restructurings. However, as loan workout efforts progress to a point where the bank’s liquidation of real estate collateral is the likely outcome, the impairment analysis is updated to reflect actual recent experience with bank sales of OREO properties.

A disposition discount is built into our impairment analysis and reflected in our allowance once a property is determined to be a likely OREO (e.g. foreclosure is probable). To determine the discount we compare the average sales prices of our prior OREO properties to the appraised value that was obtained as of the date when we took title to the property. The difference is the bank-owned disposition discount.

The Company has a risk rating system as part of the risk assessment of its loan portfolio. The Company’s lending officers are required to assign a risk rating to each loan in their portfolio at origination, which is ratified or modified by the Committee to which the loan is submitted for approval. When the lender learns of important financial developments, the risk rating is reviewed and adjusted if necessary. Similarly, the Loan Committee can adjust a risk rating. The Company employs a system to ensure an independent review of the ratings annually for commercial credits over $250,000.

The Company uses an independent third party loan reviewer who performs quarterly reviews of a sample of loans, validating the Bank’s risk ratings assigned to such loans. Any upgrades to classified loans must be approved by the Management Loan Committee.

When assigning a risk rating to a loan, management utilizes the Bank’s internal eleven-point risk rating system. An asset is considered “special mention” when it has a potential weakness based on objective evidence, but does not currently expose the Company to sufficient risk to warrant classification in one of the following categories:

	●	An asset is considered “substandard” if it is not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets have well defined weaknesses based on objective evidence, and are characterized by the “distinct possibility” that the Company will sustain “some loss” if the deficiencies are not corrected.
	●	Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”

Charge–off generally commences after the loan is classified “doubtful” to reduce the loan to its recoverable balance. If the account is classified as “loss”, the full balance is charged off regardless of the potential recovery from the sale of the collateral. That amount is recognized as a recovery after the collateral is sold.

In accordance with FFIEC (“Federal Financial Institutions Examination Council”) published policies establishing uniform criteria for the classification of retail credit based on delinquency status, “Open-end” credits are charged-off when 180 days delinquent and “Closed-end” credits are charged-off when 120 days delinquent.

Included in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The unpaid principal balances of loans on nonaccrual status and considered impaired were $515,000 at March 31, 2015 and $866,000 at December 31, 2014. If non-accrual loans had been performing in accordance with their contractual terms, the Company would have recorded approximately $4,000 of additional income during the quarter ended March 31, 2015 and $33,000 during the quarter ended March 31, 2014.

The following table sets forth the detail, and delinquency status, of non-accrual loans at March 31, 2015 :

(in thousands)	Non-Accrual Loans

2015	31-60 Days Past Due		61-90 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Non-Accrual Loans
Commercial Real Estate Substandard	$	-	$	-	$	-	$	-	$	135	$	135
Total Commercial Real Estate	$	-	$	-	$	-	$	-	$	135	$	135
Residential Real Estate Substandard	$	-	$	-	$	380	$	380	$	-	$	380
Total Residential Real Estate	$	-	$	-	$	380	$	380	$	-	$	380

Total	$	-	$	-	$	380	$	380	$	135	$	515

Generally, loans are placed on non-accruing status when they become 90 days or more delinquent, and remain on non-accrual status until they are brought current, have at least six months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exist. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent and still be on a non-accruing status.

At March 31, 2015, $135,000 or 26% of the non-accruing loan balance of $515,000 was current and being applied to principal.

There was one loan of $1.5 million that was past due ninety days or more and accruing interest at March 31, 2015. This is a residential mortgage loan which had been in non-accrual status from September 2012 until December 31, 2014. The customer has been making regular payments since September 2013, however, the loan is greater than 90 days past due because not all prior payments owed have not been brought current.

At December 31, 2014, there were five loans totaling $1.8 million which were past due ninety days or more and accruing interest. One loan of $1.6 million was the residential mortgage loan discussed above. The other four loans were mature lines of credit totaling $279,000, which were in the process of renewal. Three of these loans were renewed, and one paid off.

The following table sets forth the detail, and delinquency status, of non-accrual loans at December 31, 2014:

(in thousands)	Non-Accrual Loans

2014	31-60 Days Past Due		61-90 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Non-Accrual Loans
Commercial
Substandard	$	-	$	-	$	2	$	2	$	-	$	2
Total Commercial	$	-	$	-	$	2	$	2	$	-	$	2
Commercial Real Estate
Substandard	$	-	$	-	$	-	$	-	$	138	$	138
Total Commercial Real Estate	$	-	$	-	$	-	$	-	$	138	$	138
Residential Real Estate
Substandard	$	-	$	-	$	719	$	719	$	-	$	719
Total Residential Real Estate	$	-	$	-	$	719	$	719	$	-	$	719
Consumer
Substandard	$	-	$	-	$	7	$	7	$	-	$	7
Total Consumer	$	-	$	-	$	7	$	7	$	-	$	7

Total	$	-	$	-	$	728	$	728	$	138	$	866

The following table sets forth the detail and delinquency status of loans receivable, by performing and non-performing loans at March 31, 2015.

(in thousands)	Performing (Accruing) Loans

2015	31-60 Days Past Due		61-90 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Performing Loans		Total Non-Accrual Loans		Total Loans
Commercial
Pass	$	40	$	-	$	-	$	40	$	46,732	$	46,772	$	-	$	46,772
Special Mention		-		-		-		-		113		113		-		113
Substandard		-		-		-		-		5,591		5,591		-		5,591
Total Commercial	$	40	$	-	$	-	$	40	$	52,436	$	52,476	$	-	$	52,476
Commercial Real Estate
Pass	$	-	$	-	$	-	$	-	$	271,956	$	271,956	$	-	$	271,956
Special Mention		1,032		-		-		1,032		5,986		7,018		-		7,018
Substandard		-		-		-		-		2,278		2,278		135		2,413
Total Commercial Real Estate	$	1,032	$	-	$	-	$	1,032	$	280,220	$	281,252	$	135	$	281,387
Construction
Pass	$	-	$	-	$	-	$	-	$	7,024	$	7,024	$	-	$	7,024
Total Construction	$	-	$	-	$	-	$	-	$	7,024	$	7,024	$	-	$	7,024
Construction to Permanent
Pass	$	-	$	-	$	-	$	-	$	9,988	$	9,988	$	-	$	9,988
Total Construction to Permanent	$	-	$	-	$	-	$	-	$	9,988	$	9,988	$	-	$	9,988
Residential Real Estate
Pass	$	30	$	178	$	1,537	$	1,745	$	100,396	$	102,141	$	-	$	102,141
Substandard		-		-		-		-		-		-		380		380
Total Residential Real Estate	$	30	$	178	$	1,537	$	1,745	$	100,396	$	102,141	$	380	$	102,521
Consumer
Pass	$	4	$	99	$	-	$	103	$	45,860	$	45,963	$	-	$	45,963
Total Consumer	$	4	$	99	$	-	$	103	$	45,860	$	45,963	$	-	$	45,963
Total
Pass	$	74	$	277	$	1,537	$	1,888	$	481,956	$	483,844	$	-	$	483,844
Special Mention		1,032		-		-		1,032		6,099		7,131		-		7,131
Substandard		-		-		-		-		7,869		7,869		515		8,384
Grand Total	$	1,106	$	277	$	1,537	$	2,920	$	495,924	$	498,844	$	515	$	499,359

The following table sets forth the detail and delinquency status of loans receivable, by performing and non-performing loans at December 31, 2014.

(in thousands)	Performing (Accruing) Loans

2014	31-60 Days Past Due		61-90 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Performing Loans		Total Non-Accrual Loans		Total Loans
Commercial
Pass	$	1,520	$	-	$	279	$	1,799	$	46,279	$	48,078	$	-	$	48,078
Special Mention		-		-		-		-		121		121		-		121
Substandard		-		-		-		-		5,772		5,772		2		5,774
Total Commercial	$	1,520	$	-	$	279	$	1,799	$	52,172	$	53,971	$	2	$	53,973
Commercial Real Estate
Pass	$	-	$	-	$	-	$	-	$	248,132	$	248,132	$	-	$	248,132
Special Mention		1,041		-		-		1,041		2,887		3,928		-		3,928
Substandard		-		815		-		815		1,492		2,307		138		2,445
Total Commercial Real Estate	$	1,041	$	815	$	-	$	1,856	$	252,511	$	254,367	$	138	$	254,505
Construction
Pass	$	-	$	-	$	-	$	-	$	3,096	$	3,096	$	-	$	3,096
Total Construction	$	-	$	-	$	-	$	-	$	3,096	$	3,096	$	-	$	3,096
Construction to Permanent
Pass	$	-	$	-	$	-	$	-	$	10,627	$	10,627	$	-	$	10,627
Total Construction to Permanent	$	-	$	-	$	-	$	-	$	10,627	$	10,627	$	-	$	10,627
Residential Real Estate
Pass	$	172	$	87	$	1,553	$	1,812	$	106,012	$	107,824	$	-	$	107,824
Substandard		-		-		-		-		-		-		719		719
Total Residential Real Estate	$	172	$	87	$	1,553	$	1,812	$	106,012	$	107,824	$	719	$	108,543
Consumer
Pass	$	-	$	2	$	-	$	2	$	46,155	$	46,157	$	-	$	46,157
Substandard		-		-		-		-		-		-		7		7
Total Consumer	$	-	$	2	$	-	$	2	$	46,155	$	46,157	$	7	$	46,164
Total
Pass	$	1,692	$	89	$	1,832	$	3,613	$	460,301	$	463,914	$	-	$	463,914
Special Mention		1,041		-		-		1,041		3,008		4,049		-		4,049
Substandard		-		815		-		815		7,264		8,079		866		8,945
Grand Total	$	2,733	$	904	$	1,832	$	5,469	$	470,573	$	476,042	$	866	$	476,908

Impaired loans consist of non-accrual loans, TDRs, and loans previously classified as TDRs that have been upgraded. The recorded investment of impaired loans at March 31, 2015 and December 31, 2014 was $12.2 million and $11.7 million, with related allowances of $0 and $7,000 respectively.

The following table summarizes impaired loans by loan portfolio class as of March 31, 2015

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance


With no related allowance recorded:
Commercial	$	-	$	101	$	-
Commercial Real Estate		8,272		9,113		-
Construction		-		287		-
Residential		3,406		3,433		-
Consumer		552		639		-
Total:	$	12,230	$	13,573	$	-

With an allowance recorded:
Commercial	$	-	$	-	$	-
Commercial Real Estate		-		-		-
Construction		-		-		-
Residential		-		-		-
Consumer		-		-		-
Total:	$	-	$	-	$	-

Commercial	$	-	$	101	$	-
Commercial Real Estate		8,272		9,113		-
Construction		-		287		-
Residential		3,406		3,433		-
Consumer		552		639		-
Total:	$	12,230	$	13,573	$	-

The following table summarizes impaired loans by loan portfolio class as of December 31, 2014

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance


With no related allowance recorded:
Commercial	$	2	$	104	$	-
Commercial Real Estate		7,398		8,249		-
Construction		-		732		-
Residential		3,764		3,793		-
Consumer		553		633		-
Total:	$	11,717	$	13,511	$	-

With an allowance recorded:
Commercial	$	-	$	-	$	-
Commercial Real Estate		-		-		-
Construction		-		-		-
Residential		-		-		-
Consumer		7		7		7
Total:	$	7	$	7	$	7

Commercial	$	2	$	104	$	-
Commercial Real Estate		7,398		8,249		-
Construction		-		732		-
Residential		3,764		3,793		-
Consumer		560		640		7
Total:	$	11,724	$	13,518	$	7

Included in the tables above at March 31, 2015 and December 31, 2014 are loans with carrying balances of $12.2 million and $11.7 million that required no specific reserves in our allowance for loan losses. Loans that did not require specific reserves have sufficient collateral values, less costs to sell, supporting the carrying balances of the loans. In some cases, there may be no specific reserves because the Company already charged-off the specific impairment. Once a borrower is in default, the Company is under no obligation to advance additional funds on unused commitments.

On a case-by-case basis, the Company may agree to modify the contractual terms of a borrower’s loan to assist customers who may be experiencing financial difficulty. If the borrower is experiencing financial difficulties and a concession has been made, the loan is classified as a troubled debt restructured loan.

The following table summarizes additional information regarding impaired loans for three months ended March 31, 2015 and 2014.

	Three Months Ended March 31
	2015				2014
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

With no related allowance recorded:
Commercial	$	1	$	-	$	2		86
Commercial Real Estate		8,296		95		7,941		72
Construction		-		-		-		-
Construction to Permanent		-		-		788		-
Residential		3,525		32		4,821		32
Consumer		552		4		588		9
Total:	$	12,374	$	131	$	14,140	$	199

With an allowance recorded:
Commercial	$	-	$	-	$	6,078	$	-
Commercial Real Estate		-		-		158		-
Construction		-		-		260		-
Residential		-		-		662		-
Consumer		2		-		2		-
Total:	$	2	$	-	$	7,160

Commercial	$	1	$	-	$	6,080	$	86
Commercial Real Estate		8,296		95		8,099		72
Construction		-		-		260		-
Residential		3,525		32		5,483		32
Consumer		554		4		590		9
Total:	$	12,376	$	131	$	21,300	$	199

No loans were modified in troubled debt restructurings during the three months ended March 31, 2015.

Notes to consolidated financial statements (Unaudited)

Substantially all of our troubled debt restructured loan modifications involve lowering the monthly payments on such loans through either a reduction in interest rate below market rate, an extension of the term of the loan, or a combination of these two methods. These modifications rarely result in the forgiveness of principal or accrued interest. In addition, we frequently obtain additional collateral or guarantor support when modifying commercial loans. If the borrower had demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible. All troubled debt restructurings are classified as impaired loans, which are individually evaluated for impairment.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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