Toggle SGML Header (+)


Section 1: 10-Q (10-Q JUNE 30, 2018)

Document


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]
Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2018

OR

[   ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File No. 001-36551

Blue Hills Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
 
 
46-5429062
(State or Other Jurisdiction of
 
 
 
(I.R.S. Employer
Incorporation or Organization)
 
 
 
Identification Number)
500 River Ridge Drive
Norwood, Massachusetts 02062
(617) 360-6520
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices) 

N/A
(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.
YES [ X ]     NO [ ]
    
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [X]     NO [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer [   ]
 
Accelerated filer [X]
Non-accelerated filer [ ]
(Do not check if smaller reporting company)
 
 
Smaller reporting company [ ]
 
 
Emerging growth company [ X ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [   ]     NO [X]

As of August 1, 2018 there were 26,901,347 shares of the registrant’s common stock, par value $0.01 per share, outstanding.





Blue Hills Bancorp, Inc.
Form 10-Q

Index
Part I. Financial Information
 
 
 
Item 1.


Page No.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Part II. Other Information
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
Signature Page

1



Blue Hills Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
 
June 30,
2018
 
December 31, 2017
(In thousands, except share data)
 
 
 
Assets
 
 
 
Cash and due from banks
$
17,566

 
$
16,149

Short-term investments
34,383

 
30,018

Total cash and cash equivalents
51,949

 
46,167

Equity securities, at fair value
5,331

 

Securities available for sale, at fair value

 
9,720

Securities held to maturity, at amortized cost
303,137

 
303,716

Federal Home Loan Bank stock, at cost
14,375

 
12,105

Loans held for sale
10,005

 
8,992

Loans, net of allowance for loan losses of $20,125 at June 30, 2018 and $20,877 at December 31, 2017
2,241,746

 
2,186,147

Premises and equipment, net
20,192

 
21,573

Other real estate owned
3,649

 

Accrued interest receivable
6,531

 
6,438

Goodwill
9,160

 
9,160

Core deposit intangible
278

 
557

Net deferred tax asset
6,480

 
6,000

Bank-owned life insurance
33,610

 
33,078

Other assets
34,719

 
24,867

 
$
2,741,162

 
$
2,668,520

Liabilities and Stockholders' Equity
 
 
 
Deposits:
 
 
 
Non-interest bearing
$
213,017

 
$
219,984

Interest bearing
1,899,050

 
1,819,885

Total deposits
2,112,067

 
2,039,869

Short-term borrowings
110,000

 
100,000

Long-term debt
90,000

 
105,000

Accrued expenses and other liabilities
28,850

 
25,845

Total liabilities
2,340,917

 
2,270,714

 

 

Stockholders' Equity:
 
 
 
Preferred stock, zero par value, (50,000,000 shares authorized; none issued and outstanding)

 

Common stock, $0.01 par value, (100,000,000 shares authorized; 26,874,071 and 26,827,660 issued and outstanding at June 30, 2018 and December 31, 2017, respectively)
268

 
268

Additional paid-in capital
258,225

 
254,750

Unearned compensation-ESOP
(19,357
)
 
(19,737
)
Retained earnings
162,948

 
163,978

Accumulated other comprehensive loss
(1,839
)
 
(1,453
)
Total stockholders' equity
400,245

 
397,806

 
$
2,741,162

 
$
2,668,520

The accompanying notes are an integral part of these unaudited consolidated financial statements.

2

Blue Hills Bancorp, Inc. and Subsidiaries
Consolidated Statements of Net Income (unaudited)


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except share data)
Interest and dividend income:
Interest and fees on loans
$
23,081

 
$
18,715

 
$
44,890

 
$
36,097

Interest on securities
1,809

 
1,572

 
3,666

 
3,782

Dividends
195

 
193

 
399

 
350

Other
62

 
94

 
140

 
126

Total interest and dividend income
25,147

 
20,574

 
49,095

 
40,355

Interest expense:
 
 
 
 
 
 
 
Interest on deposits
5,252

 
3,523

 
10,027

 
6,777

Interest on borrowings
912

 
643

 
1,726

 
1,289

Total interest expense
6,164

 
4,166

 
11,753

 
8,066

Net interest and dividend income
18,983


16,408

 
37,342

 
32,289

Provision (credit) for loan losses
101

 
1,118

 
(359
)
 
1,175

Net interest and dividend income, after provision (credit) for loan losses
18,882


15,290

 
37,701

 
31,114

Non-interest income:
 
 
 
 
 
 
 
Deposit account fees
422

 
341

 
777

 
661

Interchange and ATM fees
454

 
388

 
845

 
736

Mortgage banking
1,033

 
1,219

 
1,773

 
1,959

Loan level derivative income
143

 
1,367

 
383

 
1,531

Net unrealized gains on equity securities
452

 

 
383

 

Gain (loss) on sales of available for sale securities, net

 
928

 

 
(94
)
Gain on exchange of investment in Northeast Retirement Services

 

 
653

 
5,947

Bank-owned life insurance income
256

 
261

 
532

 
518

Gain on sale of premises and equipment

 

 
271

 

Miscellaneous
872

 
6

 
1,913

 
68

Total non-interest income
3,632

 
4,510

 
7,530

 
11,326

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
8,264

 
7,664

 
16,646

 
15,227

Occupancy and equipment
2,050

 
2,030

 
4,133

 
4,145

Data processing
1,054

 
1,022

 
2,098

 
2,066

Professional fees
450

 
526

 
903

 
1,395

Advertising
499

 
489

 
803

 
856

FDIC deposit insurance
230

 
223

 
463

 
435

Directors’ fees
362

 
428

 
771

 
802

Amortization of core deposit intangible
127

 
222

 
278

 
469

Other general and administrative
655

 
762

 
1,467

 
1,371

Total non-interest expense
13,691

 
13,366

 
27,562

 
26,766

Income before income taxes
8,823

 
6,434

 
17,669

 
15,674

Provision for income taxes
2,366

 
2,566

 
4,629

 
4,319

Net income
$
6,457

 
$
3,868

 
$
13,040

 
$
11,355

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.16

 
$
0.54

 
$
0.47

Diluted
$
0.26

 
$
0.16

 
$
0.52

 
$
0.47

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
24,230,098

 
23,952,443

 
24,201,328

 
23,932,044

Diluted
24,991,958

 
24,346,553

 
24,910,065

 
24,311,222

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3

Blue Hills Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income
$
6,457

 
$
3,868

 
$
13,040

 
$
11,355

Other comprehensive income:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Change in unrealized holding gains

 
2,190

 

 
3,993

Reclassification adjustment for net (gains) losses realized in net income (1)

 
(928
)
 

 
94

Net change in unrealized gains


1,262

 

 
4,087

Tax effect

 
(523
)
 

 
(1,427
)
Net-of-tax amount

 
739

 

 
2,660

Securities held to maturity:
 
 
 
 
 
 
 
Reclassification adjustment for amortization of amounts previously recorded upon transfer from available for sale (2)
(21
)
 
(22
)
 
(40
)
 
(45
)
Tax effect
5

 
9

 
11

 
5

Net-of-tax amount
(16
)

(13
)
 
(29
)
 
(40
)
Defined benefit pension plan:





 
 
 
 
Reclassification adjustment for net actuarial loss recognized in net periodic benefit cost (3)
67

 
89

 
133

 
178

Tax effect
(19
)
 
(31
)
 
(38
)
 
(90
)
Net-of-tax amount
48


58

 
95

 
88

Other comprehensive income
32


784

 
66

 
2,708

Comprehensive income
$
6,489

 
$
4,652

 
$
13,106

 
$
14,063

______________________

(1)
Amounts are included in gain (loss) on sales of available for sale securities, net, in the consolidated statements of net income. Income tax expense (benefit) associated with the reclassification adjustment for the three and six months ended June 30, 2017 was $324,000 and (32,000).
(2)
Amounts are included in interest income on securities in the consolidated statements of net income.
(3)
Amounts are included in salaries and employee benefits expense in the consolidated statements of net income.




The accompanying notes are an integral part of these unaudited consolidated financial statements.

4



Blue Hills Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended June 30, 2018 and 2017 (unaudited)
 
Common Stock
Additional paid-in capital
Unearned compensation- ESOP
Retained
earnings
Accumulated other comprehensive (loss) income
Total
(In thousands, except share data)
Shares
Amount
Balance at December 31, 2016
26,759,953

$
268

$
249,308

$
(20,496
)
$
161,896

$
(4,069
)
386,907

Cumulative effect of change in accounting principle


27


(27
)


Comprehensive income




11,355

2,708

14,063

ESOP shares committed to be released


305

379



684

Common stock dividends declared ($0.30 per common share)




(7,191
)

(7,191
)
Restricted stock awards granted
175,695







Restricted stock awards forfeited
(84,417
)






Share-based compensation expense


2,745




2,745

Share redemption for tax withholdings for restricted stock vesting
(5,903
)

(107
)



(107
)
Proceeds from the exercise of options
15,660


217




217

Balance at June 30, 2017
26,860,988

$
268

$
252,495

$
(20,117
)
$
166,033

$
(1,361
)
$
397,318

 
 
 
 
 
 
 
 
Balance at December 31, 2017
26,827,660

$
268

$
254,750

$
(19,737
)
$
163,978

$
(1,453
)
$
397,806

Cumulative effect of change in accounting principle ASU 2016-01 (Note 2)




173

(173
)

Adoption of ASU 2018-02 (Note 2)




279

(279
)

Comprehensive income




13,040

66

13,106

ESOP shares committed to be released


395

380



775

Common stock dividends declared ($0.60 per common share)




(14,522
)

(14,522
)
Restricted stock awards granted
36,500







Restricted stock awards forfeited
(23,450
)






Share-based compensation expense


2,714




2,714

Share redemption for tax withholdings for restricted stock vesting
(15,969
)

(325
)



(325
)
Proceeds from exercise of options
49,330


691




691

Balance at June 30, 2018
26,874,071

$
268

$
258,225

$
(19,357
)
$
162,948

$
(1,839
)
$
400,245

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5

Blue Hills Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)

 
Six Months Ended
 
June 30,
 
2018
 
2017
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
13,040

 
$
11,355

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision (credit) for loan losses
(359
)
 
1,175

Net amortization of securities
476

 
1,007

Loss on sales of available for sale securities, net

 
94

Net unrealized gains on equity securities
(383
)
 

Net change in loans held for sale
(1,013
)
 
(4,028
)
Losses on sales of portfolio loans, net
41

 
74

Net amortization of net deferred loan origination costs and discounts
(538
)
 
31

Depreciation and amortization of premises and equipment
1,020

 
1,062

Amortization of core deposit intangible
278

 
469

Bank-owned life insurance income
(532
)
 
(518
)
ESOP expense
775

 
684

Deferred income tax (benefit) provision
(507
)
 
450

Share-based compensation expense
2,714

 
2,745

Gain on exchange of investment in Northeast Retirement Services
(653
)
 
(5,947
)
Gain on sale of premises and equipment
(271
)
 

Net change in:
 
 
 
Accrued interest receivable
(93
)
 
695

Other assets
(10,159
)
 
(3,284
)
Accrued expenses and other liabilities
3,791

 
(2,245
)
Net cash provided by operating activities
7,627

 
3,819

Cash flows from investing activities:
 
 
 
Activity in securities available for sale:
 
 
 
Purchases

 
(13,951
)
Sales

 
213,084

Principal paydowns

 
5,049

Activity in securities held to maturity:
 
 
 
Purchases
(19,239
)
 
(97,591
)
Principal paydowns
19,302

 
14,324

Proceeds from sale of equity securities
4,772

 

Loan originations and purchases, net of paydowns
(65,599
)
 
(166,992
)
Proceeds from residential portfolio loan sales
7,207

 
32,406

Net disposals (purchases) of premises and equipment
632

 
(1,032
)
Purchase of FHLBB stock
(7,254
)
 
(4,309
)
Redemption of FHLBB stock
4,984

 
5,718

Proceeds from exchange of investment in Northeast Retirement Services
308

 
1,595

Net cash used in investing activities
(54,887
)
 
(11,699
)
The accompanying notes are an integral part of these unaudited consolidated financial statements.

(continued)


6

Blue Hills Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)

(concluded)

 
Six Months Ended
 
June 30,
 
2018
 
2017

(In thousands)
Cash flows from financing activities:



Net change in deposits, excluding brokered deposits
46,139


135,405

Net change in brokered deposits
26,059

 
21,171

Net change in short-term borrowings
10,000


(146,000
)
Net (repayments) proceeds from long-term debt
(15,000
)
 
25,000

Share redemption for tax withholdings for restricted stock vesting
(325
)
 
(107
)
Proceeds from exercise of stock options
691

 
217

Common stock dividends paid
(14,522
)
 
(7,191
)
Net cash provided by financing activities
53,042


28,495

Net change in cash and cash equivalents
5,782

 
20,615

Cash and cash equivalents at beginning of period
46,167


30,496

Cash and cash equivalents at end of period
$
51,949


$
51,111

Supplementary information:



Interest paid
$
11,448


$
7,978

Income taxes paid, net of refunds
3,931


4,240

Other real estate owned acquired in settlement of loans
3,649

 
202


The accompanying notes are an integral part of these unaudited consolidated financial statements.




7


BLUE HILLS BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



NOTE 1 - BASIS OF PRESENTATION AND CONSOLIDATION

Basis of Presentation

The accompanying unaudited interim consolidated financial statements include the accounts of Blue Hills Bancorp, Inc. (the "Company"), its wholly-owned subsidiaries, Blue Hills Funding Corporation and Blue Hills Bank (the "Bank"), the principal operating entity, and the Bank's wholly-owned subsidiaries, B.H. Security Corporation, HP Security Corporation and 1196 Corporation, which are Massachusetts security corporations, and Nantucket Property Acquisition Company LLC, the Bank's subsidiary that holds other real estate owned. All significant intercompany balances and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements of the Company presented herein have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission ("SEC") for quarterly reports on Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and note disclosures required by GAAP for a complete set of financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures necessary for the fair presentation of the accompanying consolidated financial statements have been included. Interim results are not necessarily reflective of the results of the year. The accompanying unaudited financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2017, included in the Company's annual report on Form 10-K.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of deferred tax assets.

Loan policies

The Company has historically granted mortgage and consumer loans to its customers and a substantial portion of the loan portfolio consists of mortgage loans in communities including and near the locations of its banking offices. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in these areas.

The Company’s loan portfolio includes 1-4 family residential real estate, home equity, commercial real estate, construction, commercial business, and consumer segments.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, charge-offs, deferred origination fees and costs, and discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Deferred loan origination fees/costs and discounts on purchased loans are recognized as an adjustment of the related loan yield using the interest method.

It is the policy of the Company to discontinue the accrual of interest on loans past due in excess of 90 days, unless the loan is well-secured and in the process of collection. Accrual may be discontinued sooner when in the judgment of management, the ultimate collectability of the principal or interest becomes doubtful. Upon discontinuance of accrual, all interest previously accrued is reversed against interest income. Past due status is based on contractual terms of the loan. The interest on non-accrual loans is accounted for on the cash-basis until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due have been current for six consecutive months and future payments are reasonably assured.


8



Allowance for loan losses

The allowance for loan losses is based on the size and the composition of the loan portfolio, delinquency levels, loss experience, economic conditions and other factors related to the collectability of the loan portfolio. Loss experience is updated at least quarterly with consideration given to unusual circumstances in the portfolio. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated regularly by management and reflects consideration of all significant factors that affect the collectability of the loan portfolio. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. It is the intention of management to maintain an allowance that is prudently commensurate with the growth in the loan portfolio.

The allowance consists of general and allocated components, as further described below.

General component
The general component of the allowance for loan losses is based on a combination of the Company's own loss history and an extrapolated historical loss experience based on FDIC data for depository institutions with assets of one billion to five billion dollars dating back to 2010, adjusted for qualitative and environmental factors including changes to lending policies and procedures, economic and business conditions, portfolio characteristics, staff experience, problem loan trends, collateral values, concentrations and the competitive, legal and regulatory environment.

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate - The Company does not generally originate loans with a loan-to-value ratio greater than 80 percent and does not generally grant loans that would be classified as subprime upon origination. When the Company does extend credit either on a first- or second-lien basis at a loan-to-value ratio greater than 80 percent, such loans are supported by either mortgage insurance or state guarantee programs. All loans in this segment are collateralized by owner-occupied, 1-4 family residential real estate and repayment is dependent on the credit quality of the individual borrower. The health of the national and state economy, including unemployment rates and housing prices, will have an effect on the credit quality of loans in this segment.

Home equity - Loans in this segment are generally secured by first or second liens on residential real estate. Repayment is dependent on the credit quality of the individual borrower. The Company evaluates each loan application based on factors including the borrower’s credit score, income, length of employment, and other factors to establish the creditworthiness of the borrower.

Commercial real estate - Loans in this segment include investment real estate and are generally secured by assignments of leases, real estate collateral and owner-occupied properties. In cases where there is a concentration of exposure to a single large tenant, underwriting standards include analysis of the tenant’s ability to support lease payments over the duration of the loan. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy due to increased vacancy rates, which in turn can have an effect on the credit quality in this segment. Payments on loans secured by income-producing properties often depend on the successful operation and management of the properties. Management continually monitors the cash flows of these loans.

Construction - Loans in this segment primarily include real estate development loans for which payment is derived from permanent financing or sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

Commercial business - Loans in this segment are generally secured by business assets, including accounts receivable, inventory, real estate and intangible assets. Strict underwriting standards include considerations of the borrower’s ability to support the debt service requirements from the underlying historical and projected cash flows of the business, collateral values, the borrower’s credit history and the ultimate collectability of the debt. Economic conditions, real estate values, commodity prices, unemployment trends and other factors will affect the credit quality of loans in these segments.


9



Consumer - Loans in this segment primarily include used classic and collector automobile loans. A significant portion of the used automobile loan portfolio is comprised of geographically diverse loans originated by and purchased from a third party, who also provides collection services and shares equally in any losses incurred.

Allocated component

The allocated component relates to loans that are considered impaired. Impairment is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Management reviews all loan types for individual impairment. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are initially classified as impaired and generally remain impaired for the remaining life of the loan. The impaired classification may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring.

NOTE 2 – ACCOUNTING STANDARDS UPDATES

Accounting Standards Adopted in the Period

In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The purpose of this Update is to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company adopted the Update on January 1, 2018. The effect of applying the provisions of this Update resulted in an increase to retained earnings and a corresponding decrease in accumulated other comprehensive loss in the amount of $279,000.

Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall, (Subtopic 825-10). The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Targeted improvements to generally accepted accounting principles include the requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income and the elimination of the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost. The Update also requires Companies to utilize an "exit price" fair value methodology when measuring the fair value of financial instruments. The cumulative effect of applying the provisions of this Update resulted in an increase to retained earnings and a corresponding decrease to accumulated other comprehensive loss in the amount of $173,000.

Effective January 1, 2018, the Company adopted ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments in this Update require an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The impact to the consolidated financial statements upon adopting was not material.

Effective January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this Update require that in the statement of cash flows, amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The impact to the consolidated financial statements upon adopting was not material.

10




Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers. This Update provides a revenue recognition framework for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other accounting standards. The Company's revenue relates principally to financial instruments, which are explicitly excluded from the scope of the new guidance. The Company adopted this Update on January 1, 2018 and the impact to the consolidated financial statements upon adopting was not material.

Effective January 1, 2018, the Company adopted ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting which amends the scope of modification accounting for share-based payment arrangements. The Update provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The Update should be applied prospectively to awards modified on or after the effective date. The impact to the consolidated financial statements upon adopting was not material.

Recently Issued

In June 2018 the FASB issued ASU 2018-07 Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The Updates expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The Update is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company does not anticipate the adoption of ASU 2018-07 will have a material impact on its consolidated financial statements.

Future Application of Accounting Pronouncements Previously Issued

In March 2018, the FASB issued ASU 2018-04, Investments-Debt Securities (Topic 320) and Regulated Operations (Topic 980). Amendments to SEC paragraph Pursuant to SEC Staff Accounting Bulletin No. 177 and SEC Release No 33-9273, the amendment of ASU 2018-04 adds, amends and supersedes variance paragraphs that contain SEC guidance in ASC 320, Investments-Debt Securities and ASC 980, Regulated Operations. The Company does not anticipate the adoption of ASU 2018-04 will have a material impact on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The purpose of this Update is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. This Update is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period permitted. The Update requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. While the Company continues to assess all potential impacts of the standard, we currently expect the adoption to have an immaterial impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This Update is intended to improve financial reporting about leasing transactions and the key provision impacting the Company is the requirement for a lessee to record a right-to-use asset and a liability representing the obligation to make lease payments for long-term operating leases. Additionally, the Update includes additional quantitative and qualitative disclosures required by lessees and lessors to help users better understand the amount, timing, and uncertainty of cash flows arising from leases. This Update is effective for fiscal years beginning after December 31, 2018, and interim periods within those fiscal years. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply as well as transition guidance specific to nonstandard leasing transactions. The Company's assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date; however, this is not expected to be material to the Company's results of operations or financial position. Future lease commitments as of at June 30, 2018 amounted to $20.5 million.


11



In June, 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove previously established recognition thresholds based on probability, and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the net amount that the company expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and will require that credit losses be recorded through an allowance for credit losses. Additionally, this Update may reduce the carrying value of the Company's held-to-maturity investment securities as it will require an allowance on the expected losses over the life of these securities to be recorded upon adoption. The ASU is effective for public business entities fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. Any increase in our allowance for loan losses or expenses may have a material adverse effect on our financial condition and results of operations. The Company is actively working through the provisions of the Update. Management has established a steering committee which has identified the methodologies and the additional data requirements necessary to implement the Update and has engaged a third-party software service provider to assist in the Company's implementation.

NOTE 3 - SECURITIES

The amortized cost and estimated fair value of securities available for sale and securities held to maturity, with gross unrealized gains and losses, follows:
 
June 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Securities Held to Maturity:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Government-sponsored enterprises
$
30,683

 
$

 
$
(1,312
)
 
$
29,371

Government-sponsored mortgage-backed and collateralized mortgage obligations
245,849

 
8

 
(8,061
)
 
237,796

SBA asset-backed securities
26,605

 

 
(832
)
 
25,773

Total securities held to maturity
$
303,137

 
$
8

 
$
(10,205
)
 
$
292,940

 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Securities Available for Sale:
 
 
 
 
 
 
 
Marketable equity securities
$
9,437

 
$
755

 
$
(472
)
 
$
9,720

 
 
 
 
 
 
 
 
Securities Held to Maturity:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Government-sponsored enterprises
$
30,673

 
$

 
$
(894
)
 
$
29,779

Government-sponsored mortgage-backed and collateralized mortgage obligations
244,668

 
30

 
(3,437
)
 
241,261

SBA asset-backed securities
28,375

 
28

 
(329
)
 
28,074

Total securities held to maturity
$
303,716

 
$
58

 
$
(4,660
)
 
$
299,114



12



The amortized cost and estimated fair value of debt securities by contractual maturity at June 30, 2018 are included in the following table. Expected maturities will differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Based on expected maturities, the mortgage and asset-backed securities and collateralized mortgage obligations, included below, have a 4.0 year weighted average duration.
 
Amortized Cost
 
Fair Value
 
(In thousands)
After 1 year through 5 years
$
18,635

 
$
17,999

After 5 years through 10 years
12,048

 
11,372

 
30,683

 
29,371

Mortgage and asset-backed securities and collateralized mortgage obligations
272,454

 
263,569

 
$
303,137

 
$
292,940


At June 30, 2018, net unrealized gains on equity securities held at the end of the period are $654,000. For the three and six months ended June 30, 2018, proceeds from the sale of equity securities amounted to $4.8 million. For the three months ended June 30, 2017, proceeds from sale of securities available for sale amounted to $168.2 million, gross realized gains amounted to $2.0 million, and gross realized losses amount to $1.0 million. For the six months ended June 30, 2017, proceeds from sales of securities available for sale amounted to $213.1 million, gross realized gains amounted $2.2 million, and gross realized losses amounted to $2.3 million.

Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
 
June 30, 2018
 
Less Than Twelve Months
 
More Than Twelve Months
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Securities Held to Maturity:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Government-sponsored enterprises
$
(244
)
 
$
8,394

 
$
(1,068
)
 
$
20,976

Government-sponsored mortgage-backed and collateralized mortgage obligations
(2,066
)
 
79,335

 
(5,995
)
 
157,606

SBA asset-backed securities
(141
)
 
6,333

 
(691
)
 
19,440

Total temporarily impaired held-to-maturity securities
$
(2,451
)
 
$
94,062

 
$
(7,754
)
 
$
198,022


The Company continually reviews securities for the existence of other-than-temporary impairment ("OTTI"), taking into consideration current market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, the credit worthiness of the obligor of the security, volatility of earnings, current analysts’ evaluations, the Company’s intent to sell the security, or whether it is more likely than not that the Company will be required to sell the security before its anticipated recovery, as well as other qualitative factors. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.

At June 30, 2018, multiple debt securities have unrealized losses with aggregate depreciation of approximately 3.4% from the Company’s amortized cost basis. The unrealized losses were primarily caused by interest rate fluctuations. It is expected that none of these securities would be settled at a price less than the par value of the investment. Because the decline in fair value is attributable to changes in interest rates and not to credit quality and it is more likely than not that the Company will recover their amortized cost bases by maturity, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2018. Management has the ability and intent to hold the securities until maturity.


13



 
December 31, 2017
 
Less Than Twelve Months
 
More Than Twelve Months
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
Securities Available for Sale:
 
 
 
 
 
 
 
Temporarily impaired marketable equity securities
$
(449
)
 
$
4,310

 
$
(23
)
 
$
443

Securities Held to Maturity:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Government-sponsored enterprises
$
(109
)
 
$
8,521

 
$
(785
)
 
$
21,258

Government-sponsored mortgage-backed and collateralized mortgage obligations
(1,563
)
 
119,782

 
(1,874
)
 
111,712

SBA asset-backed securities
(34
)
 
9,897

 
(295
)
 
11,423

Total temporarily impaired securities held to maturity
$
(1,706
)
 
$
138,200

 
$
(2,954
)
 
$
144,393


NOTE 4 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

A summary of the balances of loans follows: 
 
June 30,
 
December 31,
 
2018
 
2017
 
(In thousands)
Real estate:
 
 
 
1-4 family residential
$
985,901

 
$
922,627

Home equity
71,956

 
80,662

Commercial real estate
824,731

 
834,264

Construction
88,337

 
91,050

 
1,970,925

 
1,928,603

Commercial business
268,963

 
253,509

Consumer
18,262

 
21,698

Total loans
2,258,150

 
2,203,810

Allowance for loan losses
(20,125
)
 
(20,877
)
Discount and fair value adjustments on purchased loans
(1,177
)
 
(1,477
)
Deferred loan costs and fees, net
4,898

 
4,691

Loans, net
$
2,241,746

 
$
2,186,147




14



Activity in the allowance for loan losses for the three and six months ended June 30, 2018 and 2017, by loan segment, follows: 

1-4 Family
Residential

Home
Equity

Commercial
Real Estate

Construction

Commercial
Business

Consumer

Total
 
(In thousands)
Three Months Ended June 30, 2018













Allowance at March 31, 2018
$
5,099

 
$
631

 
$
9,511


$
1,281


$
3,353


$
310


$
20,185

Provision (credit) for loan losses
273

 
(28
)
 
(519
)

198

 
178

 
(1
)
 
101

Loans charged-off

 

 




(153
)

(19
)

(172
)
Recoveries

 

 




11



 
11

Allowance at June 30, 2018
$
5,372

 
$
603

 
$
8,992


$
1,479


$
3,389


$
290


$
20,125

Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance at March 31, 2017
$
5,000

 
$
558

 
$
8,333

 
$
1,457

 
$
3,126

 
$
401

 
$
18,875

Provision (credit) for loan losses
25

 
51

 
654

 
153

 
226

 
9

 
1,118

Loans charged-off
(52
)
 

 

 

 

 
(24
)
 
(76
)
Recoveries

 

 

 

 

 

 

Allowance at June 30, 2017
$
4,973

 
$
609

 
$
8,987

 
$
1,610

 
$
3,352

 
$
386

 
$
19,917

Six Months Ended June 30, 2018













Allowance at December 31, 2017
$
5,076


$
699


$
9,584


$
1,708


$
3,473


$
337


$
20,877

Provision (credit) for loan losses
296


(96
)

(398
)

(229
)

83


(15
)

(359
)
Loans charged-off




(194
)



(178
)

(40
)

(412
)
Recoveries








11


8


19

Allowance at June 30, 2018
$
5,372


$
603


$
8,992


$
1,479


$
3,389


$
290


$
20,125

Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance at December 31, 2016
$
4,846

 
$
537

 
$
8,374

 
$
1,353

 
$
3,206

 
$
434

 
$
18,750

Provision (credit) for loan losses
105

 
72

 
613

 
257

 
137

 
(9
)
 
1,175

Loans charged-off
(52
)
 

 

 

 

 
(39
)
 
(91
)
Recoveries
74

 

 

 

 
9

 

 
83

Allowance at June 30, 2017
$
4,973

 
$
609

 
$
8,987

 
$
1,610

 
$
3,352

 
$
386

 
$
19,917




15



Additional information pertaining to the allowance for loan losses at June 30, 2018 and December 31, 2017 is as follows:
 
1-4 Family
Residential
 
Home
Equity
 
Commercial
Real Estate
 
Construction
 
Commercial
Business
 
Consumer
 
Total
 
(In thousands)
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance related to impaired loans
$
48

 
$

 
$

 
$

 
$

 
$
7

 
$
55

Allowance related to non-impaired loans
5,324

 
603

 
8,992

 
1,479

 
3,389

 
283

 
20,070

Total allowance for loan losses
$
5,372

 
$
603

 
$
8,992

 
$
1,479

 
$
3,389

 
$
290

 
$
20,125

Impaired loans
$
5,860

 
$
2,224

 
$
2,357

 
$

 
$
179

 
$
96

 
$
10,716

Non-impaired loans
980,041

 
69,732

 
822,374

 
88,337

 
268,784

 
18,166

 
2,247,434

Total loans
$
985,901

 
$
71,956

 
$
824,731

 
$
88,337

 
$
268,963

 
$
18,262

 
$
2,258,150

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance related to impaired loans
$
80

 
$

 
$

 
$

 
$

 
$
1

 
$
81

Allowance related to non-impaired loans
4,996

 
699

 
9,584

 
1,708

 
3,473

 
336

 
20,796

Total allowance for loan losses
$
5,076

 
$
699

 
$
9,584

 
$
1,708

 
$
3,473

 
$
337

 
$
20,877

Impaired loans
$
5,949

 
$
1,387

 
$
4,744

 
$

 
$

 
$
202

 
$
12,282

Non-impaired loans
916,678

 
79,275

 
829,520

 
91,050

 
253,509

 
21,496

 
2,191,528

Total loans
$
922,627

 
$
80,662

 
$
834,264

 
$
91,050

 
$
253,509

 
$
21,698

 
$
2,203,810


The following is a summary of past due and non-accrual loans, by loan class, at June 30, 2018 and December 31, 2017:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Past Due 90
Days or More
 
Total
Past Due
 
Loans on
Non-accrual
 
(In thousands)
June 30, 2018
 
 
 
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
 
 
1-4 family residential
$
733

 
$
425

 
$
1,664

 
$
2,822


$
5,393

Home equity
677

 

 
605

 
1,282


2,224

Commercial real estate

 

 

 

 
2,357

Commercial business

 

 

 

 
179

Consumer
134

 

 
7

 
141


96

Total
$
1,544


$
425


$
2,276


$
4,245


$
10,249

December 31, 2017
 
 
 
 
 
 
 
 
 
Real estate:
 
 
 
 
 
 
 
 
 
1-4 family residential
$
381

 
$
348

 
$
2,184

 
$
2,913

 
$
5,190

Home equity
509

 
13

 
656

 
1,178

 
1,387

Commercial real estate

 

 
3,893

 
3,893

 
4,744

Consumer
107

 
7

 
92

 
206

 
202

Total
$
997

 
$
368

 
$
6,825

 
$
8,190

 
$
11,523


There were no loans past due 90 days or more and still accruing interest at June 30, 2018 and December 31, 2017.


16



The following is a summary of information pertaining to impaired loans by loan class at the dates indicated: 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
June 30, 2018
(In thousands)
Impaired loans without a valuation allowance:
 
 
 
 
 
Real estate:
 
 
 
 
 
1-4 family residential
$
4,337

 
$
4,733

 
$

Home equity
2,224

 
2,407

 

Commercial real estate
2,357

 
2,488

 

Commercial business
179

 
325

 

Consumer
89

 
101

 

Total
9,186

 
10,054

 

 
 
 
 
 
 
Impaired loans with a valuation allowance:
 
 
 
 
 
1-4 family residential
1,523

 
1,523

 
48

Consumer
7

 
7

 
7

Total
1,530

 
1,530

 
55

 
 
 
 
 
 
Total impaired loans
$
10,716

 
$
11,584

 
$
55

 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
Impaired loans without a valuation allowance:
 
 
 
 
 
Real estate:
 
 
 
 
 
1-4 family residential
$
4,501

 
$
4,897

 
$

Home equity
1,387

 
1,523

 

Commercial real estate
4,744

 
5,206

 

Commercial business

 
11

 

Consumer
191

 
243

 

Total
10,823

 
11,880

 

 
 
 
 
 
 
Impaired loans with a valuation allowance:
 
 
 
 
 
Real estate:
 
 
 
 
 
1-4 family residential
1,448

 
1,448

 
80

Consumer
11

 
11

 
1

Total
1,459

 
1,459

 
81

 
 
 
 
 
 
Total impaired loans
$
12,282

 
$
13,339

 
$
81











17



The following tables set forth information regarding average balances and interest income recognized (the majority of which is on a cash basis) on impaired loans by class, for the periods indicated: 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Three Months Ended June 30, 2018
(In thousands)
Real estate:



1-4 family residential
$
5,943


$
72

Home equity
1,775


36

Commercial real estate
2,377


22

Commercial business
242


4

Consumer
94


1

Total
$
10,431


$
135





Three Months Ended June 30, 2017



Real estate:



1-4 family residential
$
6,395


$
82

Home equity
1,294


15

Commercial real estate
5,048


27

Commercial business
200


2

Consumer
287


4

Total
$
13,224


$
130

 
 
 
 
Six Months Ended June 30, 2018
 
 
 
Real estate:
 
 
 
1-4 family residential
$
5,945

 
$
150

Home equity
1,357

 
45

Commercial real estate
3,166

 
46

Commercial business
162

 
8

Consumer
147

 
3

Total
$
10,777

 
$
252

 
 
 
 
Six Months Ended June 30, 2017
 
 
 
Real estate:
 
 
 
1-4 family residential
$
6,505

 
$
160

Home equity
1,247

 
29

Commercial real estate
3,679

 
35

Commercial business
214

 
5

Consumer
249

 
5

Total
$
11,894

 
$
234


No additional funds are committed to be advanced in connection with impaired loans.

18



Troubled debt restructurings entered into during the three and six months ended June 30, 2018 are as follows:
Three Months Ended June 30, 2018
Number of contracts
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
Real estate:
 
Home equity
1
 
$
359

 
$
359

Total
1
 
$
359

 
$
359

Six Months Ended June 30, 2018
Number of contracts
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
Real estate:
 
1-4 family residential
3
 
$
469

 
$
475

Home equity
1
 
359

 
359

Commercial real estate
1
 
1,563

 
1,563

Total
5
 
$
2,391

 
$
2,397


There were no material troubled debt restructurings recorded during the three and six months ended June 30, 2017. Loans modified during the three and six months ended June 30, 2018 were modified to capitalize past due interest for residential loans and extend interest only periods for commercial real estate loans.

Credit Quality Information
The Company utilizes a ten-grade internal loan rating system for all loans as follows:
Loans rated 1 – 6 are considered “acceptable” rated loans that are performing as agreed, and generally require only routine supervision.
Loans rated 7 are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 8 are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected. Generally, all loans 90 days delinquent are rated 8.
Loans rated 9 are considered “doubtful.” Serious problems exist to the point where a partial loss of principal is likely. Weakness is so pronounced that on the basis of current information, conditions and values, collection in full is highly improbable.
Loans rated 10 are considered "loss" and the credit extended to the customer is considered uncollectible or of such little value that it does not warrant consideration as an active asset.
The Company assigns a 6 risk-rating to otherwise performing, satisfactorily collateralized consumer and residential loans where the Bank becomes aware of deterioration in a FICO score or other indication of potential inability to service the debt. The Company assigns risk ratings of 7-10 to residential or consumer loans that have a well-defined weakness that may jeopardize the collection of the contractual principal and interest, are contractually past due 90 days or more or legal action has commenced against the borrower. All other residential mortgage and consumer loans have no risk rating.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial and commercial construction loans. At least annually, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process. In addition, management utilizes delinquency reports, the watch list and other loan reports to monitor credit quality of other loan segments.

19




The following tables present the Company’s loans by risk rating at June 30, 2018 and December 31, 2017
 
1-4 Family
Residential
 
Home
Equity
 
Commercial
Real Estate
 
Construction
 
Commercial
Business
 
Consumer
 
Total
Loans
 
(In thousands)
June 30, 2018