BLMT Bsb Bancorp, Inc.

PART I

Market Area

We conduct our operations from our six full service branch offices located in Belmont, Watertown, Waltham, Newton and Cambridge in Southeast Middlesex County, Massachusetts. Our primary lending market includes Middlesex, Norfolk and Suffolk Counties, Massachusetts. Due to its proximity to Boston, our primary market area benefits from the presence of numerous institutions of higher learning, medical care and research centers and the corporate headquarters of several significant financial service companies. Eastern Massachusetts also has many high technology companies employing personnel with specialized skills. These factors affect the demand for residential homes, multi-family apartments, office buildings, shopping centers, industrial warehouses and other commercial properties.

Our lending area is primarily an urban market area with a substantial number of one-to-four unit properties, some of which are non-owner occupied, as well as apartment buildings, condominiums, office buildings and retail space. As a result, compared to many thrift institutions, our loan portfolio contains a significantly greater number of multi-family and commercial real estate loans.

Our market area is located largely in the Boston-Cambridge-Quincy, Massachusetts/New Hampshire Metropolitan Statistical Area (“MSA”). The United States Census Bureau estimates that as of July 1, 2017, the Boston metropolitan area is the 10 ^th largest metropolitan area in the United States. Located adjacent to major transportation corridors, the Boston metropolitan area provides a highly diversified economic base, with major employment sectors ranging from services, manufacturing and wholesale/retail trade, to finance, technology, education and medical care. According to the United States Department of Labor, in December 2018, the Boston-Cambridge-Quincy, Massachusetts/New Hampshire MSA had an unemployment rate of 2.4% compared to the national unemployment rate of 3.7%.

Competition

We face intense competition in our market area both for making loans and attracting deposits. We compete with commercial banks, credit unions, savings institutions, online banks, mortgage brokerage firms, finance companies, mutual funds, insurance companies and investment banking firms. Some of our competitors have greater name recognition and market presence that benefit them in attracting customers, and offer certain services that we do not or cannot provide.

Our deposit sources are primarily from customers in the communities in which our offices are located, as well as from small businesses, municipalities, nonprofit organizations and other customers from our lending areas. As of June 30, 2018 (the latest date for which information is publicly available from the Federal Deposit Insurance Corporation), we ranked first of eleven bank and thrift institutions with offices in the town of Belmont, Massachusetts, with a 50.4% market share. As of that same date, we ranked fourth of seven bank and thrift institutions with offices in the city of Watertown, Massachusetts, with a 5.3% market share, eighth of ten bank and thrift institutions with offices in the city of Waltham, Massachusetts, with a 2.9% market share, twelfth of fourteen bank and thrift institutions with offices in the city of Newton, Massachusetts, with a 1.1% market share, and thirteenth of sixteen bank and thrift institutions with offices in the city of Cambridge, with a 0.6% market share.

Lending Activities

Our primary lending activity is comprised of one-to-four family residential mortgage loans, multi-family real estate loans, commercial real estate loans, home equity lines of credit, indirect auto loans, commercial business loans and construction loans.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio at the dates indicated, excluding loans held for sale of $2.9 million, $0, $0, $1.2 million, and $0 at December 31, 2018, 2017, 2016, 2015, and 2014, respectively.

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Loan Portfolio Maturities and Coupons. The following table summarizes the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity at December 31, 2018. The table does not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

The following table sets forth the scheduled repayments of fixed and adjustable-rate loans at December 31, 2018 that are contractually due after December 31, 2019.

One-to-Four Family Residential Mortgage Loans. At December 31, 2018, $1.58 billion, or 60.2%, of our total loan portfolio, consisted of one-to-four family residential mortgage loans. We offer fixed and adjustable rate residential mortgage loans with maturities up to 30 years.

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Much of the housing stock in our primary lending market area is comprised of one, two, three and four unit properties, all of which are classified as one-to-four family residential mortgage loans. At December 31, 2018, of the $1.58 billion of one-to-four family residential mortgage loans in our portfolio, $74.2 million, or 4.7%, were comprised of non-owner occupied properties.

Our one-to-four family residential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate and purchase both fixed and adjustable rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which is generally between $453,100 and $679,650 (increased to between $484,350 and $726,525 in 2019) for one-unit properties. We also originate and purchase loans above this amount, which are referred to as “jumbo loans.” We generally underwrite jumbo loans in a manner similar to conforming loans, and in adherence to the Bank’s Credit Policy. Jumbo loans are common in our market area. During the year ended December 31, 2018, we originated $128.4 million and purchased $236.8 million of jumbo loans.

We generally originate and purchase our adjustable rate one-to-four family residential mortgage loans with initial interest rate adjustment periods of one, three, five, seven and ten years, based on adding a margin to a designated market index. We determine whether a borrower qualifies for an adjustable rate mortgage loan annually based on secondary market guidelines.

We will originate and purchase one-to-four family residential mortgage loans with loan-to-value ratios up to 80% without private mortgage insurance. We will originate loans with loan-to-value ratios of up to 95% with private mortgage insurance and where the borrower’s debt service does not exceed 43% of the borrower’s monthly cash flow.    

Occasionally, we sell into the secondary market both fixed and adjustable rate one-to-four family residential mortgage loans. We base the amount of loans that we sell into the secondary market on our liquidity needs, asset/liability mix, loan volume, portfolio size, interest rate environment and other factors. We sell loans both servicing released and servicing retained. During the year ended December 31, 2018, we sold $53.7 million of one-to-four family residential mortgage loans and recognized gains of $756,000 on the sales. For the year ended December 31, 2018, we received servicing fees of $332,000 on one-to-four family residential mortgage loans that were previously sold. At December 31, 2018, the principal balance of loans serviced for others totaled $142.8 million.

We generally do not offer reverse mortgages, “interest only” mortgage loans on one to four family residential properties nor do we offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on his loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that are made with low down payments to 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-burden ratios) or Alt-A loans (defined as loans having less than full documentation).    

Commercial Real Estate Loans. At December 31, 2018, $555.0 million, or 21.1%, of our loan portfolio consisted of commercial real estate loans. At December 31, 2018, substantially all of our commercial real estate loans were secured by properties located in Eastern Massachusetts.

Our commercial real estate mortgage loans are primarily secured by office buildings, owner-occupied commercial buildings, industrial buildings and strip mall centers. At December 31, 2018, loans secured by commercial real estate had an average loan balance of $2.8 million. Also included within our commercial real estate portfolio are certain industrial revenue bonds. The Bank owns certain bonds issued by state agencies that it categorizes as loans. This categorization is made on the basis that another entity (i.e. the Bank’s customer), not the issuing agency, is responsible for payment to the Bank of the principal and interest on the debt. Furthermore, credit underwriting is based solely on the credit of the customer (and guarantors, if any), the banking relationship is with the customer and not the agency, there is no active secondary market for the bonds, and the bonds are not available for sale, but are intended to be held by the Bank until maturity. At December 31, 2018, the balance of industrial development bonds was $13.6 million. These loans were secured by office property containing 60,250 feet of rentable area and fourteen one-to-four family residential properties.

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We offer commercial real estate loans at fixed and adjustable rates. Our commercial real estate loans with adjustable rates generally have terms of ten years with fixed rates for the first five or seven years and adjustable rates thereafter based on changes in a designated market index. These loans generally amortize on a twenty-five to thirty year basis, with a balloon payment due at maturity.

In underwriting commercial real estate loans, we consider a number of factors, which include the net cash flow to the loan’s debt service requirement (generally requiring a minimum of 125%), the age and condition of the collateral, the financial resources and income level of the borrower or guarantor and the borrower’s and guarantor’s experience in owning or managing similar properties. Commercial real estate loans are generally originated in amounts up to 80% of the appraised value or the purchase price of the property securing the loan, whichever is lower. Personal guarantees are typically obtained on these commercial real estate loans. In addition, the borrower’s and guarantor’s financial information on such loans is monitored on an ongoing basis through required periodic financial statement updates.

Commercial real estate loans generally carry higher interest rates and have shorter terms than one-to-four family residential mortgage loans. Commercial real estate loans, however, entail greater credit risks compared to the one-to-four family residential mortgage loans we hold as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income producing properties typically depends on the successful operation of the property as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than for one-to-four family residential properties. All commercial real estate loans, regardless of size, are approved at a minimum by the Senior Vice President-Credit Manager of Commercial Real Estate Lending, the Executive Vice President and Division Executive of Commercial Real Estate Lending and the President and Chief Executive Officer of the Bank.

At December 31, 2018, our largest commercial real estate loan had an outstanding balance of $18.5 million and was secured by a 25.95 acre site that is improved with one retail multitenant building, a retail strip building, four outparcels, three additional buildings and a freestanding ATM kiosk totaling 284,104 square feet of retail space, and was performing in accordance with its original terms.    

Multi-family Real Estate Loans. At December 31, 2018, $203.7 million, or 7.74%, of our loan portfolio consisted of multi-family (which we consider to be five or more units) residential real estate loans. At December 31, 2018, substantially all of our multi-family real estate loans were secured by properties located in Eastern Massachusetts.

Our multi-family loans are primarily secured by five or more unit residential properties. At December 31, 2018, loans secured by multi-family real estate had an average loan balance of $3.8 million.

We offer multi-family real estate loans at fixed and adjustable rates. Our multi-family real estate loans with adjustable rates generally have terms of ten years with fixed rates for the first five or seven years and adjustable rates thereafter based on changes in a designated market index. These loans generally amortize on a twenty-five to thirty year basis, with a balloon payment due at maturity.

In underwriting multi-family real estate loans, we consider a number of factors, which include the net cash flow to the loan’s debt service requirement (generally requiring a minimum of 125%), the age and condition of the collateral, the financial resources and income level of the borrower or guarantor and the borrower’s and guarantor’s experience in owning or managing similar properties. Multi-family real estate loans are generally originated in amounts up to 80% of the appraised value or the purchase price of the property securing the loan, whichever is lower. Personal guarantees are typically obtained on these multi-family real estate loans. In addition, the borrower’s and guarantor’s financial information on such loans is monitored on an ongoing basis through required periodic financial statement updates.

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Multi-family real estate loans generally carry higher interest rates and have shorter terms than one-to-four family residential mortgage loans. Multi-family real estate loans, however, entail greater credit risks compared to the one-to-four family residential mortgage loans we hold as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income producing properties typically depends on the successful operation of the property as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for multi-family real estate than for one-to-four family residential properties. All multi-family real estate loans, regardless of size, are approved at a minimum by the Senior Vice President-Credit Manager of Commercial Real Estate Lending, the Executive Vice President and Division Executive of Commercial Real Estate Lending and the President and Chief Executive Officer of the Bank.

At December 31, 2018, our largest multi-family real estate loan had a balance of $25.0 million, was secured by a 6 story, 80 unit residential building and was performing in accordance with its original terms.

Home Equity Lines of Credit. At December 31, 2018, $163.2 million, or 6.2%, of our loan portfolio consisted of home equity lines of credit. In addition to traditional one-to-four family residential mortgage loans, we offer home equity lines of credit that are secured by the borrower’s primary residence, secondary residence or one-to-four family investment properties. Home equity lines of credit are generally underwritten with the same criteria that we use to underwrite one-to-four family residential mortgage loans. In addition, the borrower’s financial condition is monitored on an ongoing basis through required periodic credit score reviews. If the borrower has shown signs of credit deterioration, home equity lines of credit may be frozen.

Under the Tax Cuts and Jobs Act enacted on December 22, 2017, interest on home equity loans and lines of credit is only deductible if the proceeds are used to buy, build or substantially improve the taxpayer’s home that secures the loan or line of credit. This change could adversely impact the level of originations and outstanding volumes of home equity lines of credit in the future.

Our home equity lines of credit are revolving lines of credit which generally have a term of twenty five years, with draws available for the first ten years. Our twenty five year lines of credit are interest only during the first ten years, and amortize on a fifteen year basis thereafter. We generally originate home equity lines of credit with loan-to-value ratios of up to 80% when combined with the principal balance of the existing first mortgage loan, although loan-to-value ratios may occasionally exceed 80% on a case by case basis. Maximum loan-to-values are determined based on an applicant’s credit score, property value and debt-to-income ratio. Lines of credit above $1 million with loan-to-values greater than 60% require two full appraisals with the valuation being the average of the two. Rates are adjusted monthly based on changes in a designated market index. At December 31, 2018, our largest home equity line of credit was a $2.6 million line of credit and had a $359,000 outstanding balance. At December 31, 2018 this line of credit was performing in accordance with its original terms.

Commercial Loans . We originate commercial term loans and variable lines of credit to small- and medium-sized businesses in our primary market area. Our commercial loans are generally used for working capital purposes or for acquiring equipment or real estate. These loans are generally secured by real estate as well as business assets, such as business equipment and inventory or accounts receivable, and are generally originated with maximum loan-to-value ratios of up to 80%. The commercial business loans that we offer are generally adjustable-rate loans with terms ranging from three to five years. At December 31, 2018, we had $62.5 million of commercial business loans and lines of credit outstanding, representing 2.4% of our total loan portfolio. At December 31, 2018, the average outstanding loan balance of our commercial loans and lines of credit was $905,000.

When making commercial business loans, we consider the value of the collateral, the financial condition of the borrower, the payment history of the borrower, the debt service capabilities of the borrower and the projected cash flows of the business. Generally our loans are guaranteed by the principals of the borrower.

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Commercial business loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. We seek to minimize these risks through our underwriting standards and the experience of our commercial lenders and credit department. The commercial lenders and credit department are responsible for the underwriting and documentation of new commercial loans. The annual review of credit ratings of existing loans and special credit projects are also completed by members of the credit department. The credit department has no loan production goals and has annual performance objectives based on credit quality and credit risk management. All commercial loans, regardless of size, are approved at a minimum by the Senior Vice President-Credit Manager of Commercial Real Estate Lending, the Executive Vice President and Division Executive of Commercial Real Estate Lending and the President and Chief Executive Officer of the Bank.

At December 31, 2018, our largest commercial loan outstanding was a $15.9 million loan secured by five separate Class A suburban office properties with a combined total of 487,254 square feet of rentable space, on a combined 47 acres of property. At December 31, 2018, this loan was performing in accordance with its original terms.

Construction Loans. We originate loans to professional developers and investors to finance the construction of one-to-four family residential, multi-family and commercial properties. The majority of our construction loans are for commercial development projects, including residential properties. Most of our loans for the construction of one-to-four family residential properties are “on speculation,” meaning there is no buyer committed to purchase the completed residence.

At December 31, 2018, $50.5 million, or 1.9%, of our total loan portfolio, consisted of construction loans, $5.5 million of which were secured by one-to-four family residential real estate projects on speculation, $20.7 million of which were secured by multi-family residential real estate projects, and $24.3 million of which were secured by land and commercial real estate.

Our construction loans generally provide for the payment of interest only during the construction phase, which is usually 12 to 24 months. At the end of the construction phase, depending upon the initial purpose, the loan either converts to a permanent mortgage loan or the project is sold and the loan is paid off.

Loans generally are made with a maximum loan to cost ratio of 75%, or a maximum loan-to-as completed value ratio of 75%, whichever is lower. Before making a commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We also require satisfactory inspections of the property and a satisfactory title update before disbursements of funds during the term of the construction loan.

At December 31, 2018, our largest speculative construction loan had a principal balance of $8.9 million and was secured by a 59.85 acre tract of vacant land to be improved by 147 townhouse condominium units. At December 31, 2018, this loan was performing in accordance with its original terms.

Construction financing generally involves greater credit risk than the financing of improved cash flowing real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.

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Indirect Automobile Loans and Other Consumer Loans. In the fourth quarter of 2010, we began originating indirect automobile loans. These are automobile loans that franchised dealerships originate and assign to us, upon our approval, for a premium based on pre-established rates and terms.    During the year ended December 31, 2018, our portfolio of indirect auto loans decreased from $30.2 million to $12.0 million, a decrease of 60.4% as we decided to suspend new originations due to market conditions during the second quarter of 2015.     

To a lesser extent we also offer a variety of other consumer loans, primarily loans secured by savings deposits. At December 31, 2018, our portfolio of consumer loans other than indirect automobile loans totaled $418,000, or 0.02%, of our total loan portfolio.

Indirect automobile loans and other consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

Consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan repayments are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, our consumer loan portfolio contains a substantial number of indirect automobile loans where we assume the risk that the automobile dealership administering the lending process complies with federal, state and local consumer protection laws.

Loan Originations, Purchases, Sales, Participations and Servicing. One-to-four family residential mortgage loans that we originate are generally underwritten pursuant to our policies and procedures, which incorporate standard underwriting guidelines, including those of Fannie Mae, to the extent applicable.

We originate both adjustable-rate and fixed-rate loans. Our loan origination and sales activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand. Most of our one-to-four family residential mortgage loan originations are generated by our loan officers or referred by branch managers and employees located in our banking offices.

In recent years, in an effort to manage interest rate risk in what has been a relatively low interest rate environment, as well as generate non-interest income, we have sold a portion of fixed-rate one-to-four family residential mortgage loans that we have originated or purchased.

Some of these loans were sold with the servicing rights released. For loans sold with servicing rights retained, we provide the servicing for the loans on a per-loan fee basis.

For the year ended December 31, 2018, we recognized $177,000 in net servicing income on residential mortgage loans that we sold and retained the servicing rights. At December 31, 2018, the principal balance of residential mortgage loans serviced for others totaled $142.8 million. For the year ended December 31, 2018, we recognized $179,000 in net servicing income on indirect auto loans that we sold and retained the servicing rights. At December 31, 2018, the principal balance of indirect auto loans serviced for others totaled $2.9 million.

We generally sell our loans without recourse, except for customary representations and warranties provided in sales transactions. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. We retain a portion of the interest paid by the borrower on the loans we service as consideration for our servicing activities.

From time to time, we will participate in loans with other banks. Whether we are the lead lender or not, we follow our customary loan underwriting and approval policies.

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At December 31, 2018, we held $10.1 million of commercial real estate loans in our portfolio that were participation loans from other lenders and we are the lead bank on $261.8 million of commercial real estate and commercial construction loans of which $70.6 million has been participated out to other lenders.

We also purchase whole loans from other banks and mortgage companies. In these cases, we follow our customary loan underwriting and approval policies. During the year ended December 31, 2018, we purchased $274.7 million of whole one-to-four family residential mortgage loans with both fixed and adjustable rates, from other banks and mortgage companies.

Loan Approval Procedures and Authority . Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by senior management and approved by our Board of Directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of the collateral that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower. We require “full documentation” on all of our loan applications.

Our policies and loan approval limits are approved by our Board of Directors. Aggregate commercial lending relationships in amounts up to $1.0 million can be approved by designated individual officers or officers acting together with specific lending approval authority. Individual commercial loans and commercial relationships of $1.0 million or greater require the approval of the Executive Committee of the Board of Directors (“Executive Committee”). All commercial real estate and commercial loans, regardless of size, are approved by the Senior Vice President-Credit Manager of Commercial Real Estate Lending, the Executive Vice President and Division Executive of Commercial Real Estate Lending and the President and Chief Executive Officer of the Bank.

In accordance with governing banking statutes, the Bank is permitted, with certain exceptions, to make loans and commitments to any one borrower, including related entities, in the aggregate amount of not more than 20% of the Bank’s Tier 1 capital, or $39.5 million, at December 31, 2018, which is the Bank’s legal lending limit. There were no borrowers whose total indebtedness in aggregate exceeded the Bank’s legal lending limit.

We seek to minimize credit risks through our underwriting standards and the experience of our credit department. The credit department is responsible for the underwriting and documentation of new commercial loans as well as the annual review of credit ratings of existing loans and special credit projects. We consider our credit department to be independent because it has no loan production goals and has annual performance objectives based on credit quality and credit risk management.

We require appraisals based on a comparison with current market sales for all real property securing one-to-four family residential mortgage loans, multi-family loans and commercial real estate loans, unless the Executive Committee approves an alternative means of valuation. All appraisers are independent, state-licensed or state-certified appraisers and are approved by the Board of Directors annually.

Non-Performing and Problem Assets

When a residential mortgage loan or home equity line of credit is 15 days past due, a late payment notice is generated and mailed to the borrower. We will attempt personal, direct contact with the borrower to determine when payment will be made. We will send a letter when a loan is 30 days or more past due and will attempt to contact the borrower by telephone. Thereafter, we will send an additional letter when a loan is 60 days or more past due, and we will attempt to contact the borrower by telephone. By the 90 ^th day of delinquency, unless the borrower has made arrangements to bring the loan current on its payments, the loan will be placed on non-accrual. We refer loans to legal counsel to commence foreclosure proceedings according to Massachusetts law. In addition, a property appraisal is conducted to determine the current condition and market value of the property. The account will be monitored on a regular basis thereafter. In attempting to resolve a default on a residential mortgage loan, the Bank complies with all applicable Massachusetts laws regarding a borrower’s right to cure the default.

When indirect auto loans become 10 to 15 days past due, a late fee is charged according to applicable guidelines. When the loan is 11 days past due, the customer will receive a phone call from our servicer requesting a payment. Letters are generated at 20 and 25 days past due.

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A letter stating our intent to repossess the automobile goes to the customer 21 days prior to repossession, which is triggered at 45 days past due. Vehicles are assigned for repossession at 65 to 70 days past due. Once an automobile has been repossessed, the customer has 21 days for right of redemption until the vehicle is sold. Auto loans are placed on non-accrual status at 90 days past due and charged off at 120 days past due.

Commercial business loans, commercial real estate loans and consumer loans are generally handled in the same manner as residential mortgage loans or home equity lines of credit. All commercial business loans that are 30 days past due are immediately referred to a senior lending officer. Because of the nature of the collateral securing consumer loans, we may commence collection procedures faster for consumer loans than for residential mortgage loans or home equity lines of credit.

Loans are placed on non-accrual status when payment of principal or interest is more than 90 days delinquent. Loans are also placed on non-accrual status if collection of principal or interest in full and in a timely manner is in doubt. When loans are placed on non-accrual, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. In general, the loan may be returned to accrual status if both principal and interest payments are brought current and remain current for six consecutive months and full payment of principal and interest is expected. All non-performing loans and problem assets are reviewed by the Executive Committee on a regular basis.

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Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.

For the years ended December 31, 2018 and 2017, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $46,000 and $56,000, respectively. Interest income recognized on such loans for the years ended December 31, 2018 and 2017, was $11,000 and $19,000, respectively. Loans remain on non-accrual until both principal and interest payments are brought current and remain current for six consecutive months and full payment of principal and interest is expected. As of December 31, 2018, there were no non-performing loans that were paid current.

Troubled Debt Restructurings. We periodically modify loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. At December 31, 2018 and 2017, we had $4.2 million and $4.8 million, respectively, of troubled debt restructurings. At December 31, 2018, $1.4 million was related to four residential one-to-four family loans and $2.8 million was related to two commercial real estate loans.

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At December 31, 2017, $2.0 million was related to five residential one to four family loans and $2.9 million was related to two commercial real estate loans. For the years ended December 31, 2018 and 2017, gross interest income that would have been recorded had our troubled debt restructurings been performing in accordance with their original terms was $69,000 and $98,000, respectively. Interest income recognized on such modified loans for the years ended December 31, 2018 and 2017 was $171,000 and $194,000, respectively.

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Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.

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Other Real Estate Owned . Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned. When property is acquired it is recorded at the estimated fair value at the date of foreclosure less the estimated costs to sell, establishing a new cost basis. Estimated fair value generally represents the sales price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions. Holding costs and declines in estimated fair value result in charges to expense after acquisition. At December 31, 2018 and 2017 we did not have any property classified as other real estate owned.

Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified as 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. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention.

We maintain an allowance for loan losses at an amount estimated to equal all credit losses incurred in our loan portfolio that are both probable and reasonable to estimate at the balance sheet measurement date. Our determination as to the classification of our assets and the amount of our loss allowances is subject to review by regulatory agencies, which may require that we establish additional loss allowances.

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We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

The following table sets forth our amounts of classified assets, assets designated as special mention and criticized assets (classified assets and loans designated as special mention) as of the dates indicated.

At December 31, 2018, we had $5.5 million of substandard assets, of which $3.7 million were commercial real estate loans and$1.8 million were one-to-four family residential mortgage loans. At December 31, 2018, special mention assets consisted of a $335,000 one-to-four family residential mortgage loan. Other than disclosed in the above tables, there are no other loans at December 31, 2018 that management has serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

Potential Problem Loans. Potential problem loans are loans that are currently performing and are not included in non-accrual loans above, but may be delinquent. These loans require an increased level of management attention, because we have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and as a result such loans may be included at a later date in non-accrual loans. At December 31, 2018, we had no potential problem loans that are not discussed above under “Classification of Assets.”

Allowance for Loan Losses

We provide for loan losses based upon the consistent application of our documented allowance for loan losses methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio, including a review of our classified assets, and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with Accounting Principles Generally Accepted in the United States of America (“GAAP”). The allowance for loan losses consists primarily of two components:

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Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.

The adjustments to historical loss experience are based on our evaluation of several qualitative and environmental factors, including: