Note 6. Loans and the Allowance for Loan Losses

Loans Receivable - The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred fees, as of March 31, 2019 and December 31, 2018:

	March 31,			December 31,
	2019			2018
	(dollars in thousands)
Commercial	$	1,051,199		$	988,758
Commercial real estate		3,054,196			2,778,167
Commercial construction		548,039			465,389
Residential real estate		319,215			309,991
Consumer		4,156			2,594
Gross loans		4,976,805			4,544,899
Net deferred loan fees		(4,154	)		(3,807	)
Total loans receivable	$	4,972,651		$	4,541,092

At March 31, 2019 and December 31, 2018, loan balances of approximately $2.5 billion and $2.3 billion, respectively, were pledged to secure borrowings from the FHLB of New York.

Purchased Credit-Impaired Loans - The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investment of those loans is as follows at March 31, 2019 and December 31, 2018.

	March 31,		December 31,
	2019		2018
	(dollars in thousands)
Commercial	$	6,159	$	2,509
Commercial real estate		1,181		-
Commercial construction		1,649		-
	$	8,989	$	2,509

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during either the three months ended March 31, 2019 and March 31, 2018. There were no reversals from the allowance for loan losses during the three months ended March 31, 2019 and March 31, 2018.

The following table presents the accretable yield, or income expected to be collected, on the purchased credit-impaired loans for three months ended March 31, 2019 and March 31, 2018:

	Three Months			Three Months
	Ended			Ended
	March 31,			March 31,
	2019			2018
	(dollars in thousands)
Balance at beginning of period	$	1,134		$	1,387
New loans purchased		1,286			-
Accretion of income		(146	)		(65	)
Balance at end of period	$	2,274		$	1,322

Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans included in loans receivable by loan class as of March 31, 2019 and December 31, 2018:

	March 31,		December 31,
	2019		2018
	(dollars in thousands)
Commercial	$	28,099	$	29,340
Commercial real estate		12,159		15,135
Commercial construction		2,934		2,934
Residential real estate		4,488		4,446
Total nonaccrual loans	$	47,680	$	51,855

Nonaccrual loans and loans 90 days or greater past due and still accruing include both smaller balance homogeneous loans that are collectively evaluated for impairment and loans individually evaluated for impairment.

Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third-party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. All loans past due 90 days or greater and all impaired loans are included in the appropriate category below. The following table presents information about the loan credit quality by loan class of gross loans (which exclude net deferred fees) at March 31, 2019 and December 31, 2018:

	March 31, 2019
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial	$	997,975	$	17,452	$	35,772	$	-	$	1,051,199
Commercial real estate		3,024,553		12,970		16,673		-		3,054,196
Commercial construction		533,103		6,920		8,014		-		548,039
Residential real estate		314,599		-		4,616		-		319,215
Consumer		4,143		-		13		-		4,156
Gross loans	$	4,874,375	$	37,342	$	65,088	$	-	$	4,976,805

	December 31, 2018
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial	$	951,610	$	3,371	$	33,777	$	-	$	988,758
Commercial real estate		2,742,989		12,574		22,604		-		2,778,167
Commercial construction		453,598		5,515		6,276		-		465,389
Residential real estate		305,414		-		4,577		-		309,991
Consumer		2,576		-		18		-		2,594
Gross loans	$	4,456,187	$	21,460	$	67,252	$	-	$	4,544,899

The following table provides an analysis of the impaired loans by class as of March 31, 2019 and 2018.

	March 31, 2019
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
No related allowance recorded	(dollars in thousands)
Commercial	$	28,870	$	78,844
Commercial real estate		10,124		18,258
Commercial construction		6,326		10,443
Residential real estate		2,185		2,511
Consumer		-		-
Total (no related allowance)	$	47,505	$	110,056

With an allowance recorded
Commercial real estate	$	4,984	$	7,999	$	1,035
Residential real estate		256		266		25
Total (with allowance)	$	5,240	$	8,265	$	1,060

Total
Commercial	$	28,870	$	78,844	$	-
Commercial real estate		15,108		26,257		1,035
Commercial construction		6,326		10,443		-
Residential real estate		2,441		2,777		25
Consumer		-		-		-
Total	$	52,745	$	118,321	$	1,060

	December 31, 2018
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
No related allowance recorded	(dollars in thousands)
Commercial	$	29,896	$	83,596
Commercial real estate		16,839		17,935
Commercial construction		9,240		9,240
Residential real estate		2,209		2,521
Consumer		-		-
Total (no related allowance)	$	58,184	$	113,292

With an allowance recorded
Commercial real estate	$	1,488	$	1,488	$	7
Residential real estate		260		266		29
	$	1,748	$	1,754	$	36

Total
Commercial	$	29,896	$	83,596	$	-
Commercial real estate		18,327		19,423		7
Commercial construction		9,240		9,240		-
Residential real estate		2,469		2,787		29
Consumer		-		-		-
Total	$	59,932	$	115,046	$	36

The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by class as of and for the three months ended March 31, 2019 and 2018:

	Three Months Ended March 31,
	2019				2018
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with no related allowance recorded
Commercial	$	29,080	$	16	$	45,607	$	31
Commercial real estate		10,146		47		35,010		243
Commercial construction		10,400		57		6,083		77
Residential real estate		2,194		-		2,613		-
Consumer		-		-		-		-
Total	$	51,820	$	120	$	89,313	$	351

Impaired loans with an allowance recorded
Commercial real estate	$	7,084	$	-	$	1,129	$	12
Commercial construction		-		-		2,649		42
Residential real estate		258		-		-		-
Total	$	7,342	$	-	$	3,778	$	54

Total impaired loans
Commercial	$	29,080	$	16	$	45,607	$	31
Commercial real estate		17,230		47		36,139		255
Commercial construction		10,400		57		8,732		119
Residential real estate		2,452		-		2,613		-
Consumer		-		-		-		-
Total	$	59,162	$	120	$	93,091	$	405

Included in impaired loans at March 31, 2019 and December 31, 2018 are loans that are deemed troubled debt restructurings. The recorded investment in loans include accrued interest receivable and other capitalized costs such as real estate taxes paid on behalf of the borrower and loan origination fees, net, when applicable. Cash basis interest and interest income recognized on accrual basis approximate each other.

Aging Analysis - The following table provides an analysis of the aging of the loans by class, excluding net deferred fees, that are past due at March 31, 2019 and December 31, 2018:

	March 31, 2019
					90 Days or
					Greater Past				Total Past
	30-59 Days		60-89 Days		Due and Still				Due and
	Past Due		Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Gross Loans
	(dollars in thousands)
Commercial	$	1,979	$	2,626	$	3,799	$	28,099	$	36,503	$	1,014,696	$	1,051,199
Commercial real estate		10,213		180		-		12,159		22,552		3,031,644		3,054,196
Commercial construction		648		-		1,649		2,934		5,231		542,808		548,039
Residential real estate		1,591		-		-		4,488		6,079		313,136		319,215
Consumer		12		-		-		-		12		4,144		4,156
Total	$	14,443	$	2,806	$	5,448	$	47,680	$	70,377	$	4,906,428	$	4,976,805

Included in the 90 days or greater past due and still accruing category as of March 31, 2019 are purchased credit-impaired loans, net of fair value marks, which accretes income per the valuation at date of acquisition.

	December 31, 2018
					90 Days or
					Greater Past				Total Past
	30-59 Days		60-89 Days		Due and Still				Due and
	Past Due		Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Gross Loans
Commercial	$	1,673	$	-	$	1,647	$	29,340	$	32,660	$	956,098	$	988,758
Commercial real estate		6,162		1,840		-		15,135		23,137		2,755,030		2,778,167
Commercial construction		2,496		564		-		2,934		5,994		459,395		465,389
Residential real estate		3,455		119		-		4,446		8,020		301,971		309,991
Consumer		-		-		-		-		-		2,594		2,594
Total	$	13,786	$	2,523	$	1,647	$	51,855	$	69,811	$	4,475,088	$	4,544,899

The amount reported 90 days or greater past due and still accruing as of December 31, 2018 are comprised of PCI loans, net of their fair value marks, which are accreting income per their valuation at date of acquisition.

The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for loan losses that are allocated to each loan portfolio segment:

	March 31, 2019
			Commercial		Commercial		Residential
	Commercial		real estate		construction		real estate		Consumer		Unallocated		Total
	(dollars in thousands)
ALLL
Individually evaluated for impairment	$	-	$	1,035	$	-	$	25	$	-	$	-	$	1,060
Collectively evaluated for impairment		8,460		19,526		4,982		1,141		1		488		34,598
Acquired portfolio		200		1,000		-		-		-		-		1,200
Acquired with deteriorated credit quality		-		-		-		-		-		-		-
Total	$	8,660	$	21,561	$	4,982	$	1,166	$	1	$	488	$	36,858

Gross loans
Individually evaluated for impairment	$	28,870	$	15,108	$	6,326	$	2,441	$	-			$	52,745
Collectively evaluated for impairment		893,678		2,603,459		498,503		267,903		3,826				4,267,369
Acquired portfolio		122,492		434,448		41,561		48,871		330				647,702
Acquired with deteriorated credit quality		6,159		1,181		1,649		-		-				8,989
Total	$	1,051,199	$	3,054,196	$	548,039	$	319,215	$	4,156			$	4,976,805

	December 31, 2018
			Commercial		Commercial		Residential
	Commercial		real estate		construction		real estate		Consumer		Unallocated		Total
	(dollars in thousands)
Allowance for loan losses
Individually evaluated for impairment	$	-	$	7	$	-	$	29	$	-	$	-	$	36
Collectively evaluated for impairment		9,675		17,840		4,519		1,237		2		445		33,718
Acquired portfolio		200		1,000		-		-		-		-		1,200
Acquired with deteriorated credit quality		-		-		-		-		-		-		-
Total	$	9,875	$	18,847	$	4,519	$	1,266	$	2	$	445	$	34,954

Gross loans
Individually evaluated for impairment	$	29,896	$	18,327	$	9,240	$	2,469	$	-			$	59,932
Collectively evaluated for impairment		949,129		2,500,132		456,149		263,449		2,484				4,171,343
Acquired portfolio		7,224		259,708		-		44,073		110				311,115
Acquired with deteriorated credit quality		2,509		-		-		-		-				2,509
Total	$	988,758	$	2,778,167	$	465,389	$	309,991	$	2,594			$	4,544,899

The Company’s allowance for loan losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit.

A summary of the activity in the allowance for loan losses by loan segment is as follows:

	Three Months Ended March 31, 2019
				Commercial			Commercial		Residential
	Commercial			real estate			construction		real estate			Consumer			Unallocated		Total
	(dollars in thousands)
Balance at December 31, 2018	$	9,875		$	18,847		$	4,519	$	1,266		$	2		$	445	$	34,954

Charge-offs		-			(2,676	)		-		-			-			-		(2,676	)

Recoveries		71			-			-		2			7			-		80

Provision for loan losses		(1,286	)		5,390			463		(102	)		(8	)		43		4,500

Balance at March 31, 2019	$	8,660		$	21,561		$	4,982	$	1,166		$	1		$	488	$	36,858

	Three Months Ended March 31, 2018
				Commercial		Commercial		Residential
	Commercial			real estate		construction		real estate			Consumer		Unallocated		Total
	(dollars in thousands)
Balance at December 31,
2017	$	8,233		$	17,112	$	4,747	$	1,050		$	1	$	605	$	31,748

Charge-offs		(17,020	)		-		-		(18	)		-		-		(17,038	)

Recoveries		19			-		-		-			-		-		19

Provision for loan losses		17,318			323		25		77			1		56		17,800

Balance at March 31, 2018	$	8,550		$	17,435	$	4,772	$	1,109		$	2	$	661	$	32,529

Troubled Debt Restructurings

Loans are considered to have been modified in a troubled debt restructuring (“TDRs”) when due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a nonaccrual loan that has been modified in a troubled debt restructuring remains on nonaccrual status for a period of six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status.

At March 31, 2019, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due 90 days or greater and still accruing interest, or whose terms have been modified in troubled debt restructurings.

As of March 31, 2019, TDRs totaled $30.9 million, of which $22.7 million were on nonaccrual status and $8.2 million were performing under their restructured terms. As of December 31, 2018, TDRs totaled $34.5 million, of which $23.3 million were on nonaccrual status and $11.2 million were performing under their restructured terms. The Company has allocated $-0- and $147 thousand of specific allowance for the three months ended March 31, 2019 and March 31, 2018, respectively.

There were no loans modified as TDRs during the three months ended March 31, 2019. There were no charge-offs in connection with a loan modification at the time of modification during the three months ended March 31, 2019. There were no TDRs for which there was a payment default within twelve months following the modification during the three months ended March 31, 2019.

The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2018 (dollars in thousands):

		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
	Loans	Investment		Investment
Troubled debt restructurings:
Commercial	3	$	2,077	$	2,077
Commercial real estate	1		60		60
Commercial construction	2		1,839		1,839

Total	6	$	3,976	$	3,976

These six loan modifications included interest rate reductions and maturity extensions.