6. LOANS

The following table sets forth the major classifications of loans:



(In thousands)	March 31, 2019		December 31, 2018
Commercial real estate mortgage loans	$	1,402,633	$	1,373,556
Multi-family mortgage loans		624,114		585,827
Residential real estate mortgage loans		515,173		519,763
Commercial, industrial and agricultural loans		671,897		645,724
Real estate construction and land loans		147,116		123,393
Installment/consumer loans		22,781		20,509
Total loans		3,383,714		3,268,772
Net deferred loan costs and fees		7,390		7,039
Total loans held for investment		3,391,104		3,275,811
Allowance for loan losses		(31,784)		(31,418)
Loans, net	$	3,359,320	$	3,244,393

In June 2015, the Company completed the acquisition of Community National Bank (“CNB”) resulting in the addition of $729.4 million of acquired loans recorded at their fair value. There were approximately $266.1 million and $275.0 million of acquired CNB loans remaining as of March 31, 2019 and December 31, 2018, respectively.

Lending Risk

The principal business of the Bank is lending in commercial real estate mortgage loans, multi-family mortgage loans, residential real estate mortgage loans, construction loans, home equity loans, commercial, industrial and agricultural loans, land loans and consumer loans. The Bank considers its primary lending area to be Nassau and Suffolk Counties located on Long Island and the New York City boroughs. A substantial portion of the Bank's loans is secured by real estate in these areas. Accordingly, the ultimate collectability of the loan portfolio is susceptible to changes in market and economic conditions in this region.

Commercial Real Estate Mortgages

Loans in this classification include income producing investment properties and owner-occupied real estate used for business purposes. The underlying properties are located largely in the Bank's primary market area. The cash flows of the income producing investment properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on credit quality. Generally, management seeks to obtain annual financial information for borrowers with loans in excess of $1.0 million in this category. In the case of owner-occupied real estate used for business purposes, a weakened economy and resultant decreased consumer and/or business spending will have an adverse effect on credit quality.

Multi-Family Mortgages

Loans in this classification include income producing residential investment properties of five or more families. Loans are made to established owners with a proven and demonstrable record of strong performance. Loans are secured by a first mortgage lien on the subject property with a loan to value ratio generally not exceeding 75%. Repayment is derived generally from the rental income generated from the property and may be supplemented by the owners' personal cash flow. Credit risk arises with an increase in vacancy rates, property mismanagement and the predominance of non-recourse loans that are customary in the industry.

Residential Real Estate Mortgages and Home Equity Loans

Loans in these classifications are generally secured by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, can have an effect on the credit quality in this loan class. The Bank generally does not originate loans with a loan-to-value ratio greater than 80% and does not grant subprime loans.

Commercial, Industrial and Agricultural Loans

Loans in this classification are made to businesses and include term loans, lines of credit, senior secured loans to corporations, equipment financing and taxi medallion loans. Generally, these loans are secured by assets of the business and repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and/or business spending, will have an effect on the credit quality in this loan class.

Real Estate Construction and Land Loans

Loans in this classification primarily include land loans to local individuals, contractors and developers for developing the land for sale or for the purpose of making improvements thereon. Repayment is derived primarily from sale of the lots/units including any pre-sold units. Credit risk is affected by market conditions, time to sell at an adequate price and cost overruns. To a lesser extent, this class includes commercial development projects that the Company finances, which in most cases require interest only during construction, and then convert to permanent financing. Construction delays, cost overruns, market conditions and the availability of permanent financing, to the extent such permanent financing is not being provided by the Bank, all affect the credit risk in this loan class.

Installment and Consumer Loans

Loans in this classification may be either secured or unsecured. Repayment is dependent on the credit quality of the individual borrower and, if applicable, sale of the collateral securing the loan, such as automobiles. Therefore, the overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this loan class.

Credit Quality Indicators

The Company categorizes loans into risk categories of pass, special mention, substandard and doubtful based on relevant information about the ability of borrowers to service their debt including repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Assigned risk rating grades are continuously updated as new information is obtained. Loans risk rated special mention; substandard and doubtful are reviewed on a quarterly basis. The Company uses the following definitions for risk rating grades:

Pass: Loans classified as pass include current loans performing in accordance with contractual terms, pools of homogenous residential real estate and installment/consumer loans that are not individually risk rated and loans which do not exhibit certain risk factors that require greater than usual monitoring by management.

Special mention: Loans classified as special mention, while generally not delinquent, have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank's credit position at some future date.

Substandard: Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard loan, and may also be in delinquency status and have defined weaknesses based on currently existing facts, conditions and values making collection or liquidation in full highly questionable and improbable.

The following tables represent loans categorized by class and internally assigned risk grades as of March 31, 2019 and December 31, 2018:


	March 31, 2019
(In thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial real estate:
Owner occupied	$	513,116	$	11,652	$	18,068	$	—	$	542,836
Non-owner occupied		845,486		10,564		3,747		—		859,797
Multi-family		623,699		415		—		—		624,114
Residential real estate:
Residential mortgage		436,967		8,278		1,304		—		446,549
Home equity		66,569		992		1,063		—		68,624
Commercial and industrial:
Secured		151,751		2,762		9,125		—		163,638
Unsecured		486,419		11,885		9,955		—		508,259
Real estate construction and land loans		146,816		—		300		—		147,116
Installment/consumer loans		21,994		757		30		—		22,781
Total loans	$	3,292,817	$	47,305	$	43,592	$	—	$	3,383,714


	December 31, 2018
(In thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial real estate:
Owner occupied	$	480,503	$	12,045	$	17,850	$	—	$	510,398
Non-owner occupied		858,069		2,188		2,901		—		863,158
Multi-family		585,409		418		—		—		585,827
Residential real estate:
Residential mortgage		438,891		8,510		1,114		—		448,515
Home equity		68,480		1,594		1,174		—		71,248
Commercial and industrial:
Secured		147,474		5,536		15,530		—		168,540
Unsecured		458,526		12,886		5,772		—		477,184
Real estate construction and land loans		123,089		—		304		—		123,393
Installment/consumer loans		20,464		9		36		—		20,509
Total loans	$	3,180,905	$	43,186	$	44,681	$	—	$	3,268,772

Past Due and Non-accrual Loans

The following tables represent the aging of the recorded investment in past due loans as of March 31, 2019 and December 31, 2018 by class of loans, as defined by FASB ASC 310‑10:


	March 31, 2019
					>90 Days		Non-accrual
	30-59		60-89		Past Due		Including 90		Total Past
	Days		Days		And		Days or More		Due and
(In thousands)	Past Due		Past Due		Accruing		Past Due		Non-accrual		Current		Total Loans
Commercial real estate:
Owner occupied	$	1,190	$	—	$	—	$	580	$	1,770	$	541,066	$	542,836
Non-owner occupied		—		9,292		—		878		10,170		849,627		859,797
Multi-family		—		—		—		—		—		624,114		624,114
Residential real estate:
Residential mortgages		1,934		—		—		422		2,356		444,193		446,549
Home equity		1,017		—		318		622		1,957		66,667		68,624
Commercial and industrial:
Secured		1,137		50		—		197		1,384		162,254		163,638
Unsecured		2,361		956		—		342		3,659		504,600		508,259
Real estate construction and land loans		—		—		—		—		—		147,116		147,116
Installment/consumer loans		—		—		—		30		30		22,751		22,781
Total loans	$	7,639	$	10,298	$	318	$	3,071	$	21,326	$	3,362,388	$	3,383,714


	December 31, 2018
					>90 Days		Non-accrual
	30-59		60-89		Past Due		Including 90		Total Past
	Days		Days		And		Days or More		Due and
(In thousands)	Past Due		Past Due		Accruing		Past Due		Non-accrual		Current		Total Loans
Commercial real estate:
Owner occupied	$	333	$	194	$	—	$	253	$	780	$	509,618	$	510,398
Non-owner occupied		—		—		—		885		885		862,273		863,158
Multi-family		—		—		—		—		—		585,827		585,827
Residential real estate:
Residential mortgages		892		230		—		199		1,321		447,194		448,515
Home equity		1,033		—		308		624		1,965		69,283		71,248
Commercial and industrial:
Secured		330		196		—		174		700		167,840		168,540
Unsecured		1,108		—		—		621		1,729		475,455		477,184
Real estate construction and land loans		—		—		—		—		—		123,393		123,393
Installment/consumer loans		84		—		—		52		136		20,373		20,509
Total loans	$	3,780	$	620	$	308	$	2,808	$	7,516	$	3,261,256	$	3,268,772

Impaired Loans

At March 31, 2019 and December 31, 2018, the Company had individually impaired loans as defined by FASB ASC No. 310, “Receivables” of $16.1 million and $19.4 million, respectively. The decrease in impaired loans was attributable to the payoff of certain troubled debt restructurings ("TDRs”) and other impaired performing loans, partially offset by new TDRs during the three months ended March 31, 2019. During the three months ended March 31, 2019, the Bank modified certain loans as TDRs totaling $3.2 million. For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified non-accrual loans and TDRs and at December 31, 2018 included $2.7 million in other impaired performing loans related to three taxi medallion loans which paid off in January 2019. For impaired loans, the Bank evaluates the impairment of the loan in accordance with FASB ASC 310‑10‑35‑22. Impairment is determined based on the present value of expected future cash flows discounted at the loan's effective interest rate. For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based on recent appraised values. The fair value of the collateral or present value of expected cash flows is compared to the carrying value to determine if any write-down or specific loan loss allowance allocation is required.

The following tables set forth the recorded investment, unpaid principal balance and related allowance by class of loans at March 31, 2019 and December 31, 2018 for individually impaired loans. The tables also set forth the average recorded investment of individually impaired loans and interest income recognized while the loans were impaired during the three months ended March 31, 2019 and 2018:


							Three Months Ended
	March 31, 2019						March 31, 2019
			Unpaid		Related		Average		Interest
	Recorded		Principal		Allocated		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	595	$	608	$	—	$	483	$	—
Non-owner occupied		2,777		2,781		—		2,786		25
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		—		—
Commercial and industrial:
Secured		1,644		1,644		—		1,482		16
Unsecured		6,869		6,870		—		5,617		85
Total with no related allowance recorded		11,885		11,903		—		10,368		126

With an allowance recorded:
Commercial real estate:
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		—		—
Commercial and industrial:
Secured		4,259		4,259		299		3,942		36
Unsecured		—		—		—		—		—
Total with an allowance recorded		4,259		4,259		299		3,942		36

Total:
Commercial real estate:
Owner occupied		595		608		—		483		—
Non-owner occupied		2,777		2,781		—		2,786		25
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		—		—
Commercial and industrial:
Secured		5,903		5,903		299		5,424		52
Unsecured		6,869		6,870		—		5,617		85
Total	$	16,144	$	16,162	$	299	$	14,310	$	162


							Three Months Ended
	December 31, 2018						March 31, 2018
			Unpaid		Related		Average		Interest
	Recorded		Principal		Allocated		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	268	$	278	$	—	$	2,073	$	—
Non-owner occupied		2,816		2,816		—		8,973		76
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		100		—
Commercial and industrial:
Secured		8,234		8,234		—		8,744		56
Unsecured		5,316		5,316		—		4,932		37
Total with no related allowance recorded		16,634		16,644		—		24,822		169

With an allowance recorded:
Commercial real estate:
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		—		—
Commercial and industrial:
Secured		2,721		2,721		189		—		—
Unsecured		—		—		—		1,708		—
Total with an allowance recorded		2,721		2,721		189		1,708		—

Total:
Commercial real estate:
Owner occupied		268		278		—		2,073		—
Non-owner occupied		2,816		2,816		—		8,973		76
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		100		—
Commercial and industrial:
Secured		10,955		10,955		189		8,744		56
Unsecured		5,316		5,316		—		6,640		37
Total	$	19,355	$	19,365	$	189	$	26,530	$	169

The Bank’s other real estate owned totaled $0.2 million at March 31, 2019 and December 31, 2018 and consisted of one property.

Troubled Debt Restructurings

The terms of certain loans were modified and are considered TDRs. The modification of the terms of such loans generally includes one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. The modification of these loans involved loans to borrowers who were experiencing financial difficulties.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed to determine if that borrower is currently in payment default under any of its obligations or whether there is a probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.

During the three months ended March 31, 2019, the Bank modified three commercial and industrial loans, including one taxi medallion loan, totaling $3.2 million as TDRs compared to six commercial and industrial loans totaling $6.7 million modified as TDRs during the three months ended March 31, 2018. These modifications did not result in a change to the recorded investment of the loans and did not increase the allowance for loan losses for those periods. During the three months ended March 31, 2019, there was one charge-off totaling $6 thousand relating to TDRs and there was one loan modified as a TDR for which there was a payment default within twelve months following the modification. During the three months ended March 31, 2018, there were no charge-offs relating to TDRs and there were no loans modified as TDRs for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

As of March 31, 2019 and December 31, 2018, the Company had $119 thousand and $133 thousand, respectively, of non-accrual TDRs and $16.3 million and $16.9 million, respectively, of performing TDRs. At March 31, 2019 and December 31, 2018, non-accrual TDRs were unsecured. The Bank has no commitment to lend additional funds to these debtors.

The terms of certain other loans were modified during the three months ended March 31, 2019 that did not meet the definition of a TDR. These loans have a total recorded investment at March 31, 2019 of $10.9 million. These loans were to borrowers who were not experiencing financial difficulties.

Purchased Credit Impaired Loans

Loans acquired in a business combination are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.

At the acquisition date, the purchased credit impaired (“PCI”) loans acquired as part of the FNBNY acquisition had contractually required principal and interest payments receivable of $40.3 million, expected cash flows of $28.4 million, and a fair value (initial carrying amount) of $21.8 million. The difference between the contractually required principal and interest payments receivable and the expected cash flows of $11.9 million represented the non-accretable difference. The difference between the expected cash flows and fair value of $6.6 million represented the initial accretable yield. At March 31, 2019, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $1.1 million and $0.5 million, respectively, with a remaining non-accretable difference of $0.5 million. At December 31, 2018, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $1.1 million and $0.5 million, respectively, with a remaining non-accretable difference of $0.5 million.

At the acquisition date, the PCI loans acquired as part of the CNB acquisition had contractually required principal and interest payments receivable of $23.4 million, expected cash flows of $10.1 million, and a fair value (initial carrying amount) of $8.7 million. The difference between the contractually required principal and interest payments receivable and the expected cash flows of $13.3 million represented the non-accretable difference. The difference between the expected cash flows and fair value of $1.4 million represented the initial accretable yield. At March 31, 2019, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $0.9 million and $0.1 million, respectively, with a remaining non-accretable difference of $0.6 million. At December 31, 2018, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $1.2 million and $0.1 million, respectively, with a remaining non-accretable difference of $0.8 million.

The following table summarizes the activity in the accretable yield for the PCI loans:


	Three Months Ended
	March 31,
(In thousands)	2019		2018
Balance at beginning of period	$	460	$	2,151
Accretion		(108)		(1,033)
Reclassification from (to) nonaccretable difference during the period		11		(161)
Accretable discount at end of period	$	363	$	957