LOANS

6 Months Ended

Jun. 30, 2011

LOANS

LOANS

6. LOANS

The following table sets forth the major classifications of loans:

(In thousands)	June 30, 2011			December 31, 2010
Commercial real estate mortgage loans	$	262,281		$	236,048
Multi-family mortgage loans	21,299			9,217
Residential real estate mortgage loans	156,584			140,986
Commercial, financial, and agricultural loans	118,871			97,663
Installment/consumer loans	10,772			9,659
Real estate-construction and land loans	19,581			9,928
Total loans	589,388			503,501
Net deferred loan costs and fees	400			559
	589,788			504,060
Allowance for loan losses	(9,494		)	(8,497		)
Net loans	$	580,294		$	495,563

Lending Risk

The principal business of the Bank is lending, primarily in commercial real estate mortgage loans, multi-family mortgage loans, residential real estate mortgage loans, construction loans, home equity loans, commercial and industrial loans, land loans and consumer loans. The Bank considers its primary lending area to be eastern Long Island in Suffolk County, New York, and a substantial portion of the Bank’s loans are secured by real estate in this area. Accordingly, the ultimate collectability of such a loan portfolio is susceptible to changes in market and economic conditions in this region.

Credit Quality Indicators

The Company categorizes loans into risk categories 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. 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 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 at 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 table represents loans by class categorized by internally assigned risk grades as of June 30, 2011 and December 31, 2010:

	Grades:
June 30, 2011	Pass		Special Mention		Substandard		Doubtful		Total
(In thousands)
Originated loans
Commercial real estate:
Owner occupied	$	112,842	$	10,809	$	7,199	$	—	$	130,850
Non-owner occupied	102,273		9,162		3,195		—		114,630
Multi-Family	21,299		—		—		—		21,299
Residential real estate:
First lien	79,541		—		711		1,239		81,491
Home equity	62,167		240		1,727		225		64,359
Commercial:
Secured	51,825		2,823		2,871		—		57,519
Unsecured	48,831		1,783		1,024		12		51,650
Installment/consumer loans	10,052		174		—		—		10,226
Real estate construction and land loans	9,704		1,953		7,027		250		18,934
Total loans	$	498,534	$	26,944	$	23,754	$	1,726	$	550,958
Acquired loans
Commercial real estate:
Owner occupied	$	13,471	$	—	$	363	$	—	$	13,834
Non-owner occupied	2,472		495		—		—		2,967
Multi-Family	—		—		—		—		—
Residential real estate:
First lien	5,221		—		—		—		5,221
Home equity	5,513		—		—		—		5,513
Commercial:
Secured	2,483		—		150		—		2,633
Unsecured	6,760		244		65		—		7,069
Installment/consumer loans	546		—		—		—		546
Real estate construction and land loans	403		—		244		—		647
Total loans	$	36,869	$	739	$	822	$	—	$	38,430
Total loans
Commercial real estate:
Owner occupied	$	126,313	$	10,809	$	7,562	$	—	$	144,684
Non-owner occupied	104,745		9,657		3,195		—		117,597
Multi-Family	21,299		—		—		—		21,299
Residential real estate:
First lien	84,762		—		711		1,239		86,712
Home equity	67,680		240		1,727		225		69,872
Commercial:
Secured	54,308		2,823		3,021		—		60,152
Unsecured	55,591		2,027		1,089		12		58,719
Installment/consumer loans	10.598		174		—		—		10,772
Real estate construction and land loans	10,107		1,953		7,271		250		19,581
Total loans	$	535,403	$	27,683	$	24,576	$	1,726	$	589,388

	Grades:
December 31, 2010	Pass		Special Mention		Substandard		Doubtful		Total
(In thousands)
Originated loans
Commercial real estate:
Owner occupied	$	110,395	$	4,892	$	4,298	$	—	$	119,585
Non-owner occupied	97,878		7,652		10,683		250		116,463
Multi-Family	9,217		—		—		—		9,217
Residential real estate:
First lien	71,686		—		1,194		1,269		74,149
Home equity	64,708		—		1,834		295		66,837
Commercial:
Secured	49,146		1,949		3,212		—		54,307
Unsecured	41,058		1,072		1,226		—		43,356
Installment/consumer loans	9,484		175		—		—		9,659
Real estate construction and land loans	6,020		223		3,685		—		9,928
Total loans	$	459,592	$	15,963	$	26,132	$	1,814	$	503,501

Past Due and Nonaccrual Loans

The following table represents the aging of the recorded investment in past due loans as of June 30, 2011 and December 31, 2010 by class of loans, as defined by ASC 310-10:

June 30, 2011	30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due and Accruing		Nonaccrual Including 90 Days or More Past Due		Total Past Due and Nonaccrual		Current		Total Loans
(In thousands)
Originated loans
Commercial real estate:
Owner occupied	$	—	$	397	$	—	$	487	$	884	$	129,966	$	130,850
Non-owner occupied	1,144		—		—		227		1,371		113,259		114,630
Multi-Family	—		—		—		—		—		21,299		21,299
Residential real estate:
First lien	—		—		—		1,239		1,239		80,252		81,491
Home equity	50		—		—		1,516		1,566		62,793		64,359
Commercial:
Secured	—		722		—		27		749		56,770		57,519
Unsecured	17		47		—		262		326		51,324		51,650
Installment/consumer loans	5		73		—		6		84		10,142		10,226
Real estate construction and land loans	—		—		—		3,264		3,264		15,670		18,934
Total loans	$	1,216	$	1,239	$	—	$	7,028	$	9,483	$	541,475	$	550,958
Acquired loans
Commercial real estate:
Owner occupied	$	—	$	—	$	363	$	—	$	363	$	13,471	$	13,834
Non-owner occupied	—		—		—		—		—		2,967		2,967
Multi-Family	—		—		—		—		—		—		—
Residential real estate:
First lien	193		—		—		—		193		5,028		5,221
Home equity	25		—		—		—		25		5,488		5,513
Commercial:
Secured	446		—		—		—		446		2,187		2,633
Unsecured	70		49		—		—		119		6,950		7,069
Installment/consumer loans	—		—		—		—		—		546		546
Real estate construction and land loans	—		—		—		—		—		647		647
Total loans	$	734	$	49	$	363	$	—	$	1,146	$	37,284	$	38,430
Total loans
Commercial real estate:
Owner occupied	$	—	$	397	$	363	$	487	$	1,247	$	143,437	$	144,684
Non-owner occupied	1,144		—		—		227		1,371		116,226		117,597
Multi-Family	—		—		—		—		—		21,299		21,299
Residential real estate:
First lien	193		—		—		1,239		1,432		85,280		86,712
Home equity	75		—		—		1,516		1,591		68,281		69,872
Commercial:
Secured	446		722		—		27		1,195		58,957		60,152
Unsecured	87		96		—		262		445		58,274		58,719
Installment/consumer loans	5		73		—		6		84		10,688		10,772
Real estate construction and land loans	—		—		—		3,264		3,264		16,317		19,581
Total loans	$	1,950	$	1,288	$	363	$	7,028	$	10,629	$	578,759	$	589,388

December 31, 2010	30-59 Days Past Due		60-89 Days Past Due		Nonaccrual Including 90 Days or More Past Due		Total Past Due and Nonaccrual		Current		Total Loans
(In thousands)
Originated loans
Commercial real estate:
Owner occupied	$	—	$	511	$	—	$	511	$	119,074	$	119,585
Non-owner occupied	—		—		478		478		115,985		116,463
Multi-Family	—		—		—		—		9,217		9,217
Residential real estate:
First lien	151		165		1,747		2,063		72,086		74,149
Home equity	782		298		1,696		2,776		64,061		66,837
Commercial:
Secured	10		—		—		10		54,297		54,307
Unsecured	105		—		32		137		43,219		43,356
Installment/consumer loans	10		5		86		101		9,558		9,659
Real estate construction and land loans	—		—		2,686		2,686		7,242		9,928
Total loans	$	1,058	$	979	$	6,725	$	8,762	$	494,739	$	503,501

All loans 90 days or more past due that are still accruing interest represent loans that were acquired from Hamptons State Bank on May 27, 2011 and were recorded at fair value upon acquisition. These loans are considered to be accruing as management can reasonably estimate future cash flows on these acquired loans and expect to fully collect the carrying value of these loans. Therefore, the difference between the carrying value of these loans and their expected cash flows is being accreted. There were no loans 90 days or more past due that were still accruing interest at December 31, 2010.

Impaired Loans

As of June 30, 2011 and December 31, 2010, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $10.8 million and $9.9 million, respectively. 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. Additionally management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified nonaccrual loans and troubled debt restructured (“TDR”) loans. 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 upon 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.

Nonaccrual loans were $7.0 million or 1.19% of total loans at June 30, 2011 and were $6.7 million or 1.34% of total loans at December 31, 2010. Approximately $4.7 million of the nonaccrual loans at June 30 2011 and at December 31, 2010, represent troubled debt restructured loans. As of June 30, 2011 two of the borrowers with loans totaling $1.7 million are complying with the modified terms of the loans and are currently making payments. Another borrower with loans totaling $3.0 million is past due and the Bank has initiated the foreclosure process. Total troubled debt restructured loans are secured with collateral that has a fair value of $5.5 million. Furthermore, the Bank has no commitment to lend additional funds to these debtors.

In addition, the Company has three borrowers with TDR loans of $3.5 million at June 30, 2011 that are current and secured with collateral that has a fair value of approximately $8.6 million.  At December 31, 2010, the Company had one borrower with TDR loans of $3.2 million that was current and secured with collateral that had a fair value of approximately $5.4 million as well as personal guarantors. Management believes that the ultimate collection of principal and interest is reasonably assured and therefore continues to recognize interest income on an accrual basis. In addition, the Bank has no commitment to lend additional funds to these debtors. Two of the borrowers were determined to be impaired during the second quarter of 2011 and since that determination the interest income recognized has been immaterial. The third loan was determined to be impaired during the third quarter of 2008 and since that determination $0.3 million of interest income has been recognized.

The following table represents impaired loans by class at June 30, 2011 and December 31, 2010:

June 30, 2011	Recorded Investment		Unpaid Principal Balance		Related Allocated Allowance
(In thousands)
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	3,673	$	3,691	$	—
Non-owner occupied	227		228		—
Residential real estate:
First lien	1,239		1,329		—
Home equity	919		919		—
Commercial:
Secured	27		30		—
Unsecured	289		295		—
Installment/consumer loans	6		7		—
Real estate construction and land loans	3,264		3,400		—
Total with no related allowance recorded	$	9,644	$	9,899	$	—
With an allowance recorded:
Residential real estate - Home equity	$	597	$	597	$	86
Commercial - Unsecured	241		241		162
Total with an allowance recorded:	$	838	$	838	$	248
Total:
Commercial real estate:
Owner occupied	$	3,673	$	3,691	$	—
Non-owner occupied	227		228		—
Residential real estate:
First lien	1,239		1,329		—
Home equity	1,516		1,516		86
Commercial:
Secured	27		30		—
Unsecured	530		536		162
Installment/consumer loans	6		7		—
Real estate construction and land loans	3,264		3,400		—
Total	$	10,482	$	10,737	$	248

December 31, 2010	Recorded Investment		Unpaid Principal Balance		Related Allocated Allowance
(In thousands)
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	3,219	$	3,219	$	—
Non-owner occupied	478		599		—
Residential real estate:
First lien	1,747		1,829		—
Home equity	996		996		—
Commercial:
Secured	—		—		—
Unsecured	32		35		—
Installment/consumer loans	86		86		—
Real estate construction and land loans	2,686		2,800		—
Total with no related allowance recorded	$	9,244	$	9,564	$	—
With an allowance recorded:
Residential real estate - Home equity	$	700	$	700	$	7
Total with an allowance recorded:	$	700	$	700	$	7
Total:
Commercial real estate:
Owner occupied	$	3,219	$	3,219	$	—
Non-owner occupied	478		599		—
Residential real estate:
First lien	1,747		1,829		—
Home equity	1,696		1,696		7
Commercial:
Secured	—		—		—
Unsecured	32		35		—
Installment/consumer loans	86		86		—
Real estate construction and land loans	2,686		2,800		—
Total	$	9,944	$	10,264	$	7

Residential home equity loans represent the only class of impaired loans with a related allowance recorded at December 31, 2010. The average recorded investment in the impaired loans was $10.1 million for the year ended December 31, 2010. Residential home equity loans and commercial unsecured loans represent the classes of impaired loans with a related allowance recorded at June 30, 2011. The average recorded investment in the impaired loans was $10.6 million for the six months ended June 30, 2011.

The Bank had no foreclosed real estate at June 30, 2011, December 31, 2010 and June 30, 2010, respectively.