3. LOANS

The following table sets forth the major classifications of loans:

December 31,	2013			2012
(In thousands)
Commercial real estate mortgage loans	$	484,900		$	332,782
Multi-family mortgage loans		107,488			66,080
Residential real estate mortgage loans		153,417			143,703
Commercial, financial and agricultural loans		209,452			197,448
Real estate construction and land loans		46,981			48,632
Installment/consumer loans		9,287			9,167
Total loans		1,011,525			797,812
Net deferred loan costs and fees		1,738			634
		1,013,263			798,446
Allowance for loan losses		(16,001	)		(14,439	)
Net loans	$	997,262		$	784,007

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 collectibility of such a 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 generally located largely in our 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 $0.25 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 5 or more families. The loans are usually made in areas with limited single family residences generating high demand for these facilities. 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 maybe 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 made to and 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, will 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. 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. Credit risk is affected by construction delays, cost overruns, market conditions and the availability of permanent financing; to the extent such permanent financing is not being provided by us.

Installment and Consumer Loans

Loans in this classification may be either secured or unsecured and 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.

Allowance for Loan Losses

The allowance for loan losses is established and maintained through a provision for loan losses based on probable incurred losses inherent in the Bank’s loan portfolio. Management evaluates the adequacy of the allowance on a quarterly basis. The allowance is comprised of both individual valuation allowances and loan pool valuation allowances.

The Bank monitors its entire loan portfolio on a regular basis, with consideration given to detailed analysis of classified loans, repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance.

Individual valuation allowances are established in connection with specific loan reviews and the asset classification process including the procedures for impairment testing under FASB Accounting Standard Codification (“ASC”) No. 310, “Receivables”. Such valuation, which includes a review of loans for which full collectibility in accordance with contractual terms is not reasonably assured, considers the estimated fair value of the underlying collateral less the costs to sell, if any, or the present value of expected future cash flows, or the loan’s observable market value. Any shortfall that exists from this analysis results in a specific allowance for the loan. Pursuant to our policy, loan losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectible. Assumptions and judgments by management, in conjunction with outside sources, are used to determine whether full collectibility of a loan is not reasonably assured. These assumptions and judgments are also used to determine the estimates of the fair value of the underlying collateral or the present value of expected future cash flows or the loan’s observable market value. Individual valuation allowances could differ materially as a result of changes in these assumptions and judgments. Individual loan analyses are periodically performed on specific loans considered impaired. The results of the individual valuation allowances are aggregated and included in the overall allowance for loan losses.

Loan pool valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with our lending activities, but which, unlike individual allowances, have not been allocated to particular problem assets. Pool evaluations are broken down into loans with homogenous characteristics by loan type and include commercial real estate mortgages, multi-family mortgage loans, home equity loans, residential real estate mortgages, commercial and industrial loans, real estate construction and land loans and consumer loans. The determination of the adequacy of the valuation allowance is a process that takes into consideration a variety of factors. The Bank has developed a range of valuation allowances necessary to adequately provide for probable incurred losses inherent in each pool of loans. We consider our own charge-off history along with the growth in the portfolio as well as the Bank’s credit administration and asset management philosophies and procedures when determining the allowances for each pool. In addition, we evaluate and consider the credit’s risk rating which includes management’s evaluation of: cash flow, collateral, guarantor support, financial disclosures, industry trends and strength of borrowers’ management, the impact that economic and market conditions may have on the portfolio as well as known and inherent risks in the portfolio. Finally, we evaluate and consider the allowance ratios and coverage percentages of both peer group and regulatory agency data. These evaluations are inherently subjective because, even though they are based on objective data, it is management’s interpretation of that data that determines the amount of the appropriate allowance. If the evaluations prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio, resulting in additions to the allowance for loan losses.

The Credit Risk Committee is comprised of members of both management and the Board of Directors. The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the Credit Risk Committee, based on its risk assessment of the entire portfolio. Based on the Credit Risk Committee’s review of the classified loans and the overall allowance levels as they relate to the entire loan portfolio at December 31, 2013 and 2012, management believes the allowance for loan losses has been established at levels sufficient to cover the probable incurred losses in the Bank’s loan portfolio. Future additions or reductions to the allowance may be necessary based on changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for loan losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.

The following table sets forth changes in the allowance for loan losses:

December 31,	2013			2012			2011
(In thousands)
Allowance for loan losses balance at beginning of period	$	14,439		$	10,837		$	8,497

Charge-offs	(916		)	(1,510		)	(1,681		)
Recoveries	128			112			121
Net charge-offs	(788		)	(1,398		)	(1,560		)
Provision for loan losses charged to operations	2,350			5,000			3,900
Balance at end of period	$	16,001		$	14,439		$	10,837

The following table represents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, as defined under ASC 310-10, and based on impairment method as of December 31, 2013 and 2012. The loan segment represents the categories that the Bank develops to determine its allowance for loan losses.

December 31, 2013	Commercial Real Estate Mortgage Loans		Multi-family Loans		Residential Real Estate Mortgage Loans			Commercial, Financial and Agricultural Loans			Real Estate Construction and Land Loans			Installment/ Consumer Loans				Total
(In thousands)
Allowance for Loan Losses
Beginning balance	$	4,445	$	1,239	$	2,803		$	4,349		$	1,375		$	228		$	14,439
Charge-offs	—		—		(420		)	(420		)	(23		)	(53		)	(916		)
Recoveries	—		—		34			87			2			5			128
Provision	1,834		358		295			(10		)	(148		)	21			2,350
Ending balance	$	6,279	$	1,597	$	2,712		$	4,006		$	1,206		$	201		$	16,001

Ending balance: individually evaluated for impairment	$	116	$	—	$	122		$	—		$	—		$	—		$	238

Ending balance: collectively evaluated for impairment	$	6,163	$	1,597	$	2,590		$	4,006		$	1,206		$	201		$	15,763


Ending balance: loans acquired with deteriorated credit quality	$	—	$	—	$	—		$	—		$	—		$	—		$	—

Loans	$	484,900	$	107,488	$	153,417		$	209,452		$	46,981		$	9,287		$	1,011,525

Ending balance: individually evaluated for impairment	$	5,950	$	—	$	2,382		$	526		$	—		$	—		$	8,858

Ending balance: collectively evaluated for impairment	$	478,129	$	107,488	$	151,035		$	208,677		$	46,641		$	9,287		$	1,001,257

Ending balance: loans acquired with deteriorated credit quality	$	821	$	—	$	—		$	249		$	340		$	—		$	1,410

December 31, 2012	Commercial Real Estate Mortgage Loans		Multi-family Loans		Residential Real Estate Mortgage Loans			Commercial, Financial and Agricultural Loans			Real Estate Construction and Land Loans			Installment/ Consumer Loans				Total
(In thousands)
Allowance for Loan Losses
Beginning balance	$	3,530	$	395	$	2,280		$	2,895		$	1,465		$	272		$	10,837
Charge-offs	—		—		(1,210		)	(285		)	—			(15		)	(1,510		)
Recoveries	—		—		7			83			—			22			112
Provision	915		844		1,726			1,656			(90		)	(51		)	5,000
Ending balance	$	4,445	$	1,239	$	2,803		$	4,349		$	1,375		$	228		$	14,439

Ending balance: individually evaluated for impairment	$	—	$	—	$	141		$	228		$	—		$	—		$	369

Ending balance: collectively evaluated for impairment	$	4,445	$	1,239	$	2,662		$	4,121		$	1,375		$	228		$	14,070

Ending balance: loans acquired with deteriorated credit quality	$	—	$	—	$	—		$	—		$	—		$	—		$	—

Loans	$	332,782	$	66,080	$	143,703		$	197,448		$	48,632		$	9,167		$	797,812

Ending balance: individually evaluated for impairment	$	4,776	$	—	$	2,549		$	883		$	—		$	—		$	8,208

Ending balance: collectively evaluated for impairment	$	327,282	$	66,080	$	141,154		$	196,350		$	48,331		$	9,167		$	788,364

Ending balance: loans acquired with deteriorated credit quality	$	724	$	—	$	—		$	215		$	301		$	—		$	1,240

The Company has an immaterial amount of purchased loans as a result of the acquisition of Hamptons State Bank in 2011, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. These loans are referred to as loans acquired with deteriorated credit quality in the table above.

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. 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 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:

Grades:

December 31, 2013

Pass

Special Mention

Substandard

Doubtful

Total

(In thousands)

Commercial real estate:

Owner occupied

164,502

11,828

7,336

—

183,666

Non-owner occupied

291,758

5,490

3,986

—

301,234

Multi-family loans

107,488

—

107,488

Residential real estate:

First lien

87,288

264

2,847

—

90,399

Home equity

60,285

1,014

1,719

—

63,018

Commercial:

Secured

69,475

4,320

2,175

—

75,970

Unsecured

128,655

3,749

1,078

—

133,482

Real estate construction and land loans

46,311

—

670

—

46,981

Installment/consumer loans

9,144

—

9,287

Total loans

964,906

26,709

19,910

—

1,011,525

	Grades:

December 31, 2012	Pass		Special Mention		Substandard		Doubtful		Total
(In thousands)
Commercial real estate:
Owner occupied	$	138,675	$	11,285	$	11,039	$	—	$	160,999
Non-owner occupied	159,967		7,523		4,293		—		171,783
Multi-family loans	66,080		—		—		—		66,080
Residential real estate:
First lien	72,158		—		2,846		717		75,721
Home equity	65,955		745		1,282		—		67,982
Commercial:
Secured	81,661		1,447		5,605		—		88,713
Unsecured	105,454		1,948		1,234		99		108,735
Real estate construction and land loans	45,178		—		3,454		—		48,632
Installment/consumer loans	9,058		—		109		—		9,167
Total loans	$	744,186	$	22,948	$	29,862	$	816	$	797,812

Past Due and Nonaccrual Loans

The following table represents the aging of the recorded investment in past due loans as of December 31, 2013 and December 31, 2012 by class of loans, as defined by ASC 310-10:

December 31, 2013	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)
Commercial real estate:
Owner occupied	$	327	$	201	$	1	$	1,072	$	1,601	$	182,065	$	183,666
Non-owner occupied	—		193		—		617		810		300,424		301,234
Multi-family loans	—		—		—		—		—		107,488		107,488
Residential real estate:
First lien	329		—		—		1,286		1,615		88,784		90,399
Home equity	341		127		—		767		1,235		61,783		63,018
Commercial:
Secured	—		—		—		58		58		75,912		75,970
Unsecured	—		20		—		21		41		133,441		133,482
Real estate construction and land loans	—		—		—		—		—		46,981		46,981
Installment/consumer loans	5		6		—		—		11		9,276		9,287
Total loans	$	1,002	$	547	$	1	$	3,821	$	5,371	$	1,006,154	$	1,011,525

December 31, 2012	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)
Commercial real estate:
Owner occupied	$	—	$	1,265	$	491	$	492	$	2,248	$	158,751	$	160,999
Non-owner occupied	—		—		—		—		—		171,783		171,783
Multi-family loans	—		—		—		—		—		66,080		66,080
Residential real estate:
First lien	—		158		—		1,203		1,361		74,360		75,721
Home equity	965		—		—		1,010		1,975		66,007		67,982
Commercial:
Secured	—		—		—		136		136		88,577		88,713
Unsecured	22		—		—		426		448		108,287		108,735
Real estate construction and land loans	—		—		—		22		22		48,610		48,632
Installment/consumer loans	—		—		—		—		—		9,167		9,167
Total loans	$	987	$	1,423	$	491	$	3,289	$	6,190	$	791,622	$	797,812

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 into income.

Impaired Loans

As of December 31, 2013 and 2012, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $8.9 million and $8.2 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. 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. These methods of fair value measurement for impaired loans are considered level 3 within the fair value hierarchy described in FASB ASC 820-10-50-5.

The following tables represent impaired loans by class at December 31, 2013 and 2012:

December 31, 2013

Recorded
Investment

Unpaid
Principal
Balance

Related
Allocated
Allowance

Average
Recorded
Investment

Interest
Income
Recognized

(In thousands)

With no related allowance recorded:

Commercial real estate:

Owner occupied

3,696

3,805

—

3,730

118

Non-owner occupied

917

—

917

Residential real estate:

First lien

1,463

2,213

—

1,482

Home equity

689

1,046

—

633

—

Commercial:

Secured

352

—

450

Unsecured

174

—

232

Total with no related allowance recorded

7,291

8,333

—

7,444

289

With an allowance recorded:

Commercial real estate – Owner occupied

720

420

—

Commercial real estate – Non-owner occupied

617

515

—

Residential real estate – First Lien

152

156

141

—

Residential real Estate – Home equity

—

Total with an allowance recorded

1,567

1,582

238

1,157

—

Total:

Commercial real estate:

Owner occupied

4,416

4,525

4,150

118

Non-owner occupied

1,534

1,432

Residential real estate:

First lien

1,615

2,369

1,623

Home equity

767

1,135

714

—

Commercial:

Secured

352

—

450

Unsecured

174

—

232

Total

8,858

9,915

238

8,601

289

December 31, 2012	Recorded Investment		Unpaid Principal Balance		Related Allocated Allowance		Average Recorded Investment		Interest Income Recognized
(In thousands)
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	3,860	$	3,931	$	—	$	3,816	$	116
Non-owner occupied	916		916		—		916		61
Residential real estate:
First lien	1,539		2,151		—		1,484		35
Home equity	736		1,094		—		768		—
Commercial:
Secured	515		520		—		281		14
Unsecured	95		97		—		42		—
Real estate construction and land loans	—		—		—		2		—
Total with no related allowance recorded	7,661		8,709		—		7,309		226

With an allowance recorded:
Residential real estate – Home equity	274		287		141		244		—
Commercial - Unsecured	273		302		228		236		—
Total with an allowance recorded	547		589		369		480		—

Total:
Commercial real estate:
Owner occupied	3,860		3,931		—		3,816		116
Non-owner occupied	916		916		—		916		61
Residential real estate:
First lien	1,539		2,151		—		1,484		35
Home equity	1,010		1,381		141		1,012		—
Commercial:
Secured	515		520		—		281		14
Unsecured	368		399		228		278		—
Real estate construction and land loans	—		—		—		2		—
Total	$	8,208	$	9,298	$	369	$	7,789	$	226

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.

The Bank had $2.2 million foreclosed real estate owned at December 31, 2013 and $0.3 million at December 31, 2012.

Troubled Debt Restructurings

The terms of certain loans were modified and are considered troubled debt restructurings (“TDR”). The modification of the terms of such loans included 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 a loan 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. This evaluation is performed under the Company’s internal underwriting policy.

The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2013 and 2012:

Years Ended December 31,	2013					2012
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
(In thousands)
Trouble Debt Restructurings
Commercial real estate:
Owner occupied	1	$	720	$	720	1	$	163	$	160
Non-owner occupied	1	620		620		—	—		—
Multi-Family	—	—		—		—	—		—
Residential real estate:
First lien	—	—		—		—	—		—
Home equity:	—	—		—		—	—		—
Commercial:
Secured	—	—		—		1	387		380
Unsecured	1	33		33		1	42		39
Real estate construction and land loans	—	—		—		—	—		—
Installment/consumer loans	—	—		—		—	—		—
Total loans	3	$	1,373	$	1,373	3	$	592	$	579

The TDRs described above did not increase the allowance for loan losses and there were no charge offs during the year ended December 31, 2013. The TDRs for the year ended December 31, 2012 did not increase the allowance for loan losses but had related charge offs of $0.4 million.

There was one loan modified as a TDR during 2013 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.

At December 31, 2013 and 2012, the Company had $2.0 million and $1.0 million, respectively of nonaccrual TDR loans and $5.1 million and $5.0 million respectively of performing TDRs. At December 31, 2013 and 2012, total nonaccrual TDR loans are secured with collateral that has an appraised value of $2.3 million and $2.7 million, respectively.

The terms of certain other loans were modified during the year ended December 31, 2013 that did not meet the definition of a TDR. These loans have a total recorded investment as of December 31, 2013 of $22.2 million. The modification of these loans involved a modification of the terms of loans to borrowers who were not experiencing financial difficulties.

Related Party Loans

Certain directors, executive officers, and their related parties, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during 2013 and 2012.

The following table sets forth selected information about related party loans at December 31, 2013:

	Balance Outstanding
(In thousands)
Balance at December 31, 2012	$	1,271
New loans	2,800
Effective change in related parties	—
Advances	17
Repayments	(1,037		)
Balance at December 31, 2013	$	3,051