3. LOANS

The following table sets forth the major classifications of loans:

December 31,	2014			2013
(In thousands)
Commercial real estate mortgage loans	$	595,397		$	484,900
Multi-family mortgage loans	218,985			107,488
Residential real estate mortgage loans	156,156			153,417
Commercial, financial and agricultural loans	291,743			209,452
Real estate construction and land loans	63,556			46,981
Installment/consumer loans	10,124			9,287
Total loans	1,335,961			1,011,525
Net deferred loan costs and fees	2,366			1,738
	1,338,327			1,013,263
Allowance for loan losses	(17,637		)	(16,001		)
Net loans	$	1,320,690		$	997,262

On February 14, 2014, the Company completed the acquisition of FNBNY Bancorp, Inc. and its wholly owned subsidiary First National Bank of New York (collectively “FNBNY”) resulting in the addition of $89.7 million of acquired loans recorded at their fair value. There were approximately $64.9 million of acquired FNBNY loans remaining as of December 31, 2014.

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 Nassau and Suffolk Counties located on Long Island 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, 2014 and 2013, 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,	2014			2013			2012
(In thousands)
Allowance for loan losses balance at beginning of period	$	16,001		$	14,439		$	10,837

Charge-offs	(824		)	(916		)	(1,510		)
Recoveries	260			128			112
Net charge-offs	(564		)	(788		)	(1,398		)
Provision for loan losses charged to operations	2,200			2,350			5,000
Balance at end of period	$	17,637		$	16,001		$	14,439

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, 2014, 2013 and 2012. The loan segment represents the categories that the Bank develops to determine its allowance for loan losses.

December 31, 2014	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	$	6,279		$	1,597	$	2,712		$	4,006		$	1,206		$	201		$	16,001
Charge-offs	(461		)	—		(257		)	(104		)	—			(2		)	(824		)
Recoveries	—			—		170			87			—			3			260
Provision	1,176			1,073		(417		)	537			(102		)	(67		)	2,200
Ending balance	$	6,994		$	2,670	$	2,208		$	4,526		$	1,104		$	135		$	17,637

Ending balance: individually evaluated for impairment	$	23		$	—	$	72		$	79		$	—		$	—		$	174

Ending balance: collectively evaluated for impairment	$	6,971		$	2,670	$	2,136		$	4,447		$	1,104		$	135		$	17,463


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

Loans	$	595,397		$	218,985	$	156,156		$	291,743		$	63,556		$	10,124		$	1,335,961

Ending balance: individually evaluated for impairment	$	5,136		$	—	$	383		$	682		$	—		$	—		$	6,201

Ending balance: collectively evaluated for impairment	$	582,946		$	218,985	$	154,897		$	286,368		$	63,556		$	10,124		$	1,316,876

Ending balance: loans acquired with deteriorated credit quality(1)	$	7,315		$	—	$	876		$	4,693		$	—		$	—		$	12,884

(1)

Includes PCI loans acquired on February 14, 2014 from FNBNY.

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 recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.

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, 2014	Pass		Special Mention		Substandard		Doubtful		Total
(In thousands)
Commercial real estate:
Owner occupied	$	243,512	$	7,133	$	5,963	$	—	$	256,608
Non-owner occupied	334,790		171		3,828		—		338,789
Multi-family loans	217,855		202		928		—		218,985
Residential real estate:
First lien	88,405		—		1,613		—		90,018
Home equity	64,994		212		932		—		66,138
Commercial:
Secured	91,007		621		2,339		—		93,967
Unsecured	191,942		4,168		1,666		—		197,776
Real estate construction and land loans	63,190		—		366		—		63,556
Installment/consumer loans	9,921		100		103		—		10,124
Total loans	$	1,305,616	$	12,607	$	17,738	$	—	$	1,335,961

At December 31, 2014 there were $0.3 million and $1.5 million, respectively, of acquired FNBNY loans included in the special mention and substandard 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		44		99		—		9,287
Total loans	$	964,906	$	26,709	$	19,910	$	—	$	1,011,525

Past Due and Nonaccrual Loans

The following table represents the aging of the recorded investment in past due loans as of December 31, 2014 and December 31, 2013 by class of loans, as defined by ASC 310-10:

December 31, 2014	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	$	—	$	184	$	—	$	595	$	779	$	255,829	$	256,608
Non-owner occupied	181		—		10		10		201		338,588		338,789
Multi-family loans	—		—		—		—		—		218,985		218,985
Residential real estate:
First lien	—		—		—		143		143		89,875		90,018
Home equity	919		—		134		374		1,427		64,711		66,138
Commercial:
Secured	—		—		—		—		—		93,967		93,967
Unsecured	25		—		—		222		247		197,529		197,776
Real estate construction and land loans	—		—		—		—		—		63,556		63,556
Installment/consumer loans	1		—		—		3		4		10,120		10,124
Total loans	$	1,126	$	184	$	144	$	1,347	$	2,801	$	1,333,160	$	1,335,961

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

At December 31, 2014 there were no FNBNY acquired loans that were 30-89 days past due. All loans 90 days or more past due that are still accruing interest represent loans that were acquired from FNBNY and were recorded at fair value upon acquisition. These loans are considered to be accruing as management can reasonably estimate future cash flows and expect to fully collect the carrying value of these acquired 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, 2014 and 2013, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $6.2 million and $8.9 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. 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, 2014, 2013 and 2012:

December 31, 2014	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	$	3,562	$	3,707	$	—	$	3,974	$	113
Non-owner occupied	1,251		1,568		—		961		63
Residential real estate:
Residential mortgages	143		231		—		199		—
Home equity	169		377		—		229		—
Commercial:
Secured	345		345		—		354		25
Unsecured	—		—		—		—		—
Total with no related allowance recorded	5,470		6,228		—		5,717		201

With an allowance recorded:
Commercial real estate – Owner occupied	—		—		—		—		—
Commercial real estate – Non-owner occupied	323		323		23		27		—
Residential real estate– Residential mortgages	—		—		—		—		—
Residential real estate – Home equity	72		89		72		75		13
Commercial–Secured	—		—		—		—		—
Commercial–Unsecured	337		339		79		206		—
Total with an allowance recorded	732		751		174		308		13

Total:
Commercial real estate:
Owner occupied	3,562		3,707		—		3,974		113
Non-owner occupied	1,574		1,891		23		988		63
Residential real estate:
Residential mortgages	143		231		—		199		—
Home equity	241		466		72		304		13
Commercial:
Secured	345		345		—		354		25
Unsecured	337		339		79		206		—
Total	$	6,202	$	6,979	$	174	$	6,025	$	214

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		—		917		60
Residential real estate:
First lien	1,463		2,213		—		1,482		26
Home equity	689		1,046		—		633		—
Commercial:
Secured	352		352		—		450		26
Unsecured	174		—		—		232		59
Total with no related allowance recorded	7,291		8,333		—		7,444		289

With an allowance recorded:
Commercial real estate - Owner occupied	720		720		94		420		—
Commercial real estate - Non-owner occupied	617		617		22		515		—
Residential real estate - First Lien	152		156		42		141		—
Residential real Estate - Home equity	78		89		80		81		—
Total with an allowance recorded	1,567		1,582		238		1,157		—

Total:
Commercial real estate:
Owner occupied	4,416		4,525		94		4,150		118
Non-owner occupied	1,534		1,534		22		1,432		60
Residential real estate:
First lien	1,615		2,369		42		1,623		26
Home equity	767		1,135		80		714		—
Commercial:
Secured	352		352		—		450		26
Unsecured	174		—		—		232		59
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 no other real estate owned at December 31, 2014 and $2.2 million at December 31, 2013.

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:

Years Ended December 31,	2014					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		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	323		323		1	620		620		—	—		—
Residential real estate:
Home equity:	1	127		127		—	—		—		—	—		—
Commercial:
Secured	—	—		—		—	—		—		1	387		380
Unsecured	1	127		127		1	33		33		1	42		39
Installment/consumer loans	1	5		5		—	—		—		—	—		—
Total loans	4	$	582	$	582	3	$	1,373	$	1,373	3	$	592	$	579

The TDRs described above did not increase the allowance for loan losses during the years ended December 31, 2014, 2013 and 2014.

There was a $0.5 million charge-off related to a TDR during the year ended December 31, 2014 and none for the year ended December 31, 2013. There were $0.4 million of charge-offs related to TDR’s during the year ended December 31, 2012. There were no loans modified as a TDR during 2014 for which there was a payment default within twelve months following the modification. During 2013, there was one loan modified as a TDR for which there was a payment default within twelve months following the modification and none during 2012. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. The Bank had no commitments to lend additional amounts to loans that were classified as TDRs.

At December 31, 2014 and 2013, the Company had $0.5 million and $2.0 million, respectively of nonaccrual TDR loans and $5.0 million and $5.1 million, respectively of performing TDRs. At December 31, 2014 and 2013, total nonaccrual TDR loans are secured with collateral that has an appraised value of $0.9 million and $2.3 million, respectively.

The terms of certain other loans were modified during the year ended December 31, 2014 that did not meet the definition of a TDR. These loans have a total recorded investment as of December 31, 2014 of $16.7 million. The modification of these loans involved a modification of the terms of loans to borrowers who were not experiencing financial difficulties.

Acquired 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.

In determining the acquisition date fair value of purchased loans, acquired loans are aggregated into pools of loans with common characteristics. Each loan is reviewed at acquisition to determine if it should be accounted for as a loan that has experienced credit deterioration and it is probable that at acquisition, the Company will not be able to collect all the contractual principle and interest due from the borrower. All loans with evidence of deterioration in credit quality are considered purchased credit impaired (“PCI”) loans unless the loan type is specifically excluded from the scope of ASC 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” such as loans with active revolver features or because management has minimal doubt in the collection of the loan. This policy is based on the following general themes;

1.The loans were acquired in a business combination;

2.The acquisition of the loans will result in recognition of a discount attributable, at least in part, to credit quality; and

3.The loans are not subsequently accounted for at fair value

The Bank makes an estimate of the loans’ contractual principal and contractual interest payments as well as the total cash flows it expects to collect from the pools of loans, which includes undiscounted expected principal and interest. The excess of contractual amounts over the total cash flows expected to be collected from the loans is referred to as non-accretable difference, which is not accreted into income. The excess of the expected undiscounted cash flows over the fair value of the loans is referred to as accretable discount. Accretable discount is recognized as interest income on a level-yield basis over the life of the loans. Management has not included prepayment assumptions in its modeling of contractual or expected cash flows. The Bank continues to estimate cash flows expected to be collected over the life of the loans. Subsequent increases in total cash flows expected to be collected are recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of the loans. Subsequent decreases in cash flows expected to be collected over the life of the loans are recognized as impairment in the current period through allowance for loan losses.

A PCI loan may be resolved either through a sale of the loan, by working with the customer and obtaining partial or full repayment, by short sale of the collateral, or by foreclosure. When a loan accounted for in a pool is resolved, it is removed from the pool at its carrying amount. Any differences between the amounts received and the outstanding balance are absorbed by the non-accretable difference of the pool. For loans not accounted for in pools, a gain or loss on resolution would be recognized based on the difference between the proceeds received and the carrying amount of the loan.

Payments received earlier than expected or in excess of expected cash flows from sales or other resolutions may result in the carrying value of a pool being reduced to zero even though outstanding contractual balances and expected cash flows remain related to loans in the pool. Once the carrying value of a pool is reduced to zero, any future proceeds, which may include cash or real estate acquired in foreclosure, from the remaining loans, representing further realization of accretable yield, are recognized as interest income upon receipt.

At the acquisition date, the purchased credit impaired loans 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 ($11.9 million) represented the non-accretable difference. The difference between the expected cash flows and fair value ($6.6) million represented the initial accretable yield. At December 31, 2014, the outstanding principal balance and carrying amount of the purchased credit impaired loans was $21.5 million and $12.3 million, respectively, with a remaining non-accretable difference of $5.9 million.

The following table summarizes the activity in the accretable yield for the purchased credit impaired loans:

December 31,	2014
(In thousands)
Balance at beginning of period	$	—
Accretable discount arising from acquisition of PCI loans	6,580
Accretion	(1,598		)
Reclassification from non-accretable difference during the period	3,450
Accretable discount at end of period	$	8,432

The allowance for loan losses was not increased during the year ended December 31, 2014 for those purchased credit impaired loans disclosed above. In addition, no allowances for loan losses were reversed during 2014.

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 2014 and 2013.

The following table sets forth selected information about related party loans at December 31, 2014:

	Balance Outstanding
(In thousands)
Balance at January 1, 2014	$	3,051
New loans	—
Effective change in related parties	(114		)
Advances	15
Repayments	(193		)
Balance at December 31, 2014	$	2,759