LOANS

9 Months Ended

Sep. 30, 2017

LOANS

LOANS

6. LOANS

The following table sets forth the major classifications of loans:

(In thousands)	September 30, 2017			December 31, 2016
Commercial real estate mortgage loans	$	1,261,369		$	1,091,752
Multi-family mortgage loans		570,181			518,146
Residential real estate mortgage loans		400,256			364,884
Commercial, industrial and agricultural loans		572,393			524,450
Real estate construction and land loans		93,393			80,605
Installment/consumer loans		19,671			16,368
Total loans		2,917,263			2,596,205
Net deferred loan costs and fees		4,442			4,235
Total loans held for investment		2,921,705			2,600,440
Allowance for loan losses		(29,273	)		(25,904	)
Loans, net	$	2,892,432		$	2,574,536

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 $386.9 million and $464.2 million of acquired CNB loans remaining as of September 30, 2017 and December 31, 2016, respectively.

In February 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 $21.8 million and $26.5 million of acquired FNBNY loans remaining as of September 30, 2017 and December 31, 2016, 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 $250,000 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. 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 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 September 30, 2017 and December 31, 2016:

	September 30, 2017
(In thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial real estate:
Owner occupied	$	449,761	$	1,334	$	20,081	$	-	$	471,176
Non-owner occupied		776,497		9,278		4,418		-		790,193
Multi-family		570,181		-		-		-		570,181
Residential real estate:
Residential mortgage		329,338		4,883		373		-		334,594
Home equity		64,134		825		703		-		65,662
Commercial and industrial:
Secured		68,934		16,111		12,009		-		97,054
Unsecured		456,964		10,838		7,537		-		475,339
Real estate construction and land loans		93,070		-		323		-		93,393
Installment/consumer loans		19,553		18		100				19,671
Total loans	$	2,828,432	$	43,287	$	45,544	$	-	$	2,917,263

At September 30, 2017, there were $1.9 million and $2.6 million of acquired CNB loans included in the special mention and substandard grades, respectively, and $0.2 million and $0.3 million of acquired FNBNY loans included in the special mention and substandard grades, respectively.

	December 31, 2016
(In thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial real estate:
Owner occupied	$	404,584	$	18,909	$	722	$	-	$	424,215
Non-owner occupied		643,426		20,035		4,076		-		667,537
Multi-family		518,146		-		-		-		518,146
Residential real estate:
Residential mortgage		299,297		82		370		-		299,749
Home equity		64,195		563		377		-		65,135
Commercial and industrial:
Secured		75,837		31,143		2,254		-		109,234
Unsecured		409,879		2,493		2,844		-		415,216
Real estate construction and land loans		80,272		-		333		-		80,605
Installment/consumer loans		16,268		-		100		-		16,368
Total loans	$	2,511,904	$	73,225	$	11,076	$	-	$	2,596,205

At December 31, 2016, there were $0.01 million and $1.5 million of acquired CNB loans included in the special mention and substandard grades, respectively, and $0.2 million and $0.2 million of acquired FNBNY loans included in the special mention and substandard grades, respectively. 

Past Due and Nonaccrual Loans

The following tables represent the aging of the recorded investment in past due loans as of September 30, 2017 and December 31, 2016 by class of loans, as defined by FASB ASC 310-10:

	September 30, 2017
(In thousands)	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
Commercial real estate:
Owner occupied	$	480	$	-	$	563	$	145	$	1,188	$	469,988	$	471,176
Non-owner occupied		912		-		1,182		-		2,094		788,099		790,193
Multi-family		-		-		-		-		-		570,181		570,181
Residential real estate:
Residential mortgages		1,309		217		-		490		2,016		332,578		334,594
Home equity		145		-		263		199		607		65,055		65,662
Commercial and industrial:
Secured		32		-		436		1,568		2,036		95,018		97,054
Unsecured		75		559		-		5,049		5,683		469,656		475,339
Real estate construction and land loans		-		-		-		-		-		93,393		93,393
Installment/consumer loans		26		-		-		-		26		19,645		19,671
Total loans	$	2,979	$	776	$	2,444	$	7,451	$	13,650	$	2,903,613	$	2,917,263

	December 31, 2016
(In thousands)	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
Commercial real estate:
Owner occupied	$	222	$	-	$	467	$	184	$	873	$	423,342	$	424,215
Non-owner occupied		-		-		-		-		-		667,537		667,537
Multi-family		-		-		-		-		-		518,146		518,146
Residential real estate:
Residential mortgages		1,232		-		-		770		2,002		297,747		299,749
Home equity		532		-		238		265		1,035		64,100		65,135
Commercial and industrial:
Secured		27		-		204		-		231		109,003		109,234
Unsecured		115		-		118		22		255		414,961		415,216
Real estate construction and land loans		-		-		-		-		-		80,605		80,605
Installment/consumer loans		28		-		-		-		28		16,340		16,368
Total loans	$	2,156	$	-	$	1,027	$	1,241	$	4,424	$	2,591,781	$	2,596,205

There were $1.9 million and $1.0 million of acquired loans that were 30-89 days past due at September 30, 2017 and December 31, 2016, respectively. All loans 90 days or more past due that are still accruing interest represent loans acquired from CNB, FNBNY and Hamptons State Bank (“HSB”) which were recorded at fair value upon acquisition. These loans are considered to be accruing as management can reasonably estimate future cash flows and expects 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

At September 30, 2017 and December 31, 2016, the Company had individually impaired loans as defined by FASB ASC No. 310, “Receivables” of $18.4 million and $3.4 million, respectively. During the nine months ended September 30, 2017, the Bank modified certain commercial real estate mortgage loans as troubled debt restructurings (“TDRs”) totaling $7.8 million, which are classified as special mention, and certain taxi medallion loans totaling $2.8 million, which are classified as substandard, which, coupled with an increase in nonaccrual loans, caused the increase in impaired loans from December 31, 2016. 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 TDRs. 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 September 30, 2017 and December 31, 2016 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 and nine months ended September 30, 2017 and 2016:

	September 30, 2017						Three Months Ended  September 30, 2017				Nine Months Ended  September 30, 2017
(In thousands)	Recorded  Investment		Unpaid  Principal  Balance		Related  Allocated  Allowance		Average  Recorded  Investment		Interest  Income  Recognized		Average  Recorded  Investment		Interest  Income  Recognized
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Non-owner occupied		8,896		8,896		-		8,906		100		6,352		298
Residential real estate:
Residential mortgages		-		-		-		-		-		-		-
Home equity		-		-		-		-		-		-		-
Commercial and industrial:
Secured		3,023		3,023		-		3,030		5		1,459		66
Unsecured		333		333		-		342		4		367		12
Total with no related allowance recorded	$	12,252	$	12,252	$	-	$	12,278	$	109	$	8,178	$	376
With an allowance recorded:
Commercial real estate:
Owner occupied	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Non-owner occupied		-		-		-		-		-		-		-
Residential real estate:
Residential mortgages		-		-		-		-		-		-		-
Home equity		-		-		-		-		-		-		-
Commercial and industrial:
Secured		1,216		1,216		646		1,216		6		540		6
Unsecured		4,941		4,941		1,315		3,294		105		1,098		106
Total with an allowance recorded	$	6,157	$	6,157	$	1,961	$	4,510	$	111	$	1,638	$	112
Total:
Commercial real estate:
Owner occupied	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Non-owner occupied		8,896		8,896		-		8,906		100		6,352		298
Residential real estate:
Residential mortgages		-		-		-		-		-		-		-
Home equity		-		-		-		-		-		-		-
Commercial and industrial:
Secured		4,239		4,239		646		4,246		11		1,999		72
Unsecured		5,274		5,274		1,315		3,636		109		1,465		118
Total	$	18,409	$	18,409	$	1,961	$	16,788	$	220	$	9,816	$	488

	December 31, 2016						Three Months Ended  September 30, 2016				Nine Months Ended September 30, 2016
(In thousands)	Recorded  Investment		Unpaid  Principal  Balance		Related  Allocated  Allowance		Average  Recorded  Investment		Interest  Income  Recognized		Average  Recorded  Investment		Interest  Income  Recognized
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	326	$	538	$	-	$	344	$	2	$	360	$	7
Non-owner occupied		1,213		1,213		-		1,224		20		1,232		57
Residential real estate:
Residential mortgages		520		558		-		555		-		437		-
Home equity		264		285		-		657		-		613		-
Commercial and industrial:
Secured		556		556		-		194		3		173		9
Unsecured		408		408		-		442		6		467		15
Total with no related allowance recorded	$	3,287	$	3,558	$	-	$	3,416	$	31	$	3,282	$	88
With an allowance recorded:
Commercial real estate:
Owner occupied	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Non-owner occupied		-		-		-		-		-		-		-
Residential real estate:
Residential mortgages		-		-		-		-		-		-		-
Home equity		-		-		-		-		-		-		-
Commercial and industrial:
Secured		-		-		-		-		-		-		-
Unsecured		66		66		1		203		1		132		5
Total with an allowance recorded	$	66	$	66	$	1	$	203	$	1	$	132	$	5
Total:
Commercial real estate:
Owner occupied	$	326	$	538	$	-	$	344	$	2	$	360	$	7
Non-owner occupied		1,213		1,213		-		1,224		20		1,232		57
Residential real estate:
Residential mortgages		520		558		-		555		-		437		-
Home equity		264		285		-		657		-		613		-
Commercial and industrial:
Secured		556		556		-		194		3		173		9
Unsecured		474		474		1		645		7		599		20
Total	$	3,353	$	3,624	$	1	$	3,619	$	32	$	3,414	$	93

The Bank had no other real estate owned at September 30, 2017 and December 31, 2016.

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 September 30, 2017, there were no loans modified as TDRs, compared to one loan modified as a TDR totaling $0.3 million for the three months ended September 30, 2016. During the nine months ended September 30, 2017, the Bank modified certain commercial real estate mortgage loans totaling $7.8 million and certain taxi medallion loans totaling $2.8 million as TDRs compared to four loans as TDRs totaling $0.9 million for the nine months ended September 30, 2016. 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 nine months ended September 30, 2017, there were no charge-offs relating to TDRs. During the nine months ended September 30, 2016, there were $0.06 million charge-offs relating to TDRs. During the nine months ended September 30, 2017 there were two loans modified as TDRs for which there was a payment default within twelve months following the modification and none during the nine months ended September 30, 2016. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

As of September 30, 2017 and December 31, 2016, the Company had $0.5 million and $0.3 million, respectively, of nonaccrual TDRs and $12.7 million and $2.4 million, respectively, of performing TDRs. At September 30, 2017 and December 31, 2016, total nonaccrual TDRs are secured with collateral that has an appraised value of $4.0 million and $1.3 million, respectively. The Bank has no commitment to lend additional funds to these debtors.

The terms of certain other loans were modified during the nine months ended September 30, 2017 that did not meet the definition of a TDR. These loans have a total recorded investment at September 30, 2017 of $41.0 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.

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 principal 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 FASB 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 about the collection of the loan.

The Bank makes an estimate of the loans’ contractual principal and contractual interest payments as well as the expected total cash flows 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 the 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 from the remaining loans, representing further realization of accretable yield, are recognized as interest income upon receipt. These proceeds may include cash or real estate acquired in foreclosure.

At the acquisition date, the 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 September 30, 2017, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $6.1 million and $4.0 million, respectively, with a remaining non-accretable difference of $1.1 million. At December 31, 2016, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $12.2 million and $7.0 million, respectively, with a remaining non-accretable difference of $1.3 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 September 30, 2017, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $10.9 million and $3.2 million, respectively, with a remaining non-accretable difference of $6.2 million. At December 31, 2016, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $12.2 million and $2.3 million, respectively, with a remaining non-accretable difference of $6.9 million.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2017			2016			2017			2016
Balance at beginning of period	$	3,966		$	5,963		$	6,915		$	7,113
Accretion		(1,067	)		(559	)		(3,970	)		(3,217	)
Reclassification (to) from nonaccretable difference during the period		(362	)		46			(408	)		1,138
Other		-			-			-			416
Accretable discount at end of period	$	2,537		$	5,450		$	2,537		$	5,450