LOANS

3 Months Ended

Mar. 31, 2018

LOANS

LOANS

6. LOANS

The following table sets forth the major classifications of loans:

(In thousands)	March 31, 2018			December 31, 2017
Commercial real estate mortgage loans	$	1,339,992		$	1,293,906
Multi-family mortgage loans		601,747			595,280
Residential real estate mortgage loans		493,153			464,264
Commercial, industrial and agricultural loans		638,711			616,003
Real estate construction and land loans		104,496			107,759
Installment/consumer loans		19,078			21,041
Total loans		3,197,177			3,098,253
Net deferred loan costs and fees		4,720			4,499
Total loans held for investment		3,201,897			3,102,752
Allowance for loan losses		(32,812	)		(31,707	)
Loans, net	$	3,169,085		$	3,071,045

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 $331.4 million and $359.4 million of acquired CNB loans remaining as of March 31, 2018 and December 31, 2017, 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 $15.3 million and $15.4 million of acquired FNBNY loans remaining as of March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017:

	March 31, 2018
(In thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial real estate:
Owner occupied	$	461,080	$	1,822	$	20,293	$	-	$	483,195
Non-owner occupied		844,249		8,019		4,529		-		856,797
Multi-family		601,747		-		-		-		601,747
Residential real estate:
Residential mortgage		421,767		5,902		287		-		427,956
Home equity		63,161		1,240		796		-		65,197
Commercial and industrial:
Secured		89,564		12,907		13,598		-		116,069
Unsecured		502,073		12,459		8,110		-		522,642
Real estate construction and land loans		104,181		-		315		-		104,496
Installment/consumer loans		19,064		14		-		-		19,078
Total loans	$	3,106,886	$	42,363	$	47,928	$	-	$	3,197,177

At March 31, 2018, there were $0.4 million and $1.6 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, 2017
(In thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial real estate:
Owner occupied	$	451,264	$	1,796	$	19,589	$	-	$	472,649
Non-owner occupied		808,612		8,056		4,589		-		821,257
Multi-family		595,280		-		-		-		595,280
Residential real estate:
Residential mortgage		393,029		4,854		290		-		398,173
Home equity		64,601		698		792		-		66,091
Commercial and industrial:
Secured		86,116		12,637		13,560		-		112,313
Unsecured		485,598		14,553		3,539		-		503,690
Real estate construction and land loans		107,440		-		319		-		107,759
Installment/consumer loans		21,020		16		5		-		21,041
Total loans	$	3,012,960	$	42,610	$	42,683	$	-	$	3,098,253

At December 31, 2017, there were $0.4 million and $1.6 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.

Past Due and Nonaccrual Loans

The following tables represent the aging of the recorded investment in past due loans as of March 31, 2018 and December 31, 2017 by class of loans, as defined by FASB ASC 310-10:

	March 31, 2018
(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	$	1,450	$	-	$	-	$	2,192	$	3,642	$	479,553	$	483,195
Non-owner occupied		-		-		1,143		425		1,568		855,229		856,797
Multi-family		-		-		-		-		-		601,747		601,747
Residential real estate:
Residential mortgages		1,386		-		1,017		393		2,796		425,160		427,956
Home equity		575		-		280		261		1,116		64,081		65,197
Commercial and industrial:
Secured		343		-		225		570		1,138		114,931		116,069
Unsecured		688		47		-		2,078		2,813		519,829		522,642
Real estate construction and land loans		-		-		-		152		152		104,344		104,496
Installment/consumer loans		17		-		-		-		17		19,061		19,078
Total loans	$	4,459	$	47	$	2,665	$	6,071	$	13,242	$	3,183,935	$	3,197,177

	December 31, 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	$	284	$	-	$	175	$	2,205	$	2,664	$	469,985	$	472,649
Non-owner occupied		-		-		1,163		-		1,163		820,094		821,257
Multi-family		-		-		-		-		-		595,280		595,280
Residential real estate:
Residential mortgages		2,074		398		-		401		2,873		395,300		398,173
Home equity		329		-		271		161		761		65,330		66,091
Commercial and industrial:
Secured		113		41		225		570		949		111,364		112,313
Unsecured		18		35		-		3,618		3,671		500,019		503,690
Real estate construction and land loans		-		281		-		-		281		107,478		107,759
Installment/consumer loans		36		5		-		-		41		21,000		21,041
Total loans	$	2,854	$	760	$	1,834	$	6,955	$	12,403	$	3,085,850	$	3,098,253

There were $1.6 million and $2.4 million of acquired loans that were 30-89 days past due at March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017, the Company had individually impaired loans as defined by FASB ASC No. 310, “Receivables” of $27.1 million and $22.5 million, respectively. The increase in impaired loans was attributable to troubled debt restructurings ("TDRs”) during the 2018 first quarter, partially offset by a decrease in non-accrual loans. During the three months ended March 31, 2018, the Bank modified certain commercial and industrial TDRs totaling $6.7 million. For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified 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 March 31, 2018 and December 31, 2017 for individually impaired loans. The tables also set forth the average recorded investment of individually impaired loans and interest income recognized while the loans were impaired during the three months ended March 31, 2018 and 2017:

	March 31, 2018						Three Months Ended  March 31, 2018
(In thousands)	Recorded Investment		Unpaid  Principal  Balance		Related  Allocated  Allowance		Average  Recorded  Investment		Interest  Income  Recognized
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	2,073	$	2,073	$	-	$	2,073	$	-
Non-owner occupied		9,243		9,243		-		8,973		76
Residential real estate:
Residential mortgages		-		-		-		-		-
Home equity		100		100		-		100		-
Commercial and industrial:
Secured		8,727		9,373		-		8,744		56
Unsecured		5,203		5,203		-		4,932		37
Total with no related allowance recorded	$	25,346	$	25,992	$	-	$	24,822	$	169
With an allowance recorded:
Commercial real estate:
Owner occupied	$	-	$	-	$	-	$	-	$	-
Non-owner occupied		-		-		-		-		-
Residential real estate:
Residential mortgages		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial and industrial:
Secured		-		-		-		-		-
Unsecured		1,708		3,235		1,708		1,708		-
Total with an allowance recorded	$	1,708	$	3,235	$	1,708	$	1,708	$	-
Total:
Commercial real estate:
Owner occupied	$	2,073	$	2,073	$	-	$	2,073	$	-
Non-owner occupied		9,243		9,243		-		8,973		76
Residential real estate:
Residential mortgages		-		-		-		-		-
Home equity		100		100		-		100		-
Commercial and industrial:
Secured		8,727		9,373		-		8,744		56
Unsecured		6,911		8,438		1,708		6,640		37
Total	$	27,054	$	29,227	$	1,708	$	26,530	$	169

	December 31, 2017						Three Months Ended March 31, 2017
(In thousands)	Recorded  Investment		Unpaid  Principal  Balance		Related Allocated  Allowance		Average  Recorded  Investment		Interest Income  Recognized
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	2,073	$	2,073	$	-	$	158	$	2
Non-owner occupied		9,089		9,089		-		604		18
Residential real estate:
Residential mortgages		-		-		-		4,139		79
Home equity		100		100		-		131		-
Commercial and industrial:
Secured		7,368		8,013		-		270		8
Unsecured		2,154		2,408		-		196		5
Total with no related allowance recorded	$	20,784	$	21,683	$	-	$	5,498	$	112
With an allowance recorded:
Commercial real estate:
Owner occupied	$	-	$	-	$	-	$	-	$	-
Non-owner occupied		-		-		-		-		-
Residential real estate:
Residential mortgages		-		-		-		-		-
Home equity		-		-		-		-		-
Commercial and industrial:
Secured		-		-		-		-		-
Unsecured		1,708		3,235		1,708		32		1
Total with an allowance recorded	$	1,708	$	3,235	$	1,708	$	32	$	1
Total:
Commercial real estate:
Owner occupied	$	2,073	$	2,073	$	-	$	158	$	2
Non-owner occupied		9,089		9,089		-		604		18
Residential real estate:
Residential mortgages		-		-		-		4,139		79
Home equity		100		100		-		131		-
Commercial and industrial:
Secured		7,368		8,013		-		270		8
Unsecured		3,862		5,643		1,708		228		6
Total	$	22,492	$	24,918	$	1,708	$	5,530	$	113

The Bank had one other real estate owned, consisting of $0.2 million at March 31, 2018 compared to none at December 31, 2017.

Troubled Debt Restructurings

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

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

During the three months ended March 31, 2018, the Bank modified six commercial and industrial loans totaling $6.7 million as TDRs compared to two commercial real estate loans as TDRs totaling $7.8 million for the three months ended March 31, 2017. These modifications did not result in a change to the recorded investment of the loans and did not increase the allowance for loan losses for those periods. During the three months ended March 31, 2018 and 2017, there were no charge-offs relating to TDRs and there were no loans modified as TDRs for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

As of March 31, 2018 and December 31, 2017, the Company had $32 thousand and $5 thousand, respectively, of nonaccrual TDRs and $23.2 million and $16.7 million, respectively, of performing TDRs. At March 31, 2018 and December 31, 2017, nonaccrual TDRs were unsecured. The Bank has no commitment to lend additional funds to these debtors.

The terms of certain other loans were modified during the three months ended March 31, 2018 that did not meet the definition of a TDR. These loans have a total recorded investment at March 31, 2018 of $3.6 million. These loans were to borrowers who were not experiencing financial difficulties.

Purchased Credit Impaired Loans

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

At the acquisition date, the purchased credit impaired (“PCI”) loans acquired as part of the FNBNY acquisition had contractually required principal and interest payments receivable of $40.3 million, expected cash flows of $28.4 million, and a fair value (initial carrying amount) of $21.8 million. The difference between the contractually required principal and interest payments receivable and the expected cash flows of $11.9 million represented the non-accretable difference. The difference between the expected cash flows and fair value of $6.6 million represented the initial accretable yield. At March 31, 2018, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $3.9 million and $2.6 million, respectively, with a remaining non-accretable difference of $0.7 million. At December 31, 2017, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $4.0 million and $2.4 million, respectively, with a remaining non-accretable difference of $0.7 million.

At the acquisition date, the PCI loans acquired as part of the CNB acquisition had contractually required principal and interest payments receivable of $23.4 million, expected cash flows of $10.1 million, and a fair value (initial carrying amount) of $8.7 million. The difference between the contractually required principal and interest payments receivable and the expected cash flows of $13.3 million represented the non-accretable difference. The difference between the expected cash flows and fair value of $1.4 million represented the initial accretable yield. At March 31, 2018, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $1.5 million and $0.2 million, respectively, with a remaining non-accretable difference of $1.0 million. At December 31, 2017, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $7.6 million and $1.0 million, respectively, with a remaining non-accretable difference of $5.3 million.

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

	Three Months Ended
	March 31,
(In thousands)	2018			2017
Balance at beginning of period	$	2,151		$	6,915
Accretion		(1,033	)		(1,857	)
Reclassification (to) from nonaccretable difference during the period		(161	)		275
Accretable discount at end of period	$	957		$	5,333