Loans

6 Months Ended

Jun. 30, 2020

4 - LOANS

The following table sets forth the loans outstanding by class of loans at the dates indicated.




	June 30,		December 31, 2019
	2020		Loans						Allowance for Loan Losses
(in thousands)	Loans ‎Outstanding		Individually ‎Evaluated		Collectively ‎Evaluated		Ending ‎Balance		Individually ‎Evaluated		Collectively ‎Evaluated		Ending ‎Balance
Commercial and industrial	$	104,673	$	—	$	103,879	$	103,879	$	—	$	1,493	$	1,493
SBA PPP		165,704		—		—		—		—		—		—
Commercial mortgages:
Multifamily		797,660		—		835,013		835,013		—		7,151		7,151
Other		434,020		—		447,484		447,484		—		3,498		3,498
Owner-occupied		119,862		501		118,291		118,792		—		921		921
Residential mortgages:
Closed end		1,470,181		1,189		1,620,230		1,621,419		14		15,684		15,698
Revolving home equity		58,945		—		59,231		59,231		—		515		515
Consumer and other		1,416		268		2,163		2,431		—		13		13
	$	3,152,461	$	1,958	$	3,186,291	$	3,188,249	$	14	$	29,275	$	29,289

Management identifies loans in the Bank’s portfolio that must be individually evaluated for loss due to disparate risk characteristics or information suggesting that the Bank will be unable to collect all the principal and interest due. For loans individually evaluated, a specific reserve is estimated based on either the fair value of collateral or the discounted value of expected future cash flows. In estimating the fair value of real estate collateral, management utilizes appraisals or evaluations adjusted for costs to dispose and a distressed sale adjustment, if needed. Estimating the fair value of collateral other than real estate is also subjective in nature and sometimes requires difficult and complex judgements. Determining expected future cash flows can be more subjective than determining fair values. Expected future cash flows could differ significantly, both in timing and amount, from the cash flows actually received over the loan’s remaining life. Individually evaluated loans are excluded from the estimation of credit losses for the pooled portfolio.

For loans collectively evaluated for credit loss, management segregates its loan portfolio into eleven distinct pools, certain of which are combined in reporting loans outstanding by class of loans: (1) commercial and industrial; (2) small business credit scored; (3) multifamily; (4) owner-occupied; (5) other commercial real estate; (6) construction and land development; (7) closed end residential mortgage; (8) revolving home equity; (9) consumer; (10) municipal loans; and (11) Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans. Historical loss information from the Bank’s own loan portfolio from December 31, 2007 to present provides a basis for management’s assessment of expected credit losses. The choice of a historical look-back period that begins in 2007 covers an entire economic cycle and impacts the average historical loss rates used to calculate the final ACL. Due to the extensive historical loss data available, management has determined that the vintage approach is the most appropriate method of measuring the historical loss component of credit losses inherent in its portfolio for most of its loan pools. For the revolving home equity and small business credit scored pools, the migration approach was selected to measure historical losses since contractual lives are not readily discernable and balances can fluctuate throughout the life of the lines. Finally, no historical loss method was applied to the SBA PPP loan pool which is a new pool with no loss experience and is 100% guaranteed by the federal government. Management believes that the methods selected fairly reflect the historical loss component of expected losses inherent in the Bank’s loan portfolio. However, since future losses could vary significantly from those experienced in the past, on a quarterly basis management adjusts its historical loss experience to reflect current and forecasted conditions. In doing so, management considers a variety of general qualitative and quantitative factors (“Q-factors”) and then subjectively determines the weight to assign to each in estimating losses. Qualitative characteristics include, among others, differences in underwriting standards, policies, lending staff and environmental risks. Management also considers whether further adjustments to historical loss information are needed to reflect the extent to which current conditions and reasonable and supportable forecasts over a one year to two year forecasting horizon differ from the conditions that existed during the historical loss period. These quantitative adjustments reflect changes to relevant data such as changes in unemployment rates, GDP, vacancies, home prices, average growth in pools of loans, delinquencies or other factors associated with the financial assets. The allowance of $249,000 at June 30, 2020 for SBA PPP loans represents an estimate of potential loss due to documentation and processing deficiencies. The immediate reversion method is applied for periods beyond the forecasting horizon. The Bank’s ACL allocable to pools of loans that are collectively evaluated for credit loss results primarily from these qualitative and quantitative adjustments to historical loss experience. Because of the nature of the Q-factors and the degree of judgement involved in assessing their impact, management’s resulting estimate of losses may not accurately reflect current and future losses in the portfolio.

Q-factors derived from reasonable and supportable sources forecasting unemployment, GDP, vacancies and home prices reflect the effects of the pandemic on the economic environment and were the key drivers in estimating the ACL required at June 30, 2020, offset in part by the decline in loan balances for most loan pools.

The following tables present the activity in the ACL for the periods indicated.



(in thousands)	Balance at ‎ 1/1/20		Impact of ‎ASC 326 ‎Adoption		Chargeoffs		Recoveries		Provision (Credit) for Credit Losses		Balance at ‎6/30/20
Commercial and industrial	$	1,493	$	(244)	$	815	$	257	$	902	$	1,593
SBA PPP		—		—		—		—		249		249
Commercial mortgages:
Multifamily		7,151		1,059		—		—		646		8,856
Other		3,498		(47)		—		—		409		3,860
Owner-occupied		921		778		—		—		(77)		1,622
Residential mortgages:
Closed end		15,698		1,356		19		2		347		17,384
Revolving home equity		515		(6)		—		—		(27)		482
Consumer and other		13		(8)		3		2		1		5
	$	29,289	$	2,888	$	837	$	261	$	2,450	$	34,051



	Balance at ‎4/1/20		Chargeoffs		Recoveries		Provision (Credit) for Credit Losses		Balance at ‎6/30/20
Commercial and industrial	$	1,931	$	197	$	70	$	(211)	$	1,593
SBA PPP		—		—		—		249		249
Commercial mortgages:
Multifamily		8,647		—		—		209		8,856
Other		3,792		—		—		68		3,860
Owner-occupied		1,782		—		—		(160)		1,622
Residential mortgages:
Closed end		17,459		19		2		(58)		17,384
Revolving home equity		487		—		—		(5)		482
Consumer and other		7		2		—		—		5
	$	34,105	$	218	$	72	$	92	$	34,051



(in thousands)	Balance at ‎1/1/19		Chargeoffs		Recoveries		Provision (Credit) for Loan Losses		Balance at ‎6/30/19
Commercial and industrial	$	1,158	$	365	$	8	$	400	$	1,201
Commercial mortgages:
Multifamily		5,851		—		—		879		6,730
Other		3,783		—		—		(343)		3,440
Owner-occupied		743		—		—		85		828
Residential mortgages:
Closed end		18,844		433		1		(1,264)		17,148
Revolving home equity		410		249		—		236		397
Consumer and other		49		—		3		(28)		24
	$	30,838	$	1,047	$	12	$	(35)	$	29,768

	Balance at ‎4/1/19		Chargeoffs		Recoveries		Provision (Credit) for Loan Losses		Balance at ‎6/30/19
Commercial and industrial	$	1,047	$	311	$	4	$	461	$	1,201
Commercial mortgages:
Multifamily		6,435		—		—		295		6,730
Other		3,517		—		—		(77)		3,440
Owner-occupied		685		—		—		143		828
Residential mortgages:
Closed end		18,071		299		—		(624)		17,148
Revolving home equity		402		249		—		244		397
Consumer and other		42		—		2		(20)		24
	$	30,199	$	859	$	6	$	422	$	29,768

Aging of Loans. The following tables present the aging of loans past due and loans on nonaccrual status by class of loans.



	June 30, 2020
	Past Due						Nonaccrual
							With an		With No		Total Past
					90 Days or		Allowance		Allowance		Due Loans &
					More and		for Credit		for Credit		Nonaccrual				Total
(in thousands)	30-59 Days		60-89 Days		Still Accruing		Loss		Loss		Loans		Current		Loans
Commercial and industrial	$	268	$	332	$	—	$	—	$	—	$	600	$	104,073	$	104,673
SBA PPP		—		—		—		—		—		—		165,704		165,704
Commercial mortgages:
Multifamily		—		—		—		—		1,318		1,318		796,342		797,660
Other		—		—		—		—		2,938		2,938		431,082		434,020
Owner-occupied		—		—		—		—		—		—		119,862		119,862
Residential mortgages:
Closed end		—		—		—		—		2,064		2,064		1,468,117		1,470,181
Revolving home equity		9		—		—		—		644		653		58,292		58,945
Consumer and other		1		—		—		—		—		1		1,415		1,416
	$	278	$	332	$	—	$	—	$	6,964	$	7,574	$	3,144,887	$	3,152,461

	December 31, 2019
Commercial and industrial	$	196	$	—	$	—	$	—	$	—	$	196	$	103,683	$	103,879
Commercial mortgages:
Multifamily		—		—		—		—		—		—		835,013		835,013
Other		—		—		—		—		—		—		447,484		447,484
Owner-occupied		—		—		—		—		—		—		118,792		118,792
Residential mortgages:
Closed end		2,316		—		—		—		888		3,204		1,618,215		1,621,419
Revolving home equity		—		414		—		—		—		414		58,817		59,231
Consumer and other		2		—		—		—		—		2		2,429		2,431
	$	2,514	$	414	$	—	$	—	$	888	$	3,816	$	3,184,433	$	3,188,249

There were no loans in the process of foreclosure nor did the Bank hold any foreclosed residential real estate property at June 30, 2020 or December 31, 2019.

Accrued interest receivable from loans totaled $12,830,000 and $8,409,000 at June 30, 2020 and December 31, 2019, respectively, and is included in the line item “Other assets” on the consolidated balance sheets.

Loan Modifications. During the second quarter the Bank entered into $621 million of loan modifications on 775 loans. These modifications were done to support borrowers experiencing financial disruption and economic hardship as a result of the pandemic. Under the guidance issued by FASB and federal banking agencies and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), these are not considered troubled debt restructurings (“TDR”). However, modified loans present an elevated level of credit risk to the Bank because they involve borrowers experiencing business or financial disruption as a result of the pandemic. Such modifications could result in a higher level of nonaccrual loans, reversal of accrued interest and loan chargeoffs in the future which could have a material negative effect on earnings. Loan modifications were evaluated on a case-by-case basis for borrowers that were current as to principal and interest and were not in default prior to the pandemic. Modifications outstanding as of June 30, 2020 were as follows:



	Number		Outstanding		Accrued
Type of Modification (dollars in thousands)	of Loans	Type of Loans	Loan Balance		Interest
3 Month Deferral of Principal	274	Commercial and Industrial	$	23,477	$	94
3 Month Deferral of Principal and Interest	284	Residential Mortgages		162,928		1,429
3 Month Deferral of Principal and Interest	189	Commercial Mortgages		423,052		4,553
3 Month Deferral of Principal and Interest	28	Commercial and Industrial		11,832		161
	775		$	621,289	$	6,237

Accrued interest on loan modifications of $6,237,000 is included in interest income for the six months ended June 30, 2020 and is a component of other assets on the balance sheet.

Troubled Debt Restructurings. A restructuring constitutes a TDR when it includes a concession by the Bank and the borrower is experiencing financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. The Bank performs the evaluation under its internal underwriting policy.

The Bank did not modify any loans in a TDR during the first six months of 2020 or 2019.

At June 30, 2020, the Bank had no allowance allocated to TDRs. At December 31, 2019, the Bank had an allowance of $14,000 allocated to specific TDRs. The Bank had no commitments to lend additional amounts in connection with loans that were classified as TDRs.

There were no TDRs for which there was a payment default during the six months ended June 30, 2020 and 2019 that were modified during the 12-month period prior to default. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

Risk Characteristics. Credit risk within the Bank’s loan portfolio primarily stems from factors such as changes in the borrower’s financial condition, credit concentrations, changes in collateral values, economic conditions, rent regulation and environmental contamination of properties securing mortgage loans. The Bank’s commercial loans, including those secured by real estate mortgages, are primarily made to small and medium-sized businesses. Such loans sometimes involve a higher degree of risk than those to larger companies because such businesses may have shorter operating histories, higher debt-to-equity ratios and may lack sophistication in internal record keeping and financial and operational controls. In addition, most of the Bank’s loans are made to businesses and consumers on Long Island and in the boroughs of New York City (“NYC”), and a large percentage of these loans are mortgage loans secured by properties located in those areas. The primary sources of repayment for residential and commercial mortgage loans include employment and other income of the borrowers, the businesses of the borrowers and cash flows from the underlying properties. In the case of multifamily mortgage loans, a substantial portion of the underlying properties are rent stabilized or rent controlled. These sources of repayment are dependent on, among other things, the strength of the local economy.

The pandemic continues to create substantial challenges for the Bank and its customers. Normal business activity in the NYC metropolitan area was significantly disrupted for an extended period of time due to government mandated business and school closures and stay-at-home orders to protect public health. As a result, many of the Bank’s customers, which include small and medium-sized businesses, professionals, consumers, municipalities and other organizations, experienced a significant decline in, or complete discontinuance of, business activity, earnings and cash flow. These challenges may result in higher drawdowns by customers on the Bank’s lending commitments and higher past due and nonaccrual loans, TDRs and credit losses. In addition, the value of collateral supporting mortgage loans may be negatively impacted leading to a deterioration in the Bank’s loan-to-value ratios and increased risk of loss. Although the local economy is slowly reopening, the full impact of the pandemic on the Bank is beyond the Bank’s current knowledge and will ultimately be determined by the pace at which economic activity rebounds and the extent to which the economy recovers from the high level of unemployment and business disruption.

Credit Quality Indicators. The Bank categorizes loans into risk categories based on relevant information about the borrower’s ability to service their debt including, but not limited to, current financial information for the borrower and any guarantors, payment experience, credit underwriting documentation, public records, due diligence checks and current economic trends. Management analyzes loans individually and classifies them using the following definitions for risk rating.

Watch: The borrower’s cash flow has a high degree of variability and subject to economic downturns. Liquidity is strained and the ability of the borrower to access traditional sources of credit is diminished.

Special Mention: The borrower has 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. Special mention assets are not adversely classified and do not expose the Bank to risk sufficient to warrant adverse classification.

Substandard: Loans are inadequately protected by the current sound worth and paying capacity of the borrower or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans have all the inherent weaknesses of those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Risk ratings on commercial and industrial loans and commercial mortgages are initially assigned during the underwriting process and affirmed as part of the approval process. The ratings are periodically reviewed and evaluated based on borrower contact, credit department review or independent loan review.

The Bank's loan risk rating and review policy establishes requirements for the annual review of commercial real estate and commercial and industrial loans. The requirements include details of the scope of coverage and selection process based on loan-type and risk rating.

Among other things, at least 80% of the recorded investment of commercial real estate loans as of December 31 of the prior year must be reviewed annually. Lines of credit are also reviewed annually at each proposed reaffirmation. The frequency of the review of other loans is determined by minimum principal balance thresholds and the Bank’s ongoing assessments of the borrower’s condition.

Residential mortgage loans, revolving home equity lines and other consumer loans are initially evaluated utilizing the borrower’s credit score. A credit score is a tool used in the Bank’s loan approval process, and a minimum score of 680 is generally required for new loans. Credit scores for each borrower are updated at least annually. However, regardless of credit score, loans may be classified, criticized or placed on management’s watch list if relevant information comes to light.

‎

The following tables present the amortized cost basis of loans by class of loans and risk rating for the periods indicated. Loans shown as Pass are all loans other than those risk rated Watch, Special Mention, Substandard or Doubtful.



	June 30, 2020
	Term Loans by Origination Year
													Revolving
(in thousands)	2020		2019		2018		2017		2016		Prior		Loans		Total
Commercial and industrial:
Pass	$	9,769	$	13,228	$	10,527	$	11,374	$	7,619	$	26,299	$	24,624	$	103,440
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		75		136		—		347		—		558
Substandard		—		448		—		—		—		227		—		675
Doubtful		—		—		—		—		—		—		—		—
	$	9,769	$	13,676	$	10,602	$	11,510	$	7,619	$	26,873	$	24,624	$	104,673
SBA PPP:
Pass	$	165,704	$	—	$	—	$	—	$	—	$	—	$	—	$	165,704
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
	$	165,704	$	—	$	—	$	—	$	—	$	—	$	—	$	165,704
Commercial mortgages – multifamily:
Pass	$	10,769	$	154,913	$	164,149	$	163,104	$	33,171	$	266,639	$	—	$	792,745
Watch		—		—		—		1,302		2,295		—		—		3,597
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		1,318		—		—		1,318
Doubtful		—		—		—		—		—		—		—		—
	$	10,769	$	154,913	$	164,149	$	164,406	$	36,784	$	266,639	$	—	$	797,660
Commercial mortgages – other:
Pass	$	22,790	$	43,346	$	50,159	$	56,721	$	96,650	$	151,641	$	—	$	421,307
Watch		—		—		—		—		9,775		—		—		9,775
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		1,387		1,551		—		2,938
Doubtful		—		—		—		—		—		—		—		—
	$	22,790	$	43,346	$	50,159	$	56,721	$	107,812	$	153,192	$	—	$	434,020
Commercial mortgages – owner-occupied:
Pass	$	4,825	$	43,846	$	9,118	$	10,076	$	12,712	$	36,813	$	—	$	117,390
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		1,868		—		604		—		2,472
Doubtful		—		—		—		—		—		—		—		—
	$	4,825	$	43,846	$	9,118	$	11,944	$	12,712	$	37,417	$	—	$	119,862
Residential mortgages:
Pass	$	1,778	$	26,905	$	330,632	$	387,609	$	278,075	$	442,091	$	57,886	$	1,524,976
Watch		—		—		—		—		—		302		415		717
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		461		—		—		2,328		644		3,433
Doubtful		—		—		—		—		—		—		—		—
	$	1,778	$	26,905	$	331,093	$	387,609	$	278,075	$	444,721	$	58,945	$	1,529,126
Consumer and other (1):
Pass	$	—	$	217	$	25	$	34	$	279	$	343	$	—	$	898
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		249		—		—		—		—		—		249
Doubtful		—		—		—		—		—		—		—		—
	$	—	$	466	$	25	$	34	$	279	$	343	$	—	$	1,147

	December 31, 2019
	Internally Assigned Risk Rating
					Special
(in thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
Commercial and industrial	$	100,095	$	—	$	3,493	$	291	$	—	$	103,879
Commercial mortgages:
Multifamily		831,360		—		3,653		—		—		835,013
Other		437,655		—		9,829		—		—		447,484
Owner-occupied		113,534		—		4,757		501		—		118,792
Residential mortgages:
Closed end		1,619,034		306		890		1,189		—		1,621,419
Revolving home equity		58,816		415		—		—		—		59,231
Consumer and other (1)		1,644		—		—		268		—		1,912
	$	3,162,138	$	721	$	22,622	$	2,249	$	—	$	3,187,730

(1) Deposit account overdrafts were $269,000 and $519,000 at June 30, 2020 and December 31, 2019, respectively. Overdrafts are not assigned a risk rating and are therefore excluded from consumer loans in the tables above.