4. LOANS

The following table sets forth the major classifications of loans:


	December 31,
(In thousands)	2018		2017
Commercial real estate mortgage loans	$	1,373,556	$	1,293,906
Multi-family mortgage loans		585,827		595,280
Residential real estate mortgage loans		519,763		464,264
Commercial, industrial and agricultural loans		645,724		616,003
Real estate construction and land loans		123,393		107,759
Installment/consumer loans		20,509		21,041
Total loans		3,268,772		3,098,253
Net deferred loan costs and fees		7,039		4,499
Total loans held for investment		3,275,811		3,102,752
Allowance for loan losses		(31,418)		(31,707)
Loans, net	$	3,244,393	$	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 $275.0 million and $359.4 million of acquired CNB loans remaining as of December 31, 2018 and 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 $10.1 million and $15.4 million of acquired FNBNY loans remaining as of December 31, 2018 and 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 $1.0 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 five or more families. 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:


	December 31, 2018
(In thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Commercial real estate:
Owner occupied	$	480,503	$	12,045	$	17,850	$	—	$	510,398
Non-owner occupied		858,069		2,188		2,901		—		863,158
Multi-family		585,409		418		—		—		585,827
Residential real estate:
Residential mortgage		438,891		8,510		1,114		—		448,515
Home equity		68,480		1,594		1,174		—		71,248
Commercial and industrial:
Secured		147,474		5,536		15,530		—		168,540
Unsecured		458,526		12,886		5,772		—		477,184
Real estate construction and land loans		123,089		—		304		—		123,393
Installment/consumer loans		20,464		9		36		—		20,509
Total loans	$	3,180,905	$	43,186	$	44,681	$	—	$	3,268,772

At December 31, 2018 there were $1.3 million and $0.2 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		128,729		12,637		13,560		—		154,926
Unsecured		442,985		14,553		3,539		—		461,077
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 Non-accrual Loans

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


	December 31, 2018
					>90 Days		Non-accrual
	30-59		60-89		Past Due		Including 90		Total Past
	Days		Days		And		Days or More		Due and
(In thousands)	Past Due		Past Due		Accruing		Past Due		Non-accrual		Current		Total Loans
Commercial real estate:
Owner occupied	$	333	$	194	$	—	$	253	$	780	$	509,618	$	510,398
Non-owner occupied		—		—		—		885		885		862,273		863,158
Multi-family		—		—		—		—		—		585,827		585,827
Residential real estate:
Residential mortgages		892		230		—		199		1,321		447,194		448,515
Home equity		1,033		—		308		624		1,965		69,283		71,248
Commercial and industrial:
Secured		330		196		—		174		700		167,840		168,540
Unsecured		1,108		—		—		621		1,729		475,455		477,184
Real estate construction and land loans		—		—		—		—		—		123,393		123,393
Installment/consumer loans		84		—		—		52		136		20,373		20,509
Total loans	$	3,780	$	620	$	308	$	2,808	$	7,516	$	3,261,256	$	3,268,772


	December 31, 2017
					>90 Days		Non-accrual
	30-59		60-89		Past Due		Including 90		Total Past
	Days		Days		And		Days or More		Due and
(In thousands)	Past Due		Past Due		Accruing		Past Due		Non-accrual		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		153,977		154,926
Unsecured		18		35		—		3,618		3,671		457,406		461,077
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

At December 31, 2018, there were acquired loans of $1.7 million that were 30‑89 days past due, $0.3 million that were 90 days past due and still accruing interest and $1.0 million that were non-accrual. At December 31, 2017, there were acquired loans of $2.4 million that were 30-89 days past due, $1.8 million that were 90 days past due and still accruing interest and none that were non-accrual.

Impaired Loans

At December 31, 2018 and 2017, the Company had individually impaired loans as defined by FASB ASC No. 310, “Receivables” of $19.4 million and $22.5 million, respectively. The decrease in impaired loans was attributable to the payoff of certain troubled debt restructurings (“TDRs”), coupled with a decrease in non-accrual loans due to the charge-off of one loan and sales and payoffs, partially offset by new TDRs. During the year ended December 31, 2018, the Bank modified certain loans as TDRs totaling $9.2 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 non-accrual loans and TDRs and at December 31, 2018 included $2.7 million in other impaired performing loans related to three taxi medallion loans which paid off in January 2019. 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 December 31, 2018, 2017 and 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 years ended December 31, 2018, 2017 and 2016:


	December 31, 2018						Year Ended December 31, 2018
			Unpaid		Related		Average		Interest
	Recorded		Principal		Allocated		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	268	$	278	$	—	$	177	$	—
Non-owner occupied		2,816		2,816		—		1,583		88
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		—		—
Commercial and industrial:
Secured		8,234		8,234		—		5,644		196
Unsecured		5,316		5,316		—		5,127		284
Total with no related allowance recorded		16,634		16,644		—		12,531		568

With an allowance recorded:
Commercial real estate:
Owner occupied		—		—		—		—		—
Non-owner occupied		—		—		—		—		—
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		—		—
Commercial and industrial:
Secured		2,721		2,721		189		2,757		91
Unsecured		—		—		—		—		—
Total with an allowance recorded		2,721		2,721		189		2,757		91

Total:
Commercial real estate:
Owner occupied		268		278		—		177		—
Non-owner occupied		2,816		2,816		—		1,583		88
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		—		—		—		—		—
Commercial and industrial:
Secured		10,955		10,955		189		8,401		287
Unsecured		5,316		5,316		—		5,127		284
Total	$	19,355	$	19,365	$	189	$	15,288	$	659


	December 31, 2017						Year Ended December 31, 2017
			Unpaid		Related		Average		Interest
	Recorded		Principal		Allocated		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	2,073	$	2,073	$	—	$	173	$	80
Non-owner occupied		9,089		9,089		—		7,001		400
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		100		100		—		8		—
Commercial and industrial:
Secured		7,368		8,013		—		2,633		211
Unsecured		2,154		2,408		—		592		36
Total with no related allowance recorded		20,784		21,683		—		10,407		727

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		142		174
Total with an allowance recorded		1,708		3,235		1,708		142		174

Total:
Commercial real estate:
Owner occupied		2,073		2,073		—		173		80
Non-owner occupied		9,089		9,089		—		7,001		400
Residential real estate:
Residential mortgages		—		—		—		—		—
Home equity		100		100		—		8		—
Commercial and industrial:
Secured		7,368		8,013		—		2,633		211
Unsecured		3,862		5,643		1,708		734		210
Total	$	22,492	$	24,918	$	1,708	$	10,549	$	901


	December 31, 2016						Year Ended December 31, 2016
			Unpaid		Related		Average		Interest
	Recorded		Principal		Allocated		Recorded		Income
(In thousands)	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	326	$	538	$	—	$	176	$	10
Non-owner occupied		1,213		1,213		—		614		75
Residential real estate:
Residential mortgages		520		558		—		276		—
Home equity		264		285		—		328		—
Commercial and industrial:
Secured		556		556		—		274		12
Unsecured		408		408		—		227		19
Total with no related allowance recorded		3,287		3,558		—		1,895		116

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		43		7
Total with an allowance recorded		66		66		1		43		7

Total:
Commercial real estate:
Owner occupied		326		538		—		176		10
Non-owner occupied		1,213		1,213		—		614		75
Residential real estate:
Residential mortgages		520		558		—		276		—
Home equity		264		285		—		328		—
Commercial and industrial:
Secured		556		556		—		274		12
Unsecured		474		474		1		270		26
Total	$	3,353	$	3,624	$	1	$	1,938	$	123

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’s other real estate owned at December 31, 2018 was $0.2 million, consisting of one property, 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.

The following table presents loans by class modified as troubled debt restructurings during the years indicated:


	Modifications During the Year Ended December 31,
	2018					2017					2016
		Pre-		Post-			Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification			Modification		Modification
		Outstanding		Outstanding			Outstanding		Outstanding			Outstanding		Outstanding
	Number of	Recorded		Recorded		Number of	Recorded		Recorded		Number of	Recorded		Recorded
(Dollars in thousands)	Loans	Investment		Investment		Loans	Investment		Investment		Loans	Investment		Investment
Commercial real estate:
Owner occupied	—	$	—	$	—	—	$	—	$	—	—	$	—	$	—
Non-owner occupied	1		926		926	2		7,764		7,764	—		—		—
Residential real estate:
Residential mortgages	1		644		644	—		—		—	1		252		252
Home equity	—		—		—	—		—		—	1		69		69
Commercial and industrial:
Secured	2		1,994		1,994	7		6,828		6,828	3		459		459
Unsecured	8		5,655		5,655	2		189		189	1		525		525
Installment/consumer loans	—		—		—	—		—		—	—		—		—
Total	12	$	9,219	$	9,219	11	$	14,781	$	14,781	6	$	1,305	$	1,305

The TDRs described in the table above did not increase the allowance for loan losses during the years ended December 31, 2018, 2017 and 2016.

There were $0.4 million, $0.4 million and $0.1 million of charge-offs related to TDRs during the years ended December 31, 2018, 2017 and 2016, respectively. During the year ended December 31, 2018 there was one loan modified as a TDR for which there was a payment default within twelve months following the modification. There were two loans modified as TDRs during 2017 and one loan modified as a TDR during 2016 for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

At December 31, 2018 and 2017, the Company had $133 thousand and $5 thousand, respectively, of non-accrual TDRs and $16.9 million and $16.7 million, respectively, of performing TDRs. The non-accrual TDRs at December 31, 2018 were unsecured. At December 31, 2017, the non-accrual TDR was unsecured. The Bank has no commitment to lend additional funds to these debtors.

The terms of certain other loans were modified during the year ended December 31, 2018 that did not meet the definition of a TDR. These loans have a total recorded investment at December 31, 2018 of $50.9 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 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 December 31, 2018, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $1.1 million and $0.5 million, respectively, with a remaining non-accretable difference of $0.5 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 December 31, 2018, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $1.2 million and $0.1 million, respectively, with a remaining non-accretable difference of $0.8 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:


	Year Ended December 31,
(In thousands)	2018		2017
Balance at beginning of period	$	2,151	$	6,915
Accretion		(1,842)		(5,221)
Reclassification from nonaccretable difference during the period		151		457
Accretable discount at end of period	$	460	$	2,151

The allowance for loan losses was not increased during the year ended December 31, 2018 for those PCI loans disclosed above and there were no charge-offs recorded. The allowance for loan losses was increased $0.1 million during the year ended December 31, 2017 for those PCI loans disclosed above and a $0.1 million charge-off was recorded.

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 2018 and 2017.

The following table sets forth selected information about related party loans for the year ended December 31, 2018:


	Year Ended
	December 31,
(In thousands)	2018
Balance at beginning of period	$	21,142
New loans		2,318
Repayments		(2,413)
Balance at end of period	$	21,047