LOANS

9 Months Ended

Sep. 30, 2011

LOANS

LOANS

6. LOANS

The following table sets forth the major classifications of loans:

(In thousands)	September 30, 2011			December 31, 2010
Commercial real estate mortgage loans	$	266,565		$	236,048
Multi-family mortgage loans	21,276			9,217
Residential real estate mortgage loans	146,559			140,986
Commercial, financial, and agricultural loans	117,806			97,663
Installment/consumer loans	8,765			9,659
Real estate-construction and land loans	37,386			9,928
Total loans	598,357			503,501
Net deferred loan costs and fees	384			559
	598,741			504,060
Allowance for loan losses	(10,162		)	(8,497		)
Net loans	$	588,579		$	495,563

Lending Risk

The principal business of the Bank is lending, primarily in commercial real estate mortgage loans, multi-family mortgage loans, residential real estate mortgage loans, construction loans, home equity loans, commercial and industrial loans, land loans and consumer loans. The Bank considers its primary lending area to be eastern Long Island in Suffolk County, New York, and a substantial portion of the Bank’s loans are secured by real estate in this area. Accordingly, the ultimate collectability of such a loan portfolio is susceptible to changes in market and economic conditions in this region.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt including repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. The Company uses the following definitions for risk rating grades:

Pass: Loans classified as pass include current loans performing in accordance with contractual terms, pools of homogenous residential real estate and installment/consumer loans that are not individually risk rated and loans which exhibit certain risk factors that require greater than usual monitoring by management.

Special mention: Loans classified as special mention, while generally not delinquent, have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s credit position at some future date.

Substandard: Loans classified as substandard have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard loan, and may also be at delinquency status and have defined weaknesses based on currently existing facts, conditions and values making collection or liquidation in full highly questionable and improbable.

The following table represents loans by class categorized by internally assigned risk grades as of September 30, 2011 and December 31, 2010:

	Grades:
September 30, 2011	Pass		Special Mention		Substandard		Doubtful		Total
(In thousands)
Originated loans
Commercial real estate:
Owner occupied	$	110,867	$	11,289	$	7,665	$	—	$	129,821
Non-owner occupied	108,080		9,115		2,879		—		120,074
Multi-Family	21,276		—		—		—		21,276
Residential real estate:
First lien	70,056		—		1,365		1,227		72,648
Home equity	61,007		587		1,776		225		63,595
Commercial:
Secured	53,961		3,658		3,688		—		61,307
Unsecured	47,600		1,261		986		11		49,858
Installment/consumer loans	7,931		250		20		—		8,201
Real estate construction and land loans	28,313		1,697		6,470		250		36,730
Total loans	$	509,091	$	27,857	$	24,849	$	1,713	$	563,510
Acquired loans
Commercial real estate:
Owner occupied	$	13,123	$	226	$	384	$	—	$	13,733
Non-owner occupied	2,443		494		—		—		2,937
Multi-Family	—		—		—		—		—
Residential real estate:
First lien	—		—		—		—		—
Home equity	10,316		—		—		—		10,316
Commercial:
Secured	2,747		122		134		—		3,003
Unsecured	3,397		186		55		—		3,638
Installment/consumer loans	564		—		—		—		564
Real estate construction and land loans	403		—		253		—		656
Total loans	$	32,993	$	1,028	$	826	$	—	$	34,847
Total loans
Commercial real estate:
Owner occupied	$	123,990	$	11,515	$	8,049	$	—	$	143,554
Non-owner occupied	110,523		9,609		2,879		—		123,011
Multi-Family	21,276		—		—		—		21,276
Residential real estate:
First lien	70,056		—		1,365		1,227		72,648
Home equity	71,323		587		1,776		225		73,911
Commercial:
Secured	56,708		3,780		3,822		—		64,310
Unsecured	50,997		1,447		1,041		11		53,496
Installment/consumer loans	8,495		250		20		—		8,765
Real estate construction and land loans	28,716		1,697		6,723		250		37,386
Total loans	$	542,084	$	28,885	$	25,675	$	1,713	$	598,357

	Grades:
December 31, 2010	Pass		Special Mention		Substandard		Doubtful		Total
(In thousands)
Originated loans
Commercial real estate:
Owner occupied	$	110,395	$	4,892	$	4,298	$	—	$	119,585
Non-owner occupied	97,878		7,652		10,683		250		116,463
Multi-Family	9,217		—		—		—		9,217
Residential real estate:
First lien	71,686		—		1,194		1,269		74,149
Home equity	64,708		—		1,834		295		66,837
Commercial:
Secured	49,146		1,949		3,212		—		54,307
Unsecured	41,058		1,072		1,226		—		43,356
Installment/consumer loans	9,484		175		—		—		9,659
Real estate construction and land loans	6,020		223		3,685		—		9,928
Total loans	$	459,592	$	15,963	$	26,132	$	1,814	$	503,501

Past Due and Nonaccrual Loans

The following table represents the aging of the recorded investment in past due loans as of September 30, 2011 and December 31, 2010 by class of loans, as defined by ASC 310-10:

September 30, 2011	30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due and Accruing		Nonaccrual Including 90 Days or More Past Due		Total Past Due and Nonaccrual		Current		Total Loans
(In thousands)
Originated loans
Commercial real estate:
Owner occupied	$	—	$	—	$	—	$	468	$	468	$	129,353	$	129,821
Non-owner occupied	216		—		—		—		216		119,858		120,074
Multi-Family	—		—		—		—		—		21,276		21,276
Residential real estate:
First lien	550		—		—		1,227		1,777		70,871		72,648
Home equity	681		315		—		1,415		2,411		61,184		63,595
Commercial:
Secured	1,267		—		—		—		1,267		60,040		61,307
Unsecured	36		46		—		318		400		49,458		49,858
Installment/consumer loans	—		6		—		6		12		8,189		8,201
Real estate construction and land loans	—		—		—		2,650		2,650		34,080		36,730
Total loans	$	2,750	$	367	$	—	$	6,084	$	9,201	$	554,309	$	563,510
Acquired loans
Commercial real estate:
Owner occupied	$	—	$	—	$	384	$	—	$	384	$	13,349	$	13,733
Non-owner occupied	—		—		—		—		—		2,937		2,937
Multi-Family	—		—		—		—		—		—		—
Residential real estate:
First lien	—		—		—		—		—		—		—
Home equity	193		—		—		—		193		10,123		10,316
Commercial:
Secured	—		—		148		—		148		2,855		3,003
Unsecured	50		—		—		—		50		3,588		3,638
Installment/consumer loans	—		—		—		—		—		564		564
Real estate construction and land loans	—		—		—		—		—		656		656
Total loans	$	243	$	—	$	532	$	—	$	775	$	34,072	$	34,847
Total loans
Commercial real estate:
Owner occupied	$	—	$	—	$	384	$	468	$	852	$	142,702	$	143,554
Non-owner occupied	216		—		—		—		216		122,795		123,011
Multi-Family	—		—		—		—		—		21,276		21,276
Residential real estate:
First lien	550		—		—		1,227		1,777		70,871		72,648
Home equity	874		315		—		1,415		2,604		71,307		73,911
Commercial:
Secured	1,267		—		148		—		1,415		62,895		64,310
Unsecured	86		46		—		318		450		53,046		53,496
Installment/consumer loans	—		6		—		6		12		8,753		8,765
Real estate construction and land loans	—		—		—		2,650		2,650		34,736		37,386
Total loans	$	2,993	$	367	$	532	$	6,084	$	9,976	$	588,381	$	598,357

December 31, 2010	30-59 Days Past Due		60-89 Days Past Due		Nonaccrual Including 90 Days or More Past Due		Total Past Due and Nonaccrual		Current		Total Loans
(In thousands)
Originated loans
Commercial real estate:
Owner occupied	$	—	$	511	$	—	$	511	$	119,074	$	119,585
Non-owner occupied	—		—		478		478		115,985		116,463
Multi-Family	—		—		—		—		9,217		9,217
Residential real estate:
First lien	151		165		1,747		2,063		72,086		74,149
Home equity	782		298		1,696		2,776		64,061		66,837
Commercial:
Secured	10		—		—		10		54,297		54,307
Unsecured	105		—		32		137		43,219		43,356
Installment/consumer loans	10		5		86		101		9,558		9,659
Real estate construction and land loans	—		—		2,686		2,686		7,242		9,928
Total loans	$	1,058	$	979	$	6,725	$	8,762	$	494,739	$	503,501

All loans 90 days or more past due that are still accruing interest represent loans that were acquired from Hamptons State Bank on May 27, 2011 and were recorded at fair value upon acquisition. These loans are considered to be accruing as management can reasonably estimate future cash flows on these acquired loans and expect to fully collect the carrying value of these loans. Therefore, the difference between the carrying value of these loans and their expected cash flows is being accreted. There were no loans 90 days or more past due that were still accruing interest at December 31, 2010.

Troubled Debt Restructurings

During the nine months ended September 30, 2011, the terms of certain loans were modified and are considered troubled debt restructurings (“TDR”). The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. The modification of these loans involved a loan to borrowers who were experiencing financial difficulties.

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

The terms of certain other loans were modified during the period ending September 30, 2011 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of September 30, 2011 of $14.2 million. The modification of these loans involved a modification of the terms of a loan to borrowers who were not experiencing financial difficulties.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months and nine months ended September 30, 2011:

	For the Three Months Ended					For the Nine Months Ended
	September 30, 2011					September 30, 2011
(In thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Originated loans
Commercial real estate:
Owner occupied	1	$	485	$	485	1	$	485	$	485
Non-owner occupied	2	969		969		2	969		969
Multi-Family	—	—		—		—	—		—
Residential real estate:
First lien	—	—		—		—	—		—
Home equity	1	347		347		1	347		347
Commercial:
Secured	1	123		123		2	273		273
Unsecured	—	—		—		1	241		230
Installment/consumer loans	—	—		—		—	—		—
Real estate construction and land loans	—	—		—		—	—		—
Total loans	5	$	1,924	$	1,924	7	$	2,315	$	2,304

The troubled debt restructurings described above increased the allowance for loan losses by $0.2 million for the three and nine months ended September 30, 2011 and resulted in charge offs of $0.6 million and $0.8 million for the three and nine months ended September 30, 2011, respectively.

There were no loans modified as troubled debt restructurings during the three months and nine months ended September 30, 2011 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 September 30, 2011 and December 31, 2010, the Company had $4.4 million and $4.7 million, respectively of nonaccrual troubled debt restructured loans. As of September 30, 2011 three of the borrowers with loans totaling $2.0 million are complying with the modified terms of the loans and are currently making payments. Another borrower with loans totaling $2.4 million is past due and the Bank has initiated the foreclosure process. Total nonaccrual troubled debt restructured loans are secured with collateral that has an appraised value of $8.1 million. Furthermore, the Bank has no commitment to lend additional funds to these debtors.

In addition, the Company has four borrowers with TDR loans of $4.9 million at September 30, 2011 that are current and secured with collateral that has an appraised value of approximately $11.5 million.  At December 31, 2010, the Company had one borrower with TDR loans of $3.2 million that was current and secured with collateral that had an appraised value of approximately $5.4 million as well as personal guarantees. Management believes that the ultimate collection of principal and interest is reasonably assured and therefore continues to recognize interest income on an accrual basis. Two of the loans were determined to be impaired during the third quarter of 2011 and one of the loans in the second quarter of 2011 and since that determination the interest income recognized has been immaterial. The fourth loan was determined to be impaired during the third quarter of 2008 and since that determination $0.4 million of interest income has been recognized. In addition, the Bank has no commitment to lend additional funds to these debtors.

Impaired Loans

As of September 30, 2011 and December 31, 2010, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $11.0 million and $9.9 million, respectively. For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Additionally, management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified nonaccrual loans and troubled debt restructured (“TDR”) loans. For impaired loans, the Bank evaluates the impairment of the loan in accordance with FASB ASC 310-10-35-22.  Impairment is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate. For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based upon recent appraised values. The fair value of the collateral or present value of expected cash flows is compared to the carrying value to determine if any write-down or specific loan loss allowance allocation is required.

Nonaccrual loans were $6.1 million or 1.02% of total loans at September 30, 2011 and were $6.7 million or 1.34% of total loans at December 31, 2010. Approximately $4.4 million of the nonaccrual loans at September 30, 2011 and $4.7 million at December 31, 2010, represent troubled debt restructured loans. In addition, the Company has four borrowers with TDR loans of $4.9 million at September 30, 2011 that are current and performing. At December 31, 2010, the Company had one borrower with TDR loans of $3.2 million that was current and performing.

The following table represents impaired loans by class at September 30, 2011 and December 31, 2010:

September 30, 2011	Recorded Investment		Unpaid Principal Balance		Related Allocated Allowance
(In thousands)
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	4,139	$	4,171	$	—
Non-owner occupied	969		969		—
Residential real estate:
First lien	1,226		1,329		—
Home equity	723		893		—
Commercial:
Secured	273		273		—
Unsecured	88		95		—
Installment/consumer loans	6		6		—
Real estate construction and land loans	2,650		3,670		—
Total with no related allowance recorded	$	10,074	$	11,406	$	—
With an allowance recorded:
Residential real estate - Home equity	$	693	$	700	$	29
Commercial - Unsecured	230		235		162
Total with an allowance recorded:	$	923	$	935	$	191
Total:
Commercial real estate:
Owner occupied	$	4,139	$	4,171	$	—
Non-owner occupied	969		969		—
Residential real estate:
First lien	1,226		1,329		—
Home equity	1,416		1,593		29
Commercial:
Secured	273		273		—
Unsecured	318		330		162
Installment/consumer loans	6		6		—
Real estate construction and land loans	2,650		3,670		—
Total	$	10,997	$	12,341	$	191

December 31, 2010	Recorded Investment		Unpaid Principal Balance		Related Allocated Allowance
(In thousands)
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	3,219	$	3,219	$	—
Non-owner occupied	478		599		—
Residential real estate:
First lien	1,747		1,829		—
Home equity	996		996		—
Commercial:
Secured	—		—		—
Unsecured	32		35		—
Installment/consumer loans	86		86		—
Real estate construction and land loans	2,686		2,800		—
Total with no related allowance recorded	$	9,244	$	9,564	$	—
With an allowance recorded:
Residential real estate - Home equity	$	700	$	700	$	7
Total with an allowance recorded:	$	700	$	700	$	7
Total:
Commercial real estate:
Owner occupied	$	3,219	$	3,219	$	—
Non-owner occupied	478		599		—
Residential real estate:
First lien	1,747		1,829		—
Home equity	1,696		1,696		7
Commercial:
Secured	—		—		—
Unsecured	32		35		—
Installment/consumer loans	86		86		—
Real estate construction and land loans	2,686		2,800		—
Total	$	9,944	$	10,264	$	7

Residential home equity loans represent the only class of impaired loans with a related allowance recorded at December 31, 2010. The average recorded investment in the impaired loans was $10.1 million for the year ended December 31, 2010. Residential home equity loans and commercial unsecured loans represent the classes of impaired loans with a related allowance recorded at September 30, 2011. The average recorded investment in the impaired loans was $11.6 million for the three months ended September 30, 2011 $11.9 million for the nine months ended September 30, 2011.

The Bank had no foreclosed real estate at September 30, 2011, December 31, 2010 and September 30, 2010, respectively.