| LOANS | 4. LOANS At December 31, 2015 and 2014, net loans disaggregated by class consisted of the following (in thousands): December 31, 2015 December 31, 2014 Commercial and industrial $ 189,769 $ 177,813 Commercial real estate 696,787 560,524 Multifamily 426,549 309,666 Mixed use commercial 78,787 34,806 Real estate construction 37,233 26,206 Residential mortgages 186,313 187,828 Home equity 44,951 50,982 Consumer 6,058 7,602 Gross loans 1,666,447 1,355,427 Allowance for loan losses (20,685 ) (19,200 ) Net loans at end of period $ 1,645,762 $ 1,336,227 The Bank’s real estate loans and loan commitments are primarily for properties located throughout Long Island and New York City. Repayment of these loans is dependent in part upon the overall economic health of the Company’s market area and current real estate values. The Bank considers the credit circumstances, the nature of the project and loan to value ratios for all real estate loans. The Bank makes loans to its directors and executive officers, and other related parties, in the ordinary course of its business. Loans made to directors and executive officers, either directly or indirectly, totaled $18 million and $11 million at December 31, 2015 and 2014, respectively. New loans totaling $81 million and $58 million were extended and payments of $74 million and $59 million were received during 2015 and 2014, respectively, on these loans. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes a loan, in full or in part, is uncollectible. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired. Generally, TDRs are initially classified as non-accrual until sufficient time has passed to assess whether the restructured loan will continue to perform. Generally, the Company returns a TDR to accrual status upon six months of performance under the new terms. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. All non-accrual loans over $250 thousand in the commercial and industrial, commercial real estate, multifamily, mixed use commercial, real estate construction and residential mortgages loan classes and all TDRs are evaluated individually for impairment. All other loans are generally evaluated as homogeneous pools with similar risk characteristics. If a loan is impaired, a specific reserve may be recorded so that the loan is reported, net, at the present value of estimated future cash flows including balloon payments, if any, using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of homogeneous loans with smaller individual balances, such as consumer loans, are generally evaluated collectively for impairment, and accordingly, are not separately identified for impairment disclosures. TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be collateral-dependent, the loan is reported at the fair value of the collateral net of estimated costs to sell. For TDRs that subsequently default, the Company determines the allowance amount in accordance with its accounting policy for the allowance for loan losses. The general component of the allowance covers non-impaired loans and is based on historical loss experience, adjusted for qualitative factors. The historical loss experience is determined by loan class, and is based on the actual loss history experienced by the Company over a rolling twelve quarter period. This actual loss experience is supplemented with other qualitative factors based on the risks present for each loan class. These qualitative factors include consideration of the following: levels and trends in various risk rating categories; levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability, and depth of lending management and other relevant staff; local, regional and national economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following loan classes have been identified: commercial and industrial, commercial real estate, multifamily, mixed use commercial, real estate construction, residential mortgages, home equity and consumer loans. The qualitative factors utilized by the Company in computing its allowance for loan losses are determined based on the various risk characteristics of each loan class. Relevant risk characteristics are as follows: Commercial and industrial loans Commercial real estate loans Multifamily loans Mixed use commercial loans Real estate construction loans Residential mortgages and home equity loans Consumer loans At December 31, 2015 and 2014, the ending balance in the allowance for loan losses disaggregated by class and impairment methodology is as follows (in thousands). Also in the tables below are total loans at December 31, 2015 and 2014 disaggregated by class and impairment methodology (in thousands). Allowance for Loan Losses Loan Balances December 31, 2015 Individually evaluated for impairment Collectively evaluated for impairment Ending balance Individually evaluated for impairment Collectively evaluated for impairment Ending balance Commercial and industrial $ — $ 1,875 $ 1,875 $ 2,872 $ 186,897 $ 189,769 Commercial real estate — 7,019 7,019 4,334 692,453 696,787 Multifamily — 4,688 4,688 — 426,549 426,549 Mixed use commercial — 766 766 — 78,787 78,787 Real estate construction — 386 386 — 37,233 37,233 Residential mortgages 559 1,917 2,476 5,817 180,496 186,313 Home equity 170 469 639 1,683 43,268 44,951 Consumer 48 58 106 379 5,679 6,058 Unallocated — 2,730 2,730 — — — Total $ 777 $ 19,908 $ 20,685 $ 15,085 $ 1,651,362 $ 1,666,447 Allowance for Loan Losses Loan Balances December 31, 2014 Individually evaluated for impairment Collectively evaluated for impairment Ending balance Individually evaluated for impairment Collectively evaluated for impairment Ending balance Commercial and industrial $ 16 $ 1,544 $ 1,560 $ 4,889 $ 172,924 $ 177,813 Commercial real estate — 6,777 6,777 10,214 550,310 560,524 Multifamily — 4,018 4,018 — 309,666 309,666 Mixed use commercial — 261 261 — 34,806 34,806 Real estate construction — 383 383 — 26,206 26,206 Residential mortgages 809 2,218 3,027 5,422 182,406 187,828 Home equity 92 617 709 1,567 49,415 50,982 Consumer 88 78 166 323 7,279 7,602 Unallocated — 2,299 2,299 — — — Total $ 1,005 $ 18,195 $ 19,200 $ 22,415 $ 1,333,012 $ 1,355,427 At December 31, 2015 and 2014, past due loans disaggregated by class were as follows (in thousands). Past Due December 31, 2015 30 - 59 days 60 - 89 days 90 days and over Total Current Total Commercial and industrial $ 21 $ — $ 1,954 $ 1,975 $ 187,794 $ 189,769 Commercial real estate — — 1,733 1,733 695,054 696,787 Multifamily — — — — 426,549 426,549 Mixed use commercial — — — — 78,787 78,787 Real estate construction — — — — 37,233 37,233 Residential mortgages 512 175 1,358 2,045 184,268 186,313 Home equity 336 — 406 742 44,209 44,951 Consumer 2 — 77 79 5,979 6,058 Total $ 871 $ 175 $ 5,528 $ 6,574 $ 1,659,873 $ 1,666,447 % of Total Loans 0.1 % 0.0 % 0.3 % 0.4 % 99.6 % 100.0 % Past Due December 31, 2014 30 - 59 days 60 - 89 days 90 days and over Total Current Total Commercial and industrial $ 52 $ 241 $ 4,060 $ 4,353 $ 173,460 $ 177,813 Commercial real estate — — 6,556 6,556 553,968 560,524 Multifamily — — — — 309,666 309,666 Mixed use commercial — — — — 34,806 34,806 Real estate construction — — — — 26,206 26,206 Residential mortgages 822 — 2,020 2,842 184,986 187,828 Home equity — 112 303 415 50,567 50,982 Consumer 59 77 42 178 7,424 7,602 Total $ 933 $ 430 $ 12,981 $ 14,344 $ 1,341,083 $ 1,355,427 % of Total Loans 0.1 % 0.0 % 1.0 % 1.1 % 98.9 % 100.0 % The following table presents the Company’s impaired loans disaggregated by class at December 31, 2015 and 2014 (in thousands). December 31, 2015 December 31, 2014 Unpaid Principal Balance Recorded Balance Allowance Allocated Unpaid Principal Balance Recorded Balance Allowance Allocated With no allowance recorded: Commercial and industrial $ 2,869 $ 2,869 $ — $ 4,833 $ 4,833 $ — Commercial real estate 4,753 4,334 — 10,632 10,214 — Residential mortgages 3,076 2,947 — 1,645 1,516 — Home equity 1,233 1,233 — 1,377 1,377 — Consumer 207 207 — 137 137 — Subtotal 12,138 11,590 — 18,624 18,077 — With an allowance recorded: Commercial and industrial 3 3 — 57 56 16 Residential mortgages 2,870 2,870 559 3,906 3,906 809 Home equity 586 450 170 326 190 92 Consumer 172 172 48 185 186 88 Subtotal 3,631 3,495 777 4,474 4,338 1,005 Total $ 15,769 $ 15,085 $ 777 $ 23,098 $ 22,415 $ 1,005 The following table presents the Company’s average recorded investment in impaired loans and the related interest income recognized disaggregated by class for the years ended December 31, 2015, 2014 and 2013 (in thousands). No interest income was recognized on a cash basis on impaired loans for any of the periods presented. The interest income recognized on accruing impaired loans is shown in the following table. Years Ended December 31, 2015 2014 2013 Average recorded investment in impaired loans Interest income recognized on impaired loans Average recorded investment in impaired loans Interest income recognized on impaired loans Average recorded investment in impaired loans Interest income recognized on impaired loans Commercial and industrial $ 3,313 $ 533 $ 6,961 $ 730 $ 12,065 $ 800 Commercial real estate 7,710 688 10,823 251 11,556 1,041 Real estate construction — — — — 488 114 Residential mortgages 5,645 297 5,094 207 4,970 102 Home equity 1,719 67 804 83 814 15 Consumer 376 16 248 18 235 22 Total $ 18,763 $ 1,601 $ 23,930 $ 1,289 $ 30,128 $ 2,094 The following table presents a summary of non-performing assets for each period (in thousands): December 31, 2015 December 31, 2014 Non-accrual loans $ 5,528 $ 12,981 Non-accrual loans held for sale — — Loans 90 days past due and still accruing — — OREO — — Total non-performing assets $ 5,528 $ 12,981 TDRs accruing interest $ 9,239 $ 9,380 TDRs non-accruing $ 2,324 $ 10,293 At December 31, 2015 and 2014, non-accrual loans disaggregated by class were as follows (dollars in thousands): December 31, 2015 December 31, 2014 Non- accrual loans % of Total Total Loans % of Total Loans Non- accrual loans % of Total Total Loans % of Total Loans Commercial and industrial $ 1,954 35.3 % $ 189,769 0.1 % $ 4,060 31.3 % $ 177,813 0.3 % Commercial real estate 1,733 31.4 696,787 0.1 6,556 50.5 560,524 0.5 Multifamily — — 426,549 — — — 309,666 — Mixed use commercial — — 78,787 — — — 34,806 — Real estate construction — — 37,233 — — — 26,206 — Residential mortgages 1,358 24.6 186,313 0.1 2,020 15.6 187,828 0.1 Home equity 406 7.3 44,951 — 303 2.3 50,982 0.1 Consumer 77 1.4 6,058 — 42 0.3 7,602 — Total $ 5,528 100.0 % $ 1,666,447 0.3 % $ 12,981 100.0 % $ 1,355,427 1.0 % Additional interest income of approximately $297 thousand, $953 thousand and $521 thousand would have been recorded during the years ended December 31, 2015, 2014 and 2013, respectively, if non-accrual loans had performed in accordance with their original terms. The following summarizes the activity in the allowance for loan losses disaggregated by class for the periods indicated (in thousands). Year Ended December 31, 2015 Year Ended December 31, 2014 Balance at beginning of period Charge- offs Recoveries (Credit) provision for loan losses Balance at end of period Balance at beginning of period Charge- offs Recoveries (Credit) provision for loan losses Balance at end of period Commercial and industrial $ 1,560 $ (744 ) $ 1,524 $ (465 ) $ 1,875 $ 2,615 $ (420 ) $ 797 $ (1,432 ) $ 1,560 Commercial real estate 6,777 — 39 203 7,019 6,572 — 519 (314 ) 6,777 Multifamily 4,018 — — 670 4,688 2,159 — — 1,859 4,018 Mixed use commercial 261 — — 505 766 54 — — 207 261 Real estate construction 383 — — 3 386 88 — — 295 383 Residential mortgages 3,027 — 32 (583 ) 2,476 2,463 (32 ) 16 580 3,027 Home equity 709 — 22 (92 ) 639 745 — 50 (86 ) 709 Consumer 166 (14 ) 26 (72 ) 106 241 (40 ) 47 (82 ) 166 Unallocated 2,299 — — 431 2,730 2,326 — — (27 ) 2,299 Total $ 19,200 $ (758 ) $ 1,643 $ 600 $ 20,685 $ 17,263 $ (492 ) $ 1,429 $ 1,000 $ 19,200 Year Ended December 31, 2013 Balance at beginning of period Charge- offs Recoveries (Credit) provision for loan losses Balance at end of period Commercial and industrial $ 6,181 $ (2,867 ) $ 2,077 $ (2,776 ) $ 2,615 Commercial real estate 5,965 (383 ) 97 893 6,572 Multifamily 150 — — 2,009 2,159 Mixed use commercial 34 — — 20 54 Real estate construction 141 — — (53 ) 88 Residential mortgages 1,576 (126 ) 5 1,008 2,463 Home equity 907 (558 ) 32 364 745 Consumer 189 (166 ) 121 97 241 Unallocated 2,638 — — (312 ) 2,326 Total $ 17,781 $ (4,100 ) $ 2,332 $ 1,250 $ 17,263 The Company utilizes an eight-grade risk-rating system for loans. Loans in risk grades 1- 4 are considered pass loans. The Company’s risk grades are as follows: Risk Grade 1, Excellent Risk Grade 2, Good Risk Grade 3, Satisfactory • At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory. • At inception, the loan was secured with collateral possessing a loan value adequate to protect the Company from loss. • The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance. • During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted. Risk Grade 4, Satisfactory/Monitored Risk Grade 5, Special Mention Risk Grade 6, Substandard • Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss. • Loans are inadequately protected by the current net worth and paying capacity of the obligor. • The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees. • Loans have a distinct possibility that the Company will sustain some loss if deficiencies are not corrected. • Unusual courses of action are needed to maintain a high probability of repayment. • The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments. • The lender is forced into a subordinated or unsecured position due to flaws in documentation. • Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms. • The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan. • There is a significant deterioration in market conditions to which the borrower is highly vulnerable. Risk Grade 7, Doubtful • Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable. • The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment. • The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known. Risk Grade 8, Loss The Company annually reviews the ratings on all loans greater than $750 thousand. Annually, the Company engages an independent third-party to review a significant portion of loans within the commercial and industrial, commercial real estate, multifamily, mixed use commercial and real estate construction loan classes. Management uses the results of these reviews as part of its ongoing review process. The following presents the Company’s loan portfolio credit risk profile by internally assigned grade disaggregated by class of loan at December 31, 2015 and 2014 (in thousands). December 31, 2015 December 31, 2014 Grade Grade Pass Special mention Substandard Total Pass Special mention Substandard Total Commercial and industrial $ 180,024 $ 3,088 $ 6,657 $ 189,769 $ 167,922 $ 1,225 $ 8,666 $ 177,813 Commercial real estate 687,210 6,109 3,468 696,787 536,536 9,182 14,806 560,524 Multifamily 426,549 — — 426,549 309,666 — — 309,666 Mixed use commercial 78,779 — 8 78,787 34,806 — — 34,806 Real estate construction 37,233 — — 37,233 26,206 — — 26,206 Residential mortgages 184,781 — 1,532 186,313 183,263 — 4,565 187,828 Home equity 44,545 — 406 44,951 49,569 — 1,413 50,982 Consumer 5,939 — 119 6,058 7,279 — 323 7,602 Total $ 1,645,060 $ 9,197 $ 12,190 $ 1,666,447 $ 1,315,247 $ 10,407 $ 29,773 $ 1,355,427 % of Total 98.7 % 0.6 % 0.7 % 100.0 % 97.0 % 0.8 % 2.2 % 100.0 % TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress. The Company reviews all modifications and renewals for determination of TDR status. The Company allocated $534 thousand and $790 thousand of specific reserves to customers whose loan terms have been modified as TDRs as of December 31, 2015 and 2014, respectively. These loans involved the restructuring of terms to allow customers to mitigate the risk of default by meeting a lower payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit. A total of $45 thousand and $100 thousand were committed to be advanced in connection with TDRs as of December 31, 2015 and 2014, respectively, representing the amount the Company is legally required to advance under existing loan agreements. These loans are not in default under the terms of the loan agreements and are accruing interest. It is the Company’s policy to evaluate advances on such loans on a case-by-case basis. Absent a legal obligation to advance pursuant to the terms of the loan agreement, the Company generally will not advance funds for which it has outstanding commitments, but may do so in certain circumstances. Outstanding TDRs, disaggregated by class, at December 31, 2015 and 2014 are as follows (dollars in thousands): December 31, 2015 December 31, 2014 TDRs Outstanding Number of Loans Outstanding Recorded Balance Number of Loans Outstanding Recorded Balance Commercial and industrial 17 $ 1,116 31 $ 3,683 Commercial real estate 5 4,131 8 10,179 Residential mortgages 22 4,653 19 4,314 Home equity 5 1,362 5 1,216 Consumer 8 301 7 281 Total 57 $ 11,563 70 $ 19,673 The following presents, disaggregated by class, information regarding TDRs executed during the years ended December 31, 2015, 2014 and 2013 (dollars in thousands): Years Ended December 31, 2015 2014 New TDRs Number of Loans Pre-Modification Outstanding Recorded Balance Post-Modification Outstanding Recorded Balance Number of Loans Pre-Modification Outstanding Recorded Balance Post-Modification Outstanding Recorded Balance Commercial and industrial 4 $ 388 $ 388 10 $ 1,877 $ 1,877 Commercial real estate — — — 2 5,161 5,161 Residential mortgages 3 300 305 4 581 581 Home equity 1 192 192 5 1,219 1,219 Consumer 1 43 43 4 145 145 Total 9 $ 923 $ 928 25 $ 8,983 $ 8,983 Year Ended December 31, 2013 New TDRs Number of Loans Pre-Modification Outstanding Recorded Balance Post-Modification Outstanding Recorded Balance Commercial and industrial 8 $ 2,484 $ 2,484 Commercial real estate 3 3,025 3,025 Residential mortgages 4 924 924 Consumer 1 17 17 Total 16 $ 6,450 $ 6,450 Presented below and disaggregated by class is information regarding loans modified as TDRs that had payment defaults of 90 days or more within twelve months of restructuring during the years ended December 31, 2015, 2014 and 2013 (dollars in thousands). Years Ended December 31, 2015 2014 2013 Defaulted TDRs Number of Loans Outstanding Recorded Balance Number of Loans Outstanding Recorded Balance Number of Loans Outstanding Recorded Balance Commercial real estate — $ — 2 $ 1,529 1 $ 390 Residential mortgages — — — — 1 310 Consumer 1 46 — — — — Total 1 $ 46 2 $ 1,529 2 $ 700 Not all loan modifications are TDRs. In some cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress. This could be the case if the Company is matching a competitor’s interest rate. |
