| LOANS | 6. LOANS The following table sets forth the major classifications of loans:
September 30, 2015 December 31, 2014
(In thousands)
Commercial real estate mortgage loans $ 1,029,729 $ 595,397
Multi-family mortgage loans 298,910 218,985
Residential real estate mortgage loans 384,452 156,156
Commercial, financial, and agricultural loans 473,814 291,743
Real estate-construction and land loans 93,667 63,556
Installment/consumer loans 17,667 10,124
Total loans 2,298,239 1,335,961
Net deferred loan costs and fees 3,078 2,366
2,301,317 1,338,327
Allowance for loan losses (20,187 ) (17,637 )
Net loans $ 2,281,130 $ 1,320,690 On June 19, 2015, the Company completed the acquisition of Community National Bank (“CNB”) resulting in the addition of $735.6 million of acquired loans recorded at their fair value. There were approximately $706.2 million of acquired CNB loans remaining as of September 30, 2015 On February 14, 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 $38.0 million of acquired FNBNY loans remaining as of September 30, 2015. 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 Nassau and Suffolk Counties located on Long Island and a substantial portion of the Bank’s loans are secured by real estate in this area. Accordingly, the ultimate collectibility of such a 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 generally located largely in our 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 $0.25 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 5 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 maybe 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 made to and 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. 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 can 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. Credit risk is affected by construction delays, cost overruns, market conditions and the availability of permanent financing, to the extent such permanent financing is not being provided by us. Installment and Consumer Loans Loans in this classification may be either secured or unsecured and 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 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 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, 2015 and December 31, 2014:
Grades:
September 30, 2015 Pass Special Mention Substandard Doubtful Total
(In thousands)
Commercial real estate:
Owner occupied $ 461,748 $ 3,266 $ 3,861 $ — $ 468,875
Non-owner occupied 557,212 560 3,082 — 560,854
Multi-Family 298,899 3 8 — 298,910
Residential real estate:
Residential mortgage 316,175 — 852 — 317,027
Home equity 66,090 366 969 — 67,425
Commercial:
Secured 121,330 161 2,125 — 123,616
Unsecured 343,822 3,426 2,950 — 350,198
Real estate construction and land loans 93,667 — — — 93,667
Installment/consumer loans 17,567 — 100 — 17,667
Total loans $ 2,276,510 $ 7,782 $ 13,947 $ — $ 2,298,239
Grades:
December 31, 2014 Pass Special Mention Substandard Doubtful Total
(In thousands)
Commercial real estate:
Owner occupied $ 243,512 $ 7,133 $ 5,963 $ — $ 256,608
Non-owner occupied 334,790 171 3,828 — 338,789
Multi-Family 217,855 202 928 — 218,985
Residential real estate:
Residential mortgage 88,405 — 1,613 90,018
Home equity 64,994 212 932 66,138
Commercial:
Secured 91,007 621 2,339 — 93,967
Unsecured 191,942 4,168 1,666 — 197,776
Real estate construction and land loans 63,190 — 366 — 63,556
Installment/consumer loans 9,921 100 103 — 10,124
Total loans $ 1,305,616 $ 12,607 $ 17,738 $ — $ 1,335,961 Past Due and Nonaccrual Loans The following table represents the aging of the recorded investment in past due loans as of September 30, 2015 and December 31, 2014 by class of loans, as defined by ASC 310-10:
September 30, 2015 30-59 60-89 > Past Due and Accruing Nonaccrual Total Past Current Total Loans
(In thousands)
Commercial real estate:
Owner occupied $ 168 $ — $ 1,450 $ 546 $ 2,164 $ 466,711 468,875
Non-owner occupied 102 — — — 102 560,752 560,854
Multi-Family — — — — — 298,910 298,910
Residential real estate:
Residential mortgages 1,607 87 — 64 1,758 315,269 317,027
Home equity 98 41 158 719 1,016 66,409 67,425
Commercial and Industrial:
Secured — 300 176 — 476 123,140 123,616
Unsecured 15 219 2,338 69 2,641 347,557 350,198
Real estate construction and land loans — — — — — 93,667 93,667
Installment/consumer loans 10 — — — 10 17,657 17,667
Total loans $ 2,000 $ 647 $ 4,122 $ 1,398 $ 8,167 $ 2,290,072 $ 2,298,239
December 31, 2014 30-59 60-89 > Past Due and Accruing Nonaccrual Total Past Current Total Loans
(In thousands)
Commercial real estate:
Owner occupied $ — $ 184 $ — $ 595 $ 779 $ 255,829 256,608
Non-owner occupied 181 — 10 10 201 338,588 338,789
Multi-Family — — — — — 218,985 218,985
Residential real estate:
Residential mortgages — — — 143 143 89,875 90,018
Home equity 919 — 134 374 1,427 64,711 66,138
Commercial and Industrial:
Secured — — — — — 93,967 93,967
Unsecured 25 — — 222 247 197,529 197,776
Real estate construction and land loans — — — — — 63,556 63,556
Installment/consumer loans 1 — — 3 4 10,120 10,124
Total loans $ 1,126 $ 184 $ 144 $ 1,347 $ 2,801 $ 1,333,160 $ 1,335,961 At September 30, 2015, there were $1.6 million of CNB acquired loans 30-59 days past due and $0.5 million 60-89 days past due. There were no FNBNY loans 30-59 days or 60-89 days past due at September 30, 2015 and December 31, 2014. Loans 90 days or more past due that are still accruing interest primarily represent PCI loans acquired from CNB and FNBNY which were recorded at fair value upon acquisition. These loans are considered to be accruing as management can reasonably estimate future cash flows and expect 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 As of September 30, 2015 and December 31, 2014, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $3.1 million and $6.2 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. 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. These methods of fair value measurement for impaired loans are considered level 3 within the fair value hierarchy described in FASB ASC 820-10-50-5. For individually impaired loans, the following tables set forth by class of loans at September 30, 2015 and December 31, 2014 the recorded investment, unpaid principal balance and related allowance. The tables also set forth the average recorded investment of individually impaired loans and interest income recognized while the loans were impaired during the nine months and three months ended September 30, 2015 and 2014:
September 30, 2015 Nine Months Ended Three Months Ended
Recorded Unpaid Related Average Interest Average Interest
(In thousands)
With no related allowance recorded:
Commercial real estate:
Owner occupied $ 694 $ 1,186 $ — $ 720 $ 8 $ 702 $ 3
Non-owner occupied 934 934 — 942 46 936 15
Residential real estate:
Residential mortgages 64 74 — 67 — 65 —
Home equity 732 951 — 636 — 734 —
Commercial:
Secured 110 110 — 91 4 111 2
Total with no related allowance recorded 2,534 3,255 — 2,456 58 2,548 20
With an allowance recorded:
Commercial real estate - Non-owner occupied 319 319 21 321 11 319 4
Commercial Unsecured 212 212 2 231 13 211 4
Total with an allowance recorded: 531 531 23 552 24 530 8
Total:
Commercial real estate:
Owner occupied 694 1,186 — 720 8 702 3
Non-owner occupied 1,253 1,253 21 1,263 57 1,255 19
Residential real estate:
Residential mortgages 64 74 — 67 — 65 —
Home equity 732 951 — 636 — 734 —
Commercial:
Secured 110 110 — 91 4 111 2
Unsecured 212 212 2 231 13 211 4
Total $ 3,065 $ 3,786 $ 23 $ 3,008 $ 82 $ 3,078 $ 28
December 31, 2014 Nine Months Ended Three Months Ended
Recorded Unpaid Related Average Interest Average Interest
(In thousands)
With no related allowance recorded:
Commercial real estate:
Owner occupied $ 3,562 $ 3,707 $ — $ 4,010 $ 85 $ 3,909 $ 28
Non-owner occupied 1,251 1,568 — 964 48 959 16
Residential real estate:
Residential mortgages 143 231 — 834 — 815 —
Home equity 169 377 — 691 — 651 —
Commercial:
Secured 345 345 — 356 19 351 6
Unsecured — — — 177 9 196 3
Total with no related allowance recorded 5,470 6,228 — $ 7,032 $ 161 $ 6,881 $ 53
With an allowance recorded:
Commercial real estate - Non-owner occupied 323 323 23 — — — —
Residential real estate - Residential mortgage — — — — — — —
Residential real estate - Home equity 72 89 72 76 — 74 —
Commercial-Unsecured 337 339 79 — — — —
Total with an allowance recorded: 732 751 174 76 — 74 —
Total:
Commercial real estate:
Owner occupied 3,562 3,707 — 4,010 85 3,909 28
Non-owner occupied 1,574 1,891 23 964 48 959 16
Residential real estate:
Residential mortgages 143 231 — 834 — 815 —
Home equity 241 466 72 767 — 725 —
Commercial:
Secured 345 345 — 356 19 351 6
Unsecured 337 339 79 177 9 196 3
Total $ 6,202 $ 6,979 $ 174 $ 7,108 $ 161 $ 6,955 $ 53 The Bank had no other real estate owned at September 30, 2015 and December 31, 2014, respectively. Troubled Debt Restructurings The terms of certain loans were modified and are considered TDRs. 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. During the nine months ended September 30, 2015, the Bank modified two commercial loans as TDRs with pre and post modification balances totaling $0.1 million. During the nine months ended September 30, 2014 there were no loans modified as TDRs. There were no loans modified as TDRs during the three months ended September 30, 2015 or September 30, 2014. There were no charge offs relating to TDRs during the nine months ended September 30, 2015 or September 30, 2014. There were no loans modified as TDRs for which there was a payment default within twelve months following the modification for the nine months ended September 30, 2015 and September 30, 2014, respectively. 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, 2015 and December 31, 2014, the Company had $0.4 million and $0.5 million, respectively of nonaccrual TDR loans and $1.7 million and $5.0 million, respectively of performing TDRs. At September 30, 2015 and December 31, 2014, total nonaccrual TDR loans are secured with collateral that has an appraised value of $1.0 million and $2.3 million, respectively. Furthermore, the Bank has no commitment to lend additional funds to these debtors. The terms of certain other loans were modified during the quarter ended September 30, 2015 that did not meet the definition of a TDR. These loans have a total recorded investment as of September 30, 2015 of $1.8 million. The modification of these loans involved a modification of the terms of loans to borrowers who were not experiencing financial difficulties. Acquired 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 principle and interest due from the borrower. All loans with evidence of deterioration in credit quality are considered purchased credit impaired (“PCI”) loans unless the loan type is specifically excluded from the scope of 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 in the collection of the loan. This policy is based on the following general themes;
1. The loans were acquired in a business combination;
2. The acquisition of the loans will result in recognition of a discount attributable, at least in part, to credit quality; and
3. The loans are not subsequently accounted for at fair value The Bank makes an estimate of the loans’ contractual principal and contractual interest payments as well as the total cash flows it expects to collect 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 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, which may include cash or real estate acquired in foreclosure, from the remaining loans, representing further realization of accretable yield, are recognized as interest income upon receipt. At the acquisition date, the purchased credit impaired 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 ($11.9 million) represented the non-accretable difference. The difference between the expected cash flows and fair value ($6.6) million represented the initial accretable yield. At September 30, 2015, the contractually required principal and interest payments receivable of the purchased credit impaired loans was $17.4 million with a remaining non-accretable difference of $1.7 million. At the acquisition date, the purchased credit impaired loans acquired as part of the CNB acquisition had contractually required principal and interest payments receivable of $8.2 million; expected cash flows of $3.0 million; and a fair value (initial carrying amount) of $2.7 million. The difference between the contractually required principal and interest payments receivable and the expected cash flows ($5.2 million) represented the non-accretable difference. The difference between the expected cash flows and fair value ($0.3) million represented the initial accretable yield. At September 30, 2015, the contractually required principal and interest payments receivable of the purchased credit impaired loans was $8.2 million with a remaining non-accretable difference of $5.2 million. Considering the closing date of the transaction, the amounts presented are preliminary and subject to adjustment as fair value assessments are finalized. Refer to Note 14. “Business Combinations,” for details related to the CNB acquisition. The following table summarizes the activity in the accretable yield for the purchased credit impaired loans:
Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
(In thousands)
Balance at beginning of period $ 7,530 $ 7,614 $ 8,432 $ —
Accretable discount arising from acquisition of PCI loans — — 259 6,458
Accretion (658 ) (437 ) (3,316 ) (1,213 )
Reclassification from (to) nonaccretable difference during the period 654 (1,120 ) 2,151 812
Accretable discount at end of period $ 7,526 $ 6,057 $ 7,526 $ 6,057 |
