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ALLOWANCE FOR LOAN LOSSES
 3 Months Ended
Mar. 31, 2017
ALLOWANCE FOR LOAN LOSSES  
ALLOWANCE FOR LOAN LOSSES

7. ALLOWANCE FOR LOAN LOSSES

 

The allowance for loan losses is established and maintained through a provision for loan losses based on probable incurred losses in the Bank’s loan portfolio. Management evaluates the adequacy of the allowance quarterly. The allowance is comprised of both individual valuation allowances and loan pool valuation allowances.

 

The Bank monitors its entire loan portfolio regularly, with consideration given to detailed analysis of classified loans, repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance.

 

Individual valuation allowances are established in connection with specific loan reviews and the asset classification process including the procedures for impairment testing under FASB ASC No. 310, “Receivables”. Such valuation, which includes a review of loans for which full collectibility in accordance with contractual terms is not reasonably assured, considers the estimated fair value of the underlying collateral less the costs to sell, if any, or the present value of expected future cash flows, or the loan’s observable market value. Any shortfall that exists from this analysis results in a specific allowance for the loan. Pursuant to the Company’s policy, loan losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectible. Assumptions and judgments by management, in conjunction with outside sources, are used to determine whether full collectibility of a loan is not reasonably assured. These assumptions and judgments are also used to determine the estimates of the fair value of the underlying collateral or the present value of expected future cash flows or the loan’s observable market value. Individual valuation allowances could differ materially as a result of changes in these assumptions and judgments. Individual loan analyses are periodically performed on specific loans considered impaired. The results of the individual valuation allowances are aggregated and included in the overall allowance for loan losses.

 

Loan pool valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with the Bank’s lending activities, but which, unlike individual allowances, have not been allocated to particular problem assets. Pool evaluations are broken down into loans with homogenous characteristics by loan type and include commercial real estate mortgages, owner and non-owner occupied; multi-family mortgage loans; residential real estate mortgages; home equity loans; commercial, industrial and agricultural loans, secured and unsecured; real estate construction and land loans; and consumer loans. Management considers a variety of factors in determining the adequacy of the valuation allowance and has developed a range of valuation allowances necessary to adequately provide for probable incurred losses in each pool of loans. Management considers the Bank’s charge-off history along with the growth in the portfolio as well as the Bank’s credit administration and asset management philosophies and procedures when determining the allowances for each pool. In addition, management evaluates and considers the credit’s risk rating which includes management’s evaluation of: cash flow, collateral, guarantor support, financial disclosures, industry trends and strength of borrowers’ management, the impact that economic and market conditions may have on the portfolio as well as known and inherent risks in the portfolio. Finally, management evaluates and considers the allowance ratios and coverage percentages of both peer group and regulatory agency data. These evaluations are inherently subjective because, even though they are based on objective data, it is management’s interpretation of that data that determines the amount of the appropriate allowance. If the evaluations prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio, resulting in additions to the allowance for loan losses.

 

For PCI loans, a valuation allowance is established when it is probable that the Bank will be unable to collect all the cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimate after acquisition. A specific allowance is established when subsequent evaluations of expected cash flows from PCI loans reflect a decrease in those estimates. The allowance established represents the excess of the recorded investment in those loans over the present value of the currently estimated future cash flow, discounted at the last effective accounting yield.

  

The Bank uses assumptions and methodologies that are relevant to estimating the level of impairment and probable losses in the loan portfolio. To the extent that the data supporting such assumptions has limitations, management's judgment and experience play a key role in recording the allowance estimates. Additions to the allowance for loan losses are made by provisions charged to earnings. Furthermore, an improvement in the expected cash flows related to PCI loans would result in a reduction of the required specific allowance with a corresponding credit to the provision.

 

The Credit Risk Management Committee (“CRMC”) is comprised of Bank management. The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the CRMC, based on its risk assessment of the entire portfolio. Each quarter, members of the CRMC meet with the Credit Risk Committee of the Board to review credit risk trends and the adequacy of the allowance for loan losses. Based on the CRMC’s review of the classified loans and the overall allowance levels as they relate to the entire loan portfolio at March 31, 2017 and December 31, 2016, management believes the allowance for loan losses has been established at levels sufficient to cover the probable incurred losses in the Bank’s loan portfolio. Future additions or reductions to the allowance may be necessary based on changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for loan losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.

 

The following tables represent the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, as defined under FASB ASC 310-10, and based on impairment method as of March 31, 2017 and December 31, 2016. The tables include loans acquired from CNB and FNBNY.

 

    At March 31, 2017  
(In thousands)   Commercial
Real Estate
Mortgage
Loans		     Multi-
Family
Loans		     Residential
Real Estate
Mortgage
Loans		     Commercial,
Industrial
and
Agricultural
Loans		     Real Estate
Construction
and Land
Loans		     Installment/
Consumer
Loans		     Total  
Allowance for loan losses:                                                        
Individually  evaluated for impairment   $ -     $ -     $ -     $ 4     $ -     $ -     $ 4  
Collectively  evaluated for impairment     7,745       6,480       2,027       9,194       1,058       110       26,614  
Loans acquired with deteriorated credit quality     -       -       -       -       -       -       -  
Total allowance for loan losses   $ 7,745     $ 6,480     $ 2,027     $ 9,198     $ 1,058     $ 110     $ 26,618  
                                                         
Loans:                                                        
Individually evaluated for impairment   $ 1,516     $ -     $ 8,534     $ 989     $ -     $ -     $ 11,039  
Collectively evaluated for impairment     1,026,372       532,016       433,653       537,154       85,704       16,863       2,631,762  
Loans acquired with deteriorated credit quality     2,206       3,279       875       3,797       -       -       10,157  
Total loans   $ 1,030,094     $ 535,295     $ 443,062     $ 541,940     $ 85,704     $ 16,863     $ 2,652,958  

  

    At December 31, 2016  
(In thousands)   Commercial
Real Estate
Mortgage
Loans		     Multi-
Family
Loans		     Residential
Real Estate
Mortgage
Loans		     Commercial,
Industrial
and
Agricultural
Loans		     Real Estate
Construction
and Land
Loans		     Installment/
Consumer
Loans		     Total  
Allowance for loan losses:                                                        
Individually  evaluated for impairment   $ -     $ -     $ -     $ 1     $ -     $ -     $ 1  
Collectively  evaluated for impairment     8,759       6,264       1,961       7,836       955       128       25,903  
Loans acquired with deteriorated credit quality     -       -       -       -       -       -       -  
Total allowance for loan losses   $ 8,759     $ 6,264     $ 1,961     $ 7,837     $ 955     $ 128     $ 25,904  
                                                         
Loans:                                                        
Individually evaluated for impairment   $ 1,539     $ -     $ 784     $ 1,030     $ -     $ -     $ 3,353  
Collectively evaluated for impairment     1,013,563       514,853       437,999       519,686       80,605       16,368       2,583,074  
Loans acquired  with deteriorated credit quality     1,881       3,293       870       3,734       -       -       9,778  
Total loans   $ 1,016,983     $ 518,146     $ 439,653     $ 524,450     $ 80,605     $ 16,368     $ 2,596,205  

 

The following tables represent the changes in the allowance for loan losses for the three months ended March 31, 2017 and 2016, by portfolio segment, as defined under FASB ASC 310-10. The portfolio segments represent the categories that the Bank uses to determine its allowance for loan losses.

 

    For the Three Months Ended March 31, 2017  
                      Commercial,                    
    Commercial           Residential     Industrial     Real Estate              
    Real Estate     Multi-     Real Estate     and     Construction     Installment/        
    Mortgage     Family     Mortgage     Agricultural     and Land     Consumer        
(In thousands)   Loans     Loans     Loans     Loans     Loans     Loans     Total  
Allowance for loan losses:                                                        
Beginning balance   $ 8,759     $ 6,264     $ 1,961     $ 7,837     $ 955     $ 128     $ 25,904  
 Charge-offs     -       -       -       (95 )     -       -       (95 )
 Recoveries     -       -       1       7       -       1       9  
 Provision     (1,014 )     216       65       1,449       103       (19 )     800  
Ending balance   $ 7,745     $ 6,480     $ 2,027     $ 9,198     $ 1,058     $ 110     $ 26,618  
       
    For the Three Months Ended March 31, 2016  
                      Commercial,                    
    Commercial           Residential     Industrial     Real Estate              
    Real Estate     Multi-     Real Estate     and     Construction     Installment/        
    Mortgage     Family     Mortgage     Agricultural     and Land     Consumer        
(In thousands)   Loans     Loans     Loans     Loans     Loans     Loans     Total  
Allowance for loan losses:                                                        
Beginning balance   $ 7,850     $ 4,208     $ 2,115     $ 5,405     $ 1,030     $ 136     $ 20,744  
 Charge-offs     -       -       -       (200 )     -       -       (200 )
 Recoveries     -       -       -       4       -       1       5  
 Provision     (404 )     461       583       359       247       4       1,250  
Ending balance   $ 7,446     $ 4,669     $ 2,698     $ 5,568     $ 1,277     $ 141     $ 21,799