Loans

The loan portfolio, excluding loans held for sale, is comprised of the following:


	December 31,
	2013			2012
	(In thousands)
Real Estate:
Commercial	$	593,476		$	550,786
Construction		88,311			74,727
Residential Multi-Family		226,898			196,199
Residential Other		432,999			325,774
Commercial & Industrial		258,578			288,809
Individuals & Lease Financing		30,528			33,488

Total loans		1,630,790			1,469,783
Deferred loan costs (fees), net		1,379			(2,411	)
Allowance for loan losses		(25,990	)		(26,612	)

Loans, net	$	1,606,179		$	1,440,760

During 2013, the Company purchased $142,860 of fixed and adjustable rate 1-4 family residential real estate loans. In March 2012, the Company purchased $65,795 of adjustable rate 1-4 family residential loans. All purchases were made as a partial redeployment of excess liquidity.

The Company has established credit policies applicable to each type of lending activity in which it engages. The Bank evaluates the credit worthiness of each customer and extends credit based on credit history, ability to repay and market value of collateral. The customers’ credit worthiness is monitored on an ongoing basis. Additional collateral is obtained when warranted. Real estate is the primary form of collateral. Other important forms of collateral are bank deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of payment to be based on the borrower’s ability to generate continuing cash flows.

Risk characteristics of the Company’s loan portfolio segments include the following:

Commercial Real Estate Loans — In underwriting commercial real estate loans, the Company evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loan. Repayment of such loans may be negatively impacted should the borrower default or should there be a substantial decline in the value of the property securing the loan, or a decline in general economic conditions. Where the owner occupies the property, the Company also evaluates the business’s ability to repay the loan on a timely basis. In addition, the Company may require personal guarantees, lease assignments and/or the guarantee of the operating company when the property is owner occupied. These types of loans may involve greater risks than other types of lending, because payments on such loans are often dependent upon the successful operation of the business involved, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions affecting the borrowers’ business.

Construction Loans — Construction loans are short-term loans (generally up to 18 months) secured by land for both residential and commercial development. The loans are generally made for acquisition and improvements. Funds are disbursed as phases of construction are completed. Most non-residential construction loans require pre-approved permanent financing or pre-leasing by the company or another bank providing the permanent financing. The Company funds construction of single family homes and commercial real estate, when no contract of sale exists, based upon the experience of the builder, the financial strength of the owner, the type and location of the property and other factors. Construction loans are generally personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by the builders’ inability to complete construction, by a downturn in the new construction market, by a significant increase in interest rates or by a decline in general economic conditions. The Bank’s primary regulator considers construction loans to be part of commercial real estate for concentration risk measurement purposes.

Residential Real Estate Loans — Various loans secured by residential real estate properties are offered by the Company, including 1-4 family residential mortgages, multi-family residential loans and a variety of home equity line of credit products. Repayment of such loans may be negatively impacted should the borrower default, should there be a significant decline in the value of the property securing the loan or should there be decline in general economic conditions. The Company offers multi-family loans up to $7.5 million per transaction. These loans are available for 7 or 10 year terms with one 5 year extension option. A 7 year term with no extension option is also offered. Pricing is typically based on a spread over the corresponding Federal Home Loan Bank (“FHLB”) rate. Amortization of up to 30 years, a maximum loan to value ratio of 75% and a debt service coverage ratio of 1.2 to 1 are generally required. The Bank’s primary regulator considers multi-family residential loans to be part of commercial real estate for concentration risk measurement purposes.

Commercial and Industrial Loans — The Company’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are usually made to finance the purchase of inventory, new or used equipment or other short or long-term working capital purposes. These loans are generally secured by corporate assets, often with real estate as secondary collateral, but are also offered on an unsecured basis. In granting this type of loan, the Company primarily looks to the borrower’s cash flow as the source of repayment with collateral and personal guarantees, where obtained, as a secondary source. Commercial loans are often larger and may involve greater risks than other types of loans offered by the Company. Payments on such loans are often dependent upon the successful operation of the underlying business involved and, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions, management’s inability to effectively manage the business, claims of others against the borrower’s assets which may take priority over the Company’s claims against assets, death or disability of the borrower or loss of market for the borrower’s products or services.

Lease Financing and Other Loans — The Company originates lease financing transactions which are primarily conducted with businesses, professionals and not-for-profit organizations and provide financing principally for office equipment, telephone systems, computer systems, energy saving improvements and other special use equipment. Payments on such loans are often dependent upon the successful operation of the underlying business involved and, therefore, repayment of such loans may be negatively impacted by adverse changes in economic conditions, and management’s inability to effectively manage the business. The Company also offers installment loans and reserve lines of credit to individuals. Repayment of such loans are often dependent on the personal income of the borrower which may be negatively impacted by adverse changes in economic conditions. The Company does not place an emphasis on originating these types of loans.

The following table presents the allowance for loan losses by portfolio segment for the years indicated:


	For the Year Ended December 31, 2013
	Total			Commercial Real Estate			Construction			Residential Real Estate			Commercial & Industrial			Lease Financing & Other
	(In thousands)
Balance at beginning of year	$	26,612		$	10,090		$	3,949		$	8,119		$	4,077		$	377

Charge-offs		(5,602	)		(1,084	)		(793	)		(2,216	)		(1,103	)		(406	)
Recoveries		2,504			113			15			1,746			561			69

Net Charge-offs		(3,098	)		(971	)		(778	)		(470	)		(542	)		(337	)
Provision for loan losses		2,476			2,112			1,470			(1,413	)		(99	)		406

Net change during the year		(622	)		1,141			692			(1,883	)		(641	)		69

Balance at end of year	$	25,990		$	11,231		$	4,641		$	6,236		$	3,436		$	446


	For the Year Ended December 31, 2012
	Total			Commercial Real Estate			Construction			Residential Real Estate			Commercial & Industrial			Lease Financing & Other
	(In thousands)
Balance at beginning of period	$	30,685		$	12,776		$	6,470		$	8,093		$	2,650		$	696

Charge-offs		(15,847	)		(5,002	)		(3,509	)		(3,018	)		(3,744	)		(574	)
Recoveries		3,267			957			179			437			1,171			523

Net Charge-offs		(12,580	)		(4,045	)		(3,330	)		(2,581	)		(2,573	)		(51	)
Provision for loan losses		8,507			1,359			809			2,607			4,000			(268	)

Net change during the period		(4,073	)		(2,686	)		(2,521	)		26			1,427			(319	)

Balance at end of year	$	26,612		$	10,090		$	3,949		$	8,119		$	4,077		$	377


	For the Year Ended December 31, 2011
	Total			Commercial Real Estate			Construction			Residential Real Estate			Commercial & Industrial			Lease Financing & Other
	(In thousands)
Balance at beginning of year	$	38,949		$	16,736		$	7,140		$	9,851		$	4,290		$	932

Charge-offs		(78,236	)		(39,168	)		(10,026	)		(22,692	)		(6,225	)		(125	)
Recoveries		5,818			1,424			622			2,571			992			209

Net (Charge-offs) Recoveries		(72,418	)		(37,744	)		(9,404	)		(20,121	)		(5,233	)		84
Provision for loan losses		64,154			33,784			8,734			18,363			3,593			(320	)

Net change during the year		(8,264	)		(3,960	)		(670	)		(1,758	)		(1,640	)		(236	)

Balance at end of year	$	30,685		$	12,776		$	6,470		$	8,093		$	2,650		$	696

In 2011, approximately $60,200 of net charge-offs and $48,100 of the provision for loan losses were directly related to the transfer of loans to held for sale status.

The following tables present the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method at the dates indicated:


	December 31, 2013
	Total		Commercial Real Estate		Construction		Residential Real Estate		Commercial & Industrial		Lease Financing & Other
	(In thousands)
Allowance for loan losses:
Ending balance attributed to loans:
Collectively evaluated for impairment	$	25,990	$	11,231	$	4,641	$	6,236	$	3,436	$	446
Individually evaluated for impairment		—		—		—		—		—		—

Total ending balance of allowance	$	25,990	$	11,231	$	4,641	$	6,236	$	3,436	$	446

Total loans:
Ending balance of loans:
Collectively evaluated for impairment	$	1,589,738	$	580,561	$	87,432	$	642,957	$	248,260	$	30,528
Individually evaluated for impairment		41,052		12,915		879		16,940		10,318		—

Total ending balance of loans	$	1,630,790	$	593,476	$	88,311	$	659,897	$	258,578	$	30,528


	December 31, 2012
	Total		Commercial Real Estate		Construction		Residential Real Estate		Commercial & Industrial		Lease Financing & Other
	(In thousands)
Allowance for loan losses:
Ending balance attributed to loans:
Collectively evaluated for impairment	$	26,612	$	10,090	$	3,949	$	8,119	$	4,077	$	377
Individually evaluated for impairment		—		—		—		—		—		—

Total ending balance of allowance	$	26,612	$	10,090	$	3,949	$	8,119	$	4,077	$	377

Total loans:
Ending balance of loans:
Collectively evaluated for impairment	$	1,415,035	$	525,579	$	70,007	$	509,297	$	276,664	$	33,488
Individually evaluated for impairment		54,748		25,207		4,720		12,676		12,145		—

Total ending balance of loans	$	1,469,783	$	550,786	$	74,727	$	521,973	$	288,809	$	33,488

Non-accrual loans at December 31, 2013, 2012 and 2011 are summarized as follows:


	2013		2012		2011
	(In thousands)
Total non-accrual loans	$	23,489	$	34,808	$	29,892
Interest income that would have been recorded under the original contract terms		805		1,401		3,216

There was no income recorded on non-accrual loans during the years ended December 31, 2013, 2012 and 2011.

The following table presents the recorded investments in non-accrual loans and loans past due 90 days and still accruing by class of loans as of the dates indicated:


	December 31, 2013				December 31, 2012
	Non-Accrual		Past Due 90 Days and Still Accruing		Non-Accrual		Past Due 90 Days and Still Accruing
	(In thousands)
Loans:
Commercial Real Estate:
Owner occupied	$	3,768		—	$	15,670		—
Non owner occupied		2,861		—		2,717		—
Construction:
Commercial		879		—		2,478		—
Residential		—		—		2,242		—
Residential:
Multifamily		1,282		—		—		—
1-4 family		12,164		—		8,470		—
Home equity		1,113		—		1,212		—
Commercial & Industrial		1,422		—		2,019		—
Other:
Lease financing & other		—		—		—		—
Overdrafts		—		—		—		—

Total	$	23,489		—	$	34,808		—

The following tables present the aging of loans (including past due and non-accrual loans) as of the dates indicated:


	December 31, 2013
	Total		31-60 Days Past Due		61-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Current
	(In thousands)
Loans:
Commercial Real Estate:
Owner occupied	$	168,371		—	$	158	$	704	$	862	$	167,509
Non owner occupied		425,105	$	200		—		2,861		3,061		422,044
Construction:
Commercial		47,039		—		—		879		879		46,160
Residential		41,272		1		—		—		1		41,271
Residential:
Multifamily		226,898		—		—		—		—		226,898
1-4 family		320,641		1,012		190		11,841		13,043		307,598
Home equity		112,358		408		540		1,113		2,061		110,297
Commercial & Industrial		258,578		1,606		321		1,365		3,292		255,286
Other:
Lease financing & other		29,626		185		4		—		189		29,437
Overdrafts		902		—		—		—		—		902

Total	$	1,630,790	$	3,412	$	1,213	$	18,763	$	23,388	$	1,607,402


	December 31, 2012
	Total		31-60 Days Past Due		61-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Current
	(In thousands)
Loans:
Commercial Real Estate:
Owner occupied	$	181,541	$	472		—	$	9,464	$	9,936	$	171,605
Non owner occupied		369,245		802		—		2,717		3,519		365,726
Construction:
Commercial		40,708		1,421		—		—		1,421		39,287
Residential		34,019		455		—		2,242		2,697		31,322
Residential:
Multifamily		196,199		—		—		—		—		196,199
1-4 family		215,771		4,506	$	91		8,470		13,067		202,704
Home equity		110,003		3,411		321		1,212		4,944		105,059
Commercial & Industrial		288,809		1,938		170		1,479		3,587		285,222
Other:
Lease financing & other		32,104		431		1		—		432		31,672
Overdrafts		1,384		—		—		—		—		1,384

Total	$	1,469,783	$	13,436	$	583	$	25,584	$	39,603	$	1,430,180

Impaired loans and the recorded investment in loans by class of loans were as follows:


	December 31, 2013						December 31, 2012
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
With no related allowance recorded:
Commercial Real Estate:
Owner occupied	$	10,320	$	10,054		—	$	26,235	$	22,022		—
Non owner occupied		2,861		2,861		—		4,292		3,185		—
Construction:
Commercial		1,231		879		—		2,735		2,478		—
Residential		—		—		—		3,242		2,242		—
Residential:
Multifamily		2,921		2,921		—		2,994		2,994		—
1-4 family		14,782		12,831		—		9,726		8,470		—
Home equity		1,705		1,188		—		2,220		1,212		—
Commercial & Industrial		11,421		10,318		—		13,218		12,145		—
Lease Financing & Other		—		—		—		—		—		—

Total loans	$	45,241	$	41,052		—	$	64,662	$	54,748		—

The carrying value of impaired loans was determined using either the fair value of the underlying collateral of the loan or by an analysis of the expected cash flows related to the loan.

The following tables present the average recorded investment in impaired loans by class of loans and interest recognized on impaired loans for the years indicated:


	Year Ended December 31,
	2013				2012
	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
	(In thousands)
Commercial Real Estate:
Owner occupied	$	19,227	$	14	$	23,006	$	434
Non owner occupied		3,068		251		4,742		275
Construction:
Commercial		1,127		—		2,219		—
Residential		1,574		37		1,745		—
Residential:
Multifamily		3,202		72		1,788		69
1-4 family		12,544		—		6,208		—
Home equity		828		1		1,508		—
Commercial & Industrial		11,458		431		10,588		—
Lease Financing & Other		—		—		64		—

Total	$	53,028	$	806	$	51,868	$	778

During the year ended December 31, 2013, the terms of certain loans were modified as troubled debt restructurings (“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. Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 6 months to 15 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 3 years.

The Company is not committed to extending any additional credit to borrowers whose loans are classified as TDRs. Impaired loans at December 31, 2013 and 2012 included $30,864 and $27,183, respectively, of loans considered to be TDRs. The Company classifies all loans considered to be TDRs as impaired.

At December 31, 2013 and 2012, ten TDRs with carrying amounts totaling $17,564 and seven TDRs with carrying amounts totaling $19,941 respectively, were on accrual status and performing in accordance with their modified terms. All other TDRs at December 31, 2013 and 2012, were on non-accrual status. A loan that has been on non-accrual status that is subsequently modified as a TDR will usually remain on non-accrual status until the borrower is able to demonstrate repayment performance in compliance with the modified terms for a sustained period. A loan that has not been placed on non-accrual status may be modified as a TDR and remain on accrual status. The Company’s policy states that a TDR is considered to be in payment default once it is 45 days contractually past due under the modified terms.

At December 31, 2013, there was one loan totaling $4,069 modified as a TDR that was in payment default within twelve months following the modification. At December 31, 2012, there were no TDRs in which there were payment defaults within twelve months following the modification.

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


	Year Ended December 31, 2013						Year Ended December 31, 2012
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial Real Estate:
Owner occupied		—		—		—		—		—		—
Non owner occupied		1	$	5,546	$	5,546		—		—		—
Construction:
Commercial		—		—		—		—		—		—
Residential		—		—		—		—		—		—
Residential:
Multifamily		—		—		—		1	$	2,159	$	1,579
1-4 family		7		9,643		9,419		—		—		—
Home equity		1		75		75		1		12,515		10,500
Commercial & Industrial		2		569		538		—		—		—
Other:
Lease financing & other		—		—		—		—		—		—
Overdrafts		—		—		—		—		—		—

Total		11	$	15,833	$	15,579		2	$	14,674	$	12,079

The troubled debt restructurings described above resulted in charge offs of $269 and $2,595 during the years ended December 31, 2013 and 2012.

The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as; value of underlying collateral, current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes non-homogeneous loans individually and classifies them as to credit risk on a quarterly basis. The Company uses the following definitions for risk ratings.

Special Mention — Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the asset or in the institution’s credit position at some future date.

Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the 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 one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loans not meeting the above criteria that are analyzed individually as part of the above described process are considered to be pass rated loans.

The following tables present the risk category by class of loans at the dates indicated of non-homogeneous loans individually classified as to credit risk as of the most recent analysis performed:


	December 31, 2013
	Total		Pass		Special Mention		Substandard		Doubtful
	(In thousands)
Commercial Real Estate:
Owner occupied	$	168,371	$	139,108	$	6,342	$	22,921		—
Non owner occupied		425,105		399,009		14,024		12,072		—
Construction:
Commercial		47,039		46,160		—		879		—
Residential		41,272		37,931		3,341		—		—
Residential:
Multifamily		226,898		222,147		2,550		2,201		—
1-4 family		61,440		42,158		2,008		17,274		—
Home equity		1,146		34		—		1,112		—
Commercial & Industrial		258,578		249,238		5,207		4,133		—
Lease Financing & Other		28,661		28,391		—		270		—

Total loans	$	1,258,510	$	1,164,176	$	33,472	$	60,862		—


	December 31, 2012
	Total		Pass		Special Mention		Substandard		Doubtful
	(In thousands)
Commercial Real Estate:
Owner occupied	$	181,541	$	132,181	$	6,447	$	42,913		—
Non owner occupied		369,245		356,960		4,438		7,847		—
Construction:
Commercial		40,708		29,303		5,349		6,056		—
Residential		34,019		28,936		891		4,192		—
Residential:
Multifamily		196,199		193,083		—		3,116		—
1-4 family		89,246		58,480		20,439		10,327		—
Home equity		1,212		—		—		1,212		—
Commercial & Industrial		288,809		270,362		3,368		15,079		—
Lease Financing & Other		31,015		29,842		846		327		—

Total loans	$	1,231,994	$	1,099,147	$	41,778	$	91,069		—

Loans not individually rated, primarily consisting of certain 1-4 family residential mortgages and home equity lines of credit, are evaluated for risk in groups of homogeneous loans. The primary risk characteristic evaluated on these pools is payment history.

The following tables present delinquency categories by class of loans for loans evaluated for risk in groups of homogeneous loans as of the dates indicated:


	December 31, 2013
	Total		31-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Current
	(In thousands)
Residential:
1-4 family	$	259,201	$	705	$	115		—	$	820	$	258,381
Home equity		111,212		408		540		—		948		110,264
Other:
Other loans		965		23		4		—		27		938
Overdrafts		902		—		—		—		—		902

Total loans	$	372,280	$	1,136	$	659		—	$	1,795	$	370,485


	December 31, 2012
	Total		31-59 Days Past Due		60-89 Days Past Due		90 Days Or More Past Due		Total Past Due		Current
	(In thousands)
Residential:
1-4 family	$	126,525		—	$	91		—	$	91	$	126,434
Home equity		108,791	$	3,411		321		—		3,732		105,059
Other:
Other loans		1,089		30		1		—		31		1,058
Overdrafts		1,384		—		—		—		—		1,384

Total loans	$	237,789	$	3,441	$	413		—	$	3,854	$	233,935

Loans made directly or indirectly to executive officers, directors or principal stockholders were approximately $36,642 and $31,338 at December 31, 2013 and 2012, respectively. During 2013, new loans granted to these individuals totaled $12,840 and payments and decreases due to changes in board composition totaled $7,536. During 2012, new loans granted to these individuals totaled $1,269 and payments and decreases due to changes in board composition totaled $15,047.

Loans Held for Sale

There were no loans held-for-sale at December 31, 2013 and $2,317 of loans held-for-sale at December 31, 2012. On February 1, 2012, the Company announced plans to sell a total of $474 million in performing and nonperforming loans in two tranches by mid-2012, as a step towards reducing the Bank’s concentrations of commercial real estate loans and classified assets. These loans were transferred to loans held-for-sale at December 31, 2011 and both tranche sales were completed in March 2012, and the Company recognized a pretax gain of $15,935.