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 inherent in the Bank’s loan portfolio. Management evaluates the adequacy of the allowance on a quarterly basis. The allowance is comprised of both individual valuation allowances and loan pool valuation allowances.

The Bank monitors its entire loan portfolio on a regular basis, 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 Accounting Standard Codification (“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 our 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 our 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, multi-family mortgage loans, home equity loans, residential real estate mortgages, commercial and industrial loans, real estate construction and land loans and consumer loans. The determination of the adequacy of the valuation allowance is a process that takes into consideration a variety of factors. The Bank has developed a range of valuation allowances necessary to adequately provide for probable incurred losses inherent in each pool of loans. We consider our own 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, we evaluate and consider 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, we evaluate and consider 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 purchased credit impaired 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 purchased credit impaired 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 purchased credit impaired loans would result in a reduction of the required specific allowance with a corresponding credit to the provision.

The Credit Risk Management Committee is comprised of Bank management. The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the Credit Risk Management Committee, based on its risk assessment of the entire portfolio. Each quarter, members of the Credit Risk Management Committee 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 Credit Risk Management Committee’s review of the classified loans and the overall allowance levels as they relate to the entire loan portfolio at March 31, 2016 and December 31, 2015, 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 table represents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, as defined under ASC 310-10, and based on impairment method as of March 31, 2016 and December 31, 2015. Additionally, the following tables represent the changes in the allowance for loan losses for the three month period ended March 31, 2016 and 2015, and the twelve month period ended December 31, 2015, by portfolio segment, as defined under ASC 310-10. The loan segment represents the categories that the Bank develops to determine its allowance for loan losses.

	For the Three Months Ended March 31, 2016
	Commercial Real Estate Mortgage Loans			Multi- Family		Residential Real Estate Mortgage Loans		Commercial, Financial and Agricultural Loans			Real Estate Construction and Land Loans		Installment/ Consumer Loans		Total
(In thousands)
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

Ending balance: individually evaluated for impairment	$	-		$	-	$	-	$	18		$	-	$	-	$	18

Ending balance: collectively evaluated for impairment	$	7,446		$	4,669	$	2,698	$	5,550		$	1,277	$	141	$	21,781

Ending balance: loan acquired with deteriorated credit quality	$	-		$	-	$	-	$	-		$	-	$	-	$	-

Loans	$	1,011,068		$	380,125	$	448,164	$	511,190		$	111,180	$	16,135	$	2,477,862

Ending balance: individually evaluated for impairment	$	1,606		$	-	$	1,277	$	866		$	-	$	-	$	3,749

Ending balance: collectively evaluated for impairment	$	1,004,120		$	376,763	$	445,590	$	504,290		$	111,180	$	16,135	$	2,458,078

Ending balance: loans acquired with deteriorated credit quality	$	5,342		$	3,362	$	1,297	$	6,034		$	-	$	-	$	16,035

The table above includes loans acquired on June 19, 2015 from CNB and February 14, 2014 from FNBNY.

	For the Twelve Months Ended December 31, 2015
	Commercial Real Estate Mortgage Loans			Multi- Family		Residential Real Estate Mortgage Loans			Commercial, Financial and Agricultural Loans			Real Estate Construction and Land Loans			Installment/ Consumer Loans			Total
(In thousands)
Allowance for Loan Losses:
Beginning balance	$	6,994		$	2,670	$	2,208		$	4,526		$	1,104		$	135		$	17,637
Charge-offs		(50	)		-		(249	)		(827	)		-			(2	)		(1,128	)
Recoveries		-			-		79			149			-			7			235
Provision		906			1,538		77			1,557			(74	)		(4	)		4,000
Ending Balance	$	7,850		$	4,208	$	2,115		$	5,405		$	1,030		$	136		$	20,744

Ending balance: individually evaluated for impairment	$	20		$	-	$	-		$	9		$	-		$	-		$	29

Ending balance: collectively evaluated for impairment	$	7,830		$	4,208	$	2,115		$	5,396		$	1,030		$	136		$	20,715

Ending balance: loan acquired with deteriorated credit quality	$	-		$	-	$	-		$	-		$	-		$	-		$	-

Loans	$	1,053,399		$	350,793	$	392,815		$	501,766		$	91,153		$	17,596		$	2,407,522

Ending balance: individually evaluated for impairment	$	1,629		$	-	$	672		$	290		$	-		$	-		$	2,591

Ending balance: collectively evaluated for impairment	$	1,051,135		$	347,054	$	390,876		$	495,045		$	91,153		$	17,596		$	2,392,859

Ending balance: loans acquired with deteriorated credit quality	$	635		$	3,739	$	1,267		$	6,431		$	-		$	-		$	12,072

The table above includes loans acquired on June 19, 2015 from CNB and February 14, 2014 from FNBNY.

	Three Months Ended March 31, 2015
(In thousands)	Commercial Real Estate Mortgage Loans			Multi-Family		Residential Real Estate Mortgage Loans			Commercial, Financial and Agricultural Loans			Real Estate Construction and Land Loans		Installment/ Consumer Loans			Total
Allowance for Loan Losses:
Beginning balance	$	6,994		$	2,670	$	2,208		$	4,526		$	1,104	$	135		$	17,637
Charge-offs		-			-		-			(200	)		-		(2	)		(202	)
Recoveries		-			-		-			20			1		4			25
Provision		(4	)		310		(71	)		559			1		5			800
Ending Balance	$	6,990		$	2,980	$	2,137		$	4,905		$	1,106	$	142		$	18,260