Allowance For Loan Losses

Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a quarterly basis to provide for probable losses inherent in the portfolio. Management assesses the risk in each loan type based on historical trends, the general economic environment of its local markets, individual loan performance and other relevant factors.

Individual credits are selected throughout the year for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the adequacy of the allowance. Due to the nature of commercial lending, evaluation of the adequacy of the allowance as it relates to these types of loan types is often based more upon specific credit reviews, with consideration given to the potential impairment of certain credits and historical loss rates, adjusted for economic conditions and other inherent risk factors.

The following summarizes the activity in the allowance for loan loss, by portfolio segment, for the three months ended March 31, 2014 and 2013 (in thousands). The following also presents the balance in the allowance for loan loss disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans, by portfolio segment, as of March 31, 2014 and December 31, 2013 (in thousands).



	Commercial &			Commercial		Residential								DDA
	Industrial			Real Estate		Real Estate		Home equity			Consumer			Overdrafts		Total
Three months ended March 31, 2014
Allowance for loan loss
Beginning balance	$	1,139		$	10,775	$	6,057	$	1,672		$	77		$	855	$	20,575
Charge-offs	4			382		427		108			84			341		1,346
Recoveries	63			30		24		—			76			259		452
Provision	(123		)	837		756		(103		)	5			3		1,375
Provision for acquired loans	$	(12	)	$	—	$	—	$	—		$	—		$	—	(12		)
Ending balance	$	1,063		$	11,260	$	6,410	$	1,461		$	74		$	776	$	21,044

Three months ended March 31, 2013
Allowance for loan loss
Beginning balance	$	498		$	10,440	$	5,229	$	1,699		$	81		$	862	$	18,809
Charge-offs	62			203		591		116			3			339		1,314
Recoveries	1			18		48		—			147			274		488
Provision	67			554		1,189		52			(149		)	25		1,738
Ending balance	$	504		$	10,809	$	5,875	$	1,635		$	76		$	822	$	19,721

As of March 31, 2014
Allowance for loan loss
Evaluated for impairment:
Individually	$	—		$	533	$	—	$	—		$	—		$	—	$	533
Collectively	760			10,448		6,407		1,461			74			776		19,926
Acquired with deteriorated
credit quality	303			279		3		—			—			—		585
Total	$	1,063		$	11,260	$	6,410	$	1,461		$	74		$	776	$	21,044

Loans
Evaluated for impairment:
Individually	$	—		$	10,947	$	456	$	297		$	—		$	—	$	11,700
Collectively	142,358			980,885		1,213,816		139,310			42,206			4,001		2,522,576
Acquired with deteriorated
credit quality	1,750			18,060		513		2,322			114			—		22,759
Total	$	144,108		$	1,009,892	$	1,214,785	$	141,929		$	42,320		$	4,001	$	2,557,035

As of December 31, 2013
Allowance for loan loss
Evaluated for impairment:
Individually	$	—		$	880	$	—	$	—		$	—		$	—	$	880
Collectively	827			9,615		6,054		1,672			77			855		19,100
Acquired with deteriorated
credit quality	312			280		3		—			—			—		595
Total	$	1,139		$	10,775	$	6,057	$	1,672		$	77		$	855	$	20,575

Loans
Evaluated for impairment:
Individually	$	—		$	11,837	$	459	$	298		$	—		$	—	$	12,594
Collectively	162,500			1,004,475		1,204,594		142,325			46,292			3,905		2,564,091
Acquired with deteriorated
credit quality	1,984			24,554		2,097		767			110			—		29,512
Total	$	164,484		$	1,040,866	$	1,207,150	$	143,390		$	46,402		$	3,905	$	2,606,197

Credit Quality Indicators

All commercial loans within the portfolio are subject to internal risk grading. All non-commercial loans are evaluated based on payment history. The Company’s internal risk ratings for commercial loans are: Pass, Special Mention, Substandard and Doubtful. Each internal risk rating is defined in the loan policy using the following criteria: balance sheet yields, ratios and leverage, cash flow spread and coverage, prior history, capability of management, market position/industry, potential impact of changing economic, legal, regulatory or environmental conditions, purpose, structure, collateral support, and guarantor support. Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company’s internal loan review process. Based on an individual loan’s risk grade, estimated loss percentages are applied to the outstanding balance of the loan to determine the amount of probable loss.

The Company categorizes loans into risk categories based on relevant information regarding the customer’s debt service ability, capacity, overall collateral position along with other economic trends, and historical payment performance. The risk grades for each credit are updated when the Company receives current financial information, the loan is reviewed by the Company’s internal loan review/credit administration departments, or the loan becomes delinquent or impaired. The risk grades are updated a minimum of annually for loans rated exceptional, good, acceptable, or pass/watch. Loans rated special mention, substandard or doubtful are reviewed at least quarterly. The Company uses the following definitions for its risk ratings:



Risk Rating	Description
Pass ratings:
(a) Exceptional	Loans classified as exceptional are secured with liquid collateral conforming to the internal loan policy. Loans rated within this category pose minimal risk of loss to the bank and the risk grade within this pool of loans is generally updated on an annual basis.
(b) Good	Loans classified as good have similar characteristics that include a strong balance sheet, satisfactory debt service coverage ratios, strong management and/or guarantors, and little exposure to economic cycles. Loans within this category are generally reviewed on an annual basis. Loans in this category generally have a low chance of loss to the bank.
(c) Acceptable	Loans classified as acceptable have acceptable liquidity levels, adequate debt service coverage ratios, experienced management, and have average exposure to economic cycles. Loans within this category generally have a low risk of loss to the bank.
(d) Pass/watch	Loans classified as pass/watch have erratic levels of leverage and/or liquidity, cash flow is volatile and the borrower is subject to moderate economic risk. A borrower in this category poses a low to moderate risk of loss to the bank.
Special mention	Loans classified as special mention have a potential weakness(es) that deserves management’s close attention. The potential weakness could result in deterioration of the loan repayment or the bank’s credit position at some future date. A loan rated in this category poses a moderate loss risk to the bank.
Substandard	Loans classified as substandard reflect a customer with a well defined weakness that jeopardizes the liquidation of the debt. Loans in this category have the possibility that the bank will sustain some loss if the deficiencies are not corrected and the bank’s collateral value is weakened by the financial deterioration of the borrower.
Doubtful	Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that make collection of the full contract amount highly improbable. Loans rated in this category are most likely to cause the bank to have a loss due to a collateral shortfall or a negative capital position.

The following presents loans by the Company’s commercial loans by credit quality indicators, by class (in thousands):



	Commercial and industrial		Commercial real estate		Total
March 31, 2014
Pass	$	137,353	$	929,467	$	1,066,820
Special mention	1,118		23,004		24,122
Substandard	5,223		56,976		62,199
Doubtful	414		445		859
Total	$	144,108	$	1,009,892	$	1,154,000

December 31, 2013
Pass	$	158,000	$	958,186	$	1,116,186
Special mention	648		20,072		20,720
Substandard	5,416		62,139		67,555
Doubtful	420		469		889
Total	$	164,484	$	1,040,866	$	1,205,350

The following table presents the Company's non-commercial loans by payment performance, by class (in thousands):



	Performing		Non-Performing		Total
March 31, 2014
Residential real estate	$	1,213,245	$	1,540	$	1,214,785
Home equity - junior lien	141,830		99		141,929
Consumer	42,319		1		42,320
DDA overdrafts	4,001		—		4,001
Total	$	1,401,395	$	1,640	$	1,403,035

December 31, 2013
Residential real estate	$	1,204,331	$	2,819	$	1,207,150
Home equity - junior lien	143,112		278		143,390
Consumer	46,353		49		46,402
DDA overdrafts	3,900		5		3,905
Total	$	1,397,696	$	3,151	$	1,400,847

Aging Analysis of Accruing and Non-Accruing Loans

Interest income on loans is accrued and credited to operations based upon the principal amount outstanding, using methods that generally result in level rates of return. Loan origination fees, and certain direct costs, are deferred and amortized as an adjustment to the yield over the term of the loan. The accrual of interest generally is discontinued when a loan becomes 90 days past due as to principal or interest for all loan types. However, any loan may be placed on non-accrual if the Company receives information that indicates a borrower is unable to meet the contractual terms of their respective loan agreement. Other indicators considered for placing a loan on non-accrual status include the borrower’s involvement in bankruptcies, foreclosures, repossessions, litigation and any other situation resulting in doubt as to whether full collection of contractual principal and interest is attainable. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the net realizable value of collateral exceeds the principal balance and related accrued interest, and the loan is in the process of collection.

Generally for all loan classes, interest income during the period the loan is non-performing is recorded on a cash basis after recovery of principal is reasonably assured. Cash payments received on nonperforming loans are typically applied directly against the outstanding principal balance until the loan is fully repaid. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Generally, all loan types are considered past due when the contractual terms of a loan are not met and the borrower is 30 days or more past due on a payment. Furthermore, residential and home equity loans are generally subject to charge-off when the loan becomes 120 days past due, depending on the estimated fair value of the collateral less cost to dispose, versus the outstanding loan balance. Commercial loans are generally charged off when the loan becomes 120 days past due. Open-end consumer loans are generally charged off when the loan becomes 180 days past due.

A loan acquired and accounted for under ASC Topic 310-30 is reported as an accruing loan and a performing asset provided that the loan is performing in accordance with the initial expectations. The loan would be considered non-performing if the loan's performance deteriorates below the initial expectations.

The following presents an aging analysis of the Company’s accruing and non-accruing loans, by class, as of March 31, 2014 and December 31, 2013 (in thousands):



	Originated Loans
	March 31, 2014
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,108,719	$	3,328	$	672	$	118	$	—	$	1,188	$	1,114,025
Home equity - junior lien	141,097		552		56		30		—		69		141,804
Commercial and industrial	126,118		77		—		—		—		134		126,329
Commercial real estate	821,681		534		255		—		—		12,812		835,282
Consumer	31,156		53		10		—		—		—		31,219
DDA overdrafts	3,804		195		2		—		—		—		4,001
Total	$	2,232,575	$	4,739	$	995	$	148	$	—	$	14,203	$	2,252,660

	Acquired Loans
	March 31, 2014
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	99,713	$	768	$	45	$	—	$	—	$	234	$	100,760
Home equity - junior lien	104		18		3		—		—		—		125
Commercial and industrial	15,812		83		44		—		—		1,840		17,779
Commercial real estate	166,504		610		167		283		2,729		4,317		174,610
Consumer	10,704		379		17		1		—		—		11,101
DDA overdrafts	—		—		—		—		—		—		—
Total	$	292,837	$	1,858	$	276	$	284	$	2,729	$	6,391	$	304,375

	Total Loans
	March 31, 2014
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,208,432	$	4,096	$	717	$	118	$	—	$	1,422	$	1,214,785
Home equity - junior lien	141,201		570		59		30		—		69		141,929
Commercial and industrial	141,930		160		44		—		—		1,974		144,108
Commercial real estate	988,185		1,144		422		283		2,729		17,129		1,009,892
Consumer	41,860		432		27		1		—		—		42,320
DDA overdrafts	3,804		195		2		—		—		—		4,001
Total	$	2,525,412	$	6,597	$	1,271	$	432	$	2,729	$	20,594	$	2,557,035



	Originated Loans
	December 31, 2013
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,096,911	$	4,123	$	495	$	231	$	—	$	1,905	$	1,103,665
Home equity - junior lien	141,967		880		—		42		—		236		143,125
Commercial and industrial	144,197		—		—		—		—		79		144,276
Commercial real estate	835,908		668		—		—		—		13,097		849,673
Consumer	32,647		172		7		4		—		—		32,830
DDA overdrafts	3,511		374		15		5		—		—		3,905
Total	$	2,255,141	$	6,217	$	517	$	282	$	—	$	15,317	$	2,277,474

	Acquired Loans
	December 31, 2013
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	101,789	$	842	$	172	$	—	$	—	$	682	$	103,485
Home equity - junior lien	265		—		—		—		—		—		265
Commercial and industrial	18,253		—		80		—		—		1,875		20,208
Commercial real estate	176,018		2,772		273		109		7,534		4,487		191,193
Consumer	12,876		622		29		45		—		—		13,572
DDA overdrafts	—		—		—		—		—		—		—
Total	$	309,201	$	4,236	$	554	$	154	$	7,534	$	7,044	$	328,723

	Total Loans
	December 31, 2013
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,198,700	$	4,965	$	667	$	231	$	—	$	2,587	$	1,207,150
Home equity - junior lien	142,232		880		—		42		—		236		143,390
Commercial and industrial	162,450		—		80		—		—		1,954		164,484
Commercial real estate	1,011,926		3,440		273		109		7,534		17,584		1,040,866
Consumer	45,523		794		36		49		—		—		46,402
DDA overdrafts	3,511		374		15		5		—		—		3,905
Total	$	2,564,342	$	10,453	$	1,071	$	436	$	7,534	$	22,361	$	2,606,197

The following presents the Company’s impaired loans, by class, as of March 31, 2014 and December 31, 2013 (in thousands). The difference between the unpaid principal balance and the recorded investment generally reflects amounts that have been previously charged-off.



	March 31, 2014						December 31, 2013
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Residential real estate	$	456	$	456	$	—	$	459	$	459	$	—
Home equity - junior liens	297		297		—		298		298		—
Commercial and industrial	—		—		—		—		—		—
Commercial real estate	8,273		9,064		—		8,421		8,361		—
Consumer	—		—		—		—		—		—
DDA overdrafts	—		—		—		—		—		—
Total	$	9,026	$	9,817	$	—	$	9,178	$	9,118	$	—

With an allowance recorded
Residential real estate	$	—	$	—	$	—	$	—	$	—	$	—
Home equity - junior liens	—		—		—		—		—		—
Commercial and industrial	—		—		—		—		—		—
Commercial real estate	2,675		6,330		533		3,416		3,416		880
Consumer	—		—		—		—		—		—
DDA overdrafts	—		—		—		—		—		—
Total	$	2,675	$	6,330	$	533	$	3,416	$	3,416	$	880

The following table presents information related to the average recorded investment and interest income recognized on the Company’s impaired loans, by class (in thousands):



	For the three months ended
	March 31, 2014				March 31, 2013
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Residential real estate	$	456	$	—	$	—	$	—
Home equity - junior liens	297		—		—		—
Commercial and industrial	—		—		—		—
Commercial real estate	8,815		5		10,340		—
Consumer	—		—		—		—
DDA overdrafts	—		—		—		—
Total	$	9,568	$	5	$	10,340	$	—

With an allowance recorded
Residential real estate	$	—	$	—	$	—	$	—
Home equity - junior liens	—		—		—		—
Commercial and industrial	—		—		—		—
Commercial real estate	2,706		30		3,137		—
Consumer	—		—		—		—
DDA overdrafts	—		—		—		—
Total	$	2,706	$	30	$	3,137	$	—

Approximately $0.1 million and $0.1 million of interest income would have been recognized during the three months ended March 31, 2014 and 2013, if such loans had been current in accordance with their original terms. There were no commitments to provide additional funds on non-accrual, impaired or other potential problem loans at March 31, 2014.

Loan Modifications

The Company’s policy on loan modifications typically does not allow for modifications that would be considered a concession from the Company. However, when there is a modification, the Company evaluates each modification to determine if the modification constitutes a troubled debt restructuring (“TDR”) in accordance with ASU 2011-2, whereby a modification of a loan would be considered a TDR when both of the following conditions are met: (1) a borrower is experiencing financial difficulty and (2) the modification constitutes a concession. When determining whether the borrower is experiencing financial difficulties, the Company reviews whether the debtor is currently in payment default on any of its debt or whether it is probable that the debtor would be in payment default in the foreseeable future without the modification. Other indicators of financial difficulty include whether the debtor has declared or is in the process of declaring bankruptcy, the debtor’s ability to continue as a going concern, or the debtor’s projected cash flow to service its debt (including principal and interest) in accordance with the contractual terms for the foreseeable future, without a modification.

During the third quarter of 2012, regulatory guidance was clarified to require loans to be accounted for as collateral-dependent loans when borrowers have filed Chapter 7 bankruptcy, the debt has been discharged by the bankruptcy court and the borrower has not reaffirmed the debt. The filing of bankruptcy is deemed to be evidence that the borrower is in financial difficulty and the discharge of the debt by the bankruptcy court is deemed to be a concession granted to the borrower. The impact on the allowance for loan losses of this reclassification was insignificant. Prior to this reclassification, the Company's TDRs were insignificant.

The following tables set forth the Company’s TDRs (in thousands):



	March 31, 2014						December 31, 2013
			Non-						Non-
	Accruing		Accruing		Total		Accruing		Accruing		Total
Commercial and industrial	$	84	$	—	$	84	$	88	$	—	$	88
Commercial real estate	1,854		—		1,854		1,783		—		1,783
Residential real estate	18,666		274		18,940		18,651		1,693		20,344
Home equity	2,852		14		2,866		2,859		14		2,873
Consumer	—		—		—		—		—		—
	$	23,456	$	288	$	23,744	$	23,381	$	1,707	$	25,088



	New TDRs					New TDRs
	For the three months ended					For the three months ended
	March 31, 2014					March 31, 2013
		Pre		Post			Pre		Post
		Modification		Modification			Modification		Modification
		Outstanding		Outstanding			Outstanding		Outstanding
	Number of	Recorded		Recorded		Number of	Recorded		Recorded
	Contracts	Investment		Investment		Contracts	Investment		Investment
Commercial and industrial	—	$	—	$	—	—	$	—	$	—
Commercial real estate	—	—		—		1	1,071		1,071
Residential real estate	7	351		351		9	853		853
Home equity	4	116		116		17	1,075		1,075
Consumer	—	—		—		—	—		—
	11	$	467	$	467	27	$	2,999	$	2,999