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 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 table summarizes the activity in the allowance for loan loss, by portfolio segment, for the nine months ended September 30, 2014 and 2013 (in thousands). The following table 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 September 30, 2014 and December 31, 2013 (in thousands).



	Commercial &		Commercial		Residential						DDA
	Industrial		Real Estate		Real Estate		Home equity		Consumer		Overdrafts		Total
Nine months ended September 30, 2014
Allowance for loan loss
Beginning balance	$	1,139	$	10,775	$	6,057	$	1,672	$	77	$	855	$	20,575
Charge-offs	330		1,665		1,348		288		171		1,052		4,854
Recoveries	85		94		91		—		172		654		1,096
Provision	564		402		2,159		107		10		293		3,535
Provision for acquired loans	135		—		—		—		—		—		135
Ending balance	$	1,593	$	9,606	$	6,959	$	1,491	$	88	$	750	$	20,487

Nine months ended September 30, 2013
Allowance for loan loss
Beginning balance	$	498	$	10,440	$	5,229	$	1,699	$	81	$	862	$	18,809
Charge-offs	772		803		1,598		278		326		1,102		4,879
Recoveries	51		669		137		—		242		674		1,773
Provision	1,460		201		2,481		268		79		414		4,903
Ending balance	$	1,237	$	10,507	$	6,249	$	1,689	$	76	$	848	$	20,606

As of September 30, 2014
Allowance for loan loss
Evaluated for impairment:
Individually	$	—	$	247	$	—	$	—	$	—	$	—	$	247
Collectively	1,551		8,705		6,923		1,491		88		750		19,508
Acquired with deteriorated
credit quality	42		654		36		—		—		—		732
Total	$	1,593	$	9,606	$	6,959	$	1,491	$	88	$	750	$	20,487

Loans
Evaluated for impairment:
Individually	$	—	$	6,115	$	451	$	297	$	—	$	—	$	6,863
Collectively	128,726		1,014,641		1,273,230		144,241		40,918		3,618		2,605,374
Acquired with deteriorated
credit quality	1,736		13,837		381		2,427		124		—		18,505
Total	$	130,462	$	1,034,593	$	1,274,062	$	146,965	$	41,042	$	3,618	$	2,630,742

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	146,318		1,020,657		1,201,894		145,025		46,292		3,905		2,564,091
Acquired with deteriorated
credit quality	1,984		24,554		2,097		767		110		—		29,512
Total	$	148,302	$	1,057,048	$	1,204,450	$	146,090	$	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.
(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 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 table presents loans by the Company’s commercial loans by credit quality indicators, by class (in thousands):



	Commercial and industrial		Commercial real estate		Total
September 30, 2014
Pass	$	116,498	$	967,581	$	1,084,079
Special mention	654		19,134		19,788
Substandard	12,900		47,443		60,343
Doubtful	410		435		845
Total	$	130,462	$	1,034,593	$	1,165,055

December 31, 2013
Pass	$	141,818	$	974,368	$	1,116,186
Special mention	648		20,072		20,720
Substandard	5,416		62,139		67,555
Doubtful	420		469		889
Total	$	148,302	$	1,057,048	$	1,205,350

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



	Performing		Non-Performing		Total
September 30, 2014
Residential real estate	$	1,271,767	$	2,295	$	1,274,062
Home equity - junior lien	146,689		276		146,965
Consumer	41,001		41		41,042
DDA overdrafts	3,617		1		3,618
Total	$	1,463,074	$	2,613	$	1,465,687

December 31, 2013
Residential real estate	$	1,201,631	$	2,819	$	1,204,450
Home equity - junior lien	145,812		278		146,090
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 table presents an aging analysis of the Company’s accruing and non-accruing loans, by class, as of September 30, 2014 and December 31, 2013 (in thousands):



	Originated Loans
	September 30, 2014
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,176,782	$	4,428	$	683	$	164	$	—	$	2,131	$	1,184,188
Home equity - junior lien	143,460		590		25		136		—		127		144,338
Commercial and industrial	114,963		188		—		—		—		90		115,241
Commercial real estate	859,813		938		—		—		—		9,270		870,021
Consumer	32,994		46		12		—		—		—		33,052
DDA overdrafts	3,025		590		2		1		—		—		3,618
Total	$	2,331,037	$	6,780	$	722	$	301	$	—	$	11,618	$	2,350,458

	Acquired Loans
	September 30, 2014
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	89,373	$	406	$	95	$	—	$	—	$	—	$	89,874
Home equity - junior lien	2,612		2		—		13		—		—		2,627
Commercial and industrial	13,572		3		8		86		—		1,552		15,221
Commercial real estate	157,412		1,477		85		393		1,016		4,189		164,572
Consumer	7,802		145		2		16		—		25		7,990
DDA overdrafts	—		—		—		—		—		—		—
Total	$	270,771	$	2,033	$	190	$	508	$	1,016	$	5,766	$	280,284

	Total Loans
	September 30, 2014
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,266,155	$	4,834	$	778	$	164	$	—	$	2,131	$	1,274,062
Home equity - junior lien	146,072		592		25		149		—		127		146,965
Commercial and industrial	128,535		191		8		86		—		1,642		130,462
Commercial real estate	1,017,225		2,415		85		393		1,016		13,459		1,034,593
Consumer	40,796		191		14		16		—		25		41,042
DDA overdrafts	3,025		590		2		1		—		—		3,618
Total	$	2,601,808	$	8,813	$	912	$	809	$	1,016	$	17,384	$	2,630,742




	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	128,015		—		—		—		—		79		128,094
Commercial real estate	852,090		668		—		—		—		13,097		865,855
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	$	99,089	$	842	$	172	$	—	$	—	$	682	$	100,785
Home equity - junior lien	2,965		—		—		—		—		—		2,965
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	$	1,196,000	$	4,965	$	667	$	231	$	—	$	2,587	$	1,204,450
Home equity - junior lien	144,932		880		—		42		—		236		146,090
Commercial and industrial	146,268		—		80		—		—		1,954		148,302
Commercial real estate	1,028,108		3,440		273		109		7,534		17,584		1,057,048
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 table presents the Company’s impaired loans, by class, as of September 30, 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.



	September 30, 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	$	451	$	451	$	—	$	459	$	459	$	—
Home equity - junior liens	297		297		—		298		298		—
Commercial and industrial	—		—		—		—		—		—
Commercial real estate	4,718		4,718		—		8,421		8,361		—
Consumer	—		—		—		—		—		—
DDA overdrafts	—		—		—		—		—		—
Total	$	5,466	$	5,466	$	—	$	9,178	$	9,118	$	—

With an allowance recorded
Residential real estate	$	—	$	—	$	—	$	—	$	—	$	—
Home equity - junior liens	—		—		—		—		—		—
Commercial and industrial	—		—		—		—		—		—
Commercial real estate	1,397		1,397		247		3,416		3,416		880
Consumer	—		—		—		—		—		—
DDA overdrafts	—		—		—		—		—		—
Total	$	1,397	$	1,397	$	247	$	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 nine months ended
	September 30, 2014				September 30, 2013
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Residential real estate	$	453	$	—	$	464	$	—
Home equity - junior liens	297		—		297		—
Commercial and industrial	—		—		—		—
Commercial real estate	7,329		4		9,200		24
Consumer	—		—		—		—
DDA overdrafts	—		—		—		—
Total	$	8,079	$	4	$	9,961	$	24

With an allowance recorded
Residential real estate	$	—	$	—	$	—	$	—
Home equity - junior liens	—		—		—		—
Commercial and industrial	—		—		—		—
Commercial real estate	1,837		30		3,277		—
Consumer	—		—		—		—
DDA overdrafts	—		—		—		—
Total	$	1,837	$	30	$	3,277	$	—

Approximately $0.3 million and $0.4 million of interest income would have been recognized during the nine months ended September 30, 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 September 30, 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.

Regulatory guidance requires 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 following tables set forth the Company’s TDRs (in thousands):



	September 30, 2014						December 31, 2013
			Non-						Non-
	Accruing		Accruing		Total		Accruing		Accruing		Total
Commercial and industrial	$	77	$	—	$	77	$	88	$	—	$	88
Commercial real estate	2,269		—		2,269		1,783		—		1,783
Residential real estate	17,833		207		18,040		18,651		1,693		20,344
Home equity	2,821		—		2,821		2,859		14		2,873
Consumer	—		—		—		—		—		—
	$	23,000	$	207	$	23,207	$	23,381	$	1,707	$	25,088



	New TDRs					New TDRs
	For the nine months ended					For the nine months ended
	September 30, 2014					September 30, 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	—	$	—	$	—	1	$	91	$	91
Commercial real estate	1	432		432		3	1,567		1,567
Residential real estate	26	2,049		2,049		30	2,808		2,808
Home equity	8	203		203		12	323		323
Consumer	—	—		—		—	—		—
	35	$	2,684	$	2,684	46	$	4,789	$	4,789