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 three months ended March 31, 2015 and 2014 (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 March 31, 2015 and December 31, 2014 (in thousands).



	Commercial &			Commercial		Residential								DDA
	Industrial			Real Estate		Real Estate			Home equity			Consumer		Overdrafts			Total
Three months ended March 31, 2015
Allowance for loan loss
Beginning balance	$	1,582		$	8,921	$	7,208		$	1,495		$	85	$	859		$	20,150
Charge-offs	94			337		257			91			74		311			1,164
Recoveries	18			8		10			—			28		241			305
Provision	(624		)	1,073		(60		)	180			140		(67		)	642
Provision for acquired loans	246			—		—			—			—		—			246
Ending balance	$	1,128		$	9,665	$	6,901		$	1,584		$	179	$	722		$	20,179

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

As of March 31, 2015
Allowance for loan loss
Evaluated for impairment:
Individually	$	1,105		$	238	$	—	$	—	$	—	$	—	$	1,343
Collectively	18			8,910		6,835		1,584		179		722		18,248
Acquired with deteriorated
credit quality	5			517		66		—		—		—		588
Total	$	1,128		$	9,665	$	6,901	$	1,584	$	179	$	722	$	20,179

Loans
Evaluated for impairment:
Individually	$	2,859		$	5,961	$	446	$	296	$	—	$	—	$	9,562
Collectively	121,132			999,623		1,302,435		141,615		38,295		3,203		2,606,303
Acquired with deteriorated
credit quality	351			13,978		377		1,759		141		—		16,606
Total	$	124,342		$	1,019,562	$	1,303,258	$	143,670	$	38,436	$	3,203	$	2,632,471

As of December 31, 2014
Allowance for loan loss
Evaluated for impairment:
Individually	$	—		$	252	$	—	$	—	$	—	$	—	$	252
Collectively	1,540			7,898		7,208		1,429		85		859		19,019
Acquired with deteriorated
credit quality	42			771		—		66		—		—		879
Total	$	1,582		$	8,921	$	7,208	$	1,495	$	85	$	859	$	20,150

Loans
Evaluated for impairment:
Individually	$	—		$	6,023	$	449	$	297	$	—	$	—	$	6,769
Collectively	131,955			1,017,148		1,293,748		142,743		39,572		2,802		2,627,968
Acquired with deteriorated
credit quality	686			13,567		379		2,564		133		—		17,329
Total	$	132,641		$	1,036,738	$	1,294,576	$	145,604	$	39,705	$	2,802	$	2,652,066

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
March 31, 2015
Pass	$	112,978	$	957,139	$	1,070,117
Special mention	980		25,035		26,015
Substandard	10,384		37,343		47,727
Doubtful	—		45		45
Total	$	124,342	$	1,019,562	$	1,143,904

December 31, 2014
Pass	$	120,905	$	978,492	$	1,099,397
Special mention	761		15,103		15,864
Substandard	10,575		42,691		53,266
Doubtful	400		452		852
Total	$	132,641	$	1,036,738	$	1,169,379

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



	Performing		Non-Performing		Total
March 31, 2015
Residential real estate	$	1,300,714	$	2,544	$	1,303,258
Home equity - junior lien	143,577		93		143,670
Consumer	38,344		92		38,436
DDA overdrafts	3,203		—		3,203
Total	$	1,485,838	$	2,729	$	1,488,567

December 31, 2014
Residential real estate	$	1,292,012	$	2,564	$	1,294,576
Home equity - junior lien	145,506		98		145,604
Consumer	39,692		13		39,705
DDA overdrafts	2,802		—		2,802
Total	$	1,480,012	$	2,675	$	1,482,687

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 March 31, 2015 and December 31, 2014 (in thousands):



	Originated Loans
	March 31, 2015
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,211,870	$	3,876	$	371	$	79	$	—	$	2,213	$	1,218,409
Home equity - junior lien	140,763		471		71		1		—		92		141,398
Commercial and industrial	109,661		113		—		—		—		2,924		112,698
Commercial real estate	862,315		299		—		—		—		6,589		869,203
Consumer	32,565		44		—		78		—		—		32,687
DDA overdrafts	2,988		212		3		—		—		—		3,203
Total	$	2,360,162	$	5,015	$	445	$	158	$	—	$	11,818	$	2,377,598

	Acquired Loans
	March 31, 2015
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	82,971	$	1,400	$	226	$	166	$	—	$	86	$	84,849
Home equity - junior lien	2,186		86		—		—		—		—		2,272
Commercial and industrial	10,732		445		—		45		—		422		11,644
Commercial real estate	144,484		635		—		—		1,383		3,857		150,359
Consumer	5,599		120		16		14		—		—		5,749
DDA overdrafts	—		—		—		—		—		—		—
Total	$	245,972	$	2,686	$	242	$	225	$	1,383	$	4,365	$	254,873

	Total Loans
	March 31, 2015
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,294,841	$	5,276	$	597	$	245	$	—	$	2,299	$	1,303,258
Home equity - junior lien	142,949		557		71		1		—		92		143,670
Commercial and industrial	120,393		558		—		45		—		3,346		124,342
Commercial real estate	1,006,799		934		—		—		1,383		10,446		1,019,562
Consumer	38,164		164		16		92		—		—		38,436
DDA overdrafts	2,988		212		3		—		—		—		3,203
Total	$	2,606,134	$	7,701	$	687	$	383	$	1,383	$	16,183	$	2,632,471




	Originated Loans
	December 31, 2014
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,200,177	$	4,235	$	758	$	169	$	—	$	2,259	$	1,207,598
Home equity - junior lien	142,624		561		155		30		—		68		143,438
Commercial and industrial	120,950		100		—		210		—		78		121,338
Commercial real estate	877,437		479		—		—		—		7,330		885,246
Consumer	33,178		119		78		1		—		—		33,376
DDA overdrafts	2,483		317		2		—		—		—		2,802
Total	$	2,376,849	$	5,811	$	993	$	410	$	—	$	9,735	$	2,393,798

	Acquired Loans
	December 31, 2014
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	86,129	$	714	$	—	$	—	$	—	$	135	$	86,978
Home equity - junior lien	2,164		2		—		—		—		—		2,166
Commercial and industrial	10,123		143		—		—		—		1,037		11,303
Commercial real estate	144,721		892		210		—		1,270		4,399		151,492
Consumer	6,108		172		36		13		—		—		6,329
DDA overdrafts	—		—		—		—		—		—		—
Total	$	249,245	$	1,923	$	246	$	13	$	1,270	$	5,571	$	258,268

	Total Loans
	December 31, 2014
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,286,306	$	4,949	$	758	$	169	$	—	$	2,394	$	1,294,576
Home equity - junior lien	144,788		563		155		30		—		68		145,604
Commercial and industrial	131,073		243		—		210		—		1,115		132,641
Commercial real estate	1,022,158		1,371		210		—		1,270		11,729		1,036,738
Consumer	39,286		291		114		14		—		—		39,705
DDA overdrafts	2,483		317		2		—		—		—		2,802
Total	$	2,626,094	$	7,734	$	1,239	$	423	$	1,270	$	15,306	$	2,652,066

The following table presents the Company’s impaired loans, by class, as of March 31, 2015 and December 31, 2014 (in thousands). The difference between the unpaid principal balance and the recorded investment generally reflects amounts that have been previously charged-off.



	March 31, 2015						December 31, 2014
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Residential real estate	$	446	$	446	$	—	$	449	$	449	$	—
Home equity - junior liens	296		296		—		297		297		—
Commercial and industrial	—		—		—		—		—		—
Commercial real estate	4,594		5,033		—		4,631		4,631		—
Consumer	—		—		—		—		—		—
DDA overdrafts	—		—		—		—		—		—
Total	$	5,336	$	5,775	$	—	$	5,377	$	5,377	$	—

With an allowance recorded
Residential real estate	$	—	$	—	$	—	$	—	$	—	$	—
Home equity - junior liens	—		—		—		—		—		—
Commercial and industrial	2,859		2,859		1,105		—		—		—
Commercial real estate	1,367		4,296		238		1,392		1,392		252
Consumer	—		—		—		—		—		—
DDA overdrafts	—		—		—		—		—		—
Total	$	4,226	$	7,155	$	1,343	$	1,392	$	1,392	$	252

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, 2015				March 31, 2014
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Residential real estate	$	446	$	—	$	456	$	—
Home equity - junior liens	296		—		297		—
Commercial and industrial	—		—		—		—
Commercial real estate	4,612		5		8,815		5
Consumer	—		—		—		—
DDA overdrafts	—		—		—		—
Total	$	5,354	$	5	$	9,568	$	5

With an allowance recorded
Residential real estate	$	—	$	—	$	—	$	—
Home equity - junior liens	—		—		—		—
Commercial and industrial	2,859		—		—		—
Commercial real estate	1,383		10		2,706		30
Consumer	—		—		—		—
DDA overdrafts	—		—		—		—
Total	$	4,242	$	10	$	2,706	$	30

Approximately $0.2 million and $0.1 million of interest income would have been recognized during the three months ended March 31, 2015 and 2014, 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, 2015.

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):



	March 31, 2015						December 31, 2014
			Non-						Non-
	Accruing		Accruing		Total		Accruing		Accruing		Total
Commercial and industrial	$	70	$	—	$	70	$	73	$	—	$	73
Commercial real estate	1,894		—		1,894		2,263		—		2,263
Residential real estate	18,451		616		19,067		17,946		545		18,491
Home equity	2,726		15		2,741		2,673		15		2,688
Consumer	—		—		—		—		—		—
	$	23,141	$	631	$	23,772	$	22,955	$	560	$	23,515



	New TDRs					New TDRs
	For the three months ended					For the nine months ended
	March 31, 2015					March 31, 2014
		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	—	—		—		—	—		—
Residential real estate	17	1,405		1,405		7	351		351
Home equity	7	187		187		4	116		116
Consumer	—	—		—		—	—		—
	24	$	1,592	$	1,592	11	$	467	$	467