ALLOWANCE FOR LOAN LOSSES

Management systematically monitors the loan portfolio and the appropriateness 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 in excess of $1 million are selected at least annually for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the appropriateness of the allowance. Due to the nature of commercial lending, evaluation of the appropriateness 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 (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 (in thousands).



	Commercial and industrial			Commercial real estate			Residential real estate			Home equity			Consumer			DDA overdrafts			Total
December 31, 2015
Allowance for loan loss
Beginning balance	$	1,582		$	8,921		$	7,208		$	1,495		$	85		$	859		$	20,150
Charge-offs	(5,051		)	(580		)	(1,144		)	(312		)	(210		)	(1,414		)	(8,711		)
Recoveries	74			366			199			—			186			792			1,617
Provision	6,113			(929		)	515			280			36			420			6,435
Provision for acquired loans with deteriorated credit quality	553			—			—			—			—			—			553
Ending balance	$	3,271		$	7,778		$	6,778		$	1,463		$	97		$	657		$	20,044

December 31, 2014
Allowance for loan loss
Beginning balance	$	1,139		$	10,775		$	6,057		$	1,672		$	77		$	855		$	20,575
Charge-offs	(323		)	(1,925		)	(1,762		)	(309		)	(188		)	(1,415		)	(5,922		)



Recoveries	89		113			187		—		204			850		1,443
Provision	394		(42		)	2,726		132		(8		)	569		3,771
Provision for acquired loans with deteriorated credit quality	$	283	$	—		$	—	$	—	$	—		$	—	283
Ending balance	$	1,582	$	8,921		$	7,208	$	1,495	$	85		$	859	$	20,150

As of December 31, 2015
Allowance for loan loss
Evaluated for impairment:
Individually	$	—	$	—		$	—	$	—	$	—		$	—	$	—
Collectively	3,267		6,966			6,777		1,451		97			657		19,215
Acquired with deteriorated credit quality	4		812			1		12		—			—		829
Total	$	3,271	$	7,778		$	6,778	$	1,463	$	97		$	657	$	20,044

Loans
Evaluated for impairment:
Individually	$	2,349	$	5,399		$	437	$	297	$	—		$	—	$	8,482
Collectively	163,209		1,110,307			1,382,325		145,041		35,997			3,361		2,840,240
Acquired with deteriorated credit quality	329		12,121			371		1,698		86			—		14,605
Total	$	165,887	$	1,127,827		$	1,383,133	$	147,036	$	36,083		$	3,361	$	2,863,327

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	139,862		1,009,241			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	$	140,548	$	1,028,831		$	1,294,576	$	145,604	$	39,705		$	2,802	$	2,652,066

Credit Quality Indicators

All non-commercial loans are evaluated based on payment history. All commercial loans within the portfolio are subject to internal risk grading. The Company’s internal risk ratings for commercial loans are: Exceptional, Good, Acceptable, Pass/Watch, 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 table presents the Company's commercial loans by credit quality indicators, by class (in thousands):



	Commercial and industrial		Commercial real estate		Total
December 31, 2015
Pass	$	157,211	$	1,070,752	$	1,227,963
Special mention	4,099		20,942		25,041
Substandard	4,539		36,133		40,672
Doubtful	38		—		38
Total	$	165,887	$	1,127,827	$	1,293,714

December 31, 2014
Pass	$	128,812	$	970,585	$	1,099,397
Special mention	761		15,103		15,864
Substandard	10,575		42,691		53,266
Doubtful	400		452		852
Total	$	140,548	$	1,028,831	$	1,169,379

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



	Performing		Non-Performing		Total
December 31, 2015
Residential real estate	$	1,382,715	$	418	$	1,383,133
Home equity	147,013		23		147,036
Consumer	36,049		34		36,083
DDA overdrafts	3,361		—		3,361
Total	$	1,569,138	$	475	$	1,569,613

December 31, 2014
Residential real estate	$	1,292,012	$	2,564	$	1,294,576
Home equity	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

The following presents an aging analysis of the Company’s accruing and non-accruing loans, by class (in thousands). The purchased credit-impaired loan column represents the purchased credit-impaired loans that the Company acquired that are contractually past due; however, are still performing in accordance with the Company's initial expectations.



	Originated Loans
	December 31, 2015
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,290,312	$	4,648	$	805	$	418	$	—	$	2,038	$	1,298,221
Home equity	142,697		306		65		22		—		136		143,226
Commercial and industrial	106,003		43		—		19		—		2,389		108,454
Commercial real estate	946,611		568		211		—		—		7,353		954,743
Consumer	31,894		71		2		34		—		—		32,001
DDA overdrafts	3,048		310		3		—		—		—		3,361
Total	$	2,520,565	$	5,946	$	1,086	$	493	$	—	$	11,916	$	2,540,006

	Acquired Loans
	December 31, 2015
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	83,292	$	613	$	127	$	—	$	—	$	880	$	84,912
Home equity	3,796		12		—		2		—		—		3,810
Commercial and industrial	56,979		98		—		—		—		356		57,433
Commercial real estate	168,588		194		—		—		506		3,796		173,084
Consumer	3,992		83		7		—		—		—		4,082
DDA overdrafts	—		—		—		—		—		—		—
Total	$	316,647	$	1,000	$	134	$	2	$	506	$	5,032	$	323,321

	Total Loans
	December 31, 2015
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,373,604	$	5,261	$	932	$	418	$	—	$	2,918	$	1,383,133
Home equity	146,493		318		65		24		—		136		147,036
Commercial and industrial	162,982		141		—		19		—		2,745		165,887
Commercial real estate	1,115,199		762		211		—		506		11,149		1,127,827
Consumer	35,886		154		9		34		—		—		36,083
DDA overdrafts	3,048		310		3		—		—		—		3,361
Total	$	2,837,212	$	6,946	$	1,220	$	495	$	506	$	16,948	$	2,863,327



	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	142,624		561		155		30		—		68		143,438
Commercial and industrial	128,857		100		—		210		—		78		129,245
Commercial real estate	869,530		479		—		—		—		7,330		877,339
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	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	144,788		563		155		30		—		68		145,604
Commercial and industrial	138,980		243		—		210		—		1,115		140,548
Commercial real estate	1,014,251		1,371		210		—		1,270		11,729		1,028,831
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 presents the Company’s impaired loans, by class (in thousands):



	December 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	$	437	$	437	$	—	$	449	$	449	$	—
Home equity	297		297		—		297		297		—
Commercial and industrial	2,349		7,547		—		—		—		—
Commercial real estate	5,399		8,768		—		4,631		4,631		—
Consumer	—		—		—		—		—		—
DDA overdrafts	—		—		—		—		—		—
Total	$	8,482	$	17,049	$	—	$	5,377	$	5,377	$	—

With an allowance recorded
Residential real estate	$	—	$	—	$	—	$	—	$	—	$	—
Home equity	—		—		—		—		—		—
Commercial and industrial	—		—		—		—		—		—
Commercial real estate	—		—		—		1,392		1,392		252
Consumer	—		—		—		—		—		—
DDA overdrafts	—		—		—		—		—		—
Total	$	—	$	—	$	—	$	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 year ended
	December 31, 2015				December 31, 2014
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Residential real estate	$	441	$	—	$	452	$	—
Home equity	296		—		297		—
Commercial and industrial	2,913		—		—		—
Commercial real estate	4,869		4		6,657		17
Consumer	—		—		—		—
DDA overdrafts	—		—		—		—
Total	$	8,519	$	4	$	7,406	$	17

With an allowance recorded
Residential real estate	$	—	$	—	$	—	$	—
Home equity	—		—		—		—
Commercial and industrial	—		—		—		—
Commercial real estate	1,012		—		1,725		128
Consumer	—		—		—		—
DDA overdrafts	—		—		—		—
Total	$	1,012	$	—	$	1,725	$	128

If the Company's non-accrual and impaired loans had been current in accordance with their original terms, approximately $0.8 million, $0.5 million and $0.6 million of interest income would have been recognized during the years ended December 31, 2015, 2014 and 2013, respectively. There were no commitments to provide additional funds on non-accrual, impaired or other potential problem loans at December 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):



	December 31, 2015						December 31, 2014
			Non-						Non-
	Accruing		Accruing		Total		Accruing		Accruing		Total
Commercial and industrial	$	58	$	—	$	58	$	73	$	—	$	73
Commercial real estate	1,746		—		1,746		2,263		—		2,263
Residential real estate	17,796		191		17,987		17,946		545		18,491
Home equity	2,659		34		2,693		2,673		15		2,688
Consumer	—		—		—		—		—		—
	$	22,259	$	225	$	22,484	$	22,955	$	560	$	23,515



	New TDRs					New TDRs
	For the year ended					For the year ended
	December 31, 2015					December 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	—	—		—		1	428		428
Residential real estate	38	2,969		2,969		35	2,381		2,381
Home equity	13	361		361		10	211		211
Consumer	—	—		—		—	—		—
	51	$	3,330	$	3,330	46	$	3,020	$	3,020