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, 2016 and 2015 (in thousands). The allocation of a portion of the allowance in one portfolio segment does not preclude its availability to absorb losses in other portfolio segments. 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, 2016 and December 31, 2015 (in thousands).



	Commercial &			Commercial			Residential									DDA
	Industrial			Real Estate			Real Estate			Home equity			Consumer			Overdrafts			Total
Three months ended March 31, 2016
Allowance for loan loss
Beginning balance	$	3,271		$	6,985		$	6,778		$	1,463		$	97		$	657		$	19,251
Charge-offs	(1		)	(302		)	(405		)	(106		)	(38		)	(318		)	(1,170		)
Recoveries	1			384			39			—			29			242			695
Provision for acquired loans	—			40			—			—			—			—			40
Provision	632			(703		)	347			45			5			173			499
Ending balance	$	3,903		$	6,404		$	6,759		$	1,402		$	93		$	754		$	19,315

Three months ended March 31, 2015
Allowance for loan loss
Beginning balance	$	1,582		$	8,845		$	7,208		$	1,495		$	85		$	859		$	20,074
Charge-offs	(94		)	(337		)	(257		)	(91		)	(74		)	(311		)	(1,164		)
Recoveries	18			8			10			—			28			241			305



Provision for acquired loans	—			246		—			—		—		—			246
Provision	(378		)	827		(60		)	180		140		(67		)	642
Ending balance	$	1,128		$	9,589	$	6,901		$	1,584	$	179	$	722		$	20,103

As of March 31, 2016
Allowance for loan loss
Evaluated for impairment:
Individually	$	—		$	—	$	—		$	—	$	—	$	—		$	—
Collectively	3,899			5,850		6,758			1,390		93		754			18,744
Acquired with deteriorated
credit quality	4			554		1			12		—		—			571
Total	$	3,903		$	6,404	$	6,759		$	1,402	$	93	$	754		$	19,315

Loans
Evaluated for impairment:
Individually	$	2,349		$	4,886	$	—		$	—	$	—	$	—		$	7,235
Collectively	162,878			1,120,311		1,395,301			140,985		34,647		2,825			2,856,947
Acquired with deteriorated
credit quality	322			10,428		369			1,709		107		—			12,935
Total	$	165,549		$	1,135,625	$	1,395,670		$	142,694	$	34,754	$	2,825		$	2,877,117

As of December 31, 2015
Allowance for loan loss
Evaluated for impairment:
Individually	$	—		$	—	$	—		$	—	$	—	$	—		$	—
Collectively	3,267			6,173		6,777			1,451		97		657			18,422
Acquired with deteriorated
credit quality	4			812		1			12		—		—			829
Total	$	3,271		$	6,985	$	6,778		$	1,463	$	97	$	657		$	19,251

Loans
Evaluated for impairment:
Individually	$	2,349		$	6,133	$	—		$	—	$	—	$	—		$	8,482
Collectively	162,662			1,109,327		1,382,762			145,338		35,997		3,361			2,839,447
Acquired with deteriorated
credit quality	329			12,121		371			1,698		86		—			14,605
Total	$	165,340		$	1,127,581	$	1,383,133		$	147,036	$	36,083	$	3,361		$	2,862,534

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



	Commercial and industrial		Commercial real estate		Total
March 31, 2016
Pass	$	157,275	$	1,079,256	$	1,236,531
Special mention	1,995		21,247		23,242
Substandard	6,279		34,892		41,171
Doubtful	—		230		230
Total	$	165,549	$	1,135,625	$	1,301,174

December 31, 2015
Pass	$	156,664	$	1,070,506	$	1,227,170
Special mention	4,099		20,942		25,041
Substandard	4,539		36,133		40,672
Doubtful	38		—		38
Total	$	165,340	$	1,127,581	$	1,292,921

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



	Performing		Non-Performing		Total
March 31, 2016
Residential real estate	$	1,392,531	$	3,139	$	1,395,670
Home equity	142,523		171		142,694
Consumer	34,754		—		34,754
DDA overdrafts	2,825		—		2,825
Total	$	1,572,633	$	3,310	$	1,575,943

December 31, 2015
Residential real estate	$	1,379,797	$	3,336	$	1,383,133
Home equity	146,877		159		147,036
Consumer	36,049		34		36,083
DDA overdrafts	3,361		—		3,361
Total	$	1,566,084	$	3,529	$	1,569,613

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 (in thousands):



	March 31, 2016
	Accruing
	Current		30-59 days		60-89 days		Over 90 days		Purchased-Credit Impaired		Non-accrual		Total
Residential real estate	$	1,387,649	$	4,330	$	553	$	161	$	—	$	2,977	$	1,395,670
Home equity	141,947		535		41		19		—		152		142,694
Commercial and industrial	162,239		145		198		—		—		2,967		165,549
Commercial real estate	1,123,769		1,094		380		45		619		9,718		1,135,625
Consumer	34,672		51		31		—		—		—		34,754
DDA overdrafts	2,312		172		341		—		—		—		2,825
Total	$	2,852,588	$	6,327	$	1,544	$	225	$	619	$	15,814	$	2,877,117

	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	162,435		141		—		19		—		2,745		165,340
Commercial real estate	1,114,953		762		211		—		506		11,149		1,127,581
Consumer	35,886		154		9		34		—		—		36,083
DDA overdrafts	3,048		310		3		—		—		—		3,361
Total	$	2,836,419	$	6,946	$	1,220	$	495	$	506	$	16,948	$	2,862,534

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



	March 31, 2016						December 31, 2015
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Residential real estate	$	—	$	—	$	—	$	—	$	—	$	—
Home equity	—		—		—		—		—		—
Commercial and industrial	2,349		7,547		—		2,349		7,547		—
Commercial real estate	4,886		7,125		—		6,133		9,502		—
Consumer	—		—		—		—		—		—
Total	$	7,235	$	14,672	$	—	$	8,482	$	17,049	$	—

With an allowance recorded:
Residential real estate	$	—	$	—	$	—	$	—	$	—	$	—
Home equity	—		—		—		—		—		—
Commercial and industrial	—		—		—		—		—		—
Commercial real estate	—		—		—		—		—		—
Consumer	—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	—

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):



	Three months ended March 31,
	2016				2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Residential real estate	$	—	$	—	$	—	$	—
Home equity	—		—		—		—
Commercial and industrial	2,349		—		—		—
Commercial real estate	5,358		4		5,354		5
Consumer	—		—		—		—
Total	$	7,707	$	4	$	5,354	$	5

With an allowance recorded:
Residential real estate	$	—	$	—	$	—	$	—
Home equity	—		—		—		—
Commercial and industrial	—		—		2,859		—
Commercial real estate	—		—		1,383		10
Consumer	—		—		—		—
Total	$	—	$	—	$	4,242	$	10

Approximately $0.2 million and $0.2 million of interest income would have been recognized during the three months ended March 31, 2016 and 2015, respectively, 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, 2016.

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 borrower is currently in payment default on any of its debt or whether it is probable that the borrower would be in payment default in the foreseeable future without the modification. Other indicators of financial difficulty include whether the borrower has declared or is in the process of declaring bankruptcy, the borrower’s ability to continue as a going concern, and the borrower’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, 2016						December 31, 2015
			Non-						Non-
	Accruing		Accruing		Total		Accruing		Accruing		Total
Commercial and industrial	$	54	$	—	$	54	$	58	$	—	$	58
Commercial real estate	523		—		523		1,746		—		1,746
Residential real estate	18,306		36		18,342		17,796		191		17,987
Home equity	2,878		—		2,878		2,659		34		2,693
Consumer	—		—		—		—		—		—
	$	21,761	$	36	$	21,797	$	22,259	$	225	$	22,484



	New TDRs
	Three months ended March 31,
	2016					2015
		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	8	741		741		17	1,405		1,405
Home equity	1	29		29		7	187		187
Consumer	—	—		—		—	—		—
	9	$	770	$	770	24	$	1,592	$	1,592