LOANS, ALLOWANCE FOR LOAN LOSSES, AND CREDIT QUALITY

The following tables bifurcate the amount of loans and the allowance allocated to each loan category based on the type of impairment analysis as of the periods indicated:



	September 30, 2016
	(Dollars in thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Home Equity		Other Consumer		Total
Financing receivables ending balance:
Collectively evaluated for impairment	$	853,245	$	2,759,158	$	376,245	$	114,085	$	609,854	$	958,999	$	11,244	$	5,682,830
Individually evaluated for impairment	$	4,468	$	18,077	$	—	$	969	$	14,193	$	5,904	$	418	$	44,029
Purchased credit impaired loans	$	—	$	10,425	$	—	$	—	$	8,638	$	209	$	2	$	19,274
Total loans by group	$	857,713	$	2,787,660	$	376,245	$	115,054	$	632,685	$	965,112	$	11,664	$	5,746,133	(1	)



	December 31, 2015
	(Dollars in thousands)
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Residential Real Estate		Home Equity		Other Consumer		Total
Financing receivables ending balance:
Collectively evaluated for impairment	$	838,129	$	2,619,294	$	373,064	$	95,225	$	614,014	$	921,563	$	14,427	$	5,475,716
Individually evaluated for impairment	$	5,147	$	22,986	$	304	$	1,021	$	15,405	$	5,989	$	558	$	51,410
Purchased credit impaired loans	$	—	$	11,154	$	—	$	—	$	9,187	$	251	$	3	$	20,595
Total loans by group	$	843,276	$	2,653,434	$	373,368	$	96,246	$	638,606	$	927,803	$	14,988	$	5,547,721	(1	)


(1)	The amount of net deferred fees on loans and net unamortized discounts on acquired loans not deemed to be purchased credit impaired ("PCI") included in the ending balance was $10.9 million at both September 30, 2016 and December 31, 2015 respectively.

The following tables summarize changes in allowance for loan losses by loan category for the periods indicated:



	Three Months Ended September 30, 2016
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction		Small Business			Residential Real Estate			Home Equity			Other Consumer			Total
Allowance for loan losses
Beginning balance	$	14,027		$	29,011		$	5,216	$	1,441		$	2,578		$	4,986		$	468		$	57,727
Charge-offs	(27		)	(341		)	—		(98		)	—			(154		)	(523		)	(1,143		)
Recoveries	63			124			—		28			130			24			302			671
Provision (benefit)	(189		)	609			117		113			(44		)	196			148			950
Ending balance	$	13,874		$	29,403		$	5,333	$	1,484		$	2,664		$	5,052		$	395		$	58,205



	Three Months Ended September 30, 2015
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction		Small Business			Residential Real Estate			Home Equity			Other Consumer			Total
Allowance for loan losses
Beginning balance	$	15,279		$	26,359		$	4,071	$	1,248		$	2,551		$	4,871		$	616		$	54,995
Charge-offs	(497		)	(28		)	—		(2		)	(40		)	(249		)	(349		)	(1,165		)
Recoveries	22			152			—		57			6			130			208			575
Provision (benefit)	(518		)	582			422		(20		)	75			128			131			800
Ending balance	$	14,286		$	27,065		$	4,493	$	1,283		$	2,592		$	4,880		$	606		$	55,205



	Nine Months Ended September 30, 2016
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Home Equity			Other Consumer			Total
Allowance for loan losses
Beginning balance	$	13,802		$	27,327		$	5,366		$	1,264		$	2,590		$	4,889		$	587		$	55,825
Charge-offs	(31		)	(365		)	—			(191		)	(27		)	(491		)	(1,152		)	(2,257		)
Recoveries	850			535			—			122			182			77			796			2,562
Provision (benefit)	(747		)	1,906			(33		)	289			(81		)	577			164			2,075
Ending balance	$	13,874		$	29,403		$	5,333		$	1,484		$	2,664		$	5,052		$	395		$	58,205
Ending balance: individually evaluated for impairment	$	134		$	355		$	—		$	2		$	1,156		$	223		$	23		$	1,893
Ending balance: collectively evaluated for impairment	$	13,740		$	29,048		$	5,333		$	1,482		$	1,508		$	4,829		$	372		$	56,312
	Nine Months Ended September 30, 2015
	(Dollars in thousands)
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Small Business			Residential Real Estate			Home Equity			Other Consumer			Total
Allowance for loan losses
Beginning balance	$	15,573		$	25,873		$	3,945		$	1,171		$	2,834		$	4,956		$	748		$	55,100
Charge-offs	(1,531		)	(236		)	—			(198		)	(242		)	(659		)	(922		)	(3,788		)
Recoveries	903			1,006			—			189			52			234			509			2,893
Provision (benefit)	(659		)	422			548			121			(52		)	349			271			1,000
Ending balance	$	14,286		$	27,065		$	4,493		$	1,283		$	2,592		$	4,880		$	606		$	55,205
Ending balance: individually evaluated for impairment	$	252		$	225		$	—		$	28		$	1,313		$	245		$	27		$	2,090
Ending balance: collectively evaluated for impairment	$	14,034		$	26,840		$	4,493		$	1,255		$	1,279		$	4,635		$	579		$	53,115

For the purpose of estimating the allowance for loan losses, management segregates the loan portfolio into the portfolio segments detailed in the above tables. Each of these loan categories possesses unique risk characteristics that are considered when determining the appropriate level of allowance for each segment. Some of the risk characteristics unique to each loan category include:

Commercial Portfolio

•

Commercial and Industrial: Loans in this category consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant and equipment, or real estate, if applicable. Repayment sources consist of primarily, operating cash flow, and secondarily, liquidation of assets.

•

Commercial Real Estate: Loans in this category consist of mortgage loans to finance investment in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties. Loans are typically written with amortizing payment structures. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources consist of primarily, cash flow from operating leases and rents, and secondarily, liquidation of assets.

•

Commercial Construction: Loans in this category consist of short-term construction loans, revolving and nonrevolving credit lines and construction/permanent loans to finance the acquisition, development and construction or rehabilitation of real property. Project types include residential 1-4 family, condominium and multi-family homes, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties. Loans may be written with nonamortizing or hybrid payment structures depending upon the type of project. Collateral values are determined based upon third party appraisals and evaluations. Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources vary depending upon the type of project and may consist of sale or lease of units, operating cash flows or liquidation of other assets.

•

Small Business: Loans in this category consist of revolving, term loan and mortgage obligations extended to sole proprietors and small businesses for purposes of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, or real estate if applicable. Repayment sources consist primarily of operating cash flows, and secondarily, liquidation of assets.

For the commercial portfolio it is the Company’s policy to obtain personal guarantees for payment from individuals holding material ownership interests of the borrowing entities.

Consumer Portfolio

•

Residential Real Estate: Residential mortgage loans held in the Company’s portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors such as current and expected income, employment status, current assets, other financial resources, credit history and the value of the collateral. Collateral consists of mortgage liens on 1-4 family residential properties. The Company does not originate or purchase sub-prime loans.

•

Home Equity: Home equity loans and lines are made to qualified individuals and are primarily secured by senior or junior mortgage liens on owner-occupied 1-4 family homes, condominiums or vacation homes. The home equity loan has a fixed rate and is billed in equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed in interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Additionally, the Company has the option of renewing the line of credit for additional draw periods. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan to value ratios within established policy guidelines.

•

Other Consumer: Other consumer loan products include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. These loans may be secured or unsecured.

Credit Quality

The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as delinquent, impaired, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. If a restructured loan meets certain criteria, it may be categorized as a troubled debt restructuring (“TDR”).

The Company reviews numerous credit quality indicators when assessing the risk in its loan portfolio. For the commercial portfolio, the Company utilizes a 10-point commercial risk-rating system, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated with a commercial loan transaction. Factors considered include industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral, and other considerations. The risk-ratings categories are defined as follows:

•

1- 6 Rating — Pass: Risk-rating grades “1” through “6” comprise those loans ranging from ‘Substantially Risk Free’ which indicates borrowers are of unquestioned credit standing and the pinnacle of credit quality, well established companies with a very strong financial condition, and loans fully secured by cash collateral, through ‘Acceptable Risk’, which indicates borrowers may exhibit declining earnings, strained cash flow, increasing or above average leverage and/or weakening market fundamentals that indicate below average asset quality, margins and market share. Collateral coverage is protective.


•	7 Rating — Potential Weakness: Borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Company’s asset and position. While potentially weak, currently these borrowers are marginally acceptable; no loss of principal or interest is envisioned.

•

8 Rating — Definite Weakness Loss Unlikely: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. Loan may be inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. However, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation.


•	9 Rating — Partial Loss Probable: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt with the added provision that the weaknesses make collection of the debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely.


•	10 Rating — Definite Loss: Borrowers deemed incapable of repayment. Loans to such borrowers are considered uncollectible and of such little value that continuation as active assets of the Company is not warranted.

The credit quality of the commercial loan portfolio is actively monitored and any changes in credit quality are reflected in risk-rating changes. Risk-ratings are assigned or reviewed for all new loans, when advancing significant additions to existing relationships (over $50,000), at least quarterly for all actively managed loans, and any time a significant event occurs, including at renewal of the loan.

The Company utilizes a comprehensive strategy for monitoring commercial credit quality. Borrowers are required to provide updated financial information at least annually which is carefully evaluated for any changes in credit quality. Larger loan relationships are subject to a full annual credit review by an experienced credit analysis group. Additionally, the Company retains an independent loan review firm to evaluate the credit quality of the commercial loan portfolio. The independent loan review process achieves significant penetration into the commercial loan portfolio and reports the results of these reviews to the Audit Committee of the Board of Directors on a quarterly basis.

The following table details the amount of outstanding principal balances relative to each of the risk-rating categories for the Company’s commercial portfolio:



		September 30, 2016
Category	Risk Rating	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Total
		(Dollars in thousands)
Pass	1 - 6	$	746,616	$	2,648,658	$	370,149	$	112,442	$	3,877,865
Potential weakness	7	83,166		86,408		4,516		1,965		176,055
Definite weakness-loss unlikely	8	27,909		50,162		1,580		619		80,270
Partial loss probable	9	22		2,432		—		28		2,482
Definite loss	10	—		—		—		—		—
Total		$	857,713	$	2,787,660	$	376,245	$	115,054	$	4,136,672



		December 31, 2015
Category	Risk Rating	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Small Business		Total
		(Dollars in thousands)
Pass	1 - 6	$	765,753	$	2,484,025	$	363,781	$	93,008	$	3,706,567
Potential weakness	7	54,375		112,022		7,678		2,444		176,519
Definite weakness-loss unlikely	8	23,073		56,276		1,909		732		81,990
Partial loss probable	9	75		1,111		—		62		1,248
Definite loss	10	—		—		—		—		—
Total		$	843,276	$	2,653,434	$	373,368	$	96,246	$	3,966,324

For the Company’s consumer portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. However, the Company does supplement performance data with current Fair Isaac Corporation (“FICO”) scores and Loan to Value (“LTV”) estimates. Current FICO data is purchased and appended to all consumer loans on a quarterly basis. In addition, automated valuation services and broker opinions of value are used to supplement original value data for the residential and home equity portfolios, periodically. The following table shows the weighted average FICO scores and the weighted average combined LTV ratios as of the periods indicated below:



	September 30, 2016		December 31, 2015
Residential portfolio
FICO score (re-scored)(1)	743		742
LTV (re-valued)(2)	62.7	%	61.4	%
Home equity portfolio
FICO score (re-scored)(1)	767		765
LTV (re-valued)(2)	56.2	%	55.8	%


(1)	The average FICO scores for September 30, 2016 are based upon rescores available from August 31, 2016 and origination score data for loans booked between September 1, 2016 and September 30, 2016. The average FICO scores for December 31, 2015 are based upon rescores available from November 30, 2015 and origination score data for loans booked between December 1, 2015 and December 31, 2015.

(2)

The combined LTV ratios for September 30, 2016 are based upon updated automated valuations as of March 31, 2015 and origination value data for loans booked between April 1, 2015 and September 30, 2016. The combined LTV ratios for December 31, 2015 are based upon updated automated valuations as of March 31, 2015 and actual score data for loans booked from April 1, 2015 through December 31, 2015. For home equity loans and lines in a subordinate lien position, the LTV data represents a combined LTV, taking into account the senior lien data for loans and lines.

Asset Quality

The Company’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. Delinquent loans are managed by a team of seasoned collection specialists and the Company seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. As a general rule, loans more than 90 days past due with respect to principal or interest are classified as nonaccrual loans. The Company also may use discretion regarding other loans over 90 days delinquent if the loan is well secured and/or in process of collection. Set forth is information regarding the Company’s nonperforming loans at the period shown:

The following table shows information regarding nonaccrual loans at the dates indicated:



	September 30, 2016		December 31, 2015
	(Dollars in thousands)
Commercial and industrial	$	3,065	$	3,699
Commercial real estate	7,399		7,856
Commercial construction	—		304
Small business	288		239
Residential real estate	7,684		8,795
Home equity	6,311		6,742
Other consumer	44		55
Total nonaccrual loans(1)	$	24,791	$	27,690


(1)	Included in these amounts were $5.9 million and $5.2 million of nonaccruing TDRs at September 30, 2016 and December 31, 2015, respectively.

The following table shows information regarding foreclosed residential real estate property at the dates indicated:



	September 30, 2016		December 31, 2015
	(Dollars in thousands)
Foreclosed residential real estate property held by the creditor	$	1,384	$	1,430
Recorded investment in mortgage loans collateralized by residential real estate property that are in the process of foreclosure	$	1,557	$	1,059

The following table shows the age analysis of past due financing receivables as of the dates indicated:



	September 30, 2016
	30-59 days			60-89 days			90 days or more			Total Past Due					Total Financing Receivables		Recorded Investment >90 Days and Accruing
	Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Current		Total Financing Receivables		Recorded Investment >90 Days and Accruing
	(Dollars in thousands)
Loan Portfolio
Commercial and industrial	5	$	436	2	$	205	6	$	2,584	13	$	3,225	$	854,488	$	857,713	$	—
Commercial real estate	6	3,396		9	2,200		8	3,772		23	9,368		2,778,292		2,787,660		—
Commercial construction	—	—		—	—		—	—		—	—		376,245		376,245		—
Small business	16	218		5	90		18	203		39	511		114,543		115,054		—
Residential real estate	13	2,621		11	1,692		27	4,222		51	8,535		624,150		632,685		—
Home equity	14	1,199		11	611		30	1,794		55	3,604		961,508		965,112		—
Other consumer (1)	250	230		19	32		15	11		284	273		11,391		11,664		2
Total	304	$	8,100	57	$	4,830	104	$	12,586	465	$	25,516	$	5,720,617	$	5,746,133	$	2



	December 31, 2015
	30-59 days			60-89 days			90 days or more			Total Past Due					Total Financing Receivables		Recorded Investment >90 Days and Accruing
	Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Current		Total Financing Receivables		Recorded Investment >90 Days and Accruing
	(Dollars in thousands)
Loan Portfolio
Commercial and industrial	9	$	399	4	$	1,021	8	$	3,039	21	$	4,459	$	838,817	$	843,276	$	—
Commercial real estate	19	7,349		6	1,627		13	4,458		38	13,434		2,640,000		2,653,434		—
Commercial construction	—	—		—	—		1	304		1	304		373,064		373,368		—
Small business	11	93		4	9		13	69		28	171		96,075		96,246		—
Residential real estate	20	3,119		11	2,049		19	3,433		50	8,601		630,005		638,606		—
Home equity	21	1,526		11	903		20	1,338		52	3,767		924,036		927,803		—
Other consumer (1)	297	231		12	65		13	25		322	321		14,667		14,988		—
Total	377	$	12,717	48	$	5,674	87	$	12,666	512	$	31,057	$	5,516,664	$	5,547,721	$	—

(1) Other consumer portfolio is inclusive of deposit account overdrafts recorded as loan balances.

Troubled Debt Restructurings

In the course of resolving nonperforming loans, the Bank may choose to restructure the contractual terms of certain loans. The Bank attempts to work out an alternative payment schedule with the borrower in order to avoid foreclosure actions. Any loans that are modified are reviewed by the Bank to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.

The following table shows the Company’s total TDRs and other pertinent information as of the dates indicated:



	September 30, 2016		December 31, 2015
	(Dollars in thousands)
TDRs on accrual status	$	27,644	$	32,849
TDRs on nonaccrual	5,910		5,225
Total TDRs	$	33,554	$	38,074
Amount of specific reserves included in the allowance for loan losses associated with TDRs	$	1,515	$	1,628
Additional commitments to lend to a borrower who has been a party to a TDR	$	1,097	$	972

The Company’s policy is to have any restructured loan which is on nonaccrual status prior to being modified remain on nonaccrual status for six months subsequent to being modified before management considers its return to accrual status. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. Additionally, loans classified as TDRs are adjusted to reflect the changes in value of the recorded investment in the loan, if any, resulting from the granting of a concession. For all residential loan modifications, the borrower must perform during a 90 day trial period before the modification is finalized.

The following table shows the modifications which occurred during the periods indicated and the change in the recorded investment subsequent to the modifications occurring:



	Three Months Ended					Nine Months Ended
	September 30, 2016					September 30, 2016
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)
	(Dollars in thousands)
Troubled debt restructurings
Commercial and industrial	—	$	—	$	—	7	$	528	$	528
Commercial real estate	3	986		986		9	2,329		2,329
Small business	1	59		59		3	168		168
Residential real estate	—	—		—		5	1,167		1,209
Home equity	4	328		328		8	632		632
Other consumer	—	—		—		5	107		107
Total	8	$	1,373	$	1,373	37	$	4,931	$	4,973



	Three Months Ended					Nine Months Ended
	September 30, 2015					September 30, 2015
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment (1)
	(Dollars in thousands)
Troubled debt restructurings
Commercial and industrial	1	$	100	$	100	10	$	1,153	$	1,153
Commercial real estate	1	653		653		6	2,963		2,963
Small business	2	103		103		7	269		269
Residential real estate	2	218		245		5	376		403
Home equity	1	36		36		4	251		251
Total	7	$	1,110	$	1,137	32	$	5,012	$	5,039


(1)	The post-modification balances represent the legal principal balance of the loan on the date of modification. These amounts may show an increase when modifications include a capitalization of interest.

The following table shows the Company’s post-modification balance of TDRs listed by type of modification as of the periods indicated:



	Three Months Ended September 30				Nine Months Ended September 30
	2016		2015		2016		2015
	(Dollars in thousands)				(Dollars in thousands)
Extended maturity	$	256	$	855	$	2,638	$	2,204
Adjusted interest rate	—		—		92		—
Combination rate and maturity	730		246		990		2,769
Court ordered concession	387		36		1,253		66
Total	$	1,373	$	1,137	$	4,973	$	5,039

The Company considers a loan to have defaulted when it reaches 90 days past due. The following table shows loans that have been modified during the past twelve months which have subsequently defaulted during the periods indicated:



	Three Months Ended September 30
	2016			2015
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Troubled debt restructurings that subsequently defaulted
Home equity	1	$	141	—	$	—
	1	$	141	—	$	—

	Nine Months Ended September 30
	2016			2015
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Troubled debt restructurings that subsequently defaulted
Commercial real estate	—	$	—	2	$	880
Commercial and industrial	—	—		3	339
Home equity	1	$	141	—	$	—
	1	$	141	5	$	1,219

All TDR loans are considered impaired and therefore are subject to a specific review for impairment. The impairment analysis appropriately discounts the present value of the anticipated cash flows by the loan’s contractual rate of interest in effect prior to the loan’s modification. The amount of impairment, if any, is recorded as a specific loss allocation to each individual loan in the allowance for loan losses. Commercial loans (commercial and industrial, commercial construction, commercial real estate and small business loans), residential loans, and home equity loans that have been classified as TDRs and which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. In such an instance, any shortfall between the value of the collateral and the carrying value of the loan is determined by measuring the recorded investment in the loan against the fair value of the collateral less costs to sell. The Company charges off the amount of any confirmed loan loss in the period when the loans, or portion of loans, are deemed uncollectible. Smaller balance consumer TDR loans are reviewed for performance to determine when a charge-off is appropriate.

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The tables below set forth information regarding the Company’s impaired loans by loan portfolio at the dates indicated:



	September 30, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded
Commercial and industrial	$	2,382	$	2,750	$	—
Commercial real estate	11,481		12,567		—
Small business	612		703		—
Residential real estate	4,226		4,399		—
Home equity	4,611		4,733		—
Other consumer	158		159		—
Subtotal	23,470		25,311		—
With an allowance recorded
Commercial and industrial	$	2,086	$	2,252	$	134
Commercial real estate	6,596		7,023		355
Small business	357		369		2
Residential real estate	9,967		10,968		1,156
Home equity	1,293		1,459		223
Other consumer	260		261		23
Subtotal	20,559		22,332		1,893
Total	$	44,029	$	47,643	$	1,893



	December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded
Commercial and industrial	$	2,613	$	3,002	$	—
Commercial real estate	12,008		13,128		—
Commercial construction	304		305		—
Small business	527		618		—
Residential real estate	3,874		4,033		—
Home equity	4,893		5,005		—
Other consumer	184		185		—
Subtotal	24,403		26,276		—
With an allowance recorded
Commercial and industrial	$	2,534	$	2,648	$	183
Commercial real estate	10,978		11,047		204
Small business	494		523		4
Residential real estate	11,531		12,652		1,278
Home equity	1,096		1,287		238
Other consumer	374		389		23
Subtotal	27,007		28,546		1,930
Total	$	51,410	$	54,822	$	1,930

The following tables set forth information regarding interest income recognized on impaired loans, by portfolio, for the periods indicated:



	Three Months Ended				Nine Months Ended
	September 30, 2016				September 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded
Commercial and industrial	$	2,444	$	16	$	2,584	$	48
Commercial real estate	11,549		115		11,775		348
Small business	646		5		679		18
Residential real estate	4,255		42		4,286		134
Home equity	4,616		45		4,677		138
Other consumer	162		3		168		9
Subtotal	23,672		226		24,169		695
With an allowance recorded
Commercial and industrial	$	2,097	$	4	$	2,135	$	13
Commercial real estate	6,854		42		6,977		126
Small business	367		6		384		17
Residential real estate	10,004		92		10,071		272
Home equity	1,299		13		1,310		36
Other consumer	265		2		272		6
Subtotal	20,886		159		21,149		470
Total	$	44,558	$	385	$	45,318	$	1,165



	Three Months Ended				Nine Months Ended
	September 30, 2015				September 30, 2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded
Commercial and industrial	$	2,080	$	11	$	2,204	$	41
Commercial real estate	13,876		89		14,433		337
Commercial construction	307		—		309		—
Small business	465		4		484		14
Residential real estate	3,566		42		3,601		123
Home equity	4,585		44		4,670		134
Other consumer	198		4		207		12
Subtotal	25,077		194		25,908		661
With an allowance recorded
Commercial and industrial	$	3,687	$	10	$	3,894	$	57
Commercial real estate	15,830		204		15,993		609
Small business	540		7		564		22
Residential real estate	11,698		106		11,764		358
Home equity	1,221		4		1,238		13
Other consumer	421		4		443		11
Subtotal	33,397		335		33,896		1,070
Total	$	58,474	$	529	$	59,804	$	1,731

Purchased Credit Impaired Loans

Certain loans acquired by the Company may have shown evidence of deterioration of credit quality since origination and it was therefore deemed unlikely that the Company would be able to collect all contractually required payments. As such, these loans were deemed to be PCI loans and the carrying value and prospective income recognition are predicated upon future cash flows expected to be collected. The following table displays certain information pertaining to PCI loans at the dates indicated:



	September 30, 2016		December 31, 2015
	(Dollars in thousands)
Outstanding balance	$	21,481	$	23,199
Carrying amount	$	19,274	$	20,595

The following table summarizes activity in the accretable yield for the PCI loan portfolio:



	Three Months Ended September 30						Nine Months Ended September 30
	2016			2015			2016			2015
	(Dollars in thousands)
Beginning balance	$	2,625		$	2,527		$	2,827		$	2,974
Acquisition	—			—			—			319
Accretion	(359		)	(592		)	(1,188		)	(2,138		)
Other change in expected cash flows (1)	213			278			744			978
Reclassification from nonaccretable difference for loans which have paid off (2)	—			218			96			298
Ending balance	$	2,479		$	2,431		$	2,479		$	2,431

(1) Represents changes in cash flows expected to be collected and resulting in increased interest income as a prospective yield adjustment over the remaining life of the loan(s).

(2) Results in increased interest income during the period in which the loan paid off at amount greater than originally expected.