LOAN LOSS ALLOWANCE

Activity in the allowance for loan losses for 2016, 2015, and 2014 was as follows:

Business Activities Loans



(In thousands) 2016	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Unallocated		Total
Balance at beginning of year	$	14,508	$	7,317	$	7,566	$	4,956	$	227	$	34,574
Charged-off loans	2,127		4,620		2,036		1,722		—		10,505
Recoveries on charged-off loans	243		123		159		267		—		792
Provision for loan losses	3,781		6,551		2,063		1,946		27		14,368
Balance at end of year	$	16,405	$	9,371	$	7,752	$	5,447	$	254	$	39,229
Individually evaluated for impairment	158		264		136		156		—		714
Collectively evaluated	16,247		9,107		7,616		5,291		254		38,515
Total	$	16,405	$	9,371	$	7,752	$	5,447	$	254	$	39,229

Business Activities Loans



(In thousands) 2015	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer			Unallocated		Total
Balance at beginning of year	$	14,690	$	5,206	$	6,836	$	5,928		$	135	$	32,795
Charged-off loans	6,865		2,358		1,215		1,183			—		11,621
Recoveries on charged-off loans	164		169		141		285			—		759
Provision for loan losses	6,519		4,300		1,804		(74		)	92		12,641
Balance at end of year	$	14,508	$	7,317	$	7,566	$	4,956		$	227	$	34,574
Individually evaluated for impairment	149		21		153		103			—		426
Collectively evaluated	14,359		7,296		7,413		4,853			227		34,148
Total	$	14,508	$	7,317	$	7,566	$	4,956		$	227	$	34,574

Business Activities Loans



(In thousands) 2014	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Unallocated		Total
Balance at beginning of year	$	13,705	$	5,173	$	6,937	$	3,644	$	68	$	29,527
Charged-off loans	4,207		2,500		1,455		1,308		—		9,470
Recoveries on charged-off loans	9		193		186		285		—		673
Provision for loan losses	5,183		2,340		1,168		3,307		67		12,065
Balance at end of year	$	14,690	$	5,206	$	6,836	$	5,928	$	135	$	32,795
Individually evaluated for impairment	922		—		155		66		—		1,143
Collectively evaluated	13,768		5,206		6,681		5,862		135		31,652
Total	$	14,690	$	5,206	$	6,836	$	5,928	$	135	$	32,795

Acquired Loans



(In thousands) 2016	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Unallocated		Total
Balance at beginning of year	$	1,903	$	1,330	$	976	$	525	$	—	$	4,734
Charged-off loans	977		1,095		829		620		—		3,521
Recoveries on charged-off loans	61		266		144		91		—		562
Provision for loan losses	1,316		663		475		540		—		2,994
Balance at end of year	$	2,303	$	1,164	$	766	$	536	$	—	$	4,769
Individually evaluated for impairment	250		60		11		111		—		432
Purchased credit-impaired loans	—		—		—		—		—		—
Collectively evaluated	2,053		1,104		755		425		—		4,337
Total	$	2,303	$	1,164	$	766	$	536	$	—	$	4,769

Acquired Loans



(In thousands) 2015	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Unallocated		Total
Balance at beginning of year	$	790	$	1,093	$	615	$	369	$	—	$	2,867
Charged-off loans	681		752		642		992		—		3,067
Recoveries on charged-off loans	418		289		64		78		—		849
Provision for loan losses	1,376		700		939		1,070		—		4,085
Balance at end of year	$	1,903	$	1,330	$	976	$	525	$	—	$	4,734
Individually evaluated for impairment	43		—		30		25		—		98
Purchased credit-impaired loans	42		—		—		—		—		42
Collectively evaluated	1,818		1,330		946		500		—		4,594
Total	$	1,903	$	1,330	$	976	$	525	$	—	$	4,734

Acquired Loans



(In thousands) 2014	Commercial real estate			Commercial and industrial		Residential mortgages		Consumer		Unallocated		Total
Balance at beginning of year	$	2,339		$	597	$	625	$	235	$	—	$	3,796
Charged-off loans	1,477			510		1,141		1,255		—		4,383
Recoveries on charged-off loans	261			35		179		76		—		551
Provision for loan losses	(333		)	971		952		1,313		—		2,903
Balance at end of year	$	790		$	1,093	$	615	$	369	$	—	$	2,867
Individually evaluated for impairment	48			—		48		75		—		171
Purchased credit-impaired loans	—			—		—		—		—		—
Collectively evaluated	742			1,093		567		294		—		2,696
Total	$	790		$	1,093	$	615	$	369	$	—	$	2,867

Credit Quality Information

Business Activities Loans Credit Quality Analysis

The Company monitors the credit quality of its portfolio by using internal risk ratings that are based on regulatory guidance. Loans that are given a Pass rating are not considered a problem credit. Loans that are classified as Special Mention loans are considered to have potential weaknesses and are evaluated closely by management. Substandard and non-accruing loans are loans for which a definitive weakness has been identified and which may make full collection of contractual cash flows questionable. Doubtful loans are those with identified weaknesses that make full collection of contractual cash flows, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

For commercial credits, the Company assigns an internal risk rating at origination and reviews the rating annual, semiannually, or quarterly depending on the risk rating. The rating is also reassessed at any point in time when management becomes aware of information that may affect the borrower’s ability to fulfill their obligations.

The Company risk rates its residential mortgages, including 1-4 family and residential construction loans, based on a three rating system: Pass, Special Mention, and Substandard. Loans that are current within 59 days are rated Pass. Residential mortgages that are 60-89 days delinquent are rated Special Mention. Loans delinquent for 90 days or greater are rated Substandard and generally placed on non-accrual status. Home equity loans are risk rated based on the same rating system as the Company’s residential mortgages.

Ratings for other consumer loans, including auto loans, are based on a two rating system. Loans that are current within 119 days are rated Performing while loans delinquent for 120 days or more are rated Non-performing. Other consumer loans are placed on non-accrual at such time as they become Non-performing.

Acquired Loans Credit Quality Analysis

Upon acquiring a loan portfolio, our internal loan review function assigns risk ratings to the acquired loans, utilizing the same methodology as it does with business activities loans. This may differ from the risk rating policy of the predecessor bank. Loans which are rated Substandard or worse according to the rating process outlined below are deemed to be credit impaired loans accounted for under ASC 310-30, regardless of whether they are classified as performing or non-performing.

The Bank utilizes a loan risk rating system for acquired loans consistent with loans originated from business activities, as outlined in the Credit Quality Information section of this Note. The ratings system is similar to loans originated through business activities.

The Company subjects loans that do not meet the ASC 310-30 criteria to ASC 450-20 by collectively evaluating these loans for an allowance for loan loss. The Company applies a methodology similar to the methodology prescribed for business activities loans, which includes the application of environmental factors to each category of loans. The methodology to collectively evaluate the acquired loans outside the scope of ASC 310-30 includes the application of a number of environmental factors that reflect management’s best estimate of the level of incremental credit losses that might be recognized given current conditions. This is reviewed as part of the allowance for loan loss adequacy analysis. As the loan portfolio matures and environmental factors change, the loan portfolio will be reassessed each quarter to determine an appropriate reserve allowance.

Additionally, the Company considers the need for an additional reserve for acquired loans accounted for outside of the scope of ASC 310-30 under ASC 310-20. At acquisition date, the Bank determined a fair value mark with credit and interest rate components. Under the Company’s model, the impairment evaluation process involves comparing the carrying value of acquired loans, including the entire unamortized premium or discount, to the recorded reserve allowance. If necessary, the Company books an additional reserve to account for shortfalls identified through this calculation. Fair value marks are not bifurcated when evaluating for impairment.

A decrease in the expected cash flows in subsequent periods requires the establishment of an allowance for loan losses at that time for ASC 310-30 loans. At year-end 2016, the allowance for loan losses related to acquired loans under ASC 310-30 and ASC 310-20 was $4.8 million using the above mentioned criteria. The Company presented several tables within this footnote separately for business activity loans and acquired loans in order to distinguish the credit performance of the acquired loans from the business activity loans.

The following tables present the Company’s loans by risk rating at year-end 2016 and 2015:

Business Activities Loans

Commercial Real Estate

Credit Risk Profile by Creditworthiness Category



	Construction				Single and multi-family				Real Estate				Total commercial real estate
(In thousands)	2016		2015		2016		2015		2016		2015		2016		2015
Grade:
Pass	$	253,302	$	208,138	$	189,310	$	212,900	$	1,434,762	$	1,155,770	$	1,877,374	$	1,576,808
Special mention	—		—		334		—		5,827		3,449		6,161		3,449
Substandard	—		2,058		2,175		1,923		40,598		49,716		42,773		53,697
Doubtful	—		—		—		—		36		73		36		73
Total	$	253,302	$	210,196	$	191,819	$	214,823	$	1,481,223	$	1,209,008	$	1,926,344	$	1,634,027

Commercial and Industrial Loans

Credit Risk Profile by Creditworthiness Category



	Asset based lending				Other				Total comm. and industrial
(In thousands)	2016		2015		2016		2015		2016		2015
Grade:
Pass	$	321,270	$	331,253	$	569,704	$	455,710	$	890,974	$	786,963
Special mention	—		—		123		24,578		123		24,578
Substandard	—		—		13,825		15,691		13,825		15,691
Doubtful	—		—		3,180		—		3,180		—
Total	$	321,270	$	331,253	$	586,832	$	495,979	$	908,102	$	827,232

Residential Mortgages

Credit Risk Profile by Internally Assigned Grade



	1-4 family				Construction				Total residential mortgages
(In thousands)	2016		2015		2016		2015		2016		2015
Grade:
Pass	$	1,578,913	$	1,449,073	$	11,178	$	26,704	$	1,590,091	$	1,475,777
Special mention	701		857		—		—		701		857
Substandard	4,179		4,303		—		—		4,179		4,303
Total	$	1,583,793	$	1,454,233	$	11,178	$	26,704	$	1,594,971	$	1,480,937

Consumer Loans

Credit Risk Profile Based on Payment Activity



	Home equity				Auto and other				Total consumer
(In thousands)	2016		2015		2016		2015		2016		2015
Performing	$	310,846	$	305,562	$	477,416	$	310,777	$	788,262	$	616,339
Nonperforming	2,675		1,597		952		551		3,627		2,148
Total	$	313,521	$	307,159	$	478,368	$	311,328	$	791,889	$	618,487

Acquired Loans

Commercial Real Estate

Credit Risk Profile by Creditworthiness Category



	Construction				Single and multi-family				Real Estate				Total commercial real estate
(In thousands)	2016		2015		2016		2015		2016		2015		2016		2015
Grade:
Pass	$	33,461	$	42,176	$	119,414	$	32,796	$	496,562	$	324,614	$	649,437	$	399,586
Special mention	—		—		907		655		1,622		352		2,529		1,007
Substandard	746		1,298		5,351		3,332		32,031		20,517		38,128		25,147
Total	$	34,207	$	43,474	$	125,672	$	36,783	$	530,215	$	345,483	$	690,094	$	425,740

Commercial and Industrial Loans

Credit Risk Profile by Creditworthiness Category



	Asset based lending				Other				Total comm. and industrial
(In thousands)	2016		2015		2016		2015		2016		2015
Grade:
Pass	$	—	$	—	$	147,102	$	212,825	$	147,102	$	212,825
Special mention	—		—		1,260		487		1,260		487
Substandard	—		—		5,574		7,719		5,574		7,719
Total	$	—	$	—	$	153,936	$	221,031	$	153,936	$	221,031

Residential Mortgages

Credit Risk Profile by Internally Assigned Grade



	1-4 family				Construction				Total residential mortgages
(In thousands)	2016		2015		2016		2015		2016		2015
Grade:
Pass	$	294,983	$	329,375	$	804	$	1,351	$	295,787	$	330,726
Special mention	343		311		—		—		343		311
Substandard	2,029		3,061		—		—		2,029		3,061
Total	$	297,355	$	332,747	$	804	$	1,351	$	298,159	$	334,098

Consumer Loans

Credit Risk Profile Based on Payment Activity



	Home equity				Auto and other				Total consumer
(In thousands)	2016		2015		2016		2015		2016		2015
Performing	$	79,762	$	52,719	$	105,117	$	129,345	$	184,879	$	182,064
Nonperforming	517		727		895		893		1,412		1,620
Total	$	80,279	$	53,446	$	106,012	$	130,238	$	186,291	$	183,684

The following table summarizes information about total loans rated Special Mention or lower. The table below includes consumer loans that are Special Mention and Substandard accruing that are classified in the above table as performing based on payment activity.



	December 31, 2016						December 31, 2015
(In thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Non-Accrual	$	16,816	$	5,424	$	22,240	$	15,484	$	5,391	$	20,875
Substandard Accruing	51,125		44,177		95,302		60,549		32,560		93,109
Total Classified	67,941		49,601		117,542		76,033		37,951		113,984
Special Mention	7,479		4,323		11,802		29,036		2,259		31,295
Total Criticized	$	75,420	$	53,924	$	129,344	$	105,069	$	40,210	$	145,279