LOAN LOSS ALLOWANCE

Activity in the allowance for loan losses for the three months ended March 31, 2018 and 2017 was as follows:



	At or for the three months ended March 31, 2018
Business Activities Loans (In thousands)	Commercial real estate		Commercial and industrial loans		Residential mortgages			Consumer		Total
Balance at beginning of period	$	16,843	$	13,850	$	9,420		$	5,807	$	45,920
Charged-off loans	106		890		—			940		1,936
Recoveries on charged-off loans	23		44		—			74		141
Provision/(releases) for loan losses	1,081		225		(822		)	2,668		3,152
Balance at end of period	$	17,841	$	13,229	$	8,598		$	7,609	$	47,277



	At or for the three months ended March 31, 2017
Business Activities Loans (In thousands)	Commercial real estate			Commercial and industrial loans		Residential mortgages		Consumer		Total
Balance at beginning of period	$	16,498		$	9,447	$	7,805	$	5,479	$	39,229
Charged-off loans	124			1,270		235		687		2,316
Recoveries on charged-off loans	58			16		15		86		175
Provision/(releases) for loan losses	(152		)	3,657		278		592		4,375
Balance at end of period	$	16,280		$	11,850	$	7,863	$	5,470	$	41,463



	At or for the three months ended March 31, 2018
Acquired Loans (In thousands)	Commercial real estate		Commercial and industrial loans		Residential mortgages		Consumer		Total
Balance at beginning of period	$	3,856	$	1,125	$	598	$	335	$	5,914
Charged-off loans	740		155		431		529		1,855
Recoveries on charged-off loans	6		29		25		40		100
Provision for loan losses	873		244		854		452		2,423
Balance at end of period	$	3,995	$	1,243	$	1,046	$	298	$	6,582



	At or for the three months ended March 31, 2017
Acquired Loans (In thousands)	Commercial real estate		Commercial and industrial loans		Residential mortgages		Consumer		Total
Balance at beginning of period	$	2,303	$	1,164	$	766	$	536	$	4,769
Charged-off loans	577		436		143		151		1,307
Recoveries on charged-off loans	10		55		39		55		159
Provision for loan losses	392		271		44		13		720
Balance at end of period	$	2,128	$	1,054	$	706	$	453	$	4,341

The following tables present a summary of the allowance for loan losses as of March 31, 2018 and December 31, 2017:



	At March 31, 2018
Business Activities Loans (In thousands)	Commercial real estate		Commercial and industrial loans		Residential mortgages		Consumer		Total
Individually evaluated for impairment	174		296		137		2		609
Collectively evaluated for impairment	17,667		12,933		8,461		7,607		46,668
Total	$	17,841	$	13,229	$	8,598	$	7,609	$	47,277



	At December 31, 2017
Business Activities Loans (In thousands)	Commercial real estate	Commercial and industrial loans	Residential mortgages	Consumer	Total
Individually evaluated for impairment	229	66	130	35	460
Collectively evaluated for impairment	16,614	13,784	9,290	5,772	45,460
Total	16,843	13,850	9,420	5,807	45,920



	At March 31, 2018
Acquired Loans (In thousands)	Commercial real estate		Commercial and industrial loans		Residential mortgages		Consumer		Total
Individually evaluated for impairment	41		3		506		30		580
Collectively evaluated for impairment	3,954		1,240		540		268		6,002
Total	$	3,995	$	1,243	$	1,046	$	298	$	6,582



	At December 31, 2017
Acquired Loans (In thousands)	Commercial real estate	Commercial and industrial loans	Residential mortgages	Consumer	Total
Individually evaluated for impairment	56	1	9	45	111
Collectively evaluated for impairment	3,800	1,124	589	290	5,803
Total	3,856	1,125	598	335	5,914

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 credit problems 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 annually, 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, the Company's 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 an eleven grade internal loan rating system for each of its acquired commercial real estate, construction and commercial loans 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 (Loss Contingencies) 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 a 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 calculated reserve allowance. If necessary, the Company books a 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 March 31, 2018, the allowance for loan losses related to acquired loans under ASC 310-30 and ASC 310-20 was $6.6 million using the above mentioned criteria.

The following tables present the Company’s loans by risk rating at March 31, 2018 and December 31, 2017:

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)	March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017
Grade:
Pass	$	255,835	$	269,206	$	342,683	$	214,289	$	1,627,063	$	1,687,256	$	2,225,581	$	2,170,751
Special mention	—		—		2,064		504		47,909		12,999		49,973		13,503
Substandard	—		—		433		2,290		5,516		31,163		5,949		33,453
Total	$	255,835	$	269,206	$	345,180	$	217,083	$	1,680,488	$	1,731,418	$	2,281,503	$	2,217,707

Commercial and Industrial Loans

Credit Risk Profile by Creditworthiness Category



	Total comm. and industrial loans
(In thousands)	March 31, 2018		December 31, 2017
Grade:
Pass	$	1,168,102	$	1,156,240
Special mention	21,668		12,806
Substandard	3,517		11,123
Doubtful	2,355		2,400
Total	$	1,195,642	$	1,182,569

Residential Mortgages

Credit Risk Profile by Internally Assigned Grade



	1-4 family				Construction				Total residential mortgages
(In thousands)	March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017
Grade:
Pass	$	1,897,584	$	1,805,596	$	6,121	$	5,177	$	1,903,705	$	1,810,773
Special mention	968		242		—		—		968		242
Substandard	2,040		2,186		—		—		2,040		2,186
Total	$	1,900,592	$	1,808,024	$	6,121	$	5,177	$	1,906,713	$	1,813,201

Consumer Loans

Credit Risk Profile Based on Payment Activity



	Home equity				Auto and other				Total consumer loans
(In thousands)	March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017
Performing	$	288,496	$	293,327	$	606,064	$	602,313	$	894,560	$	895,640
Nonperforming	2,598		1,627		1,662		1,454		4,260		3,081
Total	$	291,094	$	294,954	$	607,726	$	603,767	$	898,820	$	898,721

Acquired Loans

Commercial Real Estate

Credit Risk Profile by Creditworthiness Category



	Construction				Single and multi-family				Real Estate				Total commercial real estate
(In thousands)	March 31,2018		December 31, 2017		March 31,2018		December 31, 2017		March 31,2018		December 31, 2017		March 31,2018		December 31, 2017
Grade:
Pass	$	83,117	$	76,611	$	191,691	$	203,624	$	628,186	$	684,846	$	902,994	$	965,081
Special mention	8,351		—		5,121		603		64,632		22,070		78,104		22,673
Substandard	—		8,354		228		1,855		3,908		49,072		4,136		59,281
Total	$	91,468	$	84,965	$	197,040	$	206,082	$	696,726	$	755,988	$	985,234	$	1,047,035

Commercial and Industrial Loans

Credit Risk Profile by Creditworthiness Category



	Total comm. and industrial loans
(In thousands)	March 31, 2018		December 31, 2017
Grade:
Pass	$	604,890	$	606,922
Special mention	16,884		1,241
Substandard	1,558		13,207
Total	$	623,332	$	621,370

Residential Mortgages

Credit Risk Profile by Internally Assigned Grade



	1-4 family				Construction				Total residential mortgages
(In thousands)	March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017
Grade:
Pass	$	266,514	$	281,160	$	204	$	233	$	266,718	$	281,393
Special mention	4,640		2,704		—		—		4,640		2,704
Substandard	3,736		5,509		—		—		3,736		5,509
Total	$	274,890	$	289,373	$	204	$	233	$	275,094	$	289,606

Consumer Loans

Credit Risk Profile Based on Payment Activity



	Home equity				Auto and other				Total consumer loans
(In thousands)	March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017
Performing	$	107,768	$	113,262	$	100,575	$	113,510	$	208,343	$	226,772
Nonperforming	1,251		1,965		485		392		1,736		2,357
Total	$	109,019	$	115,227	$	101,060	$	113,902	$	210,079	$	229,129

The following table summarizes information about total loans rated Special Mention or lower as of March 31, 2018 and December 31, 2017. 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.



	March 31, 2018						December 31, 2017
(In thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Non-Accrual	$	18,121	$	11,166	$	29,287	$	15,659	$	7,240	$	22,899
Substandard Accruing	39,344		81,849		121,193		36,846		73,412		110,258
Total Classified	57,465		93,015		150,480		52,505		80,652		133,157
Special Mention	34,267		18,210		52,477		28,387		26,802		55,189
Total Criticized	$	91,732	$	111,225	$	202,957	$	80,892	$	107,454	$	188,346