7. LOANS

The Company’s loan portfolio includes residential mortgage, commercial mortgage, commercial business, and consumer loan segments to customers. Residential mortgage loans include classes for 1- 4 family owner occupied and construction. Commercial mortgage loans include construction, single and multi-family, and commercial real estate classes. Commercial business loans include asset based lending loans and other commercial business loan classes. Consumer loans include home equity and other. A substantial portion of the loan portfolio is secured by real estate in western Massachusetts, southern Vermont, northeastern New York, and in the Bank’s New England lending areas. The ability of many of the Bank’s debtors to honor their contracts is dependent, among other things, on the economies and real estate markets in these areas.

Total loans include loans from business activities and loans acquired from business combinations. Loans from business combinations are those loans acquired from the acquisitions of Beacon, CBT, Legacy Bancorp, Inc., and Rome Bancorp, Inc.

Year-end loans consisted of the following:

	2012						2011
(In thousands)	Loans from Business Activities		Loans from Business Combinations		Total		Loans from Business Activities		Loans from Business Combinations		Total

Residential mortgages:
1-4 family	$	870,322	$	427,210	$	1,297,532	$	649,467	$	329,407	$	978,874
Construction	20,344		6,375		26,719		32,191		9,370		41,561
Total residential mortgages	890,666		433,585		1,324,251		681,658		338,777		1,020,435

Commercial mortgages:
Construction	150,694		17,131		167,825		117,492		6,726		124,218
Single and multi-family	43,332		80,488		123,820		89,401		16,398		105,799
Commercial real estate	768,867		353,032		1,121,899		746,545		179,679		926,224
Total commercial mortgages	962,893		450,651		1,413,544		953,438		202,803		1,156,241

Commercial business loans:
Asset based lending	255,265		2,830		258,095		151,065		2,206		153,271
Other commercial business loans	234,662		107,369		342,031		210,701		46,320		257,021
Total commercial business loans	489,927		110,199		600,126		361,766		48,526		410,292

Total commercial loans	1,452,820		560,850		2,013,670		1,315,204		251,329		1,566,533

Consumer loans:
Home equity	205,892		119,509		325,401		226,369		71,827		298,196
Other	76,258		249,074		325,332		39,020		32,386		71,406
Total consumer loans	282,150		368,583		650,733		265,389		104,213		369,602

Total loans	$	2,625,636	$	1,363,018	$	3,988,654	$	2,262,251	$	694,319	$	2,956,570

Total unamortized net costs and premiums included in the year-end total loans for historical loans were the following:

(In thousands)	2012		2011
Unamortized net loan origination costs	$	6,552	$	5,163
Unamortized net premium on purchased loans	4,055		251
Total unamortized net costs and premiums	$	10,607	$	5,414

The Company occasionally transfers a portion of its originated commercial loans to participating lending partners. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying consolidated balance sheets. The Company and its lending partners share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans, collects cash payments from the borrowers, remits payments (net of servicing fees), and disburses required escrow funds to relevant parties. At year-end 2012 and 2011, the Company was servicing loans for participants totaling $76.8 million and $86 million, respectively.

In 2012, the Company purchased loans aggregating $166.5 million and sold loans aggregating $780 million. In 2011, the Company did not purchase any loans and sold loans aggregating $75.2 million. Net gains on sales of loans were $11.8 million, $257 thousand, and $851 thousand for the years 2012, 2011, and 2010, respectively.

Most of the Company’s lending activity occurs within its primary markets in Western Massachusetts, Southern Vermont and Northeastern New York. Most of the loan portfolio is secured by real estate, including residential mortgages, commercial mortgages, and home equity loans. Year-end loans to operators of non-residential buildings totaled $493.5 million, or 12.4%, and $365 million, or 12.3% of total loans in 2012 and 2011, respectively. There were no other concentrations of loans related to any one industry in excess of 10% of total loans at year-end 2012 or 2011.

At year-end 2012, the Company had pledged loans totaling $87 million to the Federal Reserve Bank of Boston as collateral for certain borrowing arrangements. Also, residential first mortgage loans are subject to a blanket lien for FHLBB advances. See Note 12- Borrowings & Subordinated Notes.

At year-end 2012 and 2011, the Company’s commitments outstanding to related parties totaled $18.5 million and $34.3 million, respectively, and the loans outstanding against these commitments totaled $10.0 million and $33.4 million, respectively. Related parties include directors and executive officers of the Company and its subsidiaries and their respective affiliates in which they have a controlling interest, and immediate family members. For the years 2012 and 2011, all related party loans were performing. Year-end aggregate extensions of credit to one related party included a non-depository organization formed to finance and promote economic development within the New England region. The only relationship between this organization and the Company, in addition to the $8.0 million loan relationship, is that an Executive Officer of the Company serves as Chairman of the Board of this organization. In addition, the aforementioned Executive Officer serves as a Director and on the Finance Committee of a non-profit organization that provides educational and theatrical experience for children, adolescents and youth at risk. The Company originated $650,000 in loan commitments to that organization in 2012. These were new credit extensions in 2012.

The carrying amount of the acquired loans at December 31, 2012 totaled $1.4 billion. These loans consisted of loans determined to be impaired at the time of acquisition, which are accounted for in accordance with ASC Topic 310-30, with a carrying amount of $62 million and loans that were considered not impaired at the acquisition date with a carrying amount of $1.3 billion.

The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

(In thousands)	2012			2011
Balance at beginning of period	$	1,277		$	—
Acquisitions	11,814			3,553
Sales	—			(648		)
Reclassification from nonaccretable difference for loans with improved cash flows	—			—
Changes in expected cash flows that do not affect nonaccretable difference	—			—
Accretion	(4,844		)	(1,628		)
Balance at end of period	$	8,247		$	1,277

The following is a summary of past due loans at December 31, 2012 and 2011:

Loans from Business Activities

(in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Past Due > 90 days and Accruing
December 31, 2012
Residential mortgages:
1-4 family	$	4,105	$	1,291	$	8,061	$	13,457	$	856,865	$	870,322	$	1,563
Construction	—		210		48		258		20,086		20,344		48
Total	4,105		1,501		8,109		13,715		876,951		890,666		1,611
Commercial mortgages:
Construction	—		—		4,668		4,668		146,026		150,694		—
Single and multi-family	616		—		27		643		42,689		43,332		—
Commercial real estate	1,183		1,727		8,231		11,141		757,726		768,867		1,195
Total	1,799		1,727		12,926		16,452		946,441		962,893		1,195
Commercial business loans
Asset based lending	—		—		—		—		255,265		255,265		—
Other commercial business loans	745		372		3,427		4,544		230,118		234,662		159
Total	745		372		3,427		4,544		485,383		489,927		159
Consumer loans:
Home equity	828		300		1,856		2,984		202,908		205,892		424
Other	546		55		248		849		75,409		76,258		69
Total	1,374		355		2,104		3,833		278,317		282,150		493
Total	$	8,023	$	3,955	$	26,566	$	38,544	$	2,587,092	$	2,625,636	$	3,458

Loans from Business Activities

(in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Past Due > 90 days and Accruing
December 31, 2011
Residential mortgages:
1-4 family	$	2,045	$	877	$	11,479	$	14,401	$	635,066	$	649,467	$	5,123
Construction	—		—		—		—		32,191		32,191		—
Total	2,045		877		11,479		14,401		667,257		681,658		5,123
Commercial mortgages:
Construction	—		—		8,650		8,650		108,842		117,492		—
Single and multi-family	70		—		676		746		88,655		89,401		314
Commercial real estate	746		8,019		5,258		14,023		732,522		746,545		—
Total	816		8,019		14,584		23,419		930,019		953,438		314
Commercial business loans
Asset based lending	—		—		—		—		151,065		151,065		—
Other commercial business loans	369		781		1,156		2,306		208,395		210,701		178
Total	369		781		1,156		2,306		359,460		361,766		178
Consumer loans:
Home equity	430		257		1,692		2,379		223,990		226,369		—
Other	311		148		148		607		38,413		39,020		100
Total	741		405		1,840		2,986		262,403		265,389		100
Total	$	3,971	$	10,082	$	29,059	$	43,112	$	2,219,139	$	2,262,251	$	5,715

Loans from Business Combinations

(in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Past Due > 90 days and Accruing
December 31, 2012
Residential mortgages:
1-4 family	$	1,817	$	585	$	2,523	$	4,925	$	422,285	$	427,210	$	1,555
Construction	—		—		—		—		6,375		6,375		—
Total	1,817		585		2,523		4,925		428,660		433,585		1,555
Commercial mortgages:
Construction	—		—		1,056		1,056		16,075		17,131		1,056
Single and multi-family	194		1,328		746		2,268		78,220		80,488		746
Commercial real estate	1,532		2,024		11,062		14,618		338,414		353,032		10,176
Total	1,726		3,352		12,864		17,942		432,709		450,651		11,978
Commercial business loans:
Asset based lending	—		—		—		—		2,830		2,830		—
Other commercial business loans	422		577		2,177		3,176		104,193		107,369		1,764
Total	422		577		2,177		3,176		107,023		110,199		1,764
Consumer loans:
Home equity	1,689		169		89		1,947		117,562		119,509		52
Other	2,624		365		271		3,260		245,814		249,074		171
Total	4,313		534		360		5,207		363,376		368,583		223
Total	$	8,278	$	5,048	$	17,924	$	31,250	$	1,331,768	$	1,363,018	$	15,520

Loans from Business Combinations

(in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Past Due > 90 days and Accruing
December 31, 2011
Residential mortgages:
1-4 family	$	663	$	242	$	1,450	$	2,355	$	327,052	$	329,407	$	796
Construction	—		—		165		165		9,205		9,370		165
Total	663		242		1,615		2,520		336,257		338,777		961
Commercial mortgages:
Construction	—		—		606		606		6,120		6,726		606
Single and multi-family	—		—		703		703		15,695		16,398		703
Commercial real estate	68		102		1,923		2,093		177,586		179,679		1,913
Total	68		102		3,232		3,402		199,401		202,803		3,222
Commercial business loans:
Asset based lending	—		—		—		—		2,206		2,206		—
Other commercial business loans	349		235		258		842		45,478		46,320		245
Total	349		235		258		842		47,684		48,526		245
Consumer loans:
Home equity	284		—		75		359		71,468		71,827		—
Other	239		69		179		487		31,899		32,386		41
Total	523		69		254		846		103,367		104,213		41
Total	$	1,603	$	648	$	5,359	$	7,610	$	686,709	$	694,319	$	4,469

The following is summary information pertaining to non-accrual loans at year-end 2012 and 2011:

	2012						2011
(In thousands)	Loans from Business Activities		Loans from Business Combinations		Total		Loans from Business Activities		Loans from Business Combinations		Total
Residential mortgages:
1-4 family	$	6,498	$	968	$	7,466	$	6,356	$	654	$	7,010
Construction	—		—		—		—		—		—
Total	6,498		968		7,466		6,356		654		7,010

Commercial mortgages:
Construction	4,668		—		4,668		8,650		—		8,650
Single and multi-family	27		—		27		362		—		362
Other	7,036		886		7,922		5,259		9		5,268
Total	11,731		886		12,617		14,271		9		14,280

Commercial business loans:
Asset based lending	—		—		—		—		—		—
Other commercial business loans	3,268		413		3,681		977		13		990
Total	3,268		413		3,681		977		13		990

Consumer loans:
Home equity	1,432		37		1,469		1,692		75		1,767
Other	179		100		279		48		139		187
Total	1,611		137		1,748		1,740		214		1,954

Total non-accrual loans	$	23,108	$	2,404	$	25,512	$	23,344	$	890	$	24,234

Activity in the allowance for loan losses for 2012, 2011, and 2010 was as follows:

Loans from Business Activities

(In thousands)	Residential mortgages		Commercial mortgages		Commercial business		Consumer		Unallocated			Total
2012
Balance at beginning of year	$	3,150	$	22,095	$	4,540	$	2,203	$	(90	)	$	31,898
Charged-off loans	2,604		4,229		697		1,537		—			9,067
Recoveries on charged-off loans	103		52		96		165		—			416
Provision for loan losses	5,279		945		1,666		635		119			8,644
Balance at end of year	$	5,928	$	18,863	$	5,605	$	1,466	$	29		$	31,891
Individually evaluated for impairment	342		1,444		1,205		273		—			3,264
Collectively evaluated for impairment	5,586		17,419		4,400		1,193		29			28,627
Total	$	5,928	$	18,863	$	5,605	$	1,466	$	29		$	31,891

Loans receivable:
Balance at end of year
Individually evaluated for impairment	6,362		30,287		2,821		1,218					40,688
Collectively evaluated for impairment	884,304		932,606		487,106		280,932					2,584,948
Total	$	890,666	$	962,893	$	489,927	$	282,150				$	2,625,636

Loans from Business Activities

(In thousands)	Residential mortgages		Commercial mortgages		Commercial business			Consumer		Unallocated			Total
2011
Balance at beginning of year	$	3,077	$	19,461	$	6,038		$	2,099	$	1,223		$	31,898
Charged-off loans	1,322		4,047		1,443			884		—			7,696
Recoveries on charged-off loans	231		189		109			150		—			679
Provision for loan losses	1,164		6,492		(164		)	838		(1,313		)	7,017
Balance at end of year	$	3,150	$	22,095	$	4,540		$	2,203	$	(90	)	$	31,898
Individually evaluated for impairment	449		1,722		116			488		—			2,775
Collectively evaluated for impairment	2,701		20,373		4,424			1,715		(90		)	29,123
Loans acquired with deteriorated credit quality	—		—		—			—		—			—
Total	$	3,150	$	22,095	$	4,540		$	2,203	$	(90	)	$	31,898

Loans receivable:
Balance at end of year
Individually evaluated for impairment	5,655		34,074		564			1,190					41,483
Collectively evaluated for impairment	676,003		919,364		361,202			264,199					2,220,768
Total	$	681,658	$	953,438	$	361,766		$	265,389				$	2,262,251

Loans from Business Activities

(In thousands)	Residential mortgages		Commercial mortgages		Commercial business		Consumer		Unallocated		Total
2010
Balance at beginning of year	$	2,897	$	19,282	$	6,011	$	2,749	$	877	$	31,816
Charged-off loans	409		6,403		2,685		1,188		—		10,685
Recoveries on charged-off loans	213		794		1,094		140		—		2,241
Provision for loan losses	376		5,788		1,618		398		346		8,526
Balance at end of year	$	3,077	$	19,461	$	6,038	$	2,099	$	1,223	$	31,898
Individually evaluated for impairment	246		2,151		92		—		—		2,489
Collectively evaluated for impairment	2,831		17,310		5,946		2,099		1,223		29,409
Total	$	3,077	$	19,461	$	6,038	$	2,099	$	1,223	$	31,898

Loans receivable:
Balance at end of year
Individually evaluated for impairment	1,352		3,798		8,606		397				14,153
Collectively evaluated for impairment	643,621		921,775		277,481		285,132				2,128,009
Total	$	644,973	$	925,573	$	286,087	$	285,529			$	2,142,162

Loans from Business Combinations

(In thousands)	Residential mortgages		Commercial mortgages		Commercial business		Consumer		Unallocated			Total
2012
Balance at beginning of year	$	281	$	158	$	38	$	87	$	(18	)	$	546
Charged-off loans	43		—		—		340		—			383
Recoveries on charged-off loans	—		—		—		208		—			208
Provision for loan losses	271		232		58		359		26			946
Balance at end of year	$	509	$	390	$	96	$	314	$	8		$	1,317
Individually evaluated for impairment	55		—		—		—		—			55
Collectively evaluated for impairment	454		390		96		314		8			1,262
Total	$	509	$	390	$	96	$	314	$	8		$	1,317

Loans receivable:
Balance at end of year
Individually evaluated for impairment	371		886		—		—		—			1,257
Collectively evaluated for impairment	433,214		449,765		110,199		368,583		—			1,361,761
Total	$	433,585	$	450,651	$	110,199	$	368,583	$	—		$	1,363,018

Loans from Business Combinations

(In thousands)	Residential mortgages		Commercial mortgages		Commercial business		Consumer		Unallocated			Total
2011
Balance at beginning of year	$	—	$	—	$	—	$	—	$	—		$	—
Charged-off loans	—		—		—		—		—			—
Recoveries on charged-off loans	—		—		—		—		—			—
Provision for loan losses	281		158		38		87		(18		)	546
Balance at end of year	$	281	$	158	$	38	$	87	$	(18	)	$	546
Individually evaluated for impairment	—		—		—		—		—			—
Collectively evaluated for impairment	281		158		38		87		(18		)	546
Total	$	281	$	158	$	38	$	87	$	(18	)	$	546

Loans receivable:
Balance at end of year
Individually evaluated for impairment	—		—		—		—					—
Collectively evaluated for impairment	338,777		202,803		48,526		104,213					694,319
Total	$	338,777	$	202,803	$	48,526	$	104,213				$	694,319

The following is a summary of impaired loans at year-end 2012 and 2011 and for the years then ended:

Loans from Business Activities

	At December 31, 2012
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance:
Residential mortgages - 1-4 family	$	3,408	$	3,408	$	—
Commercial mortgages - construction	2,730		2,730		—
Commercial mortgages - single and multifamily	—		—		—
Commercial mortgages - real estate	3,450		3,450		—
Other commercial business loans	31		31		—
Consumer - home equity	602		602		—

With an allowance recorded:
Residential mortgages - 1-4 family	$	1,056	$	1,343	$	287
Commercial mortgages - construction	1,584		1,938		354
Commercial mortgages - single and multifamily	—		—		—
Commercial mortgages - real estate	2,019		3,109		1,090
Other commercial business loans	1,135		2,340		1,205
Consumer - home equity	209		482		273

Total
Residential mortgages	$	4,464	$	4,751	$	287
Commercial mortgages	9,783		11,227		1,444
Commercial business	1,166		2,371		1,205
Consumer	811		1,084		273
Total impaired loans	$	16,224	$	19,433	$	3,209

Loans Acquired from Business Combinations

	At December 31, 2012
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance:
Residential mortgages - 1-4 family	$	215	$	215	$	—
Commercial mortgages - real estate	886		886		—

With an allowance recorded:
Residential mortgages - 1-4 family	101		156		55

Total
Residential mortgages	$	316	$	371	$	55
Commercial mortgages	886		886		—
Total impaired loans	$	1,202	$	1,257	$	55

Loans from Business Activities

	At December 31, 2011
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance:
Residential mortgages - 1-4 family	$	2,546	$	2,546	$	—
Commercial mortgages - single and multifamily	326		326		—
Commercial mortgages - real estate	2,751		2,751		—
Consumer - home equity	308		308		—

With an allowance recorded:
Residential mortgages - 1-4 family	$	1,853	$	2,302	$	449
Commercial mortgages - construction	7,559		8,650		1,091
Commercial mortgages - real estate	1,373		2,004		631
Other commercial business loans	13		129		116
Consumer - home equity	357		845		488

Total
Residential mortgages	$	4,399	$	4,848	$	449
Commercial mortgages	12,009		13,731		1,722
Commercial business	13		129		116
Consumer	665		1,153		488
Total impaired loans	$	17,086	$	19,861	$	2,775

Loans Acquired from Business Combinations

	At December 31, 2011
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance:
Residential mortgages - 1-4 family	$	247	$	247	$	—
Consumer - home equity	37		37		—

Total
Residential mortgages	$	247	$	247	$	—
Consumer	37		37		—
Total impaired loans	$	284	$	284	$	—

Loans from Business Activities

	For the Year Ended December 31, 2012				For the Year Ended December 31, 2011
(in thousands)	Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized
With no related allowance:
Residential mortgages - 1-4 family	$	2,592	$	28	$	1,740	$	82
Residential mortgages - construction	—		—		48		—
Commercial mortages - construction	624		—		79		—
Commercial mortgages - single and multifamily	210		10		122		1
Commercial mortgages - real estate	3,667		87		6,189		260
Commercial business loans	17		—		23		1
Consumer-home equity	399		1		375		4

With an allowance recorded:
Residential mortgages - 1-4 family	$	2,802	$	27	$	1,027	$	20
Residential mortgages - construction	—		—		16		—
Commercial mortages - construction	5,280		—		4,476		—
Commercial mortgages - single and multifamily	75		—		274		11
Commercial mortgages - real estate	2,683		22		2,005		20
Commercial business loans	619		7		400		6
Consumer-home equity	542		—		327		—

Total
Residential mortgages	$	5,394	$	55	$	2,831	$	102
Commercial mortgages	12,539		119		13,145		292
Commercial business loans	636		7		423		7
Consumer loans	941		1		702		4
Total impaired loans	$	19,510	$	182	$	17,101	$	405

Loans Acquired from Business Combinations

	For the Year Ended December 31, 2012				For the Year Ended December 31, 2011
(in thousands)	Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized
With no related allowance:
Residential mortgages - 1-4 family	$	520	$	—	$	41	$	—
Commercial mortages - construction	—		—		—		—
Commercial mortgages - real estate	497		24		1,198		33
Commercial business loans	—		—		177		28
Consumer-home equity	25		—		6		—

With an allowance recorded:
Residential mortgages - 1-4 family	$	52	$	2	$	—	$	—
Commercial mortages - construction	—		—		—		—
Commercial mortgages - single and multifamily	—		—		—		—
Commercial mortgages - real estate	—		—		—		—
Commercial business loans	—		—		—		—
Consumer-home equity	—		—		—		—

Total
Residential mortgages	$	572	$	2	$	41	$	—
Commercial mortgages	497		24		1,198		33
Commercial business loans	—		—		177		28
Consumer loans	25		—		6		—
Total impaired loans	$	1,094	$	26	$	1,422	$	61

No additional funds are committed to be advanced in connection with impaired loans.

Credit Quality Information

The Bank utilizes an eleven grade internal loan rating system for each of its commercial real estate, construction and commercial loans as follows:

1 Substantially Risk Free

Borrowers in this category are of unquestioned credit standing and are at the pinnacle of credit quality. Credits in this category are generally cash secured with strong management depth and experience and exhibit a superior track record.

2 Minimal Risk

A relationship which provides an adequate return on investment to the Company, has been stable during the last three years and has a superior financial condition as determined by a comparison with the industry. In addition, management must be of unquestionable character and have strong abilities as measured by its long-term financial performance.

3 Moderate Risk

A relationship which does not appear to possess more than the normal degree of credit risk. Overall, the borrower’s financial statements compare favorably with the industry. A strong secondary repayment source exists and the loan is performing as agreed.

4 Better than Average Risk

A relationship which possesses most of the characteristics found in the Moderate Risk category and ranges from definitely sound to those with minor risk characteristics. Operates in a reasonably stable industry that may be moderately affected by the business cycle and moderately open to changes. Has a satisfactory track record and the loan is performing as agreed.

5 Average Risk

A relationship which possesses most of the characteristics found in the Better than Average Risk category but may have recently experienced a loss year often as a result of its operation in a cyclical industry. The relationship has lower margins of debt service coverage with some elements of reduced strength. Good secondary repayment source exists and the loan is performing as agreed. Start-up businesses and construction loans will generally be assigned to this category as well.

6 Acceptable Risk

Borrowers in this category may be more highly leveraged than their industry peers and experience moderate losses relative to net worth. Trends and performance, e.g. Sales and earnings, leverage, among other factors may be negative. Management’s ability may be questionable, or perhaps untested. The industry may be experiencing either temporary or long term pressures. Collateral values are seen as more important in assessing risk than in higher quality loans. Failure to meet required line clean-up periods or other terms and conditions, including some slow payments may also predicate this grade.

7 Special Mention

A classification assigned to all relationships for credits with potential weaknesses which present a higher than normal credit risk, but not to the point of requiring a Substandard loan classification. No loss of principal or interest is anticipated. However, these credits are followed closely, and if necessary, remedial plans to reduce the Company’s risk exposure are established.

8 Substandard — Performing

A classification assigned to a credit that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard loans will be evaluated on at least a quarterly basis to determine if an additional allocation of the Company’s allowance for loan loss is warranted.

9 Substandard — Non-Performing

A classification given to Substandard credits which have deteriorated to the point that management has placed the accounts on non-accrual status due to delinquency exceeding 90 days or where the Company has determined that collection of principal and interest in full is unlikely.

10 Doubtful

Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, highly questionable and improbable. Collection in excess of 50% of the balance owed is not expected.

11 Loss

Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be possible in the future.

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 rated 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 undertakes the same process of assigning risk ratings as historical loans, which may differ from the risk rating policy of the predecessor company. Loans which are rated Substandard or lower 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 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. Residential mortgages that are current within 59 days are rated Pass. Residential mortgages that are 60 — 89 days delinquent are rated Special Mention. Residential mortgages delinquent for 90 days or greater are rated Substandard. Home equity loans are risk rated based on the same rating system as the Company’s residential mortgages. Other consumer loans are rated based on a two rating system. Other consumer loans that are current within 119 days are rated Performing while loans delinquent for 120 days or more are rated Non-performing. Non-performing other consumer loans are deemed to be credit impaired loans accounted for under ASC 310-30.

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 originated 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.

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 December 31, 2012, there had not been such a decrease and therefore there was no allowance for losses on acquired loans under Subtopic ASC 310-30.

The Company presented several tables within this footnote of historical loans and acquired loans in order to distinguish the credit performance of the newly acquired loans.

The following table presents the Company’s loans by risk rating at year-end 2012 and 2011:

Loans from Business Activities

Residential Mortgage Credit Exposure

Credit Risk Profile by Internally Assigned Grade

	1-4 family				Construction				Total residential mortgages
(In thousands)	2012		2011		2012		2011		2012		2011
Grade:
Pass	$	860,970	$	637,110	$	20,085	$	32,191	$	881,055	$	669,301
Special mention	1,291		877		210		—		1,501		877
Substandard	8,061		11,480		49		—		8,110		11,480
Total	$	870,322	$	649,467	$	20,344	$	32,191	$	890,666	$	681,658

Commercial Mortgage Credit Exposure

Credit Risk Profile by Creditworthiness Category

	Construction				Single and multi-family				Real estate				Total commercial mortgages
(In thousands)	2012		2011		2012		2011		2012		2011		2012		2011
Grade:
Pass	$	142,946	$	91,452	$	40,690	$	85,153	$	707,867	$	674,814	$	891,503	$	851,419
Special mention	—		5,939		$	420	435		5,965		16,459		6,385		22,833
Substandard	7,748		17,262		2,222		3,813		54,930		55,156		64,900		76,231
Doubtful	—		2,839		—		—		105		116		105		2,955
Total	$	150,694	$	117,492	$	43,332	$	89,401	$	768,867	$	746,545	$	962,893	$	953,438

Commercial Business Credit Exposure

Credit Risk Profile by Creditworthiness Category

	Asset based lending				Other				Total commercial business
(In thousands)	2012		2011		2012		2011		2012		2011
Grade:
Pass	$	255,265	$	149,741	$	219,172	$	200,246	$	474,437	$	349,987
Special mention	—		—		5,857		607		5,857		607
Substandard	—		1,324		9,541		9,753		9,541		11,077
Doubtful	—		—		92		95		92		95
Total	$	255,265	$	151,065	$	234,662	$	210,701	$	489,927	$	361,766

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	Home equity				Other				Total consumer
(In thousands)	2012		2011		2012		2011		2012		2011
Performing	$	204,460	$	224,677	$	76,079	$	38,972	$	280,539	$	263,649
Nonperforming	1,432		1,692		179		48		1,611		1,740
Total	$	205,892	$	226,369	$	76,258	$	39,020	$	282,150	$	265,389

Loans from Business Combinations

Residential Mortgage Credit Exposure

Credit Risk Profile by Internally Assigned Grade

	1-4 family				Construction				Total residential mortgages
(In thousands)	2012		2011		2012		2011		2012		2011
Grade:
Pass	$	424,102	$	327,715	$	6,375	$	9,205	$	430,477	$	336,920
Special mention	585		242		—		—		585		242
Substandard	2,523		1,450		—		165		2,523		1,615
Total	$	427,210	$	329,407	$	6,375	$	9,370	$	433,585	$	338,777

Commercial Mortgage Credit Exposure

Credit Risk Profile by Creditworthiness Category

	Construction				Single and multi-family				Real estate				Total commercial mortgages
(In thousands)	2012		2011		2012		2011		2012		2011		2012		2011
Grade:
Pass	$	10,142	$	3,548	$	57,305	$	14,802	$	318,809	$	161,218	$	386,256	$	179,568
Special mention	1,057		2,160		10,383		272		6,790		8,071		18,230		10,503
Substandard	5,932		1,018		12,800		1,324		27,433		10,390		46,165		12,732
Total	$	17,131	$	6,726	$	80,488	$	16,398	$	353,032	$	179,679	$	450,651	$	202,803

Commercial Business Credit Exposure

Credit Risk Profile by Creditworthiness Category

	Asset based lending				Other				Total commercial business
(In thousands)	2012		2011		2012		2011		2012		2011
Grade:
Pass	$	2,830	$	2,206	$	87,325	$	39,578	$	90,155	$	41,784
Special mention	—		—		7,444		3,810		7,444		3,810
Substandard	—		—		12,600		2,932		12,600		2,932
Total	$	2,830	$	2,206	$	107,369	$	46,320	$	110,199	$	48,526

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	Home equity				Other				Total consumer
(In thousands)	2012		2011		2012		2011		2012		2011
Performing	$	119,472	$	71,752	$	248,974	$	32,248	$	368,446	$	104,000
Nonperforming	37		75		100		138		137		213
Total	$	119,509	$	71,827	$	249,074	$	32,386	$	368,583	$	104,213

The following table summarizes information about total loans rated Special Mention or lower. Loans from Business Activities are identified as Business and loans Acquired from Business Combinations are identified as Acquired.

	December 31, 2012						December 31, 2011
(In thousands)	Business Activities		Loans Acquired from Business Combinations		Total		Business Activities		Loans Acquired from Business Combinations		Total
Non-Accrual	$	23,108	$	2,405	$	25,513	$	23,344	$	890	$	24,234
Substandard Accruing	61,745		59,243		120,988		80,334		16,643		96,977
Total Classified	84,853		61,648		146,501		103,678		17,533		121,211
Special Mention	14,097		26,793		40,890		24,722		14,624		39,346
Total Criticized	$	98,950	$	88,441	$	187,391	$	128,400	$	32,157	$	160,557

The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

The following tables include the recorded investment and number of modifications for modified loans identified during the years-ended December 31, 2012 and 2011. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured.

	Modifications by Class For the twelve months ending December 31, 2012
	Number of Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Residential- 1-4 Family	3	$	468	$	467
Commercial - Single and multifamily	4	225		225
Commercial - Other	3	2,493		2,493
Commercial business- Other	3	1,308		1,308
Consumer- Other	1	133		133
	14	$	4,627	$	4,626

	Modifications by Class For the twelve months ending December 31, 2011
		Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded
	Modifications	Investment		Investment
Troubled Debt Restructurings
Residential- 1-4 Family	1	$	607	$	607
Commercial - Other	1	726		176
	2	$	1,333	$	783

As of December 31, 2012, there were no loans that were restructured within the last 12 months that have subsequently defaulted.

The following table presents the Company’s TDR activity in 2012 and 2011:

(In thousands)	2012			2011
Balance at beginning of year	$	1,263		$	7,829
Principal payments	(142		)	(69		)
TDR status change (1)	(1,124		)	(7,041		)
Other reductions (2)	—			(239		)
Newly identified TDRs	4,629			783
Balance at end of year	$	4,626		$	1,263

(1) TDR Status change classification represents TDR loans with a specified interest rate equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk and the loan was on current payment status and not impaired based on the terms specified by the restructuring agreement.

(2) Other Reductions classification consists of transfer to other real estate owned and charge-offs to loans.

The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.