NOTE 7.LOAN LOSS ALLOWANCE

Activity in the allowance for loan losses for 2014, 2013, and 2012 was as follows:

Business Activities Loans

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

Acquired Loans

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

Business Activities Loans

(In thousands)	Residential		Commercial			Commercial
2013	mortgages		real estate			and industrial		Consumer		Unallocated		Total
Balance at beginning of year	$	5,928	$	18,863		$	5,605	$	1,466	$	29	$	31,891
Charged-off loans	1,761		3,378			2,046		917		—		8,102
Recoveries on charged-off loans	398		540			121		270		—		1,329
Provision for loan losses	2,372		(2,320		)	1,493		2,825		39		4,409
Balance at end of year	$	6,937	$	13,705		$	5,173	$	3,644	$	68	$	29,527
Individually evaluated for impairment	905		219			55		103		—		1,282
Collectively evaluated	6,032		13,486			5,118		3,541		68		28,245
Total	$	6,937	$	13,705		$	5,173	$	3,644	$	68	$	29,527

Acquired Loans

(In thousands)	Residential		Commercial		Commercial
2013	mortgages		real estate		and industrial		Consumer		Unallocated			Total
Balance at beginning of year	$	509	$	390	$	96	$	314	$	8		$	1,317
Charged-off loans	636		1,748		771		1,580		—			4,735
Recoveries on charged-off loans	1		15		84		145		—			245
Provision for loan losses	751		3,682		1,188		1,356		(8		)	6,969
Balance at end of year	$	625	$	2,339	$	597	$	235	$	—		$	3,796
Individually evaluated for impairment	230		488		—		39		—			757
Collectively evaluated	395		1,851		597		196		—			3,039
Total	$	625	$	2,339	$	597	$	235	$	—		$	3,796

Business Activities Loans

(In thousands)	Residential		Commercial		Commercial
2012	mortgages		real estate		and industrial		Consumer		Unallocated			Total
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	287		1,444		1,205		273		—			3,209
Collectively evaluated	5,641		17,419		4,400		1,193		29			28,682
Total	$	5,928	$	18,863	$	5,605	$	1,466	$	29		$	31,891

Acquired Loans

(In thousands)	Residential		Commercial		Commercial
2012	mortgages		real estate		and industrial		Consumer		Unallocated			Total
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	454		390		96		314		8			1,262
Total	$	509	$	390	$	96	$	314	$	8		$	1,317

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. 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, the Company’s Internal Loan Review function undertakes the same process of assigning risk ratings as historical loans. This 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. 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.

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 December 31, 2013, 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 business activity 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 2014 and 2013:

Business Activities Loans

Residential Mortgages

Credit Risk Profile by Internally Assigned Grade

	1-4 family				Construction				Total residential mortgages
(In thousands)	2014		2013		2014		2013		2014		2013
Grade:
Pass	$	1,195,209	$	1,019,732	$	26,634	$	18,117	$	1,221,843	$	1,037,849
Special mention	146		623		410		—		556		623
Substandard	4,053		7,382		—		41		4,053		7,423
Total	$	1,199,408	$	1,027,737	$	27,044	$	18,158	$	1,226,452	$	1,045,895

Commercial Mortgages

Credit Risk Profile by Creditworthiness Category

	Construction				Single and multi-family				Other				Total commercial real estate
(In thousands)	2014		2013		2014		2013		2014		2013		2014		2013
Grade:
Pass	$	166,295	$	120,071	$	137,533	$	59,636	$	959,836	$	800,672	$	1,263,664	$	980,379
Special mention	—		—		—		140		6,933		8,150		6,933		8,290
Substandard	2,894		5,176		2,517		3,717		63,995		61,807		69,406		70,700
Doubtful	—		—		—		—		73		642		73		642
Total	$	169,189	$	125,247	$	140,050	$	63,493	$	1,030,837	$	871,271	$	1,340,076	$	1,060,011

Commercial Business Loans

Credit Risk Profile by Creditworthiness Category

	Asset based lending				Other				Total comm. and industrial
(In thousands)	2014		2013		2014		2013		2014		2013
Grade:
Pass	$	341,246	$	294,241	$	404,846	$	313,984	$	746,092	$	608,225
Special mention	—		—		560		884		560		884
Substandard	—		—		6,539		7,725		6,539		7,725
Doubtful	—		—		—		603		—		603
Total	$	341,246	$	294,241	$	411,945	$	323,196	$	753,191	$	617,437

Consumer Loans

Credit Risk Profile Based on Payment Activity

	Home equity				Auto and other				Total consumer
(In thousands)	2014		2013		2014		2013		2014		2013
Performing	$	251,524	$	231,594	$	346,175	$	212,922	$	597,699	$	444,516
Nonperforming	1,157		1,083		305		249		1,462		1,332
Total	$	252,681	$	232,677	$	346,480	$	213,171	$	599,161	$	445,848

Acquired Loans

Residential Mortgages

Credit Risk Profile by Internally Assigned Grade

	1-4 family				Construction				Total residential mortgages
(In thousands)	2014		2013		2014		2013		2014		2013
Grade:
Pass	$	266,445	$	330,353	$	1,018	$	1,081	$	267,463	$	331,434
Special mention	638		437		—		—		638		437
Substandard	1,651		2,577		—		3,931		1,651		6,508
Total	$	268,734	$	333,367	$	1,018	$	5,012	$	269,752	$	338,379

Commercial Mortgages

Credit Risk Profile by Creditworthiness Category

	Construction				Single and multi-family				Other				Total commercial real estate
(In thousands)	2014		2013		2014		2013		2014		2013		2014		2013
Grade:
Pass	$	2,904	$	7,154	$	44,497	$	46,961	$	195,681	$	254,787	$	243,082	$	308,902
Special mention	—		—		533		4,799		4,868		9,034		5,401		13,833
Substandard	1,297		6,616		8,138		13,067		13,573		14,691		23,008		34,374
Total	$	4,201	$	13,770	$	53,168	$	64,827	$	214,122	$	278,512	$	271,491	$	357,109

Commercial Business Loans

Credit Risk Profile by Creditworthiness Category

	Asset based lending				Other				Total comm. and industrial
(In thousands)	2014		2013		2014		2013		2014		2013
Grade:
Pass	$	—	$	3,130	$	45,757	$	59,615	$	45,757	$	62,745
Special mention	—		—		1,723		2,396		1,723		2,396
Substandard	—		—		3,695		4,715		3,695		4,715
Total	$	—	$	3,130	$	51,175	$	66,726	$	51,175	$	69,856

Consumer Loans

Credit Risk Profile Based on Payment Activity

	Home equity				Auto and other				Total consumer
(In thousands)	2014		2013		2014		2013		2014		2013
Performing	$	65,368	$	73,552	$	102,182	$	170,275	$	167,550	$	243,827
Nonperforming	583		602		1,169		1,559		1,752		2,161
Total	$	65,951	$	74,154	$	103,351	$	171,834	$	169,302	$	245,988

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, 2014						December 31, 2013
(In thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Non-Accrual	$	14,778	$	6,927	$	21,705	$	18,472	$	8,983	$	27,455
Substandard Accruing	66,995		23,839		90,834		70,667		38,891		109,558
Total Classified	81,773		30,766		112,539		89,139		47,874		137,013
Special Mention	9,113		8,800		17,913		10,081		17,853		27,934
Total Criticized	$	90,886	$	39,566	$	130,452	$	99,220	$	65,727	$	164,947