NOTE 5.LOAN LOSS ALLOWANCE

Activity in the allowance for loan losses for the three months ended March 31, 2015 and 2014 was as follows:

Business Activities Loans (In thousands)	Residential mortgages			Commercial real estate		Commercial and industrial loans		Consumer			Unallocated		Total
March 31, 2015
Balance at beginning of period	$	6,836		$	14,690	$	5,206	$	5,928		$	135	$	32,795
Charged-off loans	128			1,605		223		202			—		2,158
Recoveries on charged-off loans	67			3		5		61			—		136
Provision for loan losses	(702		)	1,330		1,460		(751		)	158		1,495
Balance at end of period	$	6,073		$	14,418	$	6,448	$	5,036		$	293	$	32,268
Individually evaluated for impairment	—			1,086		—		—			—		1,086
Collectively evaluated	6,073			13,332		6,448		5,036			293		31,182
Total	$	6,073		$	14,418	$	6,448	$	5,036		$	293	$	32,268

Business Activities Loans (In thousands)	Residential mortgages			Commercial real estate		Commercial and industrial loans			Consumer		Unallocated			Total
March 31, 2014
Balance at beginning of period	$	6,937		$	13,705	$	5,173		$	3,644	$	68		$	29,527
Charged-off loans	706			660		189			429		—			1,984
Recoveries on charged-off loans	7			1		20			79		—			107
Provision for loan losses	(575		)	1,900		(185		)	836		(248		)	1,728
Balance at end of period	$	5,663		$	14,946	$	4,819		$	4,130	$	(180	)	$	29,378
Individually evaluated for impairment	397			1,558		54			9		—			2,018
Collectively evaluated	5,266			13,388		4,765			4,121		(180		)	27,360
Total	$	5,663		$	14,946	$	4,819		$	4,130	$	(180	)	$	29,378

Acquired Loans (In thousands)	Residential mortgages		Commercial real estate		Commercial and industrial loans			Consumer		Unallocated		Total
March 31, 2015
Balance at beginning of period	$	615	$	790	$	1,093		$	369	$	—	$	2,867
Charged-off loans	238		405		198			433		—		1,274
Recoveries on charged-off loans	—		—		41			28		—		69
Provision for loan losses	372		1,579		(11		)	416		—		2,356
Balance at end of period	$	749	$	1,964	$	925		$	380	$	—	$	4,018
Individually evaluated for impairment	52		455					61		—		568
Collectively evaluated	697		1,509		925			319		—		3,450
Total	$	749	$	1,964	$	925		$	380	$	—	$	4,018

Acquired Loans (In thousands)	Residential mortgages		Commercial real estate		Commercial and industrial loans		Consumer		Unallocated		Total
March 31, 2014
Balance at beginning of period	$	625	$	2,339	$	597	$	235	$	—	$	3,796
Charged-off loans	429		447		52		405		—		1,333
Recoveries on charged-off loans	73		1		5		14		—		93
Provision for loan losses	401		231		548		488		—		1,668
Balance at end of period	$	670	$	2,124	$	1,098	$	332	$	—	$	4,224
Individually evaluated for impairment	30		250		21		—		—		301
Collectively evaluated	640		1,874		1,077		332		—		3,923
Total	$	670	$	2,124	$	1,098	$	332	$	—	$	4,224

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. 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, 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 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 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 March 31, 2015, the allowance for loan losses related to acquired loans was $4.0 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 table presents the Company’s loans by risk rating at March 31, 2015 and December 31, 2014:

Business Activities Loans

Residential Mortgages

Credit Risk Profile by Internally Assigned Grade

	1-4 family				Construction				Total residential mortgages
(In thousands)	Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014
Grade:
Pass	$	1,183,064	$	1,195,209	$	27,382	$	26,634	$	1,210,446	$	1,221,843
Special mention	888		146		—		410		888		556
Substandard	4,066		4,053		414		—		4,480		4,053
Total	$	1,188,018	$	1,199,408	$	27,796	$	27,044	$	1,215,814	$	1,226,452

Commercial Real Estate

Credit Risk Profile by Creditworthiness Category

	Construction				Single and multi-family				Other				Total commercial real estate
(In thousands)	Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014
Grade:
Pass	$	179,868	$	166,295	$	140,022	$	137,533	$	1,023,304	$	959,836	$	1,343,194	$	1,263,664
Special mention	—		—		—		—		6,891		6,933		6,891		6,933
Substandard	2,932		2,894		2,275		2,517		56,625		63,995		61,832		69,406
Doubtful	—		—		—		—		73		73		73		73
Total	$	182,800	$	169,189	$	142,297	$	140,050	$	1,086,893	$	1,030,837	$	1,411,990	$	1,340,076

Commercial and Industrial Loans

Credit Risk Profile by Creditworthiness Category

	Asset based lending				Other				Total comm. and industrial loans
(In thousands)	Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014
Grade:
Pass	$	354,106	$	341,246	$	410,699	$	404,846	$	764,805	$	746,092
Special mention	—		—		187		560		187		560
Substandard	—		—		13,679		6,539		13,679		6,539
Total	$	354,106	$	341,246	$	424,565	$	411,945	$	778,671	$	753,191

Consumer Loans

Credit Risk Profile Based on Payment Activity

	Home equity				Auto and other				Total consumer loans
(In thousands)	Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014
Performing	$	254,176	$	251,524	$	351,574	$	346,175	$	605,750	$	597,699
Nonperforming	1,192		1,157		252		305		1,444		1,462
Total	$	255,368	$	252,681	$	351,826	$	346,480	$	607,194	$	599,161

Acquired Loans

Residential Mortgages

Credit Risk Profile by Internally Assigned Grade

	1-4 family				Construction				Total residential mortgages
(In thousands)	Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014
Grade:
Pass	$	253,866	$	266,445	$	922	$	1,018	$	254,788	$	267,463
Special mention	707		638		—		—		707		638
Substandard	1,930		1,651		—		—		1,930		1,651
Total	$	256,503	$	268,734	$	922	$	1,018	$	257,425	$	269,752

Commercial Real Estate

Credit Risk Profile by Creditworthiness Category

	Construction				Single and multi-family				Other				Total commercial real estate
(In thousands)	Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014
Grade:
Pass	$	2,765	$	2,904	$	41,145	$	44,497	$	192,233	$	195,681	$	236,143	$	243,082
Special mention	—		—		120		533		2,208		4,868		2,328		5,401
Substandard	1,281		1,297		7,164		8,138		13,193		13,573		21,638		23,008
Total	$	4,046	$	4,201	$	48,429	$	53,168	$	207,634	$	214,122	$	260,109	$	271,491

Commercial and Industrial Loans

Credit Risk Profile by Creditworthiness Category

	Asset based lending				Other				Total comm. and industrial loans
(In thousands)	Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014
Grade:
Pass	$	—	$	—	$	44,922	$	45,757	$	44,922	$	45,757
Special mention	—		—		—		1,723		—		1,723
Substandard	—		—		3,222		3,695		3,222		3,695
Total	$	—	$	—	$	48,144	$	51,175	$	48,144	$	51,175

Consumer Loans

Credit Risk Profile Based on Payment Activity

	Home equity				Auto and other				Total consumer loans
(In thousands)	Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014		Mar. 31, 2015		Dec. 31, 2014
Performing	$	61,371	$	65,368	$	86,356	$	102,182	$	147,727	$	167,550
Nonperforming	876		583		713		1,169		1,589		1,752
Total	$	62,247	$	65,951	$	87,069	$	103,351	$	149,316	$	169,302

The following table summarizes information about total loans rated Special Mention or lower as of March 31, 2015 and December 31, 2014. 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, 2015						December 31, 2014
(In thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Non-Accrual	$	14,636	$	7,373	$	22,009	$	14,778	$	6,927	$	21,705
Substandard Accruing	68,228		21,266		89,494		66,995		23,839		90,834
Total Classified	82,864		28,639		111,503		81,773		30,766		112,539
Special Mention	8,175		3,286		11,461		9,113		8,800		17,913
Total Criticized	$	91,039	$	31,925	$	122,964	$	90,886	$	39,566	$	130,452