Allowance for Loan and Lease Losses | Allowance for Loan and Lease Losses Originated Loans and Leases Management reviews the appropriateness of the allowance for loan and lease losses (“allowance”) on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated loan loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues and ASC Topic 310, Receivables and ASC Topic 450, Contingencies . The model is comprised of four major components that management has deemed appropriate in evaluating the appropriateness of the allowance for loan and lease losses. While none of these components, when used independently, is effective in arriving at a reserve level that appropriately measures the risk inherent in the portfolio, management believes that using them collectively, provides reasonable measurement of the loss exposure in the portfolio. The four components include: impaired loans; individually reviewed and graded loans; historical loss experience; and qualitative or subjective analysis. Since the methodology is based upon historical experience and trends as well as management’s judgment, factors may arise that result in different estimates. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in the local area, concentration of risk, changes in interest rates, and declines in local property values. While management’s evaluation of the allowance as of September 30, 2017 , considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. Acquired Loans and Leases Acquired loans accounted for under ASC 310-30 For our acquired loans, our allowance for loan losses is estimated based upon our expected cash flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans. Acquired loans accounted for under ASC 310-20 We establish our allowance for loan losses through a provision for credit losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses. The following tables detail activity in the allowance for loan and lease losses segregated by originated and acquired loan and lease portfolios and by portfolio segment for the three and nine months ended September 30, 2017 and 2016 . Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. Three months ended September 30, 2017 (in thousands) Commercial Commercial Residential Consumer Finance Total Allowance for originated loans and leases Beginning balance $ 10,842 $ 19,121 $ 5,761 $ 1,236 $ 0 $ 36,960 Charge-offs (85 ) 0 (41 ) (212 ) 0 (338 ) Recoveries (18 ) 264 33 71 0 350 Provision (credit) 951 70 (262 ) 172 0 931 Ending Balance $ 11,690 $ 19,455 $ 5,491 $ 1,267 $ 0 $ 37,903 Three months ended September 30, 2017 (in thousands) Commercial Commercial Residential Consumer Finance Total Allowance for acquired loans Beginning balance $ 50 $ 87 $ 54 $ 6 $ 0 $ 197 Charge-offs 0 (10 ) (34 ) (1 ) 0 (45 ) Recoveries 0 499 12 1 0 512 Provision (credit) (50 ) (501 ) 22 0 0 (529 ) Ending Balance $ 0 $ 75 $ 54 $ 6 $ 0 $ 135 Three months ended September 30, 2016 (in thousands) Commercial Commercial Residential Consumer Finance Total Allowance for originated loans and leases Beginning balance $ 8,937 $ 18,229 $ 4,486 $ 1,316 $ 0 $ 32,968 Charge-offs (133 ) 0 (19 ) (94 ) 0 (246 ) Recoveries 110 216 17 23 0 366 Provision (credit) 340 331 223 (26 ) 0 868 Ending Balance $ 9,254 $ 18,776 $ 4,707 $ 1,219 $ 0 $ 33,956 Three months ended September 30, 2016 (in thousands) Commercial Commercial Residential Consumer Covered Total Allowance for acquired loans Beginning balance $ 47 $ 65 $ 23 $ 22 $ 0 $ 157 Charge-offs (12 ) 0 (19 ) 0 0 (31 ) Recoveries 20 96 0 0 0 116 Provision (credit) (55 ) (84 ) 53 0 0 (86 ) Ending Balance $ 0 $ 77 $ 57 $ 22 $ 0 $ 156 Nine months ended September 30, 2017 (in thousands) Commercial Commercial Residential Consumer Finance Total Allowance for originated loans and leases Beginning balance $ 9,389 $ 19,836 $ 5,149 $ 1,224 $ 0 $ 35,598 Charge-offs (162 ) (21 ) (483 ) (742 ) 0 (1,408 ) Recoveries 112 717 169 336 0 1,334 Provision (credit) 2,351 (1,077 ) 656 449 0 2,379 Ending Balance $ 11,690 $ 19,455 $ 5,491 $ 1,267 $ 0 $ 37,903 Nine months ended September 30, 2017 (in thousands) Commercial Commercial Residential Consumer Covered Total Allowance for acquired loans Beginning balance $ 0 $ 97 $ 54 $ 6 $ 0 $ 157 Charge-offs (74 ) (84 ) (186 ) (1 ) 0 (345 ) Recoveries 0 524 24 7 0 555 Provision (credit) 74 (462 ) 162 (6 ) 0 (232 ) Ending Balance $ 0 $ 75 $ 54 $ 6 $ 0 $ 135 Nine months ended September 30, 2016 (in thousands) Commercial Commercial Residential Consumer Finance Total Allowance for originated loans and leases Beginning balance $ 10,495 $ 15,479 $ 4,070 $ 1,268 $ 0 $ 31,312 Charge-offs (584 ) (12 ) (220 ) (455 ) 0 (1,271 ) Recoveries 217 636 49 295 0 1,197 Provision (credit) (874 ) 2,673 808 111 0 2,718 Ending Balance $ 9,254 $ 18,776 $ 4,707 $ 1,219 $ 0 $ 33,956 Nine months ended September 30, 2016 (in thousands) Commercial Commercial Residential Consumer Covered Total Allowance for acquired loans Beginning balance $ 433 $ 61 $ 198 $ 0 $ 0 $ 692 Charge-offs (399 ) (182 ) (35 ) (93 ) 0 (709 ) Recoveries 20 256 0 0 0 276 Provision (credit) (54 ) (58 ) (106 ) 115 0 (103 ) Ending Balance $ 0 $ 77 $ 57 $ 22 $ 0 $ 156 At September 30, 2017 and December 31, 2016 , the allocation of the allowance for loan and lease losses summarized on the basis of the Company’s impairment methodology was as follows: (in thousands) Commercial Commercial Residential Consumer Finance Total Allowance for originated loans and leases September 30, 2017 Individually evaluated for impairment $ 518 $ 19 $ 2 $ 0 $ 0 $ 539 Collectively evaluated for impairment 11,172 19,436 5,489 1,267 0 37,364 Ending balance $ 11,690 $ 19,455 $ 5,491 $ 1,267 $ 0 $ 37,903 (in thousands) Commercial Commercial Real Estate Residential Real Estate Consumer Covered Loans Total Allowance for acquired loans September 30, 2017 Individually evaluated for impairment $ 0 $ 75 $ 0 $ 0 $ 0 $ 75 Collectively evaluated for impairment 0 0 54 6 0 60 Ending balance $ 0 $ 75 $ 54 $ 6 $ 0 $ 135 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Finance Leases Total Allowance for originated loans and leases December 31, 2016 Individually evaluated for impairment $ 95 $ 322 $ 0 $ 0 $ 0 $ 417 Collectively evaluated for impairment 9,294 19,514 5,149 1,224 0 35,181 Ending balance $ 9,389 $ 19,836 $ 5,149 $ 1,224 $ 0 $ 35,598 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Covered Loans Total Allowance for acquired loans December 31, 2016 Individually evaluated for impairment $ 0 $ 76 $ 0 $ 0 $ 0 $ 76 Collectively evaluated for impairment 0 21 54 6 0 81 Ending balance $ 0 $ 97 $ 54 $ 6 $ 0 $ 157 The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology as of September 30, 2017 and December 31, 2016 was as follows: (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Finance Leases Total Originated loans and leases September 30, 2017 Individually evaluated for impairment $ 1,425 $ 6,396 $ 3,396 $ 0 $ 0 $ 11,217 Collectively evaluated for impairment 984,977 1,870,320 1,227,379 61,560 15,522 4,159,758 Total $ 986,402 $ 1,876,716 $ 1,230,775 $ 61,560 $ 15,522 $ 4,170,975 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Covered Loans Total Acquired loans September 30, 2017 Individually evaluated for impairment $ 0 $ 2,109 $ 1,365 $ 0 $ 0 $ 3,474 Loans acquired with deteriorated credit quality 353 7,711 6,582 0 0 14,646 Collectively evaluated for impairment 53,131 204,609 46,525 874 0 305,139 Total $ 53,484 $ 214,429 $ 54,472 $ 874 $ 0 $ 323,259 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Finance Leases Total Originated loans and leases December 31, 2016 Individually evaluated for impairment $ 635 $ 8,812 $ 3,507 $ 0 $ 0 $ 12,954 Collectively evaluated for impairment 964,667 1,661,221 1,153,148 59,228 16,650 3,854,914 Total $ 965,302 $ 1,670,033 $ 1,156,655 $ 59,228 $ 16,650 $ 3,867,868 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Covered Loans Total Acquired loans December 31, 2016 Individually evaluated for impairment $ 172 $ 4,081 $ 1,372 $ 0 $ 0 $ 5,625 Loans acquired with deteriorated credit quality 448 14,368 7,701 0 0 22,517 Collectively evaluated for impairment 78,697 232,359 54,087 826 0 365,969 Total $ 79,317 $ 250,808 $ 63,160 $ 826 $ 0 $ 394,111 A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans consist of our non-homogenous nonaccrual loans, and all loans restructured in a troubled debt restructuring (TDR). Specific reserves on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off. The majority of impaired loans are collateral dependent impaired loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans, and previous charge-offs. Interest payments on impaired loans are typically applied to principal unless collectibility of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis. Impaired loans are as follows: 9/30/2017 12/31/2016 (in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance Originated loans and leases with no related allowance Commercial and industrial Commercial and industrial other $ 653 $ 657 $ 0 $ 276 $ 370 $ 0 Commercial real estate Commercial real estate other 6,296 6,737 0 6,979 7,263 0 Residential real estate Home equity 3,247 3,332 0 3,507 3,535 0 Subtotal $ 10,196 $ 10,726 $ 0 $ 10,762 $ 11,168 $ 0 Originated loans and leases with related allowance Commercial and industrial Commercial and industrial other 772 791 518 359 276 95 Commercial real estate Commercial real estate other 100 100 19 1,833 2,042 322 Residential real estate Home equity $ 149 $ 149 $ 2 $ 0 $ 0 $ 0 Subtotal $ 1,021 $ 1,040 $ 539 $ 2,192 $ 2,318 $ 417 Total $ 11,217 $ 11,766 $ 539 $ 12,954 $ 13,486 $ 417 9/30/2017 12/31/2016 (in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance Acquired loans and leases with no related allowance Commercial and industrial Commercial and industrial other $ 0 $ 0 $ 0 $ 172 $ 472 $ 0 Commercial real estate Commercial real estate other 1,842 2,035 0 4,003 4,386 0 Residential real estate Home equity 1,365 1,397 0 1,372 1,372 0 Subtotal $ 3,207 $ 3,432 $ 0 $ 5,547 $ 6,230 $ 0 Acquired loans and leases with related allowance Commercial real estate Commercial real estate other 267 267 75 78 78 76 Subtotal $ 267 $ 267 $ 75 $ 78 $ 78 $ 76 Total $ 3,474 $ 3,699 $ 75 $ 5,625 $ 6,308 $ 76 The average recorded investment and interest income recognized on impaired loans for the three months ended September 30, 2017 and 2016 was as follows: Three Months Ended 09/30/2017 Three Months Ended 09/30/2016 (in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Originated loans and leases with no related allowance Commercial and industrial Commercial and industrial other 404 0 146 0 Commercial real estate Commercial real estate other 6,409 0 7,422 0 Residential real estate Home equity 3,581 0 3,097 0 Subtotal $ 10,394 $ 0 $ 10,665 $ 0 Originated loans and leases with related allowance Commercial and industrial Commercial and industrial other 1,083 0 77 0 Commercial real estate Commercial real estate other 50 0 636 0 Subtotal $ 1,133 $ 0 $ 713 $ 0 Total $ 11,527 $ 0 $ 11,378 $ 0 Three Months Ended 09/30/2017 Three Months Ended 09/30/2016 (in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Acquired loans and leases with no related allowance Commercial and industrial Commercial and industrial other 0 0 6 0 Commercial real estate Construction 0 0 126 0 Commercial real estate other 1,516 0 4,201 0 Residential real estate Home equity 1,440 0 1,319 0 Subtotal $ 2,956 $ 0 $ 5,652 $ 0 Acquired loans and leases with related allowance Commercial real estate Commercial real estate other 267 0 78 0 Subtotal $ 267 $ 0 $ 78 $ 0 Total $ 3,223 $ 0 $ 5,730 $ 0 The average recorded investment and interest income recognized on impaired loans for the nine months ended September 30, 2017 and 2016 was as follows: Nine Months Ended 09/30/17 Nine Months Ended 09/30/16 (in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Originated loans and leases with no related allowance Commercial and industrial Commercial and industrial other 290 0 476 0 Commercial real estate Commercial real estate other 7,569 0 6,351 0 Residential real estate Home equity 3,441 0 2,694 0 Subtotal $ 11,300 $ 0 $ 9,521 $ 0 Originated loans and leases with related allowance Commercial and industrial Commercial and industrial other 335 0 48 0 Commercial real estate Commercial real estate other 20 0 641 0 Subtotal $ 355 $ 0 $ 689 $ 0 Total $ 11,655 $ 0 $ 10,210 $ 0 Nine Months Ended 09/30/17 Nine Months Ended 09/30/16 (in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Acquired loans and leases with no related allowance Commercial and industrial Commercial and industrial other 66 0 303 0 Commercial real estate Construction 16 0 242 0 Commercial real estate other 2,402 0 4,320 0 Residential real estate Home equity 1,722 0 1,267 0 Subtotal $ 4,206 $ 0 $ 6,132 $ 0 Acquired loans and leases with related allowance Commercial real estate Commercial real estate other 267 0 54 0 Subtotal $ 267 $ 0 $ 54 $ 0 Total $ 4,473 $ 0 $ 6,186 $ 0 Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes concessions to the borrower that it would not otherwise consider. These modifications may include, among others, an extension for the term of the loan, and granting a period when interest-only payments can be made with the principal payments made over the remaining term of the loan or at maturity. There were no new TDRs for the three months ended September 30, 2017. The following tables present information on loans modified in troubled debt restructuring during the periods indicated. September 30, 2016 Three Months Ended Defaulted TDRs 3 (in thousands) Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Loans Post-Modification Outstanding Recorded Investment Commercial real estate Commercial real estate other 1 1 50 50 1 1,800 Residential real estate Home equity 2 5 382 382 0 0 Total 6 $ 432 $ 432 1 $ 1,800 1 Represents the following concessions: extension of term and reduction of rate. 2 Represents the following concessions: extension of term and reduction of rate. 3 TDRs that defaulted during the three months ended September 30, 2016 that were restructured in the prior twelve months. September 30, 2017 Nine Months Ended Defaulted TDRs 2 (in thousands) Number of Pre- Post- Number of Post- Residential real estate Home equity 1 2 162 162 1 55 Total 2 $ 162 $ 162 1 $ 55 1 Represents the following concessions: extension of term and reduction of rate. 2 TDRs that defaulted during the nine months ended September 30, 2017 that had been restructured in the prior twelve months. September 30, 2016 Nine Months Ended Defaulted TDRs 4 (in thousands) Number of Pre- Post- Number of Post- Commercial and industrial Commercial and industrial other 1 2 $ 1,115 $ 1,115 0 $ 0 Commercial real estate Commercial real estate other 2 1 50 50 1 1,800 Residential real estate Home equity 3 10 1,164 1,164 0 0 Total 13 $ 2,329 $ 2,329 1 $ 1,800 1 Represents the following concessions: extension of term and reduction of rate. 2 Represents the following concessions: extension of term and reduction of rate. 3 Represents the following concessions: extension of term and reduction of rate. 4 TDRs that defaulted during the nine months ended September 30, 2016 that had been restructured in the prior twelve months. The following tables present credit quality indicators (internal risk grade) by class of commercial and industrial loans and commercial real estate loans as of September 30, 2017 and December 31, 2016 . September 30, 2017 Commercial and Industrial Commercial and Industrial CommercialReal Estate CommercialReal Estate CommercialReal Estate (in thousands) Other Agriculture Other Agriculture Construction Total Originated Loans and Leases Internal risk grade: Pass $ 876,622 $ 81,523 $ 1,503,943 $ 112,857 $ 217,218 $ 2,792,163 Special Mention 12,943 9,455 18,578 9,447 0 50,423 Substandard 5,783 76 14,673 0 0 20,532 Total $ 895,348 $ 91,054 $ 1,537,194 $ 122,304 $ 217,218 $ 2,863,118 September 30, 2017 Commercial and Industrial Commercial and Industrial Commercial Real Estate Commercial Real Estate Commercial Real Estate (in thousands) Other Agriculture Other Agriculture Construction Total Acquired Loans and Leases Internal risk grade: Pass $ 52,370 $ 0 $ 205,028 $ 257 $ 1,526 $ 259,181 Special Mention 0 0 539 0 0 539 Substandard 1,114 0 7,079 0 0 8,193 Total $ 53,484 $ 0 $ 212,646 $ 257 $ 1,526 $ 267,913 December 31, 2016 Commercial and Industrial Commercial and Industrial Commercial Real Estate Commercial Real Estate Commercial Real Estate (in thousands) Other Agriculture Other Agriculture Construction Total Originated Loans and Leases Internal risk grade: Pass $ 836,788 $ 117,135 $ 1,403,370 $ 101,407 $ 135,834 $ 2,594,534 Special Mention 7,218 755 11,939 573 0 20,485 Substandard 3,049 357 16,381 529 0 20,316 Total $ 847,055 $ 118,247 $ 1,431,690 $ 102,509 $ 135,834 $ 2,635,335 December 31, 2016 Commercial and Industrial Commercial and Industrial Commercial Real Estate Commercial Real Estate Commercial Real Estate (in thousands) Other Agriculture Other Agriculture Construction Total Acquired Loans and Leases Internal risk grade: Pass $ 77,921 $ 0 $ 229,334 $ 267 $ 8,936 $ 316,458 Special Mention 0 0 526 0 0 526 Substandard 1,396 0 11,745 0 0 13,141 Total $ 79,317 $ 0 $ 241,605 $ 267 $ 8,936 $ 330,125 The following tables present credit quality indicators by class of residential real estate loans and by class of consumer loans. Nonperforming loans include nonaccrual, impaired, and loans 90 days past due and accruing interest. All other loans are considered performing as of September 30, 2017 and December 31, 2016 . For purposes of this footnote, acquired loans that were recorded at fair value at the acquisition date and are 90 days or greater past due are considered performing. September 30, 2017 (in thousands) Residential Residential Consumer Consumer Total Originated Loans and Leases Performing $ 212,116 $ 1,009,982 $ 12,276 $ 48,898 $ 1,283,272 Nonperforming 1,454 7,223 356 30 9,063 Total $ 213,570 $ 1,017,205 $ 12,632 $ 48,928 $ 1,292,335 September 30, 2017 (in thousands) Residential Residential Consumer Consumer Total Acquired Loans and Leases Performing $ 30,296 $ 21,968 $ 0 $ 874 $ 53,138 Nonperforming 1,009 1,199 0 0 2,208 Total $ 31,305 $ 23,167 $ 0 $ 874 $ 55,346 December 31, 2016 (in thousands) Residential Residential Consumer Consumer Total Originated Loans and Leases Performing $ 207,261 $ 941,936 $ 14,669 $ 44,393 $ 1,208,259 Nonperforming 2,016 5,442 166 0 7,624 Total $ 209,277 $ 947,378 $ 14,835 $ 44,393 $ 1,215,883 December 31, 2016 (in thousands) Residential Residential Consumer Consumer Total Acquired Loans and Leases Performing $ 37,074 $ 24,483 $ 0 $ 826 $ 62,383 Nonperforming 663 940 0 0 1,603 Total $ 37,737 $ 25,423 $ 0 $ 826 $ 63,986 |