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 March 31, 2019 , 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 months ended March 31, 2019 and 2018 . 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 March 31, 2019 (in thousands) Commercial Commercial Residential Consumer Finance Total Allowance for originated loans and leases Beginning balance $ 11,217 $ 23,483 $ 7,317 $ 1,304 $ 0 $ 43,321 Charge-offs (380 ) (3,343 ) (18 ) (180 ) 0 (3,921 ) Recoveries 43 1 226 95 0 365 Provision (credit) 643 904 (1,121 ) 54 0 480 Ending Balance $ 11,523 $ 21,045 $ 6,404 $ 1,273 $ 0 $ 40,245 Three Months Ended March 31, 2019 (in thousands) Commercial Commercial Residential Consumer Finance Total Allowance for acquired loans Beginning balance $ 55 $ 0 $ 28 $ 6 $ 0 $ 89 Charge-offs 0 0 0 0 0 0 Recoveries 16 6 7 0 0 29 Provision (credit) (71 ) 19 23 (6 ) 0 (35 ) Ending Balance $ 0 $ 25 $ 58 $ 0 $ 0 $ 83 Three Months Ended March 31, 2018 (in thousands) Commercial Commercial Residential Consumer Finance Total Allowance for originated loans and leases Beginning balance $ 11,812 $ 20,412 $ 6,161 $ 1,301 $ 0 39,686 Charge-offs (3 ) 0 (185 ) (292 ) 0 (480 ) Recoveries 6 170 42 75 0 293 Provision (credit) 616 (180 ) (46 ) 218 0 608 Ending Balance $ 12,431 $ 20,402 $ 5,972 $ 1,302 $ 0 $ 40,107 Three Months Ended March 31, 2018 (in thousands) Commercial Commercial Residential Consumer Covered Total Allowance for acquired loans Beginning balance $ 25 $ 0 $ 54 $ 6 $ 0 $ 85 Charge-offs (1 ) 0 0 0 0 (1 ) Recoveries 20 8 33 0 0 61 Provision (credit) (19 ) (8 ) (14 ) 0 0 (41 ) Ending Balance $ 25 $ 0 $ 73 $ 6 $ 0 $ 104 At March 31, 2019 and December 31, 2018 , 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 March 31, 2019 Individually evaluated for impairment $ 384 $ 51 $ 0 $ 0 $ 0 $ 435 Collectively evaluated for impairment 11,139 20,994 6,404 1,273 0 39,810 Ending balance $ 11,523 $ 21,045 $ 6,404 $ 1,273 $ 0 $ 40,245 (in thousands) Commercial Commercial Real Estate Residential Real Estate Consumer Covered Loans Total Allowance for acquired loans March 31, 2019 Individually evaluated for impairment $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Collectively evaluated for impairment 0 25 58 0 0 83 Ending balance $ 0 $ 25 $ 58 $ 0 $ 0 $ 83 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Finance Leases Total Allowance for originated loans and leases December 31, 2018 Individually evaluated for impairment $ 397 $ 3,365 $ 0 $ 0 $ 0 $ 3,762 Collectively evaluated for impairment 10,820 20,118 7,317 1,304 0 39,559 Ending balance $ 11,217 $ 23,483 $ 7,317 $ 1,304 $ 0 $ 43,321 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Covered Loans Total Allowance for acquired loans December 31, 2018 Individually evaluated for impairment $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Collectively evaluated for impairment 55 0 28 6 0 89 Ending balance $ 55 $ 0 $ 28 $ 6 $ 0 $ 89 The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology as of March 31, 2019 and December 31, 2018 was as follows: (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Finance Leases Total Originated loans and leases March 31, 2019 Individually evaluated for impairment $ 1,925 $ 5,009 $ 4,047 $ 0 $ 0 $ 10,981 Collectively evaluated for impairment 1,003,596 2,167,196 1,270,297 69,315 15,164 4,525,568 Total $ 1,005,521 $ 2,172,205 $ 1,274,344 $ 69,315 $ 15,164 $ 4,536,549 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Covered Loans Total Acquired loans March 31, 2019 Individually evaluated for impairment $ 12 $ 840 $ 2,669 $ 0 $ 0 $ 3,521 Loans acquired with deteriorated credit quality 291 5,802 4,700 0 0 10,793 Collectively evaluated for impairment 42,362 167,107 32,303 811 0 242,583 Total $ 42,665 $ 173,749 $ 39,672 $ 811 $ 0 $ 256,897 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Finance Leases Total Originated loans and leases December 31, 2018 Individually evaluated for impairment $ 1,864 $ 8,388 $ 3,915 $ 0 $ 0 $ 14,167 Collectively evaluated for impairment 1,032,059 2,153,181 1,288,346 70,228 14,556 4,558,370 Total $ 1,033,923 $ 2,161,569 $ 1,292,261 $ 70,228 $ 14,556 $ 4,572,537 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Covered Loans Total Acquired loans December 31, 2018 Individually evaluated for impairment $ 32 $ 842 $ 2,564 $ 0 $ 0 $ 3,438 Loans acquired with deteriorated credit quality 153 5,852 5,031 0 0 11,036 Collectively evaluated for impairment 43,527 172,398 34,038 761 0 250,724 Total $ 43,712 $ 179,092 $ 41,633 $ 761 $ 0 $ 265,198 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 collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis. Impaired loans are as follows: March 31, 2019 December 31, 2018 (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 $ 1,116 $ 1,343 $ 0 $ 183 $ 271 $ 0 Commercial real estate Commercial real estate other 4,564 8,107 0 3,205 3,405 0 Residential real estate Home equity 4,047 4,261 0 3,915 4,168 0 Subtotal $ 9,727 $ 13,711 $ 0 $ 7,303 $ 7,844 $ 0 Originated loans and leases with related allowance Commercial and industrial Commercial and industrial other 809 828 384 5,183 5,183 3,365 Commercial real estate Commercial real estate other 445 445 51 1,681 1,681 397 Subtotal $ 1,254 $ 1,273 $ 435 $ 6,864 $ 6,864 $ 3,762 Total $ 10,981 $ 14,984 $ 435 $ 14,167 $ 14,708 $ 3,762 March 31, 2019 December 31, 2018 (in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance Acquired loans with no related allowance Commercial and industrial Commercial and industrial other $ 12 $ 12 $ 0 $ 32 $ 32 $ 0 Commercial real estate Commercial real estate other 840 922 0 842 924 0 Residential real estate Home equity 2,669 2,772 0 2,564 2,696 0 Total $ 3,521 $ 3,706 $ 0 $ 3,438 $ 3,652 $ 0 The average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2019 and 2018 was as follows: Three Months Ended March 31, 2019 Three Months Ended March 31, 2018 (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 $ 1,468 $ 0 $ 2,399 $ 0 Commercial real estate Commercial real estate other 6,099 0 6,373 0 Residential real estate Home equity 3,981 0 3,980 0 Subtotal $ 11,548 $ 0 $ 12,752 $ 0 Originated loans and leases with related allowance Commercial and industrial Commercial and industrial other 581 0 864 0 Commercial real estate Commercial real estate other 445 0 13 0 Subtotal $ 1,026 $ 0 $ 877 $ 0 Total $ 12,574 $ 0 $ 13,629 $ 0 Three Months Ended March 31, 2019 Three Months Ended March 31, 2018 (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 $ 22 $ 0 $ 265 $ 0 Commercial real estate Commercial real estate other 855 0 1,469 0 Residential real estate Home equity 2,577 0 1,808 0 Subtotal $ 3,454 $ 0 $ 3,542 $ 0 Acquired loans and leases with related allowance Commercial and industrial Commercial and industrial other 0 0 37 0 Subtotal $ 0 $ 0 $ 37 $ 0 Total $ 3,454 $ 0 $ 3,579 $ 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. The following tables present information on loans modified in troubled debt restructuring during the periods indicated. March 31, 2019 Three Months Ended Defaulted TDRs 2 (in thousands) Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Loans Post-Modification Outstanding Recorded Investment Residential real estate Home equity 1 1 168 168 0 0 Total 1 168 168 0 0 1 Represents the following concessions: extension of term and reduction of rate. 2 TDRs that defaulted during the three months ended March 31, 2019 that were restructured in the prior twelve months. March 31, 2018 Three Months Ended Defaulted TDRs 2 (in thousands) Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Loans Post-Modification Outstanding Recorded Investment Residential real estate Home equity 1 1 63 63 0 0 Total 1 63 63 0 0 1 Represents the following concessions: extension of term and reduction of rate. 2 TDRs that defaulted during the three months ended March 31, 2018 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 March 31, 2019 and December 31, 2018 . March 31, 2019 (in thousands) Commercial and Industrial Other Commercial and Industrial Agriculture CommercialReal Estate Other CommercialReal Estate Agriculture Commercial Real Estate Construction Total Originated Loans and Leases Internal risk grade: Pass $ 897,192 $ 82,819 $ 1,804,845 $ 156,105 $ 167,181 $ 3,108,142 Special Mention 10,228 4,979 14,547 3,935 0 33,689 Substandard 3,364 6,939 15,104 10,488 0 35,895 Total $ 910,784 $ 94,737 $ 1,834,496 $ 170,528 $ 167,181 $ 3,177,726 March 31, 2019 (in thousands) Commercial and Industrial Other Commercial and Industrial Agriculture CommercialReal Estate Other CommercialReal Estate Agriculture Commercial Real Estate Construction Total Acquired Loans and Leases Internal risk grade: Pass $ 42,429 $ 0 $ 169,305 $ 219 $ 1,361 $ 213,314 Special Mention 0 0 270 0 0 270 Substandard 236 0 2,594 0 0 2,830 Total $ 42,665 $ 0 $ 172,169 $ 219 $ 1,361 $ 216,414 December 31, 2018 (in thousands) Commercial and Industrial Other Commercial and Industrial Agriculture CommercialReal Estate Other CommercialReal Estate Agriculture Commercial Real Estate Construction Total Originated Loans and Leases Internal risk grade: Pass $ 910,476 $ 93,939 $ 1,797,599 $ 157,156 $ 164,285 $ 3,123,455 Special Mention 8,675 4,951 9,484 4,964 0 28,074 Substandard 7,278 8,604 20,196 7,885 0 43,963 Total $ 926,429 $ 107,494 $ 1,827,279 $ 170,005 $ 164,285 $ 3,195,492 December 31, 2018 (in thousands) Commercial and Industrial Other Commercial and Industrial Agriculture CommercialReal Estate Other CommercialReal Estate Agriculture Commercial Real Estate Construction Total Acquired Loans and Leases Internal risk grade: Pass $ 43,447 $ 0 $ 174,383 $ 224 $ 1,384 $ 219,438 Special Mention 0 0 452 0 0 452 Substandard 265 0 2,649 0 0 2,914 Total $ 43,712 $ 0 $ 177,484 $ 224 $ 1,384 $ 222,804 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 March 31, 2019 and December 31, 2018 . 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. March 31, 2019 (in thousands) Residential Residential Consumer Consumer Total Originated Loans and Leases Performing $ 201,616 $ 1,063,151 $ 13,290 $ 55,791 $ 1,333,848 Nonperforming 1,922 7,655 140 94 9,811 Total $ 203,538 $ 1,070,806 $ 13,430 $ 55,885 $ 1,343,659 March 31, 2019 (in thousands) Residential Residential Consumer Consumer Total Acquired Loans and Leases Performing $ 18,401 $ 19,015 $ 0 $ 811 $ 38,227 Nonperforming 1,185 1,071 0 0 2,256 Total $ 19,586 $ 20,086 $ 0 $ 811 $ 40,483 December 31, 2018 (in thousands) Residential Residential Consumer Consumer Total Originated Loans and Leases Performing $ 206,675 $ 1,076,032 $ 12,508 $ 57,486 $ 1,352,701 Nonperforming 1,784 7,770 155 79 9,788 Total $ 208,459 $ 1,083,802 $ 12,663 $ 57,565 $ 1,362,489 December 31, 2018 (in thousands) Residential Residential Consumer Consumer Total Acquired Loans and Leases Performing $ 19,735 $ 19,380 $ 0 $ 761 $ 39,876 Nonperforming 1,414 1,104 0 0 2,518 Total $ 21,149 $ 20,484 $ 0 $ 761 $ 42,394 |