Allowance for Loan and Lease Losses | 6. 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 Receivables Contingencies The model is comprised of five 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 five components include: impaired loans; individually reviewed and graded loans; past due and nonaccrual 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 June 30, 2015, 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 six months ended June 30, 2015 and 2014. 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 June 30, 2015 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Finance Leases Total Allowance for originated loans and leases Beginning balance $ 9,830 $ 12,338 $ 4,665 $ 1,857 $ 0 $ 28,690 Charge-offs (42 ) 0 (219 ) (243 ) 0 (504 ) Recoveries 88 269 2 114 0 473 Provision (credit) (1,652 ) 880 1,135 406 769 Ending Balance $ 8,224 $ 13,487 $ 5,583 $ 2,134 $ 0 $ 29,428 Three months ended June 30, 2015 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Finance Leases Total Allowance for acquired loans Beginning balance $ 563 $ 166 $ 43 $ 23 $ 0 $ 795 Charge-offs (52 ) (156 ) (82 ) 0 0 (290 ) Recoveries 0 5 0 0 0 5 Provision (credit) (127 ) 152 139 (11 ) 0 153 Ending Balance $ 384 $ 167 $ 100 $ 12 $ 0 $ 663 Three months ended June 30, 2014 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Finance Leases Total Allowance for originated loans and leases Beginning balance $ 8,769 $ 10,415 $ 5,368 $ 2,109 $ 0 $ 26,661 Charge-offs (133 ) (433 ) (74 ) (414 ) 0 (1,054 ) Recoveries 424 560 74 143 0 1,201 Provision (credit) (498 ) (153 ) 77 518 0 (56 ) Ending Balance $ 8,562 $ 10,389 $ 5,445 $ 2,356 $ 0 $ 26,752 Three months ended June 30, 2014 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Covered Total Allowance for acquired loans Beginning balance $ 298 $ 819 $ 70 $ 166 $ 0 $ 1,353 Charge-offs (6 ) (526 ) (178 ) (1 ) 0 (711 ) Recoveries 0 0 0 0 0 0 Provision (credit) (133 ) 167 157 (68 ) 0 123 Ending Balance $ 159 $ 460 $ 49 $ 97 $ 0 $ 765 Six months ended June 30, 2015 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Finance Leases Total Allowance for originated loans and leases Beginning balance $ 9,157 $ 12,069 $ 5,030 $ 1,900 $ 0 $ 28,156 Charge-offs (44 ) (14 ) (312 ) (510 ) 0 (880 ) Recoveries 235 477 49 282 0 1,043 Provision (credit) (1,124 ) 955 816 462 0 1,109 Ending Balance $ 8,224 $ 13,487 $ 5,583 $ 2,134 $ 0 $ 29,428 Six months ended June 30, 2015 (in thousands) Commercial and Commercial Real Estate Residential Real Estate Consumer and Other Covered Total Allowance for acquired loans Beginning balance $ 431 $ 337 $ 51 $ 22 $ 0 $ 841 Charge-offs (53 ) (156 ) (112 ) 0 0 (321 ) Recoveries 7 112 2 0 0 121 Provision (credit) (1 ) (126 ) 159 (10 ) 0 22 Ending Balance $ 384 $ 167 $ 100 $ 12 $ 0 $ 663 Six months ended June 30, 2014 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Finance Leases Total Allowance for originated loans and leases Beginning balance $ 8,406 $ 10,459 $ 5,771 $ 2,059 $ 5 $ 26,700 Charge-offs (254 ) (613 ) (267 ) (666 ) 0 (1,800 ) Recoveries 489 562 86 260 0 1,397 Provision (credit) (79 ) (19 ) (145 ) 703 (5 ) 455 Ending Balance $ 8,562 $ 10,389 $ 5,445 $ 2,356 $ 0 $ 26,752 Six months ended June 30, 2014 (in thousands) Commercial and Commercial Real Estate Residential Real Estate Consumer and Other Covered Total Allowance for acquired loans Beginning balance $ 168 $ 770 $ 274 $ 58 $ 0 $ 1,270 Charge-offs (25 ) (551 ) (277 ) (7 ) 0 (860 ) Recoveries 0 0 0 0 0 0 Provision (credit) 16 241 52 46 0 355 Ending Balance $ 159 $ 460 $ 49 $ 97 $ 0 $ 765 At June 30, 2015 and December 31, 2014, 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 and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Finance Leases Total Allowance for originated loans and leases June 30, 2015 Individually evaluated for impairment $ 0 $ 735 $ 0 $ 0 $ 0 $ 735 Collectively evaluated for impairment 8,224 12,752 5,583 2,134 0 28,693 Ending balance $ 8,224 $ 13,487 $ 5,583 $ 2,134 $ 0 $ 29,428 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Covered Loans Total Allowance for acquired loans June 30, 2015 Individually evaluated for impairment $ 364 $ 23 $ 0 $ 0 $ 0 $ 387 Collectively evaluated for impairment 20 144 100 12 0 276 Ending balance $ 384 $ 167 $ 100 $ 12 $ 0 $ 663 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Finance Leases Total Allowance for originated loans and leases December 31, 2014 Individually evaluated for impairment $ 0 $ 652 $ 0 $ 0 $ 0 $ 652 Collectively evaluated for impairment 9,157 11,417 5,030 1,900 0 27,504 Ending balance $ 9,157 $ 12,069 $ 5,030 $ 1,900 $ 0 $ 28,156 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Covered Loans Total Allowance for acquired loans December 31, 2014 Individually evaluated for impairment $ 414 $ 100 $ 0 $ 0 $ 0 $ 514 Collectively evaluated for impairment 17 237 51 22 0 327 Ending balance $ 431 $ 337 $ 51 $ 22 $ 0 $ 841 The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology as of June 30, 2015 and December 31, 2014 was as follows: (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Finance Leases Total Originated loans and leases June 30, 2015 Individually evaluated for impairment $ 555 $ 9,027 $ 944 $ 0 $ 0 $ 10,526 Collectively evaluated for impairment 785,385 1,195,361 953,246 57,708 14,190 3,005,890 Total $ 785,940 $ 1,204,388 $ 954,190 $ 57,708 $ 14,190 $ 3,016,416 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Covered Loans Total Acquired loans June 30, 2015 Individually evaluated for impairment $ 1,184 $ 3,757 $ 1,241 $ 0 $ 0 $ 6,182 Loans acquired with deteriorated credit quality $ 689 $ 11,613 $ 3,616 $ 0 $ 14,545 $ 30,463 Collectively evaluated for impairment 91,002 303,650 74,467 973 1,226 471,318 Total $ 92,875 $ 319,020 $ 79,324 $ 973 $ 15,771 $ 507,963 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Finance Leases Total Originated loans and leases December 31, 2014 Individually evaluated for impairment $ 1,283 7,675 $ 1,408 $ 0 $ 0 $ 10,366 Collectively evaluated for impairment 765,753 1,103,367 896,453 54,172 12,251 2,831,996 Total $ 767,036 $ 1,111,042 $ 897,861 $ 54,172 $ 12,251 $ 2,842,362 (in thousands) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer and Other Covered Loans Total Acquired loans December 31, 2014 Individually evaluated for impairment $ 628 1,195 $ 440 $ 0 $ 0 $ 2,263 Loans acquired with deteriorated credit quality 995 11,640 3,669 0 18,106 34,410 Collectively evaluated for impairment 95,411 334,741 84,181 1,095 1,213 516,641 Total $ 97,034 $ 347,576 $ 88,290 $ 1,095 $ 19,319 $ 553,314 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: 06/30/2015 12/31/2014 (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 $ 555 $ 560 $ 0 $ 1,283 $ 1,307 $ 0 Commercial real estate Commercial real estate other 7,349 7,948 0 6,021 6,628 0 Residential real estate Home equity 944 944 0 1,408 1,499 0 Subtotal $ 8,848 $ 9,452 $ 0 $ 8,712 $ 9,434 $ 0 Originated loans and leases with related allowance Commercial real estate Commercial real estate other 1,678 1,702 735 1,654 1,654 652 Subtotal $ 1,678 $ 1,702 $ 735 $ 1,654 $ 1,654 $ 652 Total $ 10,526 $ 11,154 $ 735 $ 10,366 $ 11,088 $ 652 06/30/2015 12/31/2014 (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 $ 457 $ 457 $ 0 $ 64 $ 64 $ 0 Commercial real estate Construction 369 369 0 0 0 0 Commercial real estate other 3,244 3,638 0 941 1,204 0 Residential real estate Home equity 1,241 1,241 0 440 440 0 Subtotal $ 5,311 $ 5,705 $ 0 $ 1,445 $ 1,708 $ 0 Acquired loans and leases with related allowance Commercial and industrial Commercial and industrial other 727 727 364 564 564 414 Commercial real estate Commercial real estate other 144 144 23 254 254 100 Subtotal $ 871 $ 871 $ 387 $ 818 $ 818 $ 514 Total $ 6,182 $ 6,576 $ 387 $ 2,263 $ 2,526 $ 514 The average recorded investment and interest income recognized on impaired loans for the three months ended June 30, 2015 and 2014 was as follows: Three Months Ended Three Months Ended 06/30/2015 06/30/2014 (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 560 0 376 0 Commercial real estate Commercial real estate other 7,739 0 10,465 0 Residential real estate Home equity 1,137 0 1,144 0 Subtotal $ 9,436 $ 0 $ 11,985 $ 0 Originated loans and leases with related allowance Commercial real estate Commercial real estate other 1,678 0 0 0 Subtotal $ 1,678 $ 0 $ 0 $ 0 Total $ 11,114 $ 0 $ 11,985 $ 0 Three Months Ended Three Months Ended 06/30/2015 06/30/2014 (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 559 0 1,071 0 Commercial real estate Construction 371 0 2,039 0 Commercial real estate other 3,074 0 3,708 0 Residential real estate Home equity 1,109 0 0 0 Subtotal $ 5,113 $ 0 $ 6,818 $ 0 Acquired loans and leases with related allowance Commercial and industrial Commercial and industrial other 778 0 0 0 Commercial real estate Commercial real estate other 143 0 251 0 Subtotal $ 921 $ 0 $ 251 $ 0 Total $ 6,034 $ 0 $ 7,069 $ 0 Six Months Ended Six Months Ended 06/30/2015 06/30/2014 (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 1,688 0 386 0 Commercial real estate Commercial real estate other 9,045 0 10,618 0 Residential real estate Home equity 2,169 0 1,132 0 Subtotal $ 12,902 $ 0 $ 12,136 $ 0 Originated loans and leases with related allowance Commercial real estate Commercial real estate other 1,669 0 0 0 Subtotal $ 1,669 $ 0 $ 0 $ 0 Total $ 14,571 $ 0 $ 12,136 $ 0 Six Months Ended Six Months Ended 06/30/2015 06/30/2014 (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 600 0 1,093 0 Commercial real estate Construction 375 0 2,298 0 Commercial real estate other 3,176 0 3,460 0 Residential real estate Home equity 1,060 0 0 0 Subtotal $ 5,211 $ 0 $ 6,851 $ 0 Acquired loans and leases with related allowance Commercial and industrial Commercial and industrial other 787 0 0 0 Commercial real estate Commercial real estate other 144 0 248 0 Subtotal $ 931 $ 0 $ 248 $ 0 Total $ 6,142 $ 0 $ 7,099 $ 0 Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) 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. June 30, 2015 Three months ended Defaulted TDRs 3 (in thousands) Number of Loans Pre- Post- Number of Loans Post- Modification Outstanding Recorded Investment Commercial and industrial Commercial and industrial other 1 2 $ 62 $ 62 0 $ 0 Residential real estate Home equity 2 3 450 450 2 143 Total 5 $ 512 $ 512 2 $ 143 1 Represents the following concessions: Reduction of rate 2 Represents the following concessions: extension of term and reduction of rate 3 June 30, 2014 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 and industrial Commercial and industrial other 1 1 $ 88 $ 88 0 $ 0 Commercial real estate Commercial real estate other 2 1 480 480 0 0 Total 2 $ 568 $ 568 0 $ 0 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 June 30, 2015 Six months ended Defaulted TDRs 4 (in thousands) Number of Loans Pre- Post- Number of Loans Post- Modification Outstanding Recorded Investment Commercial and industrial Commercial and industrial other 1 4 $ 381 $ 381 0 $ 0 Commercial real estate Commercial real estate other 2 2 $ 614 $ 614 0 $ 0 Residential real estate Home equity 3 12 1,558 1,558 2 143 Total 18 $ 2,553 $ 2,553 2 $ 143 1 Represents the following concessions: extension of term (2 loans $319,000) and reduction of rate (2 loans $62,000) 2 Represents the following concessions: extension of term (1 loan $28,000) and extension of term (1 loan $585,000) 3 4 June 30, 2014 Six months ended Defaulted TDRs 4 (in thousands) Number of Loans Pre- Post- Number of Loans Post- Modification Outstanding Recorded Investment Commercial and industrial 1 1 $ 88 $ 88 0 $ 0 Commercial real estate 2 1 480 480 1 63 Residential real estate 3 0 0 0 1 195 Total 2 $ 568 $ 568 2 $ 258 1 2 3 The following tables present credit quality indicators (internal risk grade) by class of commercial and industrial loans and commercial real estate loans as of June 30, 2015 and December 31, 2014. June 30, 2015 (in thousands) Commercial Commercial Commercial Commercial Commercial Total Originated Loans and Leases Internal risk grade: Pass $ 716,926 $ 60,775 $ 1,020,443 $ 73,714 $ 71,164 $ 1,943,022 Special Mention 1,666 164 20,097 148 3,631 25,706 Substandard 5,604 805 14,467 724 0 21,600 Total $ 724,196 $ 61,744 $ 1,055,007 $ 74,586 $ 74,795 $ 1,990,328 June 30, 2015 (in thousands) Commercial Commercial Commercial Commercial Commercial Total Acquired Loans and Leases Internal risk grade: Pass $ 90,053 $ 0 $ 260,047 $ 2,214 $ 36,060 $ 388,374 Special Mention 83 0 1,506 0 0 1,589 Substandard 2,739 0 17,272 0 1,921 21,932 Total $ 92,875 $ 0 $ 278,825 $ 2,214 $ 37,981 $ 411,895 December 31, 2014 (in thousands) Commercial Commercial Commercial Commercial Commercial Total Originated Loans and Leases Internal risk grade: Pass $ 670,478 $ 78,250 $ 945,898 $ 58,455 $ 68,696 $ 1,821,777 Special Mention 12,602 151 19,692 155 3,731 36,331 Substandard 5,449 106 14,031 384 0 19,970 Total $ 688,529 $ 78,507 $ 979,621 $ 58,994 $ 72,427 $ 1,878,078 December 31, 2014 (in thousands) Commercial Commercial Commercial Commercial Commercial Total Acquired Loans and Leases Internal risk grade: Pass $ 94,054 $ 0 $ 288,193 $ 1,352 $ 33,686 $ 417,285 Special Mention 83 0 5,675 0 0 5,758 Substandard 2,897 0 14,620 1,830 2,220 21,567 Total $ 97,034 $ 0 $ 308,488 $ 3,182 $ 35,906 $ 444,610 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 June 30, 2015 and December 31, 2014. 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. June 30, 2015 (in thousands) Residential Home Equity Residential Mortgages Consumer Indirect Consumer Other Total Originated Loans and Leases Performing $ 191,752 $ 753,963 $ 17,783 $ 39,682 $ 1,003,180 Nonperforming 1,580 6,895 83 160 8,718 Total $ 193,332 $ 760,858 $ 17,866 $ 39,842 $ 1,011,898 June 30, 2015 (in thousands) Residential Home Equity Residential Mortgages Consumer Indirect Consumer Other Total Acquired Loans and Leases Performing $ 48,124 $ 29,148 $ 0 $ 973 $ 78,245 Nonperforming 593 1,459 0 0 2,052 Total $ 48,717 $ 30,607 $ 0 $ 973 $ 80,297 December 31, 2014 (in thousands) Residential Home Equity Residential Mortgages Consumer Indirect Consumer Other Total Originated Loans and Leases Performing $ 185,619 $ 704,663 $ 18,197 $ 35,626 $ 944,105 Nonperforming 1,338 6,241 101 248 7,928 Total $ 186,957 $ 710,904 $ 18,298 $ 35,874 $ 952,033 December 31, 2014 (in thousands) Residential Home Equity Residential Mortgages Consumer Indirect Consumer Other Total Acquired Loans and Leases Performing $ 55,416 $ 31,304 $ 0 $ 1,095 $ 87,815 Nonperforming 592 978 0 0 1,570 Total $ 56,008 $ 32,282 $ 0 $ 1,095 $ 89,385 |