ALLOWANCE FOR LOAN LOSSES | We maintain an allowance for loan losses, or ALL, at a level determined to be adequate to absorb estimated probable credit losses inherent in the loan portfolio as of the balance sheet date. We develop and document a systematic ALL methodology based on the following portfolio segments: 1. CRE, 2. C&I, 3. Commercial Construction, 4. Consumer Real Estate and 5. Other Consumer. The following are key risks within each portfolio segment: CRE —Loans secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business prospects of the lessee, if the project is not owner occupied. C&I —Loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the company is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. Collateral for these types of loans often does not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. Commercial Construction —Loans made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer Real Estate —Loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchase money mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt. Other Consumer —Loans made to individuals that may be secured by assets other than 1-4 family residences, as well as unsecured loans. This segment includes auto loans, unsecured loans and lines and credit cards. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values. We further assess risk within each portfolio segment by pooling loans with similar risk characteristics. For the commercial loan classes, the most important indicator of risk is the internally assigned risk rating, including pass, special mention and substandard. Consumer loans are pooled by type of collateral, lien position and loan to value, or LTV, for Consumer Real Estate loans. Historical loss rates are applied to these loan pools to determine the reserve for loans collectively evaluated for impairment. The ALL methodology for groups of loans collectively evaluated for impairment is comprised of both a quantitative and qualitative analysis. A key assumption in the quantitative component of the reserve is the loss emergence period, or LEP. The LEP is an estimate of the average amount of time from the point at which a loss is incurred on a loan to the point at which the loss is confirmed. Another key assumption is the look-back period, or LBP, which represents the historical data period utilized to calculate loss rates. Management monitors various credit quality indicators for both the commercial and consumer loan portfolios, including delinquency, nonperforming status and changes in risk ratings on a monthly basis. The following tables present the age analysis of past due loans segregated by class of loans as of the dates presented: September 30, 2017 (dollars in thousands) Current 30-59 Days Past Due 60-89 Days Past Due Nonaccrual Total Past Due Total Loans Commercial real estate $ 2,674,171 $ 530 $ 421 $ 6,571 $ 7,522 $ 2,681,693 Commercial and industrial 1,438,224 499 739 7,349 8,587 1,446,811 Commercial construction 428,744 75 — 4,068 4,143 432,887 Residential mortgage 684,848 3,872 865 7,782 12,519 697,367 Home equity 482,000 1,616 515 3,675 5,806 487,806 Installment and other consumer 69,316 228 52 48 328 69,644 Consumer construction 4,550 — — — — 4,550 Loans held for sale 47,936 — — — — 47,936 Total $ 5,829,789 $ 6,820 $ 2,592 $ 29,493 $ 38,905 $ 5,868,694 December 31, 2016 (dollars in thousands) Current 30-59 Days Past Due 60-89 Days Past Due Nonaccrual Total Past Due Total Loans Commercial real estate $ 2,479,513 $ 2,032 $ 759 $ 16,172 $ 18,963 $ 2,498,476 Commercial and industrial 1,391,475 1,061 428 8,071 9,560 1,401,035 Commercial construction 450,410 547 — 4,927 5,474 455,884 Residential mortgage 689,635 1,312 1,117 9,918 12,347 701,982 Home equity 476,866 1,470 509 3,439 5,418 482,284 Installment and other consumer 65,525 176 43 108 327 65,852 Consumer construction 5,906 — — — — 5,906 Loans held for sale 3,793 — — — — 3,793 Total $ 5,563,123 $ 6,598 $ 2,856 $ 42,635 $ 52,089 $ 5,615,212 We continually monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans within the pass rating generally have a lower risk of loss than loans risk rated as special mention or substandard. Our risk ratings are consistent with regulatory guidance and are as follows: Pass —The loan is currently performing and is of high quality. Special Mention —A special mention loan has potential weaknesses that warrant management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects or in the strength of our credit position at some future date. Economic and market conditions, beyond the borrower’s control, may in the future necessitate this classification. Substandard —A substandard loan is not adequately protected by the net worth and/or paying capacity of the borrower or by the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. The following tables present the recorded investment in commercial loan classes by internally assigned risk ratings as of the dates presented: September 30, 2017 (dollars in thousands) Commercial Real Estate % of Total Commercial and Industrial % of Total Commercial Construction % of Total Total % of Total Pass $ 2,587,393 96.5 % $ 1,354,269 93.6 % $ 411,379 95.0 % $ 4,353,041 95.4 % Special mention 55,218 2.1 % 53,853 3.7 % 11,503 2.7 % 120,574 2.6 % Substandard 39,082 1.4 % 38,689 2.7 % 10,005 2.3 % 87,776 2.0 % Total $ 2,681,693 100.0 % $ 1,446,811 100.0 % $ 432,887 100.0 % $ 4,561,391 100.0 % December 31, 2016 (dollars in thousands) Commercial Real Estate % of Total Commercial and Industrial % of Total Commercial Construction % of Total Total % of Total Pass $ 2,423,742 97.0 % $ 1,315,507 93.9 % $ 430,472 94.4 % $ 4,169,721 95.7 % Special mention 33,098 1.3 % 40,409 2.9 % 14,691 3.2 % 88,198 2.0 % Substandard 41,636 1.7 % 45,119 3.2 % 10,721 2.4 % 97,476 2.3 % Total $ 2,498,476 100.0 % $ 1,401,035 100.0 % $ 455,884 100.0 % $ 4,355,395 100.0 % We monitor the delinquent status of the consumer portfolio on a monthly basis. Loans are considered nonperforming when interest and principal are 90 days or more past due or management has determined that a material deterioration in the borrower’s financial condition exists. The risk of loss is generally highest for nonperforming loans. The following tables present the recorded investment in consumer loan classes by performing and nonperforming status as of the dates presented: September 30, 2017 (dollars in thousands) Residential Mortgage % of Total Home Equity % of Total Installment and other consumer % of Total Consumer Construction % of Total Total % of Total Performing $ 689,585 98.9 % $ 484,131 99.2 % $ 69,596 99.9 % $ 4,550 100.0 % $ 1,247,862 99.1 % Nonperforming 7,782 1.1 % 3,675 0.8 % 48 0.1 % — — % 11,505 0.9 % Total $ 697,367 100.0 % $ 487,806 100.0 % $ 69,644 100.0 % $ 4,550 100.0 % $ 1,259,367 100.0 % December 31, 2016 (dollars in thousands) Residential Mortgage % of Total Home Equity % of Total Installment and other consumer % of Total Consumer Construction % of Total Total % of Total Performing $ 692,064 98.6 % $ 478,845 99.3 % $ 65,744 99.8 % $ 5,906 100.0 % $ 1,242,559 98.9 % Nonperforming 9,918 1.4 % 3,439 0.7 % 108 0.2 % — — % 13,465 1.1 % Total $ 701,982 100.0 % $ 482,284 100.0 % $ 65,852 100.0 % $ 5,906 100.0 % $ 1,256,024 100.0 % We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment. Loans are considered to be impaired when based upon current information and events it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan agreement. All TDRs will be reported as an impaired loan for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is expected that the remaining principal and interest will be fully collected according to the restructured agreement. For all TDRs, regardless of size, as well as all other impaired loans, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate. The following table summarizes investments in loans considered to be impaired and related information on those impaired loans as of the dates presented: September 30, 2017 December 31, 2016 (dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With a related allowance recorded: Commercial real estate $ — $ — $ — $ — $ — $ — Commercial and industrial 2,468 2,501 260 964 2,433 771 Commercial construction — — — — — — Consumer real estate 22 22 22 26 26 26 Other consumer 30 30 30 1 1 1 Total with a Related Allowance Recorded 2,520 2,553 312 991 2,460 798 Without a related allowance recorded: Commercial real estate 6,341 6,985 — 16,352 17,654 — Commercial and industrial 6,075 8,245 — 5,902 7,699 — Commercial construction 5,974 8,629 — 6,613 10,306 — Consumer real estate 11,054 11,979 — 12,053 12,849 — Other consumer 24 30 — 24 31 — Total without a Related Allowance Recorded 29,468 35,868 — 40,944 48,539 — Total: Commercial real estate 6,341 6,985 — 16,352 17,654 — Commercial and industrial 8,543 10,746 260 6,866 10,132 771 Commercial construction 5,974 8,629 — 6,613 10,306 — Consumer real estate 11,076 12,001 22 12,079 12,875 26 Other consumer 54 60 30 25 32 1 Total $ 31,988 $ 38,421 $ 312 $ 41,935 $ 50,999 $ 798 As of September 30, 2017 , we had $32.0 million of impaired loans, which included $6.5 million of acquired loans from the Merger that experienced credit deterioration since the acquisition date. This compares to $41.9 million of impaired loans at December 31, 2016, which included $18.4 million of acquired loans from the Merger. The following table summarizes average recorded investment in and interest income recognized on loans considered to be impaired for the periods presented: For the Three Months Ended September 30, 2017 September 30, 2016 (dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With a related allowance recorded: Commercial real estate $ — $ — $ — $ — Commercial and industrial 2,406 37 2,437 37 Commercial construction — — — — Consumer real estate 23 1 28 — Other consumer 32 2 2 — Total with a Related Allowance Recorded 2,461 40 2,467 37 Without a related allowance recorded: Commercial real estate 6,415 105 7,582 38 Commercial and industrial 9,074 130 7,326 52 Commercial construction 7,140 154 8,039 49 Consumer real estate 11,149 250 11,686 159 Other consumer 28 — 32 — Total without a Related Allowance Recorded 33,806 639 34,665 298 Total: Commercial real estate 6,415 105 7,582 38 Commercial and industrial 11,480 167 9,763 89 Commercial construction 7,140 154 8,039 49 Consumer real estate 11,172 251 11,714 159 Other consumer 60 2 34 — Total $ 36,267 $ 679 $ 37,132 $ 335 Nine Months Ended September 30, 2017 September 30, 2016 (dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With a related allowance recorded: Commercial real estate $ — $ — $ — $ — Commercial and industrial 1,218 44 2,492 100 Commercial construction — — — — Consumer real estate 24 1 29 2 Other consumer 35 1 2 — Total with a Related Allowance Recorded 1,277 46 2,523 102 Without a related allowance recorded: Commercial real estate 6,577 140 7,551 106 Commercial and industrial 11,001 164 7,447 156 Commercial construction 7,222 194 8,498 143 Consumer real estate 11,488 382 11,831 400 Other consumer 33 1 38 1 Total without a Related Allowance Recorded 36,321 881 35,365 806 Total: Commercial real estate 6,577 140 7,551 106 Commercial and industrial 12,219 208 9,939 256 Commercial construction 7,222 194 8,498 143 Consumer real estate 11,512 383 11,860 402 Other consumer 68 2 40 1 Total $ 37,598 $ 927 $ 37,888 $ 908 The following tables detail activity in the ALL for the periods presented: Three Months Ended September 30, 2017 (dollars in thousands) Commercial Real Estate Commercial and Industrial Commercial Construction Consumer Real Estate Other Consumer Total Loans Balance at beginning of period $ 24,358 $ 9,256 $ 13,944 $ 5,803 $ 1,990 $ 55,351 Charge-offs (37 ) (644 ) (1,453 ) (101 ) (425 ) (2,660 ) Recoveries 182 243 473 91 182 1,171 Net (Charge-offs)/ Recoveries 145 (401 ) (980 ) (10 ) (243 ) (1,489 ) Provision for loan losses 472 859 1,951 (262 ) (170 ) 2,850 Balance at End of Period $ 24,975 $ 9,714 $ 14,915 $ 5,531 $ 1,577 $ 56,712 Three Months Ended September 30, 2016 (dollars in thousands) Commercial Real Estate Commercial and Industrial Commercial Construction Consumer Real Estate Other Consumer Total Loans Balance at beginning of period $ 15,978 $ 14,771 $ 11,701 $ 8,418 $ 1,345 $ 52,213 Charge-offs (93 ) (414 ) (163 ) (369 ) (461 ) (1,500 ) Recoveries 264 169 17 44 70 564 Net (Charge-offs)/ Recoveries 171 (245 ) (146 ) (325 ) (391 ) (936 ) Provision for loan losses 4,244 (2,232 ) 1,356 (1,760 ) 908 2,516 Balance at End of Period $ 20,393 $ 12,294 $ 12,911 $ 6,333 $ 1,862 $ 53,793 Nine Months Ended September 30, 2017 (dollars in thousands) Commercial Real Estate Commercial and Industrial Commercial Construction Consumer Real Estate Other Consumer Total Loans Balance at beginning of period $ 19,976 $ 10,810 $ 13,999 $ 6,095 $ 1,895 $ 52,775 Charge-offs (2,100 ) (4,041 ) (2,097 ) (1,957 ) (1,228 ) (11,423 ) Recoveries 415 499 842 270 433 2,459 Net (Charge-offs)/Recoveries (1,685 ) (3,542 ) (1,255 ) (1,687 ) (795 ) (8,964 ) Provision for loan losses 6,684 2,446 2,171 1,123 477 12,901 Balance at End of Period $ 24,975 $ 9,714 $ 14,915 $ 5,531 $ 1,577 $ 56,712 Nine Months Ended September 30, 2016 (dollars in thousands) Commercial Real Estate Commercial and Industrial Commercial Construction Consumer Real Estate Other Consumer Total Loans Balance at beginning of period $ 15,043 $ 10,853 $ 12,625 $ 8,400 $ 1,226 $ 48,147 Charge-offs (1,808 ) (3,244 ) (1,108 ) (891 ) (1,572 ) (8,623 ) Recoveries 662 589 20 342 277 1,890 Net (Charge-offs)/Recoveries (1,146 ) (2,655 ) (1,088 ) (549 ) (1,295 ) (6,733 ) Provision for loan losses 6,496 4,096 1,374 (1,518 ) 1,931 12,379 Balance at End of Period $ 20,393 $ 12,294 $ 12,911 $ 6,333 $ 1,862 $ 53,793 The following tables present the ALL and recorded investments in loans by category as of the periods presented: September 30, 2017 Allowance for Loan Losses Portfolio Loans (dollars in thousands) Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Commercial real estate $ — $ 24,975 $ 24,975 $ 6,341 $ 2,675,352 $ 2,681,693 Commercial and industrial 260 9,454 9,714 8,543 1,438,268 1,446,811 Commercial construction — 14,915 14,915 5,974 426,913 432,887 Consumer real estate 22 5,509 5,531 11,076 1,178,647 1,189,723 Other consumer 30 1,547 1,577 54 69,590 69,644 Total $ 312 $ 56,400 $ 56,712 $ 31,988 $ 5,788,770 $ 5,820,758 December 31, 2016 Allowance for Loan Losses Portfolio Loans (dollars in thousands) Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Individually Evaluated for Impairment Collectively Evaluated for Impairment Total Commercial real estate $ — $ 19,976 $ 19,976 $ 16,352 $ 2,482,124 $ 2,498,476 Commercial and industrial 771 10,039 10,810 6,866 1,394,169 1,401,035 Commercial construction — 13,999 13,999 6,613 449,271 455,884 Consumer real estate 26 6,069 6,095 12,079 1,178,093 1,190,172 Other consumer 1 1,894 1,895 25 65,827 65,852 Total $ 798 $ 51,977 $ 52,775 $ 41,935 $ 5,569,484 $ 5,611,419 |