ALLOWANCE FOR LOAN LOSSES | 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 within the loan portfolio as of the balance sheet date. We develop and document a systematic ALL methodology based on the following portfolio segments: 1) Commercial Real Estate, or CRE, 2) Commercial and Industrial, or 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 and 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 and 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 of credit. 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 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, 2019 (dollars in thousands) Current 30-59 Days Past Due 60-89 Days Past Due Non - performing Total Past Due Loans Total Loans Commercial real estate $ 2,886,051 $ 1,845 $ 561 $ 33,740 $ 36,146 $ 2,922,197 Commercial and industrial 1,620,286 2,049 313 4,206 6,568 1,626,854 Commercial construction 313,190 480 — 1,143 1,623 314,813 Residential mortgage 760,601 1,566 1,331 7,384 10,281 770,882 Home equity 469,805 1,370 357 3,492 5,219 475,024 Installment and other consumer 74,233 132 77 18 227 74,460 Consumer construction 11,535 — — — — 11,535 Loans held for sale 8,371 — — — — 8,371 Total $ 6,144,072 $ 7,442 $ 2,639 $ 49,983 $ 60,064 $ 6,204,136 December 31, 2018 (dollars in thousands) Current 30-59 Days Past Due 60-89 Days Past Due Non - performing Total Past Total Loans Commercial real estate $ 2,903,997 $ 3,638 $ 2,145 $ 12,052 $ 17,835 $ 2,921,832 Commercial and industrial 1,482,473 1,000 983 8,960 10,943 1,493,416 Commercial construction 243,004 — — 14,193 14,193 257,197 Residential mortgage 717,447 1,584 520 7,128 9,232 726,679 Home equity 465,152 2,103 609 3,698 6,410 471,562 Installment and other consumer 67,281 148 75 42 265 67,546 Consumer construction 8,416 — — — — 8,416 Loans held for sale 2,371 — — — — 2,371 Total $ 5,890,141 $ 8,473 $ 4,332 $ 46,073 $ 58,878 $ 5,949,019 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, 2019 (dollars in thousands) Commercial Real Estate % of Total Commercial and Industrial % of Total Commercial Construction % of Total Total % of Total Pass $ 2,767,646 94.7 % $ 1,547,375 95.0 % $ 304,135 96.6 % $ 4,618,155 94.9 % Special mention 60,096 2.1 % 43,482 2.7 % 7,112 2.3 % 110,690 2.3 % Substandard 94,455 3.2 % 36,997 2.3 % 3,566 1.1 % 135,019 2.8 % Total $ 2,922,197 100.0 % $ 1,626,854 100.0 % $ 314,813 100.0 % $ 4,863,864 100.0 % December 31, 2018 (dollars in thousands) Commercial Real Estate % of Total Commercial and Industrial % of Total Commercial Construction % of Total Total % of Total Pass $ 2,776,292 95.0 % $ 1,394,427 93.4 % $ 233,190 90.7 % $ 4,403,909 94.3 % Special mention 54,627 1.9 % 25,368 1.7 % 7,349 2.8 % 87,344 1.8 % Substandard 90,913 3.1 % 73,621 4.9 % 16,658 6.5 % 181,192 3.9 % Total $ 2,921,832 100.0 % $ 1,493,416 100.0 % $ 257,197 100.0 % $ 4,672,445 100.0 % Substandard loans decreased $46.2 million to $135.0 million at September 30, 2019 compared to $181.2 million at December 31, 2018 mainly due to loan pay-offs and upgrades of risk ratings. Special mention loans increased $23.4 million to $110.7 million at September 30, 2019 compared to $87.3 million at December 31, 2018 due to downgrades as a result of updated financial information. 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, 2019 (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 $ 763,498 99.0 % $ 471,532 99.3 % $ 74,442 100.0 % $ 11,535 100.0 % $ 1,321,007 99.2 % Nonperforming 7,384 1.0 % 3,492 0.7 % 18 — % — — % 10,894 0.8 % Total $ 770,882 100.0 % $ 475,024 100.0 % $ 74,460 100.0 % $ 11,535 100.0 % $ 1,331,901 100.0 % December 31, 2018 (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 $ 719,551 99.0 % $ 467,864 99.2 % $ 67,504 99.9 % $ 8,416 100.0 % $ 1,263,335 99.1 % Nonperforming 7,128 1.0 % 3,698 0.8 % 42 0.1 % — — % 10,868 0.9 % Total $ 726,679 100.0 % $ 471,562 100.0 % $ 67,546 100.0 % $ 8,416 100.0 % $ 1,274,203 100.0 % 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. A TDR 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 each TDR or other impaired loan, 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, 2019 December 31, 2018 (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 $ 13,081 $ 14,322 $ 2,006 $ 7,733 $ 7,733 $ 1,295 Commercial and industrial — — — 884 893 360 Commercial construction 490 490 128 489 489 87 Consumer real estate — — — 15 14 10 Other consumer 11 10 10 11 12 11 Total with a Related Allowance Recorded 13,582 14,822 2,144 9,132 9,141 1,763 Without a related allowance recorded: Commercial real estate 38,368 42,784 — 3,636 4,046 — Commercial and industrial 9,852 12,582 — 12,788 14,452 — Commercial construction 2,318 3,828 — 15,286 19,198 — Consumer real estate 8,418 9,309 — 8,659 9,635 — Other consumer 2 9 — 5 18 — Total without a Related Allowance Recorded 58,958 68,512 — 40,374 47,349 — Total: Commercial real estate 51,449 57,106 2,006 11,369 11,779 1,295 Commercial and industrial 9,852 12,582 — 13,672 15,345 360 Commercial construction 2,808 4,318 128 15,775 19,687 87 Consumer real estate 8,418 9,309 — 8,674 9,649 10 Other consumer 13 19 10 16 30 11 Total $ 72,540 $ 83,334 $ 2,144 $ 49,506 $ 56,490 $ 1,763 The following tables summarize average recorded investment in and interest income recognized on loans considered to be impaired for the periods presented: Three Months Ended September 30, 2019 September 30, 2018 (dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With a related allowance recorded: Commercial real estate $ 14,255 $ — $ — $ — Commercial and industrial — — — — Commercial construction 490 — 496 — Consumer real estate — — 15 — Other consumer 11 — 17 1 Total with a Related Allowance Recorded 14,756 — 528 1 Without a related allowance recorded: Commercial real estate 39,179 231 3,744 41 Commercial and industrial 8,008 116 14,412 73 Commercial construction 2,318 34 2,809 61 Consumer real estate 8,830 97 9,320 112 Other consumer 3 — 13 — Total without a Related Allowance Recorded 58,338 478 30,298 287 Total: Commercial real estate 53,434 231 3,744 41 Commercial and industrial 8,008 116 14,412 73 Commercial construction 2,808 34 3,305 61 Consumer real estate 8,830 97 9,335 112 Other consumer 14 — 30 1 Total $ 73,094 $ 478 $ 30,826 $ 288 Nine months ended September 30, 2019 September 30, 2018 (dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With a related allowance recorded: Commercial real estate $ 14,348 $ — $ — $ — Commercial and industrial — — — — Commercial construction 490 — 585 — Consumer real estate — — 16 1 Other consumer 13 1 21 1 Total with a Related Allowance Recorded 14,851 1 622 2 Without a related allowance recorded: Commercial real estate 39,788 712 3,895 126 Commercial and industrial 6,644 308 11,567 232 Commercial construction 2,318 117 2,813 134 Consumer real estate 8,993 297 10,031 370 Other consumer 4 — 15 — Total without a Related Allowance Recorded 57,747 1,434 28,321 862 Total: Commercial real estate 54,136 712 3,895 126 Commercial and industrial 6,644 308 11,567 232 Commercial construction 2,808 117 3,398 134 Consumer real estate 8,993 297 10,047 371 Other consumer 17 1 36 1 Total $ 72,598 $ 1,435 $ 28,943 $ 864 The following tables detail activity in the ALL for the periods presented: Three Months Ended September 30, 2019 (dollars in thousands) Commercial Real Estate Commercial and Industrial Commercial Construction Consumer Real Estate Other Consumer Total Loans Balance at beginning of period $ 32,836 $ 13,227 $ 7,254 $ 6,571 $ 1,591 $ 61,479 Charge-offs (2,304 ) (1,467 ) — (404 ) (525 ) (4,700 ) Recoveries 6 210 1 102 104 423 Net (Charge-offs)/Recoveries (2,298 ) (1,257 ) 1 (302 ) (421 ) (4,277 ) Provision for loan losses 1,292 2,397 620 65 539 4,913 Balance at End of Period $ 31,831 $ 14,366 $ 7,875 $ 6,334 $ 1,709 $ 62,115 Three Months Ended September 30, 2018 (dollars in thousands) Commercial Real Estate Commercial and Industrial Commercial Construction Consumer Real Estate Other Consumer Total Loans Balance at beginning of period $ 31,232 $ 10,874 $ 11,676 $ 5,241 $ 1,494 $ 60,517 Charge-offs (141 ) (181 ) — (487 ) (425 ) (1,234 ) Recoveries 64 504 4 70 169 811 Net (Charge-offs)/Recoveries (77 ) 323 4 (417 ) (256 ) (423 ) Provision for loan losses 1,735 (971 ) (765 ) 214 249 462 Balance at End of Period $ 32,890 $ 10,226 $ 10,915 $ 5,038 $ 1,487 $ 60,556 Nine Months Ended September 30, 2019 (dollars in thousands) Commercial Real Estate Commercial and Industrial Commercial Construction Consumer Real Estate Other Consumer Total Loans Balance at beginning of period $ 33,707 $ 11,596 $ 7,983 $ 6,187 $ 1,523 $ 60,996 Charge-offs (2,833 ) (8,379 ) — (815 ) (1,364 ) (13,391 ) Recoveries 134 718 4 595 292 1,743 Net (Charge-offs)/Recoveries (2,699 ) (7,661 ) 4 (220 ) (1,072 ) (11,648 ) Provision for loan losses 823 10,431 (112 ) 367 1,258 12,767 Balance at End of Period $ 31,831 $ 14,366 $ 7,875 $ 6,334 $ 1,709 $ 62,115 Nine Months Ended September 30, 2018 (dollars in thousands) Commercial Real Estate Commercial and Industrial Commercial Construction Consumer Real Estate Other Consumer Total Loans Balance at beginning of period $ 27,235 $ 8,966 $ 13,167 $ 5,479 $ 1,543 $ 56,390 Charge-offs (373 ) (8,403 ) (321 ) (916 ) (1,298 ) (11,311 ) Recoveries 293 985 1,134 393 393 3,198 Net (Charge-offs)/Recoveries (80 ) (7,418 ) 813 (523 ) (905 ) (8,113 ) Provision for loan losses 5,735 8,678 (3,065 ) 82 849 12,279 Balance at End of Period $ 32,890 $ 10,226 $ 10,915 $ 5,038 $ 1,487 $ 60,556 The following tables present the ALL and recorded investments in loans by category as of the periods presented: September 30, 2019 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 $ 2,006 $ 29,825 $ 31,831 $ 51,449 $ 2,870,748 $ 2,922,197 Commercial and industrial — 14,366 14,366 9,852 1,617,002 1,626,854 Commercial construction 128 7,747 7,875 2,808 312,005 314,813 Consumer real estate — 6,334 6,334 8,418 1,249,023 1,257,441 Other consumer 10 1,699 1,709 13 74,447 74,460 Total $ 2,144 $ 59,971 $ 62,115 $ 72,540 $ 6,123,225 $ 6,195,765 December 31, 2018 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 $ 1,295 $ 32,412 $ 33,707 $ 11,369 $ 2,910,463 $ 2,921,832 Commercial and industrial 360 11,236 11,596 13,672 1,479,744 1,493,416 Commercial construction 87 7,896 7,983 15,775 241,422 257,197 Consumer real estate 10 6,177 6,187 8,674 1,197,983 1,206,657 Other consumer 11 1,512 1,523 16 67,530 67,546 Total $ 1,763 $ 59,233 $ 60,996 $ 49,506 $ 5,897,142 $ 5,946,648 |