Allowance for Loan Losses and Credit Quality of Loans | 4. Allowance for Loan Losses and Credit Quality of Loans Allowance for Loan Losses The allowance for loan losses is maintained at a level estimated by management to provide adequately for probable incurred losses inherent in the current loan portfolio. The appropriateness of the allowance for loan losses is continuously monitored. It is assessed for appropriateness using a methodology designed to ensure the level of the allowance reasonably reflects the loan portfolio’s risk profile. It is evaluated to ensure that it is sufficient to absorb all reasonably estimable credit losses inherent in the current loan portfolio. To develop and document a systematic methodology for determining the allowance for loan losses, the Company has divided the loan portfolio into three segments, each with different risk characteristics and methodologies for assessing risk. Those segments are further segregated between our loans accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired in a business combination (referred to as “acquired” loans). Each portfolio segment is broken down into class segments where appropriate. Class segments contain unique measurement attributes, risk characteristics and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses. Unique characteristics such as borrower type, loan type, collateral type and risk characteristics define each class segment. The following table illustrates the portfolio and class segments for the Company’s loan portfolio: Portfolio Class Commercial Loans Commercial Commercial Real Estate Agricultural Agricultural Real Estate Business Banking Consumer Loans Indirect Home Equity Direct Residential Real Estate Mortgages Commercial Loans The Company offers a variety of commercial loan products including commercial (non-real estate), commercial real estate, agricultural, agricultural real estate and business banking loans. The Company’s underwriting analysis for commercial loans typically includes credit verification, independent appraisals, a review of the borrower’s financial condition and a detailed analysis of the borrower’s underlying cash flows. Commercial – Commercial Real Estate – Agricultural Agricultural Real Estate Business Banking Consumer Loans The Company offers a variety of consumer loan products including indirect, home equity and direct loans. Indirect – Home Equity Direct – Residential Real Estate Mortgages Residential real estate loans consist primarily of loans secured by first or second deeds of trust on primary residences. We originate adjustable-rate and fixed-rate, one-to-four-family residential real estate loans for the construction, purchase or refinancing of a mortgage. These loans are collateralized by owner-occupied properties located in the Company’s market area. When market conditions are favorable, for longer term, fixed-rate residential mortgages without escrow, the Company retains the servicing, but sells the right to receive principal and interest to Freddie Mac. This practice allows the Company to manage interest rate, liquidity risk and credit risk. Loans on one-to-four-family residential real estate are generally originated in amounts of no more than 85% of the purchase price or appraised value (whichever is lower) or have private mortgage insurance. Mortgage title insurance and hazard insurance are normally required. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period. Allowance for Loan Loss Calculation For purposes of evaluating the adequacy of the allowance, the Company considers a number of significant factors that affect the collectability of the portfolio. For individually analyzed loans, these include estimates of loss exposure, which reflect the facts and circumstances that affect the likelihood of repayment of such loans as of the evaluation date. For homogeneous pools of loans, estimates of the Company’s exposure to credit loss reflect a current assessment of a number of factors, which could affect collectability. These factors include: past loss experience, size, trend, composition and nature of loans; changes in lending policies and procedures, including underwriting standards and collection, charge-offs and recoveries; trends experienced in nonperforming and delinquent loans; current economic conditions in the Company’s market; portfolio concentrations that may affect loss experienced across one or more components of the portfolio; the effect of external factors such as competition, legal and regulatory requirements; and the experience, ability and depth of lending management and staff. In addition, various regulatory agencies, as an integral component of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make loan grade changes as well as recognize additions to the allowance based on their examinations. After a thorough consideration of the factors discussed above, any required additions or reductions to the allowance for loan losses are made periodically by charges or credits to the provision for loan losses. These charges are necessary to maintain the allowance at a level that management believes is reflective of overall inherent risk of probable loss in the portfolio. While management uses available information to recognize losses on loans, additions and reductions of the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above. The following tables illustrate the changes in the allowance for loan losses by our portfolio segments: Three months ended June 30, (In thousands) Commercial Loans Consumer Loans Residential Real Estate Mortgages Unallocated Total Balance as of March 31, 2017 $ 24,727 $ 34,769 $ 6,204 $ - $ 65,700 Charge-offs (1,123 ) (6,261 ) (698 ) - (8,082 ) Recoveries 206 1,199 10 - 1,415 Provision 618 5,816 1,133 - 7,567 Ending Balance as of June 30, 2017 $ 24,428 $ 35,523 $ 6,649 $ - $ 66,600 Balance as of March 31, 2016 $ 25,299 $ 31,035 $ 7,984 $ - $ 64,318 Charge-offs (649 ) (4,950 ) (268 ) - (5,867 ) Recoveries 339 907 91 - 1,337 Provision 233 4,479 68 - 4,780 Ending Balance as of June 30, 2016 $ 25,222 $ 31,471 $ 7,875 $ - $ 64,568 Six months ended June 30, Commercial Loans Consumer Loans Residential Real Estate Mortgages Unallocated Total Balance as of December 31, 2016 $ 25,444 $ 33,375 $ 6,381 $ - $ 65,200 Charge-offs (2,417 ) (12,763 ) (1,296 ) - (16,476 ) Recoveries 653 2,234 43 - 2,930 Provision 748 12,677 1,521 - 14,946 Ending Balance as of June 30, 2017 $ 24,428 $ 35,523 $ 6,649 $ - $ 66,600 Balance as of December 31, 2015 $ 25,545 $ 29,253 $ 7,960 $ 260 $ 63,018 Charge-offs (1,086 ) (10,363 ) (977 ) - (12,426 ) Recoveries 1,104 1,881 113 - 3,098 Provision (341 ) 10,700 779 (260 ) 10,878 Ending Balance as of June 30, 2016 $ 25,222 $ 31,471 $ 7,875 $ - $ 64,568 For acquired loans, to the extent that we experience 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 loan. There was no allowance for loan losses for the acquired loan portfolio as of June 30, 2017 and $0.8 million as of June 30, 2016. Net charge-offs related to acquired loans totaled approximately $0.3 million and $0.1 million during the three months ended June 30, 2017 and 2016, respectively and approximately $0.7 million and $0.4 million during the six months ended June 30, 2017 and 2016, respectively and are included in the table above. The following tables illustrate the allowance for loan losses and the recorded investment by portfolio segments: As of June 30, 2017 (In thousands) Commercial Loans Consumer Loans Residential Real Estate Mortgages Total Allowance for loan losses $ 24,428 $ 35,523 $ 6,649 $ 66,600 Allowance for loans individually evaluated for impairment 461 - - 461 Allowance for loans collectively evaluated for impairment $ 23,967 $ 35,523 $ 6,649 $ 66,139 Ending balance of loans $ 2,906,314 $ 2,185,790 $ 1,275,807 $ 6,367,911 Ending balance of originated loans individually evaluated for impairment 9,321 8,214 6,429 23,964 Ending balance of acquired loans collectively evaluated for impairment 222,519 52,539 186,214 461,272 Ending balance of originated loans collectively evaluated for impairment $ 2,674,474 $ 2,125,037 $ 1,083,164 $ 5,882,675 As of December 31, 2016 Allowance for loan losses $ 25,444 $ 33,375 $ 6,381 $ 65,200 Allowance for loans individually evaluated for impairment 1,517 - - 1,517 Allowance for loans collectively evaluated for impairment $ 23,927 $ 33,375 $ 6,381 $ 63,683 Ending balance of loans $ 2,786,002 $ 2,149,441 $ 1,262,614 $ 6,198,057 Ending balance of originated loans individually evaluated for impairment 13,070 8,488 6,111 27,669 Ending balance of acquired loans individually evaluated for impairment 1,205 - - 1,205 Ending balance of acquired loans collectively evaluated for impairment 236,413 63,005 199,471 498,889 Ending balance of originated loans collectively evaluated for impairment $ 2,535,314 $ 2,077,948 $ 1,057,032 $ 5,670,294 Credit Quality of Loans For all loan classes within the Company's loan portfolio, loans are placed on nonaccrual status when timely collection of principal and interest in accordance with contractual terms is doubtful. Loans are transferred to nonaccrual status generally when principal or interest payments become ninety days delinquent, unless the loan is well-secured and in the process of collection or sooner when management concludes or circumstances indicate that borrowers may be unable to meet contractual principal or interest payments. When a loan is transferred to a nonaccrual status, all interest previously accrued in the current period but not collected is reversed against interest income in that period. Any payment received on a nonaccrual loan is applied to principal. For all loan classes within the Company's loan portfolio, nonaccrual loans are returned to accrual status when they become current as to principal and interest and demonstrate a period of performance under the contractual terms and, in the opinion of management, are fully collectible as to principal and interest. For loans in all portfolios, the principal amount is charged off in full or in part as soon as management determines, based on available facts, that the collection of principal in full is improbable. For commercial loans, management considers specific facts and circumstances relative to individual credits in making such a determination. For consumer and residential loan classes, management uses specific guidance and thresholds from the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy. The following tables set forth information with regard to past due and nonperforming loans by loan class: As of June 30, 2017 (In thousands) 31-60 Days Past Due Accruing 61-90 Days Past Due Accruing Greater Than 90 Days Past Due Accruing Total Past Due Accruing Nonaccrual Current Recorded Total Loans ORIGINATED Commercial Loans: Commercial $ 35 $ 530 $ - $ 565 $ 5,118 $ 756,087 $ 761,770 Commercial Real Estate 1,621 631 - 2,252 1,928 1,371,367 1,375,547 Agricultural - - - - 630 37,025 37,655 Agricultural Real Estate - - - - 1,696 30,329 32,025 Business Banking 1,637 309 - 1,946 4,379 470,473 476,798 Total Commercial Loans 3,293 1,470 - 4,763 13,751 2,665,281 2,683,795 Consumer Loans: Indirect 16,770 4,188 2,319 23,277 1,835 1,589,934 1,615,046 Home Equity 2,480 701 354 3,535 2,811 448,502 454,848 Direct 197 115 38 350 80 62,927 63,357 Total Consumer Loans 19,447 5,004 2,711 27,162 4,726 2,101,363 2,133,251 Residential Real Estate Mortgages 3,051 974 136 4,161 7,007 1,078,425 1,089,593 Total Originated Loans $ 25,791 $ 7,448 $ 2,847 $ 36,086 $ 25,484 $ 5,845,069 $ 5,906,639 ACQUIRED Commercial Loans: Commercial $ - $ - $ - $ - $ - $ 51,179 $ 51,179 Commercial Real Estate - 294 - 294 619 124,490 125,403 Business Banking 612 - - 612 783 44,542 45,937 Total Commercial Loans 612 294 - 906 1,402 220,211 222,519 Consumer Loans: Indirect 48 3 1 52 37 3,551 3,640 Home Equity 266 63 - 329 183 45,494 46,006 Direct 29 - 1 30 12 2,851 2,893 Total Consumer Loans 343 66 2 411 232 51,896 52,539 Residential Real Estate Mortgages 5 140 - 145 2,016 184,053 186,214 Total Acquired Loans $ 960 $ 500 $ 2 $ 1,462 $ 3,650 $ 456,160 $ 461,272 Total Loans $ 26,751 $ 7,948 $ 2,849 $ 37,548 $ 29,134 $ 6,301,229 $ 6,367,911 As of December 31, 2016 (In thousands) 31-60 Days Past Due Accruing 61-90 Days Past Due Accruing Greater Than 90 Days Past Due Accruing Total Past Due Accruing Nonaccrual Current Recorded Total Loans ORIGINATED Commercial Loans: Commercial $ 33 $ 5 $ - $ 38 $ 2,964 $ 650,568 $ 653,570 Commercial Real Estate - - - - 7,935 1,343,854 1,351,789 Agricultural - - - - 730 37,186 37,916 Agricultural Real Estate - - - - 1,803 30,619 32,422 Business Banking 1,609 318 - 1,927 4,860 465,900 472,687 Total Commercial Loans 1,642 323 - 1,965 18,292 2,528,127 2,548,384 Consumer Loans: Indirect 19,253 4,185 2,499 25,937 2,145 1,538,593 1,566,675 Home Equity 3,416 1,065 528 5,009 2,851 448,797 456,657 Direct 452 125 20 597 107 62,400 63,104 Total Consumer Loans 23,121 5,375 3,047 31,543 5,103 2,049,790 2,086,436 Residential Real Estate Mortgages 2,725 172 1,406 4,303 6,682 1,052,158 1,063,143 Total Originated Loans $ 27,488 $ 5,870 $ 4,453 $ 37,811 $ 30,077 $ 5,630,075 $ 5,697,963 ACQUIRED Commercial Loans: Commercial $ - $ - $ - $ - $ - $ 49,447 $ 49,447 Commercial Real Estate - - - - 1,891 135,398 137,289 Business Banking 236 - - 236 804 49,842 50,882 Total Commercial Loans 236 - - 236 2,695 234,687 237,618 Consumer Loans: Indirect 100 5 - 105 47 8,541 8,693 Home Equity 254 53 30 337 237 50,553 51,127 Direct 30 2 - 32 20 3,133 3,185 Total Consumer Loans 384 60 30 474 304 62,227 63,005 Residential Real Estate Mortgages 609 28 327 964 2,636 195,871 199,471 Total Acquired Loans $ 1,229 $ 88 $ 357 $ 1,674 $ 5,635 $ 492,785 $ 500,094 Total Loans $ 28,717 $ 5,958 $ 4,810 $ 39,485 $ 35,712 $ 6,122,860 $ 6,198,057 There were no material commitments to extend further credit to borrowers with nonperforming loans as of June 30, 2017 and December 31, 2016. Impaired Loans The methodology used to establish the allowance for loan losses on impaired loans incorporates specific allocations on loans analyzed individually. Classified loans, including all trouble debt restructured loans ("TDRs") and nonaccrual commercial loans that are graded Substandard or below, with outstanding balances equal to or greater than $0.8 million are evaluated for impairment through the Company’s quarterly status review process. In determining whether we are able to collect all principal and interest payments due in accordance with the contractual terms of the loan agreements, we consider factors such as payment history and changes in the financial condition of individual borrowers, local economic conditions, historical loss experience and the conditions of the various markets in which the collateral may be liquidated. For loans that are evaluated for impairment, impairment is measured by one of three methods: 1) the fair value of collateral less cost to sell, 2) present value of expected future cash flows or 3) the loan’s observable market price. These impaired loans are reviewed on a quarterly basis for changes in the level of impairment. Any change to the previously recognized impairment loss is recognized as a change to the allowance account and recorded in the unaudited interim consolidated statements of income as a component of the provision for loan losses. The following table provides information on loans specifically evaluated for impairment: June 30, 2017 December 31, 2016 (In thousands) Recorded Investment Balance (Book) Unpaid Principal Balance (Legal) Related Allowance Recorded Investment Balance (Book) Unpaid Principal Balance (Legal) Related Allowance ORIGINATED With no related allowance recorded: Commercial Loans: Commercial $ 3,303 $ 3,436 $ 1,278 $ 1,697 Commercial Real Estate 2,614 2,647 3,816 3,841 Agricultural 115 125 130 137 Agricultural Real Estate 1,476 1,635 1,434 1,567 Business Banking 964 1,056 655 728 Total Commercial Loans 8,472 8,899 7,313 7,970 Consumer Loans: Indirect 31 31 5 16 Home Equity 8,064 8,900 8,483 9,429 Direct 119 119 - - Total Consumer Loans 8,214 9,050 8,488 9,445 Residential Real Estate Mortgages 6,429 7,245 6,111 6,906 Total $ 23,115 $ 25,194 $ 21,912 $ 24,321 With an allowance recorded: Commercial Loans: Commercial 695 700 $ 350 - - $ - Commercial Real Estate 79 83 50 5,553 5,736 735 Agricultural 29 31 30 49 49 37 Agricultural Real Estate 46 48 31 155 155 54 Total Commercial Loans $ 849 $ 862 $ 461 $ 5,757 $ 5,940 $ 826 ACQUIRED With an allowance recorded: Commercial Loans: Commercial Real Estate - - - 1,205 1,321 691 Total Commercial Loans $ - $ - $ - $ 1,205 $ 1,321 $ 691 Total: $ 23,964 $ 26,056 $ 461 $ 28,874 $ 31,582 $ 1,517 The following tables summarize the average recorded investments on impaired loans specifically evaluated for impairment and the interest income recognized: For the three months ended June 30, 2017 June 30, 2016 (In thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized ORIGINATED Commercial Loans: Commercial $ 3,931 $ - $ 3,126 $ - Commercial Real Estate 3,243 1 15,278 - Agricultural 157 1 18 - Agricultural Real Estate 1,549 10 610 11 Business Banking 890 3 969 6 Consumer Loans: Indirect 25 1 9 - Home Equity 8,205 110 8,223 120 Direct 120 - - - Residential Real Estate Mortgage 6,388 68 6,203 67 Total Originated $ 24,508 $ 194 $ 34,436 $ 204 ACQUIRED Commercial Loans: Commercial Real Estate - - 1,205 - Total Acquired $ - $ - $ 1,205 $ - Total Loans $ 24,508 $ 194 $ 35,641 $ 204 For the six months ended June 30, 2017 June 30, 2016 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized ORIGINATED Commercial Loans: Commercial $ 3,419 $ - $ 2,972 $ - Commercial Real Estate 4,584 45 14,264 74 Agricultural 165 1 98 1 Agricultural Real Estate 1,564 21 613 22 Business Banking 788 5 973 12 Consumer Loans: Indirect 16 1 10 - Home Equity 8,310 220 8,093 241 Direct 120 - - - Residential Real Estate Mortgage 6,308 129 6,154 134 Total Originated $ 25,274 $ 422 $ 33,177 $ 484 ACQUIRED Commercial Loans: Commercial Real Estate 172 - 1,205 - Total Acquired $ 172 $ - $ 1,205 $ - Total Loans $ 25,446 $ 422 $ 34,382 $ 484 Credit Quality Indicators The Company has developed an internal loan grading system to evaluate and quantify the Company’s loan portfolio with respect to quality and risk. The system focuses on, among other things, financial strength of borrowers, experience and depth of borrower’s management, primary and secondary sources of repayment, payment history, nature of the business and outlook on particular industries. The internal grading system enables the Company to monitor the quality of the entire loan portfolio on a consistent basis and provide management with an early warning system, enabling recognition and response to problem loans and potential problem loans. Commercial Grading System For commercial and agricultural loans, the Company uses a grading system that relies on quantifiable and measurable characteristics when available. This would include comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy and comparison of credit history to stated repayment terms and industry averages. Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment and management. Classified loans are graded Doubtful, Substandard, Special Mention and Pass. ● Doubtful A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as a loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Nonaccrual treatment is required for Doubtful assets because of the high probability of loss. ● Substandard Substandard loans have a high probability of payment default or they have other well-defined weaknesses. They require more intensive supervision by bank management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some Substandard loans, the likelihood of full collection of interest and principal may be in doubt and those loans should be placed on nonaccrual. Although Substandard assets in the aggregate will have a distinct potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated Substandard. ● Special Mention Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These loans pose elevated risk, but their weakness does not yet justify a Substandard classification. Borrowers may be experiencing adverse operating trends (e.g., declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a Special Mention rating. Although a Special Mention loan has a higher probability of default than a Pass asset, its default is not imminent. ● Pass Loans graded as Pass encompass all loans not graded as Doubtful, Substandard or Special Mention. Pass loans are in compliance with loan covenants and payments are generally made as agreed. Pass loans range from superior quality to fair quality. Business Banking Grading System Business banking loans are graded as either Classified or Non-classified: ● Classified Classified loans are inadequately protected by the current worth and paying capacity of the obligor or, if applicable, the collateral pledged. These loans have a well-defined weakness or weaknesses, that jeopardize the liquidation of the debt or in some cases make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Classified loans have a high probability of payment default or a high probability of total or substantial loss. These loans require more intensive supervision by management and are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. When the likelihood of full collection of interest and principal may be in doubt, Classified loans are considered to have a nonaccrual status. In some cases, Classified loans are considered uncollectible and of such little value that their continuance as assets is not warranted. ● Non-classified Loans graded as Non-classified encompass all loans not graded as Classified. Non-classified loans are in compliance with loan covenants and payments are generally made as agreed. Consumer and Residential Mortgage Grading System Consumer and Residential Mortgage loans are graded as either Performing or Nonperforming. ● Nonperforming Nonperforming loans are loans that are 1) over 90 days past due and interest is still accruing or 2) on nonaccrual status. ● Performing All loans not meeting any of these criteria are considered Performing. The following tables illustrate the Company’s credit quality by loan class: As of June 30, 2017 (In thousands) ORIGINATED Commercial Credit Exposure By Internally Assigned Grade: Commercial Commercial Real Estate Agricultural Agricultural Real Estate Total Pass $ 708,569 $ 1,318,522 $ 32,258 $ 24,525 $ 2,083,874 Special Mention 24,829 31,829 2,520 2,501 61,679 Substandard 28,372 25,196 2,872 4,999 61,439 Doubtful - - 5 - 5 Total $ 761,770 $ 1,375,547 $ 37,655 $ 32,025 $ 2,206,997 Business Banking Credit Exposure By Internally Assigned Grade: Business Banking Total Non-classified $ 463,897 $ 463,897 Classified 12,901 12,901 Total $ 476,798 $ 476,798 Consumer Credit Exposure By Payment Activity: Indirect Home Equity Direct Total Performing $ 1,610,892 $ 451,683 $ 63,239 $ 2,125,814 Nonperforming 4,154 3,165 118 7,437 Total $ 1,615,046 $ 454,848 $ 63,357 $ 2,133,251 Residential Mortgage Credit Exposure By Payment Activity: Residential Mortgage Total Performing $ 1,082,450 $ 1,082,450 Nonperforming 7,143 7,143 Total $ 1,089,593 $ 1,089,593 As of June 30, 2017 (In thousands) ACQUIRED Commercial Credit Exposure By Internally Assigned Grade: Commercial Commercial Real Estate Total Pass $ 44,517 $ 116,214 $ 160,731 Special Mention 5,719 2,175 7,894 Substandard 943 7,014 7,957 Total $ 51,179 $ 125,403 $ 176,582 Business Banking Credit Exposure By Internally Assigned Grade: Business Banking Total Non-classified $ 42,499 $ 42,499 Classified 3,438 3,438 Total $ 45,937 $ 45,937 Consumer Credit Exposure By Payment Activity: Indirect Home Equity Direct Total Performing $ 3,603 $ 45,823 $ 2,881 $ 52,307 Nonperforming 37 183 12 232 Total $ 3,640 $ 46,006 $ 2,893 $ 52,539 Residential Mortgage Credit Exposure By Payment Activity: Residential Mortgage Total Performing $ 184,198 $ 184,198 Nonperforming 2,016 2,016 Total $ 186,214 $ 186,214 As of December 31, 2016 (In thousands) ORIGINATED Commercial Credit Exposure By Internally Assigned Grade: Commercial Commercial Real Estate Agricultural Agricultural Real Estate Total Pass $ 616,829 $ 1,288,409 $ 36,762 $ 28,912 $ 1,970,912 Special Mention 7,750 31,053 25 1,896 40,724 Substandard 28,991 32,327 1,124 1,614 64,056 Doubtful - - 5 - 5 Total $ 653,570 $ 1,351,789 $ 37,916 $ 32,422 $ 2,075,697 Business Banking Credit Exposure By Internally Assigned Grade: Business Banking Total Non-classified $ 458,864 $ 458,864 Classified 13,823 13,823 Total $ 472,687 $ 472,687 Consumer Credit Exposure By Payment Activity: Indirect Home Equity Direct Total Performing $ 1,562,031 $ 453,278 $ 62,977 $ 2,078,286 Nonperforming 4,644 3,379 127 8,150 Total $ 1,566,675 $ 456,657 $ 63,104 $ 2,086,436 Residential Mortgage Credit Exposure By Payment Activity: Residential Mortgage Total Performing $ 1,055,055 $ 1,055,055 Nonperforming 8,088 8,088 Total $ 1,063,143 $ 1,063,143 As of December 31, 2016 (In thousands) ACQUIRED Commercial Credit Exposure By Internally Assigned Grade: Commercial Commercial Real Estate Total Pass $ 48,194 $ 127,660 $ 175,854 Special Mention 76 1,231 1,307 Substandard 1,177 7,193 8,370 Doubtful - 1,205 1,205 Total $ 49,447 $ 137,289 $ 186,736 Business Banking Credit Exposure By Internally Assigned Grade: Business Banking Total Non-classified $ 47,347 $ 47,347 Classified 3,535 3,535 Total $ 50,882 $ 50,882 Consumer Credit Exposure By Payment Activity: Indirect Home Equity Direct Total Performing $ 8,646 $ 50,860 $ 3,165 $ 62,671 Nonperforming 47 267 20 334 Total $ 8,693 $ 51,127 $ 3,185 $ 63,005 Residential Mortgage Credit Exposure By Payment Activity: Residential Mortgage Total Performing $ 196,508 $ 196,508 Nonperforming 2,963 2,963 Total $ 199,471 $ 199,471 Troubled Debt Restructured Loans Substantially all of these modifications included one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; temporary reduction in the interest rate; or change in scheduled payment amount. When the Company modifies a loan, management evaluates any possible impairment based on the present value of the expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized. The following tables illustrate the recorded investment and number of modifications for modified loans, including the recorded investment in the loans prior to a modification and the recorded investment in the loans after restructuring: Three months ended June 30, 2017 (Dollars in thousands) Number of contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Commercial Commercial 1 $ 3,300 $ 3,239 Business Banking 1 337 333 Total Commercial 2 3,637 3,572 Consumer Indirect 3 32 31 Home Equity 1 78 78 Direct 1 120 120 Total Consumer 5 230 229 Residential Real Estate 4 346 346 Total Troubled Debt Restructurings 11 $ 4,213 $ 4,147 Three months ended June 30, 2016 Number of contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Consumer Home Equity 2 $ 74 $ 73 Total Consumer 2 74 73 Residential Real Estate 2 152 151 Total Troubled Debt Restructurings 4 $ 226 $ 224 Six months ended June 30, 2017 (Dollars in thousands) Number of contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Commercial Commercial 1 $ 3,300 $ 3,239 Business Banking 1 337 333 Total Commercial 2 3,637 3,572 Consumer Indirect 3 32 31 Home Equity 4 185 192 Direct 1 120 120 Total Consumer 8 337 343 Residential Real Estate 6 548 554 Total Troubled Debt Restructurings 16 $ 4,522 $ 4,469 Six months ended June 30, 2016 Number of contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Consumer Home Equity 14 $ 1,109 $ 1,017 Total Consumer 14 1,109 1,017 Residential Real Estate 6 683 578 Total Troubled Debt Restructurings 20 $ 1,792 $ 1,595 TDRs occurring during the three and six months ended June 30, 2017 and 2016 were due to the reduction in the interest rate or extension of the term. The following table illustrates the recorded investment and number of modifications for TDRs where a concession has been made and subsequently defaulted during the period: Three months ended June 30, 2017 Three months ended June 30, 2016 (Dollars in thousands) Number of contracts Recorded Investment Number of contracts Recorded Investment Commercial Business Banking 1 $ 329 1 $ 67 Total Commercial 1 329 1 67 Consumer Indirect 1 14 - - Home Equity 13 589 10 520 Total Consumer 14 603 10 520 Residential Real Estate 4 251 6 664 Total Troubled Debt Restructurings 19 $ 1,183 17 $ 1,251 Six months ended June 30, 2017 Six months ended June 30, 2016 Number of contracts Recorded Investment Number of contracts Recorded Investment Commercial Commercial 1 $ 145 - $ - Business Banking 1 329 1 67 Total Commercial 2 474 1 67 Consumer Indirect 2 19 - - Home Equity 22 1,101 14 898 Total Consumer 24 1,120 14 898 Residential Real Estate 8 419 10 873 Total Troubled Debt Restructurings 34 $ 2,013 25 $ 1,838 |