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 September 30, (In thousands) Commercial Loans Consumer Loans Residential Real Estate Mortgages Unallocated Total Balance as of June 30, 2017 $ 24,428 $ 35,523 $ 6,649 $ - $ 66,600 Charge-offs (574 ) (6,979 ) (421 ) - (7,974 ) Recoveries 266 1,446 123 - 1,835 Provision 1,434 6,197 258 - 7,889 Ending Balance as of September 30, 2017 $ 25,554 $ 36,187 $ 6,609 $ - $ 68,350 Balance as of June 30, 2016 $ 25,222 $ 31,471 $ 7,875 $ - $ 64,568 Charge-offs (637 ) (6,046 ) (142 ) - (6,825 ) Recoveries 512 898 127 - 1,537 Provision 1,514 6,078 (1,481 ) 277 6,388 Ending Balance as of September 30, 2016 $ 26,611 $ 32,401 $ 6,379 $ 277 $ 65,668 Nine months ended September 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 (2,991 ) (19,742 ) (1,717 ) - (24,450 ) Recoveries 919 3,680 166 - 4,765 Provision 2,182 18,874 1,779 - 22,835 Ending Balance as of September 30, 2017 $ 25,554 $ 36,187 $ 6,609 $ - $ 68,350 Balance as of December 31, 2015 $ 25,545 $ 29,253 $ 7,960 $ 260 $ 63,018 Charge-offs (1,723 ) (16,409 ) (1,119 ) - (19,251 ) Recoveries 1,616 2,779 240 - 4,635 Provision 1,173 16,778 (702 ) 17 17,266 Ending Balance as of September 30, 2016 $ 26,611 $ 32,401 $ 6,379 $ 277 $ 65,668 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 September 30, 2017 and $0.7 million as of September 30, 2016. There were no charge-offs related to acquired loans during the three months ended September 30, 2017 and totaled $0.1 million during the three months ended September 30, 2016. Net charge-offs related to acquired loans were $0.7 million and $0.4 million during the nine months ended September 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 September 30, 2017 (In thousands) Commercial Loans Consumer Loans Residential Real Estate Mortgages Total Allowance for loan losses $ 25,554 $ 36,187 $ 6,609 $ 68,350 Allowance for loans individually evaluated for impairment 30 - - 30 Allowance for loans collectively evaluated for impairment $ 25,524 $ 36,187 $ 6,609 $ 68,320 Ending balance of loans $ 2,962,287 $ 2,202,070 $ 1,302,577 $ 6,466,934 Ending balance of originated loans individually evaluated for impairment $ 4,855 $ 8,307 $ 6,574 $ 19,736 Ending balance of acquired loans collectively evaluated for impairment $ 196,444 $ 47,986 $ 177,393 $ 421,823 Ending balance of originated loans collectively evaluated for impairment $ 2,760,988 $ 2,145,777 $ 1,118,610 $ 6,025,375 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 September 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 $ 1 $ 156 $ - $ 157 $ 430 $ 732,535 $ 733,122 Commercial Real Estate 1,274 - - 1,274 2,020 1,477,265 1,480,559 Agricultural - - - - 391 34,448 34,839 Agricultural Real Estate 234 - - 234 1,658 33,499 35,391 Business Banking 2,057 91 - 2,148 4,640 475,144 481,932 Total Commercial Loans $ 3,566 $ 247 $ - $ 3,813 $ 9,139 $ 2,752,891 $ 2,765,843 Consumer Loans: Indirect $ 18,755 $ 5,112 $ 2,452 $ 26,319 $ 2,069 $ 1,602,890 $ 1,631,278 Home Equity 2,933 628 213 3,774 2,790 452,189 458,753 Direct 319 47 79 445 78 63,530 64,053 Total Consumer Loans $ 22,007 $ 5,787 $ 2,744 $ 30,538 $ 4,937 $ 2,118,609 $ 2,154,084 Residential Real Estate Mortgages $ 3,812 $ 246 $ 597 $ 4,655 $ 6,180 $ 1,114,349 $ 1,125,184 Total Originated Loans $ 29,385 $ 6,280 $ 3,341 $ 39,006 $ 20,256 $ 5,985,849 $ 6,045,111 Acquired Commercial Loans: Commercial $ - $ - $ - $ - $ - $ 39,037 $ 39,037 Commercial Real Estate - - - - 501 112,810 113,311 Business Banking 355 275 - 630 773 42,693 44,096 Total Commercial Loans $ 355 $ 275 $ - $ 630 $ 1,274 $ 194,540 $ 196,444 Consumer Loans: Indirect $ 29 $ 8 $ 3 $ 40 $ 30 $ 2,084 $ 2,154 Home Equity 307 - - 307 160 42,510 42,977 Direct 32 26 7 65 8 2,782 2,855 Total Consumer Loans $ 368 $ 34 $ 10 $ 412 $ 198 $ 47,376 $ 47,986 Residential Real Estate Mortgages $ 660 $ 100 $ 37 $ 797 $ 1,725 $ 174,871 $ 177,393 Total Acquired Loans $ 1,383 $ 409 $ 47 $ 1,839 $ 3,197 $ 416,787 $ 421,823 Total Loans $ 30,768 $ 6,689 $ 3,388 $ 40,845 $ 23,453 $ 6,402,636 $ 6,466,934 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 September 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: September 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 $ - $ 251 $ 1,278 $ 1,697 Commercial Real Estate 2,239 3,996 3,816 3,841 Agricultural 100 112 130 137 Agricultural Real Estate 1,491 1,663 1,434 1,567 Business Banking 947 1,687 655 728 Total Commercial Loans $ 4,777 $ 7,709 $ 7,313 $ 7,970 Consumer Loans: Indirect 36 47 5 16 Home Equity 8,153 10,063 8,483 9,429 Direct 118 118 - - Total Consumer Loans $ 8,307 $ 10,228 $ 8,488 $ 9,445 Residential Real Estate Mortgages 6,574 8,335 6,111 6,906 Total $ 19,658 $ 26,272 $ 21,912 $ 24,321 With an allowance recorded: Commercial Loans: Commercial Real Estate $ 78 $ 83 $ 30 $ 5,553 $ 5,736 $ 735 Agricultural - - - 49 49 37 Agricultural Real Estate - - - 155 155 54 Total Commercial Loans $ 78 $ 83 $ 30 $ 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: $ 19,736 $ 26,355 $ 30 $ 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 September 30, 2017 September 30, 2016 (In thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Originated Commercial Loans: Commercial $ 1,000 $ - $ 3,204 $ - Commercial Real Estate 2,415 48 15,799 48 Agricultural 115 - 85 - Agricultural Real Estate 1,505 11 935 11 Business Banking 955 2 743 - Consumer Loans: Indirect 35 1 8 - Home Equity 8,159 111 8,401 116 Direct 119 2 - - Residential Real Estate Mortgage 6,633 82 6,141 76 Total Originated $ 20,936 $ 257 $ 35,316 $ 251 Acquired Commercial Loans: Commercial Real Estate $ - $ - $ 1,205 $ - Total Acquired $ - $ - $ 1,205 $ - Total Loans $ 20,936 $ 257 $ 36,521 $ 251 For the nine months ended September 30, 2017 September 30, 2016 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Originated Commercial Loans: Commercial $ 2,393 $ - $ 3,041 $ - Commercial Real Estate 3,906 93 14,782 122 Agricultural 147 1 101 1 Agricultural Real Estate 1,545 32 742 33 Business Banking 837 7 882 7 Consumer Loans: Indirect 22 2 9 - Home Equity 8,274 331 8,207 357 Direct 119 2 - - Residential Real Estate Mortgage 6,425 211 6,147 211 Total Originated $ 23,668 $ 679 $ 33,911 $ 731 Acquired Commercial Loans: Commercial Real Estate $ 121 $ - $ 1,205 $ - Total Acquired $ 121 $ - $ 1,205 $ - Total Loans $ 23,789 $ 679 $ 35,116 $ 731 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 (i.e., declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (i.e., 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 September 30, 2017 (In thousands) Originated Commercial Credit Exposure By Internally Assigned Grade: Commercial Commercial Real Estate Agricultural Agricultural Real Estate Total Pass $ 677,943 $ 1,424,353 $ 30,233 $ 25,546 $ 2,158,075 Special Mention 40,123 29,785 3,033 3,343 76,284 Substandard 15,056 26,421 1,573 6,502 49,552 Total $ 733,122 $ 1,480,559 $ 34,839 $ 35,391 $ 2,283,911 Business Banking Credit Exposure By Internally Assigned Grade: Business Banking Total Non-classified $ 469,025 $ 469,025 Classified 12,907 12,907 Total $ 481,932 $ 481,932 Consumer Credit Exposure By Payment Activity: Indirect Home Equity Direct Total Performing $ 1,626,757 $ 455,750 $ 63,896 $ 2,146,403 Nonperforming 4,521 3,003 157 7,681 Total $ 1,631,278 $ 458,753 $ 64,053 $ 2,154,084 Residential Mortgage Credit Exposure By Payment Activity: Residential Mortgage Total Performing $ 1,118,407 $ 1,118,407 Nonperforming 6,777 6,777 Total $ 1,125,184 $ 1,125,184 As of September 30, 2017 (In thousands) Acquired Commercial Credit Exposure By Internally Assigned Grade: Commercial Commercial Real Estate Total Pass $ 37,271 $ 106,261 $ 143,532 Special Mention 327 512 839 Substandard 1,439 6,538 7,977 Total $ 39,037 $ 113,311 $ 152,348 Business Banking Credit Exposure By Internally Assigned Grade: Business Banking Total Non-classified $ 40,636 $ 40,636 Classified 3,460 3,460 Total $ 44,096 $ 44,096 Consumer Credit Exposure By Payment Activity: Indirect Home Equity Direct Total Performing $ 2,121 $ 42,817 $ 2,840 $ 47,778 Nonperforming 33 160 15 208 Total $ 2,154 $ 42,977 $ 2,855 $ 47,986 Residential Mortgage Credit Exposure By Payment Activity: Residential Mortgage Total Performing $ 175,631 $ 175,631 Nonperforming 1,762 1,762 Total $ 177,393 $ 177,393 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 September 30, 2017 (Dollars in thousands) Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Consumer Indirect 1 $ 7 $ 7 Home Equity 4 189 222 Total Consumer 5 196 229 Residential Real Estate 1 518 518 Total Troubled Debt Restructurings 6 $ 714 $ 747 Three months ended September 30, 2016 Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Consumer Home Equity 10 $ 580 $ 556 Total Consumer 10 580 556 Residential Real Estate 4 230 126 Total Troubled Debt Restructurings 14 $ 810 $ 682 Nine months ended September 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 4 39 37 Home Equity 8 373 414 Direct 1 120 120 Total Consumer 13 532 571 Residential Real Estate 8 1,066 1,068 Total Troubled Debt Restructurings 23 $ 5,235 $ 5,211 Nine months ended September 30, 2016 Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Consumer Home Equity 24 $ 1,690 $ 1,567 Total Consumer 24 1,690 1,567 Residential Real Estate 10 914 692 Total Troubled Debt Restructurings 34 $ 2,604 $ 2,259 TDRs occurring during the three and nine months ended September 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 September 30, 2017 Three months ended September 30, 2016 (Dollars in thousands) Number of Contracts Recorded Investment Number of Contracts Recorded Investment Commercial Commercial - $ - 1 $ 169 Total Commercial - - 1 169 Consumer Indirect 1 13 - - Home Equity 12 622 17 847 Total Consumer 13 635 17 847 Residential Real Estate 6 546 8 485 Total Troubled Debt Restructurings 19 $ 1,181 26 $ 1,501 Nine months ended September 30, 2017 Nine months ended September 30, 2016 Number of Contracts Recorded Investment Number of Contracts Recorded Investment Commercial Commercial 1 $ 145 1 $ 169 Business Banking 1 329 1 67 Total Commercial 2 474 2 236 Consumer Indirect 2 19 - - Home Equity 30 1,381 30 1,634 Total Consumer 32 1,400 30 1,634 Residential Real Estate 12 817 15 1,075 Total Troubled Debt Restructurings 46 $ 2,691 47 $ 2,945 |