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. During the first quarter of 2018, the Company made adjustments to the class segments within the portfolios to better align risk characteristics and reflect the monitoring and assessment of risks as the portfolios continue to evolve. Agricultural and Agricultural Real Estate were consolidated with Commercial and Industrial and Commercial Real Estate, respectively. Agricultural loans are a type of Commercial loan with some specific underwriting guidelines; however, as of March 31, 2018, the portfolio had decreased to less than 3% of the Commercial portfolio and separation was no longer warranted. The Indirect class segment was further separated into Dealer Finance and Specialty Lending class segments. The growth in our Specialty Lending portfolio to 21% of Consumer Loans as of March 31, 2018 warranted evaluation of this class separately due to different risk characteristics from Dealer Finance class segments. The Direct and Home Equity class segments were consolidated into Direct to reflect common management, similar underwriting and in-market focus. The change to the class segments in the allowance methodology did not have a significant impact on the allowance for loan losses. The following table illustrates the portfolio and class segments for the loan portfolio in 2018 compared to 2017: Portfolio Class - 2018 Class - 2017 Commercial Loans Commercial and Industrial Commercial Commercial Real Estate Commercial Real Estate Business Banking Agricultural Agricultural Real Estate Business Banking Consumer Loans Dealer Finance Indirect Specialty Lending Home Equity Direct Direct Residential Real Estate Commercial Loans The Company offers a variety of Commercial loan products including Commercial and Industrial, Commercial Real Estate Commercial and Industrial (“C&I”) – Commercial Real Estate (“CRE”) – Business Banking Consumer Loans The Company offers a variety of Consumer loan products including Dealer Finance, Specialty Lending and Direct loans. Dealer Finance – Specialty Lending Direct – Residential Real Estate Residential real estate loans consist primarily of loans secured by a first or second mortgage 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 real estate 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 risk, 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 impaired loans, these include estimates of impairment, if any, 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 level of incurred 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 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: (In thousands) Commercial Loans Consumer Loans Residential Real Estate Total Balance as of June 30, 2018 $ 31,059 $ 36,479 $ 4,912 $ 72,450 Charge-offs (823 ) (6,818 ) (123 ) (7,764 ) Recoveries 410 1,602 81 2,093 Provision 1,086 6,044 (1,104 ) 6,026 Ending Balance as of September 30, 2018 $ 31,732 $ 37,307 $ 3,766 $ 72,805 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 (In thousands) Commercial Loans Consumer Loans Residential Real Estate Total Balance as of December 31, 2017 $ 27,606 $ 36,830 $ 5,064 $ 69,500 Charge-offs (2,535 ) (21,947 ) (513 ) (24,995 ) Recoveries 780 4,946 274 6,000 Provision 5,881 17,478 (1,059 ) 22,300 Ending Balance as of September 30, 2018 $ 31,732 $ 37,307 $ 3,766 $ 72,805 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 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 is established based on our estimate of incurred losses at the balance sheet date. There was no allowance for loan losses for the acquired loan portfolio as of September 30, 2018 and December 31, 2017. There were no charge-offs of acquired loans for the three months ended September 30, 2018 and 2017, and approximately $0.1 million and $0.7 million during the nine months ended September 30, 2018 and 2017 of net charge-offs of acquired loans, respectively, which are included in the table above. The following tables illustrate the allowance for loan losses and the recorded investment by portfolio segments: (In thousands) Commercial Loans Consumer Loans Residential Real Estate Total As of September 30, 2018 Allowance for loan losses $ 31,732 $ 37,307 $ 3,766 $ 72,805 Allowance for loans individually evaluated for impairment 25 - - 25 Allowance for loans collectively evaluated for impairment $ 31,707 $ 37,307 $ 3,766 $ 72,780 Ending balance of loans $ 3,212,577 $ 2,301,198 $ 1,373,487 $ 6,887,262 Ending balance of originated loans individually evaluated for impairment 5,077 7,760 6,445 19,282 Ending balance of acquired loans collectively evaluated for impairment 153,808 33,994 153,073 340,875 Ending balance of originated loans collectively evaluated for impairment $ 3,053,692 $ 2,259,444 $ 1,213,969 $ 6,527,105 As of December 31, 2017 Allowance for loan losses $ 27,606 $ 36,830 $ 5,064 $ 69,500 Allowance for loans individually evaluated for impairment 57 - - 57 Allowance for loans collectively evaluated for impairment $ 27,549 $ 36,830 $ 5,064 $ 69,443 Ending balance of loans $ 3,028,269 $ 2,234,349 $ 1,321,021 $ 6,583,639 Ending balance of originated loans individually evaluated for impairment 5,876 8,432 6,830 21,138 Ending balance of acquired loans collectively evaluated for impairment 187,313 43,906 170,472 401,691 Ending balance of originated loans collectively evaluated for impairment $ 2,835,080 $ 2,182,011 $ 1,143,719 $ 6,160,810 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/or interest in accordance with contractual terms is in doubt. 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 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. Interest accrued in a prior period and not collected is charged-off against the allowance for loan losses. If ultimate repayment of a nonaccrual loan is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment of principal is not expected, any payment received on a nonaccrual loan is applied to principal until ultimate repayment becomes expected. 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 or in part is improbable. For Commercial loans, management considers specific facts and circumstances relative to individual credits in making such a determination. For Consumer and Residential Real Estate loans, 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: 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 As of September 30, 2018 Originated Commercial Loans: C&I $ 209 $ 41 $ - $ 250 $ 908 $ 857,782 $ 858,940 CRE 1,133 - - 1,133 3,637 1,708,369 1,713,139 Business Banking 1,318 98 - 1,416 5,754 479,520 486,690 Total Commercial Loans $ 2,660 $ 139 $ - $ 2,799 $ 10,299 $ 3,045,671 $ 3,058,769 Consumer Loans: Dealer Finance $ 14,364 $ 2,039 $ 1,252 $ 17,655 $ 2,062 $ 1,209,880 $ 1,229,597 Specialty Lending 3,037 2,155 1,544 6,736 - 514,660 521,396 Direct 3,313 949 434 4,696 2,541 508,974 516,211 Total Consumer Loans $ 20,714 $ 5,143 $ 3,230 $ 29,087 $ 4,603 $ 2,233,514 $ 2,267,204 Residential Real Estate $ 1,366 $ 219 $ 1,231 $ 2,816 $ 6,106 $ 1,211,492 $ 1,220,414 Total Originated Loans $ 24,740 $ 5,501 $ 4,461 $ 34,702 $ 21,008 $ 6,490,677 $ 6,546,387 Acquired Commercial Loans: C&I $ - $ - $ - $ - $ - $ 30,871 $ 30,871 CRE - - - - 2 87,827 87,829 Business Banking 425 - 240 665 611 33,832 35,108 Total Commercial Loans $ 425 $ - $ 240 $ 665 $ 613 $ 152,530 $ 153,808 Consumer Loans: Dealer Finance $ 4 $ - $ - $ 4 $ - $ 99 $ 103 Direct 223 14 - 237 275 33,379 33,891 Total Consumer Loans $ 227 $ 14 $ - $ 241 $ 275 $ 33,478 $ 33,994 Residential Real Estate $ 839 $ 39 $ 33 $ 911 $ 1,405 $ 150,757 $ 153,073 Total Acquired Loans $ 1,491 $ 53 $ 273 $ 1,817 $ 2,293 $ 336,765 $ 340,875 Total Loans $ 26,231 $ 5,554 $ 4,734 $ 36,519 $ 23,301 $ 6,827,442 $ 6,887,262 (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 As of December 31, 2017 Originated Commercial Loans: Commercial $ - $ - $ - $ - $ 202 $ 753,577 $ 753,779 Commercial Real Estate 161 138 - 299 3,178 1,533,065 1,536,542 Agricultural 117 - - 117 1,043 34,386 35,546 Agricultural Real Estate 493 - - 493 2,736 30,905 34,134 Business Banking 1,907 597 - 2,504 5,304 473,147 480,955 Total Commercial Loans $ 2,678 $ 735 $ - $ 3,413 $ 12,463 $ 2,825,080 $ 2,840,956 Consumer Loans: Indirect $ 18,747 $ 4,033 $ 3,492 $ 26,272 $ 2,115 $ 1,642,204 $ 1,670,591 Home Equity 2,887 854 341 4,082 2,736 448,081 454,899 Direct 341 108 70 519 35 64,399 64,953 Total Consumer Loans $ 21,975 $ 4,995 $ 3,903 $ 30,873 $ 4,886 $ 2,154,684 $ 2,190,443 Residential Real Estate $ 3,730 $ 667 $ 1,262 $ 5,659 $ 5,987 $ 1,138,903 $ 1,150,549 Total Originated Loans $ 28,383 $ 6,397 $ 5,165 $ 39,945 $ 23,336 $ 6,118,667 $ 6,181,948 Acquired Commercial Loans: Commercial $ - $ - $ - $ - $ - $ 39,575 $ 39,575 Commercial Real Estate - - - - 2 106,632 106,634 Business Banking 354 - - 354 669 40,081 41,104 Total Commercial Loans $ 354 $ - $ - $ 354 $ 671 $ 186,288 $ 187,313 Consumer Loans: Indirect $ 38 $ - $ 1 $ 39 $ 22 $ 1,157 $ 1,218 Home Equity 254 34 103 391 225 39,256 39,872 Direct 6 1 1 8 23 2,785 2,816 Total Consumer Loans $ 298 $ 35 $ 105 $ 438 $ 270 $ 43,198 $ 43,906 Residential Real Estate $ 627 $ 226 $ 140 $ 993 $ 1,431 $ 168,048 $ 170,472 Total Acquired Loans $ 1,279 $ 261 $ 245 $ 1,785 $ 2,372 $ 397,534 $ 401,691 Total Loans $ 29,662 $ 6,658 $ 5,410 $ 41,730 $ 25,708 $ 6,516,201 $ 6,583,639 There were no material commitments to extend further credit to borrowers with nonperforming loans as of September 30, 2018 and December 31, 2017. 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 troubled debt restructured loans (“TDRs”) and nonaccrual Commercial loans that are graded Substandard, Doubtful or Loss, with outstanding balances of $750 thousand or more are evaluated for impairment through the Company’s quarterly status review process. The Company considers Commercial loans less than $750 thousand to be homogeneous loans. In determining that we will be unable to collect all principal and/or 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 identified as impaired, 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. Impaired amounts are charged off immediately if such amounts are determined by management to be uncollectable. Any change to the previously recognized impairment loss is recognized as a component of the provision for loan losses. The following table provides information on loans specifically evaluated for impairment: September 30, 2018 December 31, 2017 (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: C&I $ 404 $ 676 $ - $ - CRE 3,629 5,616 - - Commercial - - - 251 Commercial Real Estate - - 2,211 3,979 Agricultural - - 452 465 Agricultural Real Estate - - 2,250 2,423 Business Banking 1,019 2,099 860 1,730 Total Commercial Loans $ 5,052 $ 8,391 $ 5,773 $ 8,848 Consumer Loans: Dealer Finance $ 160 $ 254 $ - $ - Direct 7,600 9,600 - - Indirect - - 131 143 Home Equity - - 8,027 9,966 Direct - - 274 274 Total Consumer Loans $ 7,760 $ 9,854 $ 8,432 $ 10,383 Residential Real Estate $ 6,445 $ 8,721 $ 6,830 $ 8,780 Total $ 19,257 $ 26,966 $ 21,035 $ 28,011 With an allowance recorded: Commercial Loans: C&I $ 25 $ 25 $ 25 $ - $ - $ - Commercial Real Estate - - - 76 82 30 Agricultural - - - 27 27 27 Total Commercial Loans $ 25 $ 25 $ 25 $ 103 $ 109 $ 57 Total Loans $ 19,282 $ 26,991 $ 25 $ 21,138 $ 28,120 $ 57 There were no acquired impaired loans specifically evaluated for impairment as of September 30, 2018 or December 31, 2017. The following tables summarize the average recorded investments on loans specifically evaluated for impairment and the interest income recognized: For the three months ended September 30, 2018 September 30, 2017 (In thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Originated Commercial Loans: C&I $ 433 $ - $ - $ - CRE 3,645 32 - - Commercial - - 1,000 - Commercial Real Estate - - 2,415 48 Agricultural - - 115 - Agricultural Real Estate - - 1,505 11 Business Banking 1,024 4 955 2 Total Commercial Loans $ 5,102 $ 36 $ 5,990 $ 61 Consumer Loans: Dealer Finance $ 177 $ 4 $ - $ - Direct 7,730 102 - - Indirect - - 35 1 Home Equity - - 8,159 111 Direct - - 119 2 Total Consumer Loans $ 7,907 $ 106 $ 8,313 $ 114 Residential Real Estate $ 6,519 $ 68 $ 6,633 $ 82 Total Originated Loans $ 19,528 $ 210 $ 20,936 $ 257 Total Loans $ 19,528 $ 210 $ 20,936 $ 257 For the nine months ended September 30, 2018 September 30, 2017 (In thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Originated Commercial Loans: C&I $ 449 $ 1 $ - $ - CRE 3,999 96 - - Commercial - - 2,393 - Commercial Real Estate - - 3,906 93 Agricultural - - 147 1 Agricultural Real Estate - - 1,545 32 Business Banking 998 12 837 7 Total Commercial Loans $ 5,446 $ 109 $ 8,828 $ 133 Consumer Loans: Dealer Finance $ 187 $ 8 $ - $ - Direct 7,953 317 - - Indirect - - 22 2 Home Equity - - 8,274 331 Direct - - 119 2 Total Consumer Loans $ 8,140 $ 325 $ 8,415 $ 335 Residential Real Estate $ 6,719 $ 212 $ 6,425 $ 211 Total Originated Loans $ 20,305 $ 646 $ 23,668 $ 679 Acquired Commercial Loans: Commercial Real Estate $ - $ - $ 121 $ - Total Commercial Loans $ - $ - $ 121 $ - Total Acquired Loans $ - $ - $ 121 $ - Total Loans $ 20,305 $ 646 $ 23,789 $ 679 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 C&I and CRE 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. C&I and CRE 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 uncollectable 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 Real Estate Grading System Consumer and Residential Real Estate loans are graded as either Nonperforming or Performing. ● 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: (In thousands) As of September 30, 2018 Originated Commercial Credit Exposure By Internally Assigned Grade: C&I CRE Total Pass $ 805,333 $ 1,660,900 $ 2,466,233 Special Mention 33,557 16,762 50,319 Substandard 20,050 35,477 55,527 Total $ 858,940 $ 1,713,139 $ 2,572,079 Business Banking Credit Exposure By Internally Assigned Grade: Business Banking Total Non-classified $ 474,252 $ 474,252 Classified 12,438 12,438 Total $ 486,690 $ 486,690 Consumer Credit Exposure By Payment Activity: Dealer Finance Specialty Lending Direct Total Performing $ 1,226,283 $ 519,852 $ 513,236 $ 2,259,371 Nonperforming 3,314 1,544 2,975 7,833 Total $ 1,229,597 $ 521,396 $ 516,211 $ 2,267,204 Residential Real Estate Credit Exposure By Payment Activity: Residential Real Estate Total Performing $ 1,213,077 $ 1,213,077 Nonperforming 7,337 7,337 Total $ 1,220,414 $ 1,220,414 Acquired Commercial Credit Exposure By Internally Assigned Grade: C&I CRE Total Pass $ 27,046 $ 87,091 $ 114,137 Special Mention 3,825 93 3,918 Substandard - 645 645 Total $ 30,871 $ 87,829 $ 118,700 Business Banking Credit Exposure By Internally Assigned Grade: Business Banking Total Non-classified $ 32,098 $ 32,098 Classified 3,010 3,010 Total $ 35,108 $ 35,108 Consumer Credit Exposure By Payment Activity: Dealer Finance Direct Total Performing $ 103 $ 33,616 $ 33,719 Nonperforming - 275 275 Total $ 103 $ 33,891 $ 33,994 Residential Real Estate Credit Exposure By Payment Activity: Residential Real Estate Total Performing $ 151,635 $ 151,635 Nonperforming 1,438 1,438 Total $ 153,073 $ 153,073 (In thousands) As of December 31, 2017 Originated Commercial Credit Exposure By Internally Assigned Grade: Commercial Commercial Real Estate Agricultural Agricultural Real Estate Total Pass $ 708,567 $ 1,481,926 $ 31,142 $ 23,381 $ 2,245,016 Special Mention 30,337 28,264 2,294 2,441 63,336 Substandard 14,875 26,352 2,110 8,312 51,649 Total $ 753,779 $ 1,536,542 $ 35,546 $ 34,134 $ 2,360,001 Business Banking Credit Exposure By Internally Assigned Grade: Business Total Non-classified $ 468,898 $ 468,898 Classified 12,057 12,057 Total $ 480,955 $ 480,955 Consumer Credit Exposure By Payment Activity: Indirect Home Equity Direct Total Performing $ 1,664,984 $ 451,822 $ 64,848 $ 2,181,654 Nonperforming 5,607 3,077 105 8,789 Total $ 1,670,591 $ 454,899 $ 64,953 $ 2,190,443 Residential Real Estate Credit Exposure By Payment Activity: Residential Real Estate Total Performing $ 1,143,300 $ 1,143,300 Nonperforming 7,249 7,249 Total $ 1,150,549 $ 1,150,549 Acquired Commercial Credit Exposure By Internally Assigned Grade: Commercial Commercial Real Estate Total Pass $ 37,825 $ 103,248 $ 141,073 Special Mention 425 498 923 Substandard 1,325 2,888 4,213 Total $ 39,575 $ 106,634 $ 146,209 Business Banking Credit Exposure By Internally Assigned Grade: Business Banking Total Non-classified $ 38,236 $ 38,236 Classified 2,868 2,868 Total $ 41,104 $ 41,104 Consumer Credit Exposure By Payment Activity: Indirect Home Equity Direct Total Performing $ 1,195 $ 39,544 $ 2,792 $ 43,531 Nonperforming 23 328 24 375 Total $ 1,218 $ 39,872 $ 2,816 $ 43,906 Residential Real Estate Credit Exposure By Payment Activity: Residential Real Estate Total Performing $ 168,901 $ 168,901 Nonperforming 1,571 1,571 Total $ 170,472 $ 170,472 Troubled Debt Restructured Loans When the Company modifies a loan in a troubled debt restructuring, such modifications include 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. Residential Real Estate and Consumer TDRs occurring during 2018 and 2017 were due to the reduction in the interest rate or extension of the term. Commercial TDRs during 2018 and 2017 were both a reduction of the interest rate and change in terms. When the Company modifies a loan in a troubled debt restructuring, management measures for impairment, if any, 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. If management determines that the value of the modified loan is less than the recorded investment in the loan an impairment charge would be 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, 2018 (Dollars in thousands) Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Consumer Loans: Dealer Finance 8 $ 90 $ 89 Total Consumer Loans 8 $ 90 $ 89 Total Troubled Debt Restructurings 8 $ 90 $ 89 Three months ended September 30, 2017 (Dollars in thousands) Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Consumer Loans: Indirect 1 $ 7 $ 7 Home Equity 4 189 222 Total Consumer Loans 5 $ 196 $ 229 Residential Real Estate 1 $ 518 $ 518 Total Troubled Debt Restructurings 6 $ 714 $ 747 Nine months ended September 30, 2018 (Dollars in thousands) Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Commercial Loans: Business Banking 3 $ 369 $ 371 Total Commercial Loans 3 $ 369 $ 371 Consumer Loans: Dealer Finance 15 $ 185 $ 183 Direct 2 41 41 Total Consumer Loans 17 $ 226 $ 224 Residential Real Estate 5 $ 323 $ 323 Total Troubled Debt Restructurings 25 $ 918 $ 918 Nine months ended September 30, 2017 (Dollars in thousands) Number of Contracts Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Commercial Loans: Commercial 1 $ 3,300 $ 3,239 Business Banking 1 337 333 Total Commercial Loans 2 $ 3,637 $ 3,572 Consumer Loans: Indirect 4 $ 39 $ 37 Home Equity 8 373 414 Direct 1 120 120 Total Consumer Loans 13 $ 532 $ 571 Residential Real Estate 8 $ 1,066 $ 1,068 Total Troubled Debt Restructurings 23 $ 5,235 $ 5,211 The following tables illustrate the recorded investment and number of modifications for TDRs where a concessi |