Allowance for Loan and Lease Losses

Originated Loans and Leases

Management reviews the appropriateness of the allowance for loan and lease losses (“allowance”) on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated loan loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues and ASC Topic 310, Receivables and ASC Topic 450, Contingencies.

The model is comprised of four major components that management has deemed appropriate in evaluating the appropriateness of the allowance for loan and lease losses. While none of these components, when used independently, is effective in arriving at a reserve level that appropriately measures the risk inherent in the portfolio, management believes that using them collectively, provides reasonable measurement of the loss exposure in the portfolio. The four components include: impaired loans; individually reviewed and graded loans; historical loss experience; and qualitative or subjective analysis.

Since the methodology is based upon historical experience and trends as well as management’s judgment, factors may arise that result in different estimates. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in the local area, concentration of risk, changes in interest rates, and declines in local property values. While management’s evaluation of the allowance as of September 30, 2018, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance.

Acquired Loans and Leases

Acquired loans accounted for under ASC 310-30

For our acquired loans, our allowance for loan losses is estimated based upon our expected cash flows for these loans. To the extent that we experience a 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 loans.

Acquired loans accounted for under ASC 310-20

We establish our allowance for loan losses through a provision for credit losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.

The following tables detail activity in the allowance for loan and lease losses segregated by originated and acquired loan and lease portfolios and by portfolio segment for the three and nine months ended September 30, 2018 and 2017. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.



Three Months Ended September 30, 2018
(in thousands)	Commercial and Industrial			Commercial Real Estate		Residential Real Estate			Consumer and Other			Finance Leases		Total
Allowance for originated loans and leases
Beginning balance	$	12,866		$	20,770	$	6,147		$	1,328		$	0	$	41,111

Charge-offs	(118		)	0		(2		)	(224		)	0		(344		)
Recoveries	8			203		96			7			0		314
Provision (credit)	(335		)	199		204			140			0		208
Ending Balance	$	12,421		$	21,172	$	6,445		$	1,251		$	0	$	41,289



Three Months Ended September 30, 2018
(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other	Finance Leases	Total
Allowance for acquired loans
Beginning balance	19		25		65		5	0	114

Charge-offs	(42	)	(81	)	(45	)	0	0	(168	)
Recoveries	32		4		23		0	0	59
Provision (credit)	(9	)	52		21		0	0	64
Ending Balance	0		0		64		5	0	69



Three Months Ended September 30, 2017
(in thousands)	Commercial and Industrial		Commercial Real Estate	Residential Real Estate		Consumer and Other		Finance Leases	Total
Allowance for originated loans and leases
Beginning balance	10,842		19,121	5,761		1,236		0	36,960

Charge-offs	(85	)	0	(41	)	(212	)	0	(338	)
Recoveries	(18	)	264	33		71		0	350
Provision (credit)	951		70	(262	)	172		0	931
Ending Balance	11,690		19,455	5,491		1,267		0	37,903



Three Months Ended September 30, 2017
(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Covered Loans	Total
Allowance for acquired loans
Beginning balance	50		87		54		6		0	197

Charge-offs	0		(10	)	(34	)	(1	)	0	(45	)
Recoveries	0		499		12		1		0	512
Provision (credit)	(50	)	(501	)	22		0		0	(529	)
Ending Balance	0		75		54		6		0	135



Nine Months Ended September 30, 2018
(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases	Total
Allowance for originated loans and leases
Beginning balance	11,812		20,412		6,161		1,301		0	39,686

Charge-offs	(224	)	(60	)	(208	)	(1,166	)	0	(1,658	)
Recoveries	16		549		232		613		0	1,410
Provision (credit)	817		271		260		503		0	1,851
Ending Balance	12,421		21,172		6,445		1,251		0	41,289



Nine Months Ended September 30, 2018
(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Covered Loans	Total
Allowance for acquired loans
Beginning balance	25		0		54		6		0	85

Charge-offs	(43	)	(81	)	(148	)	0		0	(272	)
Recoveries	88		27		106		2		0	223
Provision (credit)	(70	)	54		52		(3	)	0	33
Ending Balance	0		0		64		5		0	69



Nine Months Ended September 30, 2017
(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases	Total
Allowance for originated loans and leases
Beginning balance	9,389		19,836		5,149		1,224		0	35,598

Charge-offs	(162	)	(21	)	(483	)	(742	)	0	(1,408	)
Recoveries	112		717		169		336		0	1,334
Provision (credit)	2,351		(1,077	)	656		449		0	2,379
Ending Balance	11,690		19,455		5,491		1,267		0	37,903



Nine Months Ended September 30, 2017
(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Covered Loans	Total
Allowance for acquired loans
Beginning balance	0		97		54		6		0	157

Charge-offs	(74	)	(84	)	(186	)	(1	)	0	(345	)
Recoveries	0		524		24		7		0	555
Provision (credit)	74		(462	)	162		(6	)	0	(232	)
Ending Balance	0		75		54		6		0	135

At September 30, 2018 and December 31, 2017, the allocation of the allowance for loan and lease losses summarized on the basis of the Company’s impairment methodology was as follows:



(in thousands)	Commercial and Industrial	Commercial Real Estate	Residential Real Estate	Consumer and Other	Finance Leases	Total
Allowance for originated loans and leases
September 30, 2018
Individually evaluated for impairment	376	0	0	0	0	376
Collectively evaluated for impairment	12,045	21,172	6,445	1,251	0	40,913
Ending balance	12,421	21,172	6,445	1,251	0	41,289



(in thousands)	Commercial and Industrial	Commercial Real Estate	Residential Real Estate	Consumer and Other	Covered Loans	Total
Allowance for acquired loans
September 30, 2018
Individually evaluated for impairment	0	0	0	0	0	0
Collectively evaluated for impairment	0	0	64	5	0	69
Ending balance	0	0	64	5	0	69



(in thousands)	Commercial and Industrial	Commercial Real Estate	Residential Real Estate	Consumer and Other	Finance Leases	Total
Allowance for originated loans and leases
December 31, 2017
Individually evaluated for impairment	441	0	0	0	0	441
Collectively evaluated for impairment	11,371	20,412	6,161	1,301	0	39,245
Ending balance	11,812	20,412	6,161	1,301	0	39,686



(in thousands)	Commercial and Industrial	Commercial Real Estate	Residential Real Estate	Consumer and Other	Covered Loans	Total
Allowance for acquired loans
December 31, 2017
Individually evaluated for impairment	25	0	0	0	0	25
Collectively evaluated for impairment	0	0	54	6	0	60
Ending balance	25	0	54	6	0	85

The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology as of September 30, 2018 and December 31, 2017 was as follows:



(in thousands)	Commercial and Industrial	Commercial Real Estate	Residential Real Estate	Consumer and Other	Finance Leases	Total
Originated loans and leases
September 30, 2018
Individually evaluated for impairment	3,928	5,136	4,009	0	0	13,073
Collectively evaluated for impairment	1,017,166	2,132,877	1,291,224	66,443	14,055	4,521,765
Total	1,021,094	2,138,013	1,295,233	66,443	14,055	4,534,838



(in thousands)	Commercial and Industrial	Commercial Real Estate	Residential Real Estate	Consumer and Other	Covered Loans	Total
Acquired loans
September 30, 2018
Individually evaluated for impairment	261	1,400	1,780	0	0	3,441
Loans acquired with deteriorated credit quality	209	5,974	5,126	0	0	11,309
Collectively evaluated for impairment	43,821	175,771	36,267	859	0	256,718
Total	44,291	183,145	43,173	859	0	271,468



(in thousands)	Commercial and Industrial	Commercial Real Estate	Residential Real Estate	Consumer and Other	Finance Leases	Total
Originated loans and leases
December 31, 2017
Individually evaluated for impairment	1,759	6,626	3,965	0	0	12,350
Collectively evaluated for impairment	1,038,916	1,986,354	1,247,887	62,358	14,467	4,349,982
Total	1,040,675	1,992,980	1,251,852	62,358	14,467	4,362,332



(in thousands)	Commercial and Industrial	Commercial Real Estate	Residential Real Estate	Consumer and Other	Covered Loans	Total
Acquired loans
December 31, 2017
Individually evaluated for impairment	276	1,372	1,823	0	0	3,471
Loans acquired with deteriorated credit quality	506	7,481	3,975	0	0	11,962
Collectively evaluated for impairment	50,194	198,894	45,291	765	0	295,144
Total	50,976	207,747	51,089	765	0	310,577

A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans consist of our non-homogenous nonaccrual loans, and all loans restructured in a troubled debt restructuring (TDR). Specific reserves on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off. The majority of impaired loans are collateral dependent impaired loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans, and previous charge-offs. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis. Impaired loans are as follows:



	September 30, 2018			December 31, 2017
(in thousands)	Recorded Investment	Unpaid Principal Balance	Related Allowance	Recorded Investment	Unpaid Principal Balance	Related Allowance
Originated loans and leases with no related allowance

Commercial and industrial
Commercial and industrial other	2,503	2,597	0	1,246	1,250	0
Commercial real estate
Commercial real estate other	5,136	5,336	0	6,626	6,533	0
Residential real estate
Home equity	4,009	4,230	0	3,965	4,049	0
Subtotal	11,648	12,163	0	11,837	11,832	0

Originated loans and leases with related allowance

Commercial and industrial
Commercial and industrial other	1,425	1,436	376	513	532	441
Subtotal	1,425	1,436	376	513	532	441
Total	13,073	13,599	376	12,350	12,364	441



	September 30, 2018			December 31, 2017
(in thousands)	Recorded Investment	Unpaid Principal Balance	Related Allowance	Recorded Investment	Unpaid Principal Balance	Related Allowance
Acquired loans and leases with no related allowance

Commercial and industrial
Commercial and industrial other	261	353	0	226	226	0
Commercial real estate
Commercial real estate other	1,400	1,378	0	1,372	1,474	0
Residential real estate
Home equity	1,780	1,812	0	1,823	1,854	0
Subtotal	3,441	3,543	0	3,421	3,554	0

Acquired loans and leases with related allowance

Commercial and industrial
Commercial and industrial other	0	0	0	50	50	25
Subtotal	0	0	0	50	50	25
Total	3,441	3,543	0	3,471	3,604	25

The average recorded investment and interest income recognized on impaired loans for the three months ended September 30, 2018 and 2017 was as follows:



	Three Months Ended September 30, 2018		Three Months Ended September 30, 2017
(in thousands)	Average Recorded Investment	Interest Income Recognized	Average Recorded Investment	Interest Income Recognized
Originated loans and leases with no related allowance

Commercial and industrial
Commercial and industrial other	2,963	0	404	0
Commercial real estate
Commercial real estate other	5,705	0	6,409	0
Residential real estate
Home equity	4,023	0	3,581	0
Subtotal	12,691	0	10,394	0

Originated loans and leases with related allowance

Commercial and industrial
Commercial and industrial other	1,200	0	1,083	0
Commercial real estate
Commercial real estate other	44	0	50	0
Subtotal	1,244	0	1,133	0
Total	13,935	0	11,527	0



	Three Months Ended September 30, 2018		Three Months Ended September 30, 2017
(in thousands)	Average Recorded Investment	Interest Income Recognized	Average Recorded Investment	Interest Income Recognized
Acquired loans and leases with no related allowance

Commercial and industrial
Commercial and industrial other	289	0	0	0
Commercial real estate
Commercial real estate other	1,504	0	1,516	0
Residential real estate
Home equity	1,779	0	1,440	0
Subtotal	3,572	0	2,956	0

Acquired loans and leases with related allowance

Commercial real estate
Commercial real estate other	0	0	267	0
Subtotal	0	0	267	0
Total	3,572	0	3,223	0

The average recorded investment and interest income recognized on impaired loans for the nine months ended September 30, 2018 and 2017 was as follows:



	Nine Months Ended September 30, 2018		Nine Months Ended September 30, 2017
(in thousands)	Average Recorded Investment	Interest Income Recognized	Average Recorded Investment	Interest Income Recognized
Originated loans and leases with no related allowance

Commercial and industrial
Commercial and industrial other	2,370	0	290	0
Commercial real estate
Commercial real estate other	6,006	0	7,569	0
Residential real estate
Home equity	3,862	0	3,441	0
Subtotal	12,238	0	11,300	0

Originated loans and leases with related allowance

Commercial and industrial
Commercial and industrial other	955	0	335	0
Commercial real estate
Commercial real estate other	22	0	20	0
Subtotal	977	0	355	0
Total	13,215	0	11,655	0



	Nine Months Ended September 30, 2018		Nine Months Ended September 30, 2017
(in thousands)	Average Recorded Investment	Interest Income Recognized	Average Recorded Investment	Interest Income Recognized
Acquired loans and leases with no related allowance

Commercial and industrial
Commercial and industrial other	235	0	66	0
Commercial real estate
Construction	0	0	16	0
Commercial real estate other	1,613	0	2,402	0
Residential real estate
Home equity	2,135	0	1,722	0
Subtotal	3,983	0	4,206	0

Acquired loans and leases with related allowance

Commercial real estate
Commercial real estate other	0	0	267	0
Subtotal	0	0	267	0
Total	3,983	0	4,473	0

Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes concessions to the borrower that it would not otherwise consider. These modifications may include, among others, an extension for the term of the loan, and granting a period when interest-only payments can be made with the principal payments made over the remaining term of the loan or at maturity.

The following tables present information on loans modified in troubled debt restructuring during the periods indicated.



September 30, 2018	Three Months Ended
				Defaulted TDRs²
(in thousands)	Number of Loans	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment	Number of Loans	Post-Modification Outstanding Recorded Investment
Residential real estate
Home equity¹	2	115	115	0	0
Total	2	115	115	0	0

¹Represents the following concessions: extension of term and reduction of rate.

² TDRs that defaulted during the three months ended September 30, 2018 that were restructured in the prior twelve months.

There we no new TDRs for the three months ended September 30, 2017.



September 30, 2018	Nine Months Ended
				Defaulted TDRs²
(in thousands)	Number of Loans	Pre- Modification Outstanding Recorded Investment	Post- Modification Outstanding Recorded Investment	Number of Loans	Post- Modification Outstanding Recorded Investment
Residential real estate
Home equity¹	4	227	227	0	0
Total	4	227	227	0	0

¹ Represents the following concessions: extension of term and reduction of rate.

² TDRs that defaulted during the nine months ended September 30, 2018 that had been restructured in the prior twelve months.



September 30, 2017	Nine Months Ended
				Defaulted TDRs²
(in thousands)	Number of Loans	Pre- Modification Outstanding Recorded Investment	Post- Modification Outstanding Recorded Investment	Number of Loans	Post- Modification Outstanding Recorded Investment
Residential real estate
Home equity¹	2	162	162	1	55
Total	2	162	162	1	55

¹ Represents the following concessions: extension of term and reduction of rate.

² TDRs that defaulted during the nine months ended September 30, 2017 that had been restructured in the prior twelve months.

The following tables present credit quality indicators (internal risk grade) by class of commercial and industrial loans and commercial real estate loans as of September 30, 2018 and December 31, 2017.



September 30, 2018
(in thousands)	Commercial and Industrial Other	Commercial and Industrial Agriculture	CommercialReal Estate Other	CommercialReal Estate Agriculture	Commercial Real Estate Construction	Total
Originated Loans and Leases
Internal risk grade:
Pass	902,263	80,541	1,782,283	131,095	179,083	3,075,265
Special Mention	10,201	6,315	10,773	6,956	0	34,245
Substandard	15,402	6,372	18,292	9,531	0	49,597
Total	927,866	93,228	1,811,348	147,582	179,083	3,159,107



September 30, 2018
(in thousands)	Commercial and Industrial Other	Commercial and Industrial Agriculture	CommercialReal Estate Other	CommercialReal Estate Agriculture	Commercial Real Estate Construction	Total
Acquired Loans and Leases
Internal risk grade:
Pass	44,008	0	178,281	231	1,410	223,930
Special Mention	0	0	465	0	0	465
Substandard	283	0	2,758	0	0	3,041
Total	44,291	0	181,504	231	1,410	227,436



December 31, 2017
(in thousands)	Commercial and Industrial Other	Commercial and Industrial Agriculture	CommercialReal Estate Other	CommercialReal Estate Agriculture	Commercial Real Estate Construction	Total
Originated Loans and Leases
Internal risk grade:
Pass	919,214	100,470	1,627,713	119,392	201,948	2,968,737
Special Mention	6,680	8,068	19,068	9,980	538	44,334
Substandard	6,173	70	14,001	340	0	20,584
Total	932,067	108,608	1,660,782	129,712	202,486	3,033,655



December 31, 2017
(in thousands)	Commercial and Industrial Other	Commercial and Industrial Agriculture	CommercialReal Estate Other	CommercialReal Estate Agriculture	Commercial Real Estate Construction	Total
Acquired Loans and Leases
Internal risk grade:
Pass	50,554	0	198,822	247	1,480	251,103
Special Mention	0	0	2,265	0	0	2,265
Substandard	422	0	4,933	0	0	5,355
Total	50,976	0	206,020	247	1,480	258,723

The following tables present credit quality indicators by class of residential real estate loans and by class of consumer loans. Nonperforming loans include nonaccrual, impaired, and loans 90 days past due and accruing interest. All other loans are considered performing as of September 30, 2018 and December 31, 2017. For purposes of this footnote, acquired loans that were recorded at fair value at the acquisition date and are 90 days or greater past due are considered performing.



September 30, 2018
(in thousands)	Residential Home Equity	Residential Mortgages	Consumer Indirect	Consumer Other	Total
Originated Loans and Leases
Performing	207,571	1,078,129	11,779	54,411	1,351,890
Nonperforming	1,597	7,936	184	69	9,786
Total	209,168	1,086,065	11,963	54,480	1,361,676



September 30, 2018
(in thousands)	Residential Home Equity	Residential Mortgages	Consumer Indirect	Consumer Other	Total
Acquired Loans and Leases
Performing	21,229	19,459	0	859	41,548
Nonperforming	1,204	1,281	0	0	2,485
Total	22,433	20,740	0	859	44,033



December 31, 2017
(in thousands)	Residential Home Equity	Residential Mortgages	Consumer Indirect	Consumer Other	Total
Originated Loans and Leases
Performing	211,275	1,032,932	11,866	50,138	1,306,211
Nonperforming	1,537	6,108	278	76	7,999
Total	212,812	1,039,040	12,144	50,214	1,314,210



December 31, 2017
(in thousands)	Residential Home Equity	Residential Mortgages	Consumer Indirect	Consumer Other	Total
Acquired Loans and Leases
Performing	26,840	21,531	0	765	49,136
Nonperforming	1,604	1,114	0	0	2,718
Total	28,444	22,645	0	765	51,854