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 Company’s methodology for determining and allocating the allowance for loan and lease losses focuses on ongoing reviews of larger individual loans and leases, historical net charge-offs, delinquencies in the loan and lease portfolio, the level of impaired and nonperforming loans, values of underlying loan and lease collateral, the overall risk characteristics of the portfolios, changes in character or size of the portfolios, geographic location, current economic conditions, changes in capabilities and experience of lending management and staff, and other relevant factors. The various factors used in the methodologies are reviewed on a regular basis.

At least annually, management reviews all commercial and commercial real estate loans exceeding a certain threshold and assigns a risk rating. The Company uses an internal loan rating system of pass credits, special mention loans, substandard loans, doubtful loans, and loss loans (which are fully charged off). The definitions of “special mention”, “substandard”, “doubtful” and “loss” are consistent with banking regulatory definitions. Factors considered in assigning loan ratings include: the customer’s ability to repay based upon customer’s expected future cash flow, operating results, and financial condition; the underlying collateral, if any; and the economic environment and industry in which the customer operates. Special mention loans have potential weaknesses that if left uncorrected may result in deterioration of the repayment prospects and a downgrade to a more severe risk rating. A substandard loan credit has a well-defined weakness which makes payment default or principal exposure likely, but not yet certain. There is a possibility that the Company will sustain some loss if the deficiencies are not corrected. A doubtful loan has a high possibility of loss, but the extent of the loss is difficult to quantify because of certain important and reasonably specific pending factors.

At least quarterly, management reviews all commercial and commercial real estate loans and leases and agriculturally related loans with an outstanding principal balance of over $500,000 that are internally risk rated special mention or worse, giving consideration to payment history, debt service payment capacity, collateral support, strength of guarantors, local market trends, industry trends, and other factors relevant to the particular borrowing relationship. Through this process, management identifies impaired loans. For loans and leases considered impaired, estimated exposure amounts are based upon collateral values or present value of expected future cash flows discounted at the original effective interest rate of each loan. For commercial loans, commercial mortgage loans, and agricultural loans not specifically reviewed, and for homogenous loan portfolios such as residential mortgage loans and consumer loans, estimated exposure amounts are assigned based upon historical net loss experience and current charge-off trends, past due status, and management’s judgment of the effects of current economic conditions on portfolio performance. In determining and assigning historical loss factors to the various homogeneous portfolios, the Company calculates average net losses over a period of time and compares this average to current levels and trends to ensure that the calculated average loss factor is reasonable.

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 June 30, 2013, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance.

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.

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 six months ended June 30, 2013 and 2012. 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 June 30, 2013
(in thousands)	Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer and Other			Finance Leases		Total
Originated
Allowance for credit losses:

Beginning balance	$	7,037		$	10,644		$	5,036		$	1,879		$	2	$	24,598

Charge-offs		(42	)		(144	)		(147	)		(198	)		0		(531	)
Recoveries		1,282			358			27			113			0		1,780
Provision		(1,322	)		(449	)		357			401			19		(994	)
Ending Balance	$	6,955		$	10,409		$	5,273		$	2,195		$	21	$	24,853

Three months ended June 30, 2013
(in thousands)	Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer and Other		Covered Loans		Total
Acquired
Allowance for credit losses:

Beginning balance	$	0		$	63		$	0		$	0	$	0	$	63

Charge-offs		(2,906	)		(32	)		(3	)		0		0		(2,941	)
Recoveries		0			0			0			0		0		0
Provision		2,970			350			129			34		0		3,483
Ending Balance	$	64		$	381		$	126		$	34	$	0	$	605

Three months ended June 30, 2012
(in thousands)	Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer and Other			Finance Leases		Total
Originated
Allowance for credit losses:

Beginning balance	$	8,270		$	12,314		$	4,491		$	1,868		$	5	$	26,948

Charge-offs		(329	)		(200	)		(614	)		(152	)		0		(1,295	)
Recoveries		46			0			66			89			0		201
Provision		(180	)		853			407			(85	)		16		1,011
Ending Balance	$	7,807		$	12,967		$	4,350		$	1,720		$	21	$	26,865

Six months ended June 30, 2013
(in thousands)	Commercial and Industrial				Commercial Real Estate			Residential Real Estate			Consumer and Other			Finance Leases		Total
Originated
Allowance for credit losses:

Beginning balance		$	7,533		$	10,184		$	4,981		$	1,940		$	5	$	24,643

Charge-offs			(432	)		(490	)		(339	)		(462	)		0		(1,723	)
Recoveries			1,442			436			29			200			0		2,107
Provision			(1,588	)		279			602			517			16		(174	)
Ending Balance		$	6,955		$	10,409		$	5,273		$	2,195		$	21	$	24,853

Six months ended June 30, 2013
(in thousands)	Commercial and Industrial				Commercial Real Estate			Residential Real Estate			Consumer and Other			Covered Loans		Total
Acquired
Allowance for credit losses:

Beginning balance		$	0		$	0		$	0		$	0		$	0	$	0

Charge-offs			(2,929	)		(32	)		(110	)		(25	)		0		(3,096	)
Recoveries			0			0			0			0			0		0
Provision			2,993			413			236			59			0		3,701
Ending Balance		$	64		$	381		$	126		$	34		$	0	$	605

Six months ended June 30, 2012
(in thousands)	Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer and Other			Finance Leases			Total
Originated
Allowance for credit losses:

Beginning balance	$	8,936		$	12,662		$	4,247		$	1,709		$	39		$	27,593

Charge-offs		(581	)		(1,169	)		(1,023	)		(411	)		0			(3,184	)
Recoveries		65			0			66			189			0			320
Provision		(613	)		1,474			1,060			233			(18	)		2,136
Ending Balance	$	7,807		$	12,967		$	4,350		$	1,720		$	21		$	26,865

There was no allowance for acquired loans and leases as of June 30, 2012.

At June 30, 2013 and December 31, 2012, 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
Originated
June 30, 2013
Individually evaluated for impairment	$	234	$	0	$	0	$	0	$	0	$	234
Collectively evaluated for impairment		6,721		10,409		5,273		2,195		21		24,619
Ending balance	$	6,955	$	10,409	$	5,273	$	2,195	$	21	$	24,853

(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Covered Loans		Total
Acquired
June 30, 2013
Individually evaluated for impairment	$	0	$	63	$	0	$	0	$	0	$	63
Collectively evaluated for impairment		64		318		126		34		0		542
Ending balance	$	64	$	381	$	126	$	34	$	0	$	605

(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Originated
December 31, 2012
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment		7,533		10,184		4,981		1,940		5		24,643
Ending balance	$	7,533	$	10,184	$	4,981	$	1,940	$	5	$	24,643

The recorded investment in loans and leases summarized on the basis of the Company's impairment methodology as of June 30, 2013 and December 31, 2012 was as follows:

(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate			Consumer and Other		Finance Leases	Total
Originated
June 30, 2013
Individually evaluated for impairment	$	4,615	$	17,742	$	447	$	0	$	0	$	22,804
Collectively evaluated for impairment		552,298		880,946		793,740		55,523		5,048		2,287,555
Total	$	556,913	$	898,688	$	794,187	$	55,523	$	5,048	$	2,310,359

(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Covered Loans		Total
Acquired
June 30, 2013
Individually evaluated for impairment	$	1,045	$	2,677	$	0	$	0	$	0	$	3,722
Loans acquired with deteriorated credit quality		4,386		17,626		14,130		0		31,548		67,690
Collectively evaluated for impairment		131,992		442,858		98,303		1,386		0		674,539
Total	$	137,423	$	463,161	$	112,433	$	1,386	$	31,548	$	745,951

(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Originated
December 31, 2012
Individually evaluated for impairment	$	2,771		21,478	$	483	$	0	$	0	$	24,732
Collectively evaluated for impairment		521,882		790,709		733,098		58,930		4,618		2,109,237
Total	$	524,653	$	812,187	$	733,581	$	58,930	$	4,618	$	2,133,969

(in thousands)	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Covered Loans		Total
Acquired
December 31, 2012
Individually evaluated for impairment	$	519		1,816	$	0	$	0	$	0	$	2,335
Loans acquired with deteriorated credit quality		7,144		24,032		17,650		0		36,251		85,077
Collectively evaluated for impairment		159,764		465,832		105,625		1,522		1,349		734,092
Total	$	167,427	$	491,680	$	123,275	$	1,522	$	37,600	$	821,504

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.

	June 30, 2013							December 31, 2012
(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		$	4,381	$	6,287	$	0	$	2,771	$	2,891	$	0
Commercial real estate
Construction			6,258		11,868		0		6,763		12,373		0
Commercial real estate other			11,484		15,150		0		14,715		16,940		0
Residential real estate
Residential real estate other			447		447		0		483		483		0
Subtotal		$	22,570	$	33,752	$	0	$	24,732	$	32,687	$	0

Originated loans and leases with related allowance

Commercial and industrial
Commercial and industrial other			234		415		234		0		0		0
Subtotal		$	234	$	415	$	234	$	0	$	0	$	0
Total		$	22,804	$	34,167	$	234	$	24,732	$	32,687	$	0

	June 30, 2013							December 31, 2012
(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		$	1,045	$	3,896	$	0	$	519	$	519	$	0
Commercial real estate
Commercial real estate other			2,468		2,468		0		1,816		1,861		0
Subtotal		$	3,513	$	6,364	$	0	$	2,335	$	2,380	$	0

Acquired loans and leases with related allowance

Commercial real estate
Commercial real estate other			209		209		63		0		0		0
Subtotal		$	209	$	209	$	63	$	0	$	0	$	0
Total		$	3,722	$	6,573	$	63	$	2,335	$	2,380	$	0

There was no allowance for acquired loan and leases at December 31, 2012.

The average recorded investment and interest income recognized on impaired originated loans for the three months ended June 30, 2013 and 2012 was as follows:

	Three Months Ended				Three Months Ended
	June 30, 2013				June 30, 2012
(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		4,397		0		2,966		4
Commercial real estate
Construction		6,311		0		11,247		0
Commercial real estate other		15,012		0		10,380		0
Residential real estate
Residential real estate other		447		0		488		0
Subtotal	$	26,167	$	0	$	25,081	$	4

Originated loans and leases with related allowance

Commercial and industrial
Commercial and industrial other		416		0		4,067		0
Commercial real estate
Commercial real estate other		0		0		1,026		6
Subtotal	$	416	$	0	$	5,093	$	6
Total	$	26,583	$	0	$	30,174	$	10

The average recorded investment and interest income recognized on impaired acquired loans for the three months ended June 30, 2013 was as follows:

	Three Months Ended
	June 30, 2013
(in thousands)	Average Recorded Investment		Interest Income Recognized
Acquired loans and leases with no related allowance

Commercial and industrial
Commercial and industrial other		2,517		0
Commercial real estate
Commercial real estate other		2,481		5
Subtotal	$	4,998	$	5

Acquired loans and leases with related allowance

Commercial real estate
Commercial real estate other		212		0
Subtotal	$	212	$	0
Total	$	5,210	$	5
There were no acquired loans and leases at June 30, 2012.

	Six Months Ended				Six Months Ended
	June 30, 2013				June 30, 2012
(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		5,085		0		3,108		4
Commercial real estate
Construction		6,529		0		13,196		0
Commercial real estate other		13,867		0		10,516		0
Residential real estate
Residential real estate other		447		0		488		0
Subtotal	$	25,928	$	0	$	27,308	$	4

Originated loans and leases with related allowance

Commercial and industrial
Commercial and industrial other		417		0		4,110		0
Commercial real estate
Commercial real estate other		0		0		1,049		24
Subtotal	$	417	$	0	$	5,159	$	24
Total	$	26,345	$	0	$	32,467	$	28

	Six Months Ended
	June 30, 2013
(in thousands)	Average Recorded Investment		Interest Income Recognized
Acquired loans and leases with no related allowance

Commercial and industrial
Commercial and industrial other		3,017		5
Commercial real estate
Commercial real estate other		2,492		31
Residential real estate
Subtotal	$	5,509	$	36

Acquired loans and leases with related allowance

Commercial and industrial
Commercial real estate
Residential real estate other		214		4
Subtotal	$	214	$	4
Total	$	5,723	$	40

There were no acquired loans and leases at June 30, 2012.

Loans are considered modified in a TDR when, due to a borrower’s financial difficulties; the Company makes a concession(s) 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.

June 30, 2013	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
Commercial and Industrial
Commercial and industrial other1		1	$	47	$	47		0	$	0
Total		1	$	47	$	47		0	$	0
1 Represents the following concessions: extension of term and reduction of rate
2 TDRs that defaulted during the last three months that were restructured in the prior twelve months.

June 30, 2012	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
Mortgages1		1		62		62		0		0
Total		1	$	62	$	62		0	$	0
1 Represents the following concessions: extension of term and reduction in rate
2 TDRs that defaulted during the last three months that were restructured in the prior twelve months.

June 30, 2013	Six months ended
							Defaulted TDRs3
(in thousands)	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Post-Modification Outstanding Recorded Investment
Commercial and Industrial
Commercial and industrial other1		2	$	139	$	139		0	$	0
Commercial Real Estate
Commercial real estate other2		3	$	371	$	371		0	$	0
Total		5	$	510	$	510		0	$	0
1 Represents the following concessions: extension of term and reduction in rate
2 Represents the following concessions: extension of term (1 loan: $129,000) and extended term and lowered rate (2 loans: $242,000)
3 TDRs that defaulted during the last six months that were restructured in the prior twelve months.

June 30, 2012	Six 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
Mortgages1		1	$	62	$	62		0	$	0
Total		1	$	62	$	62		0	$	0
1 Represents the following concessions: extension of term and reduction in rate
2 TDRs that defaulted during the last six months that were 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 June 30, 2013 and December 31, 2012.

June 30, 2013
	Commercial and		Commercial and		Commercial		Commercial		Commercial		Total
	Industrial		Industrial		Real Estate		Real Estate		Real Estate
(in thousands)	Other		Agriculture		Other		Agriculture		Construction
Originated Loans and Leases
Internal risk grade:
Pass	$	467,831	$	57,479	$	776,632	$	46,021	$	22,570	$	1,370,533
Special Mention		19,358		299		16,054		798		6,590		43,099
Substandard		10,002		1,944		22,637		1,128		6,258		41,969
Total	$	497,191	$	59,722	$	815,323	$	47,947	$	35,418	$	1,455,601

June 30, 2013
	Commercial and		Commercial and		Commercial		Commercial		Commercial		Total
	Industrial		Industrial		Real Estate		Real Estate		Real Estate
(in thousands)	Other		Agriculture		Other		Agriculture		Construction
Acquired Loans and Leases
Internal risk grade:
Pass	$	109,404	$	0	$	386,008	$	1,117	$	19,676	$	516,205
Special Mention		12,509		0		13,306		2,061		1,424		29,300
Substandard		15,510		0		31,412		0		8,157		55,079
Total	$	137,423	$	0	$	430,726	$	3,178	$	29,257	$	600,584

December 31, 2012
	Commercial and		Commercial and		Commercial		Commercial		Commercial		Total
	Industrial		Industrial		Real Estate		Real Estate		Real Estate
(in thousands)	Other		Agriculture		Other		Agriculture		Construction
Originated Loans and Leases
Internal risk grade:
Pass	$	410,255	$	75,456	$	677,261	$	46,317	$	26,126	$	1,235,415
Special Mention		25,308		2,055		19,782		692		8,505		56,342
Substandard		11,313		266		25,230		1,300		6,974		45,083
Total	$	446,876	$	77,777	$	722,273	$	48,309	$	41,605	$	1,336,840

December 31, 2012
	Commercial and		Commercial and		Commercial		Commercial		Commercial		Total
	Industrial		Industrial		Real Estate		Real Estate		Real Estate
(in thousands)	Other		Agriculture		Other		Agriculture		Construction
Acquired Loans and Leases
Internal risk grade:
Pass	$	139,719	$	0	$	415,397	$	813	$	27,590	$	583,519
Special Mention		7,717		0		10,112		2,136		5,416		25,381
Substandard		14,991		0		19,850		298		10,068		45,207
Total	$	162,427	$	0	$	445,359	$	3,247	$	43,074	$	654,107

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 June 30, 2013 and December 31, 2012. Acquired loans that are 90 days or greater past due and accruing interest are considered performing. Acquired loans that are nonperforming in the below tables represent loans that experienced deteriorating credit quality subsequent to the acquisition date.

June 30, 2013

(in thousands)	Residential Home Equity		Residential Mortgages		Consumer Indirect		Consumer Other		Total
Originated Loans and Leases
Performing	$	159,295	$	626,274	$	23,595	$	31,516	$	840,680
Nonperforming		1,896		6,722		188		224		9,030
Total	$	161,191	$	632,996	$	23,783	$	31,740	$	849,710

June 30, 2013
(in thousands)	Residential Home Equity		Residential Mortgages		Consumer Indirect		Consumer Other		Total
Acquired Loans and Leases
Performing	$	72,866	$	36,016	$	12	$	1,374	$	110,268
Nonperforming		1,530		2,021		0		0		3,551
Total	$	74,396	$	38,037	$	12	$	1,374	$	113,819

December 31, 2012

(in thousands)	Residential Home Equity		Residential Mortgages		Consumer Indirect		Consumer Other		Total
Originated Loans and Leases
Performing	$	157,959	$	566,542	$	26,402	$	32,235	$	783,138
Nonperforming		1,761		7,319		277		16		9,373
Total	$	159,720	$	573,861	$	26,679	$	32,251	$	792,511

December 31, 2012
(in thousands)	Residential Home Equity		Residential Mortgages		Consumer Indirect		Consumer Other		Total
Acquired Loans and Leases
Performing	$	80,204	$	40,810	$	24	$	1,498	$	122,536
Nonperforming		1,453		808		0		0		2,261
Total	$	81,657	$	41,618	$	24	$	1,498	$	124,797