ALLOWANCE FOR LOAN LOSSES

We maintain an ALL at a level determined to be adequate to absorb estimated probable credit losses inherent in the loan portfolio as of the balance sheet date. We develop and document a systematic ALL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Commercial Construction, 4) Consumer Real Estate and 5) Other Consumer.

The following are key risks within each portfolio segment:

CRE—Loans secured by commercial purpose real estate, including both owner occupied properties and investment properties for various purposes such as hotels, strip malls and apartments. Operations of the individual projects and global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type and the business prospects of the lessee, if the project is not owner occupied.

C&I—Loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the company is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.

Commercial Construction—Loans made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer.

Consumer Real Estate—Loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residential mortgages, including purchase money mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

Other Consumer—Loans made to individuals that may be secured by assets other than 1-4 family residences, as well as unsecured loans. This segment includes auto loans, unsecured loans and lines and credit cards. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

We further assess risk within each portfolio segment by pooling loans with similar risk characteristics. For the commercial loan classes, the most important indicator of risk is the internally assigned risk rating, including pass, special mention and substandard. Consumer loans are pooled by type of collateral, lien position and loan to value, or LTV, ratio for Consumer Real Estate loans. Historical loss rates are applied to these loan pools to determine the reserve for loans collectively evaluated for impairment.

The ALL methodology for groups of loans collectively evaluated for impairment is comprised of both a quantitative and qualitative analysis. A key assumption in the quantitative component of the reserve is the loss emergence period, or LEP. The LEP is an estimate of the average amount of time from the point at which a loss is incurred on a loan to the point at which the loss is confirmed. Another key assumption is the look-back period, or LBP, which represents the historical data period utilized to calculate loss rates.

Management monitors various credit quality indicators for both the commercial and consumer loan portfolios, including delinquency, nonperforming status and changes in risk ratings on a monthly basis.

The following tables present the age analysis of past due loans segregated by class of loans as of the dates presented:



	December 31, 2016
(dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		Non- performing		Total Past Due Loans		Total Loans
Commercial real estate	$	2,479,513	$	2,032	$	759	$	16,172	$	18,963	$	2,498,476
Commercial and industrial	1,391,475		1,061		428		8,071		9,560		1,401,035
Commercial construction	450,410		547		—		4,927		5,474		455,884
Residential mortgage	689,635		1,312		1,117		9,918		12,347		701,982
Home equity	476,866		1,470		509		3,439		5,418		482,284
Installment and other consumer	65,525		176		43		108		327		65,852
Consumer construction	5,906		—		—		—		—		5,906
Loans held for sale	3,793		—		—		—		—		3,793
Total	$	5,563,123	$	6,598	$	2,856	$	42,635	$	52,089	$	5,615,212



	December 31, 2015
(dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		Non- performing		Total Past Due Loans		Total Loans
Commercial real estate	$	2,145,655	$	11,602	$	627	$	8,719	$	20,948	$	2,166,603
Commercial and industrial	1,244,802		2,453		296		9,279		12,028		1,256,830
Commercial construction	401,084		3,517		90		8,753		12,360		413,444
Residential mortgage	631,085		1,728		930		5,629		8,287		639,372
Home equity	465,055		2,365		523		2,902		5,790		470,845
Installment and other consumer	73,486		242		111		100		453		73,939
Consumer construction	6,579		—		—		—		—		6,579
Loans held for sale	35,179		94		48		—		142		35,321
Total	$	5,002,925	$	22,001	$	2,625	$	35,382	$	60,008	$	5,062,933

We continually monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans within the pass rating generally have a lower risk of loss than loans risk rated as special mention and substandard.

Our risk ratings are consistent with regulatory guidance and are as follows:

Pass—The loan is currently performing and is of high quality.

Special Mention—A special mention loan has potential weaknesses that warrant management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects or in the strength of our credit position at some future date. Economic and market conditions, beyond the borrower’s control, may in the future necessitate this classification.

Substandard—A substandard loan is not adequately protected by the net worth and/or paying capacity of the borrower or by the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.

The following tables present the recorded investment in commercial loan classes by internally assigned risk ratings as of the dates presented:



	December 31, 2016
(dollars in thousands)	Commercial Real Estate		% of Total		Commercial and Industrial		% of Total		Commercial Construction		% of Total		Total		% of Total
Pass	$	2,423,742	97.0	%	$	1,315,507	93.9	%	$	430,472	94.4	%	$	4,169,721	95.7	%
Special mention	33,098		1.3	%	40,409		2.9	%	14,691		3.2	%	88,198		2.0	%
Substandard	41,636		1.7	%	45,119		3.2	%	10,721		2.4	%	97,476		2.3	%
Total	$	2,498,476	100.0	%	$	1,401,035	100.0	%	$	455,884	100.0	%	$	4,355,395	100.0	%



	December 31, 2015
(dollars in thousands)	Commercial Real Estate		% of Total		Commercial and Industrial		% of Total		Commercial Construction		% of Total		Total		% of Total
Pass	$	2,094,851	96.7	%	$	1,182,685	94.1	%	$	375,808	90.9	%	$	3,653,344	95.2	%
Special mention	19,938		0.9	%	43,896		3.5	%	19,846		4.8	%	83,680		2.2	%
Substandard	51,814		2.4	%	30,249		2.4	%	17,790		4.3	%	99,853		2.6	%
Total	$	2,166,603	100.0	%	$	1,256,830	100.0	%	$	413,444	100.0	%	$	3,836,877	100.0	%

We monitor the delinquent status of the consumer portfolio on a monthly basis. Loans are considered nonperforming when interest and principal are 90 days or more past due or management has determined that a material deterioration in the borrower’s financial condition exists. The risk of loss is generally highest for nonperforming loans.

The following tables present the recorded investment in consumer loan classes by performing and nonperforming status as of the dates presented:



	December 31, 2016
(dollars in thousands)	Residential Mortgage		% of Total		Home Equity		% of Total		Installment and other consumer		% of Total		Consumer Construction		% of Total		Total		% of Total
Performing	$	692,064	98.6	%	$	478,845	99.3	%	$	65,744	99.8	%	$	5,906	100.0	%	$	1,242,559	98.9	%
Nonperforming	9,918		1.4	%	3,439		0.7	%	108		0.2	%	—		—	%	13,465		1.1	%
Total	$	701,982	100.0	%	$	482,284	100.0	%	$	65,852	100.0	%	$	5,906	100.0	%	$	1,256,024	100.0	%



	December 31, 2015
(dollars in thousands)	Residential Mortgage		% of Total		Home Equity		% of Total		Installment and other consumer		% of Total		Consumer Construction		% of Total		Total		% of Total
Performing	$	633,743	99.1	%	$	467,943	99.4	%	$	73,839	99.8	%	$	6,579	100.0	%	$	1,182,104	99.3	%
Nonperforming	5,629		0.9	%	2,902		0.6	%	100		0.2	%	—		—	%	8,631		0.7	%
Total	$	639,372	100.0	%	$	470,845	100.0	%	$	73,939	100.0	%	$	6,579	100.0	%	$	1,190,735	100.0	%

We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment. Loans are considered to be impaired when based upon current information and events it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan agreement. All TDRs will be reported as an impaired loan for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is expected that the remaining principal and interest will be fully collected according to the restructured agreement. For all TDRs, regardless of size, and all other impaired loans, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate.

The following tables summarize investments in loans considered to be impaired and related information on those impaired loans as of the dates presented:



	December 31, 2016						December 31, 2015
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With a related allowance recorded:
Commercial real estate	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and industrial	964		2,433		771		—		—		—
Commercial construction	—		—		—		500		1,350		3
Consumer real estate	26		26		26		116		116		32
Other consumer	1		1		1		2		2		2
Total with a Related Allowance Recorded	991		2,460		798		618		1,468		37
Without a related allowance recorded:
Commercial real estate	16,352		17,654		—		12,661		13,157		—
Commercial and industrial	5,902		7,699		—		14,417		15,220		—
Commercial construction	6,613		10,306		—		10,998		14,200		—
Consumer real estate	12,053		12,849		—		6,845		7,521		—
Other consumer	24		31		—		111		188		—
Total without a Related Allowance Recorded	40,944		48,539		—		45,032		50,286		—
Total:
Commercial real estate	16,352		17,654		—		12,661		13,157		—
Commercial and industrial	6,866		10,132		771		14,417		15,220		—
Commercial construction	6,613		10,306		—		11,498		15,550		3
Consumer real estate	12,079		12,875		26		6,961		7,637		32
Other consumer	25		32		1		113		190		2
Total	$	41,935	$	50,999	$	798	$	45,650	$	51,754	$	37

As of December 31, 2016, we had $41.9 million of impaired loans which included $18.4 million of acquired loans that experienced credit deterioration since the acquisition date.

The following table summarizes investments in loans considered to be impaired and related information on those impaired loans for the years presented:



	For the Year Ended
	December 31, 2016				December 31, 2015
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Without a related allowance recorded:
Commercial real estate	17,496		144		14,622		597
Commercial and industrial	6,141		160		14,416		450
Commercial construction	7,723		162		10,581		329
Consumer real estate	11,939		523		6,902		364
Other consumer	35		1		117		1
Total without a Related Allowance Recorded	43,334		990		46,638		1,741
With a related allowance recorded:
Commercial real estate	—		—		—		—
Commercial and industrial	2,438		—		—		—
Commercial construction	—		—		834		—
Consumer real estate	28		2		120		7
Other consumer	2		—		2		—
Total with a Related Allowance Recorded	2,468		2		956		7
Total:
Commercial real estate	17,496		144		14,622		597
Commercial and industrial	8,579		160		14,416		450
Commercial construction	7,723		162		11,415		329
Consumer real estate	11,967		525		7,022		371
Other consumer	37		1		119		1
Total	$	45,802	$	992	$	47,594	$	1,748

The following tables detail activity in the ALL for the periods presented:



	2016
(dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Consumer Real Estate			Other Consumer			Total Loans
Balance at beginning of year	$	15,043		$	10,853		$	12,625		$	8,400		$	1,226		$	48,147
Charge-offs	(3,114		)	(6,810		)	(1,877		)	(1,657		)	(2,103		)	(15,561		)
Recoveries	692			722			21			433			356			2,224
Net (Charge-offs) Recoveries	(2,422		)	(6,088		)	(1,856		)	(1,224		)	(1,747		)	(13,337		)
Provision for loan losses	7,355			6,045			3,230			(1,081		)	2,416			17,965
Balance at End of Year	$	19,976		$	10,810		$	13,999		$	6,095		$	1,895		$	52,775



	2015
(dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Consumer Real Estate			Other Consumer			Total Loans
Balance at beginning of year	$	20,164		$	13,668		$	6,093		$	6,333		$	1,653		$	47,911
Charge-offs	(2,787		)	(5,463		)	(3,321		)	(2,167		)	(1,528		)	(15,266		)
Recoveries	3,545			605			143			495			326			5,114
Net Recoveries (Charge-offs)	758			(4,858		)	(3,178		)	(1,672		)	(1,202		)	(10,152		)
Provision for loan losses	(5,879		)	2,043			9,710			3,739			775			10,388
Balance at End of Year	$	15,043		$	10,853		$	12,625		$	8,400		$	1,226		$	48,147

Loans acquired in the Merger were recorded at fair value with no carryover of the ALL. As of December 31, 2016, acquired loans from the Merger of $543.3 million were outstanding, which decreased from $673.3 million at December 31, 2015. Additional credit deterioration on acquired loans during 2016 in excess of the original credit discount embedded in the fair value determination on the date of acquisition, was recognized in the ALL through the provision for loan losses.

The following tables present the ALL and recorded investments in loans by category as of December 31:



	2016
	Allowance for Loan Losses						Portfolio Loans
(dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial real estate	$	—	$	19,976	$	19,976	$	16,352	$	2,482,124	$	2,498,476
Commercial and industrial	771		10,039		10,810		6,866		1,394,169		1,401,035
Commercial construction	—		13,999		13,999		6,613		449,271		455,884
Consumer real estate	26		6,069		6,095		12,079		1,178,093		1,190,172
Other consumer	1		1,894		1,895		25		65,827		65,852
Total	$	798	$	51,977	$	52,775	$	41,935	$	5,569,484	$	5,611,419



	2015
	Allowance for Loan Losses						Portfolio Loans
(dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial real estate	$	—	$	15,043	$	15,043	$	12,661	$	2,153,942	$	2,166,603
Commercial and industrial	—		10,853		10,853		14,417		1,242,413		1,256,830
Commercial construction	3		12,622		12,625		11,498		401,946		413,444
Consumer real estate	32		8,368		8,400		6,961		1,109,835		1,116,796
Other consumer	2		1,224		1,226		113		73,826		73,939
Total	$	37	$	48,110	$	48,147	$	45,650	$	4,981,962	$	5,027,612