ALLOWANCE FOR LOAN LOSSES

We maintain an allowance for loan losses, or ALL, at a level determined to be adequate to absorb estimated probable credit losses inherent within 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) Commercial and Industrial, or 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 does 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, 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 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:



	March 31, 2019
(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	$	2,868,403	$	1,876	$	2,237	$	29,109	$	33,222	$	2,901,625
Commercial and industrial	1,504,824		785		588		6,810		8,183		1,513,007
Commercial construction	244,432		—		—		1,226		1,226		245,658
Residential mortgage	719,422		3,695		167		6,630		10,492		729,914
Home equity	457,452		1,714		254		4,146		6,114		463,566
Installment and other consumer	70,645		227		59		29		315		70,960
Consumer construction	10,500		222		—		—		222		10,722
Loans held for sale	2,706		—		—		—		—		2,706
Total	$	5,878,384	$	8,519	$	3,305	$	47,950	$	59,774	$	5,938,158



	December 31, 2018
(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	$	2,903,997	$	3,638	$	2,145	$	12,052	$	17,835	$	2,921,832
Commercial and industrial	1,482,473		1,000		983		8,960		10,943		1,493,416
Commercial construction	243,004		—		—		14,193		14,193		257,197
Residential mortgage	717,447		1,584		520		7,128		9,232		726,679
Home equity	465,152		2,103		609		3,698		6,410		471,562
Installment and other consumer	67,281		148		75		42		265		67,546
Consumer construction	8,416		—		—		—		—		8,416
Loans held for sale	2,371		—		—		—		—		2,371
Total	$	5,890,141	$	8,473	$	4,332	$	46,073	$	58,878	$	5,949,019

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 or 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:



	March 31, 2019
(dollars in thousands)	Commercial Real Estate		% of Total		Commercial and Industrial		% of Total		Commercial Construction		% of Total		Total		% of Total
Pass	$	2,745,156	94.6	%	$	1,427,120	94.3	%	$	234,717	95.5	%	$	4,406,993	94.6	%
Special mention	56,829		2.0	%	23,945		1.6	%	7,263		3.0	%	88,037		1.9	%
Substandard	99,640		3.4	%	61,942		4.1	%	3,678		1.5	%	165,260		3.5	%
Total	$	2,901,625	100.0	%	$	1,513,007	100.0	%	$	245,658	100.0	%	$	4,660,290	100.0	%

	December 31, 2018
(dollars in thousands)	Commercial Real Estate		% of Total		Commercial and Industrial		% of Total		Commercial Construction		% of Total		Total		% of Total
Pass	$	2,776,292	95.0	%	$	1,394,427	93.4	%	$	233,190	90.7	%	$	4,403,909	94.3	%
Special mention	54,627		1.9	%	25,368		1.7	%	7,349		2.8	%	87,344		1.8	%
Substandard	90,913		3.1	%	73,621		4.9	%	16,658		6.5	%	181,192		3.9	%
Total	$	2,921,832	100.0	%	$	1,493,416	100.0	%	$	257,197	100.0	%	$	4,672,445	100.0	%

Substandard loans decreased $15.9 million to $165.3 million at March 31, 2019 compared to $181.2 million at December 31, 2018 mainly due to loan pay-offs and upgrades of risk ratings.

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:



	March 31, 2019
(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	$	723,284	99.1	%	$	459,420	99.1	%	$	70,931	100.0	%	$	10,722	100.0	%	$	1,264,357	99.2	%
Nonperforming	6,630		0.9	%	4,146		0.9	%	29		—	%	—		—	%	10,805		0.8	%
Total	$	729,914	100.0	%	$	463,566	100.0	%	$	70,960	100.0	%	$	10,722	100.0	%	$	1,275,162	100.0	%

	December 31, 2018
(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	$	719,551	99.0	%	$	467,864	99.2	%	$	67,504	99.9	%	$	8,416	100.0	%	$	1,263,335	99.1	%
Nonperforming	7,128		1.0	%	3,698		0.8	%	42		0.1	%	—		—	%	10,868		0.9	%
Total	$	726,679	100.0	%	$	471,562	100.0	%	$	67,546	100.0	%	$	8,416	100.0	%	$	1,274,203	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. A TDR 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 each TDR or other impaired loan, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate.

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



	March 31, 2019						December 31, 2018
(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	$	12,965	$	12,965	$	2,046	$	7,733	$	7,733	$	1,295
Commercial and industrial	976		984		873		884		893		360
Commercial construction	489		490		87		489		489		87
Consumer real estate	14		14		9		15		14		10
Other consumer	8		8		8		11		12		11
Total with a Related Allowance Recorded	14,452		14,461		3,023		9,132		9,141		1,763
Without a related allowance recorded:
Commercial real estate	15,068		17,895		—		3,636		4,046		—
Commercial and industrial	15,934		22,551		—		12,788		14,452		—
Commercial construction	2,319		3,828		—		15,286		19,198		—
Consumer real estate	8,527		9,507		—		8,659		9,635		—
Other consumer	4		10		—		5		18		—
Total without a Related Allowance Recorded	41,852		53,792		—		40,374		47,349		—
Total:
Commercial real estate	28,033		30,860		2,046		11,369		11,779		1,295
Commercial and industrial	16,910		23,535		873		13,672		15,345		360
Commercial construction	2,808		4,318		87		15,775		19,687		87
Consumer real estate	8,541		9,521		9		8,674		9,649		10
Other consumer	12		18		8		16		30		11
Total	$	56,304	$	68,252	$	3,023	$	49,506	$	56,490	$	1,763

The following tables summarize average recorded investment in and interest income recognized on loans considered to be impaired for the periods presented:



	Three Months Ended
	March 31, 2019				March 31, 2018
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With a related allowance recorded:
Commercial real estate	$	12,983	$	400	$	—	$	—
Commercial and industrial	980		35		586		11
Commercial construction	489		—		—		—
Consumer real estate	14		1		—		—
Other consumer	10		1		42		1
Total with a Related Allowance Recorded	14,476		437		628		12
Without a related allowance recorded:
Commercial real estate	15,107		144		3,817		43
Commercial and industrial	12,780		209		6,688		110
Commercial construction	2,319		140		3,446		36
Consumer real estate	8,846		417		10,816		138
Other consumer	4		—		12		—
Total without a Related Allowance Recorded	39,056		910		24,779		327
Total:
Commercial real estate	28,090		544		3,817		43
Commercial and industrial	13,760		244		7,274		121
Commercial construction	2,808		140		3,446		36
Consumer real estate	8,860		418		10,816		138
Other consumer	14		1		54		1
Total	$	53,532	$	1,347	$	25,407	$	339

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



	Three Months Ended March 31, 2019
(dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Consumer Real Estate			Other Consumer			Total Loans
Balance at beginning of period	$	33,707		$	11,596		$	7,983		$	6,187		$	1,523		$	60,996
Charge-offs	(1		)	(5,477		)	—			(162		)	(383		)	(6,023		)
Recoveries	122			417			—			148			100			787
Net Recoveries/(Charge-offs)	121			(5,060		)	—			(14		)	(283		)	(5,236		)
Provision for loan losses	1,075			5,460			(1,226		)	5			335			5,649
Balance at End of Period	$	34,903		$	11,996		$	6,757		$	6,178		$	1,575		$	61,409


	Three Months Ended March 31, 2018
(dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Consumer Real Estate			Other Consumer			Total Loans
Balance at beginning of period	$	27,235		$	8,966		$	13,167		$	5,479		$	1,543		$	56,390
Charge-offs	—			(829		)	—			(161		)	(460		)	(1,450		)
Recoveries	49			117			1,129			238			101			1,634
Net Recoveries/(Charge-offs)	49			(712		)	1,129			77			(359		)	184
Provision for loan losses	3,679			2,218			(3,575		)	(138		)	288			2,472
Balance at End of Period	$	30,963		$	10,472		$	10,721		$	5,418		$	1,472		$	59,046

Net loan charge-offs were significantly impacted by two commercial and industrial borrowers that resulted in charge-offs of $5.1 million during the first quarter of 2019.

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



	March 31, 2019
	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	$	2,046	$	32,857	$	34,903	$	28,033	$	2,873,592	$	2,901,625
Commercial and industrial	873		11,123		11,996		16,910		1,496,097		1,513,007
Commercial construction	87		6,670		6,757		2,808		242,850		245,658
Consumer real estate	9		6,169		6,178		8,541		1,195,661		1,204,202
Other consumer	8		1,567		1,575		12		70,948		70,960
Total	$	3,023	$	58,386	$	61,409	$	56,304	$	5,879,148	$	5,935,452

	December 31, 2018
	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	$	1,295	$	32,412	$	33,707	$	11,369	$	2,910,463	$	2,921,832
Commercial and industrial	360		11,236		11,596		13,672		1,479,744		1,493,416
Commercial construction	87		7,896		7,983		15,775		241,422		257,197
Consumer real estate	10		6,177		6,187		8,674		1,197,983		1,206,657
Other consumer	11		1,512		1,523		16		67,530		67,546
Total	$	1,763	$	59,233	$	60,996	$	49,506	$	5,897,142	$	5,946,648