5. 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 risk of probable losses inherent in the current loan portfolio. The adequacy of the allowance for loan losses is continuously monitored. It is assessed for adequacy 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. The following table illustrates the portfolio and class segments for the Company’s loan portfolio:

Portfolio	Class
Commercial Loans	Commercial
	Commercial Real Estate
	Agricultural
	Agricultural Real Estate
	Business Banking
Consumer Loans	Indirect
	Home Equity
	Direct
Residential Real Estate Mortgages

COMMERCIAL LOANS

Commercial – The Company offers a variety of loan options to meet the specific needs of our commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital such as inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment or other assets owned by the borrower. These loans carry a higher risk than commercial real estate loans by the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable and is generally less liquid than real estate. To reduce the risk, management also attempts to secure real estate as collateral and obtain personal guarantees of the borrowers.

Commercial Real Estate – The Company offers commercial real estate loans to finance real estate purchases, refinancings, expansions and improvements to commercial properties. Commercial real estate loans are made to finance the purchases of real property which generally consists of real estate with completed structures. These commercial real estate loans are secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities, and other non owner-occupied facilities. These loans are typically less risky than commercial loans, since they are secured by real estate and buildings. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower's financial condition, and a detailed analysis of the borrower’s underlying cash flows. These loans are typically originated in amounts of no more than 80% of the appraised value of the property.

Agricultural – The Company offers a variety of agricultural loans to meet the needs of our agricultural customers including term loans, time notes, and lines of credit. These loans are made to purchase livestock, purchase and modernize equipment, and finance seasonal crop expenses. Generally, a collateral lien is placed on the livestock, equipment, produce inventories, and/or receivables owned by the borrower. These loans may carry a higher risk than commercial and agricultural real estate loans due to the industry price volatility and the perishable nature of the underlying collateral. To reduce these risks, management may attempt to secure these loans with additional real estate collateral, obtain personal guarantees of the borrowers, or obtain government loan guarantees to provide further support.

Agricultural Real Estate – The Company offers real estate loans to our agricultural customers to finance farm related real estate purchases, refinancings, expansions, and improvements to agricultural properties. Agricultural real estate loans are made to finance the purchases and improvements of farm properties that generally consist of barns, production facilities, and land. The agricultural real estate loans are secured by first liens on the farm real estate. Because they are secured by land and buildings, these loans may be less risky than agricultural loans. The Company's underwriting analysis includes credit verification, independent appraisals, a review of the borrower's financial condition, and a detailed analysis of the borrower’s underlying cash flows. These loans are typically originated in amounts of no more than 75% of the appraised value of the property. Government loan guarantees may be obtained to provide further support.

Business Banking - The Company offers a variety of loan options to meet the specific needs of our business banking customers including term loans, business banking mortgages and lines of credit. Such loans are generally less than $0.8 million and are made available to businesses for working capital such as inventory and receivables, business expansion, equipment purchases, and agricultural needs. Generally, a collateral lien is placed on equipment or other assets owned by the borrower such as inventory and/or receivables. These loans carry a higher risk than commercial loans due to the smaller size of the borrower and lower levels of capital. To reduce the risk, the Company obtains personal guarantees of the owners for a majority of the loans.

CONSUMER LOANS

Indirect – The Company maintains relationships with many dealers primarily in the communities that we serve. Through these relationships, the company finances the purchases of automobiles and recreational vehicles (such as campers, boats, etc.) indirectly through dealer relationships. Approximately 70% of the indirect relationships represent automobile financing. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from three to six years, based upon the nature of the collateral and the size of the loan. The majority of indirect consumer loans are underwritten on a secured basis using the underlying collateral being financed.

Home Equity – The Company offers fixed home equity loans as well as home equity lines of credit to consumers to finance home improvements, debt consolidation, education and other uses. Consumers are able to borrower up to 85% of the equity in their homes. The Company originates home equity lines of credit and second mortgage loans (loans secured by a second lien position on one-to-four-family residential real estate). These loans carry a higher risk than first mortgage residential loans as they are in a second position with respect to collateral. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

Direct – The Company offers a variety of consumer installment loans to finance vehicle purchases, mobile home purchases and personal expenditures. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to ten years, based upon the nature of the collateral and the size of the loan. The majority of consumer loans are underwritten on a secured basis using the underlying collateral being financed or a customer's deposit account. In addition to installment loans, the Company also offers personal lines of credit and overdraft protection. A minimal amount of loans are unsecured, which carry a higher risk of loss.

RESIDENTIAL REAL ESTATE LOANS

Residential real estate loans consist primarily of loans secured by first or second deeds of trust 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 mortgages without escrow, the Company retains the servicing, but sells the right to receive principal and interest to Freddie Mac when market conditions are favorable. 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

Management considers the accounting policy relating to the allowance for loan losses 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 such judgments can have on the consolidated results of operations.

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 to the allowance for loan losses are made periodically by charges to the provision for loan losses. These charges are necessary to maintain the allowance at a level which management believes is reasonably reflective of overall inherent risk of probable loss in the portfolio. While management uses available information to recognize losses on loans, additions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above.

The following table illustrates the changes in the allowance for loan losses by portfolio segment for the years ended December 31, 2016, 2015 and 2014:

(In thousands)	Commercial Loans			Consumer Loans			Residential Real Estate Mortgages			Unallocated			Total
Balance as of December 31, 2015	$	25,545		$	29,253		$	7,960		$	260		$	63,018
Charge-offs		(4,592	)		(23,364	)		(1,343	)		-			(29,299	)
Recoveries		1,887			3,870			293			-			6,050
Provision		2,604			23,616			(529	)		(260	)		25,431
Ending Balance as of December 31, 2016	$	25,444		$	33,375		$	6,381		$	-		$	65,200

Balance as of December 31, 2014	$	32,433		$	26,720		$	7,130		$	76		$	66,359
Charge-offs		(5,718	)		(18,140	)		(2,229	)		-			(26,087	)
Recoveries		1,014			3,127			320			-			4,461
Provision		(2,184	)		17,546			2,739			184			18,285
Ending Balance as of December 31, 2015	$	25,545		$	29,253		$	7,960		$	260		$	63,018

Balance as of December 31, 2013	$	35,090		$	27,694		$	6,520		$	130		$	69,434
Charge-offs		(9,414	)		(16,642	)		(1,417	)		-			(27,473	)
Recoveries		1,774			2,800			285			-			4,859
Provision		4,983			12,868			1,742			(54	)		19,539
Ending Balance as of December 31, 2014	$	32,433		$	26,720		$	7,130		$	76		$	66,359

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 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. The allowance for loan losses for the acquired loan portfolio totaled $0.7 million as of December 31, 2016 and December 31, 2015. Net charge-offs related to acquired loans totaled approximately $0.5 million, $2.7 million, and $4.8 million during the years ended December 31, 2016, December 31, 2015 and December 31, 2014, respectively, and are included in the table above.

The following table illustrates the allowance for loan losses and the recorded investment by portfolio segment as of December 31, 2016 and 2015:

(In thousands)	Commercial Loans		Consumer Loans		Residential Real Estate Mortgages		Unallocated		Total
As of December 31, 2016
Allowance for loan losses	$	25,444	$	33,375	$	6,381	$	-	$	65,200
Allowance for loans individually evaluated for impairment		1,517		-		-		-		1,517
Allowance for loans collectively evaluated for impairment	$	23,927	$	33,375	$	6,381	$	-	$	63,683
Ending balance of loans	$	2,786,002	$	2,149,441	$	1,262,614			$	6,198,057
Ending balance of originated loans individually evaluated for impairment		13,070		8,488		6,111				27,669
Ending balance of acquired loans individually evaluated for impairment		1,205		-		-				1,205
Ending balance of acquired loans collectively evaluated for impairment		236,413		63,005		199,471				498,889
Ending balance of originated loans collectively evaluated for impairment	$	2,535,314	$	2,077,948	$	1,057,032			$	5,670,294

As of December 31, 2015
Allowance for loan losses	$	25,545	$	29,253	$	7,960	$	260	$	63,018
Allowance for loans individually evaluated for impairment		2,005		-		-		-		2,005
Allowance for loans collectively evaluated for impairment	$	23,540	$	29,253	$	7,960	$	260	$	61,013
Ending balance of loans	$	2,589,707	$	2,096,646	$	1,196,780			$	5,883,133
Ending balance of originated loans individually evaluated for impairment		12,253		7,693		6,017				25,963
Ending balance of acquired loans individually evaluated for impairment		1,205		-		-				1,205
Ending balance of acquired loans collectively evaluated for impairment		284,524		95,427		230,358				610,309
Ending balance of originated loans collectively evaluated for impairment	$	2,291,725	$	1,993,526	$	960,405			$	5,245,656

The following table sets forth information with regard to past due and nonperforming loans by loan class as of December 31, 2016 and 2015:

As of December 31, 2016

(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
ORIGINATED
Commercial Loans
Commercial	$	33	$	5	$	-	$	38	$	2,964	$	650,568	$	653,570
Commercial Real Estate		-		-		-		-		7,935		1,343,854		1,351,789
Agricultural		-		-		-		-		730		37,186		37,916
Agricultural Real Estate		-		-		-		-		1,803		30,619		32,422
Business Banking		1,609		318		-		1,927		4,860		465,900		472,687
Total Commercial Loans		1,642		323		-		1,965		18,292		2,528,127		2,548,384

Consumer Loans
Indirect		19,253		4,185		2,499		25,937		2,145		1,538,593		1,566,675
Home Equity		3,416		1,065		528		5,009		2,851		448,797		456,657
Direct		452		125		20		597		107		62,400		63,104
Total Consumer Loans		23,121		5,375		3,047		31,543		5,103		2,049,790		2,086,436

Residential Real Estate Mortgages		2,725		172		1,406		4,303		6,682		1,052,158		1,063,143

Total Originated Loans	$	27,488	$	5,870	$	4,453	$	37,811	$	30,077	$	5,630,075	$	5,697,963

ACQUIRED
Commercial Loans
Commercial	$	-	$	-	$	-	$	-	$	-	$	49,447	$	49,447
Commercial Real Estate		-		-		-		-		1,891		135,398		137,289
Business Banking		236		-		-		236		804		49,842		50,882
Total Commercial Loans		236		-		-		236		2,695		234,687		237,618

Consumer Loans
Indirect		100		5		-		105		47		8,541		8,693
Home Equity		254		53		30		337		237		50,553		51,127
Direct		30		2		-		32		20		3,133		3,185
Total Consumer Loans		384		60		30		474		304		62,227		63,005

Residential Real Estate Mortgages		609		28		327		964		2,636		195,871		199,471

Total Acquired Loans		1,229		88		357		1,674		5,635		492,785		500,094

Total Loans	$	28,717	$	5,958	$	4,810	$	39,485	$	35,712	$	6,122,860	$	6,198,057

December 31, 2015

(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
ORIGINATED
Commercial Loans
Commercial	$	782	$	23	$	-	$	805	$	2,817	$	640,696	$	644,318
Commercial Real Estate		39		32		-		71		5,546		1,189,280		1,194,897
Agricultural		94		-		-		94		897		33,633		34,624
Agricultural Real Estate		-		-		-		-		1,046		28,172		29,218
Business Banking		912		394		-		1,306		4,247		395,368		400,921
Total Commercial Loans		1,827		449		-		2,276		14,553		2,287,149		2,303,978

Consumer Loans
Indirect		15,731		2,963		2,271		20,965		1,786		1,454,499		1,477,250
Home Equity		3,396		1,671		340		5,407		4,835		454,473		464,715
Direct		425		201		28		654		49		58,551		59,254
Total Consumer Loans		19,552		4,835		2,639		27,026		6,670		1,967,523		2,001,219

Residential Real Estate Mortgages		3,301		365		696		4,362		7,713		954,347		966,422

Total Originated Loans	$	24,680	$	5,649	$	3,335	$	33,664	$	28,936	$	5,209,019	$	5,271,619

ACQUIRED
Commercial Loans
Commercial	$	-	$	-	$	-	$	-	$	-	$	68,991	$	68,991
Commercial Real Estate		-		-		-		-		1,313		165,630		166,943
Business Banking		288		-		-		288		307		49,200		49,795
Total Commercial Loans		288		-		-		288		1,620		283,821		285,729

Consumer Loans
Indirect		143		11		1		155		104		27,516		27,775
Home Equity		327		132		-		459		457		62,811		63,727
Direct		76		20		-		96		43		3,786		3,925
Total Consumer Loans		546		163		1		710		604		94,113		95,427

Residential Real Estate Mortgages		1,443		293		326		2,062		2,584		225,712		230,358

Total Acquired Loans		2,277		456		327		3,060		4,808		603,646		611,514

Total Loans	$	26,957	$	6,105	$	3,662	$	36,724	$	33,744	$	5,812,665	$	5,883,133

There were no material commitments to extend further credit to borrowers with nonperforming loans as of December 31, 2016 and 2015.

The methodology used to establish the allowance for loan losses on impaired loans incorporates specific allocations on loans analyzed individually. Classified loans, including all TDRs and nonaccrual commercial loans that are graded Substandard or below, with outstanding balances of $0.8 million or more are evaluated for impairment through the Company’s quarterly status review process. In determining that we will be unable to collect all principal and 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 evaluated for impairment, 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 measurement of impairment. For impaired loans measured using the present value of expected cash flow method, any change to the previously recognized impairment loss is recognized as a change to the allowance account and recorded in the consolidated statement of income as a component of the provision for credit losses.

The following provides additional information on loans specifically evaluated for impairment for the years ended December 31, 2016 and 2015:

	December 31, 2016							December 31, 2015
(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
Commercial	$	1,278	$	1,697				$	2,244	$	2,490
Commercial Real Estate		3,816		3,841					3,165		3,175
Agricultural		130		137					576		1,164
Agricultural Real Estate		1,434		1,567					618		744
Business Banking		655		728					983		1,033
Total Commercial Loans		7,313		7,970					7,586		8,606

Consumer Loans
Indirect		5		16					12		21
Home Equity		8,483		9,429					7,681		8,574
Total Consumer Loans		8,488		9,445					7,693		8,595

Residential Real Estate Mortgages		6,111		6,906					6,017		6,627
Total		21,912		24,321					21,296		23,828

With an allowance recorded:
Commercial Loans
Commercial		-		-			-		457		457			300
Commercial Real Estate		5,553		5,736			735		4,210		6,059			970
Agricultural		49		49			37		-		-			-
Agricultural Real Estate		155		155			54		-		-			-
Total Commercial Loans		5,757		5,940			826		4,667		6,516			1,270

ACQUIRED
With an allowance recorded:
Commercial Loans
Commercial Real Estate		1,205		1,321			691		1,205		1,321			735
Total Commercial Loans		1,205		1,321			691		1,205		1,321			735

Total	$	28,874	$	31,582		$	1,517	$	27,168	$	31,665		$	2,005

The following table summarizes the average recorded investments on loans specifically evaluated for impairment and the interest income recognized for the years ended December 31, 2016, 2015 and 2014:

	December 31, 2016				December 31, 2015				December 31, 2014
(In thousands)	Average Recorded Investment		Interest Income Recognized Accrual		Average Recorded Investment		Interest Income Recognized Accrual		Average Recorded Investment		Interest Income Recognized Accrual
ORIGINATED
Commercial Loans
Commercial	$	6,217	$	-	$	2,219	$	71	$	1,954	$	115
Commercial Real Estate		5,828		167		8,538		164		9,679		169
Agricultural		715		1		148		1		91		1
Agricultural Real Estate		908		44		628		45		1,346		46
Business Banking		830		9		960		21		610		55
Consumer Loans
Indirect		8		-		-		-		-		-
Home Equity		8,278		480		7,070		374		5,198		267
Residential Real Estate Mortgages		6,143		269		5,128		219		3,039		119

ACQUIRED
Commercial Loans
Commercial		-		-		2,045		-		5,756		-
Commercial Real Estate		1,205		-		5,734		-		3,386		-
Total	$	30,132	$	970	$	32,470	$	895	$	31,059	$	772

While we continue to adhere to prudent underwriting standards, as a lender we may be adversely impacted by general economic weaknesses and, in particular, a sharp downturn in the housing market nationally. Decreases in real estate values could adversely affect the value of property used as collateral for our loans. Adverse changes in the economy may have a negative effect on the ability of our borrowers to make timely loan payments, which would have an adverse impact on our earnings. A further increase in loan delinquencies would decrease our net interest income and adversely impact our loan loss experience, causing increases in our provision and allowance for loan losses.

The Company has developed an internal loan grading system to evaluate and quantify the Bank’s loan portfolio with respect to quality and risk. The system focuses on, among other things, financial strength of borrowers, experience and depth of management, primary and secondary sources of repayment, payment history, nature of the business, outlook on particular industries. The internal grading system enables the Company to monitor the quality of the entire loan portfolio on a continuous basis and provide management with an early warning system, enabling recognition and response to problem loans and potential problem loans.

Commercial Grading System

For commercial and agricultural 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. Commercial loans are graded as 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 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. Because of high probability of loss, nonaccrual treatment is required for Doubtful assets.

●

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 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 (declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (e.g., 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 uncollectible 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 Mortgage Grading System

Consumer and Residential Mortgage 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 three criteria are considered Performing.

The following tables illustrate the Company’s credit quality by loan class for the years ended December 31, 2016 and 2015:

Credit Quality Indicators

December 31, 2016

(In thousands)
ORIGINATED
Commercial Credit Exposure
By Internally Assigned Grade:	Commercial		Commercial Real Estate		Agricultural		Agricultural Real Estate		Total
Pass	$	616,829	$	1,288,409	$	36,762	$	28,912	$	1,970,912
Special Mention		7,750		31,053		25		1,896		40,724
Substandard		28,991		32,327		1,124		1,614		64,056
Doubtful		-		-		5		-		5
Total	$	653,570	$	1,351,789	$	37,916	$	32,422	$	2,075,697

Business Banking Credit Exposure
By Internally Assigned Grade:	Business Banking		Total
Non-classified	$	458,864		$	458,864
Classified		13,823			13,823
Total	$	472,687		$	472,687

Consumer Credit Exposure
By Payment Activity:	Indirect		Home Equity		Direct		Total
Performing	$	1,562,031	$	453,278	$	62,977	$	2,078,286
Nonperforming		4,644		3,379		127		8,150
Total	$	1,566,675	$	456,657	$	63,104	$	2,086,436

Residential Mortgage Credit Exposure
By Payment Activity:	Residential Mortgage		Total
Performing	$	1,055,055	$	1,055,055
Nonperforming		8,088		8,088
Total	$	1,063,143	$	1,063,143

Credit Quality Indicators

December 31, 2016

(In thousands)

ACQUIRED
Commercial Credit Exposure
By Internally Assigned Grade:	Commercial		Commercial Real Estate		Total
Pass	$	48,194	$	127,660	$	175,854
Special Mention		76		1,231		1,307
Substandard		1,177		7,193		8,370
Doubtful		-		1,205		1,205
Total	$	49,447	$	137,289	$	186,736

Business Banking Credit Exposure
By Internally Assigned Grade:	Business Banking		Total
Non-classified	$	47,347	$	47,347
Classified		3,535		3,535
Total	$	50,882	$	50,882

Consumer Credit Exposure
By Payment Activity:	Indirect		Home Equity		Direct		Total
Performing	$	8,646	$	50,860	$	3,165	$	62,671
Nonperforming		47		267		20		334
Total	$	8,693	$	51,127	$	3,185	$	63,005

Residential Mortgage Credit Exposure
By Payment Activity:	Residential Mortgage		Total
Performing	$	196,508	$	196,508
Nonperforming		2,963		2,963
Total	$	199,471	$	199,471

Credit Quality Indicators

December 31, 2015

(In thousands)

ORIGINATED Commercial Credit Exposure
By Internally Assigned Grade:	Commercial		Commercial Real Estate		Agricultural		Agricultural Real Estate		Total
Pass	$	604,405	$	1,144,832	$	33,565	$	27,320	$	1,810,122
Special Mention		9,726		21,587		311		429		32,053
Substandard		30,187		28,478		740		1,469		60,874
Doubtful		-		-		8		-		8
Total	$	644,318	$	1,194,897	$	34,624	$	29,218	$	1,903,057

Business Banking Credit Exposure
By Internally Assigned Grade:	Business Banking		Total
Non-classified	$	386,397	$	386,397
Classified		14,524		14,524
Total	$	400,921	$	400,921

Consumer Credit Exposure
By Payment Activity:	Indirect		Home Equity		Direct		Total
Performing	$	1,473,193	$	459,540	$	59,177	$	1,991,910
Nonperforming		4,057		5,175		77		9,309
Total	$	1,477,250	$	464,715	$	59,254	$	2,001,219

Residential Mortgage Credit Exposure
By Payment Activity:	Residential Mortgage		Total
Performing	$	958,013	$	958,013
Nonperforming		8,409		8,409
Total	$	966,422	$	966,422

Credit Quality Indicators

December 31, 2015

(In thousands)

ACQUIRED
Commercial Credit Exposure
By Internally Assigned Grade:	Commercial		Commercial Real Estate		Total
Pass	$	67,241	$	154,871	$	222,112
Special Mention		802		2,174		2,976
Substandard		948		9,898		10,846
Doubtful		-		-		-
Total	$	68,991	$	166,943	$	235,934

Business Banking Credit Exposure
By Internally Assigned Grade:	Business Banking		Total
Non-classified	$	46,032	$	46,032
Classified		3,763		3,763
Total	$	49,795	$	49,795

Consumer Credit Exposure
By Payment Activity:	Indirect		Home Equity		Direct		Total
Performing	$	27,670	$	63,270	$	3,882	$	94,822
Nonperforming		105		457		43		605
Total	$	27,775	$	63,727	$	3,925	$	95,427

Residential Mortgage Credit Exposure
By Payment Activity:	Residential Mortgage		Total
Performing	$	227,448	$	227,448
Nonperforming		2,910		2,910
Total	$	230,358	$	230,358

Troubled Debt Restructuring

Substantially all 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 and home equity TDRs occurring during 2016 and 2015 were due to the reduction in the interest rate or extension of the term. In 2015, commercial and business banking TDRs were both a reduction of the interest rate and change in terms.

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 that occurred during the years ended December 31, 2016 and 2015:

	Year ended December 31, 2016
	Number of contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Consumer
Home Equity		28	$	1,886	$	1,743
Total Consumer		28		1,886		1,743

Residential Real Estate		13		1,084		843

Total Troubled Debt Restructurings		41	$	2,970	$	2,586

	Year ended December 31, 2015
	Number of contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial
Commercial		1	$	186	$	186
Business Banking		1		220		171
Total Commercial		2		406		357

Consumer
Home Equity		50		3,664		3,261
Total Consumer		50		3,664		3,261

Residential Real Estate		37		3,085		3,085

Total Troubled Debt Restructurings		89	$	7,155	$	6,703

The following table illustrates the recorded investment and number of modifications for TDRs within the years ended December 31, 2016 and 2015 where a concession has been made and subsequently defaulted during the period:

	Year ended December 31, 2016				Year ended December 31, 2015
	Number of contracts		Recorded Investment		Number of contracts		Recorded Investment
Consumer
Home Equity		2	$	121		4	$	344
Total Consumer		2		121		4		344

Residential Real Estate		2		296		3		208

Total Troubled Debt Restructurings		4	$	417		7	$	552