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Allowance for Loan and Lease Losses
 3 Months Ended
Mar. 31, 2020
Receivables [Abstract]  
Allowance for Loan and Lease Losses Allowance for Credit Losses
 
Management reviews the appropriateness of the allowance for credit losses (“allowance” or "ACL") 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 credit 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. 119, Measurement of Credit Losses on Financial Instruments ("CECL"), and Financial Instruments - Credit Losses and ASC Topic 326, Financial Instruments - Credit Losses.

The Company uses a discounted cash flow ("DCF") method to estimate expected credit losses for all loan segments. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, recovery lag probability of default, and loss give default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on internal historical data.

The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loans utilizing the DCF method, management utilizes and forecasts national unemployment and a one year percentage change in national gross domestic product as loss drivers in the model.

For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by management when developing the forecast metrics.

The combination of adjustments for credit expectations and timing expectations produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce a net present value of expected cash flows ("NPV"). An ACL is established for the difference between the NPV and amortized cost basis.

The Company adopted ASU 2016-13 using the prospective transition approach for financial assets purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining discount on the PCD assets will be accreted into interest income on a level-yield method over the life of the loans.

Since the methodology is based upon historical experience and trends, current conditions, and reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimates. While management’s evaluation of the allowance as of March 31, 2020, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance.

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to credit loss expense for off-balance sheet credit exposures included in other noninterest expense in the Company's consolidated statements of income.

The following table details activity in the allowance for credit losses on loans for the three months ended March 31, 2020 and 2019. The Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The transition adjustment includes a decrease in the allowance of $2.5 million. 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 March 31, 2020
 
 
 
 
 
 
 
 
(In thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer
and Other

 
Finance
Leases

 
Total

Allowance for credit losses:
Beginning balance, prior to adoption of ASC 326
$
10,541

 
$
21,608

 
$
6,381

 
$
1,362

 
$
0

 
$
39,892

Impact of adopting ASC 326
(2,008
)
 
(5,917
)
 
4,459

 
850

 
82

 
(2,534
)
Charge-offs
(1
)
 
(1,290
)
 
(2
)
 
(137
)
 
0

 
(1,430
)
Recoveries
16

 
18

 
79

 
69

 
0

 
182

Provision for credit loss expense
3,117

 
8,027

 
5,413

 
(261
)
 
(2
)
 
16,294

Ending Balance
$
11,665

 
$
22,446

 
$
16,330

 
$
1,883

 
$
80

 
$
52,404

 

Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
(In thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer
and Other

 
Finance
Leases

 
Total

Allowance for credit losses
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
11,272

 
$
23,483

 
$
7,345

 
$
1,310

 
$
0

 
43,410

 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(380
)
 
(3,343
)
 
(18
)
 
(180
)
 
0

 
(3,921
)
Recoveries
59

 
7

 
233

 
95

 
0

 
394

Provision (credit)
572

 
923

 
(1,098
)
 
48

 
0

 
445

Ending Balance
$
11,523

 
$
21,070

 
$
6,462

 
$
1,273

 
$
0

 
$
40,328

 
 The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related allowance for credit losses allocated to these loans:

(In thousands)
Real Estate
Business Assets
Other
Total
ACL Allocation
March 31, 2020
 
 
 
 
 
Commercial and Industrial
$
0

$
631

$
93

$
724

$
131

Commercial Real Estate
7,705

0

60

7,765

225

Commercial Real Estate - Agriculture
1,559

0

0

1,559

0

Residential - Mortgages
46

0

0

46

0

Total
$
9,310

$
631

$
153

$
10,094

$
356















The following table presents information pertaining to the allocation of the allowance for loan and lease losses as of December 31, 2019, as determined in accordance with ASC 310, prior to the adoption of ASU 2016-13: 
(In thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer
and Other

 
Finance Leases

 
Total

Allowance for originated loans and leases
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
245

 
$
662

 
$
0

 
$
0

 
$
0

 
$
907

Collectively evaluated for impairment
10,296

 
20,895

 
6,360

 
1,356

 
0

 
38,907

Ending balance
$
10,541

 
$
21,557

 
$
6,360

 
$
1,356

 
$
0

 
$
39,814


(In thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer
and Other

 
Finance
Leases

 
Total

Allowance for acquired loans
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
0

 
$
51

 
$
21

 
$
6

 
$
0

 
$
78

Ending balance
$
0

 
$
51

 
$
21

 
$
6

 
$
0

 
$
78


 
The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology as of December 31, 2019 was as follows:

(In thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer 
and Other

 
Finance Leases

 
Total

Originated loans and leases
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,110

 
$
13,496

 
$
3,779

 
$
0

 
$
0

 
$
19,385

Collectively evaluated for impairment
966,875

 
2,283,152

 
1,340,687

 
73,625

 
17,322

 
4,681,661

Total
$
968,985

 
$
2,296,648

 
$
1,344,466

 
$
73,625

 
$
17,322

 
$
4,701,046

 
(In thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer 
and Other

 
Finance
Leases

 
Total

Acquired loans
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2

 
$
714

 
$
2,114

 
$
0

 
$
0

 
$
2,830

Loans acquired with deteriorated credit quality
173

 
5,674

 
3,302

 
0

 
0

 
9,149

Collectively evaluated for impairment
38,901

 
140,529

 
27,955

 
785

 
0

 
208,170

Total
$
39,076

 
$
146,917

 
$
33,371

 
$
785

 
$
0

 
$
220,149


 
Prior to the adoption of ASC 326, a loan was considered impaired when, based on current information and events, it was probable that we would be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans consisted of non-homogenous nonaccrual loans, and all loans restructured in a troubled debt restructuring (TDR). Specific reserves on individually identified impaired loans that were not collateral dependent were measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that were collateral dependent, impairment was measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts were generally charged off. The majority of impaired loans were collateral dependent impaired loans that had limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans, and previous charge-offs. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis.

Impaired loans at December 31, 2019 were as follows:
 
 
December 31, 2019
(In thousands)
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
Originated loans and leases with no related allowance
 
 
 
 
 
Commercial and industrial
 
 
 
 
 
Commercial and industrial other
$
1,865

 
$
1,965

 
$
0

Commercial real estate
 
 
 
 
 
Commercial real estate other
10,205

 
11,017

 
0

Residential real estate
 
 
 
 
 
Home equity
3,779

 
3,992

 
0

Subtotal
$
15,849

 
$
16,974

 
$
0

Originated loans and leases with related allowance
Commercial and industrial
 
 
 
 
 
Commercial and industrial other
245

 
245

 
245

Commercial real estate
 
 
 
 
 
Commercial real estate other
3,291

 
3,291

 
662

Subtotal
$
3,536

 
$
3,536

 
$
907

Total
$
19,385

 
$
20,510

 
$
907

 
 
December 31, 2019
(In thousands)
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
Acquired loans with no related allowance
 
 
 
 
 
 
Commercial and industrial
 
 
 
 
 
Commercial and industrial other
$
2

 
$
2

 
$
0

Commercial real estate
 
 
 
 
 
Commercial real estate other
714

 
714

 
0

Residential real estate
 
 
 
 
 
Home equity
2,114

 
2,217

 
0

Total
$
2,830

 
$
2,933

 
$
0



The following table presents average impaired loans, as determined in accordance with ASC 310, prior to the adoption of ASU 2016-13, and interest recognized on such loans, for the three months ended March 31, 2019:
 
 
Three Months Ended March 31, 2019
(In thousands)
Average Recorded Investment
 
Interest Income Recognized
Originated loans and leases with no related allowance
 
 
 
Commercial and industrial
 
 
 
Commercial and industrial other
$
1,468

 
$
0

Commercial real estate
 
 
 
Commercial real estate other
6,099

 
0

Residential real estate
 
 
 
Home equity
3,981

 
0

Subtotal
$
11,548

 
$
0

 
 
 
 
Originated loans and leases with related allowance
 
 
 
Commercial and industrial
 
 
 
Commercial and industrial other
581

 
0

Commercial real estate
 
 
 
Commercial real estate other
445

 
0

Subtotal
$
1,026

 
$
0

Total
$
12,574

 
$
0


 
Three Months Ended March 31, 2019
(In thousands)
Average Recorded Investment
 
Interest Income Recognized
Acquired loans and leases with no related allowance
 
 
 
 
 
 
 
Commercial and industrial
 
 
 
Commercial and industrial other
$
22

 
$
0

Commercial real estate
 
 
 
Commercial real estate other
855

 
0

Residential real estate
 
 
 
Home equity
2,577

 
0

Subtotal
$
3,454

 
$
0

Total
$
3,454

 
$
0


Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes concessions to the borrower that it would not otherwise consider. These modifications may include, among others, an extension for the term of the loan, and granting a period when interest-only payments can be made with the principal payments made over the remaining term of the loan or at maturity.
 
The following tables present information on loans modified in troubled debt restructuring during the periods indicated and their balances immediately prior to the modification date and post-modification as of March 31, 2020 and 2019.

March 31, 2020
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 real estate
 
 
 
 
 
 
 
 
 
Commercial real estate other1
0

 
$
0

 
$
0

 
1

 
$
37

Residential real estate
 
 
 
 
 
 
 
 
 
Home equity1
2

 
121

 
121

 
1

 
87

Total
2

 
$
121

 
$
121

 
2

 
$
124

1 Represents the following concessions:  extension of term and reduction of rate.
2 TDRs that defaulted during the three months ended March 31, 2020 that were restructured in the prior twelve months.
 
March 31, 2019
Three Months Ended
 
 
 
 
 
 
 
Defaulted TDRs2
(In thousands)
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
Number of Loans
 
Post-Modification Outstanding Recorded Investment
Residential real estate


 


 


 


 


Home equity1
1

 
$
168

 
$
168

 
0

 
$
0

Total
1

 
$
168

 
$
168

 
0

 
$
0


1 Represents the following concessions:  extension of term and reduction of rate.
2 TDRs that defaulted during the three months ended March 31, 2019 that had been restructured in the prior twelve months.


For customers affected by COVID-19, the Company implemented a loan payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19. The current program allows for deferral of payments of principal and interest for up to 90 days and customers will be able to request a payment deferral through the middle of May 2020. The provisions of the CARES Act and recently issued interagency guidance issued by Federal banking regulators provided guidance and clarification related to modifications and deferral programs to assist borrowers who are negatively impacted by the COVID-19 national emergency. The guidance and clarifications detail certain provisions whereby banks are permitted to make deferrals and modifications to the terms of a loan which would not require the loan to be reported as a troubled debt restructuring. In accordance with the CARES Act and the interagency guidance, the Company elected to adopt the provisions to not report eligible loan modifications as troubled debt restructurings.
The following table presents credit quality indicators by total loans amortized cost basis by origination year as of March 31, 2020.

(In thousands)
2020
2019
2018
2017
2016
Prior
Revolving Loans Amortized Cost Basis
Revolving Loans Converted to Term
Total Loans
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial - Other:
 
 
 
 
 
 
Internal risk grade:
 
 
 
 
 
 
 
 
 
Pass
$
42,295

$
83,851

$
71,313

$
88,343

$
46,007

$
283,285

$
260,678

$
655

$
876,427

Special Mention
0

104

263

1,178

2,821

136

540

0

5,042

Substandard
0

112

1,240

286

626

866

3,244

0

6,374

Total Commercial and Industrial - Other
$
42,295

$
84,067

$
72,816

$
89,807

$
49,454

$
284,286

$
264,462

$
655

$
887,843

 
 
 
 
 
 
 
 
 
 
Commercial and Industrial - Agriculture:
 
 
 
 
 
 
Internal risk grade:
 
 
 
 
 
 
 
 
 
Pass
$
1,520

$
13,214

$
14,996

$
8,135

$
5,170

$
2,395

$
38,484

$
0

$
83,914

Special Mention
0

80

127

109

0

0

435

0

751

Substandard
100

107

3

894

35

2,310

7,271

0

10,720

Total Commercial and Industrial - Agriculture
$
1,620

$
13,401

$
15,126

$
9,138

$
5,205

$
4,705

$
46,190

$
0

$
95,385

 
 
 
 
 
 
 
 
 
 
Commercial Real Estate
 
 
 
 
 
 
Internal risk grade:
 
 
 
 
 
 
 
 
 
Pass
$
99,145

$
247,630

$
239,644

$
258,039

$
340,595

$
505,182

$
381,049

$
2,752

$
2,074,036

Special Mention
0

0

2,728

2,400

5,503

9,253

3,048

0

22,932

Substandard
0

1,700

764

3,334

349

9,717

8,107

0

23,971

Total Commercial Real Estate
$
99,145

$
249,330

$
243,136

$
263,773

$
346,447

$
524,152

$
392,204

$
2,752

$
2,120,939

 
 
 
 
 
 
 
 
 
 
Commercial Real Estate - Agriculture:
 
 
 
 
 
 
Internal risk grade:
 
 
 
 
 
 
 
 
 
Pass
$
2,028

$
30,493

$
42,366

$
23,728

$
14,147

$
39,835

$
16,842

$
448

$
169,887

Special Mention
1,510

0

2,418

120

1,264

361

11

0

5,684

Substandard
0

1,618

558

3,169

4,356

912

877

0

11,490

Total Commercial Real Estate - Agriculture
$
3,538

$
32,111

$
45,342

$
27,017

$
19,767

$
41,108

$
17,730

$
448

$
187,061

 
 
 
 
 
 
 
 
 
 
Commercial Real Estate - Construction
 
 
 
 
 
 
Internal risk grade:
 
 
 
 
 
 
 
 
 
Pass
$
1,194

$
22,565

$
9,552

$
3,011

$
2,165

$
4,169

$
121,760

$
983

$
165,399

Special Mention
0

0

0

0

0

603

2,109

0

2,712

Substandard
0

0

0

0

0

339

0

0

339

Total Commercial Real Estate - Construction
$
1,194

$
22,565

$
9,552

$
3,011

$
2,165

$
5,111

$
123,869

$
983

$
168,450


The following table presents credit quality indicators by total loans amortized cost basis by origination year as of March 31, 2020, continued.
(In thousands)
2020
2019
2018
2017
2016
Prior
Revolving Loans Amortized Cost Basis
Revolving Loans Converted to Term
Total Loans
 
 
 
 
 
 
 
 
 
 
Residential - Home Equity
 
 
 
 
 
 
 
 
 
Performing
$
3,948

$
28,694

$
23,181

$
25,332

$
21,014

$
40,444

$
70,006

$
406

$
213,025

Nonperforming
0

19

67

0

0

528

2,101

0

2,715

Total Residential - Home Equity
$
3,948

$
28,713

$
23,248

$
25,332

$
21,014

$
40,972

$
72,107

$
406

$
215,740

 
 
 
 
 
 
 
 
 
 
Residential - Mortgages
 
 
 
 
 
 
 
 
 
Performing
$
56,373

$
205,326

$
146,568

$
191,872

$
207,389

$
159,262

$
200,151

$
204

$
1,167,145

Nonperforming
0

266

406

453

1,291

2,385

4,027

0

8,828

Total Residential - Mortgages
$
56,373

$
205,592

$
146,974

$
192,325

$
208,680

$
161,647

$
204,178

$
204

$
1,175,973

 
 
 
 
 
 
 
 
 
 
Consumer - Direct
 
 
 
 
 
 
 
 
 
Performing
$
4,186

$
16,392

$
10,746

$
9,326

$
4,812

$
11,230

$
4,350

$
0

$
61,042

Nonperforming
0

47

44

10

0

18

0

0

119

Total Consumer - Direct
$
4,186

$
16,439

$
10,790

$
9,336

$
4,812

$
11,248

$
4,350

$
0

$
61,161

 
 
 
 
 
 
 
 
 
 
Consumer - Indirect
 
 
 
 
 
 
 
 
 
Performing
$
616

$
2,904

$
4,886

$
2,001

$
895

$
422

$
0

$
0

$
11,724

Nonperforming
0

57

25

6

39

20

0

0

147

Total Consumer Indirect
$
616

$
2,961

$
4,911

$
2,007

$
934

$
442

$
0

$
0

$
11,871



The following tables present credit quality indicators (internal risk grade) by class of commercial and industrial loans and commercial real estate loans as of December 31, 2019.
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Commercial and Industrial Other
 
Commercial and Industrial Agriculture
 
Commercial Real Estate Other
 
Commercial Real Estate Agriculture
 
Commercial Real Estate Construction
 
Total
Originated Loans and Leases
Internal risk grade:
 
 
 
 
 
 
 
 
 
 
 
Pass
$
851,517

 
$
89,892

 
$
1,857,142

 
$
166,888

 
$
212,302

 
$
3,177,741

Special Mention
8,306

 
1,698

 
16,623

 
3,173

 
0

 
29,800

Substandard
3,376

 
14,196

 
25,880

 
14,640

 
0

 
58,092

Total
$
863,199

 
$
105,786

 
$
1,899,645

 
$
184,701

 
$
212,302

 
$
3,265,633

 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Commercial and Industrial Other
 
Commercial and Industrial Agriculture
 
Commercial Real Estate Other
 
Commercial Real Estate Agriculture
 
Commercial Real Estate Construction
 
Total
Acquired Loans and Leases
Internal risk grade:
 
 
 
 
 
 
 
 
 
 
 
Pass
$
38,879

 
$
0

 
$
143,175

 
$
197

 
$
1,335

 
$
183,586

Special Mention
0

 
0

 
0

 
0

 
0

 
0

Substandard
197

 
0

 
2,210

 
0

 
0

 
2,407

Total
$
39,076

 
$
0

 
$
145,385

 
$
197

 
$
1,335

 
$
185,993


 
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 December 31, 2019. For purposes of this footnote, acquired loans that were recorded at fair value at the acquisition date and are 90 days or greater past due are considered performing.

December 31, 2019
(In thousands)
Residential
Home Equity
 
Residential
Mortgages
 
Consumer
Indirect
 
Consumer
Other
 
Total
Originated Loans and Leases
 
 
 
 
 
 
 
 
 
Performing
$
201,970

 
$
1,133,237

 
$
12,847

 
$
60,503

 
$
1,408,557

Nonperforming
1,924

 
7,335

 
117

 
158

 
9,534

Total
$
203,894

 
$
1,140,572

 
$
12,964

 
$
60,661

 
$
1,418,091

 
December 31, 2019
(In thousands)
Residential
Home Equity
 
Residential
Mortgages
 
Consumer
Indirect
 
Consumer
Other
 
Total
Acquired Loans and Leases
 
 
 
 
 
 
 
 
 
Performing
$
14,479

 
$
17,269

 
$
0

 
$
785

 
$
32,533

Nonperforming
872

 
751

 
0

 
0

 
1,623

Total
$
15,351

 
$
18,020

 
$
0

 
$
785

 
$
34,156