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Allowance for Credit Losses

9 Months Ended

Sep. 30, 2020

Receivables [Abstract]

Allowance for Credit Losses

Allowance for Credit Losses

Management reviews the appropriateness of the 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 DCF method to estimate expected credit losses for all loan segments excluding the leasing segment. 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.

Due to the size and characteristics of the leasing portfolio, the Company uses the remaining life method, using the historical loss rate of the commercial and industrial segment, to determine the allowance for credit losses.

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 September 30, 2020, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance bases on their judgements and information available to them at the time of their examinations.

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 and nine months ended September 30, 2020 and 2019. As previously discussed, 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 included 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 September 30, 2020
(In thousands)			Commercial & Industrial						Commercial Real Estate						Residential Real Estate						Consumer and Other						Finance Leases						Total
Allowance for credit losses:
Beginning balance			$	11,113					$	24,286					$	15,012					$	1,596					$	75					$	52,082
Charge-offs			0						0						(30)						(145)						0						(175)
Recoveries			89						9						16						73						0						187
Provision (credit) for credit loss expense			(3,918)						4,264						(65)						(75)						(7)						199
Ending Balance			$	7,284					$	28,559					$	14,933					$	1,449					$	68					$	52,293

Three Months Ended September 30, 2019
(In thousands)			Commercial & Industrial						Commercial Real Estate						Residential Real Estate						Consumer and Other						Finance Leases						Total
Allowance for credit losses:
Beginning balance			$	11,543					$	21,005					$	6,897					$	1,345					$	0					$	40,790
Charge-offs			(6)						(551)						(87)						(190)						0						(834)
Recoveries			10						2						15						68						0						95
Provision (credit) for credit loss expense			(256)						2,143						(733)						166						0						1,320
Ending Balance			$	11,291					$	22,599					$	6,092					$	1,389					$	0					$	41,371

Nine Months Ended September 30, 2020
(In thousands)			Commercial & 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)						(1,305)						(33)						(409)						0						(1,748)
Recoveries			125						40						178						195						0						538
Provision (credit) for credit loss expense			(1,373)						14,133						3,948						(549)						(14)						16,145
Ending Balance			$	7,284					$	28,559					$	14,933					$	1,449					$	68					$	52,293

Nine Months Ended September 30, 2019
(In thousands)			Commercial & 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			(489)						(3,949)						(131)						(571)						0						(5,140)
Recoveries			92						107						319						217						0						735
Provision (credit) for credit loss expense			416						2,958						(1,441)						433						0						2,366
Ending Balance			$	11,291					$	22,599					$	6,092					$	1,389					$	0					$	41,371

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
September 30, 2020
Commercial and Industrial			$	33		$	507		$	50		$	590		$	48
Commercial Real Estate			8,085			0			0			8,085			436
Commercial Real Estate - Agriculture			1,559			0			0			1,559			0
Residential - Mortgages			384			0			0			384			2
Total			$	10,061		$	507		$	50		$	10,618		$	486

The following tables present information pertaining to the allocation of the allowance for credit losses as of December 31, 2019, as determined in accordance with ASC 310, prior to the adoption of ASU 2016-13:

(In thousands)			Commercial & 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 & Industrial						Commercial Real Estate						Residential Real Estate						Consumer and Other						Finance Leases						Total
Allowance for acquired loans
December 31, 2019
Individually evaluated for impairment			$	0					$	0					$	0					$	0					$	0					$	0
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 & 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 & 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 & 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 & 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 & 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 September 30, 2019: 

			Three Months Ended September 30, 2019
(In thousands)			Average Recorded Investment						Interest Income Recognized
Originated loans and leases with no related allowance
Commercial & industrial
Commercial and industrial other			$	1,505					$	0
Commercial real estate
Commercial real estate other			7,380						0
Residential real estate
Home equity			3,963						0
Subtotal			$	12,848					$	0
Originated loans and leases with related allowance
Commercial & industrial
Commercial and industrial other			273						0
Commercial real estate
Commercial real estate other			1,708						0
Subtotal			$	1,981					$	0
Total			$	14,829					$	0

			Three Months Ended September 30, 2019
(In thousands)			Average Recorded Investment						Interest Income Recognized
Acquired loans and leases with no related allowance
Commercial & industrial
Commercial and industrial other			$	29					$	0
Commercial real estate
Commercial real estate other			857						0
Residential real estate
Home equity			2,585						0
Total			$	3,471					$	0

The average recorded investment and interest income recognized on impaired loans for the nine months ended September 30, 2019 was as follows:

			Nine Months Ended September 30, 2019
(In thousands)			Average Recorded Investment						Interest Income Recognized
Originated loans and leases with no related allowance
Commercial & industrial
Commercial and industrial other			$	2,123					$	0
Commercial real estate
Commercial real estate other			6,509						0
Residential real estate
Home equity			3,978						0
Subtotal			$	12,610					$	0
Originated loans and leases with related allowance
Commercial & industrial
Commercial and industrial other			154						0
Commercial real estate
Commercial real estate other			757						0
Subtotal			$	911					$	0
Total			$	13,521					$	0

			Nine Months Ended September 30, 2019
(In thousands)			Average Recorded Investment						Interest Income Recognized
Acquired loans and leases with no related allowance
Commercial & industrial
Commercial and industrial other			$	28					$	0
Commercial real estate
Commercial real estate other			834						0
Residential real estate
Home equity			2,606						0
Total			$	3,468					$	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. Post-modification amounts are presented as of September 30, 2020 and 2019.

			Three Months Ended
September 30, 2020																					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			1						$	196					$	196					0						$	0
Consumer and other
Consumer and other1			1						$	4					$	4					$	0					$	0
Total			2						$	200					$	200					0						$	0

 1 Represents the following concessions:  extension of term and reduction of rate.

2 TDRs that defaulted during the three months ended September 30, 2020 that were restructured in the prior twelve months.

			Three Months Ended
September 30, 2019																					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						$	9					$	9					0						$	0
Commercial real estate
Commercial real estate other1			1						$	1,577					$	1,577					0						$	0
Residential real estate
Home equity1			0						$	0					$	0					$	1					$	93
Total			2						$	1,586					$	1,586					1						$	93

 1 Represents the following concessions:  extension of term and reduction of rate.

2 TDRs that defaulted during the three months ended September 30, 2019 that were restructured in the prior twelve months.

			Nine Months Ended
September 30, 2020																					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 & industrial
Commercial and industrial other1			0						$	0					$	0					0						$	0
Commercial real estate
Commercial real estate other1			1						196						196						1						37
Residential real estate
Home equity1			2						121						121						1						87
Consumer and other
Consumer and other1			1						$	4					$	4					0						$	0
Total			4						$	321					$	321					2						$	124

1 Represents the following concessions:  extension of term and reduction of rate.

2 TDRs that defaulted during the nine months ended September 30, 2020 that were restructured in the prior twelve months.

			Nine Months Ended
September 30, 2019																					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 & industrial
Commercial and industrial other1			2						$	604					$	604					0						$	0
Commercial real estate
Commercial real estate other1			1						$	1,577					$	1,577					0						$	0
Residential real estate
Home equity1			1						$	168					$	168					1						$	93
Total			4						$	2,349					$	2,349					1						$	93

1 Represents the following concessions:  extension of term and reduction of rate.

2 TDRs that defaulted during the nine months ended September 30, 2019 that were restructured in the prior twelve months.

The following table presents credit quality indicators by total loans on an amortized cost basis by origination year as of September 30, 2020.

(In thousands)			2020			2019			2018			2017			2016			Prior			Revolving Loans Amortized Cost Basis			Revolving Loans Converted to Term			Total Loans
Commercial & Industrial - Other:
Pass			$	61,772		$	78,283		$	61,289		$	65,282		$	38,317		$	303,190		$	160,124		$	11,790		$	780,047
Special Mention			69			494			529			1,281			2,458			26			1,456			0			6,313
Substandard			42			60			999			265			312			879			1,832			0			4,389
Total Commercial & Industrial - Other			$	61,883		$	78,837		$	62,817		$	66,828		$	41,087		$	304,095		$	163,412		$	11,790		$	790,749
Commercial and Industrial - PPP:
Pass			$	464,058		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	464,058
Special Mention			$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
Substandard			$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
Total Commercial and Industrial - PPP			$	464,058		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	464,058
Commercial and Industrial - Agriculture:
Pass			$	11,203		$	9,128		$	13,160		$	7,060		$	3,857		$	2,934		$	33,800		$	467		$	81,609
Special Mention			0			0			59			771			0			0			1,681			0			2,511
Substandard			100			91			0			220			0			2,309			2,228			0			4,948
Total Commercial and Industrial - Agriculture			$	11,303		$	9,219		$	13,219		$	8,051		$	3,857		$	5,243		$	37,709		$	467		$	89,068
Commercial Real Estate
Pass			$	157,664		$	234,828		$	240,343		$	246,787		$	304,856		$	732,205		$	65,076		$	44,039		$	2,025,798
Special Mention			0			14,439			19,172			6,869			34,367			30,733			526			0			106,106
Substandard			349			1,700			739			3,608			924			22,385			345			0			30,050
Total Commercial Real Estate			$	158,013		$	250,967		$	260,254		$	257,264		$	340,147		$	785,322		$	65,947		$	44,039		$	2,161,954
Commercial Real Estate - Agriculture:
Pass			$	16,925		$	35,850		$	44,991		$	21,833		$	17,562		$	45,966		$	121		$	5,655		$	188,903
Special Mention			1,516			0			579			1,379			1,064			150			0			0			4,688
Substandard			0			0			0			1,779			718			1,569			392			0			4,458
Total Commercial Real Estate - Agriculture			$	18,441		$	35,850		$	45,570		$	24,991		$	19,344		$	47,685		$	513		$	5,655		$	198,049
Commercial Real Estate - Construction
Pass			$	12,983		$	22,285		$	8,019		$	2,629		$	2,018		$	8,324		$	107,970		$	15,434		$	179,662
Special Mention			0			0			0			0			0			529			2,085			0			2,614
Substandard			0			0			0			0			0			329			0			0			329
Total Commercial Real Estate - Construction			$	12,983		$	22,285		$	8,019		$	2,629		$	2,018		$	9,182		$	110,055		$	15,434		$	182,605

The following table presents credit quality indicators by total loans on an amortized cost basis by origination year as of September 30, 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			$	1,297		$	2,801		$	1,235		$	2,088		$	823		$	1,573		$	192,549		$	1,297		$	203,663
Nonperforming			0			18			0			0			197			390			2,188			0			2,793
Total Residential - Home Equity			$	1,297		$	2,819		$	1,235		$	2,088		$	1,020		$	1,963		$	194,737		$	1,297		$	206,456
Residential - Mortgages
Performing			$	232,860		$	198,718		$	129,779		$	166,414		$	191,858		$	286,255		$	12,391		$	944		$	1,219,219
Nonperforming			0			262			402			368			1,213			7,105			60			0			9,410
Total Residential - Mortgages			$	232,860		$	198,980		$	130,181		$	166,782		$	193,071		$	293,360		$	12,451		$	944		$	1,228,629
Consumer - Direct
Performing			$	12,884		$	12,595		$	8,728		$	7,534		$	3,219		$	11,904		$	7,298		$	0		$	64,162
Nonperforming			0			29			115			13			0			3			24			$	0		184
Total Consumer - Direct			$	12,884		$	12,624		$	8,843		$	7,547		$	3,219		$	11,907		$	7,322		$	0		$	64,346
Consumer - Indirect
Performing			$	1,266		$	2,200		$	3,840		$	1,388		$	521		$	175		$	0		$	0		$	9,390
Nonperforming			0			61			33			3			30			17			0			0			144
Total Consumer Indirect			$	1,266		$	2,261		$	3,873		$	1,391		$	551		$	192		$	0		$	0		$	9,534

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 & Industrial Other						Commercial & 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 & Industrial Other						Commercial & 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 were 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

X

- Definition

The entire disclosure for allowance for credit losses.

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-Publisher FASB
-Name Accounting Standards Codification
-Topic 310
-URI http://asc.fasb.org/topic&trid=2196771

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