Allowance for Loan and Lease Losses

3 Months Ended

Mar. 31, 2021

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 (ASU 2016-3).

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 given 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 forecasts of 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, and scenario weightings, 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.

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, 2021, considers the allowance to be appropriate, under 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 based 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 and leases for the three months ended March 31, 2021 and 2020. The Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. 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 March 31, 2021
(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Allowance for credit losses:
Beginning balance	$	9,239	$	30,546	$	10,257	$	1,562	$	65	$	51,669
Charge-offs	(116)		0		0		(91)		0		(207)
Recoveries	97		213		34		43		0		387
Provision (credit) for credit loss expense	(1,470)		(292)		(821)		69		4		(2,510)
Ending Balance	$	7,750	$	30,467	$	9,470	$	1,583	$	69	$	49,339


Three Months Ended March 31, 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 ASU 2016-13	$	10,541	$	21,608	$	6,381	$	1,362	$	0	39,892
Impact of adopting ASU 2016-13	(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 (credit) 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

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, 2021
Commercial and Industrial	$	93	$	549	$	517	$	1,159	$	5
Commercial Real Estate	26,542		105		0		26,647		184

Total	$	26,635	$	654	$	517	$	27,806	$	189


(In thousands)	Real Estate		Business Assets		Other		Total		ACL Allocation
December 31, 2020
Commercial and Industrial	$	103	$	582	$	110	$	795	$	122
Commercial Real Estate	24,277		1,418		0		25,695		186

Total	$	24,380	$	2,000	$	110	$	26,490	$	308

Loans are considered modified in a troubled debt restructuring ("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.

There were no new TDRs in the first quarter of 2021. The following table presents information on loans modified in a TDR during the period ended March 31, 2020. Post-modification amounts are presented as of March 31, 2020.


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 other	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 had been restructured in the prior twelve months.

The Company implemented and continues to utilize a loan payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19. The Company's program allows for deferral of payments of principal and interest. The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") and 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 TDR. In accordance with the CARES Act and the interagency guidance, the Company elected to adopt the provisions to not report eligible loan modifications as TDRs.

The relief related to TDRs under the CARES Act was extended by the Consolidated Appropriations Act, 2021 ("CAA Act"). Under the CAA Act, the relief under the CARES Act will continue until the earlier of (i) 60 days after the date the COVID-19 national emergency comes to an end or (ii) January 1, 2022.

The following tables present credit quality indicators by total loans on an amortized cost basis by origination year as of March 31, 2021 and December 31, 2020.

March 31, 2021


(In thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total Loans
Commercial & Industrial - Other:
Internal risk grade:
Pass	$	39,717	$	69,614	$	68,152	$	52,359	$	54,137	$	318,853	$	149,103	$	167	$	752,102
Special Mention	29		899		345		341		697		1,810		2,197		0		6,318
Substandard	30		409		304		878		396		873		1,646		0		4,536
Total Commercial & Industrial - Other	$	39,776	$	70,922	$	68,801	$	53,578	$	55,230	$	321,536	$	152,946	$	167	$	762,956

Commercial and Industrial - PPP:
Pass	$	200,794	$	169,213	$	0	$	0	$	0	$	0	$	0	$	0	$	370,007
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	$	200,794	$	169,213	$	0	$	0	$	0	$	0	$	0	$	0	$	370,007

Commercial and Industrial - Agriculture:
Pass	$	613	$	9,851	$	7,253	$	10,446	$	6,575	$	4,668	$	33,804	$	295	$	73,505
Special Mention	0		0		0		27		681		0		1,586		0		2,294
Substandard	0		96		72		0		156		2,300		2,269		0		4,893
Total Commercial and Industrial - Agriculture	$	613	$	9,947	$	7,325	$	10,473	$	7,412	$	6,968	$	37,659	$	295	$	80,692

Commercial Real Estate
Pass	$	51,512	$	272,752	$	246,240	$	225,940	$	232,958	$	924,083	$	93,777	$	698	$	2,047,960
Special Mention	0		36		13,000		3,892		4,613		80,088		139		0		101,768
Substandard	0		0		4,933		18,540		6,172		23,231		294		0		53,170
Total Commercial Real Estate	$	51,512	$	272,788	$	264,173	$	248,372	$	243,743	$	1,027,402	$	94,210	$	698	$	2,202,898

Commercial Real Estate - Agriculture:
Pass	$	4,538	$	22,338	$	33,141	$	43,997	$	21,536	$	56,972	$	6,116	$	2,100	$	190,738
Special Mention	0		1,946		0		592		1,353		1,047		49		0		4,987
Substandard	0		0		0		0		1,776		2,011		699		0		4,486
Total Commercial Real Estate - Agriculture	$	4,538	$	24,284	$	33,141	$	44,589	$	24,665	$	60,030	$	6,864	$	2,100	$	200,211

Commercial Real Estate - Construction
Pass	$	1,740	$	15,365	$	19,350	$	7,792	$	2,447	$	3,283	$	120,952	$	4,464	$	175,393
Special Mention	0		0		0		0		0		404		615		0		1,019
Substandard	0		0		0		0		0		318		0		0		318
Total Commercial Real Estate - Construction	$	1,740	$	15,365	$	19,350	$	7,792	$	2,447	$	4,005	$	121,567	$	4,464	$	176,730

December 31, 2020


(In thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total Loans
Commercial & Industrial - Other:
Internal risk grade:
Pass	$	91,597	$	72,639	$	56,191	$	60,714	$	33,402	$	301,027	$	149,969	$	16,301	$	781,840
Special Mention	1,064		367		344		912		2,045		228		1,331		0		6,291
Substandard	412		305		933		485		292		783		1,646		0		4,856
Total Commercial & Industrial - Other	$	93,073	$	73,311	$	57,468	$	62,111	$	35,739	$	302,038	$	152,946	$	16,301	$	792,987

Commercial and Industrial - Agriculture:
Pass	$	11,536	$	8,005	$	11,162	$	6,531	$	3,539	$	2,599	$	41,936	$	1,340	$	86,648
Special Mention	0		0		28		729		0		0		2080		0		2837
Substandard	99		83		0		202		0		2308		2312		0		5004
Total Commercial and Industrial - Agriculture	$	11,635	$	8,088	$	11,190	$	7,462	$	3,539	$	4,907	$	46,328	$	1,340	$	94,489

Commercial and Industrial - PPP:
Pass	$	291,252	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	291,252
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	$	291,252	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	291,252

Commercial Real Estate
Pass	$	278,747	$	246,331	$	232,651	$	237,487	$	290,106	$	664,027	$	33,117	$	64,903	$	2,047,369
Special Mention	35		13,016		5,612		4,654		34,310		46,074		203		0		103,904
Substandard	0		4,933		18,395		6,172		5,625		17,610		302		0		53,037
Total Commercial Real Estate	$	278,782	$	264,280	$	256,658	$	248,313	$	330,041	$	727,711	$	33,622	$	64,903	$	2,204,310

Commercial Real Estate - Agriculture:
Pass	$	22,440	$	35,081	$	44,519	$	22,356	$	17,081	$	44,559	$	919	$	5,602	$	192,557
Special Mention	1,960		0		575		1,366		1,053		6		49		0		5,009
Substandard	0		0		0		1,777		713		1,527		283		0		4,300
Total Commercial Real Estate - Agriculture	$	24,400	$	35,081	$	45,094	$	25,499	$	18,847	$	46,092	$	1,251	$	5,602	$	201,866

Commercial Real Estate - Construction
Pass	$	14,465	$	20,705	$	7,999	$	2,478	$	1,879	$	6,682	$	85,513	$	21,051	$	160,772
Special Mention	0		0		0		0		0		467		1,453		0		1,920
Substandard	0		0		0		0		0		324		0		0		324
Total Commercial Real Estate - Construction	$	14,465	$	20,705	$	7,999	$	2,478	$	1,879	$	7,473	$	86,966	$	21,051	$	163,016

The following tables present credit quality indicators by total loans on an amortized cost basis by origination year as of March 31, 2021 and December 31, 2020, continued.

March 31, 2021


(In thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total Loans

Residential - Home Equity
Performing	$	132	$	1,372	$	3,533	$	895	$	1,353	$	104	$	181,932	$	672	$	189,993
Nonperforming	0		0		18		0		0		677		2,214		0		2,909
Total Residential - Home Equity	$	132	$	1,372	$	3,551	$	895	$	1,353	$	781	$	184,146	$	672	$	192,902

Residential - Mortgages
Performing	$	69,755	$	297,688	$	185,225	$	116,236	$	145,978	$	394,149	$	14,515	$	196	$	1,223,742
Nonperforming	0		0		0		451		701		8,642		42		0		9,836
Total Residential - Mortgages	$	69,755	$	297,688	$	185,225	$	116,687	$	146,679	$	402,791	$	14,557	$	196	$	1,233,578

Consumer - Direct
Performing	$	7,664	$	13,471	$	10,291	$	7,405	$	6,165	$	12,209	$	6,631	$	0	$	63,836
Nonperforming	0		0		39		81		13		0		0		0		133
Total Consumer - Direct	$	7,664	$	13,471	$	10,330	$	7,486	$	6,178	$	12,209	$	6,631	$	0	$	63,969

Consumer - Indirect
Performing	$	351	$	1,304	$	2,583	$	1,873	$	844	$	329	$	0	$	0	$	7,284
Nonperforming	0		0		68		58		0		37		0		0		163
Total Consumer Indirect	$	351	$	1,304	$	2,651	$	1,931	$	844	$	366	$	0	$	0	$	7,447

December 31, 2020


(In thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total Loans

Residential - Home Equity
Performing	$	1,440	$	2,764	$	1,052	$	2,120	$	722	$	1,106	$	188,614	$	44	$	197,862
Nonperforming	0		18		0		0		194		506		2,247		0		2,965
Total Residential - Home Equity	$	1,440	$	2,782	$	1,052	$	2,120	$	916	$	1,612	$	190,861	$	44	$	200,827

Residential - Mortgages
Performing	$	305,476	$	193,543	$	123,205	$	155,699	$	178,149	$	255,556	$	11,735	$	1,617	$	1,224,980
Nonperforming	0		258		455		706		1,404		7,305		52		0		10,180
Total Residential - Mortgages	$	305,476	$	193,801	$	123,660	$	156,405	$	179,553	$	262,861	$	11,787	$	1,617	$	1,235,160

Consumer - Direct
Performing	$	14,840	$	11,127	$	8,011	$	6,632	$	2,854	$	10,840	$	6,835	$	0	$	61,139
Nonperforming	5		74		167		12		0		2		0		0		260
Total Consumer - Direct	$	14,845	$	11,201	$	8,178	$	6,644	$	2,854	$	10,842	$	6,835	$	0	$	61,399

Consumer - Indirect
Performing	$	1,424	$	1,878	$	3,327	$	1,128	$	382	$	93	$	0	$	0	$	8,232
Nonperforming	0		67		44		7		36		15		0		0		169
Total Consumer Indirect	$	1,424	$	1,945	$	3,371	$	1,135	$	418	$	108	$	0	$	0	$	8,401