Allowance for Credit Losses

6 Months Ended

Jun. 30, 2021

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 discounted cash flow ("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 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 June 30, 2021, considers the allowance to be appropriate, under certain 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 provision 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 six months ended June 30, 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 June 30, 2021
(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Allowance for credit losses:
Beginning balance	$	7,750	$	30,467	$	9,470	$	1,583	$	69	$	49,339
Charge-offs	(2)		0		(48)		(60)		0		(110)
Recoveries	4		826		125		39		0		994
Provision (credit) for credit loss expense	(639)		(2,092)		(13)		28		(2)		(2,718)
Ending Balance	$	7,113	$	29,201	$	9,534	$	1,590	$	67	$	47,505


Three Months Ended June 30, 2020
(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Allowance for credit losses:
Beginning balance	$	11,665	$	22,446	$	16,330	$	1,883	$	80	$	52,404
Charge-offs	0		(15)		(1)		(127)		0		(143)
Recoveries	21		12		84		52		0		169
Provision (credit) for credit loss expense	(573)		1,843		(1,401)		(212)		(5)		(348)
Ending Balance	$	11,113	$	24,286	$	15,012	$	1,596	$	75	$	52,082


Six Months Ended June 30, 2021
(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Allowance for credit losses:
Beginning balances	$	9,239	$	30,546	$	10,257	$	1,562	$	65	$	51,669
Charge-offs	(118)		0		(46)		(152)		0		(316)
Recoveries	101		1,039		158		82		0		1,380
Provision (credit) for credit loss expense	(2,109)		(2,384)		(835)		98		2		(5,228)
Ending Balance	$	7,113	$	29,201	$	9,534	$	1,590	$	67	$	47,505


Six Months Ended June 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)		(3)		(264)		0		(1,573)
Recoveries	37		30		163		121		0		351
Provision (credit) for credit loss expense	2,544		9,870		4,012		(473)		(7)		15,946
Ending Balance	$	11,113	$	24,286	$	15,012	$	1,596	$	75	$	52,082

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
June 30, 2021
Commercial and Industrial	$	46	$	501	$	478	$	1,025	$	155
Commercial Real Estate	35,167		0		0		35,167		1,666
Commercial Real Estate - Agriculture	1,559		0		0		1,559		0

Total	$	35,213	$	501	$	478	$	36,192	$	1,821


(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 second quarter of 2021 or 2020, and no new TDRs for the six months ended June 30, 2021. The following tables present information on loans modified in a TDR during the six months ended June 30, 2020. Post-modification amounts are presented as of June 30, 2020.


	Six Months Ended
June 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	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 six months ended June 30, 2020 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 June 30, 2021 and December 31, 2020.


June 30, 2021
(In thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total Loans
Commercial & Industrial - Other:
Pass	$	61,749	$	69,200	$	62,167	$	48,666	$	46,939	$	308,161	$	147,361	$	3,414	$	747,657
Special Mention	28		860		328		309		552		1,367		799		0		4,243
Substandard	15		385		300		801		231		695		1,558		0		3,985
Total Commercial & Industrial - Other	$	61,792	$	70,445	$	62,795	$	49,776	$	47,722	$	310,223	$	149,718	$	3,414	$	755,885

Commercial and Industrial - PPP:
Pass	$	205,576	$	53,388	$	0	$	0	$	0	$	0	$	0	$	0	$	258,964
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	$	205,576	$	53,388	$	0	$	0	$	0	$	0	$	0	$	0	$	258,964


Commercial and Industrial - Agriculture:
Pass	$	2,993	$	9,004	$	6,581	$	9,802	$	6,724	$	4,347	$	35,006	$	268	$	74,725
Special Mention	0		0		0		25		21		0		225		0		271
Substandard	0		93		24		0		118		2,337		1,783		0		4,355
Total Commercial and Industrial - Agriculture	$	2,993	$	9,097	$	6,605	$	9,827	$	6,863	$	6,684	$	37,014	$	268	$	79,351

Commercial Real Estate
Pass	$	145,134	$	269,940	$	258,852	$	206,663	$	228,178	$	858,179	$	73,474	$	22,560	$	2,062,980
Special Mention	0		1,777		11,336		3,868		4,578		78,555		362		0		100,476
Substandard	0		0		4,933		18,535		6,171		20,521		182		0		50,342
Total Commercial Real Estate	$	145,134	$	271,717	$	275,121	$	229,066	$	238,927	$	957,255	$	74,018	$	22,560	$	2,213,798

Commercial Real Estate - Agriculture:
Pass	$	11,618	$	20,794	$	32,737	$	43,163	$	24,080	$	57,892	$	3,970	$	2,586	$	196,840
Special Mention	0		1,930		0		0		0		4		49		0		1,983
Substandard	0		0		0		40		0		2,365		635		0		3,040
Total Commercial Real Estate - Agriculture	$	11,618	$	22,724	$	32,737	$	43,203	$	24,080	$	60,261	$	4,654	$	2,586	$	201,863

Commercial Real Estate - Construction
Pass	$	5,069	$	13,480	$	18,804	$	7,745	$	1,739	$	9,308	$	92,062	$	9,020	$	157,227
Special Mention	0		0		0		0		0		340		774		0		1,114
Substandard	0		0		0		0		0		313		0		0		313
Total Commercial Real Estate - Construction	$	5,069	$	13,480	$	18,804	$	7,745	$	1,739	$	9,961	$	92,836	$	9,020	$	158,654


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 table presents credit quality indicators by total loans on an amortized cost basis by origination year as of June 30, 2021 and December 31, 2020, continued.


June 30, 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	$	689	$	1,287	$	3,221	$	1,858	$	1,822	$	1,278	$	170,670	$	4,222	$	185,047
Nonperforming	0		0		17		0		0		633		1,884		0		2,534
Total Residential - Home Equity	$	689	$	1,287	$	3,238	$	1,858	$	1,822	$	1,911	$	172,554	$	4,222	$	187,581

Residential - Mortgages
Performing	$	148,238	$	295,017	$	175,802	$	109,328	$	138,882	$	359,124	$	10,456	$	581	$	1,237,428
Nonperforming	0		0		0		257		699		8,035		31		0		9,022
Total Residential - Mortgages	$	148,238	$	295,017	$	175,802	$	109,585	$	139,581	$	367,159	$	10,487	$	581	$	1,246,450

Consumer - Direct
Performing	$	12,624	$	12,508	$	10,628	$	6,625	$	5,524	$	11,115	$	5,219	$	0	$	64,243
Nonperforming	0		5		42		68		12		0		1		$	0	128
Total Consumer - Direct	$	12,624	$	12,513	$	10,670	$	6,693	$	5,536	$	11,115	$	5,220	$	0	$	64,371

Consumer - Indirect
Performing	$	1,075	$	1,134	$	874	$	2,424	$	622	$	142	$	0	$	0	$	6,271
Nonperforming	0		0		131		63		2		30		0		0		226
Total Consumer Indirect	$	1,075	$	1,134	$	1,005	$	2,487	$	624	$	172	$	0	$	0	$	6,497


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