Allowance for Credit Losses

9 Months Ended

Sep. 30, 2022

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 September 30, 2022, 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 cancellable, 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 nine months ended September 30, 2022 and 2021. 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, 2022
(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Allowance for credit losses:
Beginning balance	$	7,814	$	23,227	$	11,082	$	1,591	$	79	$	43,793
Charge-offs	(343)		0		51		(132)		0		(424)
Recoveries	106		105		8		83		0		302
(Credit) provision for credit loss expense	(1,053)		3,207		(698)		(362)		7		1,101
Ending Balance	$	6,524	$	26,539	$	10,443	$	1,180	$	86	$	44,772


Three Months Ended September 30, 2021
(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Allowance for credit losses:
Beginning balance	$	7,113	$	29,201	$	9,534	$	1,590	$	67	$	47,505
Charge-offs	(157)		0		0		(53)		0		(210)
Recoveries	16		2		65		58		0		141
(Credit) provision for credit loss expense	(774)		(119)		(184)		(99)		(1)		(1,177)
Ending Balance	$	6,198	$	29,084	$	9,415	$	1,496	$	66	$	46,259


Nine Months Ended September 30, 2022
(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Allowance for credit losses:
Beginning balance	$	6,335	$	24,813	$	10,139	$	1,492	$	64	$	42,843
Charge-offs	(366)		(50)		0		(410)		0		(826)
Recoveries	132		910		315		251		0		1,608
(Credit) provision for credit loss expense	423		866		(11)		(153)		22		1,147
Ending Balance	$	6,524	$	26,539	$	10,443	$	1,180	$	86	$	44,772


Nine Months Ended September 30, 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	(274)		0		(51)		(218)		0		(543)
Recoveries	116		1,040		229		153		0		1,538
(Credit) provision for credit loss expense	(2,883)		(2,502)		(1,020)		(1)		1		(6,405)
Ending Balance	$	6,198	$	29,084	$	9,415	$	1,496	$	66	$	46,259

The following table details activity in the liabilities for off-balance sheet credit exposures for the three and nine months ended September 30, 2022 and 2021:


Three Months Ended September 30,
(In thousands)	2022		2021
Liabilities for off-balance sheet credit exposures at beginning of period	$	2,796	$	2,247
Credit for credit loss expense related to off-balance sheet credit exposures	(45)		(55)
Liabilities for off-balance sheet credit exposures at end of period	$	2,751	$	2,192


Nine Months Ended September 30,
(In thousands)	2022		2021
Liabilities for off-balance sheet credit exposures at beginning of period	$	2,506	$	1,920

Provision for credit loss expense related to off-balance sheet credit exposures	245		272
Liabilities for off-balance sheet credit exposures at end of period	$	2,751	$	2,192

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, 2022
Commercial and Industrial	$	435	$	335	$	172	$	942	$	159
Commercial Real Estate	12,268		0		2,628		14,896		0
Commercial Real Estate - Agriculture	1,525		0		0		1,525		0
Residential Real Estate	335		0		0		335		28
Total	$	14,563	$	335	$	2,800	$	17,698	$	187


(In thousands)	Real Estate		Business Assets		Other		Total		ACL Allocation
December 31, 2021
Commercial and Industrial	$	142	$	395	$	328	$	865	$	26
Commercial Real Estate	13,334		0		1,931		15,265		40

Residential Real Estate	32		0		0		32		1
Total	$	13,508	$	395	$	2,259	$	16,162	$	67

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.

The following tables present information on loans modified in a TDR during the three and nine months ended September 30, 2022 and 2021. Post-modification amounts are presented as of September 30, 2022 and September 30, 2021.


September 30, 2022	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
Residential real estate1	6	$	608	$	608	0	$	0

Total	6	$	608	$	608	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, 2022 that were restructured in the prior twelve months.


September 30, 2021	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	$	112	$	112	1	$	201


Total	1	$	112	$	112	1	$	201

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

2 TDRs that defaulted during the three months ended September 30, 2021 that were restructured in the prior twelve months.


September 30, 2022	Nine 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
Mortgages1	6	$	608	$	608	0	$	0



Total	6	$	608	$	608	0	$0

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

2 TDRs that defaulted during the nine months ended September 30, 2022 that were restructured in the prior twelve months.


September 30, 2021	Nine 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	$	112	$	112	1	$	201


Total	1	$	112	$	112	1	$	201

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

2 TDRs that defaulted during the nine months ended September 30, 2021 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, 2022 and December 31, 2021:


September 30, 2022
(In thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total Loans
Commercial and Industrial - Other:
Pass	$	105,118	$	100,909	$	43,941	$	45,679	$	36,484	$	162,074	$	208,925	$	3,849	$	706,979
Special Mention	0		135		455		275		11		1,432		764		0		3,072
Substandard	0		119		474		39		454		519		7,070		0		8,675
Total Commercial and Industrial - Other	$	105,118	$	101,163	$	44,870	$	45,993	$	36,949	$	164,025	$	216,759	$	3,849	$	718,726

Commercial and Industrial - PPP:
Pass	$	0	$	498	$	377	$	0	$	0	$	0	$	0	$	0	$	875
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	$	0	$	498	$	377	$	0	$	0	$	0	$	0	$	0	$	875

Commercial and Industrial - Agriculture:
Pass	$	11,505	$	4,460	$	5,359	$	4,528	$	8,132	$	5,610	$	22,960	$	239	$	62,793
Special Mention	0		0		0		0		0		0		0		0		0
Substandard	0		0		74		0		0		2,298		1,411		0		3,783
Total Commercial and Industrial - Agriculture	$	11,505	$	4,460	$	5,433	$	4,528	$	8,132	$	7,908	$	24,371	$	239	$	66,576

Commercial Real Estate
Pass	$	276,588	$	362,770	$	312,387	$	279,146	$	206,351	$	836,400	$	10,778	$	25,170	$	2,309,590
Special Mention	643		3,427		1,700		11,542		2,965		43,006		0		0		63,283
Substandard	83		112		0		3,572		2,250		20,920		141		0		27,078
Total Commercial Real Estate	$	277,314	$	366,309	$	314,087	$	294,260	$	211,566	$	900,326	$	10,919	$	25,170	$	2,399,951

Commercial Real Estate - Agriculture:
Pass	$	24,003	$	24,407	$	23,558	$	26,739	$	38,919	$	67,610	$	2,810	$	1,248	$	209,294
Special Mention	0		0		0				0		375		0		0		375
Substandard	0		0		0		219		38		214		0		0		471
Total Commercial Real Estate - Agriculture	$	24,003	$	24,407	$	23,558	$	26,958	$	38,957	$	68,199	$	2,810	$	1,248	$	210,140

Commercial Real Estate - Construction
Pass	$	12,059	$	76,821	$	44,319	$	24,559	$	9,511	$	7,380	$	23,187	$	1,308	$	199,144
Special Mention	0		0		0		0		0		0		0		0		0
Substandard	0		0		0		0		0		0		0		0		0
Total Commercial Real Estate - Construction	$	12,059	$	76,821	$	44,319	$	24,559	$	9,511	$	7,380	$	23,187	$	1,308	$	199,144


December 31, 2021
(In thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total Loans
Commercial and Industrial - Other:
Internal risk grade:
Pass	$	123,996	$	58,432	$	54,116	$	42,093	$	35,725	$	239,093	$	125,476	$	10,039	$	688,970
Special Mention	156		770		450		100		201		393		1,417		0		3,487
Substandard	179		584		47		575		0		637		4,642		0		6,664
Total Commercial and Industrial - Other	$	124,331	$	59,786	$	54,613	$	42,768	$	35,926	$	240,123	$	131,535	$	10,039	$	699,121

Commercial and Industrial - Agriculture:
Pass	$	8,573	$	6,782	$	5,700	$	10,136	$	6,867	$	3,186	$	53,145	$	595	$	94,984
Special Mention	0		0		0		23		0		0		0		0		23
Substandard	0		85		11		0		93		2,316		1,660		0		4,165
Total Commercial and Industrial - Agriculture	$	8,573	$	6,867	$	5,711	$	10,159	$	6,960	$	5,502	$	54,805	$	595	$	99,172

Commercial and Industrial - PPP:
Pass	$	71,260	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	71,260
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	$	71,260	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	71,260

Commercial Real Estate
Pass	$	325,874	$	271,680	$	249,266	$	201,992	$	212,991	$	810,713	$	44,264	$	43,225	$	2,160,005
Special Mention	0		1,763		11,772		3,217		2,167		61,723		358		0		81,000
Substandard	3,482		0		2,262		2,518		8,509		20,401		422		0		37,594
Total Commercial Real Estate	$	329,356	$	273,443	$	263,300	$	207,727	$	223,667	$	892,837	$	45,044	$	43,225	$	2,278,599

Commercial Real Estate - Agriculture:
Pass	$	23,151	$	21,856	$	28,943	$	41,064	$	23,195	$	50,809	$	1,949	$	2,850	$	193,817
Special Mention	0		479		0		0		0		350		35		0		864
Substandard	0		0		0		39		0		1,253		0		0		1,292
Total Commercial Real Estate - Agriculture	$	23,151	$	22,335	$	28,943	$	41,103	$	23,195	$	52,412	$	1,984	$	2,850	$	195,973

Commercial Real Estate - Construction
Pass	$	12,840	$	10,025	$	16,325	$	7,542	$	1,274	$	6,559	$	112,537	$	10,037	$	177,139
Special Mention	0		0		0		0		0		0		0		0		0
Substandard	0		0		0		0		0		643		800		0		1,443
Total Commercial Real Estate - Construction	$	12,840	$	10,025	$	16,325	$	7,542	$	1,274	$	7,202	$	113,337	$	10,037	$	178,582

The following table presents credit quality indicators by total loans on an amortized cost basis by origination year as of September 30, 2022 and December 31, 2021, continued:


September 30, 2022
(In thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total Loans
Residential - Home Equity
Performing	$	1,603	$	1,115	$	671	$	1,026	$	839	$	3,442	$	175,683	$	1,267	$	185,646
Nonperforming	0		0		0		14		0		67		2,275		0		2,356
Total Residential - Home Equity	$	1,603	$	1,115	$	671	$	1,040	$	839	$	3,509	$	177,958	$	1,267	$	188,002

Residential - Mortgages
Performing	$	159,027	$	274,096	$	244,259	$	120,582	$	67,999	$	468,094	$	0	$	0	$	1,334,057
Nonperforming	0		340		635		603		1,566		7,540		0		0		10,684
Total Residential - Mortgages	$	159,027	$	274,436	$	244,894	$	121,185	$	69,565	$	475,634	$	0	$	0	$	1,344,741

Consumer - Direct
Performing	$	17,881	$	15,882	$	7,825	$	6,937	$	4,764	$	8,439	$	4,417	$	0	$	66,145
Nonperforming	0		0		3		22		77		9		6		$	0	117
Total Consumer - Direct	$	17,881	$	15,882	$	7,828	$	6,959	$	4,841	$	8,448	$	4,423	$	0	$	66,262

Consumer - Indirect
Performing	$	0	$	169	$	171	$	1,307	$	780	$	134	$	0	$	0	$	2,561
Nonperforming	0		0		0		95		38		18		0		0		151
Total Consumer - Indirect	$	0	$	169	$	171	$	1,402	$	818	$	152	$	0	$	0	$	2,712


December 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	$	2,033	$	1,142	$	3,041	$	1,600	$	1,572	$	3,144	$	161,630	$	6,050	$	180,212
Nonperforming	0		0		16		0		0		604		1,839		0		2,459
Total Residential - Home Equity	$	2,033	$	1,142	$	3,057	$	1,600	$	1,572	$	3,748	$	163,469	$	6,050	$	182,671

Residential - Mortgages
Performing	$	324,967	$	282,202	$	162,574	$	97,778	$	124,221	$	275,133	$	14,112	$	1,205	$	1,282,192
Nonperforming	0		0		241		702		693		7,060		23		0		8,719
Total Residential - Mortgages	$	324,967	$	282,202	$	162,815	$	98,480	$	124,914	$	282,193	$	14,135	$	1,205	$	1,290,911

Consumer - Direct
Performing	$	20,653	$	10,735	$	9,397	$	5,542	$	4,849	$	10,602	$	5,435	$	0	$	67,213
Nonperforming	0		9		44		117		12		0		1		0		183
Total Consumer - Direct	$	20,653	$	10,744	$	9,441	$	5,659	$	4,861	$	10,602	$	5,436	$	0	$	67,396

Consumer - Indirect
Performing	$	1,809	$	854	$	812	$	506	$	362	$	66	$	0	$	0	$	4,409
Nonperforming	0		2		148		81		1		14		0		0		246
Total Consumer - Indirect	$	1,809	$	856	$	960	$	587	$	363	$	80	$	0	$	0	$	4,655