Allowance for Credit Losses

9 Months Ended

Sep. 30, 2023

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 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, and scenario weightings, 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.

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, 2023, 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, 2023 and 2022. 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, 2023
(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Allowance for credit losses:
Beginning balance	$	6,685	$	28,968	$	11,111	$	1,680	$	101	$	48,545
Charge-offs	0		0		0		(271)		0		(271)
Recoveries	8		1		4		81		0		94
Provision (credit) for credit loss expense	(241)		366		791		70		(18)		968
Ending Balance	$	6,452	$	29,335	$	11,906	$	1,560	$	83	$	49,336


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
Provision (credit) 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


Nine Months Ended September 30, 2023
(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Allowance for credit losses:
Beginning balance	$	6,039	$	27,287	$	11,154	$	1,358	$	96	$	45,934
Impact of adopting ASU 2016-13	2		16		46		0		0		64
Charge-offs	0		0		(2)		(546)		0		(548)
Recoveries	67		1,238		182		192		0		1,679
Provision (credit) for credit loss expense	344		794		526		556		(13)		2,207
Ending Balance	$	6,452	$	29,335	$	11,906	$	1,560	$	83	$	49,336


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
Provision (credit) for credit loss expense	423		866		(11)		(153)		22		1,147
Ending Balance	$	6,524	$	26,539	$	10,443	$	1,180	$	86	$	44,772

The following table details activity in the liabilities for off-balance sheet credit exposures for the three and nine months ended September 30, 2023 and 2022:


Three Months Ended September 30,
(In thousands)	2023		2022
Liabilities for off-balance sheet credit exposures at beginning of period	$	2,985	$	2,796
(Credit) provision for credit loss expense related to off-balance sheet credit exposures	182		(45)
Liabilities for off-balance sheet credit exposures at end of period	$	3,167	$	2,751


Nine Months Ended September 30,
(In thousands)	2023		2022
Liabilities for off-balance sheet credit exposures at beginning of period	$	2,796	$	2,506

Provision for credit loss expense related to off-balance sheet credit exposures	371		245
Liabilities for off-balance sheet credit exposures at end of period	$	3,167	$	2,751

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, 2023
Commercial and Industrial	$	2,494	$	0	$	0	$	2,494	$	0
Commercial Real Estate	9,362		0		0		9,362		1,082


Total	$	11,856	$	0	$	0	$	11,856	$	1,082


(In thousands)	Real Estate		Business Assets		Other		Total		ACL Allocation
December 31, 2022
Commercial and Industrial	$	642	$	28	$	0	$	670	$	0
Commercial Real Estate	13,209		0		78		13,287		0
Commercial Real Estate - Agriculture	1,515		0		0		1,515		0
Residential Real Estate	188		0		0		188		3
Total	$	15,554	$	28	$	78	$	15,660	$	3

The Company adopted ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2022-02") effective January 1, 2023. ASU 2022-02 eliminates the guidance on troubled debt restructurings ("TDRs") and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases, which has been incorporated in the credit quality table below.

During the three and nine months ended September 30, 2023, loans that were modified to borrowers experiencing financial difficulty were immaterial. There were no new TDRs reported in the three and nine months ended September 30, 2022.

The following table presents credit quality indicators by total loans on an amortized cost basis by origination year as of September 30, 2023 and December 31, 2022:


September 30, 2023
(In thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total Loans
Commercial and Industrial - Other:
Internal risk grade:
Pass	$	83,753	$	97,245	$	70,435	$	29,914	$	36,570	$	149,820	$	212,932	$	5,036	$	685,705
Special Mention	0		46		104		395		96		1,521		638		0		2,800
Substandard	0		0		86		360		24		798		5,672		0		6,940
Total Commercial and Industrial - Other	$	83,753	$	97,291	$	70,625	$	30,669	$	36,690	$	152,139	$	219,242	$	5,036	$	695,445
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Commercial and Industrial - PPP:
Pass	$	0	$	0	$	323	$	165	$	0	$	0	$	0	$	0	$	488
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	$	0	$	323	$	165	$	0	$	0	$	0	$	0	$	488
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Commercial and Industrial - Agriculture:
Pass	$	15,612	$	12,772	$	3,037	$	3,569	$	3,415	$	8,501	$	29,767	$	657	$	77,330
Special Mention	0		0		268		0		0		0		49		0		317
Substandard	0		0		0		60		0		10		3		0		73
Total Commercial and Industrial - Agriculture	$	15,612	$	12,772	$	3,305	$	3,629	$	3,415	$	8,511	$	29,819	$	657	$	77,720
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Commercial Real Estate
Pass	$	134,025	$	320,115	$	369,981	$	309,691	$	276,956	$	949,655	$	17,618	$	17,979	$	2,396,020
Special Mention	0		636		2,027		3,720		11,062		43,986		0		0		61,431
Substandard	0		15,300		107		0		2,529		30,343		1,434		0		49,713
Total Commercial Real Estate	$	134,025	$	336,051	$	372,115	313,411		290,547		1,023,984		$	19,052	$	17,979	$	2,507,164
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Commercial Real Estate - Agriculture:
Pass	$	9,083	$	38,097	$	23,213	$	21,453	$	24,133	$	95,410	$	2,413	$	2,676	$	216,478
Special Mention	0		0		0		0		384		1,061		0		0		1,445
Substandard	0		0		0		0		174		47		0		0		221
Total Commercial Real Estate - Agriculture	$	9,083	$	38,097	$	23,213	$	21,453	$	24,691	$	96,518	$	2,413	$	2,676	$	218,144
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0


(In thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total Loans

Commercial Real Estate - Construction
Pass	$	0	$	2,821	$	9,731	$	2,524	$	468	$	1,129	$	250,483	$	3,805	$	270,961
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	$	0	$	2,821	$	9,731	$	2,524	$	468	$	1,129	$	250,483	$	3,805	$	270,961
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Residential - Home Equity
Performing	$	1,729	$	2,164	$	939	$	557	$	864	$	8,640	$	163,758	$	5,624	$	184,275
Nonperforming	0		0		0		0		0		331		2,781		0		3,112
Total Residential - Home Equity	$	1,729	$	2,164	$	939	$	557	$	864	$	8,971	$	166,539	$	5,624	$	187,387
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	2	$	0	$	0	$	2
Residential - Mortgages
Performing	$	99,637	$	188,901	$	260,395	$	225,960	$	111,379	$	468,208	$	0	$	0	$	1,354,480
Nonperforming	0		514		330		1,180		896		10,892		0		0		13,812
Total Residential - Mortgages	$	99,637	$	189,415	$	260,725	$	227,140	$	112,275	$	479,100	$	0	$	0	$	1,368,292
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Consumer - Direct
Performing	$	47,087	$	14,091	$	12,163	$	5,884	$	4,382	$	10,589	$	2,676	$	0	$	96,872
Nonperforming	10		9		11		4		115		133		11		0		293
Total Consumer - Direct	$	47,097	$	14,100	$	12,174	$	5,888	$	4,497	$	10,722	$	2,687	$	0	$	97,165
Current-period gross writeoffs	$	406	$	8	$	0	$	17	$	38	$	14	$	0	$	0	$	483
Consumer - Indirect
Performing	$	0	$	0	$	112	$	82	$	522	$	307	$	0	$	0	$	1,023
Nonperforming	0		0		0		0		55		12		0		0		67
Total Consumer - Indirect	$	0	$	0	$	112	$	82	$	577	$	319	$	0	$	0	$	1,090
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	49	$	14	$	0	$	0	$	63


December 31, 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:
Internal risk grade:
Pass	$	124,190	$	79,861	$	38,158	$	41,391	$	33,238	$	156,038	$	215,890	$	6,466	$	695,232
Special Mention	0		127		421		285		271		1,380		501		0		2,985
Substandard	0		111		442		35		733		503		5,659		0		7,483
Total Commercial and Industrial - Other	$	124,190	$	80,099	$	39,021	$	41,711	$	34,242	$	157,921	$	222,050	$	6,466	$	705,700
Commercial and Industrial - Agriculture:
Pass	$	16,694	$	4,120	$	4,944	$	4,186	$	7,734	$	4,883	$	42,097	$	215	$	84,873
Special Mention	0		58		0		0		0		0		50		0		108
Substandard	0		0		71		0		0		16		5		0		92
Total Commercial and Industrial - Agriculture	$	16,694	$	4,178	$	5,015	$	4,186	$	7,734	$	4,899	$	42,152	$	215	$	85,073
Commercial and Industrial - PPP:
Pass	$	0	$	416	$	340	$	0	$	0	$	0	$	0	$	0	$	756
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	$	416	$	340	$	0	$	0	$	0	$	0	$	0	$	756
Commercial Real Estate
Pass	$	342,311	$	367,104	$	311,607	$	279,587	$	203,016	$	812,563	$	10,906	$	24,503	$	2,351,597
Special Mention	643		3,406		1,688		11,462		2,555		25,361		0		0		45,115
Substandard	78		110		0		3,394		1,692		35,221		132		0		40,627
Total Commercial Real Estate	$	343,032	$	370,620	$	313,295	$	294,443	$	207,263	$	873,145	$	11,038	$	24,503	$	2,437,339
Commercial Real Estate - Agriculture:
Pass	$	33,241	$	24,125	$	22,831	$	25,576	$	37,835	$	65,112	$	3,131	$	1,235	$	213,086
Special Mention	0		0		0		401		0		1,142		0		0		1,543
Substandard	0		0		0		186		38		110		0		0		334
Total Commercial Real Estate - Agriculture	$	33,241	$	24,125	$	22,831	$	26,163	$	37,873	$	66,364	$	3,131	$	1,235	$	214,963
Commercial Real Estate - Construction
Pass	$	23,105	$	75,245	$	27,584	$	14,842	$	9,083	$	7,268	$	42,701	$	1,288	$	201,116
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	$	23,105	$	75,245	$	27,584	$	14,842	$	9,083	$	7,268	$	42,701	$	1,288	$	201,116

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


December 31, 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	$	3,030	$	1,062	$	637	$	992	$	792	$	3,183	$	175,451	$	1,085	$	186,232
Nonperforming	0		0		0		14		0		25		2,352		0		2,391
Total Residential - Home Equity	$	3,030	$	1,062	$	637	$	1,006	$	792	$	3,208	$	177,803	$	1,085	$	188,623
Residential - Mortgages
Performing	$	187,129	$	272,235	$	239,584	$	117,391	$	66,605	$	452,221	$	0	$	0	$	1,335,165
Nonperforming	218		335		628		682		1,552		7,738		0		0		11,153
Total Residential - Mortgages	$	187,347	$	272,570	$	240,212	$	118,073	$	68,157	$	459,959	$	0	$	0	$	1,346,318
Consumer - Direct
Performing	$	31,243	$	13,999	$	7,372	$	6,138	$	4,386	$	8,029	$	4,070	$	0	$	75,237
Nonperforming	0		0		3		93		76		0		3		0		175
Total Consumer - Direct	$	31,243	$	13,999	$	7,375	$	6,231	$	4,462	$	8,029	$	4,073	$	0	$	75,412
Consumer - Indirect
Performing	$	0	$	156	$	146	$	1,092	$	635	$	101	$	0	$	0	$	2,130
Nonperforming	0		0		0		76		10		8		0		0		94
Total Consumer - Indirect	$	0	$	156	$	146	$	1,168	$	645	$	109	$	0	$	0	$	2,224