Allowance for Credit Losses

12 Months Ended

Dec. 31, 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 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 rates 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.

The Company adopted ASU 2016-13 as of January 1, 2020 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.

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 December 31, 2023 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 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.

Changes in the allowance for credit losses for the years ended December 31, 2023, 2022 and 2021 are summarized as follows:

Allowance for Credit Losses - Loans and Leases


(In thousands)	2023		2022		2021
Total allowance at beginning of year	$	45,934	$	42,843	$	51,669
Impact of adopting ASU 2022-02	64		0		0
Provision (credit) for credit loss expense	4,865		2,499		(2,805)
Recoveries on loans and leases	1,820		1,798		1,725
Charge-offs on loans and leases	(1,099)		(1,206)		(7,746)
Total allowance at end of year	$	51,584	$	45,934	$	42,843

Allowance for Credit Losses - Off-Balance Sheet Credit Exposures


(In thousands)	2023		2022		2021
Liabilities for off-balance sheet credit exposures at beginning of period	$	2,796	$	2,506	$	1,920

(Credit) provision for credit loss expense related to off-balance sheet credit exposures	(526)		290		586
Liabilities for off-balance sheet credit exposures at end of period	$	2,270	$	2,796	$	2,506

The following tables detail activity in the allowance for credit losses for loans for the years ended December 31, 2023 and 2022. The allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


December 31, 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	(34)		0		(20)		(1,045)		0		(1,099)
Recoveries	87		1,292		186		255		0		1,820
Provision (credit) for credit loss expense	573		2,986		334		989		(17)		4,865
Ending Balance	$	6,667	$	31,581	$	11,700	$	1,557	$	79	$	51,584


December 31, 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	(559)		(50)		(53)		(544)		0		(1,206)
Recoveries	195		951		346		306		0		1,798
Provision for credit loss expense	68		1,573		722		104		32		2,499
Ending Balance	$	6,039	$	27,287	$	11,154	$	1,358	$	96	$	45,934

The following tables 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 as of December 31, 2023 and 2022:


December 31, 2023
(In thousands)	Real Estate		Business Assets		Other		Total		ACL Allocation
Commercial and Industrial	$	2,035	$	0	$	0	$	2,035	$	0
Commercial Real Estate	42,333		0		0		42,333		1,082

Total Loans and Leases	$	44,368	$	0	$	0	$	44,368	$	1,082


December 31, 2022
(In thousands)	Real Estate		Business Assets		Other		Total		ACL Allocation
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 Loans and Leases	$	15,554	$	28	$	78	$	15,660	$	3

Loan Modifications to Borrowers Experiencing Financial Difficulty

The Company adopted ASU 2022-02 effective January 1, 2023. This standard eliminated the previous trouble debt restructuring accounting model and replaced it with guidance and disclosure requirements for identifying modifications to loans to borrowers experiencing financial difficulty. Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.

The following table shows the amortized cost basis at the year ended December 31, 2023 of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted:


(In thousands)	Term Extension		Interest Rate Reduction		Payment Delay and Term Extension		Term Extension and Interest Rate Reduction		Payment Delay		Total		% of Total Class of Loans and Leases





Commercial Real Estate


Commercial Real Estate Other	$	0	$	3,114	$	0	$	0	$	0	$	3,114	0.12	%
Total Commercial Real Estate	0		3,114		0		0		0		3,114		0.10	%
Residential

Mortgages	0		0		0		0		402		402		0.03	%
Total Residential	0		0		0		0		402		402		0.03	%
Consumer

Consumer and Other	21		0		0		0		0		21		0.02	%
Total Consumer	21		0		0		0		0		21		0.02	%
Total Loans and Leases	$	21	$	3,114	$	0	$	0	$	402	$	3,537	0.06	%

There were no loan modifications made to borrowers experiencing financial difficulty that defaulted during the year ended December 31, 2023.

The following table shows the aging analysis of loan modifications made to borrowers experiencing financial difficulty as of December 31, 2023:


December 31, 2023	Payment Status (Amorized Cost Basis)
(In thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Non-Accrual		Total




Commercial Real Estate


Commercial real estate other	$	3,114	$	0	$	0	$	0	$	0	$	3,114
Total Commercial Real Estate	3,114		0		0		0		0		3,114
Residential Real Estate

Mortgages	158		0		0		0		244		402
Total Residential Real Estate	158		0		0		0		244		402
Consumer and Other

Consumer and other	0		0		0		0		21		21
Total Consumer and Other	0		0		0		0		21		21
Total	$	3,272	$	0	$	0	$	0	$	265	$	3,537

The following tables present loans by class modified in 2022 as troubled debt restructurings. Post-modification balances reflect paydowns and charge-offs at time of modification.


December 31, 2022	Year 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	7	$	714	$	714	1	$	87



Total	7	$	714	$	714	1	$	87

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

2TDRs that defaulted during the 12 months ended December 31, 2022, that had been restructured in the prior twelve months.

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


December 31, 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	$	130,993	$	92,335	$	68,030	$	28,237	$	33,618	$	141,758	$	212,349	$	5,063	$	712,383
Special Mention	915		196		222		242		79		1,287		682		0		3,623
Substandard	0		46		78		329		18		2,833		2,580		0		5,884
Total Commercial and Industrial - Other	$	131,908	$	92,577	$	68,330	$	28,808	$	33,715	$	145,878	$	215,611	$	5,063	$	721,890
Current-period gross writeoffs	$	6	$	0	$	0	$	0	$	0	$	29	$	0	$	0	$	35
Commercial and Industrial - PPP:
Pass	$	0	$	0	$	264	$	140	$	0	$	0	$	0	$	0	$	404
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	$	264	$	140	$	0	$	0	$	0	$	0	$	404
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Commercial and Industrial - Agriculture:
Pass	$	24,924	$	11,935	$	3,341	$	3,114	$	3,268	$	16,759	$	36,728	$	1,030	$	101,099
Special Mention	0		0		47		0		0		0		0		0		47
Substandard	0		0		0		56		0		8		1		0		65
Total Commercial and Industrial - Agriculture	$	24,924	$	11,935	$	3,388	$	3,170	$	3,268	$	16,767	$	36,729	$	1,030	$	101,211
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Commercial Real Estate
Pass	$	246,016	$	317,583	$	365,975	$	292,960	$	272,722	$	921,201	$	34,346	$	24,949	$	2,475,752
Special Mention	0		632		0		17,133		11,422		16,100		0		0		45,287
Substandard	0		15,300		2,128		0		2,059		45,709		1,356		0		66,552
Total Commercial Real Estate	$	246,016	$	333,515	$	368,103	310,093		286,203		983,010		$	35,702	$	24,949	$	2,587,591
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Commercial Real Estate - Agriculture:
Pass	$	14,668	$	37,256	$	22,813	$	21,001	$	23,794	$	93,890	$	257	$	6,364	$	220,043
Special Mention	0		0		0		0		378		1,033		0		0		1,411
Substandard	0		0		0		0		170		46		0		0		216
Total Commercial Real Estate - Agriculture	$	14,668	$	37,256	$	22,813	$	21,001	$	24,342	$	94,969	$	257	$	6,364	$	221,670
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	$	9,265	$	2,793	$	8,068	$	2,501	$	357	$	596	$	274,224	$	5,602	$	303,406
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	$	9,265	$	2,793	$	8,068	$	2,501	$	357	$	596	$	274,224	$	5,602	$	303,406
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Residential - Home Equity
Performing	$	2,378	$	2,237	$	890	$	529	$	832	$	8,178	$	164,205	$	5,837	$	185,086
Nonperforming	0		0		0		0		0		337		2,893		0		3,230
Total Residential - Home Equity	$	2,378	$	2,237	$	890	$	529	$	832	$	8,515	$	167,098	$	5,837	$	188,316
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	20	$	0	$	0	$	20
Residential - Mortgages
Performing	$	131,004	$	186,401	$	256,127	$	221,945	$	109,594	$	456,167	$	0	$	0	$	1,361,238
Nonperforming	0		393		329		986		883		9,446		0		0		12,037
Total Residential - Mortgages	$	131,004	$	186,794	$	256,456	$	222,931	$	110,477	$	465,613	$	0	$	0	$	1,373,275
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Consumer - Direct
Performing	$	50,295	$	13,327	$	11,316	$	5,157	$	4,037	$	9,857	$	2,723	$	0	$	96,712
Nonperforming	2		0		0		0		70		157		1		0		230
Total Consumer - Direct	$	50,297	$	13,327	$	11,316	$	5,157	$	4,107	$	10,014	$	2,724	$	0	$	96,942
Current-period gross writeoffs	$	801	$	29	$	16	$	21	$	83	$	28	$	0	$	0	$	978
Consumer - Indirect
Performing	$	0	$	0	$	97	$	68	$	402	$	234	$	0	$	0	$	801
Nonperforming	0		0		0		0		30		10		0		0		40
Total Consumer - Indirect	$	0	$	0	$	97	$	68	$	432	$	244	$	0	$	0	$	841
Current-period gross writeoffs	$	0	$	0	$	0	$	0	$	53	$	14	$	0	$	0	$	67

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, 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	$	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:


(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