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Allowance for Credit Losses

6 Months Ended

Jun. 30, 2020

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 give 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 and forecasts 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.

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 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. The remaining discount on the PCD assets will be accreted into interest income on a level-yield method over the life of the loans.

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, 2020, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance.

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 for the three and six months ended June 30, 2020 and 2019. As previously discussed, the Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. 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, 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


Three Months Ended June 30, 2019
(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Allowance for credit losses:
Beginning balance	$	11,523	$	21,070	$	6,462	$	1,273	$	0	$	40,328
Charge-offs	(103)		(55)		(26)		(201)		0		(385)
Recoveries	23		98		71		54		0		246
Provision (credit) for credit loss expense	100		(108)		390		219		0		601
Ending Balance	$	11,543	$	21,005	$	6,897	$	1,345	$	0	$	40,790


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


Six Months Ended June 30, 2019
(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Allowance for credit losses:
Beginning balance	$	11,272	$	23,483	$	7,345	$	1,310	$	0	$	43,410

Charge-offs	(483)		(3,398)		(44)		(381)		0		(4,306)
Recoveries	82		105		304		149		0		640
Provision (credit) for credit loss expense	672		815		(708)		267		0		1,046
Ending Balance	$	11,543	$	21,005	$	6,897	$	1,345	$	0	$	40,790

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, 2020
Commercial and Industrial	$	33	$	520	$	68	$	621	$	136
Commercial Real Estate	8,157		0		0		8,157		215
Commercial Real Estate - Agriculture	1,559		0		0		1,559		0
Residential - Mortgages	0		0		0		0		0
Total	$	9,749	$	520	$	68	$	10,337	$	351

The following tables present information pertaining to the allocation of the allowance for credit losses as of December 31, 2019, as determined in accordance with ASC 310, prior to the adoption of ASU 2016-13:


(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Allowance for originated loans and leases
December 31, 2019
Individually evaluated for impairment	$	245	$	662	$	0	$	0	$	0	$	907
Collectively evaluated for impairment	10,296		20,895		6,360		1,356		0		38,907
Ending balance	$	10,541	$	21,557	$	6,360	$	1,356	$	0	$	39,814


(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Allowance for acquired loans
December 31, 2019
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment	0		51		21		6		0		78
Ending balance	$	0	$	51	$	21	$	6	$	0	$	78

The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology as of December 31, 2019 was as follows:


(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Originated loans and leases
December 31, 2019
Individually evaluated for impairment	$	2,110	$	13,496	$	3,779	$	0	$	0	$	19,385
Collectively evaluated for impairment	966,875		2,283,152		1,340,687		73,625		17,322		4,681,661
Total	$	968,985	$	2,296,648	$	1,344,466	$	73,625	$	17,322	$	4,701,046


(In thousands)	Commercial & Industrial		Commercial Real Estate		Residential Real Estate		Consumer and Other		Finance Leases		Total
Acquired loans
December 31, 2019
Individually evaluated for impairment	$	2	$	714	$	2,114	$	0	$	0	$	2,830
Loans acquired with deteriorated credit quality	173		5,674		3,302		0		0		9,149
Collectively evaluated for impairment	38,901		140,529		27,955		785		0		208,170
Total	$	39,076	$	146,917	$	33,371	$	785	$	0	$	220,149

Prior to the adoption of ASC 326, a loan was considered impaired when, based on current information and events, it was probable that we would be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans consisted of non-homogenous nonaccrual loans, and all loans restructured in a troubled debt restructuring (TDR). Specific reserves on individually identified impaired loans that were not collateral dependent were measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that were collateral dependent, impairment was measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts were generally charged off. The majority of impaired loans were collateral dependent impaired loans that had limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans, and previous charge-offs. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis.

Impaired loans at December 31, 2019 were as follows:


	December 31, 2019
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
Originated loans and leases with no related allowance

Commercial & industrial
Commercial and industrial other	$	1,865	$	1,965	$	0
Commercial real estate
Commercial real estate other	10,205		11,017		0
Residential real estate
Home equity	3,779		3,992		0
Subtotal	$	15,849	$	16,974	$	0

Originated loans and leases with related allowance

Commercial & industrial
Commercial and industrial other	245		245		245
Commercial real estate
Commercial real estate other	3,291		3,291		662
Subtotal	$	3,536	$	3,536	$	907
Total	$	19,385	$	20,510	$	907


	December 31, 2019
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
Acquired loans with no related allowance

Commercial & industrial
Commercial and industrial other	$	2	$	2	$	0
Commercial real estate

Commercial real estate other	714		714		0
Residential real estate
Home equity	2,114		2,217		0
Total	$	2,830	$	2,933	$	0

The following table presents average impaired loans, as determined in accordance with ASC 310, prior to the adoption of ASU 2016-13, and interest recognized on such loans, for the three months ended June 30, 2019:


	Three Months Ended June 30, 2019
(In thousands)	Average Recorded Investment		Interest Income Recognized
Originated loans and leases with no related allowance

Commercial & industrial
Commercial and industrial other	$	1,331	$	0
Commercial real estate
Commercial real estate other	3,718		0
Residential real estate
Home equity	4,009		0
Subtotal	$	9,058	$	0

Originated loans and leases with related allowance

Commercial & industrial
Commercial and industrial other	693		0
Commercial real estate
Commercial real estate other	1,579		0
Subtotal	$	2,272	$	0
Total	$	11,330	$	0


	Three Months Ended June 30, 2019
(In thousands)	Average Recorded Investment		Interest Income Recognized
Acquired loans and leases with no related allowance

Commercial & industrial
Commercial and industrial other	$	12	$	0
Commercial real estate
Commercial real estate other	851		0
Residential real estate
Home equity	2,557		0











Total	$	3,420	$	0

The average recorded investment and interest income recognized on impaired loans for the six months ended June 30, 2020 and 2019 was as follows:


	Six Months Ended June 30, 2019
(In thousands)	Average Recorded Investment		Interest Income Recognized
Originated loans and leases with no related allowance

Commercial & industrial
Commercial and industrial other	$	2,352	$	0
Commercial real estate
Commercial real estate other	5,400		0
Residential real estate
Home equity	3,994		0
Subtotal	$	11,746	$	0

Originated loans and leases with related allowance

Commercial & industrial
Commercial and industrial other	487		0
Commercial real estate
Commercial real estate other	706		0
Subtotal	$	1,193	$	0
Total	$	12,939	$	0


	Six Months Ended June 30, 2019
(In thousands)	Average Recorded Investment		Interest Income Recognized
Acquired loans and leases with no related allowance

Commercial & industrial
Commercial and industrial other	$	35	$	0
Commercial real estate

Commercial real estate other	896		0
Residential real estate
Home equity	2,591		0







Total	$	3,522	$	0

Loans are considered modified in a 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 troubled debt restructuring during the periods indicated. There were no modifications on TDRs or defaulted TDRs in the second quarter of 2020.


	Three Months Ended
June 30, 2019						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 and Industrial
Commercial and industrial other¹	1	595		595		0	0


Total	1	$	595	$	595	0	$	0

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

² TDRs that defaulted during the three months ended June 30, 2019 that were restructured in the prior twelve months.


	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 & industrial
Commercial and industrial other¹	0	$	0	$	0	0	$	0
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.


	Six Months Ended
June 30, 2019						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 & industrial
Commercial and industrial other	1	595		595		0	0


Residential real estate
Home equity¹	1	$	168	$	168	0	$	0
Total	2	$	763	$	763	0	$	0

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

² TDRs that defaulted during the six months ended June 30, 2019 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 as of June 30, 2020.


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

Commercial & Industrial - Other:
Pass	$	52,554	$	82,412	$	67,418	$	73,935	$	42,652	$	205,483	$	308,949	$	402	$	833,805
Special Mention	0		259		254		1,148		2,806		0		930		0		5,397
Substandard	25		106		1,229		276		243		694		3,016		0		5,589
Total Commercial & Industrial - Other	$	52,579	$	82,777	$	68,901	$	75,359	$	45,701	$	206,176	$	312,895	$	402	$	844,791

Commercial and Industrial - PPP:
Pass	$	465,627	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	465,627
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	$	465,627	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	465,627


Commercial and Industrial - Agriculture:
Pass	$	7,306	$	10,485	$	11,254	$	6,487	$	4,627	$	2,632	$	43,111	$	0	$	85,902
Special Mention	0		79		119		58		0		0		388		0		644
Substandard	100		100		0		1,008		0		0		5,994		0		7,202
Total Commercial and Industrial - Agriculture	$	7,406	$	10,664	$	11,373	$	7,553	$	4,627	$	2,632	$	49,493	$	0	$	93,748

Commercial Real Estate
Pass	$	143,733	$	246,737	$	233,379	$	261,009	$	338,157	$	215,469	$	655,061	$	1,975	$	2,095,520
Special Mention	0		0		6,836		2,400		11,251		587		8,986		0		30,060
Substandard	0		1,700		761		3,612		496		2,166		20,136		0		28,871
Total Commercial Real Estate	$	143,733	$	248,437	$	240,976	$	267,021	$	349,904	$	218,222	$	684,183	$	1,975	$	2,154,451

Commercial Real Estate - Agriculture:
Pass	$	9,186	$	32,279	$	42,572	$	21,835	$	17,537	$	6,374	$	51,488	$	442	$	181,713
Special Mention	1,820		0		2,408		119		1,250		0		350		0		5,947
Substandard	0		0		556		3,165		722		0		1,607		0		6,050
Total Commercial Real Estate - Agriculture	$	11,006	$	32,279	$	45,536	$	25,119	$	19,509	$	6,374	$	53,445	$	442	$	193,710

Commercial Real Estate - Construction
Pass	$	7,653	$	19,325	$	9,494	$	2,789	$	2,099	$	3,131	$	145,422	$	243	$	190,156
Special Mention	0		0		0		0		0		0		2,693		0		2,693
Substandard	0		0		0		0		0		0		334		0		334
Total Commercial Real Estate - Construction	$	7,653	$	19,325	$	9,494	$	2,789	$	2,099	$	3,131	$	148,449	$	243	$	193,183

The following table presents credit quality indicators by total loans on an amortized cost basis by origination year as of June 30, 2020, continued.


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

Residential - Home Equity
Performing	$	7,598	$	27,843	$	22,998	$	24,222	$	19,761	$	19,765	$	83,857	$	822	$	206,866
Nonperforming	0		19		67		0		0		605		1,588		0		2,279
Total Residential - Home Equity	$	7,598	$	27,862	$	23,065	$	24,222	$	19,761	$	20,370	$	85,445	$	822	$	209,145

Residential - Mortgages
Performing	$	137,037	$	202,916	$	137,996	$	177,609	$	201,718	$	55,129	$	276,952	$	204	$	1,189,561
Nonperforming	0		265		406		371		1,126		1,369		5,739		0		9,276
Total Residential - Mortgages	$	137,037	$	203,181	$	138,402	$	177,980	$	202,844	$	56,498	$	282,691	$	204	$	1,198,837

Consumer - Direct
Performing	$	7,891	$	15,592	$	9,977	$	8,656	$	4,589	$	1,205	$	14,232	$	0	$	62,142
Nonperforming	0		61		133		4		0		0		5		$	0	203
Total Consumer - Direct	$	7,891	$	15,653	$	10,110	$	8,660	$	4,589	$	1,205	$	14,237	$	0	$	62,345

Consumer - Indirect
Performing	$	862	$	2,676	$	4,358	$	1,694	$	683	$	121	$	160	$	0	$	10,554
Nonperforming	0		83		45		10		34		0		22		0		194
Total Consumer Indirect	$	862	$	2,759	$	4,403	$	1,704	$	717	$	121	$	182	$	0	$	10,748

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, 2019.


December 31, 2019
(In thousands)	Commercial & Industrial Other		Commercial & Industrial Agriculture		Commercial Real Estate Other		Commercial Real Estate Agriculture		Commercial Real Estate Construction		Total
Originated Loans and Leases
Internal risk grade:
Pass	$	851,517	$	89,892	$	1,857,142	$	166,888	$	212,302	$	3,177,741
Special Mention	8,306		1,698		16,623		3,173		0		29,800
Substandard	3,376		14,196		25,880		14,640		0		58,092
Total	$	863,199	$	105,786	$	1,899,645	$	184,701	$	212,302	$	3,265,633


December 31, 2019
(In thousands)	Commercial & Industrial Other		Commercial & Industrial Agriculture		Commercial Real Estate Other		Commercial Real Estate Agriculture		Commercial Real Estate Construction		Total
Acquired Loans and Leases
Internal risk grade:
Pass	$	38,879	$	0	$	143,175	$	197	$	1,335	$	183,586
Special Mention	0		0		0		0		0		0
Substandard	197		0		2,210		0		0		2,407
Total	$	39,076	$	0	$	145,385	$	197	$	1,335	$	185,993

The following tables present credit quality indicators by class of residential real estate loans and by class of consumer loans. Nonperforming loans include nonaccrual, impaired, and loans 90 days past due and accruing interest. All other loans are considered performing as of December 31, 2019. For purposes of this footnote, acquired loans that were recorded at fair value at the acquisition date and are 90 days or greater past due are considered performing.


December 31, 2019
(In thousands)	Residential Home Equity		Residential Mortgages		Consumer Indirect		Consumer Other		Total
Originated Loans and Leases
Performing	$	201,970	$	1,133,237	$	12,847	$	60,503	$	1,408,557
Nonperforming	1,924		7,335		117		158		9,534
Total	$	203,894	$	1,140,572	$	12,964	$	60,661	$	1,418,091


December 31, 2019
(In thousands)	Residential Home Equity		Residential Mortgages		Consumer Indirect		Consumer Other		Total
Acquired Loans and Leases
Performing	$	14,479	$	17,269	$	0	$	785	$	32,533
Nonperforming	872		751		0		0		1,623
Total	$	15,351	$	18,020	$	0	$	785	$	34,156