LOANS AND ALLOWANCE

9 Months Ended

Sep. 30, 2023

Receivables [Abstract]

LOANS AND ALLOWANCE

LOANS AND ALLOWANCE

Loan Portfolio and Credit Quality

The Corporation's primary lending focus is small business and middle market commercial, commercial real estate, public finance and residential real estate, which results in portfolio diversification. The following tables show the composition of the loan portfolio and credit quality characteristics by collateral classification, excluding loans held for sale.  Loans held for sale at September 30, 2023 and December 31, 2022, were $31.0 million and $9.1 million, respectively.

The following table illustrates the composition of the Corporation’s loan portfolio by loan class as of the dates indicated:

	September 30, 2023		December 31, 2022
Commercial and industrial loans	$	3,490,953	$	3,437,126
Agricultural land, production and other loans to farmers	233,838		241,793
Real estate loans:
Construction	1,022,261		835,582
Commercial real estate, non-owner occupied	2,360,596		2,407,475
Commercial real estate, owner occupied	1,153,707		1,246,528
Residential	2,257,385		2,096,655
Home equity	609,352		630,632
Individuals' loans for household and other personal expenditures	176,523		175,211
Public finance and other commercial loans	966,807		932,892
Loans	$	12,271,422	$	12,003,894

Credit Quality

As part of the ongoing monitoring of the credit quality of the Corporation's loan portfolio, management tracks certain credit quality indicators including trends related to: (i) the level of criticized commercial loans, (ii) net charge-offs, (iii) nonperforming loans, (iv) covenant failures and (v) the general national and local economic conditions.

The Corporation utilizes a risk grading of pass, special mention, substandard, doubtful and loss to assess the overall credit quality of large commercial loans. All large commercial credit grades are reviewed at a minimum of once a year for pass grade loans. Loans with grades below pass are reviewed more frequently depending on the grade. A description of the general characteristics of these grades is as follows:

•Pass - Loans that are considered to be of acceptable credit quality.

•Special Mention - Loans which possess some credit deficiency or potential weakness, which deserves close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Corporation's credit position at some future date. Special mention assets are not adversely classified and do not expose the Corporation to sufficient risk to warrant adverse classification.

•Substandard - A substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well-defined weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

•Doubtful - Loans that have all of the weaknesses of those classified as Substandard. However, based on currently existing facts, conditions and values, these weaknesses make full collection of principal highly questionable and improbable.

•Loss – Loans that are considered uncollectible and of such little value that continuing to carry them as an asset is not warranted. Loans will be classified as Loss when it is neither practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The following tables summarize the risk grading of the Corporation’s loan portfolio by loan class and by year of origination for the years indicated. Consumer loans are not risk graded. For the purposes of this disclosure, the consumer loans are classified in the following manner: loans that are less than 30 days past due are Pass, loans 30-89 days past due are Special Mention and loans greater than 89 days past due are Substandard.  The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

	September 30, 2023
	Term Loans (amortized cost basis by origination year)												Revolving loans amortized		Revolving loans converted
	2023		2022		2021		2020		2019		Prior		cost basis		to term		Total
Commercial and industrial loans
Pass	$	901,876	$	548,276	$	296,471	$	95,426	$	53,498	$	49,094	$	1,374,146	$	50	$	3,318,837
Special Mention	9,450		11,955		6,428		5,470		114		897		28,202		—		62,516
Substandard	5,902		20,082		16,554		1,959		4,701		1,655		48,890		—		99,743
Doubtful	908		3,945		—		2,149		—		—		2,855		—		9,857
Total Commercial and industrial loans	918,136		584,258		319,453		105,004		58,313		51,646		1,454,093		50		3,490,953
Current period gross write-offs	13,901		508		400		5,588		76		239		—		—		20,712
Agricultural land, production and other loans to farmers
Pass	22,521		38,866		33,059		32,234		13,819		26,251		65,513		—		232,263
Special Mention	—		266		—		—		—		597		—		—		863
Substandard	34		156		—		458		—		64		—		—		712
Total Agricultural land, production and other loans to farmers	22,555		39,288		33,059		32,692		13,819		26,912		65,513		—		233,838
Current period gross write-offs	—		—		—		—		—		—		—		—		—
Real estate loans:
Construction
Pass	362,578		295,563		266,129		14,325		4,047		2,526		11,577		—		956,745
Special Mention	35,063		424		—		20,846		—		—		—		—		56,333
Substandard	13		3,882		5,288		—		—		—		—		—		9,183
Total Construction	397,654		299,869		271,417		35,171		4,047		2,526		11,577		—		1,022,261
Current period gross write-offs	—		—		—		—		—		—		—		—		—
Commercial real estate, non-owner occupied
Pass	214,579		529,237		533,207		471,278		142,636		225,787		31,615		—		2,148,339
Special Mention	64,871		22,956		7,842		3,641		26,567		32,842		47		—		158,766
Substandard	18,666		9,807		92		22,216		—		2,339		247		—		53,367
Doubtful	—		124		—		—		—		—		—		—		124
Total Commercial real estate, non-owner occupied	298,116		562,124		541,141		497,135		169,203		260,968		31,909		—		2,360,596
Current period gross write-offs	—		2		—		—		—		—		—		—		2
Commercial real estate, owner occupied
Pass	119,212		207,077		270,151		269,190		101,546		87,685		27,327		—		1,082,188
Special Mention	5,178		13,603		9,437		6,053		2,831		5,110		334		—		42,546
Substandard	15,113		1,339		4,228		2,486		17		5,163		627		—		28,973
Total Commercial real estate, owner occupied	139,503		222,019		283,816		277,729		104,394		97,958		28,288		—		1,153,707
Current period gross write-offs	—		—		—		—		2		—		—		—		2
Residential
Pass	332,210		691,941		451,830		372,247		105,548		265,879		4,878		65		2,224,598
Special Mention	1,087		5,304		4,034		1,710		1,578		6,501		2,588		—		22,802
Substandard	357		3,338		2,234		974		528		2,523		31		—		9,985
Total Residential	333,654		700,583		458,098		374,931		107,654		274,903		7,497		65		2,257,385
Current period gross write-offs	—		42		135		3		—		63		—		—		243
Home equity
Pass	9,155		34,784		64,438		11,511		1,162		4,566		472,517		2,065		600,198
Special Mention	120		720		41		1,114		—		168		4,108		371		6,642
Substandard	63		—		599		—		—		93		1,374		383		2,512
Total Home Equity	9,338		35,504		65,078		12,625		1,162		4,827		477,999		2,819		609,352
Current period gross write-offs	—		160		182		149		193		1,422		—		—		2,106
Individuals' loans for household and other personal expenditures
Pass	32,590		52,860		31,275		8,070		2,735		6,572		40,907		597		175,606
Special Mention	29		388		250		34		11		11		193		1		917
Substandard	—		—		—		—		—		—		—		—		—
Total Individuals' loans for household and other personal expenditures	32,619		53,248		31,525		8,104		2,746		6,583		41,100		598		176,523
Current period gross write-offs	98		591		291		77		57		151		—		—		1,265
Public finance and other commercial loans
Pass	61,235		209,069		206,637		157,399		91,705		231,931		8,831		—		966,807
Total Public finance and other commercial loans	61,235		209,069		206,637		157,399		91,705		231,931		8,831		—		966,807
Loans	$	2,212,810	$	2,705,962	$	2,210,224	$	1,500,790	$	553,043	$	958,254	$	2,126,807	$	3,532	$	12,271,422
Total current period gross charge-offs	$	13,999	$	1,303	$	1,008	$	5,817	$	328	$	1,875	$	—	$	—	$	24,330

	December 31, 2022
	Term Loans (amortized cost basis by origination year)												Revolving loans amortized		Revolving loans converted
	2022		2021		2020		2019		2018		Prior		cost basis		to term		Total
Commercial and industrial loans
Pass	$	1,064,687	$	531,504	$	141,985	$	114,999	$	43,136	$	45,310	$	1,302,562	$	5,048	$	3,249,231
Special Mention	2,164		18,005		11,900		5,727		1,012		2,181		27,702		150		68,841
Substandard	27,512		26,571		5,531		10,606		4,674		567		43,450		143		119,054
Total Commercial and industrial loans	1,094,363		576,080		159,416		131,332		48,822		48,058		1,373,714		5,341		3,437,126
Agricultural land, production and other loans to farmers
Pass	44,446		36,299		35,791		15,296		3,752		28,910		73,402		—		237,896
Special Mention	286		784		—		—		281		632		—		—		1,983
Substandard	178		—		490		—		94		1,152		—		—		1,914
Total Agricultural land, production and other loans to farmers	44,910		37,083		36,281		15,296		4,127		30,694		73,402		—		241,793
Real estate loans:
Construction
Pass	366,414		301,986		117,541		11,428		857		3,224		17,167		—		818,617
Special Mention	16,922		—		—		—		—		—		—		—		16,922
Substandard	31		—		—		—		—		12		—		—		43
Total Construction	383,367		301,986		117,541		11,428		857		3,236		17,167		—		835,582
Commercial real estate, non-owner occupied
Pass	560,146		603,254		550,605		168,701		116,859		190,264		31,196		3,803		2,224,828
Special Mention	49,439		4,026		38,268		18,785		11,546		17,992		—		—		140,056
Substandard	21,123		8,128		8,026		—		4,442		872		—		—		42,591
Total Commercial real estate, non-owner occupied	630,708		615,408		596,899		187,486		132,847		209,128		31,196		3,803		2,407,475
Commercial real estate, owner occupied
Pass	260,725		316,665		330,441		114,015		63,816		81,286		33,123		3,378		1,203,449
Special Mention	7,744		6,125		2,245		3,481		1,210		2,984		1,328		—		25,117
Substandard	3,124		1,214		2,376		1,608		2,920		6,720		—		—		17,962
Total Commercial real estate, owner occupied	271,593		324,004		335,062		119,104		67,946		90,990		34,451		3,378		1,246,528
Residential
Pass	758,161		489,301		401,353		114,420		77,768		229,812		5,365		46		2,076,226
Special Mention	2,839		2,924		1,972		513		396		2,588		34		—		11,266
Substandard	1,399		1,824		1,811		805		1,468		1,741		60		55		9,163
Total Residential	762,399		494,049		405,136		115,738		79,632		234,141		5,459		101		2,096,655
Home equity
Pass	40,768		75,670		14,621		1,572		1,348		3,325		486,924		281		624,509
Special Mention	—		—		—		—		115		8		3,698		—		3,821
Substandard	—		79		—		—		65		60		2,098		—		2,302
Total Home Equity	40,768		75,749		14,621		1,572		1,528		3,393		492,720		281		630,632
Individuals' loans for household and other personal expenditures
Pass	67,883		43,639		13,025		5,389		5,830		3,775		35,091		—		174,632
Special Mention	178		134		77		33		28		17		16		—		483
Substandard	1		—		3		—		84		8		—		—		96
Total Individuals' loans for household and other personal expenditures	68,062		43,773		13,105		5,422		5,942		3,800		35,107		—		175,211
Public finance and other commercial loans
Pass	187,125		212,702		165,019		98,687		43,760		204,719		20,880		—		932,892
Total Public finance and other commercial loans	187,125		212,702		165,019		98,687		43,760		204,719		20,880		—		932,892
Loans	$	3,483,295	$	2,680,834	$	1,843,080	$	686,065	$	385,461	$	828,159	$	2,084,096	$	12,904	$	12,003,894

Total past due loans equaled $76.3 million as of September 30, 2023 representing a $25.3 million increase from $51.0 million at December 31, 2022. The 30-59 days past due loans decreased $3.2 million from December 31, 2022. The 60-89 days past due loans increased $12.7 million from December 31, 2022 as commercial and industrial, commercial real estate, owner occupied and residential segments increased $2.8 million, $1.2 million and $8.1 million, respectively. The 90 days or more past due loans increased $15.8 million from December 31, 2022 as commercial and industrial, commercial real estate, non-owner occupied and residential segments increased $6.9 million, $5.9 million and $3.1 million, respectively. The tables below show a past due aging of the Corporation’s loan portfolio, by loan class, as of the dates indicated:

	September 30, 2023
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total		Loans > 90 Days or More Past Due And Accruing
Commercial and industrial loans	$	3,474,368	$	4,005	$	3,224	$	9,356	$	3,490,953	$	12
Agricultural land, production and other loans to farmers	233,811		—		—		27		233,838		—
Real estate loans:
Construction	1,021,537		300		424		—		1,022,261		—
Commercial real estate, non-owner occupied	2,343,002		4,603		1,913		11,078		2,360,596		—
Commercial real estate, owner occupied	1,150,029		2,368		1,225		85		1,153,707		—
Residential	2,227,184		10,884		10,405		8,912		2,257,385		39
Home equity	602,829		2,878		1,325		2,320		609,352		38
Individuals' loans for household and other personal expenditures	175,605		773		145		—		176,523		—
Public finance and other commercial loans	966,774		33		—		—		966,807		—
Loans	$	12,195,139	$	25,844	$	18,661	$	31,778	$	12,271,422	$	89

	December 31, 2022
	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total		Loans > 90 Days or More Past Due And Accruing
Commercial and industrial loans	$	3,429,314	$	4,904	$	434	$	2,474	$	3,437,126	$	1,147
Agricultural land, production and other loans to farmers	241,739		—		—		54		241,793		—
Real estate loans:
Construction	832,716		2,436		418		12		835,582		—
Commercial real estate, non-owner occupied	2,395,495		5,946		881		5,153		2,407,475		264
Commercial real estate, owner occupied	1,241,714		4,495		—		319		1,246,528		—
Residential	2,079,959		8,607		2,278		5,811		2,096,655		—
Home equity	624,543		2,206		1,782		2,101		630,632		326
Individuals' loans for household and other personal expenditures	174,629		343		142		97		175,211		—
Public finance and other commercial loans	932,778		114		—		—		932,892		—
Loans	$	11,952,887	$	29,051	$	5,935	$	16,021	$	12,003,894	$	1,737

Loans are reclassified to a nonaccruing status when, in management’s judgment, the collateral value and financial condition of the borrower do not justify accruing interest. At the time the accrual is discontinued, all unpaid accrued interest is reversed against earnings. Interest income accrued in prior years, if any, is charged to the allowance for credit losses. Payments subsequently received on nonaccrual loans are applied to principal. A loan is returned to accrual status when principal and interest are no longer past due and collectability is probable, typically after a minimum of six consecutive months of performance.

The following table summarizes the Corporation’s nonaccrual loans by loan class as of the dates indicated:

	September 30, 2023				December 31, 2022
	Nonaccrual Loans		Nonaccrual Loans with no Allowance for Credit Losses		Nonaccrual Loans		Nonaccrual Loans with no Allowance for Credit Losses
Commercial and industrial loans	$	14,737	$	1,020	$	3,292	$	481
Agricultural land, production and other loans to farmers	61		—		54		—
Real estate loans:
Construction	724		—		12		—
Commercial real estate, non-owner occupied	11,575		11,293		19,374		280
Commercial real estate, owner occupied	3,125		2,314		3,550		2,784
Residential	20,244		—		13,685		702
Home equity	2,534		—		2,247		—
Individuals' loans for household and other personal expenditures	102		—		110		—
Loans	$	53,102	$	14,627	$	42,324	$	4,247

Interest income on nonaccrual loans is recognized only to the extent that cash payments are received in excess of principal due. There was no interest income recognized on nonaccrual loans for the three and nine months ended September 30, 2023 or 2022.

Determining fair value for collateral dependent loans requires obtaining a current independent appraisal of the collateral and applying a discount factor, which includes selling costs if applicable, to the value. The fair value of real estate is generally based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Fair value on other collateral such as business assets is typically ascertained by assessing, either singularly or some combination of, asset appraisals, accounts receivable aging reports, inventory listings and or customer financial statements. Both appraised values and values based on borrower’s financial information are discounted as considered appropriate based on age and quality of the information and current market conditions.

The tables below present the amortized cost basis of collateral dependent loans by loan class and their respective collateral type, which are individually evaluated to determine expected credit losses. The total collateral dependent loan balance decreased $9.5 million, primarily related to a $9.4 million decrease in commercial real estate, non-owner occupied for the nine months ended September 30, 2023. The total related allowance balance increased $3.4 million, primarily related to an increase of $6.2 million in commercial and industrial, offset by a $2.0 million decrease in commercial real estate, non-owner occupied for the nine months ended September 30, 2023.

	September 30, 2023
	Commercial Real Estate		Residential Real Estate		Other		Total		Allowance on Collateral Dependent Loans
Commercial and industrial loans	$	—	$	—	$	39,343	$	39,343	$	14,542
Real estate loans:
Construction	—		8		—		8		1
Commercial real estate, non-owner occupied	17,145		—		—		17,145		57
Commercial real estate, owner occupied	10,568		—		—		10,568		—
Residential	—		1,464		—		1,464		235
Home equity	—		227		—		227		31
Loans	$	27,713	$	1,699	$	39,343	$	68,755	$	14,866

	December 31, 2022
	Commercial Real Estate		Residential Real Estate		Other		Total		Allowance on Collateral Dependent Loans
Commercial and industrial loans	$	—	$	—	$	42,101	$	42,101	$	8,367
Real estate loans:
Construction	—		10		—		10		1
Commercial real estate, non-owner occupied	26,534		—		—		26,534		2,064
Commercial real estate, owner occupied	6,986		—		—		6,986		776
Residential	—		2,382		—		2,382		260
Home equity	—		289		—		289		44
Loans	$	33,520	$	2,681	$	42,101	$	78,302	$	11,512

In certain situations, the Corporation may modify the terms of a loan to a debtor experiencing financial difficulty. The modifications may include principal forgiveness, interest rate reductions, payment delays, term extensions or combinations of the above. The following tables present the amortized cost basis of loans at September 30, 2023 that were both experiencing financial difficulty and modified during the three and nine months ended September 30, 2023, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.

	Three Months Ended September 30, 2023
	Loan Modifications Made to Borrowers Experiencing Financial Difficulty
	Payment Delay		Term Extension		Combination Interest Rate Reduction & Term Extension		Combination Payment Delay & Term Extension		% of Total Class of Financing Receivable
Commercial and industrial loans	$	908	$	7,734	$	134	$	—	0.25	%
Real estate loans:
Commercial real estate, non-owner occupied	—		11,823		—		—		0.50	%
Commercial real estate, owner occupied	—		6,950		—		—		0.60	%
Home equity	—		63		—		—		0.01	%
Individuals' loans for household and other personal expenditures	—		—		—		1		—	%
Total	$	908	$	26,570	$	134	$	1

	Nine Months Ended September 30, 2023
	Loan Modifications Made to Borrowers Experiencing Financial Difficulty
	Payment Delay		Term Extension		Combination Interest Rate Reduction & Term Extension		Combination Payment Delay & Term Extension		% of Total Class of Financing Receivable
Commercial and industrial loans	$	908	$	14,822	$	239	$	—	0.46	%
Agricultural land, production and other loans to farmers	—		34		—		—		0.01	%
Real estate loans:
Construction	—		13		—		—		—	%
Commercial real estate, non-owner occupied	—		11,823		5,942		—		0.75	%
Commercial real estate, owner occupied	5,602		8,642		75		—		1.24	%
Residential	—		—		—		472		0.02	%
Home equity	—		63		—		—		0.01	%
Individuals' loans for household and other personal expenditures	—		—		—		1		—	%
Total	$	6,510	$	35,397	$	6,256	$	473

The following tables present the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three and nine months ended September 30, 2023.

	Three Months Ended September 30, 2023
	Financial Effect of Loan Modifications
	Payment Delay	Term Extension	Combination Interest Rate Reduction & Term Extension	Combination Payment Delay & Term Extension
Commercial and industrial loans	Provided payment deferrals with weighted average delayed amounts of $24,000.	Extended loans by a weighted average of 8 months	Reduced the weighted average contractual interest rate from 10.75% to 7.62%. Extended loans by a weighted average of 14 months.
Real estate loans:
Commercial real estate, non-owner occupied		Extended loans by a weighted average of 11 months.
Commercial real estate, owner occupied		Extended loans by a weighted average of 4 months.
Residential				Provided payment deferrals with weighted average delayed amounts of $300. Extended loans by a weighted average of 3 months.
Home equity		Extended loans by a weighted average of 5 months.

	Nine Months Ended September 30, 2023
	Financial Effect of Loan Modifications
	Payment Delay	Term Extension	Combination Interest Rate Reduction & Term Extension	Combination Payment Delay & Term Extension
Commercial and industrial loans	Provided payment deferrals with weighted average delayed amounts of $24,000	Extended loans by a weighted average of 8 months.	Reduced the weighted average contractual interest rate from 9.66% to 7.39%. Extended loans by a weighted average of 13 months.
Agricultural land, production and other loans to farmers		Extended loans by a weighted average of 60 months.
Real estate loans:
Construction		Extended loans by a weighted average of 24 months.
Commercial real estate, non-owner occupied		Extended loans by a weighted average of 10 months.	Reduced the weighted average contractual interest rate from 7.81% to 7.40%. Extended loans by a weighted average of 41 months.
Commercial real estate, owner occupied	Provided payment deferrals with weighted average delayed amounts of $4.5 million.	Extended loans by a weighted average of 4 months.	Reduced the weighted average contractual interest rate from 10.25% to 6.61%. Extended loans by a weighted average of 114 months.
Residential				Provided payment deferrals with weighted average delayed amounts $3,400. Extended loans by a weighted average of 3 months.
Home equity		Extended loans by a weighted average of 5 months.		Provided payment deferrals with weighted average delayed amounts $300. Extended loans by a weighted average of 3 months.

The following tables present the amortized cost basis and payment status of loans that were modified during the three and nine months ended September 30, 2023 due to the borrowers experiencing financial difficulty.

	Three Months Ended September 30, 2023
	Payment Status
	Current		30-89 Days Past Due
Commercial and industrial loans	$	8,776	$	—
Real estate loans:
Commercial real estate, non-owner occupied	11,823		—
Commercial real estate, owner occupied	6,950		—
Home equity	63		—
Individuals' loans for household and other personal expenditures	—		1
Total	$	27,612	$	1

	Nine Months Ended September 30, 2023
	Payment Status
	Current		30-89 Days Past Due
Commercial and industrial loans	$	15,863	$	106
Agricultural land, production and other loans to farmers	34		—
Real estate loans:
Construction	13		—
Commercial real estate, non-owner occupied	17,765		—
Commercial real estate, owner occupied	13,157		1,162
Residential	472		—
Home equity	63		—
Individuals' loans for household and other personal expenditures	—		1
Total	$	47,367	$	1,269

Upon the Corporation's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

Purchased Credit Deteriorated Loans

The Corporation acquired Level One on April 1, 2022 and performed an evaluation of the loan portfolio in which there were loans that, at acquisition, had more than an insignificant amount of credit quality deterioration. The carrying amount of those loans is shown in the table below:

	Level One
Purchase price of loans at acquisition	$	41,347
CECL Day 1 PCD ACL	16,599
Par value of acquired loans at acquisition	$	57,946

Allowance for Credit Losses on Loans

The Allowance for Credit Losses on Loans ("ACL - Loans") is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on loans over the contractual term. The ACL - Loans is adjusted by the provision for credit losses, which is reported in earnings, and reduced by charge offs for loans, net of recoveries. Provision for credit losses on loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans. Loans are charged off against the allowance when the uncollectibility of the loan is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off.

The allowance represents the Corporation’s best estimate of current expected credit losses on loans using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. The current expected credit loss ("CECL") calculation is performed and evaluated quarterly and losses are estimated over the expected life of the loan. The level of the allowance for credit losses is believed to be adequate to absorb all expected future losses inherent in the loan portfolio at the measurement date.

In calculating the allowance for credit losses, the loan portfolio was pooled into ten loan segments with similar risk characteristics. Common characteristics include the type or purpose of the loan, underlying collateral and historical/expected credit loss patterns. In developing the loan segments, the Corporation analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors.

The expected credit losses are measured over the life of each loan segment utilizing the Probability of Default / Loss Given Default methodology combined with economic forecast models to estimate the current expected credit loss inherent in the loan portfolio. This approach is also leveraged to estimate the expected credit losses associated with unfunded loan commitments incorporating expected utilization rates.

The Corporation sub-segmented certain commercial portfolios by risk level and certain consumer portfolios by delinquency status where appropriate. The Corporation utilized a four-quarter reasonable and supportable economic forecast period followed by a six-quarter, straight-line reversion period to the historical macroeconomic mean for the remaining life of the loans. Econometric modeling was performed using historical default rates and a selection of economic forecast scenarios published by Moody’s to develop a range of estimated credit losses for which to determine the best credit loss estimate within. Macroeconomic factors utilized in the modeling process include the national unemployment rate, BBB US corporate index, CRE price index and the home price index.

The Corporation qualitatively adjusts model results for risk factors that are not inherently considered in the quantitative modeling process, but are nonetheless relevant in assessing the expected credit losses within the loan portfolio. These adjustments may increase or decrease the estimate of expected credit losses based upon the assessed level of risk for each qualitative factor. The various risks that may be considered in making qualitative adjustments include, among other things, the impact of (i) changes in the nature and volume of the loan portfolio, (ii) changes in the existence, growth and effect of any concentrations in credit, (iii) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (iv) changes in the quality of the credit review function, (v) changes in the experience, ability and depth of lending management and staff, and (vi) other environmental factors of a borrower such as regulatory, legal and technological considerations, as well as competition. At CECL adoption, the Corporation established certain qualitative factors that were expected to correlate to losses within the loan portfolio. During a scheduled review of qualitative factors in the third quarter of 2023, the Corporation determined there had been no evidence of correlation to losses for the one qualitative factor that included i) changes in experience, ability and depth of lending management and staff; ii) changes in lending policies and procedures; and iii) changes in the quality of the credit review function. The Corporation decided to refine this qualitative factor by separating it into three individual qualitative factors in order to improve our ability to assess risk for the three different factors and enhance our ability to correlate to losses. The Corporation’s evaluation resulted in an insignificant change to the ACL – Loans estimate.

In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within the loan segments. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific reserve allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. The fair value of collateral supporting collateral dependent loans is evaluated on a quarterly basis.

The risk characteristics of the Corporation’s portfolio segments are as follows:

Commercial

Commercial lending is primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the tangible assets being financed such as equipment or real estate or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee. Other loans may be unsecured, secured but under-collateralized or otherwise made on the basis of the enterprise value of an organization. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. The Corporation monitors commercial real estate loans based on collateral and risk grade criteria, as well as the levels of owner-occupied versus non-owner occupied loans.

Construction

Construction loans are underwritten utilizing a combination of tools and techniques including feasibility and market studies, independent appraisals and appraisal reviews, absorption and interest rate sensitivity analysis as well as the financial analysis of the developer and all guarantors. Construction loans are monitored by either in house or third party inspectors limiting advances to a percentage of costs or stabilized project value. These loans frequently involve the disbursement of significant funds with the repayment dependent upon the successful completion and, where necessary, the future stabilization of the project. The predominant inherent risk of this portfolio is associated with the borrower's ability to successfully complete a project on time, within budget and stabilize the projected as originally projected.

Consumer and Residential

With respect to residential loans that are secured by 1-4 family residences, which are typically owner occupied, the Corporation generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans, such as small installment loans and certain lines of credit, are unsecured. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers and can also be impacted by changes in property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

The allowance for credit losses decreased $15.4 million and $17.5 million, due to net charge-offs during the three and nine months ended September 30, 2023, respectively. There were two large commercial and industrial loan charge-offs of $13.7 million and $5.4 million in the third quarter of 2023. These charge-offs, along with related specific reserves, materially represent the entire credit risk on the loans that were idiosyncratic in nature and are not indicative of a larger portfolio credit issue. There was $5.0 million in provision for credit losses during the three and nine months ended September 30, 2023. The allowance for credit losses increased $427,000 and $31.3 million for the three and nine months ended September 30, 2022, respectively. The increase for the nine months ended September 30, 2022 was primarily due to $16.6 million of allowance for credit losses on PCD loans acquired in the Level One acquisition established through accounting adjustments on the acquisition date. In addition, $14.0 million was recorded to establish an allowance for credit losses on non-PCD loans acquired in the Level One acquisition. The following tables summarize changes in the allowance for credit losses by loan segment for the three and nine months ended September 30, 2023 and 2022:

	Three Months Ended September 30, 2023
	Commercial		Commercial Real Estate		Construction		Consumer & Residential		Total
Allowance for credit losses
Balances, June 30, 2023	$	108,373	$	39,157	$	30,073	$	43,544	$	221,147
Provision for credit losses	3,020		4,901		140		(3,061)		5,000
Recoveries on loans	179		—		—		367		546
Loans charged off	(19,833)		—		—		(1,078)		(20,911)
Balances, September 30, 2023	$	91,739	$	44,058	$	30,213	$	39,772	$	205,782

	Nine Months Ended September 30, 2023
	Commercial		Commercial Real Estate		Construction		Consumer & Residential		Total
Allowance for credit losses
Balances, December 31, 2022	$	102,216	$	46,839	$	28,955	$	45,267	$	223,277
Provision for credit losses	9,460		(2,833)		1,258		(2,885)		5,000
Recoveries on loans	775		56		—		1,004		1,835
Loans charged off	(20,712)		(4)		—		(3,614)		(24,330)
Balances, September 30, 2023	$	91,739	$	44,058	$	30,213	$	39,772	$	205,782

	Three Months Ended September 30, 2022
	Commercial		Commercial Real Estate		Construction		Consumer & Residential		Total
Allowance for credit losses
Balances, June 30, 2022	$	94,228	$	55,328	$	27,401	$	49,318	$	226,275
Provision for credit losses	10,142		(7,054)		186		(3,274)		—
Recoveries on loans	81		188		824		222		1,315
Loans charged off	(306)		(1)		—		(581)		(888)
Balances, September 30, 2022	$	104,145	$	48,461	$	28,411	$	45,685	$	226,702

	Nine Months Ended September 30, 2022
	Commercial		Commercial Real Estate		Construction		Consumer & Residential		Total
Allowance for credit losses
Balances, December 31, 2021	$	69,935	$	60,665	$	20,206	$	44,591	$	195,397
Provision for credit losses	18,518		(21,697)		5,862		(2,683)		—
CECL Day 1 non-PCD provision for credit losses	2,957		5,539		871		4,588		13,955
CECL Day 1 PCD ACL	12,970		2,981		648		—		16,599
Recoveries on loans	789		1,096		824		827		3,536
Loans charged off	(1,024)		(123)		—		(1,638)		(2,785)
Balances, September 30, 2022	$	104,145	$	48,461	$	28,411	$	45,685	$	226,702

Off-Balance Sheet Arrangements, Commitments And Contingencies

In the normal course of business, the Corporation has entered into off-balance sheet financial instruments which include commitments to extend credit and standby letters of credit. Commitments to extend credit are usually the result of lines of credit granted to existing borrowers under agreements that the total outstanding indebtedness will not exceed a specific amount during the term of the indebtedness. Typical borrowers are commercial customers that use lines of credit to supplement their treasury management functions, and thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing for their cash flows. Other typical lines of credit are related to home equity loans granted to customers. Commitments to extend credit generally have fixed expiration dates or other termination clauses that may require a fee.

Standby letters of credit are generally issued on behalf of an applicant (the Corporation’s customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. The standby letter of credit would permit the beneficiary to obtain payment from the Corporation under certain prescribed circumstances. Subsequently, the Corporation would seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.

The Corporation typically follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is typically evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate, marketable securities, accounts receivable, inventory, equipment and personal property.

The contractual amounts of these commitments are not reflected in the consolidated financial statements and only amounts drawn upon would be reflected in the future. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should the Corporation’s customers default on their resulting obligation to the Corporation, the maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those commitments.

Financial instruments with off-balance sheet risk were as follows:

	September 30, 2023		December 31, 2022
Amounts of commitments:
Loan commitments to extend credit	$	5,074,572	$	4,950,724
Standby letters of credit	$	39,812	$	40,784

The adoption of the CECL methodology for measuring credit losses on January 1, 2021 resulted in an accrual for off-balance sheet commitments of $20.5 million. The Level One acquisition was responsible for an additional $2.8 million of provision for credit losses associated with off-balance sheet commitments, resulting in a total allowance for credit losses on off-balance sheet commitments of $23.3 million. Reserves for unfunded commitments were reduced by $3.0 million for the three and nine months ended September 30, 2023 due to a decline in unfunded commitment balances, resulting in a decrease in the reserve to $20.3 million. This reserve level is deemed appropriate by the Corporation and is reported in Other Liabilities as of September 30, 2023 in the Consolidated Condensed Balance Sheets.

The table below reflects the total allowance for credit losses for the off-balance sheet commitment for the three and nine months ended September 30, 2023 and 2022:

	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Balance at beginning of the period	$	23,300	$	23,300	$	23,300	$	20,500
Provision for credit losses - unfunded commitments related to Level One	—		—		—		2,800
Provision for credit losses - unfunded commitments	(3,000)		—		(3,000)		—
Ending balance	$	20,300	$	23,300	$	20,300	$	23,300