Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

9 Months Ended

Sep. 30, 2020

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

On January 1, 2020, the Company adopted CECL, which replaced the incurred loss methodology with an expected loss methodology. This new methodology applies to off-balance sheet credit exposures, including loan commitments and lines of credit. The adoption of this new standard resulted in the Company recording a $3.2 million increase to the allowance for credit losses on off-balance sheet credit exposures with a corresponding cumulative effect adjustment to decrease retained earnings $2.4 million, net of income taxes.

Management analyzes the Company's exposure to credit losses for both on-balance sheet and off-balance sheet activity using a consistent methodology for the quantitative framework as well as the qualitative framework. For purposes of estimating the allowance for credit losses for off-balance sheet credit exposures, the exposure at default includes an estimated drawdown of unused credit based on historical credit utilization factors and current loss factors, resulting in a proportionate amount of expected credit losses.

The following table illustrates the impact of the January 1, 2020 adoption of CECL on off-balance sheet credit exposures:


	January 1, 2020
	As reported under CECL		Prior to CECL	Impact of CECL adoption
Liabilities
Allowance for credit losses on off-balance sheet credit exposure	$	3,206	—	3,206

For the three months ended September 30, 2020, the Company recorded a $575,000 credit to the provision for credit losses for off-balance sheet credit exposures. This was primarily due to a reduction in the required allowance for these exposures as loss factors decreased in the current economic forecast compared to the economic forecast in the prior period. The provision for credit losses for the nine months ended September 30, 2020, totaled $5.7 million.

The allowance for credit losses for off-balance sheet credit exposures was $8.9 million at September 30, 2020, included in other liabilities on the Consolidated Statements of Financial Condition.