Allowance for Credit Losses and Credit Quality of Loans

3 Months Ended

Mar. 31, 2021

Allowance for Credit Losses and Credit Quality of Loans [Abstract]

Allowance for Credit Losses and Credit Quality of Loans

5.	Allowance for Credit Losses and Credit Quality of Loans

The allowance for credit losses totaled $105.0 million at March 31, 2021, compared to $110.0 million at December 31, 2020. The allowance for credit losses as a percentage of loans was 1.38% at March 31, 2021, compared to 1.47% at December 31, 2020. The decrease in the allowance for credit losses from December 31, 2020 to March 31, 2021 was primarily due to the positive impact the improving economic conditions had on expected credit losses.

The Day 1 increase in the allowance for credit loss on loans relating to adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments was $3.0 million which decreased retained earnings by $2.3 million and increased the deferred tax asset by $0.7 million. The increase in the allowance for credit losses from Day 1 to March 31, 2020 was primarily due to macroeconomic factors surrounding the coronavirus (“COVID-19”) pandemic.

The March 31, 2021, December 31, 2020, March 31, 2020 and Day 1 allowance for credit losses calculation incorporated a 6-quarter forecast period to account for forecast economic conditions under each scenario utilized in the measurement. For periods beyond the 6-quarter forecast, the model reverts to long-term economic conditions over a 4-quarter reversion period on a straight-line basis. The Company considers a baseline, upside, and downside economic forecast in measuring in the allowance.

The quantitative model as of March 31, 2021 incorporated a baseline economic outlook along with an alternative downside scenario sourced from a reputable third-party to accommodate other potential economic conditions in the model. The baseline outlook reflected an unemployment rate environment above pre-COVID-19 levels for the entire forecast period, though steadily improving to below 5% by mid-2022. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start 2021 in the low to mid-single digits, with a peak growth rate of 10% in the fourth quarter of 2021 and steadily falling back down to normalized levels through 2023. Other utilized economic variables also showed improvement in their respective forecasts. Key assumptions in the baseline economic outlook included herd immunity expected by summer 2021, additional legislation focused on infrastructure and social benefits enacted in the second half of 2021 and GDP growth expectations at levels not seen since the 1980s. The alternative downside scenario assumed deteriorated economic and epidemiological conditions from the baseline outlook, leading to a double-dip recession. The alternative upside scenario was not incorporated by management because of the underlying assumptions, forecasted economic data and modeled default rates. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of March 31, 2021. Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus in 2020 and 2021, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government-sponsored loan programs. Additionally, the Company identified a slightly higher level of criticized and classified loans at in the first quarter of 2021 than those contemplated by the model during similar economic conditions in the past for which an adjustment was made for estimated expected additional losses above modeled output. These factors were considered through a separate quantitative process and incorporated into the estimate for allowance for credit losses at March 31, 2021.

The quantitative model as of December 31, 2020 incorporated a baseline economic outlook, along with alternative upside and downside scenarios sourced from a reputable third-party to accommodate other potential economic conditions in the model. The baseline outlook reflected an unemployment rate environment above pre-COVID-19 levels for the entire forecast period, though steadily improving, before returning to low single digits by the end of 2023. Northeast GDP’s annual growth was expected to start 2021 in the low to mid-single digits, with a peak growth rate of 8% in the fourth quarter of 2021 and steadily falling back down to normalized levels through 2023 and 2024. Other utilized economic variables show improvement in their respective forecasts, namely business output. Key assumptions in the baseline economic outlook included an additional stimulus package passed at the same timing and a comparable level to that of the actual $900 billion COVID-19 relief package passed in December 2020 along with no significant secondary surge in COVID-19 cases or pandemic-related business closures. The alternative downside scenario assumed deteriorated economic and epidemiological conditions from the baseline outlook. In the same way, the alternative upside scenario assumed a faster economic recovery and more effective management of the COVID-19 virus from the baseline outlook. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2020. Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus in 2020, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government-sponsored loan programs. The commercial & industrial and consumer segment models were based upon percent change in unemployment with modeled values as of December 31, 2020 well outside the observed historical experience. Therefore, adjustments were required to produce outputs more aligned with default expectations given the forecast economic environment. Additionally, the Company identified a slightly higher level of criticized and classified loans during 2020 than those contemplated by the model during similar economic conditions in the past for which an adjustment was made for estimated expected additional losses above modeled output. These factors were considered through a separate quantitative process and incorporated into the estimate for allowance for credit losses at December 31, 2020.

There were no loans purchased with credit deterioration during the three months ended March 31, 2021 or the year ended December 31, 2020. During 2020, the Company purchased $51.9 million of consumer loans at a 1% discount. The allowance for credit losses recorded for these loans on the purchase date was $3.6 million. The Company made a policy election to report AIR in the other assets line item on the balance sheet. AIR on loans totaled $22.6 million at March 31, 2021 and $23.7 million at December 31, 2020 and was included in the allowance for loan credit losses to estimate the impact of accrued interest receivable related to loans with modifications due to the pandemic as the length of time between interest recognition and the write-off of uncollectible interest could exceed 120 days, exempting these loans from our policy election for accrued interest receivable. The estimated allowance for credit losses related to AIR at March 31, 2021 was $0.5 million and $0.6 million at December 31, 2020.

The following table illustrate the changes in the allowance for credit losses by our portfolio segments:

(In thousands)	Commercial Loans			Consumer Loans			Residential			Total
Balance as of December 31, 2020	$	50,942		$	37,803		$	21,255		$	110,000
Charge-offs		(242	)		(4,348	)		(70	)		(4,660	)
Recoveries		118			2,075			263			2,456
Provision		(773	)		(950	)		(1,073	)		(2,796	)
Ending balance as of March 31, 2021	$	50,045		$	34,580		$	20,375		$	105,000

Balance as of January 1, 2020 (after adoption of ASC 326)	$	27,156		$	32,122		$	16,721		$	75,999
Charge-offs		(1,020	)		(6,891	)		(315	)		(8,226	)
Recoveries		228			2,235			124			2,587
Provision		15,848			10,080			3,712			29,640
Ending balance as of March 31, 2020	$	42,212		$	37,546		$	20,242		$	100,000

The decrease in the allowance for credit losses from December 31, 2020 to March 31, 2021 was primarily due to an improvement in the economic forecast. The increase in the allowance for credit losses from Day 1 to March 31, 2020 was primarily due to macroeconomic factors surrounding the COVID-19 pandemic.

Individually Evaluated Loans

As of March 31, 2021, there were five relationships identified to be evaluated for loss on an individual basis which had an amortized cost basis of $15.8 million. These loans’ allowance for credit loss was $3.9 million and was determined by an estimate of the fair value of the collateral which consisted of business assets (accounts receivable, inventory and machinery and equipment). As of December 31, 2020, the same five relationships were identified to be evaluated for loss on an individual basis which had an amortized cost basis of $15.2 million and the allowance for credit loss was $3.2 million. As of Day 1, there were no relationships identified to be evaluated for loss on an individual basis.

The following table sets forth information with regard to past due and nonperforming loans by loan segment:

(In thousands)	31-60 Days Past Due Accruing		61-90 Days Past Due Accruing		Greater Than 90 Days Past Due Accruing		Total Past Due Accruing		Nonaccrual		Current		Recorded Total Loans
As of March 31, 2021
Commercial loans:
C&I	$	1,985	$	402	$	-	$	2,387	$	4,994	$	1,145,359	$	1,152,740
CRE		374		291		74		739		19,512		2,430,963		2,451,214
PPP		-		-		-		-		-		536,494		536,494
Total commercial loans	$	2,359	$	693	$	74	$	3,126	$	24,506	$	4,112,816	$	4,140,448
Consumer loans:
Auto	$	4,365	$	847	$	503	$	5,715	$	1,789	$	865,474	$	872,978
Other consumer		2,867		1,830		1,109		5,806		286		633,245		639,337
Total consumer loans	$	7,232	$	2,677	$	1,612	$	11,521	$	2,075	$	1,498,719	$	1,512,315
Residential	$	1,096	$	339	$	469	$	1,904	$	16,818	$	1,961,974	$	1,980,696
Total loans	$	10,687	$	3,709	$	2,155	$	16,551	$	43,399	$	7,573,509	$	7,633,459

(In thousands)	31-60 Days Past Due Accruing		61-90 Days Past Due Accruing		Greater Than 90 Days Past Due Accruing		Total Past Due Accruing		Nonaccrual		Current		Recorded Total Loans
As of December 31, 2020
Commercial loans:
C&I	$	2,235	$	2,394	$	23	$	4,652	$	4,278	$	1,116,686	$	1,125,616
CRE		682		-		470		1,152		19,971		2,391,162		2,412,285
PPP		-		-		-		-		-		430,810		430,810
Total commercial loans	$	2,917	$	2,394	$	493	$	5,804	$	24,249	$	3,938,658	$	3,968,711
Consumer loans:
Auto	$	9,125	$	1,553	$	866	$	11,544	$	2,730	$	877,831	$	892,105
Other consumer		3,711		1,929		1,272		6,912		290		640,952		648,154
Total consumer loans	$	12,836	$	3,482	$	2,138	$	18,456	$	3,020	$	1,518,783	$	1,540,259
Residential	$	2,719	$	309	$	518	$	3,546	$	17,378	$	1,968,991	$	1,989,915
Total loans	$	18,472	$	6,185	$	3,149	$	27,806	$	44,647	$	7,426,432	$	7,498,885

As of March 31, 2021 and December 31, 2020, there were no loans in non-accrual without an allowance for credit losses.

Credit Quality Indicators

The Company has developed an internal loan grading system to evaluate and quantify the Company’s loan portfolio with respect to quality and risk. The system focuses on, among other things, financial strength of borrowers, experience and depth of borrower’s management, primary and secondary sources of repayment, payment history, nature of the business and outlook on particular industries. The internal grading system enables the Company to monitor the quality of the entire loan portfolio on a consistent basis and provide management with an early warning system, enabling recognition and response to problem loans and potential problem loans.

Commercial Grading System

For Commercial and Industrial (“C&I”), Paycheck Protection Program (“PPP”) and Commercial Real Estate (“CRE”) loans, the Company uses a grading system that relies on quantifiable and measurable characteristics when available. This includes comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy and comparison of credit history to stated repayment terms and industry averages. Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment and management. C&I and CRE loans are graded Doubtful, Substandard, Special Mention and Pass.

Doubtful

A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as a loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Nonaccrual treatment is required for Doubtful assets because of the high probability of loss.

Substandard

Substandard loans have a high probability of payment default or they have other well-defined weaknesses. They require more intensive supervision by bank management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some Substandard loans, the likelihood of full collection of interest and principal may be in doubt and those loans should be placed on nonaccrual. Although Substandard assets in the aggregate will have a distinct potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated Substandard.

Special Mention

Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These loans pose elevated risk, but their weakness does not yet justify a Substandard classification. Borrowers may be experiencing adverse operating trends (i.e., declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (i.e., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a Special Mention rating. Although a Special Mention loan has a higher probability of default than a Pass asset, its default is not imminent.

Pass

Loans graded as Pass encompass all loans not graded as Doubtful, Substandard or Special Mention. Pass loans are in compliance with loan covenants and payments are generally made as agreed. Pass loans range from superior quality to fair quality. Pass loans also include any portion of a government guaranteed loan, including PPP loans.

Consumer and Residential Grading System

Consumer and Residential loans are graded as either Nonperforming or Performing.

Nonperforming

Nonperforming loans are loans that are 1) over 90 days past due and interest is still accruing or 2) on nonaccrual status.

Performing

All loans not meeting any of the above criteria are considered Performing.

The following tables illustrate the Company’s credit quality by loan class by vintage:

(In thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
As of March 31, 2021
C&I
By internally assigned grade:
Pass	$	113,273	$	305,135	$	157,578	$	82,451	$	34,635	$	55,540	$	310,850	$	10,149	$	1,069,611
Special mention		13		15,988		6,099		4,576		4,149		4,001		17,420		-		52,246
Substandard		-		405		7,672		8,262		2,865		4,411		6,537		527		30,679
Doubtful		-		-		-		-		203		1		-		-		204
Total C&I	$	113,286	$	321,528	$	171,349	$	95,289	$	41,852	$	63,953	$	334,807	$	10,676	$	1,152,740

CRE
By internally assigned grade:
Pass	$	132,195	$	452,951	$	356,643	$	260,570	$	253,673	$	535,309	$	134,394	$	2,860	$	2,128,595
Special mention		-		2,544		41,189		7,508		54,121		88,045		1,293		-		194,700
Substandard		-		534		20,160		17,651		13,719		65,288		1,253		-		118,605
Doubtful		-		-		1,897		-		-		7,417		-		-		9,314
Total CRE	$	132,195	$	456,029	$	419,889	$	285,729	$	321,513	$	696,059	$	136,940	$	2,860	$	2,451,214

PPP
By internally assigned grade:
Pass	$	218,938	$	317,556	$	-	$	-	$	-	$	-	$	-	$	-	$	536,494
Total PPP	$	218,938	$	317,556	$	-	$	-	$	-	$	-	$	-	$	-	$	536,494

Auto
By payment activity:
Performing	$	98,666	$	183,147	$	280,077	$	173,240	$	94,084	$	41,451	$	21	$	-	$	870,686
Nonperforming		10		271		596		751		664		-		-		-		2,292
Total auto	$	98,676	$	183,418	$	280,673	$	173,991	$	94,748	$	41,451	$	21	$	-	$	872,978

Other consumer
By payment activity:
Performing	$	67,050	$	208,960	$	159,896	$	112,634	$	47,920	$	26,535	$	14,923	$	24	$	637,942
Nonperforming		-		197		467		344		239		121		10		17		1,395
Total other consumer	$	67,050	$	209,157	$	160,363	$	112,978	$	48,159	$	26,656	$	14,933	$	41	$	639,337

Residential
By payment activity:
Performing	$	67,100	$	233,363	$	204,995	$	204,255	$	173,135	$	808,168	$	259,861	$	12,532	$	1,963,409
Nonperforming		-		1,379		650		2,298		2,228		10,670		-		62		17,287
Total residential	$	67,100	$	234,742	$	205,645	$	206,553	$	175,363	$	818,838	$	259,861	$	12,594	$	1,980,696

Total loans	$	697,245	$	1,722,430	$	1,237,919	$	874,540	$	681,635	$	1,646,957	$	746,562	$	26,171	$	7,633,459

(In thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
As of December 31, 2020
C&I
By internally assigned grade:
Pass	$	331,921	$	182,329	$	91,230	$	41,856	$	32,625	$	32,609	$	322,674	$	412	$	1,035,656
Special mention		20,064		6,534		5,053		4,702		1,624		2,830		13,614		-		54,421
Substandard		338		6,364		10,219		3,388		791		4,272		9,945		14		35,331
Doubtful		-		-		-		207		-		1		-		-		208
Total C&I	$	352,323	$	195,227	$	106,502	$	50,153	$	35,040	$	39,712	$	346,233	$	426	$	1,125,616

CRE
By internally assigned grade:
Pass	$	469,919	$	361,187	$	256,154	$	271,874	$	212,197	$	383,690	$	113,128	$	4,034	$	2,072,183
Special mention		2,051		44,034		22,260		55,039		36,830		43,537		1,297		11,524		216,572
Substandard		536		5,307		18,298		15,691		6,018		62,168		1,501		4,642		114,161
Doubtful		-		1,897		-		-		-		7,472		-		-		9,369
Total CRE	$	472,506	$	412,425	$	296,712	$	342,604	$	255,045	$	496,867	$	115,926	$	20,200	$	2,412,285

PPP
By internally assigned grade:
Pass	$	430,810	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	430,810
Total PPP	$	430,810	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	430,810

Auto
By payment activity:
Performing	$	197,881	$	314,034	$	201,850	$	115,977	$	45,495	$	13,250	$	22	$	-	$	888,509
Nonperforming		359		1,140		1,135		525		437		-		-		-		3,596
Total auto	$	198,240	$	315,174	$	202,985	$	116,502	$	45,932	$	13,250	$	22	$	-	$	892,105

Other consumer
By payment activity:
Performing	$	234,628	$	178,411	$	127,549	$	55,676	$	14,255	$	17,414	$	18,588	$	71	$	646,592
Nonperforming		339		418		307		265		90		133		10		-		1,562
Total other consumer	$	234,967	$	178,829	$	127,856	$	55,941	$	14,345	$	17,547	$	18,598	$	71	$	648,154

Residential
By payment activity:
Performing	$	237,338	$	210,505	$	213,437	$	182,993	$	164,424	$	684,495	$	268,878	$	9,991	$	1,972,061
Nonperforming		1,245		659		2,318		2,535		902		10,195		-		-		17,854
Total residential	$	238,583	$	211,164	$	215,755	$	185,528	$	165,326	$	694,690	$	268,878	$	9,991	$	1,989,915

Total loans	$	1,927,429	$	1,312,819	$	949,810	$	750,728	$	515,688	$	1,262,066	$	749,657	$	30,688	$	7,498,885

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

As of March 31, 2021, the allowance for losses on unfunded commitments totaled $5.9 million, compared to $6.4 million as of December 31, 2020

Troubled Debt Restructuring

When the Company modifies a loan in a troubled debt restructuring (“TDR”), such modifications generally include one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; temporary reduction in the interest rate; or change in scheduled payment amount. Residential and Consumer TDRs occurring during 2021 and 2020 were due to the reduction in the interest rate or extension of the term.

An allowance for impaired commercial and consumer loans that have been modified in a TDR is measured based on the present value of the expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan an impairment charge would be recorded.

The Company began offering loan modifications to assist borrowers during the COVID-19 national emergency. The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), along with a joint agency statement issued by banking regulatory agencies, provides that modifications made in response to COVID-19 do not need to be accounted for as a TDR. The Company evaluated the modification programs provided to its borrowers and has concluded the modifications were generally made in accordance with the CARES Act guidance to borrowers who were in good standing prior to the COVID-19 pandemic and are not required to be designated as TDRs.

The following tables illustrate the recorded investment and number of modifications designated as TDRs, including the recorded investment in the loans prior to a modification and the recorded investment in the loans after restructuring:

	Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Consumer loans:
Auto		-	$	-	$	-		1	$	44	$	44
Total consumer loans		-	$	-	$	-		1	$	44	$	44
Residential		3	$	242	$	252		7	$	691	$	735
Total TDRs		3	$	242	$	252		8	$	735	$	779

The following table illustrates the recorded investment and number of modifications for TDRs where a concession has been made and subsequently defaulted during the period:

	Three Months Ended March 31, 2021				Three Months Ended March 31, 2020
(Dollars in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial loans:
C&I		-	$	-		1	$	387
Total commercial loans		-	$	-		1	$	387
Consumer loans:
Auto		2	$	18		-	$	-
Total consumer loans		2	$	18		-	$	-
Residential		17	$	624		16	$	803
Total TDRs		19	$	642		17	$	1,190