Allowance for Credit Losses

9 Months Ended

Sep. 30, 2022

Financing Receivable, Allowance for Credit Loss, Additional Information [Abstract]

Allowance for Loan and Lease Losses

The allowance for credit losses is established for current expected credit losses on the Company’s loan and lease portfolios utilizing guidance in Accounting Standards Codification (ASC) Topic 326. The determination of the allowance requires significant judgment to estimate credit losses measured on a collective pool basis when similar risk characteristics exist, and for loans evaluated individually. In determining the allowance, the Company estimates expected future losses for the loan’s entire contractual term adjusted for expected payments when appropriate. The allowance estimate considers relevant available information, from internal and external sources relating to the historical loss experience, current conditions, and reasonable and supportable forecasts for the Company’s outstanding loan and lease balances. The allowance is an estimation that reflects management’s evaluation of expected losses related to the Company’s financial assets measured at amortized cost. To ensure that the allowance is maintained at an adequate level, a detailed analysis is performed on a quarterly basis and an appropriate provision is made to adjust the allowance.

The Company categorizes its loan portfolios into nine segments based on similar risk characteristics. Loans within each segment are collectively evaluated using either: 1) a cohort cumulative loss rate methodology (“cohort”) or, 2) the probability of default (“PD”)/loss given default (“LGD”) methodology (PD/LGD).

The following table shows the changes in the allowance for loan and lease losses, segregated by portfolio segment, for the three months ended September 30, 2022 and 2021.



(Dollars in thousands)	Commercial and agricultural		Solar		Auto and light truck		Medium and heavy duty truck		Aircraft		Construction equipment		Commercial real estate		Residential real estate and home equity		Consumer		Total
September 30, 2022
Balance, beginning of period	$	16,110	$	6,652	$	19,057	$	6,709	$	36,987	$	21,171	$	18,416	$	5,779	$	1,984	$	132,865
Charge-offs	414		—		66		—		—		—		—		17		223		720
Recoveries	39		—		91		—		176		11		17		1		89		424
Net charge-offs (recoveries)	375		—		(25)		—		(176)		(11)		(17)		16		134		296
Provision (recovery of provision)	412		142		(85)		304		132		1,667		57		306		232		3,167
Balance, end of period	$	16,147	$	6,794	$	18,997	$	7,013	$	37,295	$	22,849	$	18,490	$	6,069	$	2,082	$	135,736

September 30, 2021
Balance, beginning of period	$	14,832	$	5,867	$	27,221	$	5,888	$	35,301	$	17,908	$	22,578	$	5,066	$	1,700	$	136,361
Charge-offs	21		—		407		—		—		551		—		—		98		1,077
Recoveries	176		—		479		—		153		170		—		3		49		1,030
Net charge-offs (recoveries)	(155)		—		(72)		—		(153)		381		—		(3)		49		47
Provision (recovery of provision)	179		(15)		(1,451)		(158)		975		(1,083)		(1,253)		96		151		(2,559)
Balance, end of period	$	15,166	$	5,852	$	25,842	$	5,730	$	36,429	$	16,444	$	21,325	$	5,165	$	1,802	$	133,755

The following table shows the changes in the allowance for loan and lease losses, segregated by portfolio segment, for the nine months ended September 30, 2022 and 2021.


(Dollars in thousands)	Commercial and agricultural		Solar		Auto and light truck		Medium and heavy duty truck		Aircraft		Construction equipment		Commercial real estate		Residential real estate and home equity		Consumer		Total
September 30, 2022
Balance, beginning of period	$	15,409	$	6,585	$	19,624	$	6,015	$	33,628	$	19,673	$	19,691	$	5,084	$	1,783	$	127,492
Charge-offs	453		—		98		—		—		48		—		27		545		1,171
Recoveries	46		—		212		—		653		11		43		129		418		1,512
Net charge-offs (recoveries)	407		—		(114)		—		(653)		37		(43)		(102)		127		(341)
Provision (recovery of provision)	1,145		209		(741)		998		3,014		3,213		(1,244)		883		426		7,903
Balance, end of period	$	16,147	$	6,794	$	18,997	$	7,013	$	37,295	$	22,849	$	18,490	$	6,069	$	2,082	$	135,736

September 30, 2021
Balance, beginning of period	$	16,680	$	5,549	$	28,926	$	6,400	$	34,053	$	19,166	$	22,758	$	5,374	$	1,748	$	140,654
Charge-offs	307		—		5,060		—		—		559		—		42		355		6,323
Recoveries	694		—		664		—		513		424		19		14		282		2,610
Net charge-offs (recoveries)	(387)		—		4,396		—		(513)		135		(19)		28		73		3,713
Provision (recovery of provision)	(1,901)		303		1,312		(670)		1,863		(2,587)		(1,452)		(181)		127		(3,186)
Balance, end of period	$	15,166	$	5,852	$	25,842	$	5,730	$	36,429	$	16,444	$	21,325	$	5,165	$	1,802	$	133,755

The allowance for credit losses increased during the quarter in response to loan growth. The forecast adjustment was maintained quarter over quarter as previous period adjustments remain pertinent. Risk during the forecast period was attributable to a weakened domestic GDP outlook, continued geopolitical uncertainty, ongoing supply chain difficulties, and persistent inflation. Credit quality remains on an improving trend as evidenced by declining total special attention credit outstandings and minimal charge-off activity during the quarter. This quarter, increases in the allowance for various portfolios were driven by loan growth, particularly in the construction equipment, aircraft, medium and heavy duty truck, and residential real estate portfolios. The decrease in the auto and light truck portfolio was due to continued amortization of special attention credits in the highly reserved bus segment, offset partially by loan growth in the lower reserved auto rental and leasing segments.

Commercial and agricultural – the decline in loan balances year-to-date was attributable to PPP debt forgiveness coupled with a modest decline in loans in our core businesses. The small increase in the allowance year-to-date was principally due to the impact of the previous quarter’s changes in the forecast adjustment.

Solar – the allowance increased primarily due to loan growth during the quarter. Credit quality is stable.

Auto and light truck – the allowance decreased as a result of lower outstanding loan balances in the higher risk bus segment of the portfolio, which was significantly impacted by the pandemic. The decline in allowance attributable to the bus segment was substantially offset by loan growth in the auto rental and leasing segments, which carry lower loss ratios.

Medium and heavy duty truck – the allowance increased due to higher loan outstandings during the quarter and increases in the forecast adjustment in prior quarters. Credit quality metrics continued to be relatively strong for this portfolio. Energy price volatility and driver availability remain a challenge.

Aircraft – the allowance increased due to loan growth in both domestic and foreign segments. The portfolio is currently bolstered by strong collateral values somewhat offset by continuing economic concerns related primarily to Latin American-based foreign loans. The Company has historically carried a higher allowance in this portfolio due to risk volatility.

Construction equipment – the allowance increased primarily due to loan growth.

Commercial real estate – the allowance increased slightly during the quarter due to loan growth. The decrease in allowance year-to-date was a result of the removal of COVID-19-related qualitative adjustment factors in prior periods.

Residential real estate and home equity – the allowance increased primarily due to loan growth.

Consumer – the allowance increased primarily due to loan growth.

Economic Outlook

As of September 30, 2022, the most significant economic factors impacting the Company’s loan portfolios are the weakening domestic growth outlook, the ongoing war in Ukraine and resultant increased uncertainty for the U.S. economy, and additional inflationary pressures, further aggravated by supply chain disruptions. Domestically, direct impacts of COVID-19 appear to be waning but the pandemic’s residual impact remains rooted in supply chain difficulties, labor constraints, and ongoing inflationary pressures. The Company remains watchful of COVID-19 surges and new variants. The forecast considers global and domestic economic impacts from these factors as well as other key economic factors such as change in Gross Domestic Product and unemployment which may impact our clients. The Company’s assumption was that economic growth will slow markedly in 2022 and 2023 and inflation will remain well above the 2% Federal Reserve target rate resulting in an adverse impact on the loan and lease portfolio over the next two years.

As a result of geopolitical risks and economic uncertainty, the Company’s future loss estimates may vary considerably from the September 30, 2022 assumptions.

Liability for Credit Losses on Unfunded Loan Commitments

The liability for credit losses inherent in unfunded loan commitments is included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition. The following table shows the changes in the liability for credit losses on unfunded loan commitments.


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2022		2021		2022		2021
Balance, beginning of period	$	5,497	$	4,317	$	4,196	$	4,499


(Recovery of provision) provision	(281)		46		1,020		(136)
Balance, end of period	$	5,216	$	4,363	$	5,216	$	4,363