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. As permitted under The Cares Act, the Company adopted ASU 2016-13 on December 31, 2020. Therefore, the June 30, 2020 provision for credit losses and other allowance for loan and lease loss disclosures for the three and six months ended June 30, 2020 were calculated under the incurred loss method.

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).



(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
June 30, 2021
Balance, beginning of period	$	15,451	$	5,758	$	29,343	$	6,271	$	35,219	$	16,309	$	24,334	$	5,163	$	1,702	$	139,550
Charge-offs	285		—		367		—		—		—		—		37		105		794
Recoveries	141		—		136		—		241		—		4		10		98		630
Net charge-offs (recoveries)	144		—		231		—		(241)		—		(4)		27		7		164
Provision (recovery of provision)	(475)		109		(1,891)		(383)		(159)		1,599		(1,760)		(70)		5		(3,025)
Balance, end of period	$	14,832	$	5,867	$	27,221	$	5,888	$	35,301	$	17,908	$	22,578	$	5,066	$	1,700	$	136,361

June 30, 2020
Balance, beginning of period*	$	20,283	$	2,896	$	15,471	$	4,356	$	30,069	$	22,693	$	19,588	$	3,908	$	1,534	$	120,798
Charge-offs	42		—		—		—		254		129		—		—		187		612
Recoveries	136		—		58		—		55		379		13		3		78		722
Net charge-offs (recoveries)	(94)		—		(58)		—		199		(250)		(13)		(3)		109		(110)
Provision (recovery of provision)*	4,682		1,052		1,842		293		1,231		929		335		(90)		101		10,375
Balance, end of period*	$	25,059	$	3,948	$	17,371	$	4,649	$	31,101	$	23,872	$	19,936	$	3,821	$	1,526	$	131,283


(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
June 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	286		—		4,653		—		—		8		—		42		257		5,246
Recoveries	518		—		185		—		360		254		19		11		233		1,580
Net charge-offs (recoveries)	(232)		—		4,468		—		(360)		(246)		(19)		31		24		3,666
Provision (recovery of provision)	(2,080)		318		2,763		(512)		888		(1,504)		(199)		(277)		(24)		(627)
Balance, end of period	$	14,832	$	5,867	$	27,221	$	5,888	$	35,301	$	17,908	$	22,578	$	5,066	$	1,700	$	136,361

June 30, 2020
Balance, beginning of period*	$	20,926	$	2,745	$	14,400	$	4,612	$	31,058	$	14,120	$	18,350	$	3,609	$	1,434	$	111,254
Charge-offs	571		—		34		—		840		1,561		1		13		430		3,450
Recoveries	302		—		140		—		503		590		28		30		158		1,751
Net charge-offs (recoveries)	269		—		(106)		—		337		971		(27)		(17)		272		1,699
Provision (recovery of provision)*	4,402		1,203		2,865		37		380		10,723		1,559		195		364		21,728
Balance, end of period*	$	25,059	$	3,948	$	17,371	$	4,649	$	31,101	$	23,872	$	19,936	$	3,821	$	1,526	$	131,283

The allowance for credit losses decreased during the second quarter of 2021 as we reduced qualitative adjustments related to COVID-19 and revised our forecast adjustment to reflect stronger economic growth than previously anticipated and the positive impact of financial stimulus funds on our customer’s liquidity positions. The allowance for loan and lease losses increased during the first quarter of 2021 for the most concerning portfolio segment, the bus segment of the auto and light truck portfolio, due to downward migration in credit quality and increased risk as a result of the pandemic. Increases in the allowance for the remainder of the portfolios were driven by loan growth. Likewise, decreases in the allowance in other portfolio segments were due to decreases in loan balances. The impact of adopting ASC 326 is included in the beginning balance (December 31, 2020) of each loan segment.

Commercial and agricultural – loan balances decreased during the quarter due to a $128.75 million net decrease in PPP loans which exceeded loan originations from core business products. Allowances established for new loans were more than offset by allowances released as a result of reducing the COVID-19 related adjustment and revising the forecast adjustment. Minimal allowances were established for PPP loans, which have negligible risk. For the six months ended June 30, 2021, allowances were released primarily as a result of paydowns exceeding loan originations on core business products, and to a lesser extent, from adjustments made to qualitative factors and the forecast adjustment.

Solar – allowance increased slightly for the quarter and year-to-date to accommodate the limited loan growth in this portfolio segment. For the second quarter, the increase was somewhat offset by revising the forecast adjustment. A COVID-19 adjustment was not established for this portfolio as it was deemed to not be materially impacted by the pandemic.

Auto and light truck – allowance decreased for the quarter due to eliminating the COVID-19 adjustment for the auto rental and leasing segments and revising the forecast adjustment. The COVID-19 adjustment was maintained for the bus segment which was significantly impacted by the pandemic and continues to face substantial uncertainty. The increase in the allowance year-to-date is due to loan growth in the auto rental and leasing segments and credit deterioration in the bus segment, partially offset by revisions to the COVID-19 qualitative adjustments and the forecast factors.

Aircraft – the allowance decrease was attributable to the impact of revisions to the forecast factors more than offsetting the increase in the allowance related to loan growth in the foreign segment. Year-to-date, the increase in the allowance was principally impacted by loan growth in both the foreign and domestic sector, somewhat offset by the forecast adjustment.

Construction equipment – allowance increase for the second quarter was driven by loan growth and a slight increase in impairments on a loan individually evaluated offset by the impact of the forecast adjustment. Year-to-date, the decrease is driven by lower total impairments on loans evaluated individually and the forecast adjustment.

Commercial real estate – allowance decrease was due to a slight decline in outstanding loan balances and the impacts from revising the forecast adjustment and reducing the COVID-19 adjustments for commercial real estate segments, except for the hotel segment where we maintained the COVID-19 adjustment as the hospitality industry continues to be concerning. For the six months ended June 30, 2021, the decrease is due to adjustments to the COVID-19 factors and the forecast adjustment more than offsetting increases in the allowance due to loan growth and credit deterioration in a hotel sector loan.

Residential real estate and home equity – allowance decreased during the second quarter due to the impact of revising the forecast adjustment more than increasing the allowances for portfolio growth. Year-to-date, the decrease in the allowance is due to the impact of the forecast adjustment; during the first six months of 2021, there was a slight decline in portfolio outstanding balances.

Consumer – segment saw a slight increase in the allowance for the second quarter as the impact of loan growth more than offset the forecast adjustment. Year-to-date, the decrease in the allowance is due to the impact of the forecast adjustment and lower outstanding loan balances.

As of June 30, 2021, the impact of the COVID-19 pandemic continues to adversely affect the loan and lease portfolios; however, the outlook has improved, and the forecast factor was adjusted accordingly. The forecast considers global and domestic economic effects from the ongoing pandemic as well as the potential impact of U.S. monetary and fiscal policy, which may impact clients, particularly those who continue to benefit from paycheck protection program funds or may benefit from targeted funds for struggling industry sectors such as transportation. The Company’s assumption was revised given recent strong GDP growth. The Company continues to believe that the pandemic will have an adverse impact on the loan and lease portfolio over the next two years with the impact on the portfolios being more severe in the second twelve months of the forecast period. GDP growth has exceeded expectations to date in 2021 and was a significant impetus for the forecast adjustments. Likewise, job growth and unemployment are better than the Company initially anticipated even though they are still not likely to get back to pre-shutdown levels until 2022.

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 June 30,				Six Months Ended June 30,
(Dollars in thousands)	2021		2020		2021		2020
Balance, beginning of period*	$	4,593	$	3,266	$	4,499	$	3,172


(Recovery of) provision*	(276)		259		(182)		353
Balance, end of period*	$	4,317	$	3,525	$	4,317	$	3,525