Allowance for Credit Losses and Credit Quality of Loans

3 Months Ended

Mar. 31, 2023

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 Company’s adoption of ASU 2022-02 resulted in an insignificant change to our methodology for estimating the allowance for credit losses on TDRs. The Day 1 decrease in allowance for credit loss on TDR loans relating to adoption of ASU 2022-02 was $0.6 million.

The allowance for credit losses totaled $100.3 million at March 31, 2023, compared to $100.8 million at December 31, 2022. The allowance for credit losses as a percentage of loans was 1.21% at March 31, 2023, compared to 1.24% at December 31, 2022.

During the first quarter of 2023, the Company made adjustments to the class segments within the portfolios to better align risk characteristics and reflect the monitoring and assessment of risks as the portfolios continue to evolve. Paycheck Protection Program was consolidated with Commercial & Industrial, as the portfolio had decreased to less than $1 million and no longer warranted a material class segment. The Other Consumer class segment was further separated into Residential Solar and Other Consumer. The growth in our Residential Solar portfolio warranted evaluation of this class separately from the Other Consumer class segments. The change to the class segments was applied retrospectively and did not have a significant impact on the allowance for loan losses. The following table illustrates the portfolio and class segments for the Company’s loan portfolio:

Portfolio Segment	Class
Commercial Loans	Commercial & Industrial
	Commercial Real Estate
Consumer Loans	Auto
	Residential Solar
	Other Consumer
Residential Loans

The 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 the allowance.

The quantitative model as of March 31, 2023 incorporates 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. At March 31, 2023, the weightings were 50%, 0% and 50% for the baseline, upside and downside economic forecasts, respectively. The baseline outlook reflected an unemployment rate environment below pre-coronavirus (“COVID-19”) pandemic levels throughout much of the forecast period. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the second quarter of 2023 at approximately 3.9% and rise to 4.4% before falling slightly to 4.1% by the end of the forecast period. Other utilized economic variables have generally remained stable in their respective forecasts, with the exception of northeast housing starts which deteriorated since December 31, 2022 and served as a counter-balance to the improved unemployment outlook. Key assumptions in the baseline economic outlook included the Federal Reserve raising rates with two more 25 basis point hikes at the May and June meetings bringing the terminal range to 5%-5.25%, recent bank failures not being symptomatic of a serious broader problem in the financial system, the economy remaining at full employment, continued tapering of the Federal Reserve balance sheet, a slowly increasing yield on ten-year treasury securities, and a continued decline in oil prices. The alternative downside scenario assumed deteriorated economic conditions from the baseline outlook. Under this scenario, northeast unemployment rises from 3.7% in the first quarter of 2023 to a peak of 7.1% in the second quarter of 2024. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of March 31, 2023. Additional adjustments were made for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools, considerations for inflation, and recent trends in asset value indices. Additional monitoring for industry concentrations, loan growth, and policy exceptions was also conducted. All these factors were considered through separate quantitative processes and incorporated when applicable into the estimate of current expected credit losses at March 31, 2023.

The quantitative model as of December 31, 2022 incorporates 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. At December 31, 2022, the weightings were 50%, 0% and 50% for the baseline, upside and downside economic forecasts, respectively. The baseline outlook reflected an unemployment rate environment initially around pre-COVID-19 levels at 3.9% that increases slightly during the forecast period to 4.0%. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the first quarter of 2023 at approximately 3.9% and hovering around 4.6% by the end of the forecast period. Other utilized economic variables have generally deteriorated in their respective forecasts, with retail sales and housing starts forecasts declining from the prior year. Key assumptions in the baseline economic outlook included a full employment economy being realized in the near future, continued tapering of the Federal Reserve balance sheet, an increasing yield on ten-year treasury securities, and a gradual decline in global oil prices. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. Under this scenario, northeast unemployment rises from 3.9% in the fourth quarter of 2022 to a peak of 6.9% in the first quarter of 2024. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2022. Additional adjustments were made for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools, considerations for inflation, and recent trends in asset value indices. Additional monitoring for industry concentrations, loan growth, and policy exceptions was also conducted. All these factors were considered through separate quantitative processes and incorporated when applicable into the estimate of current expected credit losses at December 31, 2022.

There were no loans purchased with credit deterioration during the three months ended March 31, 2023 or the year ended December 31, 2022. The Company purchased no loans during the three months ended March 31, 2023. During 2022, the Company purchased $11.5 million of residential loans at a 1.53% premium and $50.1 million in consumer loans at par. The allowance for credit losses recorded for these loans on the purchase date was $3.2 million. The Company made a policy election to report AIR in the other assets line item on the balance sheet. AIR on loans totaled $25.4 million at March 31, 2023 and $25.0 million at December 31, 2022 and there was no estimated allowance for credit losses related to AIR as of March 31, 2023 and December 31, 2022.

The following tables present the activity in the allowance for credit losses by our portfolio segments:

(In thousands)	Commercial Loans			Consumer Loans			Residential			Total
Balance as of January 1, 2023 (after adoption of ASC 2022-02)	$	34,662		$	50,951		$	14,539		$	100,152
Charge-offs		(169	)		(5,342	)		(339	)		(5,850	)
Recoveries		541			1,377			121			2,039
Provision		1,006			1,834			1,069			3,909
Ending balance as of March 31, 2023	$	36,040		$	48,820		$	15,390		$	100,250
Balance as of December 31, 2021	$	28,941		$	44,253		$	18,806		$	92,000
Charge-offs		(588	)		(3,591	)		(312	)		(4,491	)
Recoveries		93			1,652			150			1,895
Provision		111			1,277			(792	)		596
Ending balance as of March 31, 2022	$	28,557		$	43,591		$	17,852		$	90,000

The decrease in the allowance for credit losses at March 31, 2023 compared to December 31, 2022 was primarily due to a reduction in expected losses in the residential solar portfolios, an improvement in economic forecasts and reduction in allowance on TDRs related to the adoption of ASU 2022-02. These decreases were partly offset by an increase in providing for the increase in loan balances and a decline in prepayment speeds. The decrease in the allowance for credit losses from December 31, 2021 to March 31, 2022 was primarily due to an improvement in the economic forecast, partly offset by providing the increase in loan balances.

Individually Evaluated Loans

As of March 31, 2023, there were two relationships identified to be evaluated for loss on an individual basis which, in aggregate, had an amortized cost basis of $2.3 million, with no allowance for credit loss. As of December 31, 2022, the same two relationships were identified to be evaluated for loss on an individual basis, in aggregate, had an amortized cost basis of $2.4 million, with no allowance for credit loss. The decrease in the amortized cost basis on an individual basis from December 31, 2022 to March 31, 2023 was primarily due to principal payments received during the first quarter of 2023.

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, 2023
Commercial loans:
C&I	$	2,676	$	181	$	-	$	2,857	$	1,785	$	1,261,122	$	1,265,764
CRE		870		-		-		870		5,243		2,724,001		2,730,114
Total commercial loans	$	3,546	$	181	$	-	$	3,727	$	7,028	$	3,985,123	$	3,995,878
Consumer loans:
Auto	$	6,852	$	885	$	384	$	8,121	$	1,693	$	992,247	$	1,002,061
Residential solar		2,419		773		253		3,445		183		916,456		920,084
Other consumer		3,296		1,870		1,293		6,459		98		234,516		241,073
Total consumer loans	$	12,567	$	3,528	$	1,930	$	18,025	$	1,974	$	2,143,219	$	2,163,218
Residential	$	2,403	$	462	$	398	$	3,263	$	7,282	$	2,094,937	$	2,105,482
Total loans	$	18,516	$	4,171	$	2,328	$	25,015	$	16,284	$	8,223,279	$	8,264,578

(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, 2022
Commercial loans:
C&I	$	342	$	99	$	4	$	445	$	2,244	$	1,238,468	$	1,241,157
CRE		336		96		-		432		5,780		2,689,196		2,695,408
Total commercial loans	$	678	$	195	$	4	$	877	$	8,024	$	3,927,664	$	3,936,565
Consumer loans:
Auto	$	8,640	$	1,393	$	785	$	10,818	$	1,494	$	950,389	$	962,701
Residential solar		2,858		731		474		4,063		79		852,656		856,798
Other consumer		3,483		1,838		1,789		7,110		94		272,384		279,588
Total consumer loans	$	14,981	$	3,962	$	3,048	$	21,991	$	1,667	$	2,075,429	$	2,099,087
Residential	$	2,496	$	555	$	771	$	3,822	$	7,542	$	2,103,131	$	2,114,495
Total loans	$	18,155	$	4,712	$	3,823	$	26,690	$	17,233	$	8,106,224	$	8,150,147

As of March 31, 2023 and December 31, 2022, there were $1.0 million and $1.1 million, respectively, of loans in nonaccrual that were specifically evaluated for individual expected credit loss 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”) 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, and/or 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 Paycheck Protection Program 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 and beginning in 2023 with the Company’s January 1, 2023 adoption of ASU 2022-02 also includes gross charge-offs by loan class by vintage for the three months ended March 31, 2023. Included in other consumer gross charge-offs, the Company recorded $0.2 million in overdrawn deposit accounts reported as 2022 originations, for the three months ended March 31, 2023.

(In thousands)	2023		2022			2021			2020			2019			Prior			Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
As of March 31, 2023
C&I
By internally assigned grade:
Pass	$	58,995	$	287,770		$	240,751		$	154,864		$	83,060		$	65,062		$	323,916	$	17,121	$	1,231,539
Special mention		-		956			524			3,925			90			1,439			5,965		-		12,899
Substandard		350		1,902			435			534			2,301			3,489			12,230		32		21,273
Doubtful		-		24			-			-			28			1			-		-		53
Total C&I	$	59,345	$	290,652		$	241,710		$	159,323		$	85,479		$	69,991		$	342,111	$	17,153	$	1,265,764
Current-period gross charge-offs	$	-	$	(1	)	$	(1	)	$	(3	)	$	-		$	(107	)	$	-	$	-	$	(112	)
CRE
By internally assigned grade:
Pass	$	62,072	$	364,540		$	461,622		$	417,952		$	333,603		$	767,943		$	211,630	$	42,648	$	2,662,010
Special mention		-		2,266			6,785			3,394			2,399			9,525			3,590		-		27,959
Substandard		-		309			1,265			5,671			3,298			28,277			1,325		-		40,145
Total CRE	$	62,072	$	367,115		$	469,672		$	427,017		$	339,300		$	805,745		$	216,545	$	42,648	$	2,730,114
Current-period gross charge-offs	$	-	$	-		$	-		$	-		$	(57	)	$	-		$	-	$	-	$	(57	)
Auto
By payment activity:
Performing	$	136,896	$	455,757		$	216,248		$	66,132		$	83,483		$	41,468		$	-	$	-	$	999,984
Nonperforming		11		550			660			357			363			136			-		-		2,077
Total Auto	$	136,907	$	456,307		$	216,908		$	66,489		$	83,846		$	41,604		$	-	$	-	$	1,002,061
Current-period gross charge-offs	$	-	$	(318	)	$	(242	)	$	(127	)	$	(77	)	$	(89	)	$	-	$	-	$	(853	)
Residential solar
By payment activity:
Performing	$	83,543	$	476,712		$	189,586		$	72,221		$	52,543		$	45,043		$	-	$	-	$	919,648
Nonperforming		-		198			45			36			54			103			-		-		436
Total Residential solar	$	83,543	$	476,910		$	189,631		$	72,257		$	52,597		$	45,146		$	-	$	-	$	920,084
Current-period gross charge-offs	$	-	$	(272	)	$	(334	)	$	(45	)	$	(26	)	$	(58	)	$	-	$	-	$	(735	)
Other consumer
By payment activity:
Performing	$	3,689	$	41,754		$	95,002		$	31,506		$	23,595		$	26,188		$	17,930	$	18	$	239,682
Nonperforming		-		239			663			285			70			113			5		16		1,391
Total other consumer	$	3,689	$	41,993		$	95,665		$	31,791		$	23,665		$	26,301		$	17,935	$	34	$	241,073
Current-period gross charge-offs	$	-	$	(988	)	$	(2,005	)	$	(472	)	$	(281	)	$	(8	)	$	-	$	-	$	(3,754	)
Residential
By payment activity:
Performing	$	33,490	$	257,316		$	348,907		$	207,985		$	154,174		$	849,898		$	226,644	$	19,388	$	2,097,802
Nonperforming		41		181			384			258			491			6,325			-		-		7,680
Total residential	$	33,531	$	257,497		$	349,291		$	208,243		$	154,665		$	856,223		$	226,644	$	19,388	$	2,105,482
Current-period gross charge-offs	$	-	$	-		$	-		$	-		$	-		$	(339	)	$	-	$	-	$	(339	)
Total loans	$	379,087	$	1,890,474		$	1,562,877		$	965,120		$	739,552		$	1,845,010		$	803,235	$	79,223	$	8,264,578
Current-period gross charge-offs	$	-	$	(1,579	)	$	(2,582	)	$	(647	)	$	(441	)	$	(601	)	$	-	$	-	$	(5,850	)

(In thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
As of December 31, 2022
C&I
By internally assigned grade:
Pass	$	296,562	$	252,480	$	164,976	$	91,497	$	39,394	$	32,413	$	327,166	$	3,133	$	1,207,621
Special mention		1,044		524		4,531		194		1,108		417		5,234		-		13,052
Substandard		76		459		231		3,098		91		3,969		12,348		163		20,435
Doubtful		-		20		-		28		-		1		-		-		49
Total C&I	$	297,682	$	253,483	$	169,738	$	94,817	$	40,593	$	36,800	$	344,748	$	3,296	$	1,241,157
CRE
By internally assigned grade:
Pass	$	374,313	$	465,990	$	439,012	$	333,568	$	217,141	$	566,783	$	201,563	$	24,735	$	2,623,105
Special mention		605		764		868		2,641		4,649		24,023		850		-		34,400
Substandard		309		-		2,316		3,937		1,822		23,819		713		4,987		37,903
Total CRE	$	375,227	$	466,754	$	442,196	$	340,146	$	223,612	$	614,625	$	203,126	$	29,722	$	2,695,408
Auto
By payment activity:
Performing	$	488,776	$	239,090	$	75,853	$	99,615	$	44,061	$	13,027	$	-	$	-	$	960,422
Nonperforming		590		655		404		385		216		29		-		-		2,279
Total Auto	$	489,366	$	239,745	$	76,257	$	100,000	$	44,277	$	13,056	$	-	$	-	$	962,701
Residential solar
By payment activity:
Performing	$	485,942	$	193,971	$	74,532	$	54,662	$	36,119	$	11,019	$	-	$	-	$	856,245
Nonperforming		320		98		50		25		16		44		-		-		553
Total Residential solar	$	486,262	$	194,069	$	74,582	$	54,687	$	36,135	$	11,063	$	-	$	-	$	856,798
Other consumer
By payment activity:
Performing	$	52,545	$	110,624	$	36,412	$	27,383	$	15,536	$	15,735	$	19,218	$	250	$	277,703
Nonperforming		238		838		395		247		57		87		8		15		1,885
Total other consumer	$	52,783	$	111,462	$	36,807	$	27,630	$	15,593	$	15,822	$	19,226	$	265	$	279,588
Residential
By payment activity:
Performing	$	251,012	$	349,498	$	212,161	$	156,957	$	157,755	$	717,621	$	233,056	$	28,122	$	2,106,182
Nonperforming		267		384		408		555		1,028		5,651		-		20		8,313
Total residential	$	251,279	$	349,882	$	212,569	$	157,512	$	158,783	$	723,272	$	233,056	$	28,142	$	2,114,495
Total loans	$	1,952,599	$	1,615,395	$	1,012,149	$	774,792	$	518,993	$	1,414,638	$	800,156	$	61,425	$	8,150,147

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The allowance for losses on unfunded commitments totaled $4.5 million as March 31, 2023, compared to $5.1 million as of December 31, 2022.

Loan Modifications to Borrowers Experiencing Financial Difficulties

As previously mentioned in Note 3 Recent Accounting Pronouncements, the Company’s January 1, 2023 adoption of ASU 2022-02 eliminates the recognition and measurement of TDRs. Upon adoption of this guidance, the Company will no longer recognize an allowance for credit losses for the economic concession granted to a borrower for changes in the timing and amount of contractual cash flows when a loan is restructured. The adoption of ASU 2022-02 results in a change to reporting for loan modifications to borrowers experiencing financial difficulties. With the adoption of ASU 2022-02 these modifications require enhanced reporting on the type of modifications granted and the financial magnitude of the concessions granted.

When the Company modifies a loan with financial difficulty, 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; a change in scheduled payment amount; or principal forgiveness.

The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted:

	Three Months Ended March 31, 2023
	Term Extension
(Dollars in thousands)	Amortized Cost		% of Total Class of Financing Receivables
Residential	$	43		0.0020	%
Total	$	43		0.0020	%

The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulties:

	Three Months Ended March 31, 2023
Loan Type	Term Extension
Residential	Added a weighted-average 18 years to the life of loan, which reduced monthly payment amounts for the borrowers

There were no financing receivables that had a payment default during the three months ended March 31, 2023 that were modified to borrowers experiencing financial difficulty since the adoption of ASU 2022-02 effective January 1, 2023.

The following table depicts the performance of loans that have been modified since the adoption of ASU 2022-02 effective January 1, 2023:

	Payment Status (Amortized Cost Basis)
(In thousands)	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due
March 31, 2023
Loan Type
Residential	$	43	$	-	$	-	$	-
Total	$	43	$	-	$	-	$	-

Troubled Debt Restructuring

Prior to the adoption of ASU 2022-02 on January 1, 2023, the Company accounted for loan modifications to borrowers experiencing financial difficulty when concessions were granted as TDRs. The following tables are disclosures related to TDRs in prior periods.

The following table illustrates the recorded investments 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, 2022
(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Residential		2	$	118	$	124
Total TDRs		2	$	118	$	124

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, 2022
(Dollars in thousands)	Number of Contracts		Recorded Investment
Consumer loans:
Auto		1	$	11
Total consumer loans		1	$	11
Residential		20	$	900
Total TDRs		21	$	911