Allowance for Loan Losses

6 Months Ended

Jun. 30, 2020

The allowance for loan losses is established based upon the Company's current estimate of expected lifetime credit losses on loans measured at amortized cost. Loan losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan. Subsequent recoveries, if any, are credited to the allowance when collected.

Under the CECL methodology, which the Company adopted on January 1, 2020, the Company estimates credit losses on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. The quantitative model utilizes a factor-based approach to estimate expected credit losses using probability of default and loss given default, which are derived from a selected peer group's historical default and loss experience. The model estimates expected credit losses using loan level data over the contractual life of the exposure, considering the effect of estimated prepayments and curtailments. Reasonable and supportable economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period, beyond which is a reversion to the Company's historical long-run average. Management has determined a reasonable and supportable period of two years and a straight line reversion period of twelve months to be appropriate for purposes of estimating expected credit losses. Management also applies a weight to the various forecasts chosen to determine the reasonable and supportable economic forecasts. The Company's qualitative assessment is based on factors outlined in regulatory guidance and include the following:

• Volume and trend of past-due, non-accrual, and adversely-graded loans

• Trends in volume and terms of loans

• Concentration risk

• Experience and depth of management

• Risk surrounding lending policy and underwriting standards

• Risk surrounding loan review

• Banking industry conditions, other external factors, and inherent model risk

Loans that no longer share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that will be individually assessed, the Company will use either a discounted cash flow approach or a fair value of collateral approach. The latter approach will be used for loans deemed to be collateral dependent or when foreclosure is probable.

Accrued interest receivable amounts are excluded from balances of loans held at amortized cost and are included within Accrued interest receivable on the consolidated balance sheet. Management has elected not to measure an allowance for credit losses on these amounts as the Company employs a timely write-off policy as generally any loan over 89 days past-due is put on non-accrual status and any associated accrued interest is reversed.

For periods disclosed prior to the adoption of ASU 2016-13 as of January 1, 2020, the Allowance for loan losses was determined under the incurred loss model. Refer to "Note 1: Basis of Presentation and Summary of Significant Account Policies" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for a description of the methodology.

The allowance for loan losses, which is reported as a reduction of outstanding loan balances, totaled $89.3 million and $72.0 million as of June 30, 2020 and December 31, 2019, respectively.

Beginning in the first quarter of 2020, the Company made a change to the loan portfolio segmentation as it relates to the allowance for loan losses in which Commercial and industrial and Commercial tax-exempt loans were bifurcated given their different underlying risk characteristics. For the periods ended June 30, 2019, the Provision/(credit) for loan losses and related allowance balance in the allowance for loan losses for tax-exempt commercial and industrial loans is included with Commercial and industrial loans. Beginning in the second quarter of 2020, the Company made a change to the loan portfolio segmentation as it relates to the allowance for loan losses, adding the segment Paycheck Protection Program. For the periods ended June 30, 2019, there were no loans in this segment as the SBA initiated the program in the first quarter of 2020 in response to the COVID-19 pandemic. The following tables present a summary of the changes in the allowance for loan losses for the periods indicated:


	As of and for the three months ended June 30,						As of and for the six months ended June 30,
	2020		2019		2020		2019
	(In thousands)
Allowance for loan losses, beginning of period:
Commercial and industrial	$	10,255	$	15,687	$	10,048	$	15,912
Paycheck Protection Program	—		n/a		—		n/a
Commercial tax-exempt	1,927		n/a		6,016		n/a
Commercial real estate	36,580		41,813		40,765		41,934
Construction and land	5,709		5,353		5,119		6,022
Residential	11,779		10,057		8,857		10,026
Home equity	303		796		778		1,284
Consumer and other	1,658		108		399		134
Total allowance for loan losses, beginning of period	$	68,211	$	73,814	$	71,982	$	75,312


Impact of adopting ASU 2016-13:
Commercial and industrial	$	—	n/a		$	(565)	n/a
Paycheck Protection Program	—		n/a		—		n/a
Commercial tax-exempt	—		n/a		(4,409)		n/a
Commercial real estate	—		n/a		(14,455)		n/a
Construction and land	—		n/a		(2,158)		n/a
Residential	—		n/a		685		n/a
Home equity	—		n/a		(535)		n/a
Consumer and other	—		n/a		1,052		n/a
Total impact of adopting ASU 2016-13	$	—	n/a		$	(20,385)	n/a

Provision/(credit) for loan losses:
Commercial and industrial	$	(359)	$	550	$	886	$	137
Paycheck Protection Program	190		n/a		190		n/a
Commercial tax-exempt	559		n/a		879		n/a
Commercial real estate	11,095		1,898		21,365		1,588
Construction and land	3,815		(573)		6,563		(1,242)
Residential	5,986		(502)		8,223		(571)
Home equity	1,293		9		1,221		83
Consumer and other	25		(19)		239		(58)
Total provision/(credit) for loan losses	$	22,604	$	1,363	$	39,566	$	(63)


	As of and for the three months ended June 30,						As of and for the six months ended June 30,
	2020		2019		2020		2019
	(In thousands)

Loans charged off:
Commercial and industrial	$	(389)	$	(195)	$	(907)	$	(195)
Paycheck Protection Program	—		n/a		—		n/a
Commercial tax-exempt	—		n/a		—		n/a
Commercial real estate	—		—		—		—
Construction and land	—		—		—		—
Residential	—		—		—		—
Home equity	(1,157)		—		(1,157)		(562)
Consumer and other	—		—		(10)		(2)
Total charge offs	$	(1,546)	$	(195)	$	(2,074)	$	(759)

Recoveries on loans previously charged off:
Commercial and industrial	$	52	$	40	$	97	$	228
Paycheck Protection Program	—		n/a		—		n/a
Commercial tax-exempt	—		n/a		—		n/a
Commercial real estate	—		30		—		219
Construction and land	—		—		—		—
Residential	—		—		—		100
Home equity	—		—		132		—
Consumer and other	3		15		6		30
Total recoveries	$	55	$	85	$	235	$	577

Allowance for loan losses, end of period:
Commercial and industrial	$	9,559	$	16,082	$	9,559	$	16,082
Paycheck Protection Program	190		n/a		190		n/a
Commercial tax-exempt	2,486		n/a		2,486		n/a
Commercial real estate	47,675		43,741		47,675		43,741
Construction and land	9,524		4,780		9,524		4,780
Residential	17,765		9,555		17,765		9,555
Home equity	439		805		439		805
Consumer and other	1,686		104		1,686		104
Total allowance for loan losses, end of period	$	89,324	$	75,067	$	89,324	$	75,067

The balance of the allowance for loan losses of $89.3 million as of June 30, 2020 represents an increase of $17.3 million from December 31, 2019. During the three and six months ended June 30, 2020, the Company recognized a Provision for loan loss expense of $22.6 million and $39.6 million, respectively. The increase in the allowance for loan losses in the first two quarters of 2020 was primarily driven by changes in economic forecasts in both the first quarter and second quarter of 2020 to reflect deteriorating economic conditions related to the COVID-19 pandemic and a change in the weight of forecast scenarios used to be weighted more heavily to the downside scenario, combined with an increase in qualitative factors to account for incremental risk not included in the quantitative model.

The balance of reserve for unfunded loan commitments of $7.1 million as of June 30, 2020 represents an increase of $6.0 million from December 31, 2019. The increase was driven by deteriorating economic conditions related to the COVID-19 pandemic increasing the reserve factor as well as an increase in commitments. This amount is recognized as Other expense within Noninterest expense.

Upon the adoption of ASU 2016-13 on January 1, 2020, the Company recognized a decrease in the allowance for loan losses of $20.4 million. The adoption amount was driven primarily by the portfolio composition, the short-term nature of many commercial loans, estimated prepayments and curtailments, a change to the loan portfolio segmentation in which Commercial and industrial and Commercial tax-exempt loans were bifurcated given the different underlying risk characteristics, and reasonable and supportable economic forecasts at the time of adoption.

Upon the adoption of ASU 2016-13 on January 1, 2020, the Company recognized an increase in the reserve of $1.4 million in the unfunded loan commitments expense. The net, after-tax impact of the $20.4 million decrease in the allowance for loan losses and the increase in the reserve for unfunded loan commitments was an increase to Retained earnings of $13.5 million.

The allowance for loan losses is an estimate of the inherent risk of loss in the loan portfolio as of the consolidated balance sheet dates. Management estimates the level of the allowance based on all relevant information available. Changes to the required level in the allowance result in either a provision for loan loss expense, if an increase is required, or a credit to the

provision, if a decrease is required. Loan losses are charged to the allowance when available information confirms that specific loans, or portions thereof, are uncollectible. Recoveries on loans previously charged off are credited to the allowance when received in cash or when the Bank takes possession of other assets.

The following tables present the Company’s allowance for loan losses and loan portfolio as of June 30, 2020 and December 31, 2019 by portfolio segment, disaggregated by method of impairment analysis. The Company had no loans acquired with deteriorated credit quality as of June 30, 2020 or December 31, 2019.


	June 30, 2020
	Individually Evaluated for Impairment						Collectively Evaluated for Impairment						Total
	Recorded investment (loan balance)		Allowance for loan losses		Recorded investment (loan balance)		Allowance for loan losses		Recorded investment (loan balance)		Allowance for loan losses
	(In thousands)
Commercial and industrial	$	3,693	$	161	$	562,055	$	9,398	$	565,748	$	9,559
Paycheck Protection Program	—		—		370,034		190		370,034		190
Commercial tax-exempt	—		—		419,264		2,486		419,264		2,486
Commercial real estate	6,007		—		2,670,701		47,675		2,676,708		47,675
Construction and land	—		—		240,211		9,524		240,211		9,524
Residential	16,837		60		2,842,790		17,705		2,859,627		17,765
Home equity	654		18		83,934		421		84,588		439
Consumer and other	—		—		116,774		1,686		116,774		1,686
Total	$	27,191	$	239	$	7,305,763	$	89,085	$	7,332,954	$	89,324


	December 31, 2019
	Individually Evaluated for Impairment						Collectively Evaluated for Impairment						Total
	Recorded investment (loan balance)		Allowance for loan losses		Recorded investment (loan balance)		Allowance for loan losses		Recorded investment (loan balance)		Allowance for loan losses
	(In thousands)
Commercial and industrial	$	724	$	146	$	1,141,237	$	15,918	$	1,141,961	$	16,064

Commercial real estate	733		—		2,550,541		40,765		2,551,274		40,765
Construction and land	—		—		225,983		5,119		225,983		5,119
Residential	15,900		67		2,823,255		8,790		2,839,155		8,857
Home equity	1,830		22		81,827		756		83,657		778
Consumer and other	—		—		134,674		399		134,674		399
Total	$	19,187	$	235	$	6,957,517	$	71,747	$	6,976,704	$	71,982