Allowance for Loan Losses

3 Months Ended

Mar. 31, 2021

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.

Under the CECL methodology, which the Company adopted on January 1, 2020, the Company estimates credit losses on a collective basis per segment for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address risks not incorporated in the quantitative model output. The quantitative model utilizes economic factors and our selected peer group’s historical default and loss experience to estimate expected credit losses. The expected credit losses are the product of multiplying the Company’s estimates of probability of default, net loss given default, and individual loan level exposure at default on an undiscounted basis. The model estimates expected credit losses using loan level data over the contractual life of the exposure, considering the effect of estimated prepayment and curtailment rates which are derived from the Company's recent historical experience on the remaining portfolio segment balance over the life of the portfolio. Reasonable and supportable economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period, beyond which is a reversion to the historical long-run average of the macroeconomic variables. 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 includes the following factors:

• Volume and trend of past-due, nonaccrual, 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.

Loan losses are charged against the Allowance for loan losses 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 for loan losses when collected.

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 Sheets. 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.

The Allowance for loan losses, reported as a reduction of outstanding loan balances, totaled $74.0 million and $81.2 million as of March 31, 2021 and December 31, 2020, respectively.

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 ("PPP"). For the period ended March 31, 2020, there were no loans in this segment as the SBA initiated the program in the second quarter of 2020 in response to the COVID-19 pandemic.

The following table presents a summary of the changes in the Allowance for loan losses for the periods indicated:


	As of and for the three months ended March 31,
		2021		2020
		(In thousands)
Allowance for loan losses, beginning of period:
Commercial and industrial		$	8,985	$	10,048
Paycheck Protection Program		159		n/a
Commercial tax-exempt		2,550		6,016
Commercial real estate		51,161		40,765
Construction and land		4,041		5,119
Residential		12,864		8,857
Home equity		293		778
Consumer and other		1,185		399
Total Allowance for loan losses, beginning of period		$	81,238	$	71,982


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

Allowance for loan losses, beginning of period, net		$	81,238	$	51,597
Provision/(credit) for loan losses:
Commercial and industrial		$	2,017	$	1,245
Paycheck Protection Program		20		n/a
Commercial tax-exempt		35		320
Commercial real estate		(5,404)		10,270
Construction and land		(788)		2,748
Residential		(2,689)		2,237
Home equity		(64)		(72)
Consumer and other		(131)		214
Total provision/(credit) for loan losses		$	(7,004)	$	16,962


	As of and for the three months ended March 31,
		2021		2020
		(In thousands)
Loans charged -off:
Commercial and industrial		$	(297)	$	(518)
Paycheck Protection Program		—		n/a
Commercial tax-exempt		—		—
Commercial real estate		—		—
Construction and land		—		—
Residential		—		—
Home equity		—		—
Consumer and other		—		(10)
Total charge-offs		$	(297)	$	(528)

Recoveries on loans previously charged-off:
Commercial and industrial		$	39	$	45
Paycheck Protection Program		—		n/a
Commercial tax-exempt		—		—
Commercial real estate		—		—
Construction and land		—		—
Residential		3		—
Home equity		—		132
Consumer and other		31		3
Total recoveries		$	73	$	180

Allowance for loan losses, end of period:
Commercial and industrial		$	10,744	$	10,255
Paycheck Protection Program		179		n/a
Commercial tax-exempt		2,585		1,927
Commercial real estate		45,757		36,580
Construction and land		3,253		5,709
Residential		10,178		11,779
Home equity		229		303
Consumer and other		1,085		1,658
Total Allowance for loan losses, end of period		$	74,010	$	68,211

The balance of the Allowance for loan losses of $74.0 million as of March 31, 2021 represents a decrease of $7.2 million from December 31, 2020. During the three months ended March 31, 2021, the Company recognized a Provision credit of $7.0 million. The decrease in the Allowance for loan losses for the three months ended March 31, 2021 was primarily driven by the latest current reasonable and supportable economic forecasts, which indicated improving economic conditions from the prior quarter, as well as a change in the weighting of the forecast scenarios used to account for risks and assumptions not incorporated in the forecasts. These improvements were partially offset by the net impact of the change in the composition and volume of the loan portfolio.

The balance of reserve for unfunded loan commitments of $4.5 million as of March 31, 2021 represents a decrease of $2.0 million from December 31, 2020. The change was primarily driven by the latest current reasonable and supportable economic forecasts, which indicated improving economic conditions from the prior quarter, as well as a change in the weighting of the forecast scenarios used to account for risks and assumptions not incorporated in the forecasts. Changes in the balance of reserve for unfunded loan commitments are recognized as Other expense within Total operating expense.

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 for loan losses based on all relevant information available. Changes to the required level in the Allowance for loan losses 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 for loan losses when available information confirms that specific loans, or portions thereof, are uncollectible. Recoveries on loans previously charged-off are credited to the Allowance for loan losses 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 March 31, 2021 and December 31, 2020 by portfolio segment, disaggregated by method of impairment analysis. The Company had no loans acquired with deteriorated credit quality as of March 31, 2021 or December 31, 2020.


	March 31, 2021
	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	$	4,416	$	541	$	663,801	$	10,203	$	668,217	$	10,744
Paycheck Protection Program	—		—		351,170		179		351,170		179
Commercial tax-exempt	—		—		488,507		2,585		488,507		2,585
Commercial real estate	5,261		125		2,692,416		45,632		2,697,677		45,757
Construction and land	—		—		181,482		3,253		181,482		3,253
Residential	15,051		51		2,617,503		10,127		2,632,554		10,178
Home equity	611		17		71,141		212		71,752		229
Consumer and other	—		—		124,966		1,085		124,966		1,085
Total	$	25,339	$	734	$	7,190,986	$	73,276	$	7,216,325	$	74,010


	December 31, 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	$	4,315	$	279	$	554,028	$	8,706	$	558,343	$	8,985
Paycheck Protection Program	—		—		312,356		159		312,356		159
Commercial tax-exempt	—		—		442,159		2,550		442,159		2,550
Commercial real estate	5,262		50		2,752,113		51,111		2,757,375		51,161
Construction and land	—		—		159,204		4,041		159,204		4,041
Residential	14,942		54		2,662,522		12,810		2,677,464		12,864
Home equity	623		17		76,741		276		77,364		293
Consumer and other	—		—		120,044		1,185		120,044		1,185
Total	$	25,142	$	400	$	7,079,167	$	80,838	$	7,104,309	$	81,238