Allowance for Credit Losses and Credit Quality of Loans

3 Months Ended

Mar. 31, 2020

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

As previously mentioned in Note 2 Summary of Significant Accounting Policies, the Company’s January 1, 2020 adoption of CECL resulted in a significant change to our methodology for estimating the allowance for credit losses since December 31, 2019. Portfolio segmentation has been redefined under CECL and therefore prior year tables are presented separately.

Allowance for Credit Losses

The Day 1 increase in the allowance for credit loss on loans relating to adoption of ASU 2016-13 was $3.0 million, which decreased retained earnings by $2.3 million and increased the deferred tax asset by $0.7 million. There were no new loans purchased with credit deterioration during the first quarter of 2020. The Company made a policy election to report AIR in the other assets line item on the balance sheet. AIR on loans totaled $54.0 million at March 31, 2020 and was excluded from the estimate of credit losses.

The Day 1 and March 31, 2020 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 quantitative model incorporated a baseline economic outlook sourced from a reputable third-party that reflects continued economic deterioration, with unemployment peaking in the second quarter of 2020 and remaining elevated well above the pre-COVID-19 pandemic levels well into 2021 and a negative-GDP environment in the next quarter with a rebound that begins in the second half of 2020 and stabilizing in 2021. A short-term reduction in prepayment and curtailment speeds was also applied to more reasonably model payment behavior during the COVID-19 national emergency. Additionally, downside and upside scenarios were incorporated and weighted, along with the baseline outlook, to accommodate other potential economic conditions in the quantitative model. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of March 31, 2020. Additional adjustments for COVID-19 related factors were not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus, including direct payments to individuals, increased unemployment benefits, deferral/modification initiatives and various government-sponsored loan programs. These factors were considered through a separate quantitative process and incorporated into the estimate for allowance for credit losses at March 31, 2020.

The following table presents the activity in the allowance for credit losses by portfolio segment for the quarter ended March 31, 2020:

(In thousands)	Commercial Loans			Consumer Loans			Residential			Total
Balance as of January 1, 2020 (after adoption of ASC 326)	$	27,156		$	32,122		$	16,721		$	75,999
Charge-offs		(1,020	)		(6,891	)		(315	)		(8,226	)
Recoveries		228			2,235			124			2,587
Provision		15,848			10,080			3,712			29,640
Ending Balance as of March 31, 2020	$	42,212		$	37,546		$	20,242		$	100,000

The increase in the allowance for credit losses from Day 1 to March 31, 2020 was primarily due to macroeconomic factors surrounding the COVID-19 pandemic.

Individually Evaluated Loans

As of March 31, 2020, only one relationship was identified to be evaluated for loss on an individual basis which had an amortized cost basis of $4.2 million. This loan’s allowance for credit loss was $2.1 million and was determined by an estimate of the fair value of the collateral which consisted of business assets (accounts receivable, inventory and machinery and equipment).

The following table sets forth information with regard to past due and nonperforming loans by loan segment for the quarter ended March 31, 2020:

(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, 2020
Commercial Loans:
Commercial & Industrial	$	2,273	$	564	$	-	$	2,837	$	7,176	$	1,109,027	$	1,119,040
Commercial Real Estate		5,954		305		-		6,259		9,256		2,326,295		2,341,810
Total Commercial Loans	$	8,227	$	869	$	-	$	9,096	$	16,432	$	3,435,322	$	3,460,850
Consumer Loans:
Auto	$	11,107	$	1,952	$	819	$	13,878	$	2,513	$	1,134,651	$	1,151,042
Other Consumer		3,592		1,835		1,200		6,627		70		616,211		622,908
Total Consumer Loans	$	14,699	$	3,787	$	2,019	$	20,505	$	2,583	$	1,750,862	$	1,773,950
Residential	$	5,833	$	1,528	$	261	$	7,622	$	10,957	$	1,994,004	$	2,012,583
Total Loans	$	28,759	$	6,184	$	2,280	$	37,223	$	29,972	$	7,180,188	$	7,247,383

As of March 31, 2020, there were no loans in non-accrual 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 C&I and 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, 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.

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 as of March 31, 2020:

(In thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
Commercial & Industrial
By Internally Assigned Grade:
Pass	$	87,313	$	245,200	$	121,720	$	63,276	$	49,619	$	49,841	$	408,302	$	22,633	$	1,047,904
Special Mention		-		4,881		3,654		3,286		3,299		2,379		18,803		-		36,302
Substandard		541		2,002		10,926		3,317		619		6,168		6,856		27		30,456
Doubtful		-		-		-		979		-		3,399		-		-		4,378
Total Commercial & Industrial	$	87,854	$	252,083	$	136,300	$	70,858	$	53,537	$	61,787	$	433,961	$	22,660	$	1,119,040
Commercial Real Estate
By Internally Assigned Grade:
Pass	$	130,895	$	458,228	$	288,204	$	392,223	$	275,496	$	551,128	$	98,679	$	24,003	$	2,218,856
Special Mention		398		2,635		7,427		3,493		1,745		35,625		675		8,920		60,918
Substandard		-		121		6,441		3,436		3,796		38,975		9,267		-		62,036
Total Commercial & Industrial	$	131,293	$	460,984	$	302,072	$	399,152	$	281,037	$	625,728	$	108,621	$	32,923	$	2,341,810
Auto
By Payment Activity:
Performing	$	112,417	$	411,824	$	291,092	$	196,440	$	92,378	$	43,534	$	25	$	-	$	1,147,710
Nonperforming		41		903		1,207		556		615		10		-		-		3,332
Total Auto	$	112,458	$	412,727	$	292,299	$	196,996	$	92,993	$	43,544	$	25	$	-	$	1,151,042
Other Consumer
By Payment Activity:
Performing	$	67,233	$	229,068	$	170,909	$	79,635	$	26,131	$	26,202	$	22,450	$	10	$	621,638
Nonperforming		-		387		384		284		64		137		13		2		1,270
Total Other Consumer	$	67,233	$	229,455	$	171,293	$	79,919	$	26,195	$	26,339	$	22,463	$	12	$	622,908
Residential
By Payment Activity:
Performing	$	39,592	$	223,715	$	225,817	$	196,901	$	182,269	$	798,850	$	272,782	$	61,439	$	2,001,365
Nonperforming		21		291		537		1,405		303		8,588		-		73		11,218
Total Residential	$	39,613	$	224,006	$	226,354	$	198,306	$	182,572	$	807,438	$	272,782	$	61,512	$	2,012,583
Total Loans	$	438,451	$	1,579,255	$	1,128,318	$	945,231	$	636,334	$	1,564,836	$	837,852	$	117,107	$	7,247,383

Troubled Debt Restructuring

When the Company modifies a loan in a troubled debt restructuring, 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; temporary reduction in the interest rate; or change in scheduled payment amount. Residential and Consumer TDRs occurring during 2020 were due to the reduction in the interest rate or extension of the term.

An allowance for impaired commercial and consumer loans that have been modified in a TDR is measured based on the present value of the expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan an impairment charge would be recorded.

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The CARES Act, along with a joint agency statement issued by banking regulatory agencies, provides that short-term modifications made in response to COVID-19 do not need to be accounted for as a TDR. The Company evaluated the short-term modification programs provided to its borrowers and has concluded the modifications were generally made to borrowers who were in good standing prior to the COVID-19 pandemic and the modifications were temporary and minor in nature and therefore do not qualify for designation as TDRs.

The following tables illustrate the recorded investment 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, 2020
(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Consumer Loans:
Auto		1	$	44	$	44
Total Consumer Loans		1	$	44	$	44
Residential		7	$	691	$	735
Total Troubled Debt Restructurings		8	$	735	$	779

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, 2020
(Dollars in thousands)	Number of Contracts		Recorded Investment
Commercial Loans:
Commercial & Industrial		1	$	387
Total Commercial Loans		1	$	387
Residential		16	$	803
Total Trouble Debt Restructurings		17	$	1,190

Allowance for Loan Losses

Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company’s calculated allowance for loan losses used the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.

The following table illustrates the changes in the allowance for loan losses by our portfolio segments:

(In thousands)	Commercial Loans			Consumer Loans			Residential Real Estate			Total
Balance as of December 31, 2018	$	32,759		$	37,178		$	2,568		$	72,505
Charge-offs		(747	)		(7,433	)		(274	)		(8,454	)
Recoveries		94			1,399			54			1,547
Provision		53			5,660			94			5,807
Ending Balance as of March 31, 2019	$	32,159		$	36,804		$	2,442		$	71,405

The following table illustrates the allowance for loan losses and the recorded investment by portfolio segments:

(In thousands)	Commercial Loans		Consumer Loans		Residential Real Estate		Total
As of December 31, 2019
Allowance for loan losses	$	34,525	$	35,647	$	2,793	$	72,965
Allowance for loans individually evaluated for impairment		-		-		-		-
Allowance for loans collectively evaluated for impairment	$	34,525	$	35,647	$	2,793	$	72,965
Ending balance of loans	$	3,444,266	$	2,246,676	$	1,445,156	$	7,136,098
Ending balance of originated loans individually evaluated for impairment		3,488		7,044		7,721		18,253
Ending balance of acquired loans collectively evaluated for impairment		115,266		23,733		125,879		264,878
Ending balance of originated loans collectively evaluated for impairment	$	3,325,512	$	2,215,899	$	1,311,556	$	6,852,967

The following tables set forth information with regard to past due and nonperforming loans by loan class:

(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, 2019
Originated
Commercial Loans:
C&I	$	1,227	$	-	$	-	$	1,227	$	1,177	$	838,502	$	840,906
CRE		3,576		-		-		3,576		4,847		1,941,143		1,949,566
Business Banking		794		162		-		956		7,035		530,537		538,528
Total Commercial Loans	$	5,597	$	162	$	-	$	5,759	$	13,059	$	3,310,182	$	3,329,000
Consumer Loans:
Indirect Auto	$	11,860	$	2,108	$	1,005	$	14,973	$	2,175	$	1,176,487	$	1,193,635
Specialty Lending		3,153		2,087		1,307		6,547		-		535,516		542,063
Direct		2,564		564		478		3,606		2,475		481,164		487,245
Total Consumer Loans	$	17,577	$	4,759	$	2,790	$	25,126	$	4,650	$	2,193,167	$	2,222,943
Residential Real Estate	$	1,179	$	190	$	663	$	2,032	$	5,872	$	1,311,373	$	1,319,277
Total Originated Loans	$	24,353	$	5,111	$	3,453	$	32,917	$	23,581	$	6,814,722	$	6,871,220
Acquired
Commercial Loans:
C&I	$	149	$	-	$	-	$	149	$	-	$	19,215	$	19,364
CRE		-		-		-		-		-		60,937		60,937
Business Banking		397		287		-		684		382		33,899		34,965
Total Commercial Loans	$	546	$	287	$	-	$	833	$	382	$	114,051	$	115,266
Consumer Loans:
Direct	$	136	$	58	$	-	$	194	$	105	$	23,434	$	23,733
Total Consumer Loans	$	136	$	58	$	-	$	194	$	105	$	23,434	$	23,733
Residential Real Estate	$	575	$	20	$	264	$	859	$	1,106	$	123,914	$	125,879
Total Acquired Loans	$	1,257	$	365	$	264	$	1,886	$	1,593	$	261,399	$	264,878
Total Loans	$	25,610	$	5,476	$	3,717	$	34,803	$	25,174	$	7,076,121	$	7,136,098

The following table provides information on impaired loans specifically evaluated for impairment:

	December 31, 2019
(In thousands)	Recorded Investment Balance (Book)		Unpaid Principal Balance (Legal)		Related Allowance
Originated
With no related allowance recorded:
Commercial Loans:
C&I	$	76	$	302	$
CRE		2,410		2,437
Business Banking		1,002		1,443
Total Commercial Loans	$	3,488	$	4,182
Consumer Loans:
Indirect Auto	$	154	$	242
Direct		6,862		8,335
Specialty Lending		28		28
Total Consumer Loans	$	7,044	$	8,605
Residential Real Estate	$	7,721	$	9,754
Total loans with no related allowance	$	18,253	$	22,541
Total Loans	$	18,253	$	22,541	$	-

The following table summarizes the average recorded investments on loans specifically evaluated for impairment and the interest income recognized:

	For the Three Months Ended
	March 31, 2019
(In thousands)	Average Recorded Investment		Interest Income Recognized
Originated
Commercial Loans:
C&I	$	462	$	1
CRE		4,282		30
Business Banking		1,263		6
Total Commercial Loans	$	6,007	$	37
Consumer Loans:
Indirect Auto	$	173	$	2
Direct		7,716		98
Total Consumer Loans	$	7,889	$	100
Residential Real Estate	$	7,166	$	77
Total Originated	$	21,062	$	214
Total Loans	$	21,062	$	214

The following tables illustrate the Company’s credit quality by loan class:

(In thousands)	December 31, 2019
Originated
Commercial Credit Exposure By Internally Assigned Grade:	C&I		CRE		Total
Pass	$	782,763	$	1,868,678	$	2,651,441
Special Mention		28,380		30,519		58,899
Substandard		29,257		50,369		79,626
Total	$	840,906	$	1,949,566	$	2,790,472

Business Banking Credit Exposure By Internally Assigned Grade:	Business Banking		Total
Non-classified	$	524,725	$	524,725
Classified		13,803		13,803
Total	$	538,528	$	538,528

Consumer Credit Exposure By Payment Activity:	Indirect Auto		Specialty Lending		Direct		Total
Performing	$	1,190,455	$	540,756	$	484,292	$	2,215,503
Nonperforming		3,180		1,307		2,953		7,440
Total	$	1,193,635	$	542,063	$	487,245	$	2,222,943

Residential Real Estate Credit Exposure By Payment Activity:	Residential Real Estate		Total
Performing	$	1,312,742	$	1,312,742
Nonperforming		6,535		6,535
Total	$	1,319,277	$	1,319,277

Acquired
Commercial Credit Exposure
By Internally Assigned Grade:	C&I		CRE		Total
Pass	$	17,801	$	60,545	$	78,346
Special Mention		1,269		-		1,269
Substandard		294		392		686
Total	$	19,364	$	60,937	$	80,301

Business Banking Credit Exposure By Internally Assigned Grade:	Business Banking		Total
Non-classified	$	32,030	$	32,030
Classified		2,935		2,935
Total	$	34,965	$	34,965

Consumer Credit Exposure
By Payment Activity:	Direct		Total
Performing	$	23,628	$	23,628
Nonperforming		105		105
Total	$	23,733	$	23,733

Residential Real Estate Credit Exposure By Payment Activity:	Residential Real Estate		Total
Performing	$	124,509	$	124,509
Nonperforming		1,370		1,370
Total	$	125,879	$	125,879

The following table illustrates the recorded investment and number of modifications for modified loans, 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, 2019
(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial Loans:
C&I		1	$	65	$	65
Business Banking		2		388		388
Total Commercial Loans		3	$	453	$	453
Consumer Loans:
Indirect Auto		5	$	74	$	74
Direct		6		320		320
Total Consumer Loans		11	$	394	$	394
Residential Real Estate		6	$	388	$	405
Total Troubled Debt Restructurings		20	$	1,235	$	1,252

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, 2019
(Dollars in thousands)	Number of Contracts		Recorded Investment
Consumer Loans:
Indirect Auto		2	$	17
Direct		10		600
Total Consumer Loans		12	$	617
Residential Real Estate		8	$	398
Total Troubled Debt Restructurings		20	$	1,015