Allowance for Credit Losses and Credit Quality of Loans

6 Months Ended

Jun. 30, 2022

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 allowance for credit losses totaled $93.6 million at June 30, 2022, compared to $92.0 million at December 31, 2021. The allowance for credit losses as a percentage of loans was 1.20% at June 30, 2022, compared to 1.23% at December 31, 2021.

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 June 30, 2022 incorporated 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, particularly significant unknowns relating to downside risks as of the measurement date. The baseline outlook reflected an unemployment rate environment initially at pre-coronavirus (“COVID-19”) pandemic levels of 3.8% but falling below pre-COVID-19 pandemic levels by the end of the forecast period to a low of 3.4%. Northeast GDP’s annualized growth (on a quarterly basis) is expected to start the third quarter of 2022 at about 9.5% and hover around 5% by the end of the forecast period. Other utilized economic variables worsened overall during the quarter, with outlooks for annualized growth in retail sales and business output declining from the prior quarter along with housing starts. Key assumptions in the baseline economic outlook included the containment of the European conflict to only Russia and Ukraine, further interest rate hikes by the Federal Reserve, and achievement of full employment by the end of 2022. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. Under this scenario, northeast unemployment rises from 4.2% in the second quarter of 2022 to a peak of 7.0% in the third quarter of 2023. The alternative upside scenario incorporated a more optimistic outlook than the baseline scenario, with an imminent return to full employment, with northeast unemployment declining to 2.9% by the end of the forecast period. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of June 30, 2022. At June 30, 2022, the weightings were 50%, 0%, and 50% for the baseline, upside, and downside economic forecasts, respectively. Additionally, qualitative adjustments were made for isolated model limitations related to modeled outputs given abnormally high retail sales and business output growth rates in prior quarters. These factors were considered through separate quantitative processes and incorporated into the estimate of current expected credit losses at June 30, 2022.

The quantitative model as of March 31, 2022 incorporated 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, particularly significant unknowns relating to downside risks as of the measurement date. The baseline outlook reflected an unemployment rate environment initially above pre-COVID-19 levels at 4.3% but falling below pre-coronavirus pandemic levels by the fourth quarter of the forecast period and to a low of 3.4%. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the second quarter of 2022 at approximately 9% and hover around 5.5% by the middle and end of the forecast period. Other utilized economic variables either improved or remained relatively flat, with retail sales and business output remaining steady from the prior quarter and housing starts increasing from the prior quarter’s forecast. Key assumptions in the baseline economic outlook included continued abatement of COVID-19, the containment of the European conflict to only Russia and Ukraine, further increase of interest rates by the Federal Reserve, and achievement of full employment by the end of 2022. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. Under this scenario, northeast unemployment rises from 4.8% in the first quarter of 2022 to a peak of 7.15% in the second quarter of 2023. The alternative upside scenario incorporated a more optimistic outlook than the baseline scenario, with an imminent return to full employment with northeast unemployment declining to 2.99% by the end of the forecast period. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of March 31, 2022. At March 31, 2022, the weightings were 60%, 0% and 40% for the baseline, upside and downside economic forecasts, respectively. The Company also continued to monitor the level of criticized and classified loans in the first quarter of 2022 compared to the level contemplated by the model during similar, historical economic conditions, and determined that an adjustment was no longer required.

The quantitative model as of December 31, 2021 incorporated a baseline economic outlook along with alternative upside and downside scenarios sourced from a reputable third-party to accommodate other potential economic conditions in the model. The baseline outlook reflected an unemployment rate environment initially above pre-COVID-19 levels at 4.8% but falling below pre-COVID-19 levels by the end of the forecast period to 3.5%. Northeast GDP’s annualized growth (on a quarterly basis) was expected to start the first quarter of 2022 at approximately 9% and hover around 5% by the middle and end of the forecast period. The alternative downside scenario assumed deteriorated economic and pandemic related conditions from the baseline outlook. Under this scenario, northeast unemployment rose from 5.7% in the fourth quarter of 2021 to a peak of 8% in the first quarter of 2023, remaining around or above 7% for the entire forecast period. The alternative upside scenario incorporated a more optimistic outlook than the baseline scenario, with a swift return to full employment by the second quarter of 2022 and with northeast unemployment moving down to 3.1% by the end of the forecast period. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of December 31, 2021. At December 31, 2021, the weightings were 60%, 10% and 30% for the baseline, upside and downside economic forecasts, respectively. Additional adjustments were made for COVID-19 related factors not incorporated in the forecasts, such as the mitigating impact of unprecedented stimulus in the second and third quarters of 2020, including direct payments to individuals, increased unemployment benefits, the Company’s loan deferral and modification initiatives and various government sponsored loan programs. The Company also continued to monitor the level of criticized and classified loans in the fourth quarter of 2021 compared to the level contemplated by the model during similar, historical economic conditions, and an adjustment was made to estimate potential additional losses above modeled losses. Additionally, qualitative adjustments were made for Moody’s baseline economic forecast to include impacts of the Build Back Better Act not passing by December 31, 2021 and to address potential economic deterioration due to Omicron, as well as isolated model limitations related to modeled outputs given abnormally high retail sales and business output growth rates in historical periods. These factors were considered through separate quantitative processes and incorporated into the estimate of current expected credit losses at December 31, 2021.

There were no loans purchased with credit deterioration during the six months ended June 30, 2022 or the year ended December 31, 2021. During 2022, the Company purchased $8.0 million of residential loans at a slight discount 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. During 2021, the Company purchased $58.9 million of residential loans at a 2%-5% premium and $92.5 million in consumer loans at par. The allowance for credit losses recorded for these loans on the purchase date was $6.8 million. The Company made a policy election to report AIR in the other assets line item on the balance sheet. AIR on loans totaled $19.6 million at June 30, 2022 and $19.5 million at December 31, 2021 and there was no estimated allowance for credit losses related to AIR as of June 30, 2022 and December 31, 2021.

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

(In thousands)	Commercial Loans			Consumer Loans			Residential			Total
Balance as of March 31, 2022	$	28,557		$	43,591		$	17,852		$	90,000
Charge-offs		(447	)		(3,509	)		(90	)		(4,046	)
Recoveries		837			2,117			302			3,256
Provision		3,411			2,741			(1,762	)		4,390
Ending balance as of June 30, 2022	$	32,358		$	44,940		$	16,302		$	93,600
Balance as of March 31, 2021	$	50,045		$	34,580		$	20,375		$	105,000
Charge-offs		(389	)		(3,271	)		(349	)		(4,009	)
Recoveries		61			2,288			376			2,725
Provision		(5,526	)		1,284			(974	)		(5,216	)
Ending balance as of June 30, 2021	$	44,191		$	34,881		$	19,428		$	98,500

(In thousands)	Commercial Loans			Consumer Loans			Residential			Total
Balance as of December 31, 2021	$	28,941		$	44,253		$	18,806		$	92,000
Charge-offs		(1,035	)		(7,100	)		(402	)		(8,537	)
Recoveries		930			3,769			452			5,151
Provision		3,522			4,018			(2,554	)		4,986
Ending balance as of June 30, 2022	$	32,358		$	44,940		$	16,302		$	93,600
Balance as of December 31, 2020	$	50,942		$	37,803		$	21,255		$	110,000
Charge-offs		(631	)		(7,619	)		(419	)		(8,669	)
Recoveries		179			4,363			639			5,181
Provision		(6,299	)		334			(2,047	)		(8,012	)
Ending balance as of June 30, 2021	$	44,191		$	34,881		$	19,428		$	98,500

The increase in the allowance for credit losses from December 31, 2021 and March 31, 2022 to June 30, 2022 was due to an increase in loan balances, an additional specific reserve established during the second quarter and a modest deterioration in the economic forecast. The decrease in the allowance for credit losses from December 31, 2020 and March 31, 2021 to June 30, 2021 was primarily due to an improvement in the economic forecast.

Individually Evaluated Loans

As of June 30, 2022, there were five relationships identified to be evaluated for loss on an individual basis which, in aggregate, had an amortized cost basis of $9.3 million, with an allowance for credit loss of $0.8 million, which was deemed collateral dependent, and therefore determined by an estimate of the fair value of the collateral which consisted of business assets (accounts receivable, inventory, machinery and equipment). As of December 31, 2021, these same five relationships were identified to be evaluated for loss on an individual basis with an aggregate amortized cost basis of $10.2 million and no allowance for credit loss.

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 June 30, 2022
Commercial loans:
C&I	$	704	$	5	$	37	$	746	$	3,177	$	1,248,962	$	1,252,885
CRE		12,230		5		-		12,235		11,392		2,561,634		2,585,261
PPP		-		-		3		3		-		17,283		17,286
Total commercial loans	$	12,934	$	10	$	40	$	12,984	$	14,569	$	3,827,879	$	3,855,432
Consumer loans:
Auto	$	7,288	$	1,317	$	537	$	9,142	$	1,089	$	896,532	$	906,763
Other consumer		3,255		1,378		919		5,552		332		944,621		950,505
Total consumer loans	$	10,543	$	2,695	$	1,456	$	14,694	$	1,421	$	1,841,153	$	1,857,268
Residential	$	2,034	$	772	$	600	$	3,406	$	7,683	$	2,053,892	$	2,064,981
Total loans	$	25,511	$	3,477	$	2,096	$	31,084	$	23,673	$	7,722,924	$	7,777,681

(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, 2021
Commercial loans:
C&I	$	622	$	-	$	-	$	622	$	3,618	$	1,126,430	$	1,130,670
CRE		1,219		132		-		1,351		12,726		2,550,910		2,564,987
PPP		-		-		-		-		-		101,222		101,222
Total commercial loans	$	1,841	$	132	$	-	$	1,973	$	16,344	$	3,778,562	$	3,796,879
Consumer loans:
Auto	$	6,911	$	1,547	$	545	$	9,003	$	1,295	$	816,210	$	826,508
Other consumer		3,789		1,816		1,105		6,710		233		832,447		839,390
Total consumer loans	$	10,700	$	3,363	$	1,650	$	15,713	$	1,528	$	1,648,657	$	1,665,898
Residential	$	2,481	$	420	$	808	$	3,709	$	12,413	$	2,019,560	$	2,035,682
Total loans	$	15,022	$	3,915	$	2,458	$	21,395	$	30,285	$	7,446,779	$	7,498,459

As of June 30, 2022 and December 31, 2021, 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, which facilitates recognition and response to problem loans and potential problem loans.

Commercial Grading System

For Commercial and Industrial (“C&I”), Paycheck Protection Program (“PPP”) 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 and/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 (e.g., declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (e.g., 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 PPP 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 year of origination (vintage):

(In thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
As of June 30, 2022
C&I
By internally assigned grade:
Pass	$	202,059	$	281,480	$	195,394	$	104,478	$	47,547	$	39,547	$	341,800	$	7,760	$	1,220,065
Special mention		730		137		2,240		1,478		1,644		1,438		10,526		-		18,193
Substandard		-		1,588		785		3,133		137		4,495		4,382		98		14,618
Doubtful		-		-		-		-		-		9		-		-		9
Total C&I	$	202,789	$	283,205	$	198,419	$	109,089	$	49,328	$	45,489	$	356,708	$	7,858	$	1,252,885
CRE
By internally assigned grade:
Pass	$	196,306	$	472,180	$	421,023	$	340,413	$	228,895	$	627,839	$	130,986	$	60,376	$	2,478,018
Special mention		613		776		809		2,685		4,781		42,689		850		-		53,203
Substandard		-		-		135		4,192		7,945		33,052		4,019		-		49,343
Doubtful		-		-		-		-		-		4,697		-		-		4,697
Total CRE	$	196,919	$	472,956	$	421,967	$	347,290	$	241,621	$	708,277	$	135,855	$	60,376	$	2,585,261
PPP
By internally assigned grade:
Pass	$	-	$	17,283	$	3	$	-	$	-	$	-	$	-	$	-	$	17,286
Total PPP	$	-	$	17,283	$	3	$	-	$	-	$	-	$	-	$	-	$	17,286
Auto
By payment activity:
Performing	$	283,827	$	290,414	$	97,519	$	135,538	$	68,543	$	29,296	$	-	$	-	$	905,137
Nonperforming		152		405		400		377		210		82		-		-		1,626
Total auto	$	283,979	$	290,819	$	97,919	$	135,915	$	68,753	$	29,378	$	-	$	-	$	906,763
Other consumer
By payment activity:
Performing	$	261,318	$	349,126	$	126,781	$	95,652	$	62,567	$	34,103	$	19,048	$	659	$	949,254
Nonperforming		80		440		276		131		186		132		-		6		1,251
Total other consumer	$	261,398	$	349,566	$	127,057	$	95,783	$	62,753	$	34,235	$	19,048	$	665	$	950,505
Residential
By payment activity:
Performing	$	141,614	$	348,291	$	220,386	$	166,254	$	164,916	$	773,359	$	226,559	$	15,319	$	2,056,698
Nonperforming		79		54		666		301		972		6,073		119		19		8,283
Total residential	$	141,693	$	348,345	$	221,052	$	166,555	$	165,888	$	779,432	$	226,678	$	15,338	$	2,064,981
Total loans	$	1,086,778	$	1,762,174	$	1,066,417	$	854,632	$	588,343	$	1,596,811	$	738,289	$	84,237	$	7,777,681

(In thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
As of December 31, 2021
C&I
By internally assigned grade:
Pass	$	335,685	$	219,931	$	114,617	$	64,310	$	20,137	$	32,146	$	280,476	$	15,731	$	1,083,033
Special mention		148		5,255		4,641		2,430		2,699		1,111		11,835		522		28,641
Substandard		1,482		874		7,010		187		2,582		3,272		3,512		34		18,953
Doubtful		-		-		-		1		42		-		-		-		43
Total C&I	$	337,315	$	226,060	$	126,268	$	66,928	$	25,460	$	36,529	$	295,823	$	16,287	$	1,130,670
CRE
By internally assigned grade:
Pass	$	489,300	$	434,866	$	370,377	$	236,274	$	251,082	$	441,310	$	141,367	$	43,942	$	2,408,518
Special mention		789		826		11,235		3,544		15,379		53,372		780		420		86,345
Substandard		-		77		4,539		12,934		12,424		34,563		744		-		65,281
Doubtful		-		-		-		-		-		4,843		-		-		4,843
Total CRE	$	490,089	$	435,769	$	386,151	$	252,752	$	278,885	$	534,088	$	142,891	$	44,362	$	2,564,987
PPP
By internally assigned grade:
Pass	$	92,884	$	8,338	$	-	$	-	$	-	$	-	$	-	$	-	$	101,222
Total PPP	$	92,884	$	8,338	$	-	$	-	$	-	$	-	$	-	$	-	$	101,222
Auto
By payment activity:
Performing	$	351,778	$	129,419	$	183,959	$	101,441	$	46,007	$	12,064	$	-	$	-	$	824,668
Nonperforming		305		319		457		411		266		82		-		-		1,840
Total auto	$	352,083	$	129,738	$	184,416	$	101,852	$	46,273	$	12,146	$	-	$	-	$	826,508
Other consumer
By payment activity:
Performing	$	427,401	$	151,300	$	116,451	$	78,523	$	29,705	$	15,660	$	19,011	$	1	$	838,052
Nonperforming		216		429		249		134		238		33		18		21		1,338
Total other consumer	$	427,617	$	151,729	$	116,700	$	78,657	$	29,943	$	15,693	$	19,029	$	22	$	839,390
Residential
By payment activity:
Performing	$	345,338	$	226,723	$	179,087	$	179,575	$	146,611	$	687,863	$	246,103	$	11,161	$	2,022,461
Nonperforming		-		1,411		643		1,072		1,534		8,522		-		39		13,221
Total residential	$	345,338	$	228,134	$	179,730	$	180,647	$	148,145	$	696,385	$	246,103	$	11,200	$	2,035,682
Total loans	$	2,045,326	$	1,179,768	$	993,265	$	680,836	$	528,706	$	1,294,841	$	703,846	$	71,871	$	7,498,459

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The allowance for losses on unfunded commitments totaled $5.1 million as of June 30, 2022 and December 31, 2021.

Troubled Debt Restructuring

When the Company modifies a loan in a TDR, 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 temporary reduction in the interest rate; or a change in scheduled payment amount. Residential and Consumer TDRs occurring during 2022 and 2021 were due to reductions in the interest rate and/or extensions 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.

TheCompany began offering loan modifications to assist borrowers during the COVID-19 national emergency. The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), along with a joint agency statement issued by banking regulatory agencies, provides that modifications made in response to COVID-19 do not need to be accounted for as a TDR. The Company evaluated the modification programs provided to its borrowers and concluded the modifications were generally made in accordance with the CARES Act guidance to borrowers who were in good standing prior to the COVID-19 pandemic and are not required to be designated 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 June 30, 2022						Three Months Ended June 30, 2021
(Dollars in thousands)	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Consumer loans:
Auto		-	$	-	$	-		1	$	19	$	19
Total consumer loans		-	$	-	$	-		1	$	19	$	19
Residential		2	$	98	$	123		3	$	369	$	423
Total TDRs		2	$	98	$	123		4	$	388	$	442

	Six Months Ended June 30, 2022						Six Months Ended June 30, 2021
(Dollars in thousands)	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Consumer loans:
Auto		-	$	-	$	-		1	$	19	$	19
Total consumer loans		-	$	-	$	-		1	$	19	$	19
Residential		4	$	216	$	247		6	$	611	$	675
Total TDRs		4	$	216	$	247		7	$	630	$	694

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 June 30, 2022				Three Months Ended June 30, 2021
(Dollars in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Residential		18	$	890		15	$	820
Total TDRs		18	$	890		15	$	820

	Six Months Ended June 30, 2022				Six Months Ended June 30, 2021
(Dollars in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Consumer loans:
Auto		1	$	11		2	$	18
Total consumer loans		1	$	11		2	$	18
Residential		34	$	1,714		26	$	1,218
Total TDRs		35	$	1,725		28	$	1,236