Table of Contents Note 5 — Allowance for Credit Losses Allowance for Loan and Lease Losses The methodology used to estimate the appropriate level of the allowance for loan and lease losses is described in Note 1, under the heading “Allowance for Credit Losses.” The allowance for loan and lease losses at December 31, 2020, represents the Company’s current estimate of lifetime credit losses inherent in the loan and lease portfolio. The following table shows the changes in the allowance for loan and lease losses, segregated by portfolio segment, for each of the three years ended December 31. The allowance for loan and lease losses increased year-over-year in 2020 for most portfolio segments due to downward migration in credit quality and increased risk as a result of the pandemic. The impact of adopting ASC 326 is also noted for each loan segment. Generally, a decrease in the allowance upon adoption was related to shorter duration assets in the loan class and likewise, an increase was generally due to longer duration assets. Commercial and agricultural  – loan growth was due primarily to PPP loans which have minimal credit risk. The decline in the allowance was principally due to the impact of the short duration lines of credit driving lower reserves and minimal reserves for PPP loans. Auto and light truck  – allowance increased as a result of the significant impact the pandemic had on the portfolio, which includes the particularly hard-hit bus industry. The increase related to credit deterioration was somewhat offset by a lower allowance for the auto rental industry due to the short average duration of the loans. Loan balances declined somewhat year-over-year. Medium and heavy duty truck  – allowance decrease was principally attributable to credit quality metrics continuing to be relatively strong therefore a recovery of provision was recognized during the period. Aircraft  – the allowance was principally impacted by loan growth. The Company has historically carried a higher allowance in this portfolio due to volatility. The higher allowance during the period was due to charge-offs impacting the loss history and the long duration assets. Construction equipment  – allowance increase was mainly driven by exposure to mining and frac sand industries. While the total Company exposure is limited, the impact of lower oil prices on this portfolio was relevant. Commercial real estate  – allowance increase was a result of loan growth and exposure to industries hardest hit by the pandemic, i.e. hotels and accommodations and, to a lesser extent, retail and office buildings. The Company’s exposure to these industries is limited, but the impact was noticeable in this asset class. Residential real estate and home equity  – increased allowance as a result of longer asset duration. Consumer  – segment saw an increase in allowance due to portfolio mix and duration. As of December 31, 2020, the COVID-19 pandemic created extraordinary circumstances affecting the loan and lease portfolios. The forecast considers global and domestic economic effects from the ongoing pandemic as well as the potential impact of U.S. monetary and fiscal policy, including the recently passed Coronavirus Response and Relief Supplemental Appropriations Act, which may impact clients; particularly those who will benefit from a second round of paycheck protection program funds or targeted funds for struggling industry sectors such as transportation. The Company’s assumption was that the economic slowdown will have an adverse impact on the loan and lease portfolio over the next two years. GDP is expected to grow throughout 2021 but is not expected to return to pre-pandemic levels until 2022. Likewise, unemployment is not likely to get back to pre-shutdown levels until 2022. As a result of the unprecedented economic uncertainty caused by the COVID-19 pandemic, the Company’s future loss estimates may vary considerably from the December 31, 2020 assumptions. Liability for Credit Losses on Unfunded Loan Commitments Economic Outlook The liability for credit losses inherent in unfunded loan commitments is included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition. The following table shows the changes in the liability for credit losses on unfunded loan commitments for each of the three years ended December 31. As a lessor, the Company’s loan and lease portfolio includes direct finance leases, which are included in commercial and agricultural, auto and light truck, medium and heavy duty truck, aircraft, and construction equipment on the Consolidated Statements of Financial Condition. The Company also finances various types of construction equipment, medium and heavy duty trucks, automobiles and other equipment under leases classified as Note 6 — Lease Investments (Dollars in thousands)  Commercial and agricultural Auto and light truck Medium and heavy duty truck Aircraft Construction equipment Commercial real estate Residential real estate and home equity Consumer Total 2020 Balance, beginning of year $ 23,671 $ 14,400 $ 4,612 $ 31,058 $ 14,120 $ 18,350 $ 3,609 $ 1,434 $ 111,254 Impact of ASC 326 adoption (655) (1,303) 2,414 484 372 (649) 1,688 233 2,584 Adjusted balance, beginning of year 23,016 13,097 7,026 31,542 14,492 17,701 5,297 1,667 113,838 Charge-offs 903 7,107 15 855 4,090 37 74 893 13,974 Recoveries 663 499 18 1,800 1,415 58 33 303 4,789 Net charge-offs 240 6,608 (3) (945) 2,675 (21) 41 590 9,185 Provision (recovery of provision) (547) 22,437 (629) 1,566 7,349 5,036 118 671 36,001 Balance, end of year $ 22,229 $ 28,926 $ 6,400 $ 34,053 $ 19,166 $ 22,758 $ 5,374 $ 1,748 $ 140,654 2019 Balance, beginning of year $ 17,063  $ 14,689  $ 4,303  $ 33,047  $ 10,922  $ 15,705  $ 3,425  $ 1,315  $ 100,469  Charge-offs 1,040  991  1,132  3,066  238  5  53  1,066  7,591  Recoveries 664  97  32  1,143  160  75  85  287  2,543  Net charge-offs (recoveries) 376  894  1,100  1,923  78  (70) (32) 779  5,048  Provision (recovery of provision) 6,984  605  1,409  (66) 3,276  2,575  152  898  15,833  Balance, end of year $ 23,671  $ 14,400  $ 4,612  $ 31,058  $ 14,120  $ 18,350  $ 3,609  $ 1,434  $ 111,254  2018 Balance, beginning of year $ 16,228  $ 10,103  $ 4,844  $ 34,619  $ 9,343  $ 14,792  $ 3,666  $ 1,288  $ 94,883  Charge-offs 229  3,308  23  12,222  288  70  63  909  17,112  Recoveries 222  68  —  2,499  100  53  23  271  3,236  Net charge-offs (recoveries) 7  3,240  23  9,723  188  17  40  638  13,876  Provision (recovery of provision) 842  7,826  (518) 8,151  1,767  930  (201) 665  19,462  Balance, end of year $ 17,063  $ 14,689  $ 4,303  $ 33,047  $ 10,922  $ 15,705  $ 3,425  $ 1,315  $ 100,469  (Dollars in thousands) 2020 2019 2018 Balance, beginning of year $ 3,172 $ 3,075  $ 3,050  Impact of ASC 326 adoption 777 —  —  Adjusted balance, beginning of year 3,949 3,075  3,050  Provision (recovery of provision) 550 97  25  Balance, end of year $ 4,499 $ 3,172  $ 3,075 