Loans

9 Months Ended

Sep. 30, 2023

Loans and Leases Receivable Disclosure [Abstract]

(5.) LOANS

The Company’s loan portfolio consisted of the following as of the dates indicated (in thousands):


	Principal Amount Outstanding		Net Deferred Loan (Fees) Costs			Loans, Net
September 30, 2023
Commercial business	$	710,795	$	743		$	711,538
Commercial mortgage		1,989,357		(4,078	)		1,985,279
Residential real estate loans		621,913		13,296			635,209
Residential real estate lines		73,341		3,381			76,722
Consumer indirect		947,035		35,102			982,137
Other consumer		40,319		(38	)		40,281
Total	$	4,382,760	$	48,406			4,431,166
Allowance for credit losses – loans							(49,630	)
Total loans, net						$	4,381,536
December 31, 2022
Commercial business	$	663,611	$	638		$	664,249
Commercial mortgage		1,683,814		(3,974	)		1,679,840
Residential real estate loans		576,279		13,681			589,960
Residential real estate lines		74,432		3,238			77,670
Consumer indirect		985,580		38,040			1,023,620
Other consumer		15,002		108			15,110
Total	$	3,998,718	$	51,731			4,050,449
Allowance for credit losses – loans							(45,413	)
Total loans, net						$	4,005,036

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $1.9 million and $550 thousand as of September 30, 2023 and December 31, 2022, respectively.

The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote. As of September 30, 2023, and December 31, 2022, AIR for loans totaled $20.7 million and $16.6 million, respectively, and is included in other assets on the Company’s consolidated statements of financial condition.

(5.) LOANS (Continued)

Past Due Loans Aging

The Company’s recorded investment, by loan class, in current and nonaccrual loans, as well as an analysis of accruing delinquent loans is set forth as of the dates indicated (in thousands):


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Nonaccrual		Current		Total Loans		Nonaccrual with no allowance
September 30, 2023
Commercial business	$	30	$	56	$	—	$	86	$	254	$	710,455	$	710,795	$	169
Commercial mortgage		8,685		3,014		—		11,699		686		1,976,972		1,989,357		686
Residential real estate loans		2,237		—		—		2,237		4,992		614,684		621,913		4,992
Residential real estate lines		64		—		—		64		201		73,076		73,341		201
Consumer indirect		11,290		2,893		—		14,183		3,382		929,470		947,035		3,382
Other consumer		74		1		6		81		—		40,238		40,319		—
Total loans, gross	$	22,380	$	5,964	$	6	$	28,350	$	9,515	$	4,344,895	$	4,382,760	$	9,430
December 31, 2022
Commercial business	$	176	$	10	$	—	$	186	$	340	$	663,085	$	663,611	$	233
Commercial mortgage		—		—		—		—		2,564		1,681,250		1,683,814		659
Residential real estate loans		1,306		28		—		1,334		4,071		570,874		576,279		4,071
Residential real estate lines		264		102		—		366		142		73,924		74,432		142
Consumer indirect		12,637		2,073		—		14,710		3,079		967,791		985,580		3,079
Other consumer		111		1		1		113		1		14,888		15,002		1
Total loans, gross	$	14,494	$	2,214	$	1	$	16,709	$	10,197	$	3,971,812	$	3,998,718	$	8,185

There were $6 thousand and $1 thousand in consumer overdrafts which were past due greater than 90 days as of September 30, 2023 and December 31, 2022. Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue interest.

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was no interest income recognized on nonaccrual loans during the nine months ended September 30, 2023 and 2022. Estimated interest income of $437 thousand and $447 thousand for the nine months ended September 30, 2023 and 2022, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

Loan Modifications for Borrower Experiencing Financial Difficulty

Loans may be modified when it is determined that a borrower is experiencing financial difficulty. Loan modifications may include principal forgiveness, interest rate reduction, an other-than-insignificant payment delay, and term extensions, or a combination of these concessions.

(5.) LOANS (Continued)

The following table presents the amortized cost basis of loans modified to borrowers experiencing financial difficulty, disaggregated by loan class and type of concession granted as of September 30, 2023 (in thousands):


	Term Extension
	Amortized Cost Basis		% of Total Loans
Loan Type
Commercial business	$	-		0.00	%
Commercial mortgage		-		0.00	%
Residential real estate loans		335		0.05	%
Residential real estate lines		-		0.00	%
Consumer indirect		-		0.00	%
Other consumer		-		0.00	%
Total	$	335		0.01	%

The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:


Term Extension
Loan Type		Financial Effect
Residential real estate loans		Added a weighted average 10.0 years to the life of the loans, which reduced monthly payment amount for the borrower.

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the nine months ended September 30, 2023 (in thousands):


	Payment Status (Amortized Cost Basis)
	Current		30-89 Days Past Due		90+ Days Past Due
Loan Type
Commercial business	$	-	$	-	$	-
Commercial mortgage		-		-		-
Residential real estate loans		80		158		97
Residential real estate lines		-		-		-
Consumer indirect		-		-		-
Other consumer		-		-		-
Total	$	80	$	158	$	97

(5.) LOANS (Continued)

Collateral Dependent Loans

Management has determined that specific commercial loans on nonaccrual status, all loans that have had their terms restructured when a borrower is experiencing financial difficulty, and other loans deemed appropriate by management where repayment is expected to be provided substantially through the operation or sale of the collateral to be collateral dependent loans. The following table presents the amortized cost basis of collateral dependent loans by collateral type as of September 30, 2023 and December 31, 2022 (in thousands):


	Collateral type
	Business assets		Real property		Total		Specific Reserve
September 30, 2023
Commercial business	$	11,901	$	—	$	11,901	$	1,533
Commercial mortgage		105		20,296		20,401		645
Total	$	12,006	$	20,296	$	32,302	$	2,178

December 31, 2022
Commercial business	$	147	$	993	$	1,140	$	126
Commercial mortgage		—		21,592		21,592		1,152
Total	$	147	$	22,585	$	22,732	$	1,278

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors such as the fair value of collateral. The Company analyzes commercial business and commercial mortgage loans individually by classifying the loans as to credit risk. Risk ratings are updated any time the situation warrants. The Company uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans that do not meet the criteria above that are analyzed individually as part of the process described above are considered “uncriticized” or pass-rated loans and are included in groups of homogeneous loans with similar risk and loss characteristics.

(5.) LOANS (Continued)

The following tables set forth the Company’s commercial loan portfolio, categorized by internally assigned asset classification, as of the dates indicated (in thousands):


	Term Loans Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
September 30, 2023
Commercial Business:
Uncriticized	$	76,916	$	139,811	$	84,553	$	37,819	$	22,265	$	57,698	$	246,765	$	—	$	665,827
Special mention		7,129		5,056		2,502		12,841		81		47		2,801		—		30,457
Substandard		2,042		41		55		—		60		1,258		11,798		—		15,254
Doubtful		—		—		—		—		—		—		—		—		—
Total Commercial Business loans	$	86,087	$	144,908	$	87,110	$	50,660	$	22,406	$	59,003	$	261,364	$	—	$	711,538
Current period gross write-offs	$	—	$	5	$	3	$	12	$	8	$	235	$	—	$	—	$	263

Commercial Mortgage:
Uncriticized	$	289,493	$	571,684	$	365,629	$	234,150	$	152,261	$	316,695	$	—	$	—	$	1,929,912
Special mention		2,300		339		4,140		9,176		—		16,373		—		—		32,328
Substandard		3,425		497		518		1,036		190		17,373		—		—		23,039
Doubtful		—		—		—		—		—		—		—		—		—
Total Commercial Mortgage loans	$	295,218	$	572,520	$	370,287	$	244,362	$	152,451	$	350,441	$	—	$	—	$	1,985,279
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	18	$	—	$	—	$	18


	Term Loans Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
December 31, 2022
Commercial Business
Uncriticized	$	146,581	$	105,001	$	61,115	$	29,644	$	39,625	$	21,467	$	244,848	$	—	$	648,281
Special mention		238		2,351		8,736		7		5		—		1,809		—		13,146
Substandard		—		72		—		42		516		1,034		1,158		—		2,822
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	146,819	$	107,424	$	69,851	$	29,693	$	40,146	$	22,501	$	247,815	$	—	$	664,249
Commercial Mortgage
Uncriticized	$	464,863	$	380,138	$	260,463	$	171,918	$	116,770	$	248,771	$	—	$	—	$	1,642,923
Special mention		—		—		2,319		136		—		11,784		—		—		14,239
Substandard		2,987		202		105		78		10,104		9,202		—		—		22,678
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	467,850	$	380,340	$	262,887	$	172,132	$	126,874	$	269,757	$	—	$	—	$	1,679,840

(5.) LOANS (Continued)

The Company utilizes payment status as a means of identifying and reporting problem and potential problem retail loans. The Company considers nonaccrual loans and loans past due greater than 90 days and still accruing interest to be non-performing. The following tables set forth the Company’s retail loan portfolio, categorized by performance status, as of the dates indicated (in thousands):


	Term Loans Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
September 30, 2023
Residential Real Estate Loans
Performing	$	94,045	$	79,520	$	79,578	$	109,822	$	69,564	$	197,688	$	—	$	—	$	630,217
Nonperforming		—		102		1,284		744		840		2,022		—		—		4,992
Total Residential Real Estate Loans	$	94,045	$	79,622	$	80,862	$	110,566	$	70,404	$	199,710	$	—	$	—	$	635,209
Current period gross write-offs	$	—	$	—	$	—	$	—	$	32	$	70	$	—	$	—	$	102

Residential Real Estate Lines
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	71,149	$	5,372	$	76,521
Nonperforming		—		—		—		—		—		—		31		170		201
Total Residential Real Estate Lines	$	—	$	—	$	—	$	—	$	—	$	—	$	71,180	$	5,542	$	76,722
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	28	$	13	$	41

Consumer Indirect
Performing	$	201,305	$	361,192	$	255,880	$	89,404	$	37,256	$	33,718	$	—	$	—	$	978,755
Nonperforming		643		1,105		1,064		300		149		121		—		—		3,382
Total Consumer Indirect Loans	$	201,948	$	362,297	$	256,944	$	89,704	$	37,405	$	33,839	$	—	$	—	$	982,137
Current period gross write-offs	$	342	$	4,331	$	4,254	$	1,343	$	1,018	$	1,189	$	—	$	—	$	12,477

Other Consumer
Performing	$	29,304	$	4,453	$	1,680	$	1,171	$	311	$	644	$	2,712	$	—	$	40,275
Nonperforming		—		—		—		—		—		—		6		—		6
Total Other Consumer Loans	$	29,304	$	4,453	$	1,680	$	1,171	$	311	$	644	$	2,718	$	—	$	40,281
Current period gross write-offs	$	713	$	122	$	105	$	32	$	28	$	19	$	45	$	—	$	1,064

(5.) LOANS (Continued)


	Term Loans Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
December 31, 2022
Residential Real Estate Loans
Performing	$	79,882	$	85,821	$	118,819	$	76,437	$	55,520	$	169,410	$	—	$	—	$	585,889
Nonperforming		—		305		510		795		677		1,784		—		—		4,071
Total	$	79,882	$	86,126	$	119,329	$	77,232	$	56,197	$	171,194	$	—	$	—	$	589,960
Residential Real Estate Lines
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	70,942	$	6,586	$	77,528
Nonperforming		—		—		—		—		—		—		34		108		142
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	70,976	$	6,694	$	77,670
Consumer Indirect
Performing	$	440,332	$	331,902	$	126,664	$	59,981	$	39,352	$	22,310	$	—	$	—	$	1,020,541
Nonperforming		748		1,209		432		381		205		104		—		—		3,079
Total	$	441,080	$	333,111	$	127,096	$	60,362	$	39,557	$	22,414	$	—	$	—	$	1,023,620
Other Consumer
Performing	$	6,463	$	2,664	$	2,043	$	761	$	213	$	308	$	2,656	$	—	$	15,108
Nonperforming		—		—		—		—		—		—		2		—		2
Total	$	6,463	$	2,664	$	2,043	$	761	$	213	$	308	$	2,658	$	—	$	15,110

(5.) LOANS (Continued)

Allowance for Credit Losses – Loans

The following table sets forth the changes in the allowance for credit losses – loans for the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Commercial Business			Commercial Mortgage			Residential Real Estate Loans			Residential Real Estate Lines			Consumer Indirect			Other Consumer			Total
Three months ended September 30, 2023
Allowance for credit losses – loans:
Beginning balance	$	13,418		$	16,826		$	4,646		$	710		$	13,306		$	930		$	49,836
Charge-offs		(146	)		—			—			—			(4,848	)		(344	)		(5,338	)
Recoveries		114			972			4			—			2,565			85			3,740
(Benefit) provision		(600	)		(1,521	)		(791	)		(173	)		3,583			894			1,392
Ending balance	$	12,786		$	16,277		$	3,859		$	537		$	14,606		$	1,565		$	49,630
Nine months ended September 30, 2023
Beginning balance	$	12,585		$	14,412		$	3,301		$	608		$	14,238		$	269		$	45,413
Charge-offs		(263	)		(18	)		(102	)		(41	)		(12,477	)		(1,064	)		(13,965	)
Recoveries		322			976			35			—			8,056			253			9,642
Provision (benefit)		142			907			625			(30	)		4,789			2,107			8,540
Ending balance	$	12,786		$	16,277		$	3,859		$	537		$	14,606		$	1,565		$	49,630

	Commercial Business			Commercial Mortgage			Residential Real Estate Loans			Residential Real Estate Lines			Consumer Indirect			Other Consumer			Total
Three months ended September 30, 2022
Allowance for credit losses – loans:
Beginning balance	$	10,140		$	12,064		$	2,140		$	509		$	17,332		$	267		$	42,452
Charge-offs		(20	)		—			—			(38	)		(4,058	)		(398	)		(4,514	)
Recoveries		116			1			4			3			2,168			69			2,361
Provision (benefit)		1,288			2,054			210			180			(260	)		335			3,807
Ending balance	$	11,524		$	14,119		$	2,354		$	654		$	15,182		$	273		$	44,106
Nine months ended September 30, 2022
Beginning balance		11,099			14,777			1,604			379			11,611			206			39,676
Charge-offs		(262	)		—			(56	)		(38	)		(9,216	)		(1,083	)		(10,655	)
Recoveries		305			2,020			19			20			6,129			262			8,755
Provision (benefit)		382			(2,678	)		787			293			6,658			888			6,330
Ending balance	$	11,524		$	14,119		$	2,354		$	654		$	15,182		$	273		$	44,106

(5.) LOANS (Continued)

Risk Characteristics

Commercial business loans primarily consist of loans to small to mid-sized businesses in our market area in a diverse range of industries. These loans are typically associated with higher credit risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. The credit risk related to commercial loans is largely influenced by general economic conditions, including inflation, and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.

Commercial mortgage loans generally have larger balances and involve a greater degree of risk than residential mortgage loans, potentially resulting in higher losses on an individual customer basis. Loan repayment is often dependent on the successful operation and management of the properties, as well as on the collateral securing the loan. Economic events, including inflation, influencing the ability of the tenants to pay rent at these properties, or conditions in the real estate market could have an adverse impact on the cash flows generated by properties securing the Company’s commercial real estate loans and on the value of such properties.

Residential real estate loans (comprised of conventional mortgages and home equity loans) and residential real estate lines of credit (comprised of home equity lines of credit) are generally made based on the borrower’s ability to make repayment from his or her employment and other income but are secured by real property whose value tends to be more easily ascertainable. Credit risk for these types of loans is generally influenced by general economic conditions, the characteristics of individual borrowers, and the nature of the loan collateral.

Consumer indirect and other consumer loans may entail greater credit risk than residential mortgage loans and home equities, particularly in the case of other consumer loans which are primarily unsecured or, in the case of some BaaS loans, secured by depreciable assets such as solar panels, and in the case of indirect consumer loans, secured by depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by inflation and adverse personal circumstances such as job loss, illness or personal bankruptcy, including the heightened risk that such circumstances may arise as a result of inflation. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.