Loans | (6.) LOANS The Company’s loan portfolio consisted of the following as of the dates indicated (in thousands): Principal Net Deferred Loans, September 30, 2022 Commercial business $ 633,129 $ 765 $ 633,894 Commercial mortgage 1,567,888 ( 3,343 ) 1,564,545 Residential real estate loans 564,180 13,641 577,821 Residential real estate lines 74,148 3,188 77,336 Consumer indirect 959,719 37,704 997,423 Other consumer 15,719 113 15,832 Total $ 3,814,783 $ 52,068 3,866,851 Allowance for credit losses - loans ( 44,106 ) Total loans, net $ 3,822,745 December 31, 2021 Commercial business $ 639,368 $ ( 1,075 ) $ 638,293 Commercial mortgage 1,415,486 ( 2,698 ) 1,412,788 Residential real estate loans 563,579 13,720 577,299 Residential real estate lines 75,515 3,016 78,531 Consumer indirect 923,052 34,996 958,048 Other consumer 14,355 122 14,477 Total $ 3,631,355 $ 48,081 3,679,436 Allowance for credit losses - loans ( 39,676 ) Total loans, net $ 3,639,760 Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $ 2.1 million and $ 6.2 million as of September 30, 2022 and December 31, 2021, respectively. The CARES Act was passed by Congress and signed into law on March 27, 2020. The CARES Act established the PPP, an expansion of the SBA’s 7(a) loan program and the EIDL, administered directly by the SBA. The Company had $ 2.9 million and $ 57.5 million of PPP loans (included in commercial business above) as of September 30, 2022 and December 31, 2021 , respectively. In addition, the CARES Act provides that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 made between March 1, 2020 and January 1, 2022 that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Accordingly, the Company had $ 532.4 million of loans with modifications related to COVID-19 during 2020, with loans on deferral as of September 30, 2022 and December 31, 2021 of $ 2.2 million and $ 46.2 million , respectively. The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote. As of September 30, 2022 and December 31, 2021, AIR for loans totaled $ 13.7 million and $ 12.7 million , respectively, and is included in other assets on the Company’s consolidated statements of financial condition. (6.) 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 60-89 Days Greater Total Past Nonaccrual Current Total Nonaccrual September 30, 2022 Commercial business $ 1,062 $ 165 $ 973 $ 2,200 $ 385 $ 630,544 $ 633,129 $ 334 Commercial mortgage — — 13 13 830 1,567,045 1,567,888 807 Residential real estate loans 1,221 40 — 1,261 3,550 559,369 564,180 3,550 Residential real estate lines 86 — — 86 119 73,943 74,148 119 Consumer indirect 7,533 2,015 — 9,548 2,666 947,505 959,719 2,666 Other consumer 134 5 — 139 — 15,580 15,719 — Total loans, gross $ 10,036 $ 2,225 $ 986 $ 13,247 $ 7,550 $ 3,793,986 $ 3,814,783 $ 7,476 December 31, 2021 Commercial business $ 659 $ 34 $ 797 $ 1,490 $ 602 $ 637,276 $ 639,368 $ 477 Commercial mortgage 69 — — 69 6,414 1,409,003 1,415,486 781 Residential real estate loans 1,148 141 — 1,289 2,373 559,917 563,579 2,373 Residential real estate lines 18 3 — 21 200 75,294 75,515 200 Consumer indirect 5,706 770 — 6,476 1,780 914,796 923,052 1,780 Other consumer 121 1 — 122 — 14,233 14,355 — Total loans, gross $ 7,721 $ 949 $ 797 $ 9,467 $ 11,369 $ 3,610,519 $ 3,631,355 $ 5,611 The Company had $ 973 thousand and $ 797 thousand of PPP loans greater than 90 days past due and still accruing interest as of September 30, 2022 and December 31, 2021, respectively (included in commercial business above). Repayment of PPP loans is 100% secured by guarantees from the SBA. There were less than $ 1 thousand consumer overdrafts which were past due greater than 90 days as of September 30, 2022 and December 31, 2021. 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, 2022 and 2021. Estimated interest income of $ 447 thousand and $ 832 thousand for the nine months ended September 30, 2022 and 2021, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms. Troubled Debt Restructurings A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. Commercial loans modified in a TDR may involve temporary interest-only payments, term extensions, reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, collateral concessions, forgiveness of principal, forbearance agreements, or substituting or adding a new borrower or guarantor. There were no loans modified as a TDR during the nine months ended September 30, 2022 and 2021 . There were no loans modified as a TDR within the previous 12 months that defaulted during the nine months ended September 30, 2022 and 2021 . For purposes of this disclosure, a loan modified as a TDR is considered to have defaulted when the borrower becomes 90 days past due. (6.) LOANS (Continued) Collateral Dependent Loans Management has determined that specific commercial loans on nonaccrual status, all loans that have had their terms restructured in a troubled debt restructuring, 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. Collateral dependent loans at September 30, 2022 and December 31, 2021 included certain criticized COVID-19 bridge loans not otherwise classified as nonaccrual. The following table presents the amortized cost basis of collateral dependent loans by collateral type as of September 30, 2022 and December 31, 2021 (in thousands): Collateral type Business assets Real property Total Specific Reserve September 30, 2022 Commercial business $ 181 $ 964 $ 1,145 $ 188 Commercial mortgage — 22,833 22,833 2,527 Total $ 181 $ 23,797 $ 23,978 $ 2,715 December 31, 2021 Commercial business $ 326 $ 993 $ 1,319 $ 1,055 Commercial mortgage — 37,936 37,936 4,716 Total $ 326 $ 38,929 $ 39,255 $ 5,771 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. (6.) 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 2022 2021 2020 2019 2018 Prior Revolving Revolving Total September 30, 2022 Commercial Business Uncriticized $ 94,295 $ 112,228 $ 74,868 $ 33,470 $ 40,635 $ 26,151 $ 244,693 $ — $ 626,340 Special mention 263 2,337 11 73 13 33 1,155 — 3,885 Substandard — 38 76 22 567 1,001 1,965 — 3,669 Doubtful — — — — — — — — — Total $ 94,558 $ 114,603 $ 74,955 $ 33,565 $ 41,215 $ 27,185 $ 247,813 $ — $ 633,894 Commercial Mortgage Uncriticized $ 319,245 $ 371,251 $ 276,113 $ 171,289 $ 119,365 $ 244,827 $ 3,641 $ — $ 1,505,731 Special mention — 473 2,345 9,877 129 22,688 — — 35,512 Substandard 2,987 347 104 80 9,977 9,807 — — 23,302 Doubtful — — — — — — — — — Total $ 322,232 $ 372,071 $ 278,562 $ 181,246 $ 129,471 $ 277,322 $ 3,641 $ — $ 1,564,545 Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 Prior Revolving Revolving Total December 31, 2021 Commercial Business Uncriticized $ 141,925 $ 91,338 $ 68,433 $ 42,631 $ 24,847 $ 12,033 $ 248,338 $ — $ 629,545 Special mention — 132 166 44 180 1,344 1,993 — 3,859 Substandard 45 256 169 745 415 49 3,210 — 4,889 Doubtful — — — — — — — — — Total $ 141,970 $ 91,726 $ 68,768 $ 43,420 $ 25,442 $ 13,426 $ 253,541 $ — $ 638,293 Commercial Mortgage Uncriticized $ 342,483 $ 339,988 $ 176,753 $ 147,247 $ 128,381 $ 167,739 $ 3,712 $ — $ 1,306,303 Special mention 11,184 2,450 29,759 2,344 8,269 27,635 — — 81,641 Substandard 1,001 77 2,950 11,607 3,209 6,000 — — 24,844 Doubtful — — — — — — — — — Total $ 354,668 $ 342,515 $ 209,462 $ 161,198 $ 139,859 $ 201,374 $ 3,712 $ — $ 1,412,788 (6.) 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 2022 2021 2020 2019 2018 Prior Revolving Revolving Total September 30, 2022 Residential Real Estate Loans Performing $ 53,282 $ 86,500 $ 121,667 $ 77,987 $ 57,406 $ 177,429 $ — $ — $ 574,271 Nonperforming — 320 357 585 775 1,513 — — 3,550 Total $ 53,282 $ 86,820 $ 122,024 $ 78,572 $ 58,181 $ 178,942 $ — $ — $ 577,821 Residential Real Estate Lines Performing $ — $ — $ — $ — $ — $ — $ 70,364 $ 6,853 $ 77,217 Nonperforming — — — — — — 57 62 119 Total $ — $ — $ — $ — $ — $ — $ 70,421 $ 6,915 $ 77,336 Consumer Indirect Performing $ 347,722 $ 359,064 $ 141,033 $ 69,141 $ 47,378 $ 30,419 $ — $ — $ 994,757 Nonperforming 197 1,276 551 263 233 146 — — 2,666 Total $ 347,919 $ 360,340 $ 141,584 $ 69,404 $ 47,611 $ 30,565 $ — $ — $ 997,423 Other Consumer Performing $ 5,900 $ 3,077 $ 2,392 $ 938 $ 301 $ 349 $ 2,875 $ — $ 15,832 Nonperforming — — — — — — — — — Total $ 5,900 $ 3,077 $ 2,392 $ 938 $ 301 $ 349 $ 2,875 $ — $ 15,832 Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 Prior Revolving Revolving Total December 31, 2021 Residential Real Estate Loans Performing $ 92,620 $ 129,240 $ 85,876 $ 65,866 $ 50,932 $ 150,392 $ — $ — $ 574,926 Nonperforming 79 55 225 557 899 558 — — 2,373 Total $ 92,699 $ 129,295 $ 86,101 $ 66,423 $ 51,831 $ 150,950 $ — $ — $ 577,299 Residential Real Estate Lines Performing $ — $ — $ — $ — $ — $ — $ 70,521 $ 7,810 $ 78,331 Nonperforming — — — — — — 39 161 200 Total $ — $ — $ — $ — $ — $ — $ 70,560 $ 7,971 $ 78,531 Consumer Indirect Performing $ 452,601 $ 206,472 $ 122,849 $ 90,998 $ 51,598 $ 31,750 $ — $ — $ 956,268 Nonperforming 417 515 436 230 136 46 — — 1,780 Total $ 453,018 $ 206,987 $ 123,285 $ 91,228 $ 51,734 $ 31,796 $ — $ — $ 958,048 Other Consumer Performing $ 4,422 $ 3,738 $ 1,681 $ 763 $ 280 $ 1,044 $ 2,549 $ — $ 14,477 Nonperforming — — — — — — — — — Total $ 4,422 $ 3,738 $ 1,681 $ 763 $ 280 $ 1,044 $ 2,549 $ — $ 14,477 (6.) 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, 2022 and 2021 (in thousands): Commercial Commercial Residential Residential Consumer Other Total Three months ended September 30, 2022 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 Commercial Commercial Residential Residential Consumer Other Total Three months ended September 30, 2021 Beginning balance $ 11,005 $ 21,662 $ 2,299 $ 395 $ 10,748 $ 256 $ 46,365 Charge-offs ( 218 ) — ( 36 ) ( 60 ) ( 1,395 ) ( 250 ) ( 1,959 ) Recoveries 168 — 15 — 1,130 59 1,372 Provision (benefit) 889 ( 2,210 ) ( 302 ) 10 1,096 183 ( 334 ) Ending balance $ 11,844 $ 19,452 $ 1,976 $ 345 $ 11,579 $ 248 $ 45,444 Nine months ended September 30, 2021 Beginning balance 13,580 21,763 3,924 674 12,165 314 52,420 Charge-offs ( 396 ) ( 203 ) ( 103 ) ( 130 ) ( 4,965 ) ( 755 ) ( 6,552 ) Recoveries 785 7 79 — 4,383 218 5,472 (Benefit) provision ( 2,125 ) ( 2,115 ) ( 1,924 ) ( 199 ) ( 4 ) 471 ( 5,896 ) Ending balance $ 11,844 $ 19,452 $ 1,976 $ 345 $ 11,579 $ 248 $ 45,444 (6.) 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 of higher 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 the impact of the COVID-19 pandemic on small to mid-sized business in our market area, 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 potential 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 the impact of the COVID-19 pandemic on 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 (comprised of home equity lines) 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, including the impact of the COVID-19 pandemic on the employment income of these borrowers, 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 unsecured or, 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 the COVID-19 pandemic. Furthermore, the application of v arious federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. |