7.	Allowance for Credit Losses and Credit Quality of Loans

The allowance for credit losses totaled $140.2 million at June 30, 2025, compared to $116.0 million at December 31, 2024. The allowance for credit losses as a percentage of loans was 1.21% at June 30, 2025, compared to 1.16% at December 31, 2024.

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. During the second quarter of 2025, the Company included an additional downside scenario with stagflation conditions, which is characterized as an economic environment where inflation rises alongside unemployment. Stagflation was identified as an emerging risk as tariff policies begin to impact the economy.

The quantitative model as of June 30, 2025 incorporated a baseline economic outlook along with an alternative upside scenario and two equally weighted downside scenarios, recessionary conditions and stagflation, sourced from a reputable third-party to accommodate other potential economic conditions in the model. At June 30, 2025, the weightings were 70%, 5% and 25% for the baseline, upside and downside economic forecast scenarios, respectively. The baseline outlook reflected an economic environment where the Northeast unemployment rate increases from 4.3% to 4.8% during the forecast period. National Gross Domestic Product (“GDP’s”) annualized growth (on a quarterly basis) is expected to start the third quarter of 2025 at approximately 0.6% and increase to 1.6% by the end of the forecast period. Key assumptions in the baseline economic outlook included the Federal Reserve cutting rates with two 25 basis point cuts at the September and December meetings and the economy remaining at full employment. The alternative upside scenario assumes improved economic conditions from the baseline outlook. Under this scenario, Northeast unemployment falls from 4.3% in the second quarter of 2025 to 3.7% in the fourth quarter of 2025 and eventually settles at 4.1% by the end of the forecast period. The alternative downside scenario with recessionary conditions assumes deteriorated economic conditions from the baseline outlook. Under this scenario, Northeast unemployment rises from 4.3% in the second quarter of 2025 to a peak of 7.7% in the third quarter of 2026. The alternative downside stagflation scenario assumes deteriorated economic conditions from the baseline outlook. Under this scenario, Northeast unemployment rises from 4.3% in the second quarter of 2025 to 5.8% by the end of the forecast period in the fourth quarter of 2026, with a peak Northeast unemployment rate of 8.1% in the third quarter of 2027. These scenarios and their respective weightings are evaluated at each measurement date and reflect management’s expectations as of June 30, 2025. Additional qualitative adjustments were made for factors not incorporated in the forecasts or the model, such as loss rate expectations for certain loan pools, reversion adjustments for the stagflation scenario and recent trends in asset value indices. Additional monitoring for industry concentrations, loan growth and policy exceptions was also conducted.

During the first quarter of 2025, the Company performed an annual update to its econometric, PD/LGD models. Segment specific, multi-variate regression model inputs and assumptions were updated and recent period observed losses and behavior were incorporated into the models (“model refreshment”). The incorporation of recent observations did not have a material impact on most loan class segments except for the Auto class segment which resulted in an improvement in PD/LGD outcomes. The total allowance decreased by approximately 3% as of March 31, 2025 due to the model refreshment.

There were $336.4 million of PCD loans acquired from Evans during the three and six months ended June 30, 2025 which resulted in an allowance for credit losses at acquisition of $7.7 million. There were no loans purchased with credit deterioration during the year ended December 31, 2024. During the six months ended June 30, 2025, the Company purchased $5.4 million of residential loans at a 4.4% premium with a $58 thousand allowance for credit losses recorded for these loans. During 2024, the Company purchased $3.0 million of residential loans at a 7.0% premium with a $31 thousand allowance for credit losses recorded for these loans.

The Company made a policy election to report AIR in the other assets line item on the consolidated balance sheets. AIR on loans totaled $41.2 million at June 30, 2025 and $34.8 million at December 31, 2024 and with no estimated allowance for credit losses related to AIR as of June 30, 2025 and December 31, 2024 as it is excluded from amortized cost.

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

Individually Evaluated Loans

The threshold for evaluating classified, Commercial & Industrial (“C&I”) and Commercial Real Estate (“CRE”) loans risk graded substandard or doubtful, and nonperforming loans specifically evaluated for individual credit loss is $1.0 million. As of June 30, 2025, six newly acquired relationships from Evans were identified for individual credit loss evaluation which had an amortized cost basis of $14.3 million. These relationships were in nonaccrual status with no allowance for credit loss. As of December 31, 2024, three relationships were identified for individual credit loss evaluation, had an amortized cost basis of $28.8 million and were in nonaccrual status with no allowance for credit loss. The decrease in the amortized cost basis of individually evaluated loans from December 31, 2024 to June 30, 2025 was primarily attributed to the three relationships resolving through payoff or transfer to other assets in the second quarter of 2025, partially offset by the addition of the previously mentioned six newly acquired relationships from Evans which had and amortized cost basis of $14.3 million.

The following table sets forth information with regard to past due and nonperforming loans by loan segment:

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, focusing on, among other things, borrower’s financial strength, experience and depth of borrower’s management, primary and secondary sources of repayment, payment history, nature of the business and industry outlook. 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 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 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 PD 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 Paycheck Protection Program loans.

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 and includes gross charge-offs by loan class by vintage. Included in other consumer gross charge-offs for the six months ended June 30, 2025, the Company recorded $0.3 million in overdrawn deposit accounts reported as 2024 originations and $0.2 million in overdrawn deposit accounts reported as 2025 originations. Included in other consumer gross charge-offs for the year ended December 31, 2024, the Company recorded $0.2 million in overdrawn deposit accounts reported as 2023 originations and $0.7 million in overdrawn deposit accounts reported as 2024 originations.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The allowance for credit losses on unfunded commitments totaled $6.2 million as of June 30, 2025, compared to $4.4 million as of December 31, 2024. The reserve for unfunded loan commitments was $1.7 million for the three months ended June 30, 2025, compared to $(0.4) million for the three months ended June 30, 2024 and was recorded within other noninterest expense in the unaudited interim consolidated statements of income. The reserve for unfunded loan commitments was $1.8 million for the six months ended June 30, 2025, compared to $(0.8) million for the six months ended June 30, 2024, and was recorded within other noninterest expense in the unaudited interim consolidated statements of income. Included in the reserve for unfunded loan commitments for the three and six months ended June 30, 2025, was $0.5 million of acquisition-related provision for unfunded loan commitments due to the Evans acquisition. The increase is primarily related to increases in pipeline exposure and the Evans acquisition.

When the Company modifies a loan with financial difficulty, 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 change in scheduled payment amount; or principal forgiveness.

The following tables show the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted:

		Three Months Ended June 30, 2024
		Term Extension								Interest Rate Reduction
(Dollars in thousands)		Amortized Cost				% of Total Class of Financing Receivables				Amortized Cost				% of Total Class of Financing Receivables
Residential			$	184				0.007	%		$	30				0.001	%
Total			$	184							$	30

		Six Months Ended June 30, 2025
		Term Extension								Combination - Term Extension and Interest Rate Reduction
(Dollars in thousands)		Amortized Cost				% of Total Class of Financing Receivables				Amortized Cost				% of Total Class of Financing Receivables
Residential			$	894				0.028	%		$	28				0.001	%
Total			$	894							$	28

		Six Months Ended June 30, 2024
		Term Extension								Combination - Term Extension and Interest Rate Reduction
(Dollars in thousands)		Amortized Cost				% of Total Class of Financing Receivables				Amortized Cost				% of Total Class of Financing Receivables
Residential			$	478				0.018	%		$	30				0.001	%
Total			$	478							$	30

	Three Months Ended June 30, 2024
Loan Type	Term Extension	Interest Rate Reduction
Residential	Added a weighted-average 5.3 years to the life of loans, which reduced monthly payment amounts for the borrowers	Interest Rates were reduced by an average of 1.0%

	Six Months Ended June 30, 2025
Loan Type	Term Extension	Interest Rate Reduction
Residential	Added a weighted-average 7.5 years to the life of loans, which reduced monthly payment amounts for the borrowers	Interest Rates were reduced by an average of 0.62%

The following tables depict the financing receivables that had a payment default that were modified to borrowers experiencing financial difficulty in the prior twelve months:

The following table depicts the performance of loans that have been modified to borrowers experiencing financial difficulty that were modified in the prior twelve months:

		Payment Status (Amortized Cost Basis)
(In thousands)		Current				31-60 Days Past Due				61-90 Days Past Due				Greater than 90 Days Past Due
As of June 30, 2024
Residential		$	567			$	120			$	-			$	78
Total		$	567			$	120			$	-			$	78