Loans and the Allowance for Credit Losses

3 Months Ended

Jun. 30, 2022

Loans and the Allowance for Credit Losses

7. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

Loans outstanding are detailed by category as follows:


	June 30, 2022		December 31, 2021
	(dollars in thousands)
Residential mortgage
Mortgages - fixed rate	$	781,649	$	716,456
Mortgages - adjustable rate		668,528		679,675
Construction		25,413		13,012
Deferred costs, net of unearned fees		6,961		5,936
Total residential mortgages		1,482,551		1,415,079

Commercial mortgage
Mortgages - non-owner occupied		1,403,363		1,272,135
Mortgages - owner occupied		148,480		150,632
Construction		82,739		86,246
Deferred costs, net of unearned fees		2,285		1,989
Total commercial mortgages		1,636,867		1,511,002

Home equity
Home equity - lines of credit		89,790		85,639
Home equity - term loans		1,706		2,017
Deferred costs, net of unearned fees		339		304
Total home equity		91,835		87,960

Commercial and industrial
Commercial and industrial		265,295		247,024
PPP loans		2,652		22,856
Unearned fees, net of deferred costs		223		(434	)
Total commercial and industrial		268,170		269,446

Consumer
Secured		43,181		34,308
Unsecured		874		1,303
Deferred costs, net of unearned fees		14		8
Total consumer		44,069		35,619
Total loans	$	3,523,492	$	3,319,106

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020 and provided emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. Among other things, the CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, the Company was authorized to originate PPP loans.

PPP loans have: (a) an interest rate of 1.0%, (b) a two year or five-year loan term to maturity; and (c) principal and interest payments deferred until the SBA remits the forgiven amount to the Company or 10 months from the end of the covered period, as defined. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expense, with the remaining 40% of the loan proceeds used for other qualifying expenses. The Company did not record an allowance for credit losses for PPP loans at June 30, 2022 or December 31, 2021.

Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.

Asset Quality

The Company’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. The Company seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. As a general rule, loans more than 90 days past due with respect to principal or interest are classified as nonaccrual loans. The Company may use discretion regarding other loans over 90 days past due if the loan is well secured and/or in process of collection.

The following tables set forth information regarding non-performing loans disaggregated by loan category:


	June 30, 2022
	Residential Mortgage		Commercial Mortgage		Home Equity		Commercial and Industrial		Total
	(dollars in thousands)
Non-performing loans:
Non-accrual loans	$	4,067	$	450	$	520	$	101	$	5,138
Troubled debt restructurings		646		—		—		95		741
Total	$	4,713	$	450	$	520	$	196	$	5,879


	December 31, 2021
	Residential Mortgage		Commercial Mortgage		Home Equity		Commercial and Industrial		Total
	(dollars in thousands)
Non-performing loans:
Non-accrual loans	$	3,777	$	517	$	223	$	111	$	4,628
Troubled debt restructurings		652		—		—		106		758
Total	$	4,429	$	517	$	223	$	217	$	5,386

Pursuant to Section 4013 of the CARES Act, financial institutions could suspend the requirements under U.S. GAAP related to TDRs for modifications made before December 31, 2020 to loans that were current as of December 31, 2019. As a result of the enactment of the Consolidated Appropriations Act, 2021, in January 2021, the suspension of TDR accounting was extended to, and expired on January 1, 2022. The requirement that a loan be not more than 30 days past due as of December 31, 2019 was still applicable. In response to the COVID-19 pandemic and its economic impact to customers, a short-term modification program that complied with the CARES Act was implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Under issued guidance, provided that these loans were current as of either year end or the date of the modification, these loans were not considered TDR loans at June 30, 2022 and will not be reported as past due during the deferral period. The Company had no loans in deferral as of June 30, 2022.

Loans by Credit Quality Indicator. The following tables contain period-end balances of loans receivable disaggregated by credit quality indicator:


	Credit Quality Indicator - by Origination Year as of June 30, 2022

	2022		2021		2020		2019		2018		Prior		Revolving loans amortized cost basis		Total
	(dollars in thousands)
Residential Mortgage:
Current	$	202,979	$	528,323	$	291,931	$	118,731	$	81,085	$	254,789	$	—	$	1,477,838
Non-performing		—		—		147		—		713		3,853		—		4,713
Total	$	202,979	$	528,323	$	292,078	$	118,731	$	81,798	$	258,642	$	—	$	1,482,551

Home equity:
Current	$	—	$	—	$	392	$	1,864	$	4,355	$	9,826	$	74,878	$	91,315
Non-performing		—		—		—		520		—		—		—		520
Total	$	—	$	—	$	392	$	2,384	$	4,355	$	9,826	$	74,878	$	91,835

Consumer:
Current	$	15,945	$	10,181	$	6,640	$	1,365	$	2,600	$	6,738	$	600	$	44,069
Non-performing		—		—		—		—		—		—		—		—
Total	$	15,945	$	10,181	$	6,640	$	1,365	$	2,600	$	6,738	$	600	$	44,069


	Credit Quality Indicator - by Origination Year as of June 30, 2022
	2022		2021		2020		2019		2018		Prior		Revolving loans amortized cost basis		Total
	(dollars in thousands)
Commercial Mortgage:
Credit risk profile by internally assigned grade:
1-6 (Pass)	$	235,399	$	314,981	$	235,504	$	284,164	$	145,208	$	350,393	$	—	$	1,565,649
7 (Special Mention)		—		—		1,081		40,582		22,220		6,847		—		70,730
8 (Substandard)		—		—		—		—		—		488		—		488
9 (Doubtful)		—		—		—		—		—		—		—		—
10 (Loss)		—		—		—		—		—		—		—		—
Total	$	235,399	$	314,981	$	236,585	$	324,746	$	167,428	$	357,728	$	—	$	1,636,867
Commercial and Industrial:
Credit risk profile by internally assigned grade:
1-6 (Pass)	$	19,941	$	74,530	$	75,736	$	36,897	$	32,042	$	22,137	$	435	$	261,718
7 (Special Mention)		—		264		266		2,145		407		176		10		3,268
8 (Substandard)		—		—		696		2,259		95		134		—		3,184
9 (Doubtful)		—		—		—		—		—		—		—		—
10 (Loss)		—		—		—		—		—		—		—		—
Total	$	19,941	$	74,794	$	76,698	$	41,301	$	32,544	$	22,447	$	445	$	268,170


	Credit Quality Indicator - by Origination Year as of December 31, 2021
	2021		2020		2019		2018		2017		Prior		Revolving loans amortized cost basis		Total
	(dollars in thousands)
Residential Mortgage:
Current	$	535,071	$	329,501	$	135,139	$	101,108	$	77,702	$	232,129	$	—	$	1,410,650
Non-performing		—		151		—		330		54		3,894		—		4,429
Total	$	535,071	$	329,652	$	135,139	$	101,438	$	77,756	$	236,023	$	—	$	1,415,079

Home equity:
Current	$	—	$	719	$	3,088	$	4,469	$	5,060	$	5,475	$	68,926	$	87,737
Non-performing		—		—		223		—		—		—		—		223
Total	$	—	$	719	$	3,311	$	4,469	$	5,060	$	5,475	$	68,926	$	87,960

Consumer:
Current	$	14,427	$	8,758	$	1,544	$	3,168	$	1,838	$	5,357	$	527	$	35,619
Non-performing		—		—		—		—		—		—		—		—
Total	$	14,427	$	8,758	$	1,544	$	3,168	$	1,838	$	5,357	$	527	$	35,619


	Credit Quality Indicator - by Origination Year as of December 31, 2021
	2021		2020		2019		2018		2017		Prior		Revolving loans amortized cost basis		Total
	(dollars in thousands)
Commercial Mortgage:
Credit risk profile by internally assigned grade:
1-6 (Pass)	$	319,633	$	248,691	$	320,189	$	158,462	$	93,016	$	298,791	$	—	$	1,438,782
7 (Special Mention)		—		1,096		40,879		22,471		2,913		4,131		—		71,490
8 (Substandard)		—		—		—		—		—		730		—		730
9 (Doubtful)		—		—		—		—		—		—		—		—
10 (Loss)		—		—		—		—		—		—		—		—
Total	$	319,633	$	249,787	$	361,068	$	180,933	$	95,929	$	303,652	$	—	$	1,511,002
Commercial and Industrial:
Credit risk profile by internally assigned grade:
1-6 (Pass)	$	83,614	$	77,073	$	38,299	$	34,360	$	19,727	$	4,622	$	353	$	258,048
7 (Special Mention)		318		350		5,523		406		161		859		10		7,627
8 (Substandard)		—		792		2,331		504		—		144		—		3,771
9 (Doubtful)		—		—		—		—		—		—		—		—
10 (Loss)		—		—		—		—		—		—		—		—
Total	$	83,932	$	78,215	$	46,153	$	35,270	$	19,888	$	5,625	$	363	$	269,446

With respect to residential mortgages, home equity, and consumer loans, the Company utilizes the following categories as indicators of credit quality:

•

Performing – These loans are accruing and are considered having low to moderate risk.

•

Non-performing – These loans are on nonaccrual, are more than 90 days past due but are still accruing, or are restructured. These loans may contain greater than average risk.

With respect to commercial real estate mortgages and commercial and industrial loans, the Company utilizes a 10-grade internal loan rating system as an indicator of credit quality. The grades are as follows:

•

Loans rated 1-6 (Pass) – These loans are considered “pass” rated with low to moderate risk.

•

Loans rated 7 (Special Mention) – These loans have potential weaknesses warranting close attention, which, if left uncorrected, may result in deterioration of the credit at some future date.

•

Loans rated 8 (Substandard) – These loans have well-defined weaknesses that jeopardize the orderly liquidation of the debt under the original loan terms. Loss potential exists but is not identifiable in any one customer.

•

Loans rated 9 (Doubtful) – These loans have pronounced weaknesses that make full collection highly questionable and improbable.

•

Loans rated 10 (Loss) – These loans are considered uncollectible and continuance as a bankable asset is not warranted.

Delinquencies

The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more. Loan delinquencies can be attributed to many factors, such as but not limited to, a continuing weakness in, or deteriorating, economic conditions in the region in which the collateral is located, the loss of a tenant or lower lease rates for commercial borrowers, or the loss of income for consumers and the resulting liquidity impacts on the borrowers.

The following tables contain period-end balances of loans receivable disaggregated by past due status:


	June 30, 2022
	30-59 Days		60-89 Days		90 Days or greater		Total Past Due		Current Loans		Total		Amortized Cost 90+ Days Past Due and Accruing
	(dollars in thousands)
Residential mortgage	$	5,335	$	991	$	1,316	$	7,642	$	1,474,909	$	1,482,551	$	—
Commercial mortgage		—		278		—		278		1,636,589		1,636,867		—
Home equity		228		298		—		526		91,309		91,835		—
Commercial and industrial		6		32		—		38		268,132		268,170		—
Consumer		—		—		—		—		44,069		44,069		—
Total	$	5,569	$	1,599	$	1,316	$	8,484	$	3,515,008	$	3,523,492	$	—


	December 31, 2021
	30-59 Days		60-89 Days		90 Days or Greater		Total Past Due		Current Loans		Total		Amortized Cost 90+ Days Past Due and Accruing
	(dollars in thousands)
Residential mortgage	$	8,470	$	415	$	1,488	$	10,373	$	1,404,706	$	1,415,079	$	—
Commercial mortgage		476		—		—		476		1,510,526		1,511,002		—
Home equity		314		643		—		957		87,003		87,960		—
Commercial and industrial		5		437		—		442		269,004		269,446		—
Consumer		—		—		—		—		35,619		35,619		—
Total	$	9,265	$	1,495	$	1,488	$	12,248	$	3,306,858	$	3,319,106	$	—

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2022 and December 31, 2021.

Allowance for Credit Losses

The following tables present changes in the allowance for credit losses disaggregated by loan category:


	Three Months Ended June 30, 2022
	Residential Mortgage			Commercial Mortgage		Home Equity		Commercial & Industrial			Consumer			Unfunded Commitments		Total
	(dollars in thousands)
Allowance for credit loss:
Allowance for credit losses - loan portfolio:
Balance at March 31, 2022	$	13,193		$	17,138	$	377	$	2,897		$	505		$	—	$	34,110
Charge-offs		—					—		(3	)		(3	)		—		(6	)
Recoveries		—			—		—		10			10			—		20
Provision for (release of) credit losses - loan portfolio		(554	)		629		23		(52	)		(46	)		—		—
Allowance for credit losses - loan portfolio	$	12,639		$	17,767	$	400	$	2,852		$	466		$	—	$	34,124
Allowance for credit losses - unfunded commitments:
Balance at March 31, 2022	$	—		$	—	$	—	$	—		$	—		$	1,371	$	1,371
Release of credit losses - unfunded commitments		—			—		—		—			—			—		—
Allowance for credit losses- unfunded commitments	$	—		$	—	$	—	$	—		$	—		$	1,371	$	1,371
Total allowance for credit loss	$	12,639		$	17,767	$	400	$	2,852		$	466		$	1,371	$	35,495


	Six Months Ended June 30, 2022
	Residential Mortgage			Commercial Mortgage		Home Equity			Commercial & Industrial			Consumer			Unfunded Commitments			Total
	(dollars in thousands)
Allowance for credit loss:
Allowance for credit losses - loan portfolio:
Balance at December 31, 2021	$	13,383		$	17,133	$	406		$	2,989		$	585		$	—		$	34,496
Charge-offs		—			—		—			(3	)		(28	)		—			(31	)
Recoveries		—			—		—			46			12			—			58
Provision for (release of) credit losses - loan portfolio		(744	)		634		(6	)		(180	)		(103	)		—			(399	)
Allowance for credit losses - loan portfolio	$	12,639		$	17,767	$	400		$	2,852		$	466		$	—		$	34,124
Allowance for credit losses - unfunded commitments:
Balance at December 31, 2021	$	—		$	—	$	—		$	—		$	—		$	1,384		$	1,384
Release of credit losses - unfunded commitments		—			—		—			—			—			(13	)		(13	)
Allowance for credit losses- unfunded commitments	$	—		$	—	$	—		$	—		$	—		$	1,371		$	1,371
Total allowance for credit loss	$	12,639		$	17,767	$	400		$	2,852		$	466		$	1,371		$	35,495


	Three Months Ended June 30, 2021
	Residential Mortgages		Commercial Mortgages			Home Equity		Commercial & Industrial		Consumer		Unfunded Commitments			Total
	(dollars in thousands)
Allowance for credit loss:
Allowance for credit losses - loan portfolio:
Balance at March 31, 2021	$	13,144	$	18,693		$	363	$	2,978	$	468	$	—		$	35,646
Charge-offs		—		—			—		—		—		—			—
Recoveries		—		30			—		15		1		—			46
Provision for (release of) credit losses - loan portfolio		412		(1,422	)		110		216		21		—			(663	)
Allowance for credit losses - loan portfolio	$	13,556	$	17,301		$	473	$	3,209	$	490	$	—		$	35,029
Allowance for credit losses - unfunded commitments:
Balance at March 31, 2021	$	—	$	—		$	—	$	—	$	—	$	1,188		$	1,188
Release of credit losses - unfunded commitments		—		—			—		—		—		(238	)		(238	)
Allowance for credit losses- unfunded commitments		—		—			—		—		—		950			950
Total allowance for credit loss	$	13,556	$	17,301		$	473	$	3,209	$	490	$	950		$	35,979


	Six Months Ended June 30, 2021
	Residential Mortgages		Commercial Mortgages			Home Equity			Commercial & Industrial			Consumer			Unfunded Commitments			Total
	(dollars in thousands)
Allowance for credit loss:
Allowance for credit losses - loan portfolio:
Balance at December 31, 2020	$	13,067	$	18,564		$	552		$	3,309		$	524		$	—		$	36,016
Charge-offs		—		—			—			—			(3	)		—			(3	)
Recoveries		—		30			—			34			5			—			69
Provision for (release of) credit losses - loan portfolio		489		(1,293	)		(79	)		(134	)		(36	)		—			(1,053	)
Allowance for credit losses - loan portfolio	$	13,556	$	17,301		$	473		$	3,209		$	490		$	—		$	35,029
Allowance for credit losses - unfunded commitments:
Balance at December 31, 2020	$	—	$	—		$	—		$	—		$	—		$	1,004		$	1,004
Release of credit losses - unfunded commitments		—		—			—			—			—			(54	)		(54	)
Allowance for credit losses-unfunded commitments		—		—			—			—			—			950			950
Total allowance for credit loss	$	13,556	$	17,301		$	473		$	3,209		$	490		$	950		$	35,979