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Loans

6 Months Ended

Jun. 30, 2022

NOTE 8. Loans

The following table sets forth the classification of loans by class, including unearned fees, deferred costs and excluding the allowance for loan losses as of June 30, 2022 and December 31, 2021:


(In thousands)	June 30, 2022		December 31, 2021
SBA loans held for investment	$	33,089	$	36,075
SBA PPP loans		14,216		46,450
Commercial loans
SBA 504 loans		35,066		27,479
Commercial other		112,189		109,903
Commercial real estate		776,687		704,674
Commercial real estate construction		102,371		89,670
Residential mortgage loans		481,687		409,355
Consumer loans
Home equity		66,582		65,380
Consumer other		13,063		12,564
Residential construction loans		134,460		120,525
Total loans held for investment	$	1,769,410	$	1,622,075
SBA loans held for sale		32,183		27,373
Total loans	$	1,801,593	$	1,649,448

Loans held for investment are stated at the unpaid principal balance, net of unearned discounts and deferred loan origination fees and costs. In accordance with the level yield method, loan origination fees, net of direct loan origination costs, are deferred and recognized over the estimated life of the related loans as an adjustment to the loan yield. Interest is credited to operations primarily based upon the principal balance outstanding.

Loans are reported as past due when either interest or principal is unpaid in the following circumstances: fixed payment loans when the borrower is in arrears for two or more monthly payments; open end credit for two or more billing cycles; and single payment notes if interest or principal remains unpaid for 30 days or more.

Loans are charged off when collection is sufficiently questionable and when the Company can no longer justify maintaining the loan as an asset on the balance sheet. Loans qualify for charge-off when, after thorough analysis, all possible sources of repayment are insufficient. These include: 1) potential future cash flows, 2) value of collateral, and/or 3) strength of co-makers and guarantors. All unsecured loans are charged off upon the establishment of the loan’s nonaccrual status. Additionally, all loans classified as a loss or that portion of the loan classified as a loss is charged off. All loan charge-offs are approved by the Board of Directors.

Loans are made to individuals as well as commercial entities. Specific loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by the Bank. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type. A description of the Company’s different loan segments follows:

SBA Loans: SBA 7(a) loans, on which the SBA has historically provided guarantees of up to 90 percent of the principal balance, are considered a higher risk loan product for the Company than its other loan products. The guaranteed portion of the Company’s SBA loans is generally sold in the secondary market with the nonguaranteed portion held in the portfolio as a loan held for investment. SBA loans are for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. Loans are guaranteed by the businesses’ major owners. SBA loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided.

Loans held for sale represent the guaranteed portion of Small Business Administration (“SBA”) loans, other than loans originated under the Paycheck Protection Program, and are reflected at the lower of aggregate cost or market value. The net amount of loan origination fees on loans sold is included in the carrying value and in the gain or loss on the sale. When sales of SBA loans do occur, the premium received on the sale and the present value of future cash flows of the servicing assets are recognized in income. All criteria for sale accounting must be met in order for the loan sales to occur; see details under the “Transfers of Financial Assets” heading above.

Servicing assets represent the estimated fair value of retained servicing rights, net of servicing costs, at the time loans are sold. Servicing assets are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on stratifying the underlying financial assets by date of origination and term. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment, if temporary, would be reported as a valuation allowance.

Serviced loans sold to others are not included in the accompanying Consolidated Balance Sheets. Income and fees collected for loan servicing are credited to noninterest income when earned, net of amortization on the related servicing assets.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included a range of other provisions designed to support the U.S. economy and mitigate the impact of COVID-19 on financial institutions and their customers, including through the authorization of various relief programs and measures that the U.S. Department of the Treasury, the Small Business Administration, the Federal Reserve Board (“FRB”) and other federal banking agencies have implemented or may implement.

The CARES Act provided assistance to small businesses through the establishment of the SBA Paycheck Protection Program ("PPP"). The PPP provided small businesses with funds to pay up to 24 weeks of payroll costs, including certain benefits. The funds were provided in the form of loans that may be fully or partially forgiven when used for payroll costs, interest on mortgages, rent, and utilities. The payments on these loans were deferred for up to six months. Loans made after June 5, 2020, mature in five years, and loans made prior to June 5, 2020, mature in two years but can be extended to five years if the lender agrees. Forgiveness of the PPP loans is based on the borrower maintaining or quickly rehiring employees and maintaining salary levels. Most small businesses with 500 or fewer employees were eligible. Applications for the PPP loans started on April 3, 2020 and the application period was extended through August 8, 2020. As an existing SBA 7(a) lender, the Company opted to participate in the program. The PPP program was renewed in 2021. Applications for the renewed PPP loan program started on January 13, 2021 and were available until March 31, 2021.

Commercial Loans: Commercial credit is extended primarily to middle market and small business customers. Commercial loans are generally made in the Company’s market place for the purpose of providing working capital, financing the purchase of equipment, inventory or commercial real estate and for other business purposes. The SBA 504 program consists of real estate backed commercial mortgages where the Company has the first mortgage and the SBA has the second mortgage on the property. Loans will generally be guaranteed in full or for a meaningful amount by the businesses’ major owners. Commercial loans are made based primarily on the historical and projected cash flow of the business and secondarily on the underlying collateral provided. Generally, the Company has a 50 percent loan to value ratio on SBA 504 program loans at origination.

Residential Mortgage, Consumer and Residential Construction Loans: The Company originates mortgage and consumer loans including principally residential real estate and home equity lines and loans and residential construction lines. The Company originates qualified mortgages which are generally sold in the secondary market and nonqualified mortgages which are generally held for investment. Each loan type is evaluated on debt to income, type of collateral and loan to collateral value, credit history and the Company’s relationship with the borrower.

During the quarter ended September 30, 2021, the Company enrolled in the “Upgrade Consumer Unsecured Loan Program” , sponsored by Upgrade, a financial technology company that utilizes artificial intelligence to underwrite personal loan and credit card installment loans to retail customers, in addition to credit monitoring and education tools,

to purchase consumer unsecured loans. This loan product has a fixed rate, a fully amortizing term for up to five years and a maximum loan size of $50 thousand. Restrictions were placed on the loans purchased to limit the purchases to borrowers residing in New Jersey, southern New York, and eastern Pennsylvania and to limit purchases to borrowers with higher credit quality with a 700 FICO minimum. Upgrade services the loans on behalf of the Company.

Inherent in the lending function is credit risk, which is the possibility a borrower may not perform in accordance with the contractual terms of their loan. A borrower’s inability to pay their obligations according to the contractual terms can create the risk of past due loans and, ultimately, credit losses, especially on collateral deficient loans. The Company minimizes its credit risk by loan diversification and adhering to credit administration policies and procedures. Due diligence on loans begins when we initiate contact regarding a loan with a borrower. Documentation, including a borrower’s credit history, materials establishing the value and liquidity of potential collateral, the purpose of the loan, the source of funds for repayment of the loan, and other factors, are analyzed before a loan is submitted for approval. The loan portfolio is then subject to on-going internal reviews for credit quality which in part is derived from ongoing collection and review of borrowers’ financial information, as well as independent credit reviews by an outside firm.

The Company’s extension of credit is governed by the Credit Risk Policy which was established to control the quality of the Company’s loans. This policy and the underlying procedures are reviewed and approved by the Board of Directors on a regular basis.

Credit Ratings

The Company places all SBA 7(a) and commercial loans into various credit risk rating categories based on an assessment of the expected ability of the borrowers to properly service their debt. The assessment considers numerous factors including, but not limited to, current financial information on the borrower, historical payment experience, strength of any guarantor, nature of and value of any collateral, acceptability of the loan structure and documentation, relevant public information and current economic trends. This credit risk rating analysis is performed when the loan is initially underwritten and then annually based on set criteria in the loan policy.

The Company uses the following regulatory definitions for criticized and classified risk ratings:

Pass: Loans that are performing, as they meet, and are expected to continue to meet, all of the terms and conditions set forth in the original loan documentation, and are generally current on principal and interest payments. These performing loans are termed “Pass”.

Special Mention: These loans have a potential weakness that deserves Management’s close attention. If left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

Substandard: These loans 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 institution will sustain some loss if the deficiencies are not corrected.

Loss: These loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Once a borrower is deemed incapable of repayment of unsecured debt, the loan is termed a “Loss”, and charged-off immediately.

For residential mortgage, consumer and residential construction loans, management uses performing versus nonperforming as the best indicator of credit quality. Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. These credit quality indicators are updated on an ongoing basis, as a loan is placed on nonaccrual status as soon as management believes there is sufficient doubt as to the ultimate ability to collect interest on a loan.

At June 30, 2022, there were $2.1 million of residential consumer loans in the process of foreclosure, compared to $106 thousand at December 31, 2021.

The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of June 30, 2022:

June 30, 2022

SBA & Commercial loans - Internal risk ratings

(In thousands)

Pass

Special mention

Substandard

Total

SBA loans held for investment

32,535

229

325

33,089

SBA PPP loans

14,216

—

14,216

Commercial loans

SBA 504 loans

35,066

—

35,066

Commercial other

104,181

5,709

2,299

112,189

Commercial real estate

765,256

9,524

1,907

776,687

Commercial real estate construction

102,371

—

102,371

Total commercial loans

1,006,874

15,233

4,206

1,026,313

Total SBA and commercial loans

1,053,625

15,462

4,531

1,073,618

Residential mortgage, Consumer & Residential construction loans - Performing/Nonperforming

(In thousands)

Performing

Nonperforming

Total

Residential mortgage loans

479,019

2,668

481,687

Consumer loans

Home equity

66,582

—

66,582

Consumer other

13,063

—

13,063

Total consumer loans

79,645

—

79,645

Residential construction loans

131,769

2,691

134,460

Total residential mortgage, consumer and residential construction loans

690,433

5,359

695,792

The tables below detail the Company’s loan portfolio by class according to their credit quality indicators discussed in the paragraphs above as of December 31, 2021:


	December 31, 2021
	SBA & Commercial loans - Internal risk ratings
(In thousands)	Pass		Special mention		Substandard		Total
SBA loans held for investment	$	34,959	$	745	$	371	$	36,075
SBA PPP loans		46,450		—		—		46,450
Commercial loans
SBA 504 loans		27,479		—		—		27,479
Commercial other		105,388		1,976		2,539		109,903
Commercial real estate		694,627		7,980		2,067		704,674
Commercial real estate construction		86,770		2,900		—		89,670
Total commercial loans		914,264		12,856		4,606		931,726
Total SBA and commercial loans	$	995,673	$	13,601	$	4,977	$	1,014,251

			Residential mortgage, Consumer & Residential construction loans - Performing/Nonperforming
(In thousands)			Performing		Nonperforming		Total
Residential mortgage loans			$	406,093	$	3,262	$	409,355
Consumer loans
Home equity				65,170		210		65,380
Consumer other				12,564		—		12,564
Total consumer loans				77,734		210		77,944
Residential construction loans				117,403		3,122		120,525
Total residential mortgage, consumer and residential construction loans			$	601,230	$	6,594	$	607,824

Nonperforming and Past Due Loans

Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being in default for a period of 90 days or more or when the ability to collect principal and interest according to the contractual terms is in doubt. Loans past due 90 days or more and still accruing interest are not included in nonperforming loans and generally represent loans that are well collateralized and in the process of collection. When a loan is classified as nonaccrual, interest accruals are discontinued and all past due interest previously recognized as income is reversed and charged against current period earnings. Generally, until the loan becomes current, any payments received from the borrower are applied to outstanding principal until such time as management determines that the financial condition of the borrower and other factors merit recognition of a portion of such payments as interest income. Loans may be returned to an accrual status when the ability to collect is reasonably assured and when the loan is brought current as to principal and interest. The risk of loss is difficult to quantify and is subject to fluctuations in collateral values, general economic conditions and other factors. The Company values its collateral through the use of appraisals, broker price opinions, and knowledge of its local market.

The following tables set forth an aging analysis of past due and nonaccrual loans as of June 30, 2022 and December 31, 2021:

June 30, 2022

90+ days

30‑59 days

60‑89 days

and still

Total past

(In thousands)

past due

accruing

Nonaccrual

due

Current

Total loans

SBA loans held for investment

242

—

604

846

32,243

33,089

SBA PPP loans

282

—

288

13,928

14,216

Commercial loans

SBA 504 loans

—

35,066

Commercial other

363

—

1,351

1,714

110,475

112,189

Commercial real estate

2,381

—

366

2,747

773,940

776,687

Commercial real estate construction

—

102,371

Residential mortgage loans

1,317

1,721

2,668

5,749

475,938

481,687

Consumer loans

Home equity

—

66,582

Consumer other

—

106

12,957

13,063

Residential construction loans

—

2,691

131,769

134,460

Total loans held for investment

4,376

2,027

7,680

14,141

1,755,269

1,769,410

SBA loans held for sale

—

32,135

32,183

Total loans

4,424

2,027

7,680

14,189

1,787,404

1,801,593


	December 31, 2021
					90+ days
	30‑59 days		60‑89 days		and still				Total past
(In thousands)	past due		past due		accruing		Nonaccrual		due		Current		Total loans
SBA loans held for investment	$	1,558	$	—	$	—	$	510	$	2,068	$	34,007	$	36,075
SBA PPP loans		—		79		—		—		79		46,371		46,450
Commercial loans
SBA 504 loans		—		—		—		—		—		27,479		27,479
Commercial other		—		33		—		2,216		2,249		107,654		109,903
Commercial real estate		334		565		—		366		1,265		703,409		704,674
Commercial real estate construction		—		—		—		—		—		89,670		89,670
Residential mortgage loans		3,688		—		—		3,262		6,950		402,405		409,355
Consumer loans
Home equity		39		—		—		210		249		65,131		65,380
Consumer other		—		—		—		—		—		12,564		12,564
Residential construction loans		—		845		—		3,122		3,967		116,558		120,525
Total loans held for investment		5,619		1,522		—		9,686		16,827		1,605,248		1,622,075
SBA loans held for sale		—		—		—		—		—		27,373		27,373
Total loans	$	5,619	$	1,522	$	—	$	9,686	$	16,827	$	1,632,621	$	1,649,448

Impaired Loans

The Company has defined impaired loans to be all nonperforming loans individually evaluated for impairment and TDRs. Management considers a loan impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract. Impairment is evaluated on an individual basis for SBA and commercial loans.

Impairment is evaluated in total for smaller-balance loans of a similar nature (consumer and residential mortgage loans), and on an individual basis for all other loans. Impairment of a loan is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, or as a practical expedient, based on a loan’s observable market price or the fair value of collateral, net of estimated costs to sell, if the loan is collateral-dependent. If the value of the impaired loan is less than the recorded investment in the loan, the Company establishes a valuation allowance, or adjusts existing valuation allowances, with a corresponding charge to the provision for loan losses.

The following table provides detail on the Company’s impaired loans that are individually evaluated for impairment with the associated allowance amount, if applicable, as of June 30, 2022:


	June 30, 2022
	Unpaid
	principal		Recorded		Specific
(In thousands)	balance		investment		reserves
With no related allowance:
SBA loans held for investment	$	642	$	542	$	—
Commercial loans
Commercial other		153		93		—
Commercial real estate		3,254		2,319		—
Total commercial loans		3,407		2,412		—
Residential mortgage loans		1,323		1,323		—
Consumer loans
Home equity		—		—		—
Residential construction loans		1,873		1,873		—
Total impaired loans with no related allowance		7,245		6,150		—

With an allowance:
SBA loans held for investment		93		62		62
Commercial loans
Commercial other		2,110		1,610		1,610
Commercial real estate		—		—		—
Total commercial loans		2,110		1,610		1,610
Residential mortgage loans		1,385		1,345		90
Consumer loans
Home equity		417		417		46
Residential construction loans		818		818		200
Total impaired loans with a related allowance		4,823		4,252		2,008

Total individually evaluated impaired loans:
SBA loans held for investment		735		604		62
Commercial loans
Commercial other		2,263		1,703		1,610
Commercial real estate		3,254		2,319		—
Total commercial loans		5,517		4,022		1,610
Residential mortgage loans		2,708		2,668		90
Consumer loans
Home equity		417		417		46
Residential construction loans		2,691		2,691		200
Total individually evaluated impaired loans	$	12,068	$	10,402	$	2,008

The following table provides detail on the Company’s impaired loans that are individually evaluated for impairment with the associated allowance amount, if applicable, as of December 31, 2021:


	December 31, 2021
	Unpaid
	principal		Recorded		Specific
(In thousands)	balance		investment		reserves
With no related allowance:
SBA loans held for investment	$	606	$	506	$	—
Commercial loans
Commercial other		71		70
Commercial real estate		1,493		1,493		—
Total commercial loans		1,564		1,563		—
Residential mortgage loans		1,630		1,630		—
Consumer loans
Home equity		210		210		—
Residential construction loans		2,636		2,636		—
Total impaired loans with no related allowance		6,646		6,545		—

With an allowance:
SBA loans held for investment		35		4		4
Commercial loans
Commercial other		2,832		2,531		2,490
Commercial real estate		973		126		125
Total commercial loans		3,805		2,657		2,615
Residential mortgage loans		1,632		1,632		80
Consumer loans
Home Equity		427		427		56
Residential construction loans		486		486		68
Total impaired loans with a related allowance		6,385		5,206		2,823

Total individually evaluated impaired loans:
SBA loans held for investment		641		510		4
Commercial loans
Commercial other		2,903		2,601		2,490
Commercial real estate		2,466		1,619		125
Total commercial loans		5,369		4,220		2,615
Residential mortgage loans		3,262		3,262		80
Consumer loans
Home equity		637		637		56
Residential construction loans		3,122		3,122		68
Total individually evaluated impaired loans	$	13,031	$	11,751	$	2,823

The following tables present the average recorded investments in impaired loans and the related amount of interest received during the time period in which the loans were impaired for the three and six months ended June 30, 2022 and 2021. The average balances are calculated based on the month-end balances of impaired loans. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal under the cost recovery method, and therefore no interest income is recognized.

For the three months ended June 30,

2022

2021

Interest

income

Average

received

Average

recognized

recorded

on impaired

recorded

on impaired

(In thousands)

investment

loans

investment

loans

SBA loans held for investment

(416)

1,334

Commercial loans

Commercial other

1,735

271

Commercial real estate

1,823

2,121

Residential mortgage loans

2,615

4,983

—

Consumer loans

Home equity

554

444

Residential construction loans

3,102

—

2,805

Total

9,413

101

11,958

115

For the six months ended June 30,

2022

2021

Interest

income

Average

received

Average

recognized

recorded

on impaired

recorded

on impaired

(In thousands)

investment

loans

investment

loans

SBA loans held for investment

540

1,618

Commercial loans

SBA 504 loans

—

Commercial other

1,961

322

Commercial real estate

2,163

2,179

Residential mortgage loans

2,721

5,272

—

Consumer loans

Home equity

563

644

Consumer other

—

Residential construction loans

3,653

2,707

Total

11,601

219

12,742

218

TDRs

The Company’s loan portfolio also includes certain loans that have been modified as TDRs. TDRs occur when a creditor, for economic or legal reasons related to a debtor’s financial condition, grants a concession to the debtor that it would not otherwise consider, unless it results in a delay in payment that is insignificant. These concessions typically include reductions in interest rate, extending the maturity of a loan, or a combination of both. Interest income on accruing TDRs is credited to operations primarily based upon the principal amount outstanding Under the CARES Act and regulatory guidance issued in regards to the COVID-19 pandemic, loan payment deferrals for periods of up to 180 days granted to borrowers adversely effected by the pandemic are not considered TDR’s if the borrower was current on its loan payments at year end 2019 or until the deferral was granted. When the Company modifies a loan, management evaluates for any possible impairment using either the discounted cash flows method, where the value of the modified loan is based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or by using the fair value of the collateral less selling costs if the loan is collateral-dependent. If management

determines that the value of the modified loan is less than the recorded investment in the loan, impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or charge-off to the allowance. This process is used, regardless of loan type, and for loans modified as TDRs that subsequently default on their modified terms.

TDRs of $1.9 million and $1.1 million are included in the impaired loan numbers as of June 30, 2022 and December 31, 2021, respectively. The increase in TDRs was due to the addition of two loans, partially offset by principal pay downs. At June 30, 2022 and December 31, 2021, there were no specific reserves on the TDRs. The TDRs are in accrual status since they are performing in accordance with the restructured terms. There are no commitments to lend additional funds on these loans.

There were two loans modified as TDRs during the six months ended June 30, 2022. There were two loans modified during the six months ended June 30, 2021 that were deemed to be TDRs. The following table details loans modified during the six months ended June 30, 2022, including the number of modifications and the recorded investment at the time of the modification:


	For the six months ended June 30, 2022
	Number of	Recorded investment
(In thousands, except number of contracts)	contracts	at time of modification
Home equity	2	$	872
Total	2	$	872

To date, the Company’s TDRs consisted of principal reduction, interest only periods and maturity extensions. There were no loans modified as a TDR within the previous 12 months that subsequently defaulted at some point during the six months ended June 30, 2022. In this case, the subsequent default is defined as 90 days past due or transferred to nonaccrual status.