The following table sets forth the classification of loans by class, including unearned fees, deferred costs and excluding the allowance for loan losses for the past two years:

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.

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 eligible 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 or 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. Applications for the PPP loans started on April 3, 2020 and were extended through August 8, 2020. The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law on December 27, 2020. Among other things, the Economic Aid Act extended the PPP through March 31, 2021 and allocated additional funds for new PPP loans, to be guaranteed by the SBA. The extension included an authorization to make new PPP loans to existing PPP loan borrowers, and to make loans to parties that did not previously obtain a PPP loan. Loans originated under the extended PPP had substantially the same terms as existing PPP loans. As an existing SBA 7(a) lender, the Company opted to participate in the program.

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 are generally 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.

Residential Mortgage, Consumer and Residential Construction Loans: The Company originates mortgage and consumer loans including principally residential real estate, 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, loan to collateral value, credit history and Company relationship with the borrower.

In 2021, the Company enrolled in the “Upgrade Consumer Unsecured Loan Program” to purchase consumer unsecured loans. This loan product has a fixed rate, fully amortizing term for up to five years and a maximum loan amount 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. Upgrade is a financial technology company that utilizes artificial intelligence to underwrite personal loans and credit card installment loans to retail customers, in addition to credit monitoring and education tools.

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 the Company initiates 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, 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. These policies and procedures are reviewed and approved by the Board of Directors on a regular basis.

For SBA 7(a) and commercial loans, management uses internally assigned risk ratings as the best indicator of credit quality. A loan’s internal risk rating is reviewed at least annually and more frequently if circumstances warrant a change in risk rating. The Company uses a 1 through 10 loan grading system that follows regulatory accepted definitions.

Pass: Risk ratings of 1 through 6 are used for 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: Criticized loans are assigned a risk rating of 7 and termed “Special Mention”, as the borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Bank’s collateral and position. While potentially weak, these borrowers are currently marginally acceptable and no loss of interest or principal is anticipated. As a result, special mention assets do not expose an institution to sufficient risk to warrant adverse classification. Included in “Special Mention” could be turnaround situations, such as borrowers with deteriorating trends beyond one year, borrowers in start up or deteriorating industries, or borrowers with a poor market share in an average industry. "Special Mention" loans may include an element of asset quality, financial flexibility or below average management. Management and ownership may have limited depth or experience. Regulatory agencies have agreed on a consistent definition of “Special Mention” as an asset with potential weaknesses which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. This definition is intended to ensure that the “Special Mention” category is not used to identify assets that have as their sole weakness credit data exceptions or collateral documentation exceptions that are not material to the repayment of the asset.

Substandard: Classified loans are assigned a risk rating of an 8 or 9, depending upon the prospect for collection, and deemed “Substandard”. A risk rating of 8 is used for borrowers with well-defined weaknesses that jeopardize the orderly liquidation of debt. The loan is inadequately protected by the current paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified “Substandard”.

A risk rating of 9 is used for borrowers that have all the weaknesses inherent in a loan with a risk rating of 8, with the added characteristic that the weaknesses make collection of debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely. The possibility of loss is extremely high, but because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loan’s classification as loss is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures; capital injection; perfecting liens on additional collateral; and refinancing plans. Partial charge-offs are likely.

Loss: Once a borrower is deemed incapable of repayment of unsecured debt, the risk rating becomes a 10, the loan is termed a “Loss” and charged-off immediately. Loans to such borrowers are considered uncollectible and of such little value that continuance as active assets of the Bank is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these basically worthless assets even though partial recovery may occur in the future.

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 delinquent 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.

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, 2022:

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:

Nonperforming loans consist of loans that are not accruing interest (nonaccrual loans) as a result of principal or interest being delinquent 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 secured and in process of collection. 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 December 31, 2022 and December 31, 2021:


	December 31, 2021
					90+ days
	30‑59 days		60‑89 days		and still				Total past
(In thousands)	past due		past due		accruing		Nonaccrual		due (2)		Current		Total loans
SBA loans held for investment	$	1,558	$	—	$	—	$	510	$	2,068	$	34,007	$	36,075
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, excluding SBA PPP	$	5,619	$	1,522	$	—	$	9,686	$	16,827	$	1,632,621	$	1,649,448

(2)	At December 31, 2021, the Company had $79 thousand of SBA PPP loans past due. The Company is in process of working through these past due credits with the SBA and the relevant customers.

Impaired Loans

The Company has defined impaired loans to be all nonperforming loans and troubled debt restructurings. 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.

The following tables provide detail on the Company’s loans individually evaluated for impairment with the associated allowance amount, if applicable, as of December 31, 2022 and December 31, 2021:


	December 31, 2022
	Unpaid
	principal		Recorded		Specific
(In thousands)	balance		investment		reserves
With no related allowance:
SBA loans held for investment	$	687	$	399	$	—
Commercial loans
Commercial other		10		10		—
Commercial real estate		3,169		2,219		—
Total commercial loans		3,179		2,229		—
Residential mortgage loans		2,054		2,022		—
Total impaired loans with no related allowance		5,920		4,650		—

With an allowance:
SBA loans held for investment		316		291		115
Commercial loans
Commercial other		2,022		872		516
Total commercial loans		2,022		872		516
Residential mortgage loans		1,345		1,339		36
Residential construction loans		3,432		3,432		1,112
Total impaired loans with a related allowance		7,115		5,934		1,779

Total individually evaluated impaired loans:
SBA loans held for investment		1,003		690		115
Commercial loans
Commercial other		2,032		882		516
Commercial real estate		3,169		2,219		—
Total commercial loans		5,201		3,101		516
Residential mortgage loans		3,399		3,361		36
Residential construction loans		3,432		3,432		1,112
Total individually evaluated impaired loans	$	13,035	$	10,584	$	1,779


	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 table presents the average recorded investments in impaired loans and the related amount of interest recognized during the time period in which the loans were impaired for the years ended December 31, 2022, 2021 and 2020. 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, therefore no interest income is recognized. The interest recognized on impaired loans noted below represents accruing troubled debt restructurings only and nominal amounts of income recognized on a cash basis for well-collateralized impaired loans.


	For the years ended December 31,
	2022				2021				2020
			Interest				Interest				Interest
			income				income				income
	Average		recognized		Average		recognized		Average		recognized
	recorded		on impaired		recorded		on impaired		recorded		on impaired
(In thousands)	investment		loans		investment		loans		investment		loans
SBA loans held for investment	$	940	$	33	$	1,118	$	102	$	1,674	$	70
Commercial loans
SBA 504 loans		—		—		—		—		150		32
Commercial other		1,481		109		889		59		93		31
Commercial real estate		2,073		134		1,637		137		1,232		124
Commercial real estate construction		—		—		—		—		—		33
Residential mortgage loans		2,869		38		4,358		17		5,409		131
Consumer loans
Home equity		453		8		553		23		726		67
Consumer other		—		—		1		—		—		—
Residential construction loans		2,936		49		2,718		50		165		—
Total	$	10,752	$	371	$	11,274	$	388	$	9,449	$	488

Troubled Debt Restructurings

The Company’s loan portfolio includes certain loans that have been modified as a troubled debt restructuring (“TDR”). 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, other modifications of payment terms or a combination of modifications. 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 $1.4 million and $1.0 million are included in the impaired loan numbers as of December 31, 2022 and December 31, 2021, respectively. The increase in TDRs was due to the addition of two loans, partially offset by the payoff of two TDRs. At December 31, 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.

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 year ended December 31, 2022. In this case, the subsequent default is defined as 90 days past due or transferred to nonaccrual status.

Other Loan Information

Servicing Assets:

Loans sold to others and serviced by the Company are not included in the accompanying Consolidated Balance Sheets. The total amount of such loans serviced, but owned by third party investors, amounted to approximately $85.8 million and $106.1 million at December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, the carrying value, which approximates fair value, of servicing assets was $691 thousand and $1.0 million, respectively, and is included in Other assets. A summary of the changes in the related servicing assets for the past three years follows:


	For the years ended December 31,
(In thousands)	2022		2021		2020
Balance, beginning of year	$	1,013	$	1,857	$	2,026
Servicing assets capitalized		152		126		722
Amortization of expense, net		(474)		(970)		(891)
Balance, end of year	$	691	$	1,013	$	1,857

In addition, the Company had a $641 thousand and $915 thousand in discounts related to the retained portion of unsold SBA loans at December 31, 2022 and 2021, respectively.

Officer and Director Loans:

In the ordinary course of business, the Company may extend credit to officers, directors or their associates. These loans are subject to the Company’s normal lending policy. An analysis of such loans, all of which are current as to principal and interest payments, is as follows:


(In thousands)	December 31, 2022		December 31, 2021
Balance, beginning of year	$	11,502	$	12,082
New loans and advances		—		402
Loan repayments		(784)		(982)
Loans removed		(2,594)		—
Balance, end of year	$	8,124	$	11,502

Loan Portfolio Collateral:

The majority of the Company’s loans are secured by real estate. Declines in the market values of real estate in the Company’s trade area impact the value of the collateral securing its loans. This could lead to greater losses in the event of defaults on loans secured by real estate. At December 31, 2022, and December 31, 2021, respectively, approximately 96% and 92% of the Company’s loan portfolio was secured by real estate.