Loans and the Allowance for Credit Losses | 7. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES Loans outstanding are detailed by category as follows: March 31, 2022 December 31, 2021 (dollars in thousands) Residential mortgage Mortgages - fixed rate $ 747,716 $ 716,456 Mortgages - adjustable rate 669,495 679,675 Construction 21,722 13,012 Deferred costs, net of unearned fees 8,208 5,936 Total residential mortgages 1,447,141 1,415,079 Commercial mortgage Mortgages - non-owner occupied 1,336,997 1,272,135 Mortgages - owner occupied 151,173 150,632 Construction 89,200 86,246 Deferred costs, net of unearned fees 2,124 1,989 Total commercial mortgages 1,579,494 1,511,002 Home equity Home equity - lines of credit 84,465 85,639 Home equity - term loans 1,781 2,017 Deferred costs, net of unearned fees 313 304 Total home equity 86,559 87,960 Commercial and industrial Commercial and industrial 248,960 247,024 PPP loans 13,963 22,856 Unearned fees, net of deferred costs ( 151 ) ( 434 ) Total commercial and industrial 262,772 269,446 Consumer Secured 40,374 34,308 Unsecured 861 1,303 Deferred costs, net of unearned fees 12 8 Total consumer 41,247 35,619 Total loans $ 3,417,213 $ 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 March 31, 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: March 31, 2022 Residential Commercial Home Commercial and Total (dollars in thousands) Non-performing loans: Non-accrual loans $ 4,113 $ 463 $ 523 $ 107 $ 5,206 Troubled debt restructurings 636 — — 101 737 Total $ 4,749 $ 463 $ 523 $ 208 $ 5,943 December 31, 2021 Residential Commercial Home Commercial and 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. On January 3, 2021, the President of the United States of America signed into law the Consolidated Appropriations Act, 2021 (the “CAA”). As a result of the CAA, the suspension of TDR accounting was extended, however 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 these loans were current as of either year end or the date of the modification, these loans were not considered TDR loans at March 31, 2022 and will not be reported as past due during the deferral period. As of March 31, 2022 , the Company had $ 4.4 million of loans remaining in deferral. 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 March 31, 2022 2022 2021 2020 2019 2018 Prior Revolving loans amortized cost basis Total (dollars in thousands) Residential Mortgage: Current $ 86,983 $ 536,375 $ 315,864 $ 129,036 $ 94,174 $ 279,960 $ — $ 1,442,392 Non-performing — — 148 — 492 4,109 — 4,749 Total $ 86,983 $ 536,375 $ 316,012 $ 129,036 $ 94,666 $ 284,069 $ — $ 1,447,141 Home equity: Current $ — $ — $ 397 $ 2,522 $ 3,791 $ 9,850 $ 69,476 $ 86,036 Non-performing — — — 523 — — — 523 Total $ — $ — $ 397 $ 3,045 $ 3,791 $ 9,850 $ 69,476 $ 86,559 Consumer: Current $ 9,746 $ 12,043 $ 7,746 $ 1,427 $ 2,640 $ 7,144 $ 501 $ 41,247 Non-performing — — — — — — — — Total $ 9,746 $ 12,043 $ 7,746 $ 1,427 $ 2,640 $ 7,144 $ 501 $ 41,247 Credit Quality Indicator - by Origination Year as of March 31, 2022 2022 2021 2020 2019 2018 Prior Revolving loans amortized cost basis Total (dollars in thousands) Commercial Mortgage: Credit risk profile by internally 1-6 (Pass) $ 106,176 $ 323,625 $ 238,962 $ 301,506 $ 153,681 $ 378,667 $ — $ 1,502,617 7 (Special Mention) — — 1,088 45,916 22,333 6,921 — 76,258 8 (Substandard) — — — — — 619 — 619 9 (Doubtful) — — — — — — — — 10 (Loss) — — — — — — — — Total $ 106,176 $ 323,625 $ 240,050 $ 347,422 $ 176,014 $ 386,207 $ — $ 1,579,494 Commercial and Industrial: Credit risk profile by internally 1-6 (Pass) $ 6,723 $ 77,584 $ 75,550 $ 37,872 $ 33,322 $ 20,795 $ 371 $ 252,217 7 (Special Mention) — 291 347 5,624 407 581 10 7,260 8 (Substandard) — — 729 2,324 101 138 3 3,295 9 (Doubtful) — — — — — — — — 10 (Loss) — — — — — — — — Total $ 6,723 $ 77,875 $ 76,626 $ 45,820 $ 33,830 $ 21,514 $ 384 $ 262,772 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 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 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 CRE 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: March 31, 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 $ 7,521 $ — $ 1,083 $ 8,604 $ 1,438,537 $ 1,447,141 $ — Commercial mortgage — 5,148 — 5,148 1,574,346 1,579,494 — Home equity 628 — — 628 85,931 86,559 — Commercial and industrial 456 41 — 497 262,275 262,772 — Consumer 107 — — 107 41,140 41,247 — Total $ 8,712 $ 5,189 $ 1,083 $ 14,984 $ 3,402,229 $ 3,417,213 $ — December 31, 2021 30-59 Days 60-89 Days 90 Days Total Current 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 March 31, 2022 and December 31, 2021. Allowance for Credit Losses The following table presents changes in the allowance for credit losses disaggregated by loan category: For the Three Months Ended March 31, 2022 Residential Commercial Home Commercial & Consumer Unfunded Commitments Total (dollars in thousands) Allowance for credit loss: Allowance for credit losses - loan Balance at December 31, 2021 $ 13,383 $ 17,133 $ 406 $ 2,989 $ 585 $ — $ 34,496 Charge-offs — — — — ( 25 ) — ( 25 ) Recoveries — — — 36 2 — 38 Provision for (release of) credit ( 190 ) 5 ( 29 ) ( 128 ) ( 57 ) — ( 399 ) Allowance for credit losses - $ 13,193 $ 17,138 $ 377 $ 2,897 $ 505 $ — $ 34,110 Allowance for credit losses - Balance at December 31, 2021 $ — $ — $ — $ — $ — $ 1,384 $ 1,384 Release of credit — — — — — ( 13 ) ( 13 ) Allowance for credit losses- $ — $ — $ — $ — $ — $ 1,371 $ 1,371 Total allowance for credit loss $ 13,193 $ 17,138 $ 377 $ 2,897 $ 505 $ 1,371 $ 35,481 For the Three Months Ended March 31, 2021 Residential Commercial Home Commercial & Consumer Unfunded Commitments Total (dollars in thousands) Allowance for credit loss: Allowance for credit losses - loan Balance at December 31, 2020 $ 13,067 $ 18,564 $ 552 $ 3,309 $ 524 $ — $ 36,016 Charge-offs — — — — ( 3 ) — ( 3 ) Recoveries — — — 19 4 — 23 Provision for (release of) credit 77 129 ( 189 ) ( 350 ) ( 57 ) — ( 390 ) Allowance for credit losses - $ 13,144 $ 18,693 $ 363 $ 2,978 $ 468 $ — $ 35,646 Allowance for credit losses - Balance at December 31, 2020 $ — $ — $ — $ — $ — $ 1,004 $ 1,004 Provision for credit — — — — — 184 184 Allowance for credit losses- — — — — — 1,188 1,188 Total allowance for credit loss $ 13,144 $ 18,693 $ 363 $ 2,978 $ 468 $ 1,188 $ 36,834 |