LOANS

12 Months Ended

Dec. 31, 2022

Receivables [Abstract]

LOANS

3. LOANS

Major classifications of loans as of the dates indicated were as follows:

	December 31,			December 31,
	2022			2021
	(In thousands)
Commercial real estate	$	1,069,323		$	979,969
Residential real estate:
Residential one-to-four family		589,503			552,332
Home equity		105,557			99,759
Total residential real estate		695,060			652,091
Commercial and industrial:
Paycheck protection program (“PPP”) loans		2,274			25,329
Commercial and industrial		217,574			201,340
Total commercial and industrial		219,848			226,669
Consumer		5,045			4,250
Total gross loans		1,989,276			1,862,979
Unamortized PPP loan fees		(109	)		(781	)
Unearned premiums and deferred loan fees and costs, net		2,233			2,518
Total loans, net		1,991,400			1,864,716
Allowance for loan losses		(19,931	)		(19,787	)
Net loans	$	1,971,469		$	1,844,929

Loans Serviced for Others.

The Company has transferred a portion of its originated commercial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in our accompanying consolidated balance sheets. We continue to service the loans on behalf of the participating lenders. We share with participating lenders, on a pro-rata basis, any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. At December 31, 2022 and December 31, 2021, the Company was servicing commercial loans participated out to various other institutions totaling $70.5 million and $63.2 million, respectively.

Residential real estate mortgages are originated by the Bank both for its portfolio and for sale into the secondary market. The Bank may sell its loans to institutional investors such as the FHLMC. Under loan sale and servicing agreements with the investor, the Bank generally continues to service the residential real estate mortgages. The Bank pays the investor an agreed upon rate on the loan, which is less than the interest rate received from the borrower. The Bank retains the difference as a fee for servicing the residential real estate mortgages. The Bank capitalizes mortgage servicing rights at their fair value upon sale of the related loans, amortizes the asset over the estimated life of the serviced loan, and periodically assesses the asset for impairment. The significant assumptions used by a third party to estimate the fair value of capitalized servicing rights at December 31, 2022, include weighted average prepayment speed for the portfolio using the Public Securities Association Standard Prepayment Model (105 PSA), weighted average internal rate of return (10.01%), weighted average servicing fee (0.25%), and average cost to service loans ($83.71 per loan). The estimated fair value of capitalized servicing rights may vary significantly in subsequent periods primarily due to changing market interest rates, and their effect on prepayment speeds and discount rates. For the years ended December 31, 2022 and 2021, the Company sold $277,000 and $59.7 million in residential real estate mortgages with servicing retained and recorded gains on the sale of mortgages of $2,000 and $1.4 million, respectively, within non-interest income.

At December 31, 2022 and December 31, 2021, the Company was servicing residential mortgage loans owned by investors totaling $79.3 million and $88.2 million, respectively. Servicing fee income of $208,000 and $137,000 was recorded for the years ended December 31, 2022 and 2021, respectively, and is included in service charges and fees on the consolidated statements of net income.

A summary of the activity in the balances of mortgage servicing rights follows:

	Years Ended December 31,
	2022			2021
	(In thousands)
Balance at the beginning of year:	$	693		$	153
Capitalized mortgage servicing rights		2			628
Amortization		(145	)		(86	)
Write-down of mortgage servicing asset to fair value		—			(2	)
Balance at the end of year	$	550		$	693
Fair value at the end of year	$	794		$	739

Allowance for Loan Losses.

An analysis of changes in the allowance for loan losses by segment for the years ended December 31, 2022, 2021 and 2020 is as follows:

	Commercial Real Estate			Residential Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	(In thousands)
Balance at December 31, 2019	$	6,807		$	3,920		$	3,183		$	203		$	(11	)	$	14,102
Provision		6,262			408			939			129			37			7,775
Charge-offs		(107	)		(177	)		(543	)		(136	)		—			(963	)
Recoveries		58			89			51			45			—			243
Balance at December 31, 2020	$	13,020		$	4,240		$	3,630		$	241		$	26		$	21,157
Provision (credit)		46			(349	)		(644	)		35			(13	)		(925	)
Charge-offs		(103	)		(44	)		(370	)		(128	)		—			(645	)
Recoveries		7			117			27			49			—			200
Balance at December 31, 2021	$	12,970		$	3,964		$	2,643		$	197		$	13		$	19,787
Provision (credit)		(434	)		344			586			202			2			700
Charge-offs		(337	)		(28	)		(92	)		(216	)		—			(673	)
Recoveries		—			32			23			62			—			117
Balance at December 31, 2022	$	12,199		$	4,312		$	3,160		$	245		$	15		$	19,931

The following table presents information pertaining to the allowance for loan losses by segment as of the dates indicated:

	Commercial Real Estate		Residential Real Estate		Commercial and Industrial		Consumer		Unallocated		Total
	(In thousands)
December 31, 2022
Amount of allowance for impaired loans	$	—	$	—	$	—	$	—	$	—	$	—
Amount of allowance for non-impaired loans		12,199		4,312		3,160		245		15		19,931
Total allowance for loan losses	$	12,199	$	4,312	$	3,160	$	245	$	15	$	19,931
Impaired loans	$	9,178	$	3,623	$	407	$	—	$	—	$	13,208
Non-impaired loans		1,056,886		689,776		219,163		5,045		—		1,970,870
Impaired loans acquired with deteriorated credit quality		3,259		1,661		278		—		—		5,198
Total loans	$	1,069,323	$	695,060	$	219,848	$	5,045	$	—	$	1,989,276

December 31, 2021(1)
Amount of allowance for impaired loans	$	—	$	—	$	—	$	—	$	—	$	—
Amount of allowance for non-impaired loans		12,970		3,964		2,643		197		13		19,787
Total allowance for loan losses	$	12,970	$	3,964	$	2,643	$	197	$	13	$	19,787
Impaired loans	$	9,601	$	3,223	$	699	$	22	$	—	$	13,545
Non-impaired loans		965,577		647,098		200,271		4,228		—		1,817,174
Impaired loans acquired with deteriorated credit quality		4,791		1,770		370		—		—		6,931
Total loans	$	979,969	$	652,091	$	201,340	$	4,250	$	—	$	1,837,650

(1) December 31, 2021 non-impaired loan balances exclude PPP loans.

Past Due and Nonaccrual loans.

The following tables present an age analysis of past due loans as of the dates indicated:

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days or More Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Nonaccrual Loans
	(In thousands)
December 31, 2022
Commercial real estate	$	—	$	211	$	1,404	$	1,615	$	1,067,708	$	1,069,323	$	1,933
Residential real estate:
Residential one-to-four family		1,768		100		414		2,282		587,221		589,503		3,290
Home equity		209		97		51		357		105,200		105,557		181
Commercial and industrial		170		10		22		202		219,646		219,848		290
Consumer		13		—		—		13		5,032		5,045		—
Total loans	$	2,160	$	418	$	1,891	$	4,469	$	1,984,807	$	1,989,276	$	5,694
December 31, 2021(1)
Commercial real estate	$	139	$	—	$	436	$	575	$	979,394	$	979,969	$	1,224
Residential real estate:
Residential one-to-four family		787		41		507		1,335		550,997		552,332		3,214
Home equity		57		5		63		125		99,634		99,759		94
Commercial and industrial		58		10		22		90		201,250		201,340		410
Consumer		5		—		11		16		4,234		4,250		22
Total loans	$	1,046	$	56	$	1,039	$	2,141	$	1,835,509	$	1,837,650	$	4,964

(1) December 31, 2021 balances exclude PPP loans.

At December 31, 2022 and December 31, 2021, all loans past due 90 days or more were carried as nonaccrual. The ratio of nonaccrual loans to total loans was 0.29% and 0.27% at December 31, 2022 and December 31, 2021, respectively.

Impaired Loans.

The following is a summary of impaired loans by class:

							Year Ended
	At December 31, 2022						December 31, 2022
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired Loans (1)	(In thousands)
Commercial real estate	$	12,437	$	13,795	$	—	$	13,427	$	248
Residential real estate:
Residential one-to-four family		5,088		5,823		—		4,792		59
Home equity		196		214		—		172		1
Commercial and industrial		685		3,095		—		891		66
Consumer		—		—		—		3		—
Total impaired loans	$	18,406	$	22,927	$	—	$	19,285	$	374

⁽¹⁾ Includes loans acquired with deteriorated credit quality and performing troubled debt restructurings.

							Year Ended
	At December 31, 2021						December 31, 2021
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired Loans (1)	(In thousands)
Commercial real estate	$	14,392	$	15,563	$	—	$	15,757	$	469
Residential real estate:
Residential one-to-four family		4,881		5,381		—		5,693		233
Home equity		112		136		—		146		7
Commercial and industrial		1,069		3,850		—		2,551		131
Consumer		22		37		—		25		3
Total impaired loans	$	20,476	$	24,967	$	—	$	24,172	$	843

⁽¹⁾ Includes loans acquired with deteriorated credit quality and performing troubled debt restructurings.

The majority of impaired loans are included within the nonaccrual balances; however, not every loan on nonaccrual status has been designated as impaired. Impaired loans include loans that have been modified in a TDR.

Impaired loans are individually evaluated and exclude large groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated for impairment, and loans that are measured at fair value, unless the loan is amended in a TDR.

All payments received on impaired loans in nonaccrual status are applied to principal. There was no interest income recognized on nonaccrual impaired loans during the years ended December 31, 2022 and December 31, 2021. The Company’s obligation to fulfill the additional funding commitments on impaired loans is generally contingent on the borrower’s compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company’s discretion. As of December 31, 2022, we have not committed to lend any additional funds for loans that are classified as impaired. Payments received on impaired loans in accrual status are recorded in accordance with the contractual terms of the loan.

Troubled Debt Restructurings.

Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the Bank grants the borrower a concession on the terms, that would not otherwise be considered. Typically, such concessions may consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, extension of additional credit based on receipt of adequate collateral, or a deferment or reduction of payments (principal or interest) which materially alters the Bank’s position or significantly extends the note’s maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan’s origination. All loans that are modified are reviewed by the Company to identify if a TDR has occurred. All TDR loans are classified as impaired.

When we modify loans in a TDR, we measure impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific allowance or a charge-off to the allowance. Nonperforming TDRs are included in nonperforming loans.

There were no charge-offs on TDRs during the years ended December 31, 2022 and 2021. During the years ended December 31, 2022 and 2021, no TDRs defaulted (defined as 30 days or more past due) within 12 months of restructuring.

Loans Acquired with Deteriorated Credit Quality.

The following is a summary of loans acquired with evidence of credit deterioration from Chicopee as of December 31, 2022.

	Contractual Required Payments Receivable			Cash Expected To Be Collected			Non-Accretable Discount			Accretable Yield			Loans Receivable
	(In thousands)
Balance at December 31, 2021	$	12,134		$	9,430		$	2,704		$	2,499		$	6,931
Collections		(1,792	)		(1,576	)		(216	)		(213	)		(1,363	)
Dispositions		(589	)		(439	)		(150	)		(69	)		(370	)
Balance at December 31, 2022	$	9,753		$	7,415		$	2,338		$	2,217		$	5,198

Credit Quality Information.

The Company utilizes an eight-grade internal loan rating system for commercial real estate and commercial and industrial loans. Performing residential real estate, home equity and consumer loans are grouped with “Pass” rated loans. Nonperforming residential real estate, home equity and consumer loans are monitored individually for impairment and risk rated as “substandard.”

Loans rated 1 – 4: Loans rated 1-4 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent acceptable risk.

Loans rated 5: Loans rated 5 are considered “Special Mention” and may exhibit potential credit weaknesses or downward trends and are being monitored by management. Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.

Loans rated 6: Loans rated 6 are considered “Substandard.” A loan is classified as substandard if the borrower exhibits a well-defined weakness and may be inadequately protected by the current net worth and cash flow capacity to pay the current debt.

Loans rated 7: Loans rated 7 are considered “Doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation of the loan highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.

Loans rated 8: Loans rated 8 are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be affected in the future.

On an annual basis, or more often if needed, we formally review the ratings on all commercial real estate and commercial and industrial loans. In addition, management utilizes delinquency reports, the criticized report and other loan reports to monitor credit quality. In addition, at least on an annual basis, the Company contracts with an external loan review company to review the internal credit ratings assigned to loans in the commercial loan portfolio on a pre-determined schedule, based on the type, size, rating, and overall risk of the loan. During the course of their review, the third party examines a sample of loans, including new loans, existing relationships over certain dollar amounts and classified assets.

The following table presents our loans by risk rating for the periods indicated:

	Commercial Real Estate		Residential  One-to-Four Family		Home Equity		Commercial and Industrial		Consumer		Total
	(In thousands)
December 31, 2022
Pass (Rated 1 – 4)	$	1,036,337	$	585,292	$	105,248	$	193,415	$	5,027	$	1,925,319
Special Mention (Rated 5)		16,035		—		—		5,623		—		21,658
Substandard (Rated 6)		16,951		4,211		309		20,810		18		42,299
Total	$	1,069,323	$	589,503	$	105,557	$	219,848	$	5,045	$	1,989,276

		Commercial Real Estate		Residential  One-to-Four Family		Home Equity		Commercial and Industrial		Consumer		Total
December 31, 2021		(In thousands)
Pass (Rated 1 – 4)	$	913,063	$	547,980	$	99,503	$	215,605	$	4,228	$	1,780,379
Special Mention (Rated 5)		48,765		—		—		2,777		—		51,542
Substandard (Rated 6)		18,141		4,352		256		8,287		22		31,058
Total	$	979,969	$	552,332	$	99,759	$	226,669	$	4,250	$	1,862,979