NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):

	March 31, 2021			December 31, 2020
Commercial and industrial
Commercial and industrial, excluding PPP	$	392,208		$	436,331
PPP		253,811			229,079
Total commercial and industrial		646,019			665,410

Commercial real estate:
Residential developed		8,651			8,549
Vacant and unimproved		41,375			47,122
Commercial development		841			857
Residential improved		112,618			114,392
Commercial improved		264,122			266,006
Manufacturing and industrial		112,995			115,247
Total commercial real estate		540,602			552,173
Consumer
Residential mortgage		139,727			149,556
Unsecured		134			161
Home equity		52,709			57,975
Other secured		3,760			4,056
Total consumer		196,330			211,748
Total loans		1,382,951			1,429,331
Allowance for loan losses		(17,452	)		(17,408	)
	$	1,365,499		$	1,411,923

Activity in the allowance for loan losses by portfolio segment was as follows (dollars in thousands):

Three months ended March 31, 2021	Commercial and Industrial			Commercial Real Estate		Consumer			Unallocated		Total
Beginning balance	$	6,632		$	7,999	$	2,758		$	19	$	17,408
Charge-offs		—			—		(50	)		—		(50	)
Recoveries		20			39		35			—		94
Provision for loan losses		(851	)		860		(25	)		16		—
Ending Balance	$	5,801		$	8,898	$	2,718		$	35	$	17,452

Three months ended March 31, 2020	Commercial and Industrial		Commercial Real Estate			Consumer			Unallocated		Total
Beginning balance	$	7,658	$	6,521		$	3,009		$	12	$	17,200
Charge-offs		—		—			(39	)		—		(39	)
Recoveries		19		974			35			—		1,028
Provision for loan losses		1,130		(582	)		125			27		700
Ending Balance	$	8,807	$	6,913		$	3,130		$	39	$	18,889

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method (dollars in thousands):

March 31, 2021	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	511	$	181	$	295	$	—	$	987
Collectively evaluated for impairment		5,290		8,717		2,423		35		16,465
Total ending allowance balance	$	5,801	$	8,898	$	2,718	$	35	$	17,452
Loans:
Individually reviewed for impairment	$	4,987	$	2,481	$	3,817	$	—	$	11,285
Collectively evaluated for impairment		641,032		538,121		192,513		—		1,371,666
Total ending loans balance	$	646,019	$	540,602	$	196,330	$	—	$	1,382,951

December 31, 2020	Commercial and Industrial		Commercial Real Estate		Consumer		Unallocated		Total
Allowance for loan losses:
Ending allowance attributable to loans:
Individually reviewed for impairment	$	587	$	313	$	310	$	—	$	1,210
Collectively evaluated for impairment		6,045		7,686		2,448		19		16,198
Total ending allowance balance	$	6,632	$	7,999	$	2,758	$	19	$	17,408
Loans:
Individually reviewed for impairment	$	3,957	$	2,613	$	4,049	$	—	$	10,619
Collectively evaluated for impairment		661,453		549,560		207,699		—		1,418,712
Total ending loans balance	$	665,410	$	552,173	$	211,748	$	—	$	1,429,331

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2021 (dollars in thousands):

March 31, 2021	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	143	$	143	$	—
Commercial real estate:
Residential improved		87		87		—
Commercial improved		1,035		1,035		—
		1,122		1,122		—
Consumer		—		—		—
Total with no related allowance recorded	$	1,265	$	1,265	$	—

With an allowance recorded:
Commercial and industrial	$	4,844	$	4,844	$	511
Commercial real estate:
Commercial improved		1,161		1,161		173
Manufacturing and industrial		198		198		8
		1,359		1,359		181
Consumer:
Residential mortgage		3,292		3,292		254
Unsecured		104		104		8
Home equity		400		400		31
Other secured		21		21		2
		3,817		3,817		295
Total with an allowance recorded	$	10,020	$	10,020	$	987
Total	$	11,285	$	11,285	$	987

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2020 (dollars in thousands):

December 31, 2020	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial and industrial	$	156	$	156	$	—
Commercial real estate:
Residential improved		107		107		—
Commercial improved		714		714		—
		821		821		—
Consumer		—		—		—
Total with no related allowance recorded	$	977	$	977	$	—

With an allowance recorded:
Commercial and industrial	$	3,801	$	3,801	$	587
Commercial real estate:
Residential developed		67		67		3
Commercial improved		1,524		1,524		301
Manufacturing and industrial		201		201		9
		1,792		1,792		313
Consumer:
Residential mortgage		3,484		3,484		266
Unsecured		123		123		10
Home equity		419		419		32
Other secured		23		23		2
		4,049		4,049		310
Total with an allowance recorded	$	9,642	$	9,642	$	1,210
Total	$	10,619	$	10,619	$	1,210

The following table presents information regarding average balances of impaired loans and interest recognized on impaired loans for the three month periods ended March 31, 2021 and 2020 (dollars in thousands):

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Average of impaired loans during the period:
Commercial and industrial	$	4,586	$	6,615
Commercial real estate:
Residential developed		45		74
Residential improved		87		267
Commercial improved		2,208		5,822
Manufacturing and industrial		199		356
Consumer		3,941		4,914
Interest income recognized during impairment:
Commercial and industrial		134		273
Commercial real estate		31		99
Consumer		38		57
Cash-basis interest income recognized
Commercial and industrial		125		275
Commercial real estate		31		128
Consumer		36		60

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2021 and 2020:

March 31, 2021	Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	—	$	—
Commercial real estate:
Residential improved		87		—
Commercial improved		345		—
		432		—
Consumer:
Residential mortgage		93		—
		93		—
Total	$	525	$	—

December 31, 2020	Nonaccrual		Over 90 days Accruing
Commercial and industrial	$	—	$	—
Commercial real estate:
Residential improved		87		—
Commercial improved		351		—
		438		—
Consumer:
Residential mortgage		95		—
		95		—
Total	$	533	$	—

The following table presents the aging of the recorded investment in past due loans as of March 31, 2021 and December 31, 2020 by class of loans (dollars in thousands):

March 31, 2021	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	39		—	$	39	$	645,980	$	646,019
Commercial real estate:
Residential developed		—		—		—		8,651		8,651
Vacant and unimproved		—		—		—		41,375		41,375
Commercial development		—		—		—		841		841
Residential improved		—		87		87		112,531		112,618
Commercial improved		—		—		—		264,122		264,122
Manufacturing and industrial		—		—		—		112,995		112,995
		—		87		87		540,515		540,602
Consumer:
Residential mortgage		—		91		91		139,636		139,727
Unsecured		—		—		—		134		134
Home equity		—		—		—		52,709		52,709
Other secured		—		—		—		3,760		3,760
		—		91		91		196,239		196,330
Total	$	39	$	178	$	217	$	1,382,734	$	1,382,951

December 31, 2020	30-90 Days		Greater Than 90 Days		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	45	$	—	$	45	$	665,365	$	665,410
Commercial real estate:
Residential developed		—		—		—		8,549		8,549
Vacant and unimproved		—		—		—		47,122		47,122
Commercial development		—		—		—		857		857
Residential improved		—		87		87		114,305		114,392
Commercial improved		353		—		353		265,653		266,006
Manufacturing and industrial		—		—		—		115,247		115,247
		353		87		440		551,733		552,173
Consumer:
Residential mortgage		—		94		94		149,462		149,556
Unsecured		—		—		—		161		161
Home equity		—		—		—		57,975		57,975
Other secured		2		—		2		4,054		4,056
		2		94		96		211,652		211,748
Total	$	400	$	181	$	581	$	1,428,750	$	1,429,331

The Company had allocated $987,000 and $1.2 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”) as of March 31, 2021 and December 31, 2020, respectively. These loans may have involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit. The Company has been active at utilizing these programs and working with its customers to reduce the risk of foreclosure. For commercial loans, these modifications typically include an interest only period and, in some cases, a lowering of the interest rate on the loan. In some cases, the modification will include separating the note into two notes with the first note structured to be supported by current cash flows and collateral, and the second note made for the remaining unsecured debt. The second note is charged off immediately and collected only after the first note is paid in full. This modification type is commonly referred to as an A-B note structure. For consumer mortgage loans, the restructuring typically includes a lowering of the interest rate to provide payment and cash flow relief. For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured debt. An analysis is also performed to determine whether the restructured loan should be on accrual status. Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring. In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms. After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.

In situations where there is a subsequent modification or renewal and the loan is brought to market terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired loan designations may be removed. In addition, the TDR designation may also be removed from loans modified under an A-B note structure. If the remaining “A” note is at a market rate at the time of restructuring (taking into account the borrower’s credit risk and prevailing market conditions), the loan can be removed from TDR designation in a subsequent calendar year after six months of performance in accordance with the new terms. The market rate relative to the borrower’s credit risk is determined through analysis of market pricing information gathered from peers and use of a loan pricing model. The general objective of the model is to achieve a consistent return on equity from one credit to the next, taking into consideration differences in credit risk. In the model, credits with higher risk receive a higher potential loss allocation, and therefore require a higher interest rate to achieve the target return on equity.

As with other impaired loans, an allowance for loan loss is estimated for each TDR based on the most likely source of repayment for each loan. For impaired commercial real estate loans that are collateral dependent, the allowance is computed based on the fair value of the underlying collateral, less estimated costs to sell. For impaired commercial loans where repayment is expected from cash flows from business operations, the allowance is computed based on a discounted cash flow computation. Certain groups of TDRs, such as residential mortgages, have common characteristics and for them the allowance is computed based on a discounted cash flow computation on the change in weighted rate for the pool. The allowance allocations for commercial TDRs where we have reduced the contractual interest rate are computed by measuring cash flows using the new payment terms discounted at the original contractual rate.

The following table presents information regarding troubled debt restructurings as of March 31, 2021 and December 31, 2020 (dollars in thousands):

	March 31, 2021				December 31, 2020
	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		6	$	4,987		7	$	3,957
Commercial real estate		7		1,320		9		1,439
Consumer		57		3,817		60		4,049
		70	$	10,124		76	$	9,445

The following table presents information related to accruing troubled debt restructurings as of March 31, 2021 and December 31, 2020. The table presents the amount of accruing troubled debt restructurings that were on nonaccrual status prior to the restructuring, accruing at the time of restructuring and those that were upgraded to accruing status after receiving six consecutive monthly payments in accordance with the restructured terms as of each period reported (dollars in thousands):

	March 31, 2021		December 31, 2020
Accruing TDR - nonaccrual at restructuring	$	—	$	—
Accruing TDR - accruing at restructuring		5,176		5,479
Accruing TDR - upgraded to accruing after six consecutive payments		4,516		3,529
	$	9,692	$	9,008

There were no troubled debt restructurings executed during the three month period ended March 31, 2021 and one consumer loan troubled debt restructuring totaling $3,000 executed during the three month period ended March 31, 2020, with no writedown taken upon restructuring.

According to the accounting standards, not all loan modifications are TDRs. TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress. The Company reviews all modifications and renewals for determination of TDR status. In some situations a borrower may be experiencing financial distress, but the Company does not provide a concession. These modifications are not considered TDRs. In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress. This could be the case if the Company is matching a competitor’s interest rate. These modifications would also not be considered TDRs. Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered TDRs. As with other loans not considered TDR or impaired, allowance allocations are based on the historical based allocation for the applicable loan grade and loan class.

Payment defaults on TDRs have been minimal and during the three month periods ended March 31, 2021 and 2020, the balance of loans that became delinquent by more than 90 days past due or that were transferred to nonaccrual within 12 months of restructuring were not material.

In late March 2020, the federal banking regulators issued guidance that modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders do not need to be identified as a TDR if the loan was current at the time a modification plan was implemented. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs. On December 27, 2020, President Trump signed another COVID-19 relief bill that extends this guidance until the earlier of January 1, 2022 or 60 days after the national emergency termination date. Through March 31, 2021, the Bank had applied this guidance and had made 726 such modifications with principal balances totaling $337.2 million. The Bank continues to follow the guidance issued by the banking regulators in making any TDR determinations. At March 31, 2021, there were 5 such loans still in their modification period, totaling $21.9 million. Of the 5 remaining loans, 3 were modified during the three months ended March 31, 2021.

Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes commercial loans individually and classifies these relationships by credit risk grading. The Company uses an eight point grading system, with grades 5 through 8 being considered classified, or watch, credits. All commercial loans are assigned a grade at origination, at each renewal or any amendment. When a credit is first downgraded to a watch credit (either through renewal, amendment, loan officer identification or the loan review process), an Administrative Loan Review (“ALR”) is generated by the credit department and the loan officer. All watch credits have an ALR completed quarterly which analyzes the collateral position and cash flow of the borrower and its guarantors. Management meets quarterly with loan officers to discuss each of these credits in detail and to help formulate solutions where progress has stalled. When necessary, the loan officer proposes changes to the assigned loan grade as part of the ALR. Additionally, Loan Review reviews all loan grades upon origination, renewal or amendment and again as loans are selected though the loan review process. The credit will stay on the ALR until either its grade has improved to a 4 or the credit relationship is at a zero balance. The Company uses the following definitions for the risk grades:

1. Excellent - Loans supported by extremely strong financial condition or secured by the Bank’s own deposits. Minimal risk to the Bank and the probability of serious rapid financial deterioration is extremely small.

2. Above Average - Loans supported by sound financial statements that indicate the ability to repay or borrowings secured (and margined properly) with marketable securities. Nominal risk to the Bank and probability of serious financial deterioration is highly unlikely. The overall quality of these credits is very high.

3. Good Quality - Loans supported by satisfactory asset quality and liquidity, good debt capacity coverage, and good management in all critical positions. Loans are secured by acceptable collateral with adequate margins. There is a slight risk of deterioration if adverse market conditions prevail.

4. Acceptable Risk - Loans carrying an acceptable risk to the Bank, which may be slightly below average quality. The borrower has limited financial strength with considerable leverage. There is some probability of deterioration if adverse market conditions prevail. These credits should be monitored closely by the Relationship Manager.

5. Marginally Acceptable - Loans are of marginal quality with above normal risk to the Bank. The borrower shows acceptable asset quality but very little liquidity with high leverage. There is inconsistent earning performance without the ability to sustain adverse market conditions. The primary source of repayment is questionable, but the secondary source of repayment still remains an option. Very close attention by the Relationship Manager and management is needed.

6. Substandard - Loans are inadequately protected by the net worth and paying capacity of the borrower or the collateral pledged. The primary and secondary sources of repayment are questionable. Heavy debt condition may be evident and volume and earnings deterioration may be underway. It is possible that the Bank will sustain some loss if the deficiencies are not immediately addressed and corrected.

7. Doubtful - Loans supported by weak or no financial statements, as well as the ability to repay the entire loan, are questionable. Loans in this category are normally characterized less than adequate collateral, insolvent, or extremely weak financial condition. A loan classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses makes collection or liquidation in full highly questionable. The possibility of loss is extremely high, however, activity may be underway to minimize the loss or maximize the recovery.

8. Loss - Loans are considered uncollectible and of little or no value as a bank asset.

As of March 31, 2021 and December 31, 2020, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):

March 31, 2021		1		2		3		4		5		6		7		8	Total
Commercial and industrial	$	268,809	$	15,062	$	92,769	$	261,340	$	2,929	$	5,110	$	—	$	—	$	646,019

Commercial real estate:
Residential developed		—		—		—		8,651		—		—		—		—		8,651
Vacant and unimproved		—		2,640		8,469		30,266		—		—		—		—		41,375
Commercial development		—		—		296		545		—		—		—		—		841
Residential improved		—		—		21,118		91,211		202		—		87		—		112,618
Commercial improved		—		6,158		53,139		200,785		2,535		1,160		345		—		264,122
Manufacturing & industrial		—		2,075		28,462		78,800		3,658		—		—		—		112,995
	$	268,809	$	25,935	$	204,253	$	671,598	$	9,324	$	6,270	$	432	$	—	$	1,186,621

December 31, 2020		1		2		3		4		5		6		7		8	Total
Commercial and industrial	$	244,079	$	14,896	$	111,611	$	276,728	$	13,957	$	4,139	$	—	$	—	$	665,410

Commercial real estate:
Residential developed		—		—		—		8,549		—		—		—		—		8,549
Vacant and unimproved		—		3,473		9,427		32,751		1,471		—		—		—		47,122
Commercial development		—		—		302		555		—		—		—		—		857
Residential improved		—		—		23,706		90,372		227		—		87		—		114,392
Commercial improved		—		6,328		58,483		192,030		7,641		1,174		350		—		266,006
Manufacturing & industrial		—		—		31,451		80,075		3,721		—		—		—		115,247
	$	244,079	$	24,697	$	234,980	$	681,060	$	27,017	$	5,313	$	437	$	—	$	1,217,583

Commercial loans rated a 6 or worse per the Company’s internal risk rating system are considered substandard, doubtful or loss. Commercial loans classified as substandard or worse were as follows at period-end (dollars in thousands):

	March 31, 2021		December 31, 2020
Not classified as impaired	$	591	$	591
Classified as impaired		6,111		5,159
Total commercial loans classified substandard or worse	$	6,702	$	5,750

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in consumer loans based on payment activity (dollars in thousands):

March 31, 2021	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	139,636	$	134	$	52,709	$	3,760
Nonperforming		91		—		—		—
Total	$	139,727	$	134	$	52,709	$	3,760

December 31, 2020	Residential Mortgage		Consumer Unsecured		Home Equity		Consumer Other
Performing	$	149,462	$	161	$	57,975	$	4,056
Nonperforming		94		—		—		—
Total	$	149,556	$	161	$	57,975	$	4,056