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Loans and Leases

12 Months Ended

Dec. 31, 2020

5.LOANS AND LEASES

The classifications of loans and leases at December 31, 2020 and 2019 are summarized as follows:



(dollars in thousands)	2020						2019
	Originated		Acquired		Total
Commercial and industrial	$	257,277	$	23,480	$	280,757	$	122,594
Commercial real estate:
Non-owner occupied		104,653		87,490		192,143		99,801
Owner occupied		136,305		43,618		179,923		130,558
Construction		3,965		6,266		10,231		4,654
Consumer:
Home equity installment		34,561		5,586		40,147		36,631
Home equity line of credit		44,931		4,794		49,725		47,282
Auto loans		98,192		194		98,386		105,870
Direct finance leases		20,095		-		20,095		16,355
Other		7,411		191		7,602		5,634
Residential:
Real estate		180,414		38,031		218,445		167,164
Construction		23,117		240		23,357		17,770
Total		910,921		209,890		1,120,811		754,313
Less:
Allowance for loan losses		(14,202)		-		(14,202)		(9,747)
Unearned lease revenue		(1,159)		-		(1,159)		(903)
Loans and leases, net	$	895,560	$	209,890	$	1,105,450	$	743,663

As of December 31, 2020, total loans of $1.1 billion were reflected net of deferred loan costs of $1.7 million, including $2.2 million in deferred fee income from Paycheck Protection Program (PPP) loans which was offset by deferred loan costs on other loans. Net deferred loan costs of $3.0 million have been included in the carrying values of loans at December 31, 2019.

Commercial and industrial loan balances were $280.8 million at December 31, 2020 and $122.6 million on December 31, 2019. The $158.2 million increase reflected $129.9 million in PPP loans (net of unearned deferred fees) and $23.5 million in loans stated at fair value acquired in the Merchants Bank merger.

Direct finance leases include the lease receivable and the guaranteed lease residual. Unearned lease revenue represents the difference between the lessor’s investment in the property and the gross investment in the lease. Unearned revenue is accrued over the life of the lease using the effective interest method.

The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets. The approximate unpaid principal balance of mortgages serviced amounted to $366.5 million as of December 31, 2020 and $302.3 million as of December 31, 2019. Mortgage servicing rights amounted to $1.3 million and $1.0 million as of December 31, 2020 and 2019, respectively.

Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Paycheck Protection Program Loans

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. 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 automatically authorized to originate PPP loans. An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs, or (2) $10.0 million. PPP loans will have:

(a) an interest rate of 1.0%, (b) a two-year loan term to maturity for loans originated before June 5th and a five-year maturity for loans originated beginning on June 5th; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrowers’ PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP, so long as the employer maintains or quickly rehires employees and maintains salary levels and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.

As of December 31, 2020, the Company had 1,246 PPP loans outstanding totaling $132.1 million, which represents a $27.0 million, or 17%, decrease from the 1,551 loans totaling $159.1 million originated under the Paycheck Protection Program. As a PPP lender, the Company received fee income of approximately $5.6 million year-to-date. The Company recognized $3.3 million of PPP fee income during 2020 with the remaining amount to be recognized in future quarters. Unearned fees attributed to PPP loans, net of fees paid to referral sources as prescribed by the SBA under the PPP program, were $2.2 million as of December 31, 2020.

Acquired loans

Acquired loans are marked to fair value on the date of acquisition. For detailed information on calculating the fair value of acquired loans, see Footnote 9, “Acquisition.”

The carryover of allowance for loan losses related to acquired loans is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. The allowance for loan losses on acquired loans reflects only those losses incurred after acquisition and represents the present value of cash flows expected at acquisition that is no longer expected to be collected.

The Company reported provisional fair value adjustments regarding the acquired MNB Corporation loan portfolio. Therefore, we did not record an allowance on the acquired non-purchased credit impaired (PCI) loans. We are in the process of developing a plan to evaluate acquired non-PCI loans for additional reserve in the subsequent interim period. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan losses, the Company performs an analysis on acquired loans to determine whether there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Company will include these loans in the calculation of the allowance for loan losses after the initial valuation and provide reserves accordingly.

Upon acquisition, in accordance with U.S. GAAP, the Company has individually determined whether each acquired loan is within the scope of ASC 310-30. As part of this process, the Company’s senior management and other relevant individuals reviewed the seller’s loan portfolio on a loan-by-loan basis to determine if any loans met the two-part definition of an impaired loan as defined by ASC 310-30: 1) Credit deterioration on the loan from its inception until the acquisition date, and 2) It is probable that not all contractual cash flows will be collected on the loan.

With regards to ASC 310-30 loans, for external disclosure purposes, the aggregate contractual cash flows less the aggregate expected cash flows result in a credit related non-accretable yield amount. The aggregate expected cash flows less the acquisition date fair value result in an accretable yield amount. The accretable yield reflects the contractual cash flows management expects to collect above the loan's acquisition date fair value and will be recognized over the life of the loan on a level-yield basis as a component of interest income.

Over the life of the acquired ASC 310-30 loan, the Company continues to estimate cash flows expected to be collected. Decreases in expected cash flows, other than from prepayments or rate adjustments, are recognized as impairments through a charge to the provision for credit losses resulting in an increase in the allowance for credit losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized after acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized on a prospective basis over the loan’s remaining life.

Acquired ASC 310-30 loans that met the criteria for non-accrual of interest prior to acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Company can reasonably estimate the timing and amount of expected cash flows on such loans. Accordingly, the Company does not consider acquired contractually delinquent loans to be non-accruing and continues to recognize accretable yield on these loans which is recognized as interest income on a level yield method over the life of the loan.

Acquired ASC 310-20 loans, which are loans that did not meet the criteria above, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. For these pools, the Company used certain loan information, including outstanding principal balance, estimated expected losses, weighted average maturity, weighted average margin, and weighted average interest rate along with estimated prepayment rates, expected lifetime losses, and environment factors to estimate the expected cash flow for each loan pool.

Within the ASC 310-20 loans, the Company identified certain loans that have higher risk due to the COVID-19 pandemic. Although performing at the time of acquisition and likely will continue making payments in accordance with contractual terms, management elected a higher credit adjustment on these loans to reflect the greater inherent risk that the borrower will default on payments. These higher risk factors include loans that requested forbearance consistent with FIL-17-2020 FDIC Statement on Financial Institutions Working with Customers Affected by the Coronavirus and Regulatory and Supervisory

Assistance, loans that were in industries determined to be at greater risk to economic disruption due to COVID-19, and loans that had a prior history of delinquency greater than 60 days at any point in the lifetime of the loan.

The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.



	For the year ended
(dollars in thousands)	December 31, 2020
Balance at beginning of period	$	-
Accretable yield on acquired loans		248
Reclassification from non-accretable difference		429
Accretion of accretable yield		(114)
Balance at end of period	$	563

During the third quarter of 2020, management performed an analysis of all loans accounted for under ASC 310-30. Three loans had an improvement in collateral value and two loans had actual payments exceed estimates resulting in a $192 thousand reclassification from non-accretable discount to accretable discount.

During the fourth quarter of 2020, management performed an analysis of all loans accounted for under ASC 310-30. One loan had an improvement in collateral value and two loans had actual payments exceed estimates resulting in a $237 thousand reclassification from non-accretable discount to accretable discount.

Cash flows expected to be collected on acquired loans are estimated quarterly by incorporating several key assumptions. These key assumptions include probability of default and the number of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Improved cash flow expectations for loans or pools are recorded first as a reversal of previously recorded impairment, if any, and then as an increase in prospective yield when all previously recorded impairment has been recaptured.

Non-accrual loans

Non-accrual loans, segregated by class, at December 31, were as follows:



(dollars in thousands)	2020		2019
Commercial and industrial	$	590	$	336
Commercial real estate:
Non-owner occupied		846		510
Owner occupied		1,123		1,447
Consumer:
Home equity installment		61		65
Home equity line of credit		395		294
Auto loans		27		16
Residential:
Real estate		727		1,006
Total	$	3,769	$	3,674

The table above excludes $1.3 million in purchased credit impaired loans, net of unamortized fair value adjustments.

The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. C&I and CRE loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection. Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at 120 days past due as to principal and interest and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.

‎

Loan Modifications/COVID-19

The table below provides a summary by loan type of the COVID-19 accommodations based on the number and outstanding balance at December 31, 2020 along with the percentage of these accommodations relative to the loan portfolio and tier 1 capital:



(dollars in thousands)	Number of Loans		Total Modification Balance		Total Loan Balance	Percentage of Total Loan Balance	Percentage of Tier 1 Capital
Commercial and industrial	1	$	881	$	280,757	0.3%	0.6%
Commercial real estate:
Non-owner occupied	2		113		192,143	0.1%	0.1%
Owner occupied	4		1,161		179,923	0.6%	0.7%
Construction	-		-		10,231	0.0%	0.0%
Total Commercial	7		2,155		663,054	0.3%	1.4%
Consumer:
Home equity installment	-		-		40,147	0.0%	0.0%
Home equity line of credit	-		-		49,725	0.0%	0.0%
Auto loans	3		51		98,386	0.1%	0.0%
Direct finance leases	-		-		20,095	0.0%	0.0%
Other	-		-		7,602	0.0%	0.0%
Total Consumer	3		51		215,955	0.0%	0.0%
Residential:
Real estate	-		-		218,445	0.0%	0.0%
Construction	-		-		23,357	0.0%	0.0%
Total Residential	-		-		241,802	0.0%	0.0%
Total	10	$	2,206	$	1,120,811	0.2%	1.5%

The following table provides information with respect to the Company’s commercial COVID-19 accommodations by sector at December 31, 2020.


(dollars in thousands)	Count		Balance	Percentage of Tier 1 Capital

Retail Trade	2	$	1,440	1.0%
Real Estate Rental and Leasing	2		304	0.2%
Accommodation and Food Services	1		298	0.1%
Finance and Insurance	2		113	0.1%
Total commercial accommodations	7	$	2,155	1.4%

Consistent with Section 4013 and the Revised Statement of Section 4013 of the CARES Act, specifically “Temporary Relief From Troubled Debt Restructurings”, the Company approved requests by borrowers to modify loan terms and defer principal and/or interest payment for loans. U.S. GAAP permits the suspension of TDR determination defined under ASC 310-40 provided that such modifications are made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief. This includes short-term (i.e. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current for purposes of Section 4013 are those that are less than 30 days past due on their contractual payments at the time the modification program is implemented.

Beginning the week of March 16, 2020, the Company began receiving requests for temporary modifications to the repayment structure for borrower loans. Modification terms included interest only or full payment deferral for up to 6 months. As of December 31, 2020, the Company had 10 temporary modifications with principal balances totaling $2.2 million, which is down $199.6 million, or 99%, from the $201.8 million temporary modifications that were outstanding as of June 30, 2020.

The global pandemic referred to as COVID-19 has created many barriers to loan production relative to the measures taken to slow the spread. These measures have put a large strain on a wide variety of industries within the global economy generally, and the Company’s market specifically. The overall economic impact and effect of the measures is yet to be fully understood as its effects will most likely lag timewise behind while businesses and governments inject resources to help lessen the impact. Despite efforts to lessen the impact, it is the Company’s current belief that the pandemic will temporarily, or in some cases permanently, damage our borrower’s ability to repay loans and comply with terms.

‎

Troubled Debt Restructuring

A modification of a loan constitutes a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company considers all TDRs to be impaired loans. The Company typically considers the following concessions when modifying a loan, which may include lowering interest rates below the market rate, temporary interest-only payment periods, term extensions at interest rates lower than the current market rate for new debt with similar risk and/or converting revolving credit lines to term loans. The Company typically does not forgive principal when granting a TDR modification.

The following presents by class, information related to loans modified in a TDR:


	Loans modified as TDRs for the twelve months ended:
(dollars in thousands)	December 31, 2020						December 31, 2019

			Recorded		Increase in			Recorded		Increase in
		Number	investment		allowance		Number	investment		allowance
		of	(as of		(as of		of	(as of		(as of
		contracts	period end)		period end)		contracts	period end)		period end)
Commercial and industrial		2	$	206	$	66	-	$	-	$	-
Commercial real estate - non-owner occupied		2		1,598		453	-		-		-
Total		4	$	1,804	$	519	-	$	-	$	-

In the above table, the period end balance is inclusive of all partial pay downs and charge-offs since the modification date. For all loans modified in a TDR, the pre-modification recorded investment was the same as the post-modification recorded investment.

Of the TDRs outstanding as of December 31, 2020 and 2019, when modified, the concessions granted consisted of temporary interest-only payments, extensions of maturity date, or a reduction in the rate of interest to a below-market rate for a contractual period of time. Other than the TDRs that were placed on non-accrual status, the TDRs were performing in accordance with their modified terms.

Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment.

The following presents by class, loans modified as a TDR that subsequently defaulted (i.e. 90 days or more past due following a modification) during the periods indicated:


Loans modified as a TDR within the previous twelve months that subsequently defaulted during the twelve months ended:
(dollars in thousands)	December 31, 2020				December 31, 2019

		Number of		Recorded		Number of		Recorded
		contracts		investment		contracts		investment
Commercial and industrial		2	$	206		-	$	-
Total		2	$	206		-	$	-

In the above table, the period end balances are inclusive of all partial pay downs and charge-offs since the modification date.

The allowance for loan losses (allowance) may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan. An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price. If the loan is collateral dependent, the estimated fair value of the collateral is used to establish the allowance.

As of December 31, 2020 and 2019, respectively, the allowance for impaired loans that have been modified in a TDR was $0.7 million and $0.2 million, respectively.

‎

Past due loans

Loans are considered past due when the contractual principal and/or interest is not received by the due date. For loans reported 30-59 days past due, certain categories of loans are reported past due as and when the loan is in arrears for two payments or billing cycles. An aging analysis of past due loans, segregated by class of loans, as of the period indicated is as follows (dollars in thousands):



														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
December 31, 2020	past due		past due		or more ⁽¹⁾		past due		Current		loans ⁽³⁾			and accruing
Originated Loans
Commercial and industrial	$	275	$	505	$	590	$	1,370	$	255,907	$	257,277		$	-
Commercial real estate:
Non-owner occupied		-		-		846		846		103,807		104,653			-
Owner occupied		1		-		1,123		1,124		135,181		136,305			-
Construction		-		-		-		-		3,965		3,965			-
Consumer:
Home equity installment		62		-		61		123		34,438		34,561			-
Home equity line of credit		24		-		395		419		44,512		44,931			-
Auto loans		197		25		27		249		97,943		98,192			-
Direct finance leases		294		-		61		355		18,581		18,936	⁽²⁾		61
Other		6		-		-		6		7,405		7,411			-
Residential:
Real estate		-		74		727		801		179,613		180,414			-
Construction		-		-		-		-		23,117		23,117			-
Total originated loans		859		604		3,830		5,293		904,469		909,762			61
Acquired Loans
Commercial and industrial		13		-		-		13		23,467		23,480			-
Commercial real estate:
Non-owner occupied		79		-		-		79		87,411		87,490			-
Owner occupied		-		-		-		-		43,618		43,618			-
Construction		-		-		-		-		6,266		6,266			-
Consumer:
Home equity installment		40		-		-		40		5,546		5,586			-
Home equity line of credit		-		-		-		-		4,794		4,794			-
Auto loans		-		-		-		-		194		194			-
Other		3		-		-		3		188		191			-
Residential:
Real estate		-		-		-		-		38,031		38,031			-
Construction		-		-		-		-		240		240			-
Total acquired loans		135		-		-		135		209,755		209,890			-
Total Loans and Leases
Commercial and industrial		288		505		590		1,383		279,374		280,757			-
Commercial real estate:
Non-owner occupied		79		-		846		925		191,218		192,143			-
Owner occupied		1		-		1,123		1,124		178,799		179,923			-
Construction		-		-		-		-		10,231		10,231			-
Consumer:
Home equity installment		102		-		61		163		39,984		40,147			-
Home equity line of credit		24		-		395		419		49,306		49,725			-
Auto loans		197		25		27		249		98,137		98,386			-
Direct finance leases		294		-		61		355		18,581		18,936	⁽²⁾		61
Other		9		-		-		9		7,593		7,602			-
Residential:
Real estate		-		74		727		801		217,644		218,445			-
Construction		-		-		-		-		23,357		23,357			-
Total	$	994	$	604	$	3,830	$	5,428	$	1,114,224	$	1,119,652		$	61

⁽¹⁾ Includes non-accrual loans. ⁽²⁾ Net of unearned lease revenue of $1.2 million. ⁽³⁾ Includes net deferred loan costs of $1.7 million.

‎



														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
December 31, 2019	past due		past due		or more ⁽¹⁾		past due		Current		loans ⁽³⁾			and accruing

Commercial and industrial	$	33	$	171	$	336	$	540	$	122,054	$	122,594		$	-
Commercial real estate:
Non-owner occupied		-		70		510		580		99,221		99,801			-
Owner occupied		180		89		1,447		1,716		128,842		130,558			-
Construction		-		-		-		-		4,654		4,654			-
Consumer:
Home equity installment		-		5		65		70		36,561		36,631			-
Home equity line of credit		49		-		294		343		46,939		47,282			-
Auto loans		316		46		16		378		105,492		105,870			-
Direct finance leases		59		79		-		138		15,314		15,452	⁽²⁾		-
Other		15		1		-		16		5,618		5,634			-
Residential:
Real estate		29		224		1,006		1,259		165,905		167,164			-
Construction		-		-		-		-		17,770		17,770			-
Total	$	681	$	685	$	3,674	$	5,040	$	748,370	$	753,410		$	-

⁽¹⁾ Includes non-accrual loans. ⁽²⁾ Net of unearned lease revenue of $0.9 million. ⁽³⁾Includes net deferred loan costs of $3.0 million.

Impaired loans

Impaired loans, segregated by class, as of the period indicated are detailed below:



			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
December 31, 2020
Commercial and industrial	$	688	$	549	$	41	$	590	$	213
Commercial real estate:
Non-owner occupied		2,960		1,677		1,171		2,848		481
Owner occupied		2,058		1,219		473		1,692		309
Consumer:
Home equity installment		106		-		61		61		-
Home equity line of credit		443		105		290		395		48
Auto loans		50		27		-		27		4
Residential:
Real estate		774		559		168		727		151
Total	$	7,079	$	4,136	$	2,204	$	6,340	$	1,206



			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
December 31, 2019
Commercial and industrial	$	336	$	336	$	-	$	336	$	221
Commercial real estate:
Non-owner occupied		1,047		333		591		924		232
Owner occupied		2,336		1,052		972		2,024		194
Consumer:
Home equity installment		106		-		65		65		-
Home equity line of credit		362		88		206		294		87
Auto loans		32		-		16		16		-
Residential:										-
Real estate		1,053		678		328		1,006		174
Total	$	5,272	$	2,487	$	2,178	$	4,665	$	908

At December 31, 2020, impaired loans totaled $6.3 million consisting of $2.5 million in accruing TDRs and $3.8 million in non-accrual loans. At December 31, 2019, impaired loans totaled $4.7 million consisting of $1.0 million in accruing TDRs and $3.7 million in non-accrual loans. As of December 31, 2020, the non-accrual loans included four TDRs to three

unrelated borrowers totaling $0.7 million compared with two TDRs to two unrelated borrowers totaling $0.6 million as of December 31, 2019.

A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting payments when due. The significance of payment delays and/or shortfalls is determined on a case-by-case basis. All circumstances surrounding the loan are considered. Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record. Impairment is measured on these loans on a loan-by-loan basis. Impaired loans include non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors.

The following table presents the average recorded investments in impaired loans and related amount of interest income recognized during the periods indicated below. The average balances are calculated based on the quarter-end balances of impaired loans. Payments received from non-accruing impaired loans are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts. Any excess is treated as a recovery of interest income. Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon.



	December 31, 2020						December 31, 2019
					Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized

Commercial and industrial	$	404	$	1	$	-	$	226	$	1	$	-
Commercial real estate:
Non-owner occupied		1,939		96		-		914		185		-
Owner occupied		1,848		48		-		2,504		40		-
Construction		-		-		-		-		-		-
Consumer:
Home equity installment		53		-		-		129		2		-
Home equity line of credit		368		-		-		184		-		-
Auto Loans		51		2		-		39		-		-
Other		-		-		-		-		-		-
Residential:
Real estate		819		-		-		1,212		19		-
Total	$	5,482	$	147	$	-	$	5,208	$	247	$	-

The average recorded investment for the year ended December 31, 2018 was $6.7 million. There was also interest income recognized of $437 thousand and cash basis interest income recognized of $0.

Credit Quality Indicators

Commercial and industrial and commercial real estate

The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the C&I and CRE portfolios. The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio. The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the C&I and CRE portfolios.

The following is a description of each risk rating category the Company uses to classify each of its C&I and CRE loans:

Pass

Loans in this category have an acceptable level of risk and are graded in a range of one to five. Secured loans generally have good collateral coverage. Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends. Management is competent, and a reasonable succession plan is evident. Payment experience on the loans has been good with minor or no delinquency experience. Loans with a grade of one are of the highest quality in the range. Those graded five are of marginally acceptable quality.

Special Mention

Loans in this category are graded a six and may be protected but are potentially weak. They constitute a credit risk to the Company but have not yet reached the point of adverse classification. Some of the following conditions may exist: little or no collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions. Cash flow may not be sufficient to support total debt service requirements.

Substandard

Loans in this category are graded a seven and have a well-defined weakness which may jeopardize the ultimate collectability of the debt. The collateral pledged may be lacking in quality or quantity. Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth. The payment history indicates chronic delinquency problems. Management is weak. There is a distinct possibility that the Company may sustain a loss. All loans on non-accrual are rated substandard. Other loans that are included in the substandard category can be accruing, as well as loans that are current or past due. Loans 90 days or more past due, unless otherwise fully supported, are classified substandard. Also, borrowers that are bankrupt or have loans categorized as TDRs can be graded substandard.

Doubtful

Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which may strengthen credit in the near-term. Many of the weaknesses present in a substandard loan exist. Liquidation of collateral, if any, is likely. Any loan graded lower than an eight is uncollectible and charged-off.

Consumer and residential

The consumer and residential loan segments are regarded as homogeneous loan pools and as such are not risk rated. For these portfolios, the Company utilizes payment activity and history in assessing performance. Non-performing loans are comprised of non-accrual loans and loans past due 90 days or more and accruing. All loans not classified as non-performing are considered performing.

The following table presents loans including $1.7 million and $3.0 million of deferred costs, segregated by class, categorized into the appropriate credit quality indicator category as of December 31, 2020 and 2019, respectively:

Commercial credit exposure

Credit risk profile by creditworthiness category



	December 31, 2020
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total
Originated Loans
Commercial and industrial	$	249,451	$	4,162	$	3,664	$	-	$	257,277
Commercial real estate - non-owner occupied		93,784		5,522		5,347		-		104,653
Commercial real estate - owner occupied		125,569		2,992		7,744		-		136,305
Commercial real estate - construction		2,732		1,233		-		-		3,965
Total originated loans		471,536		13,909		16,755		-		502,200
Acquired Loans
Commercial and industrial		23,438		-		42		-		23,480
Commercial real estate - non-owner occupied		85,527		923		1,040		-		87,490
Commercial real estate - owner occupied		42,304		249		1,065		-		43,618
Commercial real estate - construction		5,903		-		363		-		6,266
Total acquired loans		157,172		1,172		2,510		-		160,854
Total Loans
Commercial and industrial		272,889		4,162		3,706		-		280,757
Commercial real estate - non-owner occupied		179,311		6,445		6,387		-		192,143
Commercial real estate - owner occupied		167,873		3,241		8,809		-		179,923
Commercial real estate - construction		8,635		1,233		363		-		10,231
Total commercial	$	628,708	$	15,081	$	19,265	$	-	$	663,054

‎

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity



	December 31, 2020
(dollars in thousands)	Performing		Non-performing		Total
Consumer
Originated Loans
Home equity installment	$	34,500	$	61	$	34,561
Home equity line of credit		44,536		395		44,931
Auto loans		98,165		27		98,192
Direct finance leases ⁽¹⁾		18,875		61		18,936
Other		7,411		-		7,411
Total originated loans		203,487		544		204,031
Acquired Loans
Home equity installment		5,586		-		5,586
Home equity line of credit		4,794		-		4,794
Auto loans		194		-		194
Other		191		-		191
Total acquired loans		10,765		-		10,765
Total Loans and Leases
Home equity installment		40,086		61		40,147
Home equity line of credit		49,330		395		49,725
Auto loans		98,359		27		98,386
Direct finance leases ⁽¹⁾		18,875		61		18,936
Other		7,602		-		7,602
Total consumer		214,252		544		214,796
Residential
Originated Loans
Real estate		179,687		727		180,414
Construction		23,117		-		23,117
Total originated loans		202,804		727		203,531
Acquired Loans
Real estate		38,031		-		38,031
Construction		240		-		240
Total acquired loans		38,271		-		38,271
Total Loans
Real estate		217,718		727		218,445
Construction		23,357		-		23,357
Total residential		241,075		727		241,802
Total consumer & residential	$	455,327	$	1,271	$	456,598

⁽¹⁾Net of unearned lease revenue of $1.2 million.

Commercial credit exposure

Credit risk profile by creditworthiness category


	December 31, 2019
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total

Commercial and industrial	$	115,585	$	2,061	$	4,948	$	-	$	122,594
Commercial real estate - non-owner occupied		92,016		1,360		6,425		-		99,801
Commercial real estate - owner occupied		121,887		2,065		6,606		-		130,558
Commercial real estate - construction		3,687		17		950		-		4,654
Total commercial	$	333,175	$	5,503	$	18,929	$	-	$	357,607

‎

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity


	December 31, 2019
(dollars in thousands)	Performing		Non-performing		Total

Consumer
Home equity installment	$	36,566	$	65	$	36,631
Home equity line of credit		46,988		294		47,282
Auto loans		105,854		16		105,870
Direct finance leases⁽²⁾		15,452		-		15,452
Other		5,634		-		5,634
Total consumer		210,494		375		210,869
Residential
Real estate		166,158		1,006		167,164
Construction		17,770		-		17,770
Total residential		183,928		1,006		184,934
Total consumer & residential	$	394,422	$	1,381	$	395,803

⁽²⁾ Net of unearned lease revenue of $0.9 million.

Allowance for loan losses

Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance on a quarterly basis. The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio. Management’s judgment is based on the evaluation of individual loans, experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. Loan losses are charged directly against the allowance when loans are deemed to be uncollectible. Recoveries from previously charged-off loans are added to the allowance when received.

Management applies two primary components during the loan review process to determine proper allowance levels. The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated. The methodology to analyze the adequacy of the allowance for loan losses is as follows:

identification of specific impaired loans by loan category;

identification of specific loans that are not impaired, but have an identified potential for loss;

calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;

determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;

application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation;

application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio.

Qualitative factor adjustments include:

olevels of and trends in delinquencies and non-accrual loans;

olevels of and trends in charge-offs and recoveries;

otrends in volume and terms of loans;

ochanges in risk selection and underwriting standards;

ochanges in lending policies and legal and regulatory requirements;

oexperience, ability and depth of lending management;

onational and local economic trends and conditions; and

ochanges in credit concentrations.

Allocation of the allowance for different categories of loans is based on the methodology as explained above. A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual C&I and CRE loans. C&I and CRE loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted. The credit risk grades for the C&I and CRE loan portfolios are considered in the reserve methodology and loss factors are applied based upon the credit risk grades. The loss factors applied are based upon the Company’s historical experience as well as what we believe to be best practices and common industry standards. Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs. The changes in allocations in the C&I and CRE loan portfolio from period to period are based upon the credit risk grading system and from periodic reviews of the loan portfolio. An unallocated component is maintained to cover uncertainties that could affect

management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies.

Each quarter, management performs an assessment of the allowance. The Company’s Special Assets Committee meets quarterly, and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance. The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due in payment. The assessment process also includes the review of all loans on a non-accruing basis as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating.

The Company’s policy is to charge-off unsecured consumer loans when they become 90 days or more past due as to principal and interest. In the other portfolio segments, amounts are charged-off at the point in time when the Company deems the balance, or a portion thereof, to be uncollectible.

Information related to the change in the allowance for loan losses and the Company’s recorded investment in loans by portfolio segment as of the period indicated is as follows:



As of and for the year ended December 31, 2020
	Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,484	$	3,933	$	2,013		$	2,278	$	39	$	9,747
Charge-offs		(372)		(465)		(296)			(35)		-		(1,168)
Recoveries		26		30		120			197		-		373
Provision		1,269		2,885		715			341		40		5,250
Ending balance	$	2,407	$	6,383	$	2,552		$	2,781	$	79	$	14,202
Ending balance: individually evaluated for impairment	$	213	$	790	$	52		$	151	$	-	$	1,206
Ending balance: collectively evaluated for impairment	$	2,194	$	5,593	$	2,500		$	2,630	$	79	$	12,996
Loans Receivables:
Ending balance ⁽²⁾	$	280,757	$	382,297	$	214,796	⁽¹⁾	$	241,802	$	-	$	1,119,652
Ending balance: individually evaluated for impairment	$	590	$	4,540	$	483		$	727	$	-	$	6,340
Ending balance: collectively evaluated for impairment	$	280,167	$	377,757	$	214,313		$	241,075	$	-	$	1,113,312

⁽¹⁾ Net of unearned lease revenue of $1.2 million. ⁽²⁾ Includes $1.7 million of net deferred loan costs.



As of and for the year ended December 31, 2019
	Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,432	$	3,901	$	2,548		$	1,844	$	22	$	9,747
Charge-offs		(184)		(597)		(398)			(330)		-		(1,509)
Recoveries		32		317		67			8		-		424
Provision		204		312		(204)			756		17		1,085
Ending balance	$	1,484	$	3,933	$	2,013		$	2,278	$	39	$	9,747
Ending balance: individually evaluated for impairment	$	221	$	426	$	87		$	174	$	-	$	908
Ending balance: collectively evaluated for impairment	$	1,263	$	3,507	$	1,926		$	2,104	$	39	$	8,839
Loans Receivables:
Ending balance⁽²⁾	$	122,594	$	235,013	$	210,869	⁽¹⁾	$	184,934	$	-	$	753,410
Ending balance: individually evaluated for impairment	$	336	$	2,948	$	375		$	1,006	$	-	$	4,665
Ending balance: collectively evaluated for impairment	$	122,258	$	232,065	$	210,494		$	183,928	$	-	$	748,745

⁽¹⁾ Net of unearned lease revenue of $0.9 million. ⁽²⁾ Includes $3.0 million of net deferred loan costs.

‎


As of and for the year ended December 31, 2018
	Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,374	$	4,060	$	2,063	$	1,608	$	88	$	9,193
Charge-offs		(196)		(268)		(391)		(371)		-		(1,226)
Recoveries		77		42		211		-		-		330
Provision		177		67		665		607		(66)		1,450
Ending balance	$	1,432	$	3,901	$	2,548	$	1,844	$	22	$	9,747

Direct finance leases

On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), and subsequent related updates to revise the accounting for leases. Lessor accounting was largely unchanged as a result of the standard. Additional disclosures required under the standard are included in this section and in Footnote 24, “Leases”.

The Company originates direct finance leases through two automobile dealerships. The carrying amount of the Company’s lease receivables, net of unearned income, was $6.0 million and $4.7 million as of December 31, 2020 and 2019, respectively. The residual value of the direct finance leases is fully guaranteed by the dealerships. Residual values amounted to $12.9 million and $10.8 million at December 31, 2020 and 2019, respectively, and are included in the carrying value of direct finance leases.

The undiscounted cash flows to be received on an annual basis for the direct finance leases are as follows:



(dollars in thousands)	Amount

2021	$	8,128
2022		4,848
2023		4,609
2024		2,385
2025		125
2026 and thereafter		-
Total future minimum lease payments receivable		20,095
Less: Unearned income		(1,159)
Undiscounted cash flows to be received	$	18,936