On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic and on March 13, 2020 the United States government declared COVID-19 as a national emergency. The continuing effects of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. The economic effects of COVID-19 may adversely affect the Company’s financial condition and results of operations as further described below. The full future potential impact is unknown at this time.

During the six months ended June 30, 2021 and the year ended December 31, 2020, the Company provided certain borrowers affected in a variety of ways by COVID-19 with payment accommodations that facilitate their ability to work through the immediate impact of the virus. Payment accommodations were in the form of short-term principal and/or interest deferrals. These payment accommodations were made in accordance with Section 4013 of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. Section 4013 of the CARES Act, enacted on March 27, 2020, provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020, subsequently extended until December 31, 2021, or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act terminates, the Company may elect to suspend US GAAP for loan modifications related to the pandemic which would otherwise be categorized as troubled debt restructurings and suspend any determination of a loan modified as a result of the effects of the pandemic as being a troubled debt restructuring, including impairment for accounting purposes. Interest income is continuing to be recognized during the accommodation period.

The following table presents COVID-19 CARES Act Section 4013 loans based on loan type, payment accommodation status, and amount at June 30, 2021 and December 31, 2020:


	June 30, 2021
	Number of Loans - Payment Accommodation Period Ended	Number of Loans - Payment Accommodation Period Active	Total Number of Loans		Loan Amount - Payment Accommodation Period Ended		Loan Amount - Payment Accommodation Period Active	Total Loan Amount
	(Dollars In Thousands)
Commercial real estate	126	-	126	$	116,425	$	-	$	116,425
Commercial	35	-	35		4,713		-		4,713
Residential real estate	60	-	60		12,451		-		12,451
Consumer	2	-	2		27		-		27
Total	223	-	223	$	133,616	$	-	$	133,616

	December 31, 2020
	Number of Loans - Payment Accommodation Period Ended	Number of Loans - Payment Accommodation Period Active	Total Number of Loans		Loan Amount - Payment Accommodation Period Ended		Loan Amount - Payment Accommodation Period Active	Total Loan Amount
	(Dollars In Thousands)
Commercial real estate	130	7	137	$	112,016	$	16,830	$	128,846
Commercial	43	1	44		7,445		752		8,197
Residential real estate	68	4	72		13,517		717		14,234
Consumer	2	-	2		31		-		31
Total	243	12	255	$	133,009	$	18,299	$	151,308

Included in the June 30, 2021 totals above are two hundred twenty-two (222) loans totaling $133.2 million in which the payment accommodation period has ended and the loan payments have resumed under their original contractual terms. Also included in the June 30, 2021 totals above is one (1) residential real estate loan totaling $418 thousand that, after its payment accommodation period ended in late March 2021, was taken to non-accrual and downgraded to substandard. No loss is anticipated on the loan. Between July 1, 2021 and July 31, 2021 there were no new Section 4013 modifications made.

The Company participates in the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) under the CARES Act and subsequent 2021 Consolidated Appropriations Act (“CAA”). As of June 30, 2021, the Company had a total of three hundred forty-six (346) PPP loans outstanding with a receivable balance of $42.2 million, net of $1.2 million of unearned origination fees and costs. At December 31, 2020, the Company had a total of four hundred seventy (470) PPP loans outstanding with a receivable balance of $54.3 million, net of $1.2 million of unearned origination fees and costs. From January 1, 2021 to June 30, 2021, the Company originated three hundred thirty-three (333) new PPP loans with a balance of $31.6 million, net of $1.4 million of unearned origination fees and costs. From January 1, 2021 to June 30, 2021, the Company received forgiveness payments from the SBA on PPP loan principal balances of $44.7 million. From July 1, 2021 to July 31, 2021 the Company received forgiveness payments from the SBA on PPP loan principal balances of $8.5 million.

These PPP loans are 100% guaranteed by the SBA, have a two year or up to five year maturity and an interest rate of 1% throughout the term of the loan, with payments deferred until forgiveness proceeds received from the SBA or ten months after the end of the covered period. The SBA may forgive the PPP loans if certain conditions are met by the borrower, including using at least 60% of the proceeds for payroll costs. The SBA also provided the Company with a processing fee for each loan, with the amount of such fee pre-determined by the SBA dependent upon the size of each loan. As of June 30, 2021 and December 31, 2020, the Company has net deferred PPP loan fees and costs of $1.2 million, respectively, which will be recognized through interest income over the life of the related PPP loans. In accordance with the 100% SBA guarantee and the Company’s opinion that the majority of the PPP loans will be

forgiven, the Company has determined that no allowance for loan losses is required on the PPP loans. All PPP loans have a pass rating and none are past due under their contractual terms.

In April 2020, the Company applied and was approved by the Federal Reserve Board for both the ability to borrow under its Paycheck Protection Program Liquidity Facility (“PPPLF”), as well as its Discount Window. The PPPLF provides term funding to depository institutions that originate loans to small businesses under the PPP. PPP loans that are pledged to secure PPPLF extensions of credit are excluded from leverage ratio calculations. The Company had PPPLF borrowings of $50.8 million at December 31, 2020. As of February 3, 2021, the PPPLF borrowings have been paid off in full. The Company is approved to borrow under the PPPLF through July 30, 2021.

The Company’s allowance for loan losses increased $590 thousand to $11.2 million at June 30, 2021 compared to $10.6 million at December 31, 2020. At June 30, 2021 and December 31, 2020, the allowance for loan losses represented 0.97% and 0.92% of total loans receivable. At June 30, 2021 and December 31, 2020, the allowance for loan losses represented 1.01% and 0.97%, respectively, of total loans receivable not including PPP loans, which are guaranteed by the SBA. During 2020, the Company adjusted the economic risk factor, loan modifications risk factor, and other external factor methodologies to incorporate the current economic implications, unemployment rates and amount of loan modifications due to the COVID-19 pandemic, leading to the increase in the allowance for loan losses as a percentage of non-PPP loans. During the six months ending June 30, 2021, the Company again adjusted the other external factor methodology, due to uncertainty with the post COVID-19 pandemic economy, leading to a further increase in the allowance for loan losses as a percentage of non-PPP loans. In determining its allowance for loan loss level at June 30, 2021, the Company considered the health and composition of its loan portfolio going into and during the COVID-19 pandemic. All loans that have the CARES Act Section 4013 modification are provided additional qualitative reserve in the Company’s allowance for loan loss calculation. The Company’s non-performing loans to total loans receivable was 0.29% at June 30, 2021, compared to 0.26% at June 30, 2020 and 0.25% at December 31, 2020. The Company’s nonperforming loans to total loans receivable not including PPP loans, was 0.30% at June 30, 2021, compared to 0.27% at June 30, 2020 and 0.26% at December 31, 2020. In the three months ended June 30, 2021 and June 30, 2020, there were no charge-offs and $1 thousand in recoveries. In the six months ended June 30, 2021, there were $2 thousand in charge-offs and $2 thousand in recoveries, as compared to no charge-offs and $25 thousand in recoveries for the six months ended June 30, 2020. At June 30, 2021, approximately 96% of the Company’s loan portfolio is collateralized by real estate. Less than 6% of the Company’s loan portfolio is to borrowers in the more particularly hard-hit industries (including the travel and hotel industry, the full-service and limited-service restaurant industries, and the assisted living facilities industry) and the Company has no direct international exposure. The Company was not required to adopt the Current Expected Credit Losses (“CECL”) FASB accounting standard in 2020. This guidance will not be effective for the Company until 2023. Based upon current economic conditions, the composition of the loan portfolio, the perceived credit risk in the portfolio and loan-loss experience of the Company and comparable institutions in the Company’s market area, management feels the allowance is adequate to absorb reasonably anticipated losses.