
	March 31, 2021				December 31, 2020
(dollars in thousands)	Total		% of Gross Loans		Total		% of Gross Loans
Portfolio Loans:
Commercial real estate	$	1,081,111	71.74	%	$	1,049,147	69.75	%
Residential first mortgages	115,803		7.68	%	133,779		8.89	%
Residential rentals	137,522		9.12	%	139,059		9.24	%
Construction and land development	38,446		2.55	%	37,520		2.49	%
Home equity and second mortgages	29,363		1.95	%	29,129		1.94	%
Commercial loans	42,689		2.83	%	52,921		3.52	%
Consumer loans	1,415		0.09	%	1,027		0.07	%
Commercial equipment	60,834		4.04	%	61,693		4.10	%
Gross portfolio loans	1,507,183		100.00	%	1,504,275		100.00	%
Less:
Net deferred costs	879		0.06	%	1,264		0.08	%
Allowance for loan losses	(18,256)		(1.21)	%	(19,424)		(1.29)	%
	(17,377)				(18,160)
Net portfolio loans	$	1,489,806			$	1,486,115

U.S. SBA PPP loans	$	115,700			$	110,320
Net deferred fees	(3,215)				(2,360)
Net U.S. SBA PPP Loans	$	112,485			$	107,960

Total net loans	$	1,602,291			$	1,594,075

Gross Loans	$	1,622,883			$	1,614,595

Portfolio net deferred costs of $0.9 million at March 31, 2021 included deferred fees paid by customers of $3.5 million offset by deferred costs of $4.4 million. Deferred loan costs include premiums paid for the purchase of residential first mortgages and deferred loan origination costs in accordance with ASC 310-20. Net deferred loan costs of $1.3 million at December 31, 2020 included deferred fees paid by customers of $3.4 million offset by deferred costs of $4.7 million.

U.S. SBA PPP loan net deferred fees of $3.2 million at March 31, 2021 included deferred fees paid by the U.S. SBA of $3.7 million partially offset by deferred costs of $0.4 million. U.S. SBA PPP net deferred loan fees of $2.4 million at December 31, 2020 included deferred fees paid by the SBA of $2.9 million offset by deferred costs of $0.5 million. The net deferred fees are being amortized as a component of interest income through the contractual maturity date of each individual U.S. SBA PPP loan. Net deferred fees include fees (deferred fees) paid to participant banks for each U.S. SBA PPP loan underwritten and funded net of costs incurred to underwrite the loans (deferred costs). Net deferred fees will be recognized in income when the U.S. SBA PPP loan is forgiven or paid.

Concentrations of Credit - Loans are primarily made within the Company’s operating footprint of Southern Maryland and the greater Fredericksburg area of Virginia. Real estate loans can be affected by the condition of the local real estate market. Commercial and industrial loans can be affected by the local economic conditions. The commercial loan portfolio has business loans secured by real estate and real estate development loans. At March 31, 2021 and December 31, 2020, the Company had no loans outstanding with foreign entities.

Commercial and other real estate projects include office, medical and professional buildings, retail locations, churches, other special purpose buildings and commercial construction. Commercial construction balances were 5.5% and 6.9% of the CRE portfolio at March 31, 2021 and December 31, 2020, respectively. The Bank offers both fixed-rate and adjustable-rate loans under these product lines. The primary security on a commercial real estate loan is the real property and the leases that produce income for the real property. Loans secured by commercial real estate are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to 20 years.

Residential first mortgage loans are generally long-term loans, amortized on a monthly basis, with principal and interest due each month. The contractual loan payment period for residential loans typically ranges from 10 to 30 years. The Bank’s experience indicates that real estate loans remain outstanding for significantly shorter time periods than their contractual terms. Borrowers may refinance or prepay loans at their option, without penalty. The Bank’s residential portfolio has both fixed-rate and adjustable-rate residential first mortgages. The Bank did not purchase any residential first mortgages during the three months ended March 31, 2021. During the year ended December 31, 2020, the Bank purchased residential first mortgages of $22.0 million.

The annual and lifetime limitations on interest rate adjustments may constrain interest rate increases on these loans. There are also credit risks resulting from potential increased costs to the borrower as a result of repricing of adjustable-rate mortgage loans. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower. The Bank’s adjustable rate residential first mortgage portfolio was $27.9 million or 1.9% of total gross portfolio loans of $1.5 billion at March 31, 2021 compared to $33.6 million or 2.2% of total gross portfolio loans of $1.5 billion at December 31, 2020.

Residential rental mortgage loans are amortizing, with principal and interest due each month. The loans are secured by income-producing 1-4 family units and apartments. As of March 31, 2021, and December 31, 2020, $104.9 million and $105.9 million, respectively, were 1-4 family units and $32.6 million and $33.2 million, respectively, were apartment buildings or multi-family units. Loans secured by residential rental properties are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to 20 years. The primary security on a residential rental loan is the property and the leases that produce income. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower. The Bank’s adjustable rate residential rental portfolio was $118.3 million or 7.8% of total gross portfolio loans of $1.5 billion at March 31, 2021 compared to $118.5 million or 7.9% of total gross portfolio loans of $1.5 billion at December 31, 2020.

Loans secured by residential rental properties involve greater risks than 1-4 family residential mortgage loans. Although, there are similar risk characteristics shared with commercial real estate loans, the balances for the loans secured by residential rental properties are generally smaller. Payments on loans secured by residential rental properties are dependent on the successful operation of the properties; and repayment of these loans may be subject to more volatile conditions in the rental real estate market or the economy than similar owner-occupied properties.

The Bank offers loans for the construction of 1-4 family dwellings. Generally, these loans are secured by the real estate under construction as well as by guarantees of the principals involved. In addition, the Bank offers loans to acquire and develop land, as well as loans on undeveloped, subdivided lots for home building. The Bank’s construction and land development portfolio was $38.4 million or 2.6% of total gross portfolio loans at March 31, 2021 compared to $37.5 million or 2.5% of total gross portfolio loans at December 31, 2020.

A decline in demand for new housing might adversely affect the ability of borrowers to repay these loans. Construction and land development loans are inherently riskier than financing owner-occupied real estate. The Bank’s risk of loss is affected by the accuracy of the initial estimate of the market value of the completed project as well as the accuracy of the cost estimates to complete the project. In addition, volatility in the real estate market can make it difficult to ensure that the valuation of land associated with these loans is accurate. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to complete development. If the estimate of value proves to be inaccurate, a project’s value might be insufficient to assure full repayment. As a result of these factors, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank forecloses on a project, there can be no assurance that the Bank will be able to recover all of the unpaid balance of principal, accrued interest, and related foreclosure and holding costs.

The Bank maintains a portfolio of home equity and second mortgage loans. The Bank’s home equity and second mortgage portfolio was $29.4 million or 1.9% of total gross portfolio loans of $1.5 billion at March 31, 2021 compared to $29.1 million or 1.9% of total gross portfolio loans of $1.5 billion at December 31, 2020. These products contain a higher risk of default than residential first mortgages as in the event of foreclosure, the first mortgage would need to be paid off prior to collection of the second mortgage.

The Bank offers its customers commercial loan products including term loans, demand loans and lines of credit. Such loans are generally made for terms of five years or less. The Bank offers both fixed-rate and adjustable-rate loans. The portfolio consists primarily of demand loans and lines of credit. When making commercial business loans, the Bank considers the financial condition of the borrower, the borrower’s payment history of both corporate and personal debt, the projected cash flows of the business, the viability of the industry in which the borrower operates, the value of the collateral, and the borrower’s ability to service the debt from income. These loans are primarily secured by equipment, real property, accounts receivable or other security as determined by the Bank. Commercial loans are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. In the case of business failure, collateral would need to be liquidated to provide repayment for the loan. In many cases, the highly specialized nature of collateral would make full recovery from its sale unlikely.

These loans consist primarily of fixed-rate, short-term loans collateralized by a commercial customer’s equipment or secured by real property, accounts receivable, or other security as determined by the Bank. When making commercial equipment loans, the Bank considers the same factors it considers when underwriting a commercial business loan. Commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business. As a result, repayment of commercial loans may depend substantially on the success of the business itself. In the case of business failure, collateral would need to be liquidated to repay the loan. In many cases, the highly specialized nature of collateral equipment would make full recovery from the sale of collateral problematic.

The U.S. SBA PPP loan was created to address economic hardships resulting from the COVID-19 pandemic. As of March 31, 2021, the Company had originated 865 U.S. SBA PPP loans with balances of $115.7 million. The program is designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if all employee retention criteria are met, and the funds are used for eligible expenses. U.S. SBA PPP loans carry a two or five-year term at a 1% annual interest rate until the loan is either forgiven or paid. At March 31, 2021, 52.61% or $60.9 million of these loans have a two-year term.

No credit issues are anticipated with U.S. SBA PPP loans as they are fully guaranteed by the Small Business Administration and the Bank's ALLL does not include an allowance for U.S. SBA PPP loans. Management believes all U.S. SBA PPP loans were underwritten in accordance with the program's guidelines. The U.S. SBA PPP guidelines indicate that lenders may rely on certifications of the borrower in order to determine eligibility and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for forgiveness. The guidelines further specify that lenders will be held harmless for a borrower's failure to comply with program criteria.


	March 31, 2021
(dollars in thousands)	Non-accrual Delinquent Loans		Number of Loans	Non-accrual Current Loans		Number of Loans	Total Non-accrual Loans		Total Number of Loans
Commercial real estate	$	5,200	2	$	6,686	11	$	11,886	13
Residential first mortgages	50		1	274		1	324		2
Residential rentals	—		—	736		5	736		5

Home equity and second mortgages	202		2	390		2	592		4
Commercial loans	—		—	—		—	—		—

Commercial equipment	—		—	85		3	85		3
	$	5,452	5	$	8,171	22	$	13,623	27


	December 31, 2020
(dollars in thousands)	Non-accrual Delinquent Loans		Number of Loans	Non-accrual Current Loans		Number of Loans	Total Non-accrual Loans		Total Number of Loans
Commercial real estate	$	11,428	9	$	5,184	9	$	16,612	18
Residential first mortgages	335		2	459		2	794		4
Residential rentals	—		—	275		2	275		2
Home equity and second mortgages	202		2	293		1	495		3
Commercial loans	—		—	—		—	—		—
Commercial equipment	—		—	46		3	46		3
	$	11,965	13	$	6,257	17	$	18,222	30

Non-accrual loans decreased $4.6 million from $18.2 million or 1.13% of total loans at December 31, 2020 to $13.6 million or 0.84% of total loans at March 31, 2021. Loans can be current but classified as non-accrual due to customer operating results or payment history. All interest accrued but not collected from loans that are placed on non-accrual or charged-off is reversed against interest income. In accordance with the Company’s policy, such interest income is recognized on a cash basis or cost-recovery method, until qualifying for return to accrual status.

Non-accrual loans of $8.2 million (60%) were current with all payments of principal and interest with no impairment at March 31, 2021. Delinquent non-accrual loans were $5.5 million (40%) with specific reserves of $0.7 million at March 31, 2021. During the quarter ended March 31, 2021 , non-accrual loans decreased $4.6 million primarily as a result of the loan sale mentioned previously. At December 31, 2020, there were $6.3 million (34%) of non-accrual loans were current with all payments of principal and interest with no impairment and $12.0 million (66%) of non-accrual loans were delinquent with specific valuation reserves of $1.3 million.

Non-accrual loans on which the recognition of interest has been discontinued, which did not have a specific allowance for impairment, amounted to $7.3 million and $12.4 million at March 31, 2021 and December 31, 2020, respectively. Interest due but not recognized on these balances at March 31, 2021 and December 31, 2020 was $56,000 and $0.4 million, respectively. Non-accrual loans with a specific allowance for impairment amounted to $6.3 million and $5.8 million at March 31, 2021 and December 31, 2020, respectively. Interest due but not recognized on these balances at March 31, 2021 and December 31, 2020 was $0.4 million and $0.4 million, respectively.

The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. PCI loans are included as a single category in the table below as management believes there is a lower likelihood of aggregate loss related to these loan pools. Additionally, PCI loans are discounted to allow for the accretion of income on a level yield basis over the life of the loan based on expected cash flows. Regardless of payment status, as long as cash flows can be reasonably estimated, the associated discount on these loan pools results in income recognition. An analysis of past due loans as of March 31, 2021 and December 31, 2020 were as follows:


	March 31, 2021
(dollars in thousands)	31-60 Days		61-89 Days		90 or Greater Days		Total Past Due		PCI Loans		Current		Total Loan Receivables
Commercial real estate	$	955	$	—	$	5,201	$	6,156	$	1,550	$	1,073,405	$	1,081,111
Residential first mortgages	133		—		50		183		—		115,620		115,803
Residential rentals	265		—		—		265		—		137,257		137,522
Construction and land dev.	—		—		—		—		—		38,446		38,446
Home equity and second mtg.	20		—		202		222		403		28,738		29,363
Commercial loans	—		—		—		—		—		42,689		42,689
Consumer loans	—		—		—		—		—		1,415		1,415
Commercial equipment	—		—		—		—		—		60,834		60,834
Total portfolio loans	$	1,373	$	—	$	5,453	$	6,826	$	1,953	$	1,498,404	$	1,507,183

U.S. SBA PPP loans	$	—	$	—	$	—	$	—	$	—	$	115,700	$	115,700


	December 31, 2020
(dollars in thousands)	31-60 Days		61-89 Days		90 or Greater Days		Total Past Due		PCI Loans		Current		Total Loan Receivables
Commercial real estate	$	—	$	—	$	11,428	$	11,428	$	1,572	$	1,036,147	$	1,049,147
Residential first mortgages	—		—		335		335		—		133,444		133,779
Residential rentals	—		—		—		—		—		139,059		139,059
Construction and land dev.	—		—		—		—		—		37,520		37,520
Home equity and second mtg.	167		—		202		369		406		28,354		29,129
Commercial loans	—		—		—		—		—		52,921		52,921
Consumer loans	8		—		—		8		—		1,019		1,027
Commercial equipment	—		4		—		4		—		61,689		61,693
Total portfolio loans	$	175	$	4	$	11,965	$	12,144	$	1,978	$	1,490,153	$	1,504,275

U.S. SBA PPP loans	$	—	$	—	$	—	$	—	$	—	$	110,320	$	110,320


	March 31, 2021
(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Quarter Average Recorded Investment		Quarter Interest Income Recognized		YTD Average Recorded Investment		YTD Interest Income Recognized
Commercial real estate	$	12,029	$	5,641	$	6,290	$	11,931	$	854	$	11,937	$	110	$	11,937	$	110
Residential first mortgages	794		751		—		751		—		756		11		756		11
Residential rentals	741		736		—		736		—		744		10		744		10

Home equity and second mtg.	666		651		—		651		—		657		4		657		4
Commercial loans	—		—		—		—		—		—		—		—		—

Commercial equipment	559		507		37		544		37		565		12		565		12
Total	$	14,789	$	8,286	$	6,327	$	14,613	$	891	$	14,659	$	147	$	14,659	$	147


	March 31, 2020
(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Quarter Average Recorded Investment		Quarter Interest Income Recognized		YTD Average Recorded Investment		YTD Interest Income Recognized
Commercial real estate	$	22,527	$	18,250	$	4,064	$	22,314	$	367	$	22,347	$	140	$	22,347	$	140
Residential first mortgages	1,738		1,738		—		1,738		—		1,744		16		1,744		16
Residential rentals	656		656		—		656		—		658		6		658		6

Home equity and second mtg.	530		519		—		519		—		519		5		519		5
Commercial loans	2,906		1,807		1,099		2,906		932		2,951		—		2,951		—

Commercial equipment	949		576		350		926		350		939		15		939		15
Total	$	29,306	$	23,546	$	5,513	$	29,059	$	1,649	$	29,158	$	182	$	29,158	$	182


	December 31, 2020
(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		YTD Average Recorded Investment		YTD Interest Income Recognized
Commercial real estate	$	17,952	$	11,915	$	5,799	$	17,714	$	1,316	$	17,729	$	361
Residential first mortgages	2,001		1,989		—		1,989		—		2,043		70
Residential rentals	626		625		—		625		—		643		32

Home equity and second mtg.	568		555		—		555		—		559		15
Commercial loans	—		—		—		—		—		—		—

Commercial equipment	527		472		40		512		40		531		30
Total	$	21,674	$	15,556	$	5,839	$	21,395	$	1,356	$	21,505	$	508


Three Months Ended	March 31, 2021
(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provisions		Ending Balance
Commercial real estate	$	13,744	$	(1,247)	$	1	$	787	$	13,285
Residential first mortgages	1,305		(142)		—		(139)		1,024
Residential rentals	1,413		(46)		—		(6)		1,361
Construction and land development	401		—		—		(36)		365
Home equity and second mortgages	261		—		1		1		263
Commercial loans	1,222		(50)		5		(165)		1,012
Consumer loans	20		—		—		9		29
Commercial equipment	1,058		—		15		(156)		917
	$	19,424	$	(1,485)	$	22	$	295	$	18,256

Purchase Credit Impaired**	$	—	$	—	$	—	$	—	$	—


Three Months Ended	March 31, 2020
(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provisions		Ending Balance
Commercial real estate	$	7,398	$	—	$	—	$	1,685	$	9,083
Residential first mortgages	464		—		—		398		862
Residential rentals	397		—		—		305		702
Construction and land development	273		—		—		163		436
Home equity and second mortgages	149		—		1		108		258
Commercial loans	1,086		—		5		1,175		2,266
Consumer loans	10		—		—		5		15
Commercial equipment	1,165		—		13		261		1,439
	$	10,942	$	—	$	19	$	4,100	$	15,061

Purchase Credit Impaired**	$	—	$	—	$	—	$	—	$	—


	March 31, 2021								December 31, 2020								March 31, 2020
(dollars in thousands)	Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Purchase Credit Impaired		Total		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Purchase Credit Impaired		Total		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Purchase Credit Impaired		Total
Loan Receivables:
Commercial real estate	$	11,931	$	1,067,630	$	1,550	$	1,081,111	$	17,714	$	1,029,861	$	1,572	$	1,049,147	$	22,314	$	953,634	$	1,730	$	977,678
Residential first mortgages	751		115,052		—		115,803		1,989		131,790		—		133,779		1,738		169,057		—		170,795
Residential rentals	736		136,786		—		137,522		625		138,434		—		139,059		656		132,360		—		133,016
Construction and land development	—		38,446		—		38,446		—		37,520		—		37,520		—		38,627		—		38,627
Home equity and second mortgages	651		28,309		403		29,363		555		28,168		406		29,129		519		35,023		395		35,937
Commercial loans	—		42,689		—		42,689		—		52,921		—		52,921		2,906		68,065		—		70,971
Consumer loans	—		1,415		—		1,415		—		1,027		—		1,027		—		1,134		—		1,134
Commercial equipment	544		60,290		—		60,834		512		61,181		—		61,693		926		61,005		—		61,931
	$	14,613	$	1,490,617	$	1,953	$	1,507,183	$	21,395	$	1,480,902	$	1,978	$	1,504,275	$	29,059	$	1,458,905	$	2,125	$	1,490,089
Allowance for loan losses:
Commercial real estate	$	854	$	12,431	$	—	$	13,285	$	1,316	$	12,428	$	—	$	13,744	$	367	$	8,716	$	—	$	9,083
Residential first mortgages	—		1,024		—		1,024		—		1,305		—		1,305		—		862		—		862
Residential rentals	—		1,361		—		1,361		—		1,413		—		1,413		—		702		—		702
Construction and land development	—		365		—		365		—		401		—		401		—		436		—		436
Home equity and second mortgages	—		263		—		263		—		261		—		261		—		258		—		258
Commercial loans	—		1,012		—		1,012		—		1,222		—		1,222		932		1,334		—		2,266
Consumer loans	—		29		—		29		—		20		—		20		—		15		—		15
Commercial equipment	37		880		—		917		40		1,018		—		1,058		350		1,089		—		1,439
	$	891	$	17,365	$	—	$	18,256	$	1,356	$	18,068	$	—	$	19,424	$	1,649	$	13,412	$	—	$	15,061


	Commercial Real Estate				Construction and Land Dev.				Residential Rentals
(dollars in thousands)	3/31/2021		12/31/2020		3/31/2021		12/31/2020		3/31/2021		12/31/2020
Unrated	$	—	$	162,434	$	—	$	1,036	$	—	$	47,605
Pass	1,065,163		866,648		38,446		36,484		136,786		90,633
Special mention	3,890		2,417		—		—		—		821
Substandard	12,058		17,648		—		—		736		—
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
Total	$	1,081,111	$	1,049,147	$	38,446	$	37,520	$	137,522	$	139,059


	Commercial Loans				Commercial Equipment				Total Commercial Portfolios
(dollars in thousands)	3/31/2021		12/31/2020		3/31/2021		12/31/2020		3/31/2021		12/31/2020
Unrated	$	—	$	12,962	$	—	$	26,585	$	—	$	250,622
Pass	42,689		39,959		56,872		31,091		1,339,956		1,064,815
Special mention	—		—		3,879		3,977		7,769		7,215
Substandard	—		—		83		40		12,877		17,688
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
Total	$	42,689	$	52,921	$	60,834	$	61,693	$	1,360,602	$	1,340,340


	Non-Commercial Portfolios **				U.S. SBA PPP Loans				Total Loans Portfolios
(dollars in thousands)	3/31/2021		12/31/2020		6/30/2020		12/31/2019		3/31/2021		12/31/2020
Unrated	$	121,171	$	136,792	$	115,700	$	110,320	$	236,871	$	497,734
Pass	24,471		25,125		—		—		1,364,427		1,089,940
Special mention	—		457		—		—		7,769		7,672
Substandard	939		1,561		—		—		13,816		19,249
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
Total	$	146,581	$	163,935	$	115,700	$	110,320	$	1,622,883	$	1,614,595

A risk-grading scale is used to assign grades to commercial relationships, which include commercial real estate, residential rentals, construction and land development, commercial loans and commercial equipment loans. Loans are graded at inception, annually thereafter when financial statements are received and at other times when there is an indication that a credit may have weakened or improved. At December 31, 2020 and prior, only commercial loan relationships with an aggregate exposure to the Bank of $1,000,000 or greater were subject to being risk rated. During the quarter ended March 31, 2021, the Bank's policy was amended to risk rate all commercial loan relationships.

Home equity and second mortgages and consumer loans are evaluated for creditworthiness in underwriting and are monitored based on borrower payment history. Residential first mortgages are evaluated for creditworthiness during credit due diligence before being purchased. Residential first mortgages, home equity and second mortgages and consumer loans are classified as unrated unless they are part of a larger commercial relationship that requires grading or are TDRs or nonperforming loans with an Other Assets Especially Mentioned ("OAEM") or higher risk rating due to a delinquency payment history.

Management regularly reviews credit quality indicators as part of its individual loan reviews and on a quarterly basis. The overall quality of the Bank’s loan portfolio is assessed using the Bank’s risk-grading scale, the level and trends of net charge-offs, nonperforming loans and delinquencies, the performance of TDRs and the general economic conditions in the Company’s geographical market. This review process is assisted by frequent internal reporting of loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Credit quality indicators and allowance factors are adjusted based on management’s judgment during the monthly and quarterly review process. Loans subject to risk ratings are graded on a scale of one to ten. The Company considers loans rated substandard, doubtful and loss as classified assets for regulatory and financial reporting.

Ratings 1 thru 6 have asset risks ranging from excellent-low to adequate. The specific rating assigned considers customer history of earnings, cash flows, liquidity, leverage, capitalization, consistency of debt service coverage, the nature and extent of customer relationship and other relevant specific business factors such as the stability of the industry or market area, changes to management, litigation or unexpected events that could have an impact on risks.

Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged. Substandard loans are the first adversely classified loans on the Bank's watchlist. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. The loans may have a delinquent history or combination of weak collateral, weak guarantor strength or operating losses. When a loan is assigned to this category the Bank may estimate a specific reserve in the loan loss allowance analysis. These assets listed may include assets with histories of repossessions or some that are non-performing bankruptcies. These relationships will be reviewed at least quarterly.

Doubtful assets have many of the same characteristics of Substandard with the exception that the Bank has determined that loss is not only possible but is probable and the risk is close to certain that loss will occur. When a loan is assigned to this category the Bank will identify the probable loss and the loan will receive a specific reserve in the loan loss allowance analysis. These relationships will be reviewed at least quarterly.

PCI loans had an unpaid principal balance of $2.3 million and a carrying value of $2.0 million at March 31, 2021. The carrying value of PCI loans represented 0.09% of total assets at March 31, 2021. Determining the fair value of the PCI loans at the time of acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest considering prepayment assumptions. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carryover of a previously established allowance for loan losses from acquisition.

At March 31, 2021 performing acquired loans, which totaled $55.4 million, included a $0.7 million net acquisition accounting fair market value adjustment, representing a 1.22% discount; and PCI loans which totaled $2.0 million, included a $0.3 million adjustment, representing a 14.24% discount. At December 31, 2020 acquired performing loans, which totaled $59.0 million, included a $0.8 million net acquisition accounting fair market value adjustment, representing a 1.25% discount; and PCI loans which totaled $2.0 million, included a $0.3 million adjustment, representing a 14.95% discount.


BY ACQUIRED AND NON-ACQUIRED	March 31, 2021		%		December 31, 2020		%
Acquired loans - performing	$	55,381	3.41	%	$	58,999	3.66	%
Acquired loans - purchase credit impaired ("PCI")	1,953		0.12	%	1,978		0.12	%
Total acquired loans	57,334		3.53	%	60,977		3.78	%
U.S. SBA PPP loans	115,700		7.13	%	110,320		6.83	%
Non-acquired loans**	1,449,849		89.34	%	1,443,298		89.39	%
Gross loans	1,622,883				1,614,595
Net deferred fees	(2,336)		(0.14)	%	(1,096)		(0.07)	%
Total loans, net of deferred fees	$	1,620,547			$	1,613,499