3.	Loans Receivable and Related Allowance for Loan Losses

The following table summarizes the Corporation's loans receivable as of

December 31:

(Dollar amounts in thousands)	December 31, 2020		December 31, 2019
Mortgage loans on real estate:
Residential first mortgages	$	308,031	$	293,170
Home equity loans and lines of credit		87,088		97,541
Commercial real estate		285,625		229,951
Total real estate loans		680,744		620,662
Other loans:
Commercial business		89,139		66,603
Consumer		40,035		14,639
Total other loans		129,174		81,242
Total loans, gross		809,918		701,904
Less allowance for loan losses		9,580		6,556
Total loans, net	$	800,338	$	695,348

Included in total loans above are net deferred costs of

$2.5

million and

$2.6

million at

December

31,

2020

and

2019,

respectively. In addition, included in commercial loans at

December 31, 2020

are

$30.4

million of Paycheck Protection Program (PPP) loans that are guaranteed by the Small Business Administration (SBA). The Corporation received

$2.1

million of fees related to the origination of these loans, of which

$1.3

million was recognized in

2020

and

$795,000

will be recognized in

2021

upon forgiveness by the SBA.

An allowance for loan losses (ALL) is maintained to absorb probable incurred losses from the loan portfolio. The ALL is based on management's continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience and the amount of nonperforming loans. While to Corporation has historically experienced strong trends in asset quality, as a result of the situation regarding the COVID-

pandemic, management has recognized the need to incorporate factors into the allowance evaluation to help compensate for the effects of any credit deterioration due to the current economic situation.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

Following is an analysis of the changes in the ALL for the years ended

December 31:

(Dollar amounts in thousands)	2020			2019
Balance at the beginning of the year	$	6,556		$	6,508
Provision for loan losses		3,247			715
Charge-offs		(473	)		(913	)
Recoveries		250			246
Balance at the end of the year	$	9,580		$	6,556

The following table details activity in the ALL and the recorded investment by portfolio segment based on impairment method at

December

31,

2020

and

2019:

				Home Equity
	Residential			& Lines			Commercial			Commercial
(Dollar amounts in thousands)	Mortgages			of Credit			Real Estate			Business			Consumer			Total
At December 31, 2020:
Beginning Balance	$	2,309		$	626		$	2,898		$	636		$	87		$	6,556
Charge-offs		(27	)		(126	)		(75	)		(163	)		(82	)		(473	)
Recoveries		6			15			107			70			52			250
Provision		486			105			2,250			134			272			3,247
Ending Balance	$	2,774		$	620		$	5,180		$	677		$	329		$	9,580

Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	—		$	—		$	40		$	20		$	—		$	60
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,774			620			5,140			657			329			9,520
Total	$	2,774		$	620		$	5,180		$	677		$	329		$	9,580

Total loans:
Individually evaluated for impairment	$	329		$	3		$	1,639		$	143		$	—		$	2,114
Acquired loans collectively evaluated for impairment		44,209			8,491			30,913			5,131			1,017			89,761
Originated loans collectively evaluated for impairment		263,493			78,594			253,073			83,865			39,018			718,043
Total	$	308,031		$	87,088		$	285,625		$	89,139		$	40,035		$	809,918

At December 31, 2019:
Beginning Balance	$	2,198		$	648		$	3,106		$	500		$	56		$	6,508
Charge-offs		(227	)		(61	)		(242	)		(250	)		(133	)		(913	)
Recoveries		40			6			134			—			66			246
Provision		298			33			(100	)		386			98			715
Ending Balance	$	2,309		$	626		$	2,898		$	636		$	87		$	6,556

Ending ALL balance attributable to loans:
Individually evaluated for impairment	$	5		$	—		$	—		$	—		$	—		$	5
Acquired loans collectively evaluated for impairment		—			—			—			—			—			—
Originated loans collectively evaluated for impairment		2,304			626			2,898			636			87			6,551
Total	$	2,309		$	626		$	2,898		$	636		$	87		$	6,556

Total loans:
Individually evaluated for impairment	$	358		$	4		$	81		$	40		$	—		$	483
Acquired loans collectively evaluated for impairment		60,523			10,901			41,993			7,930			1,982			123,329
Originated loans collectively evaluated for impairment		232,289			86,636			187,877			58,633			12,657			578,092
Total	$	293,170		$	97,541		$	229,951		$	66,603		$	14,639		$	701,904

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

December 31, 2020

and

2019,

there was

allowance for loan losses allocated to loans acquired from United American Savings Bank (

2016

), Northern Hancock Bank and Trust Co. (

2017

) or Community First Bancorp, Inc (

2018

) because the unaccreted purchase discount still exceeded the calculated allowance.

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was

not

necessary as of

December 31:

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of December 31, 2020						For the year ended December 31, 2020
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	—	$	—	$	—	$	43	$	—	$	—
Home equity and lines of credit		—		—		—		2		—		—
Commercial real estate		380		380		40		106		17		11
Commercial business		78		78		20		53		5		4
Consumer		—		—		—		—		—		—
Total	$	458	$	458	$	60	$	204	$	22	$	15

	Impaired Loans with No Specific Allowance
	As of December 31, 2020				For the year ended December 31, 2020
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	440	$	329	$	300	$	7	$	7
Home equity and lines of credit		3		3		2		—		—
Commercial real estate		1,259		1,259		1,167		76		66
Commercial business		65		65		80		10		6
Consumer		—		—		—		—		—
Total	$	1,767	$	1,656	$	1,549	$	93	$	79

(Dollar amounts in thousands)
	Impaired Loans with Specific Allowance
	As of December 31, 2019						For the year ended December 31, 2019
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	72	$	72	$	5	$	72	$	3	$	3
Home equity and lines of credit		4		4		—		5		—		—
Commercial real estate		—		—		—		—		—		—
Commercial business		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	76	$	76	$	5	$	77	$	3	$	3

	Impaired Loans with No Specific Allowance
	As of December 31, 2019				For the year ended December 31, 2019
	Unpaid Principal Balance		Recorded Investment		Average Recorded Investment		Interest Income Recognized in Period		Cash Basis Interest Recognized in Period
Residential first mortgages	$	398	$	286	$	301	$	4	$	4
Home equity and lines of credit		—		—		—		—		—
Commercial real estate		81		81		1,019		88		35
Commercial business		40		40		79		7		2
Consumer		—		—		—		—		—
Total	$	519	$	407	$	1,399	$	99	$	41

Unpaid principal balance includes any loans that have been partially charged off but

not

forgiven. Accrued interest is

not

included in the recorded investment in loans presented above or in the tables that follow based on the amounts

not

being material.

Troubled debt restructurings (TDR).

The Corporation has certain loans that have been modified in order to maximize collection of loan balances. If, for economic or legal reasons related to the customer's financial difficulties, management grants a concession compared to the original terms and conditions of the loan that it would

not

have otherwise considered, the modified loan is classified as a TDR. Concessions related to TDRs generally do

not

include forgiveness of principal balances. The Corporation has

legal obligation to extend additional credit to borrowers with loans classified as TDRs.

December

31,

2020

and

2019,

the Corporation had

$396,000

and

$409,000,

respectively, of loans classified as TDRs, which are included in impaired loans above. At

December

31,

2020

and

2019,

the Corporation had

$6,000

and

$5,000,

respectively, of the allowance for loan losses allocated to these specific loans.

During the year ended

December 31, 2020,

the Corporation modified

one

commercial term loan with a recorded investment of

$64,000.

In order to cure the delinquency on the loan, the maturity date was extended by

months and the loan payments reamortized over the extended period. At

December 31, 2020,

there was

$6,000

of allowance for loan losses allocated to this loan. The modification did

not

have a material impact on the Corporation's income statement during the period. During the year ended

December 31, 2019,

the Corporation initially reported

one

modified commercial mortgage loans with a recorded investment of

$67,000.

Subsequently, it was determined that the parameters applied to the loan did

not

required reporting as a TDR. As a result, the Corporation did

not

have any loans modified to TDR status for the year ending

December 31, 2019.

A loan is considered to be in payment default once it is

days contractually past due under the modified terms. During the year ended

December

31,

2020

and

2019,

there were

loans classified as TDRs which defaulted within

twelve

months of their modification.

Under the provisions of the CARES Act, as of

December 31, 2020,

the Corporation had granted modifications on

410

loans with an aggregate balance of

$110.4

million, representing

13.6%

of gross outstanding loan balances. As of

February 28, 2021,

loans with an aggregate balance of

$35.4

million remained on deferral while

382

loans with an aggregate balance of

$75.0

million have resumed normal repayment or paid off. Also, as of

February 28, 2021,

hospitality (hotel and restaurant) loans comprised

$32.8

million, or

92.7%

of the loans remaining on deferral. The characteristics of these modifications are considered short-term and do

not

result in a reclassification of these loans to TDR status.

Credit Quality Indicators.

Management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.

Commercial real estate and commercial business loans

not

identified as impaired are evaluated as risk rated pools of loans utilizing a risk rating practice that is supported by a quarterly special asset review. In this review process, strengths and weaknesses are identified, evaluated and documented for each criticized and classified loan and borrower, strategic action plans are developed, risk ratings are confirmed and the loan's performance status reviewed.

Management has determined certain portions of the loan portfolio to be homogeneous in nature and assigns like reserve factors for the following loan pool types: residential real estate, home equity loans and lines of credit, and consumer installment and personal lines of credit. These homogeneous loans are

not

rated unless identified as impaired.

Management uses the following definitions for risk ratings:

Pass:

Loans classified as pass typically exhibit good payment performance and have underlying borrowers with acceptable financial trends where repayment capacity is evident. These borrowers typically would have sufficient cash flow that would allow them to weather an economic downturn and the value of any underlying collateral could withstand a moderate degree of depreciation due to economic conditions.

Special Mention:

Loans classified as special mention are characterized by potential weaknesses that could jeopardize repayment as contractually agreed. These loans

may

exhibit adverse trends such as increasing leverage, shrinking profit margins and/or deteriorating cash flows. These borrowers would inherently be more vulnerable to the application of economic pressures.

Substandard:

Loans classified as substandard exhibit weaknesses that are well-defined to the point that repayment is jeopardized. Typically, the Corporation is

longer adequately protected by both the apparent net worth and repayment capacity of the borrower.

Doubtful:

Loans classified as doubtful have advanced to the point that collection or liquidation in full, on the basis of currently ascertainable facts, conditions and value, is highly questionable or improbable.

The following table presents the classes of the loan portfolio summarized by the aggregate pass and the criticized categories of special mention, substandard and doubtful within the Corporation's internal risk rating system as of

December

31,

2020

and

2019:

(Dollar amounts in thousands)
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2020:
Residential first mortgages	$	306,237	$	—	$	—	$	1,794	$	—	$	308,031
Home equity and lines of credit		86,867		—		—		221		—		87,088
Commercial real estate		—		249,357		19,669		16,599		—		285,625
Commercial business		—		83,059		2,054		4,026		—		89,139
Consumer		39,987		—		—		48		—		40,035
Total loans	$	433,091	$	332,416	$	21,723	$	22,688	$	—	$	809,918

December 31, 2019:
Residential first mortgages	$	291,843	$	—	$	—	$	1,327	$	—	$	293,170
Home equity and lines of credit		97,087		—		—		454		—		97,541
Commercial real estate		—		216,744		5,370		7,837		—		229,951
Commercial business		—		64,636		204		1,763		—		66,603
Consumer		14,557		—		—		82		—		14,639
Total loans	$	403,487	$	281,380	$	5,574	$	11,463	$	—	$	701,904

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a required payment is past due. As of

December 31, 2020,

the Corporation had made short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment for borrowers. Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), borrowers that are considered current are those that are less than

days past due on their contractual payments at the time a modification program is implemented. As such, the modifications made under the CARES Act are

not

included in the Corporation's past due or nonaccrual loans as of

December 31, 2020.

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonperforming loans as of

December

31,

2020

and

2019:

(Dollar amounts in thousands)
	Performing						Nonperforming
	Accruing Loans Not Past Due		Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due		Accruing 90+ Days Past Due		Nonaccrual		Total
December 31, 2020:
Residential first mortgages	$	304,161	$	1,836	$	239	$	176	$	1,619	$	308,031
Home equity and lines of credit		86,093		446		328		146		75		87,088
Commercial real estate		283,373		580		41		18		1,613		285,625
Commercial business		88,614		72		46		239		168		89,139
Consumer		39,917		28		42		—		48		40,035
Total loans	$	802,158	$	2,962	$	696	$	579	$	3,523	$	809,918

December 31, 2019:
Residential first mortgages	$	288,399	$	2,405	$	1,039	$	372	$	955	$	293,170
Home equity and lines of credit		95,908		626		553		26		428		97,541
Commercial real estate		226,133		2,141		543		227		907		229,951
Commercial business		66,087		225		72		4		215		66,603
Consumer		14,458		84		15		—		82		14,639
Total loans	$	690,985	$	5,481	$	2,222	$	629	$	2,587	$	701,904

The following table presents the Corporation's nonaccrual loans by aging category as of

December

31,

2020

and

2019:

(Dollar amounts in thousands)
	Not Past Due		30-59 Days Past Due		60-89 Days Past Due		90 Days + Past Due		Total
December 31, 2020:
Residential first mortgages	$	220	$	70	$	—	$	1,329	$	1,619
Home equity and lines of credit		4		—		—		71		75
Commercial real estate		1,016		—		24		573		1,613
Commercial business		168		—		—		—		168
Consumer		—		—		—		48		48
Total loans	$	1,408	$	70	$	24	$	2,021	$	3,523

December 31, 2019:
Residential first mortgages	$	245	$	—	$	72	$	638	$	955
Home equity and lines of credit		4		—		—		424		428
Commercial real estate		28		309		31		539		907
Commercial business		—		—		175		40		215
Consumer		—		—		—		82		82
Total loans	$	277	$	309	$	278	$	1,723	$	2,587