LOANS AND ALLOWANCE FOR CREDIT LOSSES | NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES Upon adoption of ASC 326 or CECL, at January 1, 2021, the Company evaluates its risk characteristics of loans based on regulatory call report code with segmentation based on the underlying collateral for certain loan types. Prior to the adoption of ASC 326, under the incurred loss model, the Company evaluated its risk characteristics of loans based on purpose of the loans. The following is a summary of total loans by regulatory call report code segmentation based on underlying collateral for certain loan types: March 31, December 31, (in thousands) 2021 2020 Commercial construction $ 117,464 $ 117,882 Commercial real estate owner occupied 233,847 219,217 Commercial real estate non-owner occupied 733,507 716,776 Tax exempt 46,541 47,862 Commercial and industrial 376,395 355,684 Residential real estate 940,127 995,216 Home equity 93,625 100,096 Consumer other 9,558 10,152 Total loans 2,551,064 2,562,885 Allowance for credit losses 23,653 19,082 Net loans $ 2,527,411 $ 2,543,803 Total unamortized net costs and premiums included in loan totals were as follows: March 31, December 31, (in thousands) 2021 2020 Unamortized net loan origination costs $ 3,774 $ 5,157 Unamortized net premium on purchased loans (82) (85) Total unamortized net costs and premiums $ 3,692 $ 5,072 The Company elected to exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of March 31, 2021 and December 31, 2020, accrued interest receivable for loans totaled $11.9 million and $11.4 million, respectively, and is included in the “other assets” line item on the Company’s consolidated balance sheets. The CARES Act and subsequent legislation established the Payroll Protection Program (“PPP”), administered directly by the Small Business Administration (SBA). The Company has participated in both 2020 and 2021 rounds of funding. As of March 31, 2021 and December 31, 2020, the Company had 1,057 and 746 PPP loans outstanding, with an outstanding principal balance of $77.9 million and $53.8 million, respectively. The increase reflects the 2021 round of funding of 956 PPP loans with and outstanding principal balance of $57.4 million. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible costs. PPP loans are included in the commercial and industrial portfolio segment. Characteristics of each loan portfolio segment are as follows: Commercial construction Commercial real estate owner occupied and non-owner occupied Tax Exempt Commercial and industrial loans Residential real estate Home equity - Consumer loans other Allowance for Credit Losses The Allowance for Credit Losses (ACL) is comprised of the allowance for loan losses and the allowance for unfunded commitments which is accounted for as a separate liability in other liabilities on the balance sheet. The level of the ACL represents management’s estimate of expected credit losses over the expected life of the loans at the balance sheet date. Upon adoption of CECL on January 1, 2021, the Company replaced the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged off. The ACL is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans and TDRs. The Company’s activity in the allowance for credit losses for the periods ended are as follows: Three Months Ended March 31, 2021 Balance at Beginning of Impact of ASC Balance at (in thousands) Period 326 Charge Offs Recoveries Provision End of Period Commercial construction $ 824 $ 1,196 $ — $ 18 $ (246) $ 1,792 Commercial real estate owner occupied 1,783 708 (153) 0 1,014 3,352 Commercial real estate non-owner occupied 7,864 (2,008) — 4 42 5,902 Tax exempt 58 40 — — (4) 94 Commercial and industrial 3,137 2,996 — 1 (1,094) 5,040 Residential real estate 5,010 1,732 (40) 13 (146) 6,569 Home equity 285 603 (22) 11 (54) 823 Consumer other 121 (39) (1) 1 (1) 81 Total $ 19,082 $ 5,228 $ (216) $ 48 $ (489) $ 23,653 Three Months Ended March 31, 2020 Balance at Beginning of Balance at (in thousands) Period Charge Offs Recoveries Provision End of Period Commercial construction $ 317 $ — $ — $ 78 $ 395 Commercial real estate owner occupied 2,368 — — (882) 1,486 Commercial real estate non-owner occupied 4,695 (871) 25 1,465 5,314 Tax exempt 67 — — (10) 57 Commercial and industrial 3,262 (179) 9 231 3,323 Residential real estate 4,213 (8) 7 79 4,291 Home equity 320 — — 8 328 Consumer other 111 (153) 3 142 103 Total $ 15,353 $ (1,211) $ 44 $ 1,111 $ 15,297 Unfunded Commitments The Company’s allowance for credit losses on unfunded commitments is recognized as a liability (other liabilities on the consolidated balance sheet), with adjustments to the reserve recognized in other non-interest expense in the consolidated statement of operations. The Company’s activity in the allowance for credit losses on unfunded commitments for the periods ended was as follows: (in thousands) 2021 Balance at December 31, 2020 $ 359 Impact of CECL adoption 1,616 Provision for credit losses (156) Balance at March 31, 2021 $ 1,819 (in thousands) 2020 Balance at December 31, 2019 $ 314 Provision for credit losses 45 Balance at December 31, 2020 $ 359 Loan Origination/Risk Management: Credit Quality Indicators: The following are the definitions of the Company’s credit quality indicators: Pass: Special Mention: Substandard: Doubtful: Loss: The following tables present the Company’s loans by year of origination, loan segmentation and risk indicator as of March 31, 2021: (in thousands) 2021 2020 2019 2018 2017 Prior Total Commercial construction Risk rating: Pass $ 1,262 $ 61,092 $ 29,027 $ 26,083 $ — $ — $ 117,464 Special mention — — — — — — — Substandard — — — — — — — Total $ 1,262 $ 61,092 $ 29,027 $ 26,083 $ — $ — $ 117,464 Commercial real estate owner occupied Risk rating: Pass $ 915 $ 14,931 $ 34,446 $ 30,661 $ 21,587 $ 118,206 $ 220,746 Special mention — — 780 — — 1,102 1,882 Substandard — — — 262 262 10,319 10,843 Doubtful — — — 188 188 376 Total $ 915 $ 14,931 $ 35,226 $ 31,111 $ 21,849 $ 129,815 $ 233,847 Commercial real estate non-owner occupied Risk rating: Pass $ 36,535 $ 153,240 $ 121,209 $ 42,460 $ 155,787 $ 218,391 $ 727,622 Special mention — — — 118 — 1,779 1,897 Substandard — — — 168 168 3,463 3,799 Doubtful — — — — — 189 189 Total $ 36,535 $ 153,240 $ 121,209 $ 42,746 $ 155,955 $ 223,822 $ 733,507 Tax exempt Risk rating: Pass $ 678 $ 1,845 $ 1,131 $ 14,840 $ 5,470 $ 22,577 $ 46,541 Special mention — — — — — — — Substandard — — — — — — — Total $ 678 $ 1,845 $ 1,131 $ 14,840 $ 5,470 $ 22,577 $ 46,541 Commercial and industrial Risk rating: Pass $ 59,576 $ 87,130 $ 41,814 $ 19,119 $ 64,289 $ 80,963 $ 352,891 Special mention 196 351 844 744 2,683 1,150 5,969 Substandard — — 611 15,220 88 1,039 16,958 Doubtful — — — — 131 445 576 Total $ 59,772 $ 87,481 $ 43,269 $ 35,083 $ 67,192 $ 83,598 $ 376,395 (continued) (in thousands) 2021 2020 2019 2018 2017 Prior Total Residential real estate Performing $ 36,563 $ 132,520 $ 114,920 $ 86,017 $ 85,719 $ 475,246 $ 930,985 Nonperforming — — — 299 274 8,569 9,142 Total $ 36,563 $ 132,520 $ 114,920 $ 86,316 $ 85,993 $ 483,815 $ 940,127 Home equity Performing $ 2,137 $ 11,009 $ 11,783 $ 8,800 $ 8,118 $ 50,434 $ 92,281 Nonperforming — — — — 65 1,279 1,344 Total $ 2,137 $ 11,009 $ 11,783 $ 8,800 $ 8,183 $ 51,713 $ 93,625 Consumer other Performing $ 1,030 $ 2,928 $ 1,552 $ 1,013 $ 420 $ 2,605 $ 9,548 Nonperforming — — — — — 10 10 Total $ 1,030 $ 2,928 $ 1,552 $ 1,013 $ 420 $ 2,615 $ 9,558 Total Loans $ 138,893 $ 465,046 $ 358,117 $ 245,992 $ 345,062 $ 997,954 $ 2,551,064 The following table summarizes credit risk exposure indicators by portfolio segment, under the incurred loss methodology, as of the period indicated: December 31, 2020 Commercial Commercial Residential Real Estate and Industrial Real Estate Consumer Total Grade: Pass $ 1,053,773 $ 422,016 $ — $ — $ 1,475,789 Performing — — 914,749 112,190 1,026,939 Special mention 6,075 2,771 — — 8,846 Substandard 22,267 15,180 — — 37,447 Doubtful 2,265 1,100 — — 3,365 Loss 1 2 — — 3 Non-performing — — 9,142 1,354 10,496 Total $ 1,084,381 $ 441,069 $ 923,891 $ 113,544 $ 2,562,885 Past Dues The following is a summary of past due loans for the periods ended: March 31, 2021 (in thousands) 30-59 60-89 90+ Total Past Due Current Total Loans Commercial construction $ — $ — $ — $ — $ 117,464 $ 117,464 Commercial real estate owner occupied 10 — 331 341 233,506 233,847 Commercial real estate non-owner occupied 644 179 317 1,140 732,367 733,507 Tax exempt — — — — 46,541 46,541 Commercial and industrial 364 — 399 763 375,632 376,395 Residential real estate 7,815 1,345 3,194 12,354 927,773 940,127 Home equity 399 198 429 1,026 92,599 93,625 Consumer other 4 — 100 104 9,454 9,558 Total $ 9,236 $ 1,722 $ 4,770 $ 15,728 $ 2,535,336 $ 2,551,064 December 31, 2020 (in thousands) 30-59 60-89 90+ Total Past Due Current Total Loans Commercial construction $ 74 $ — $ 1 $ 75 $ 117,807 $ 117,882 Commercial real estate owner occupied 1,309 464 438 2,211 217,006 219,217 Commercial real estate non-owner occupied 503 674 624 1,801 714,975 716,776 Tax exempt — — — — 47,862 47,862 Commercial and industrial 161 — 193 354 355,330 355,684 Residential real estate 9,178 2,511 3,200 14,889 980,327 995,216 Home equity 1,062 614 375 2,051 98,045 100,096 Consumer other 20 — 2 22 10,130 10,152 Total $ 12,307 $ 4,263 $ 4,833 $ 21,403 $ 2,541,482 $ 2,562,885 Non-Accrual Loans The following is a summary of non-accrual loans for the periods ended: March 31, 2021 Nonaccrual With No 90+ Days Past (in thousands) Nonaccrual Related Allowance Due and Accruing Commercial construction $ — $ — $ — Commercial real estate owner occupied 1,576 895 — Commercial real estate non-owner occupied 930 742 50 Tax exempt — — — Commercial and industrial 1,067 641 15 Residential real estate 9,142 3,405 24 Home equity 1,344 352 — Consumer other 10 — 100 Total $ 14,069 $ 6,035 $ 189 December 31, 2020 Nonaccrual With No 90+ Days Past (in thousands) Nonaccrual Related Allowance Due and Accruing Commercial construction $ 258 $ — $ — Commercial real estate owner occupied 2,400 929 — Commercial real estate non-owner occupied 383 118 — Tax exempt — — — Commercial and industrial 1,223 1,065 — Residential real estate 5,883 4,948 — Home equity 1,345 1,346 267 Consumer other 58 58 — Total $ 11,550 $ 8,464 $ 267 Collateral Dependent Loans Loans that do not share risk characteristics are evaluated on an individual basis. For loans that are individually evaluated and collateral dependent, financial loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment for the periods ended. March 31, 2021 December 31, 2020 (in thousands) Real Estate Other Real Estate Other Commercial construction $ — $ — $ 259 $ — Commercial real estate owner occupied 1,576 — 3,441 — Commercial real estate non-owner occupied 930 — 383 — Tax exempt — — — — Commercial and industrial 564 503 625 607 Residential real estate 9,142 — 7,432 — Home equity 1,344 — 1,493 — Consumer other 10 — 60 — Total $ 13,566 $ 503 $ 13,693 $ 607 Pre Adoption of ASC 326 – Impaired Loans For periods prior to the adoption of CECL, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. The Company identified loan relationships having aggregate balances in excess of $150 thousand with potential credit weaknesses. Such loan relationships were identified primarily through the Company's analysis of internal loan evaluations, past due loan reports, TDRs and loans adversely classified. Each loan so identified was then individually evaluated for impairment. Substantially all impaired loans have historically been collateral dependent, meaning repayment of the loan was expected or was considered to be provided solely from the sale of the loan's underlying collateral. For such loans, the Company measured impairment based on the fair value of the loan's collateral, which is generally determined utilizing current appraisals. A specific reserve was established in an amount equal to the excess, if any, of the recorded investment in each impaired loan over the fair value of its underlying collateral, less estimated costs to sell. The Company's policy was to re-evaluate the fair value of collateral dependent loans at least every twelve months unless there is a known deterioration in the collateral's value, in which case a new appraisal is obtained. The tables reflects the activity associated with impaired loans in 2020 prior to the adoption of CECL. December 31, 2020 Recorded Unpaid Principal Related Average Recorded Interest (in thousands) Investment Balance Allowance Investment Income Recognized With no related allowance: Construction and land development $ — $ — $ — $ — $ — Other commercial real estate 2,001 2,047 — 1,610 — Commercial 1,095 1,254 — 1,140 4 Agricultural 361 150 — 114 2 Tax exempt loans — — — — — Residential real estate 2,745 3,165 — 1,077 17 Home equity — — — — — Other consumer — — — — — With an allowance recorded: Construction and land development 258 258 205 203 — Other commercial real estate 1,963 2,108 1,038 1,973 17 Commercial 282 289 164 73 — Agricultural — — — — — Tax exempt loans — — — — — Residential real estate 887 944 106 1,865 37 Home equity 13 13 — 12 1 Other consumer — — — — — Total Commercial real estate 4,222 4,413 1,243 3,786 17 Commercial and industrial 1,738 1,693 164 1,327 6 Residential real estate 3,632 4,109 106 2,942 54 Consumer 13 13 — 12 1 Total impaired loans $ 9,605 $ 10,228 $ 1,513 $ 8,067 $ 78 Troubled Debt Restructuring Loans The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as non-performing at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDRs are evaluated individually for impairment and may result in a specific allowance amount allocated to an individual loan. The following tables include the recorded investment and number of modifications identified during the periods ended. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Modifications may include adjustments to interest rates, payment amounts, extensions of maturity, court ordered concessions or other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. There were no modifications qualifying as TDR’s for the three months ended March 31, 2021. March 31, 2021 Pre-Modification Post-Modification Number of Outstanding Outstanding (in thousands) Modifications Balance Balance Reserve Commercial construction — $ — $ — $ — Commercial real estate owner occupied — — — — Commercial real estate non-owner occupied — — — — Tax exempt — — — — Commercial and industrial — — — — Residential real estate — — — — Home equity — — — — Consumer other — — — — Total — $ — $ — $ — Three Months Ended March 31, 2020 Pre-Modification Post-Modification Number of Outstanding Outstanding (in thousands) Modifications Balance Balance Reserve Commercial construction — $ — $ — $ — Commercial real estate owner occupied — — — — Commercial real estate non-owner occupied 1 54 259 — Tax exempt — — — — Commercial and industrial 3 41 208 — Residential real estate — — — — Home equity 1 26 25 — Consumer other 1 9 9 — Total 6 $ 130 $ 501 $ — The following tables summarize the types of loan concessions made for the periods presented: March 31, 2021 March 31, 2020 Post-Modification Post-Modification Number of Outstanding Number of Outstanding (in thousands) Modifications Balance Modifications Balance Interest rate, forbearance and maturity concession — $ — 4 $ 467 Forbearance and interest only payments — — 1 25 Maturity concession — — 1 9 Total — $ — 6 $ 501 For the three ended March 31, 2021 there were no loans that were restructured that had subsequently defaulted during the period. The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs. Modifications in response to COVID-19 The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The CARES Act along with a joint agency statement issued by banking agencies, provides that short-term modifications made in response to COVID-19 do not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note 1 - Basis of Presentation Foreclosure Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of March 31, 2021 and December 31, 2020 totaled $343 thousand and $917 thousand, respectively. Mortgage Banking The Company had identified and designated loans with an unpaid principal balance of $10.1 million and $23.7 million as residential loans held for sale at March 31, 2021 and December 31, 2020, respectively. The interest rate exposure on loans held for sale are mitigated through forward delivery commitments with certain approved secondary market investors. Forward delivery commitments were $31.3 million, and $50.6 million, respectively. Refer to Note 8 for further discussion of the Company's forward delivery commitments. For the periods ended March 31, 2021 and December 31, 2020, the Company sold $69.2 million and $70.4 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net gain on sale of loans (net of costs, including direct and indirect origination costs) of $1.9 million and $2.2 million, respectively. The Company sells residential loans on the secondary market with the Company primarily retaining the servicing of these loans. Servicing sold loans helps to maintain customer relationships and the Company earns fees over the servicing period. Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to level of prepayments that result from shifts in interest rates. The Company obtains third party valuations of its servicing assets portfolio quarterly, which assumptions are reflected in Fair Value disclosures. |