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LOANS AND ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Jun. 30, 2021

Consistent with ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses, the Company’s loan portfolio is grouped into segments which are further broken down into classes to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio.

The risks associated with lending activities differ among the various loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact both the borrower’s ability to repay its loans and associated collateral.

The Company has various types of commercial real estate loans, which have differing levels of credit risk. Owner occupied commercial real estate loans are generally dependent upon the successful operation of the borrower’s business, with the cash flows generated from the business being the primary source of repayment of the loan. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be in jeopardy.

Non-owner occupied and multi-family commercial real estate loans and non-owner occupied residential loans present a different credit risk to the Company than owner occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements, and may result in lower collateral values. The Company generally recognizes that greater risk is inherent in these credit relationships compared to owner occupied loans mentioned above.

Acquisition and development loans consist of 1-4 family residential construction and commercial and land development loans. The risk of loss on these loans is largely dependent on the Company’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs. During the construction phase, a number of factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project, competition, and real estate market conditions, which may change based on the supply of similar properties in the area. In the event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Company must rely upon other repayment sources, if any, including the guarantors of the project or other collateral securing the loan.

Commercial and industrial loans include advances to local and regional businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured to our highest-rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Company, as they are more susceptible to risk of loss during a downturn in the economy as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Company attempts to mitigate this risk through its underwriting standards, including evaluating the creditworthiness of the borrower and, to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers are typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending. At June 30, 2021 and December 31, 2020, commercial and industrial loans include $355.6 million and $403.3 million, respectively, of loans, net of deferred fees and costs, originated through the SBA PPP.

Municipal loans consist of extensions of credit to municipalities and school districts within the Company’s market area. These loans generally present a lower risk than commercial and industrial loans, as they are generally secured by the municipality’s full taxing authority, by revenue obligations, or by its ability to raise assessments on its customers for a specific utility.

The Company originates loans to its retail customers, including fixed-rate and adjustable first lien mortgage loans, with the underlying 1-4 family owner occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the creditworthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards, which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance.

Home equity loans, including term loans and lines of credit, present a slightly higher risk to the Company than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than 90% of the value of the real estate taken as collateral. The creditworthiness of the borrower is also considered, including credit scores and debt-to-income ratios.

Installment and other loans’ credit risk are mitigated through prudent underwriting standards, including evaluation of the creditworthiness of the borrower through credit scores and debt-to-income ratios and, if secured, the collateral value of the assets. These loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate, and may present a greater risk to the Company than 1-4 family residential loans.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted. The CARES Act established the SBA PPP. The SBA PPP is intended to provide economic relief to small businesses nationwide adversely impacted under the COVID-19 Emergency Declaration issued on March 13, 2020. The SBA PPP, which began on April 3, 2020, provided small businesses with funds to cover up to 24 weeks of payroll costs and other expenses, including benefits. It also provides for forgiveness of up to the full principal amount of qualifying loans. Through December 31, 2020, the Bank closed and funded almost 3,200 loans for a total gross loan amount of $467.7 million. These loans resulted in net processing fees of $13.5 million to be recognized through net interest income over the life of the loans, which is between two and five years. For the six months ended June 30, 2021, the Bank closed and funded almost 3,300 PPP loans for a total loan amount of $231.7 million. In total, the Bank closed and funded almost 6,500 PPP loans for a total gross loan amount of $699.4 million.

The loans originated in 2021 resulted in net processing fees of $12.3 million. At June 30, 2021, the Bank has $11.2 million of net deferred SBA PPP fees remaining to be recognized through net interest income over the life of the loans, which is between two and five years. The timing of the recognition of these fees is dependent upon the loan forgiveness process established by the SBA. The Bank continues to closely monitor the SBA guidance regarding this process. As these loans are 100% guaranteed by the SBA, there is no associated allowance for loan losses at June 30, 2021.

In an effort to assist clients that were negatively impacted by the COVID-19 pandemic, the Bank offered various mitigation options, including a loan payment deferral program. Under this program, most commercial deferrals were for a 90-day period, while most consumer deferrals were for a 180-day period. Commercial and consumer deferrals totaled $3.5 million and $0.4 million, respectively, at June 30, 2021 and $15.7 million and $2.5 million, respectively, at December 31, 2020. In accordance with the revised Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus issued by the federal bank regulatory agencies on April 7, 2020, these deferrals are exempt from TDR status as they meet the specified requirements.

The following table presents the loan portfolio by segment and class, excluding residential mortgage LHFS, at June 30, 2021 and December 31, 2020:


	June 30, 2021		December 31, 2020
Commercial real estate:
Owner occupied	$	191,595	$	174,908
Non-owner occupied	471,541		409,567
Multi-family	112,420		113,635
Non-owner occupied residential	99,631		114,505
Acquisition and development:
1-4 family residential construction	9,686		9,486
Commercial and land development	55,330		51,826
Commercial and industrial (1)	599,123		647,368
Municipal	14,452		20,523
Residential mortgage:
First lien	211,918		244,321
Home equity - term	8,321		10,169
Home equity - lines of credit	149,601		157,021
Installment and other loans	21,765		26,361
Total loans	$	1,945,383	$	1,979,690

(1) This balance includes $355.6 million and $403.3 million of SBA PPP loans, net of deferred fees and costs, at June 30, 2021 and December 31, 2020, respectively.

In order to monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including "Special Mention," "Substandard," "Doubtful" or "Loss." The Special Mention category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank's position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. Substandard loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans include loans that management has determined not to be impaired, as well as loans considered to be impaired. A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as Loss is deferred. Loss loans are considered uncollectible, as the borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as Loss, there is little prospect of collecting the loan’s principal or interest and it is charged-off.

The Company has a loan review policy and program which is designed to identify and monitor risk in the lending function. The Management ERM Committee, comprised of executive officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Company's loan portfolio. This includes the monitoring of the

lending activities of all Company personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. A loan review program provides the Company with an independent review of the commercial loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event.

Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1.0 million, which includes confirmation of risk rating by an independent credit officer. In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed quarterly and corresponding risk ratings are reaffirmed by the Company's Problem Loan Committee, with subsequent reporting to the Management ERM Committee and the Board of Directors.

The following table summarizes the Company’s loan portfolio ratings based on its internal risk rating system at June 30, 2021 and December 31, 2020:


	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		PCI Loans		Total
June 30, 2021
Commercial real estate:
Owner occupied	$	166,636	$	10,690	$	7,554	$	4,326	$	—	$	2,389	$	191,595
Non-owner occupied	422,074		48,779		367		—		—		321		471,541
Multi-family	91,959		19,836		625		—		—		—		112,420
Non-owner occupied residential	94,035		2,690		1,435		253		—		1,218		99,631
Acquisition and development:
1-4 family residential construction	9,686		—		—		—		—		—		9,686
Commercial and land development	54,179		643		508		—		—		—		55,330
Commercial and industrial	578,129		10,485		5,022		3,174		—		2,313		599,123
Municipal	14,452		—		—		—		—		—		14,452
Residential mortgage:
First lien	204,353		—		—		2,561		—		5,004		211,918
Home equity - term	8,288		—		—		17		—		16		8,321
Home equity - lines of credit	149,078		22		53		448		—		—		149,601
Installment and other loans	21,713		—		—		14		—		38		21,765
	$	1,814,582	$	93,145	$	15,564	$	10,793	$	—	$	11,299	$	1,945,383

December 31, 2020
Commercial real estate:
Owner occupied	$	148,846	$	12,491	$	7,855	$	3,260	$	—	$	2,456	$	174,908
Non-owner occupied	351,860		57,378		—		—		—		329		409,567
Multi-family	92,769		20,224		642		—		—		—		113,635
Non-owner occupied residential	107,557		3,948		1,422		268		—		1,310		114,505
Acquisition and development:
1-4 family residential construction	9,101		385		—		—		—		—		9,486
Commercial and land development	49,832		655		525		814		—		—		51,826
Commercial and industrial	617,213		17,561		6,118		3,639		—		2,837		647,368
Municipal	20,523		—		—		—		—		—		20,523
Residential mortgage:
First lien	236,381		—		—		2,628		—		5,312		244,321
Home equity - term	10,076		—		64		10		—		19		10,169
Home equity - lines of credit	156,264		95		54		608		—		—		157,021
Installment and other loans	26,283		—		—		17		—		61		26,361
	$	1,826,705	$	112,737	$	16,680	$	11,244	$	—	$	12,324	$	1,979,690

For commercial real estate, acquisition and development and commercial and industrial loans, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by

management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Generally, loans that are more than 90 days past due are deemed impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed to determine if the loan should be placed on nonaccrual status. Nonaccrual loans in the commercial and commercial real estate portfolios and any TDRs are, by definition, deemed to be impaired. Impairment is measured on a loan-by-loan basis for commercial, construction and restructured loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For loans that are deemed to be impaired for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. Updated fair values are incorporated into the impairment analysis in the next reporting period.

Loan charge-offs, which may include partial charge-offs, are taken on an impaired loan that is collateral dependent if the loan’s carrying balance exceeds its collateral’s appraised value, the loan has been identified as uncollectible, and it is deemed to be a confirmed loss. Typically, impaired loans with a charge-off or partial charge-off will continue to be considered impaired, unless the note is split into two, and management expects the performing note to continue to perform and is adequately secured. The second, or non-performing note, would be charged-off. Generally, an impaired loan with a partial charge-off may continue to have an impairment reserve on it after the partial charge-off, if factors warrant.

At June 30, 2021 and December 31, 2020, nearly all of the Company’s loan impairments were measured based on the estimated fair value of the collateral securing the loan, except for TDRs. By definition, TDRs are considered impaired. All TDR impairment analyses are initially based on discounted cash flows for those loans. For real estate loans, collateral generally consists of commercial real estate, but in the case of commercial and industrial loans, it could also consist of accounts receivable, inventory, equipment or other business assets. Commercial and industrial loans may also have real estate collateral.

Updated appraisals are generally required every 18 months for classified commercial loans in excess of $250 thousand. The “as is" value provided in the appraisal is often used as the fair value of the collateral in determining impairment, unless circumstances, such as subsequent improvements, approvals, or other circumstances, dictate that another value than that provided by the appraiser is more appropriate.

Generally, impaired commercial loans secured by real estate, other than performing TDRs, are measured at fair value using certified real estate appraisals that had been completed within the last 18 months. Appraised values are discounted for estimated costs to sell the property and other selling considerations to arrive at the property’s fair value. In those situations in which it is determined an updated appraisal is not required for loans individually evaluated for impairment, fair values are based on either an existing appraisal or a discounted cash flow analysis as determined by management. The approaches are discussed below:

•Existing appraisal – if the existing appraisal provides a strong loan-to-value ratio (generally 70% or lower) and, after consideration of market conditions and knowledge of the property and area, it is determined by the Credit Administration staff that there has not been a significant deterioration in the collateral value, the existing certified appraised value may be used. Discounts to the appraised value, as deemed appropriate for selling costs, are factored into the fair value.

•Discounted cash flows – in limited cases, discounted cash flows may be used on projects in which the collateral is liquidated to reduce the borrowings outstanding, and is used to validate collateral values derived from other approaches.

Collateral on certain impaired loans is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values are determined based on borrowers’ financial statements, inventory ledgers, accounts receivable aging or appraisals from individuals with knowledge in the business. Stated balances are generally discounted for the age of the financial information or the quality of the assets. In determining fair value, liquidation discounts are applied to this collateral based on existing loan evaluation policies.

The Company distinguishes substandard loans on both an impaired and non-impaired basis, as it places less emphasis on a loan’s classification, and increased reliance on whether the loan was performing in accordance with the contractual terms. A substandard classification does not automatically meet the definition of impaired. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual extensions of credit classified as substandard. As a result, the Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and development, and commercial and industrial loans rated substandard to be collectively evaluated for impairment. Although the Company believes

these loans meet the definition of substandard, they are generally performing and management has concluded that it is likely the Company will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.

Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Generally, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The following table, which excludes accruing PCI loans, summarizes impaired loans by segment and class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at June 30, 2021 and December 31, 2020. The recorded investment in loans excludes accrued interest receivable due to insignificance. Related allowances established generally pertain to those loans in which loan forbearance agreements were in the process of being negotiated or updated appraisals were pending, and any partial charge-off will be recorded when final information is received.


	Impaired Loans with a Specific Allowance						Impaired Loans with No Specific Allowance
	Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)		Related Allowance		Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)
June 30, 2021
Commercial real estate:
Owner-occupied	$	—	$	—	$	—	$	4,326	$	5,531


Non-owner occupied residential	—		—		—		253		385



Commercial and industrial	—		—		—		3,174		3,849
Residential mortgage:
First lien	634		634		31		1,927		3,233
Home equity—term	—		—		—		17		23
Home equity—lines of credit	—		—		—		448		680
Installment and other loans	—		—		—		14		14
	$	634	$	634	$	31	$	10,159	$	13,715
December 31, 2020
Commercial real estate:
Owner-occupied	$	—	$	—	$	—	$	3,260	$	4,091


Non-owner occupied residential	—		—		—		268		393
Acquisition and development:

Commercial and land development	—		—		—		814		875
Commercial and industrial	—		—		—		3,639		4,269
Residential mortgage:
First lien	424		508		33		2,204		3,264
Home equity—term	—		—		—		10		13
Home equity—lines of credit	—		—		—		608		832
Installment and other loans	—		—		—		17		18
	$	424	$	508	$	33	$	10,820	$	13,755

The following table, which excludes accruing PCI loans, summarizes the average recorded investment in impaired loans and related recognized interest income for the three and six months ended June 30, 2021 and 2020:


	2021				2020
	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Three Months Ended June 30,
Commercial real estate:
Owner-occupied	$	4,072	$	—	$	4,639	$	—
Non-owner occupied	—		—		169		—
Multi-family	—		—		270		—
Non-owner occupied residential	259		—		521		—
Acquisition and development:

Commercial and land development	—		—		837		—
Commercial and industrial	3,302		—		1,320		—
Residential mortgage:
First lien	2,542		10		3,177		12
Home equity – term	18		—		12		—
Home equity - lines of credit	547		—		704		1
Installment and other loans	13		—		18		—
	$	10,753	$	10	$	11,667	$	13
Six Months Ended June 30,
Commercial real estate:
Owner occupied	$	3,726	$	1	$	5,143	$	1
Non-owner occupied	—		—		96		—
Multi-family	11		—		301		—
Non-owner occupied residential	263		—		396		—
Acquisition and development:

Commercial and land development	351		—		478		—
Commercial and industrial	3,049		—		1,384		—
Residential mortgage:
First lien	2,593		21		2,874		24
Home equity - term	14		—		12		—
Home equity - lines of credit	581		—		715		1
Installment and other loans	12		—		34		—
	$	10,600	$	22	$	11,433	$	26

The following table presents impaired loans that are TDRs, with the recorded investment at June 30, 2021 and December 31, 2020:


	June 30, 2021			December 31, 2020
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Accruing:
Commercial real estate:
Owner occupied	1	$	27	1	$	28



Residential mortgage:
First lien	8	823		9	898
Home equity - lines of credit	1	2		1	8
	10	852		11	934
Nonaccruing:





Residential mortgage:
First lien	5	299		5	320

	5	299		5	320
	15	$	1,151	16	$	1,254

There were no new TDR's for the three and six months ended June 30, 2021 or 2020.

Management further monitors the performance and credit quality of the loan portfolio by analyzing the length of time a portfolio is past due, by aggregating loans based on its delinquencies. The following table presents the classes of loan portfolio summarized by aging categories of performing loans and nonaccrual loans at June 30, 2021 and December 31, 2020:


			Days Past Due
	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
June 30, 2021
Commercial real estate:
Owner occupied	$	184,866	$	41	$	—	$	—	$	41	$	4,299	$	189,206
Non-owner occupied	471,220		—		—		—		—		—		471,220
Multi-family	112,420		—		—		—		—		—		112,420
Non-owner occupied residential	97,880		—		280		—		280		253		98,413
Acquisition and development:
1-4 family residential construction	9,592		—		94		—		94		—		9,686
Commercial and land development	55,320		10		—		—		10		—		55,330
Commercial and industrial	593,592		7		21		16		44		3,174		596,810
Municipal	14,452		—		—		—		—		—		14,452
Residential mortgage:
First lien	204,544		573		31		28		632		1,738		206,914
Home equity - term	8,278		10		—		—		10		17		8,305
Home equity - lines of credit	149,107		48		—		—		48		446		149,601
Installment and other loans	21,524		139		50		—		189		14		21,727
Subtotal	1,922,795		828		476		44		1,348		9,941		1,934,084
Loans acquired with credit deterioration:
Commercial real estate:
Owner occupied	2,389		—		—		—		—		—		2,389
Non-owner occupied	321		—		—		—		—		—		321

Non-owner occupied residential	1,085		—		—		133		133		—		1,218



Commercial and industrial	2,313		—		—		—		—		—		2,313

Residential mortgage:
First lien	4,698		271		—		35		306		—		5,004
Home equity - term	16		—		—		—		—		—		16

Installment and other loans	38		—		—		—		—		—		38
Subtotal	10,860		271		—		168		439		—		11,299
	$	1,933,655	$	1,099	$	476	$	212	$	1,787	$	9,941	$	1,945,383



			Days Past Due
	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
December 31, 2020
Commercial real estate:
Owner occupied	$	168,262	$	958	$	—	$	—	$	958	$	3,232	$	172,452
Non-owner occupied	409,130		108		—		—		108		—		409,238
Multi-family	113,635		—		—		—		—		—		113,635
Non-owner occupied residential	112,443		484		—		—		484		268		113,195
Acquisition and development:
1-4 family residential construction	9,486		—		—		—		—		—		9,486
Commercial and land development	50,922		32		58		—		90		814		51,826
Commercial and industrial	640,573		9		310		—		319		3,639		644,531
Municipal	19,677		846		—		—		846		—		20,523
Residential mortgage:
First lien	230,903		5,758		535		83		6,376		1,730		239,009
Home equity - term	10,099		40		—		1		41		10		10,150
Home equity - lines of credit	156,153		268		—		—		268		600		157,021
Installment and other loans	26,052		168		49		14		231		17		26,300
Subtotal	1,947,335		8,671		952		98		9,721		10,310		1,967,366
Loans acquired with credit deterioration:
Commercial real estate:
Owner occupied	2,456		—		—		—		—		—		2,456
Non-owner occupied	329		—		—		—		—		—		329

Non-owner occupied residential	1,161		—		—		149		149		—		1,310



Commercial and industrial	2,837		—		—		—		—		—		2,837

Residential mortgage:
First lien	4,341		655		9		307		971		—		5,312
Home equity - term	19		—		—		—		—		—		19

Installment and other loans	57		4		—		—		4		—		61
Subtotal	11,200		659		9		456		1,124		—		12,324
	$	1,958,535	$	9,330	$	961	$	554	$	10,845	$	10,310	$	1,979,690

The Company maintains its ALL at a level management believes adequate for probable incurred credit losses. The ALL is established and maintained through a provision for loan losses charged to earnings. On a quarterly basis, management assesses the adequacy of the ALL utilizing a defined methodology, which considers specific credit evaluation of impaired loans as discussed above, historical loan loss experience, and qualitative factors. Management believes its approach properly addresses relevant accounting guidance for loans individually identified as impaired and for loans collectively evaluated for impairment, and other bank regulatory guidance.

In connection with its quarterly evaluation of the adequacy of the ALL, management reviews its methodology to determine if it properly addresses the current risk in the loan portfolio. For each loan class, general allowances based on quantitative factors, principally historical loss trends, are provided for loans that are collectively evaluated for impairment. An

adjustment to historical loss factors may be incorporated for delinquency and other potential risk not elsewhere defined within the ALL methodology.

In addition to this quantitative analysis, adjustments to the ALL requirements are allocated on loans collectively evaluated for impairment based on additional qualitative factors, including:

Nature and Volume of Loans – including loan growth in the current and subsequent quarters based on the Company’s targeted growth and strategic plan, coupled with the types of loans booked based on risk management and credit culture; the number of exceptions to loan policy; and supervisory loan to value exceptions.

Concentrations of Credit and Changes within Credit Concentrations – including the composition of the Company’s overall portfolio makeup and management's evaluation related to concentration risk management and the inherent risk associated with the concentrations identified.

Underwriting Standards and Recovery Practices – including changes to underwriting standards and perceived impact on anticipated losses; trends in the number of exceptions to loan policy; supervisory loan to value exceptions; and administration of loan recovery practices.

Delinquency Trends – including delinquency percentages noted in the portfolio relative to economic conditions; severity of the delinquencies; and whether the ratios are trending upwards or downwards.

Classified Loans Trends – including internal loan ratings of the portfolio; severity of the ratings; whether the loan segment’s ratings show a more favorable or less favorable trend; and underlying market conditions and impact on the collateral values securing the loans.

Experience, Ability and Depth of Management/Lending staff – including the years’ experience of senior and middle management and the lending staff; turnover of the staff; and instances of repeat criticisms of ratings.

Quality of Loan Review – including the years of experience of the loan review staff; in-house versus outsourced provider of review; turnover of staff and the perceived quality of their work in relation to other external information.

National and Local Economic Conditions – including trends in the consumer price index, unemployment rates, the housing price index, housing statistics compared to the prior year, bankruptcy rates, regulatory and legal environment risks and competition. During the six months ended June 30, 2021, this factor was unchanged for the commercial and consumer portfolios to account for the negative economic impact of the COVID-19 pandemic.

COVID-19 – during the six months ended June 30, 2021, a qualitative allocation was implemented associated with the potential impact of the COVID-19 pandemic on the Company's commercial loan portfolio. The factor assumes downgrades of loans which were granted deferrals or forbearances based upon identified hardships resulting from the economic shutdown driven by the pandemic. The qualitative reserve on these loans will be reduced over time as sustained performance is demonstrated after the loans are removed from deferral status or the forbearance period has ended. During the three and six months ended June 30, 2021, this qualitative reserve was reduced by $0.8 million and $1.7 million, respectively. This reserve is $1.0 million at June 30, 2021.

The following table presents the activity in the ALL for the three and six months ended June 30, 2021 and 2020:


	Commercial										Consumer
	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
Three Months Ended
June 30, 2021
Balance, beginning of period	$	10,671	$	1,046	$	3,714	$	38	$	15,469	$	3,058	$	208	$	3,266	$	232	$	18,967
Provision for loan losses	806		197		(223)		(9)		771		(142)		19		(123)		(23)		625

Charge-offs	(181)		—		(112)		—		(293)		(71)		(9)		(80)		—		(373)
Recoveries	19		—		116		—		135		18		9		27		—		162
Balance, end of period	$	11,315	$	1,243	$	3,495	$	29	$	16,082	$	2,863	$	227	$	3,090	$	209	$	19,381
June 30, 2020
Balance, beginning of period	$	8,420	$	1,033	$	2,647	$	99	$	12,199	$	3,139	$	294	$	3,433	$	171	$	15,803
Provision for loan losses	877		31		590		(24)		1,474		323		102		425		1		1,900
Charge-offs	—		—		(421)		—		(421)		(18)		(14)		(32)		—		(453)
Recoveries	50		5		100		—		155		108		4		112		—		267
Balance, end of period	$	9,347	$	1,069	$	2,916	$	75	$	13,407	$	3,552	$	386	$	3,938	$	172	$	17,517
Six Months Ended
June 30, 2021
Balance, beginning of period	$	11,151	$	1,114	$	3,942	$	40	$	16,247	$	3,362	$	324	$	3,686	$	218	$	20,151
Provision for loan losses	312		128		(277)		(11)		152		(431)		(87)		(518)		(9)		(375)

Charge-offs	(181)		—		(566)		—		(747)		(92)		(29)		(121)		—		(868)
Recoveries	33		1		396		—		430		24		19		43		—		473
Balance, end of period	$	11,315	$	1,243	$	3,495	$	29	$	16,082	$	2,863	$	227	$	3,090	$	209	$	19,381
June 30, 2020
Balance, beginning of period	$	7,634	$	959	$	2,356	$	100	$	11,049	$	3,147	$	319	$	3,466	$	140	$	14,655
Provision for loan losses	1,260		102		912		(25)		2,249		400		144		544		32		2,825
Charge-offs	—		—		(496)		—		(496)		(109)		(86)		(195)		—		(691)
Recoveries	453		8		144		—		605		114		9		123		—		728
Balance, end of period	$	9,347	$	1,069	$	2,916	$	75	$	13,407	$	3,552	$	386	$	3,938	$	172	$	17,517

The following table summarizes the ending loan balance individually evaluated for impairment based upon loan segment, as well as the related ALL loss allocation for each at June 30, 2021 and December 31, 2020. Accruing PCI loans are excluded from loans individually evaluated for impairment.


	Commercial										Consumer
	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
June 30, 2021
Loans allocated by:
Individually evaluated for impairment	$	4,579	$	—	$	3,174	$	—	$	7,753	$	3,026	$	14	$	3,040	$	—	$	10,793
Collectively evaluated for impairment	870,608		65,016		595,949		14,452		1,546,025		366,814		21,751		388,565		—		1,934,590

	$	875,187	$	65,016	$	599,123	$	14,452	$	1,553,778	$	369,840	$	21,765	$	391,605	$	—	$	1,945,383
ALL allocated by:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	31	$	—	$	31	$	—	$	31
Collectively evaluated for impairment	11,315		1,243		3,495		29		16,082		2,832		227		3,059		209		19,350

	$	11,315	$	1,243	$	3,495	$	29	$	16,082	$	2,863	$	227	$	3,090	$	209	$	19,381
December 31, 2020
Loans allocated by:
Individually evaluated for impairment	$	3,528	$	814	$	3,639	$	—	$	7,981	$	3,246	$	17	$	3,263	$	—	$	11,244
Collectively evaluated for impairment	809,087		60,498		643,729		20,523		1,533,837		408,265		26,344		434,609		—		1,968,446
	$	812,615	$	61,312	$	647,368	$	20,523	$	1,541,818	$	411,511	$	26,361	$	437,872	$	—	$	1,979,690
ALL allocated by:
Individually evaluated for impairment	$	—	$	—	$	1	$	—	$	1	$	33	$	—	$	33	$	—	$	34
Collectively evaluated for impairment	11,151		1,114		3,941		40		16,246		3,329		324		3,653		218		20,117
	$	11,151	$	1,114	$	3,942	$	40	$	16,247	$	3,362	$	324	$	3,686	$	218	$	20,151

The following table provides activity for the accretable yield of PCI loans for the three and six months ended June 30, 2021 and 2020:


	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Accretable yield, beginning of period	$	3,072	$	4,414	$	3,438	$	6,950
Additions (1)	—		—		—		570
Accretion of income	(209)		(1,315)		(676)		(1,913)
Reclassifications from nonaccretable difference due to improvement in expected cash flows	74		1,104		118		1,121
Other changes, net (2)	79		(21)		136		(2,546)
Accretable yield, end of period	$	3,016	$	4,182	$	3,016	$	4,182

(1) The amount for the six months ended June 30, 2020 reflects a measurement period adjustment for Hamilton loans that should have been in the PCI pool at the acquisition date.

(2) The amount for the six months ended June 30, 2020 represents the impact of PCI loans sold during that period