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LOANS AND ALLOWANCE FOR CREDIT LOSSES

3 Months Ended

Mar. 31, 2021

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 - Loans in this segment primarily include raw land, land development and construction of commercial and multifamily residential properties. Collateral values are determined based upon appraisals and evaluations of the completed structure in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy guidelines that are more restrictive than existing structures. Construction loans are primarily paid by the cash flow generated from the completed structure, such as operating leases, rents, or other operating cash flows from the borrower.

Commercial real estate owner occupied and non-owner occupied - Loans in these segments are primarily owner-occupied or income-producing properties. Loans to Real Estate Investment Trusts (REITs) and unsecured loans to developers that closely correlate to the inherent risk in commercial real estate markets are also included. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy and regulatory guidelines. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.

Tax Exempt - Loans in this segment primarily include loans to various state and municipal government entities. Loans made in these borrowers may provide the Company with tax-exempt income. While governed and underwritten similar to commercial loans they do have unique requirements based on established polices. Almost all state and municipal loans are considered a general obligation of the issuing entity. Given the size of many municipal borrowers, borrowings are normally not rated by major rating agencies.

Commercial and industrial loans - Loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment in this segment. Generally loans are secured by assets of the business such as accounts receivable, inventory, marketable securities, other liquid collateral, equipment and other business assets. Some loans in this category may be unsecured or guaranteed by government agencies such as the SBA. Loans are primarily paid by the operating cash flow of the borrower.

Residential real estate - All loans in this segment are collateralized by one-to-four family homes. Residential real estate loans held in the Company's loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to various underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Home equity - All loans and lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Consumer loans other - Loans in this segment are include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto loans, recreational equipment, overdraft protection or other consumer loans. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines, as applicable.

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: The Company has certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. The Company’s Board of Directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the Company's Board of Directors with frequent reports related to loan production, loan quality, and concentration of credit, loan delinquencies, non-performing loans and potential problem loans. The Company seeks to diversify the loan portfolio as a means of managing risk associated with fluctuations in economic conditions.

Credit Quality Indicators: In monitoring the credit quality of the portfolio, management applies a credit quality indicator and uses an internal risk rating system to categorize commercial loans. These credit quality indicators range from one through nine, with a higher number correlating to increasing risk of loss. Consistent with regulatory guidelines, the Company provides for the classification of loans which are considered to be of lesser quality as special mention, substandard, doubtful, or loss (i.e. risk-rated 6, 7, 8 and 9, respectively).

The following are the definitions of the Company’s credit quality indicators:

Pass: Loans the Company considers in the commercial portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes there is a low risk of loss related to these loans considered pass-rated.

Special Mention: Loans the Company considers having some potential weaknesses, but are deemed to not carry levels of risk inherent in one of the subsequent categories, are designated as special mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. This might include loans which may require a higher level of supervision or internal reporting because of: (i) declining industry trends; (ii) increasing reliance on secondary sources of repayment; (iii) the poor condition of or lack of control over collateral; or (iv) failure to obtain proper documentation or any other deviations from prudent lending practices. Economic or market conditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an adverse trend in the borrower's operations or an imbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose the Company to sufficient risks to warrant classification.

Substandard: Loans the Company considers as substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness that jeopardizes liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected.

Doubtful: Loans the Company considers as doubtful have all of the weaknesses inherent in those loans that are classified as substandard. These loans have the added characteristic of a well-defined weakness which is inadequately protected by the current sound worth and paying capacity of borrower or of the collateral pledged, if any, and calls into question the collectability of the full balance of the loan. The possibility of loss is high but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as loss is deferred until its more exact status is determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year).

Loss: Loans the Company considers as losses are those considered uncollectible and of such little value that their continuance as an asset is not warranted and the uncollectible amounts are charged-off. This classification does not mean the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this worthless asset even though partial recovery may be affected in the future. Losses are taken in the period in which they are determined to be uncollectible.

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 in December 31, 2020 10-K for more information.

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.