The Allowance is established through provisions for loan and lease losses charged against income. Loans deemed to be uncollectible are charged against the Allowance, and subsequent recoveries, if any, are credited to the Allowance.

The Allowance is maintained at a level considered adequate to provide for losses that are probable and estimable. Management’s periodic evaluation of the adequacy of the Allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is subjective as it requires material estimates that may be susceptible to significant revisions as more information becomes available.

The following tables detail the roll-forward of the Corporation’s Allowance, by portfolio segment, as of December 31, 2020 and 2019, respectively:

The following table details the allocation of the Allowance and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of December 31, 2020 respectively:




	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
December 31, 2019	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	3,426	3,426	$	2,138	360,452	362,590
Home equity lines and loans		46	296	342		536	81,047	81,583
Residential mortgage		—	179	179		854	42,265	43,119
Construction		—	2,362	2,362		1,247	170,797	172,044
Commercial and industrial		27	2,657	2,684		1,288	272,013	273,301
Small business loans		63	446	509		1,244	20,372	21,616
Consumer		—	6	6		—	1,003	1,003
Leases		—	5	5		—	697	697
Total	$	136	9,377	9,513	$	7,307	948,646	955,953	(1)

(1)

Excludes deferred fees and loans carried at fair value.

Loans and Leases by Credit Ratings

As part of the process of determining the Allowance to the different segments of the loan and lease portfolio, Management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by Management. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:

●

Pass – Loans considered to be satisfactory with no indications of deterioration.

●

Special mention – Loans classified as special mention have a potential weakness that deserves Management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

●

Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

●

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loan balances classified as doubtful have been reduced by partial charge-offs and are carried at their net realizable values.

The following table details the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of December 31, 2020 and 2019, respectively:


December 31, 2020			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	449,545	32,059	3,499	—	485,103
Home equity lines and loans		63,923	—	1,064	—	64,987
Construction		132,286	7,960	—	—	140,246
Commercial and industrial		227,349	21,721	9,000	3,680	261,750
Small business loans		46,789	—	2,753	—	49,542
Paycheck Protection Program loans		203,543	—	—	—	203,543
Main Street Lending Program loans		580	—	—	—	580
Total	$	1,124,015	61,740	16,316	3,680	1,205,751


December 31, 2019			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	353,724	5,821	3,045	—	362,590
Home equity lines and loans		81,046	—	537	—	81,583
Construction		170,823	1,221	—	—	172,044
Commercial and industrial		251,320	9,648	12,333	—	273,301
Small business loans		20,351	—	1,265	—	21,616
Total	$	877,264	16,690	17,180	—	911,134

In addition to credit quality indicators as shown in the above tables, Allowance allocations for residential mortgages, consumer loans and leases are also applied based on their performance status as December 31, 2020 and 2019, respectively.


	December 31, 2020				December 31, 2019
(dollars in thousands)	Performing		Nonperforming	Total	Performing		Nonperforming	Total
Residential mortgage	$	38,457	1,815	40,272	$	42,265	854	43,119
Consumer		511	—	511		1,003	—	1,003
Leases		31,040	—	31,040		697	—	697
Total	$	70,008	1,815	71,823	$	43,965	854	44,819

There were five nonperforming residential mortgage loans at December 31, 2020 and five at December 31, 2019 with a combined outstanding principal balance of $910 thousand and $839 thousand, respectively, which were carried at fair value and not included in the table above. No TDR’s performing according to modified terms are included in performing residential mortgages above for the twelve months ended December 31, 2020 and 2019, respectively.

Impaired Loans

The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related Allowance and interest income recognized for the periods.




	As of December 31, 2020				As of December 31, 2019
	Recorded		Principal	Related	Recorded	Principal	Related
(dollars in thousands)	investment		balance	allowance	investment	balance	allowance
Impaired loans with related allowance:
Commercial and industrial		3,860	3,902	1,563	617	617	27
Small business loans		—	—	—	1,002	1,002	63
Home equity lines and loans		95	105	9	461	461	46
Residential mortgage		689	689	73	—	—	—
Total		4,644	4,696	1,645	2,080	2,080	136
Impaired loans without related allowance:
Commercial mortgage	$	1,606	1,642	—	2,138	2,173	—
Commercial and industrial		785	862	—	671	718	—
Small business loans		185	185	—	242	242	—
Home equity lines and loans		826	839	—	75	75	—
Residential mortgage		1,128	1,128	—	854	854	—
Construction		1,206	1,206	—	1,247	1,248	—
Total		5,736	5,862	—	5,227	5,310	—
Grand Total	$	10,380	10,558	1,645	7,307	7,390	136

Interest income recognized on performing impaired loans amounted to $328 thousand and $206 thousand for the twelve months ended December 31, 2020 and 2019, respectively.

Troubled Debt Restructuring (“TDR’s”)

The restructuring of a loan is considered a TDR if both of the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the creditor has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan, and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower, were a concession not granted. The determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

The balance of TDRs at December 31, 2020 and 2019 are as follows:


	December 31,		December 31,
(dollars in thousands)	2020		2019
TDRs included in nonperforming loans and leases	$	244	319
TDRs in compliance with modified terms		3,362	3,599
Total TDRs	$	3,606	3,918

There were no loan and lease modifications granted during the years ended December 31, 2020 and 2019 that were categorized as TDRs.

No loan and lease modifications granted during the twelve months ended December 31, 2020 and 2019 subsequently defaulted during the same time period.

COVID-19 Loan Modifications

The following table details the loan modifications excluding TDR’s that the Corporation provided to loan customers as of December 31, 2020.


		December 31, 2020
		Portfolio		Total		Active
Loan Portfolio		Balance		Modifications		Modifications
Commercial mortgage	$	485,103	$	96,712	$	19,836
Commercial and industrial, including leases		292,790		22,727		—
Construction & land development		140,246		24,847		4,343
Home equity lines and loans		64,987		1,488		—
Residential mortgage		52,454		4,563		—
Small business loans		49,542		5,958		2,726
Consumer		511		—		—
Total	$	1,085,633	$	156,295	$	26,905

In accordance with Section 4013 of the CARES Act, loan deferrals granted to customers that resulted from the impact of COVID-19 and who were not past due at the time of deferral were not considered trouble debt restructurings under ASC 310-40 as of December 31, 2020. This provision was extended to January 1, 2022 under the Consolidated Appropriations Act, 2021. Management continues to monitor these deferrals and has adequately considered these credits in the December 31, 2020 allowance for loan losses balance. These modified loans are classified as performing and are not considered past due. Loans are to be placed on non-accrual when it becomes apparent that payment of interest or recovery of all principal is questionable, and the COVID-19 related modification is no longer considered short-term or the modification is deemed ineffective.