The Allowance is established through provisions for loan 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 estimatable. 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. Estimates for the allowance for loan and lease losses at September 30, 2021 include probable losses related to the COVID-19 pandemic.

The following tables detail the roll-forward of the Corporation’s Allowance, by portfolio segment, for the three and nine month periods ended September 30, 2021 and 2020, respectively:

The following tables detail the allocation of the allowance for loan and lease losses 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 September 30, 2021 and December 31, 2020.

(1)	Excludes deferred fees and loans carried at fair value.

(2)	PPP and MSLP loans are not reserved against as they are 100% guaranteed.

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 tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the allowance for loan and lease losses as of September 30, 2021 and December 31, 2020:


September 30, 2021			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	505,355	31,464	5,654	—	542,473
Home equity lines and loans		51,427	—	1,392	—	52,819
Construction		153,200	8,992	—	—	162,192
Commercial and industrial		222,041	35,756	21,179	—	278,976
Small business loans		87,161	—	3,316	—	90,477
Paycheck Protection Program loans		118,585	—	—	—	118,585
Main Street Lending Program loans		592	—	—	—	592
Total	$	1,138,361	76,212	31,541	—	1,246,114


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

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 of September 30, 2021 and

December 31, 2020. No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of September 30, 2021 and December 31, 2020.


	September 30, 2021				December 31, 2020
(dollars in thousands)	Performing		Nonperforming	Total	Performing		Nonperforming	Total
Residential mortgage	$	40,351	1,802	42,153	$	38,457	1,815	40,272
Consumer		427	—	427		511	—	511
Leases, net		73,993	—	73,993		31,040	—	31,040
Total	$	114,771	1,802	116,573	$	70,008	1,815	71,823

There were three nonperforming residential mortgage loans at September 30, 2021 and five nonperforming residential mortgage loans at December 31, 2020 with a combined outstanding principal balance of $476 thousand and $910 thousand, respectively, which were carried at fair value and not included in the table above.

Impaired Loans

The following table details the recorded investment and principal balance of impaired loans by portfolio segment, and their related allowance for loan and lease losses.




	As of September 30, 2021				As of December 31, 2020
	Recorded		Principal	Related	Recorded	Principal	Related
(dollars in thousands)	investment		balance	allowance	investment	balance	allowance
Impaired loans with related allowance:
Commercial and industrial	$	3,201	3,321	1,526	3,860	3,902	1,563
Small business loans		916	916	376	—	—	—
Home equity lines and loans		88	102	2	95	105	9
Residential mortgage		169	169	12	689	689	73
Total	$	4,374	4,508	1,916	4,644	4,696	1,645
Impaired loans without related allowance:
Commercial mortgage	$	2,568	2,568	—	1,606	1,642	—
Commercial and industrial		450	515	—	785	862	—
Small business loans		141	141	—	185	185	—
Home equity lines and loans		822	836	—	826	839	—
Residential mortgage		1,633	1,633	—	1,128	1,128	—
Construction		1,206	1,206	—	1,206	1,206	—
Total		6,820	6,899	—	5,736	5,862	—
Grand Total	$	11,194	11,407	1,916	10,380	10,558	1,645

The following table details the average recorded investment and interest income recognized on impaired loans by portfolio segment.


		Three Months Ended		Three Months Ended
		September 30, 2021		September 30, 2020
		Average	Interest	Average	Interest
		recorded	Income	recorded	Income
(dollars in thousands)		investment	Recognized	investment	Recognized
Impaired loans with related allowance:
Commercial and industrial	$	3,242	5	3,907	26
Small business loans		916	—	—	—
Home equity lines and loans		89	—	100	—
Residential mortgage		169	—	—	—
Total	$	4,416	5	4,007	26
Impaired loans without related allowance:
Commercial mortgage	$	2,573	8	2,080	47
Commercial and industrial		473	19	874	6
Small business loans		147	3	208	5
Home equity lines and loans		823	—	564	—
Residential mortgage		1,636	6	1,649	41
Construction		1,206	17	1,206	14
Total	$	6,858	53	6,581	113
Grand Total	$	11,274	58	10,588	139

		Nine Months Ended		Nine Months Ended
		September 30, 2021		September 30, 2020
		Average	Interest	Average	Interest
		recorded	Income	recorded	Income
(dollars in thousands)		investment	Recognized	investment	Recognized
Impaired loans with related allowance:
Commercial and industrial	$	3,306	15	1,766	36
Small business loans		917	—	—	—
Home equity lines and loans		92	—	103	—
Residential mortgage		170	—	—	—
Total	$	4,485	15	1,869	36

Impaired loans without related allowance:
Commercial mortgage	$	2,584	24	1,852	89
Commercial and industrial		485	19	700	14
Small business loans		161	11	220	16
Home equity lines and loans		824	—	575	—
Residential mortgage		1,640	9	1,478	133
Construction		1,206	47	1,209	46
Leases		53	—	—	—
Total	$	6,953	110	6,034	298
Grand Total	$	11,438	125	7,903	334

Troubled Debt Restructuring

The restructuring of a loan is considered a “troubled debt restructuring” (“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 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 September 30, 2021 and December 31, 2020 are as follows:


	September 30,		December 31,
(dollars in thousands)	2021		2020
TDRs included in nonperforming loans and leases	$	367	244
TDRs in compliance with modified terms		2,476	3,362
Total TDRs	$	2,843	3,606

There were no loan and lease modifications granted during the three and nine months ended September 30, 2021 and 1 loan and lease modification granted during the three and nine months ended September 30, 2020 that were categorized as a TDR. No loan and lease modifications granted during the three and nine months ended September 30, 2021 and 2020 subsequently defaulted during the same time period.

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 September 30, 2021. COVID-19 loan modifications provided to borrowers amounted to $24.9 million as of September 30, 2021, down from $26.9 million as of December 31, 2020. Loan modifications were $19.1 million as of September 30, 2020.

This provision of Section 4013 of the CARES Act 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 September 30, 2021 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.