Loans

6 Months Ended

Jun. 30, 2020

The Company manages its loan portfolio to avoid concentration by industry, relationship size and source of repayment to lessen its credit risk exposure. For additional information on the Company's lending products, see the heading "Lending Products" under Item 1, "Business," contained in the Company's 2019 Annual Report on Form 10-K.

Loan Portfolio Classifications

Major classifications of loans at the dates indicated were as follows:



(Dollars in thousands)	June 30, 2020			December 31, 2019
Commercial real estate	$	1,471,586		$	1,394,179
Commercial and industrial	454,455			501,227
Commercial construction	404,008			317,477
SBA Paycheck Protection Program	505,557			—
Total commercial loans	2,835,606			2,212,883

Residential mortgages	261,786			247,373
Home equity	88,157			98,252
Consumer	9,174			10,054
Total retail loans	359,117			355,679

Gross loans	3,194,723			2,568,562
Deferred loan origination fees, net	(3,183		)	(3,103		)
Deferred PPP fees	(15,398		)	—
Total loans	3,176,142			2,565,459

Allowance for loan losses	(42,324		)	(33,614		)
Net loans	$	3,133,818		$	2,531,845

Commercial loans originated by other banks in which the Company is a participating institution are carried at the pro-rata share of ownership and amounted to $102.5 million at June 30, 2020 and $104.3 million at December 31, 2019. See also "Loans serviced for others" below for information related to commercial loans participated out to various other institutions.

Paycheck Protection Program (the "PPP")

The PPP was established by the CARES act and implemented by the Small Business Administration (“SBA”) with support from the Department of the Treasury. The PPP is a federally-guaranteed, low-interest rate loan program that is designed to provide a direct incentive for small businesses to keep workers on the payroll. Businesses may use PPP loan funds to pay up to eight weeks of payroll costs as well as to cover other eligible business expenses. PPP loans may be partially or fully forgiven by the SBA if the funds are used for eligible expenses during the relevant forgiveness period and the borrower meets the employee retention criteria. The PPP loans will carry an interest rate of 1% to paid by either the SBA, in the event of forgiveness, or by the borrower for the term of the loan, which may be 2 years or 5 years. The PPP loans that the SBA approved on or after June 5, 2020 will have a maturity date of 5 years. Payments for PPP loans are deferred until the SBA issues a forgiveness decision or ten months after the end of the forgiveness period if the borrower fails to apply for forgiveness. All PPP loans are fully guaranteed by the SBA and are included in total loans outstanding. As of June 30, 2020, the Company had funded 2,636 PPP loans totaling $505.6 million.

In addition to generating interest income, the SBA pays a lender’s fees for processing PPP loans. As of June 30, 2020, the Company has recorded $17.0 million in PPP-related SBA processing fees "PPP fees" and is accreting these deferred fees into interest income over the life of the applicable loans. If a PPP loan is forgiven or paid off before maturity, the remaining deferred fee is realized into interest-income at that time. During the quarter, the Company recognized $1.6 million in PPP fees.

Loans serviced for others

At June 30, 2020 and December 31, 2019, the Company was servicing residential mortgage loans owned by investors amounting to $15.9 million and $15.7 million, respectively. Additionally, the Company was servicing commercial loans originated by the Company and participated out to various other institutions amounting to $78.0 million and $80.2 million at June 30, 2020 and December 31, 2019, respectively.

Loans serving as collateral

Loans designated as qualified collateral and pledged to the FHLB for borrowing capacity as of the dates indicated are summarized below:



(Dollars in thousands)	June 30, 2020		December 31, 2019
Commercial real estate	$	224,432	$	246,865
Residential mortgages	236,653		231,028
Home equity	7,380		7,676
Total loans pledged to FHLB	$	468,465	$	485,569

See also Note 4, "Allowance for Loan Losses," of this Form 10-Q, contained below, for information on the Company's credit risk management, non-accrual, impaired and troubled debt restructured loans and the allowance for loan losses. See Note 8, "Derivatives and Hedging Activities," of this Form 10-Q, contained below, for information regarding interest-rate swap agreements related to certain commercial loans, and see Note 14, "Fair Value Measurements," of this Form 10-Q, contained below, for further information regarding the Company's fair value measurements for loans.