On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated probable credit losses. The Company uses a systematic methodology to measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology makes use of specific reserves for loans individually evaluated and deemed impaired, and general reserves for larger pools of homogeneous loans, which are collectively evaluated relying on a combination of qualitative and quantitative factors that may affect credit quality of the pool.

There have been no material changes to the Company's underwriting practices, credit risk management system, or to the allowance assessment methodology used to estimate loan loss exposure but due to the economic uncertainty from the pandemic, management has strengthened risk management over new originations and existing credits. See Note 4, "Allowance for Loan Losses," to the Company's audited consolidated financial statements contained the 2019 Annual Report on Form 10-K.

The Company has elected to delay the adoption of CECL in accordance with the CARES Act, which allows Companies to delay adoption until the earlier of: (1) the date on which the national emergency concerning the pandemic declared under the National Emergencies Act terminates; or (2) December 31, 2020. The information that follows is presented under the incurred loss model.



(Dollars in thousands)	Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Gross Loans
Commercial real estate	$	14,310	$	1,457,276	$	1,471,586
Commercial and industrial	9,513		444,942		454,455
Commercial construction	8,294		395,714		404,008
SBA PPP loans	—		505,557		505,557
Residential mortgages	888		260,898		261,786
Home equity	473		87,684		88,157
Consumer	39		9,135		9,174
Total gross loans	$	33,517	$	3,161,206	$	3,194,723



(Dollars in thousands)	Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Gross Loans
Commercial real estate	$	17,515	$	1,376,664	$	1,394,179
Commercial and industrial	9,332		491,895		501,227
Commercial construction	3,347		314,130		317,477
Residential mortgages	1,229		246,144		247,373
Home equity	411		97,841		98,252
Consumer	44		10,010		10,054
Total gross loans	$	31,878	$	2,536,684	$	2,568,562

Early detection of credit issues is critical to minimize credit losses. Accordingly, management regularly monitors internal credit quality indicators such as, among others, the risk classification of adversely classified loans, past due and non-accrual loans, impaired and restructured loans, and the level of foreclosure activity. These credit quality indicators are discussed below.

The Company's loan risk rating system classifies loans depending on risk of loss characteristics. The classifications range from "substantially risk free" for the highest quality loans and loans that are secured by cash collateral, through a satisfactory range of "minimal," "moderate," "better than average," and "average" risk, to the regulatory problem-asset classifications of "criticized," for loans that may need additional monitoring, and the more severe adverse classifications of "substandard," "doubtful," and "loss" based on criteria established under banking regulations. Loans which are evaluated to be of weaker credit quality are placed on the "watch credit list" and reviewed on a more frequent basis by management.



	June 30, 2020
	Adversely Classified						Not Adversely
(Dollars in thousands)	Substandard		Doubtful		Loss		Classified		Gross Loans
Commercial real estate	$	18,311	$	—	$	—	$	1,453,275	$	1,471,586
Commercial and industrial	9,872		2,452		—		442,131		454,455
Commercial construction	8,798		—		—		395,210		404,008
SBA PPP loans	—		—		—		505,557		505,557
Residential mortgages	983		—		—		260,803		261,786
Home equity	556		—		—		87,601		88,157
Consumer	61		—		—		9,113		9,174
Total gross loans	$	38,581	$	2,452	$	—	$	3,153,690	$	3,194,723



	December 31, 2019
	Adversely Classified						Not Adversely
(Dollars in thousands)	Substandard		Doubtful		Loss		Classified		Gross Loans
Commercial real estate	$	16,664	$	—	$	—	$	1,377,515	$	1,394,179
Commercial and industrial	10,900		2,370		—		487,957		501,227
Commercial construction	4,836		—		—		312,641		317,477
Residential mortgages	1,825		—		—		245,548		247,373
Home equity	455		—		—		97,797		98,252
Consumer	69		3		—		9,982		10,054
Total gross loans	$	34,749	$	2,373	$	—	$	2,531,440	$	2,568,562



	Balance at June 30, 2020
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 days or more		Total Past Due Loans		Current Loans		Gross Loans		Non-accrual Loans
Commercial real estate	$	3,375	$	2,282	$	4,382	$	10,039	$	1,461,547	$	1,471,586	$	8,789
Commercial and industrial	345		602		1,074		2,021		452,434		454,455		5,549
Commercial construction	—		—		5,295		5,295		398,713		404,008		5,801
SBA PPP loans	—		—		—		—		505,557		505,557		—
Residential mortgages	674		—		—		674		261,112		261,786		473
Home equity	—		—		254		254		87,903		88,157		705
Consumer	20		15		—		35		9,139		9,174		18
Total gross loans	$	4,414	$	2,899	$	11,005	$	18,318	$	3,176,405	$	3,194,723	$	21,335



	Balance at December 31, 2019
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 days or more		Total Past Due Loans		Current Loans		Gross Loans		Non-accrual Loans
Commercial real estate	$	1,469	$	3,914	$	4,158	$	9,541	$	1,384,638	$	1,394,179	$	8,280
Commercial and industrial	576		1,034		265		1,875		499,352		501,227		3,285
Commercial construction	576		3,325		1,735		5,636		311,841		317,477		1,735
Residential mortgages	700		283		623		1,606		245,767		247,373		411
Home equity	645		—		169		814		97,438		98,252		1,040
Consumer	12		—		6		18		10,036		10,054		20
Total gross loans	$	3,978	$	8,556	$	6,956	$	19,490	$	2,549,072	$	2,568,562	$	14,771

At June 30, 2020 and December 31, 2019, all loans past due 90 days or more were carried as non-accrual, in addition to those loans that were less than 90 days past due where reasonable doubt existed as to the full and timely collection of interest or principal that have also been designated as non-accrual, despite their payment due status shown in the tables above.

Non-accrual loans that were not adversely classified amounted to $58 thousand at June 30, 2020 and $84 thousand at December 31, 2019. These balances primarily represented the guaranteed portions of non-performing SBA loans. The majority of the non-accrual loan balances were also carried as impaired loans during the periods noted and are discussed further below.

Impaired loans are individually significant loans for which management considers it probable that not all amounts due (principal and interest) will be collected in accordance with the original contractual terms. Impaired loans include loans that have been modified in a TDR, see "Troubled Debt Restructurings" below. Impaired loans are individually evaluated and exclude large groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated for impairment, and loans that are measured at fair value, unless the loan is amended in a TDR.

The carrying value of impaired loans amounted to $33.5 million and $31.9 million at June 30, 2020 and December 31, 2019, respectively. Total accruing impaired loans amounted to $12.2 million and $17.1 million at June 30, 2020 and December 31, 2019, respectively, while non-accrual impaired loans amounted to $21.3 million and $14.8 million as of June 30, 2020 and December 31, 2019, respectively.



	Balance at June 30, 2020
(Dollars in thousands)	Unpaid contractual principal balance		Total recorded investment in impaired loans		Recorded investment with no allowance		Recorded investment with allowance		Related specific allowance
Commercial real estate	$	15,410	$	14,310	$	13,816	$	494	$	37
Commercial and industrial	11,557		9,513		5,533		3,980		2,351
Commercial construction	8,333		8,294		6,263		2,031		1,440
SBA PPP loans	—		—		—		—		—
Residential mortgages	996		888		888		—		—
Home equity	657		473		473		—		—
Consumer	40		39		—		39		39
Total	$	36,993	$	33,517	$	26,973	$	6,544	$	3,867



	Balance at December 31, 2019
(Dollars in thousands)	Unpaid contractual principal balance		Total recorded investment in impaired loans		Recorded investment with no allowance		Recorded investment with allowance		Related specific allowance
Commercial real estate	$	18,537	$	17,515	$	17,129	$	386	$	31
Commercial and industrial	11,455		9,332		7,405		1,927		974
Commercial construction	3,359		3,347		3,347		—		—
Residential mortgages	1,331		1,229		1,229		—		—
Home equity	607		411		411		—		—
Consumer	44		44		—		44		44
Total	$	35,333	$	31,878	$	29,521	$	2,357	$	1,049



	Three months ended June 30, 2020					Three months ended June 30, 2019
(Dollars in thousands)	Average recorded investment		Interest income recognized			Average recorded investment		Interest income recognized
Commercial real estate	$	14,289	$	70		$	16,425	$	122
Commercial and industrial	8,664		40			11,474		94
Commercial construction	7,674		5			1,738		27
SBA PPP loans	—		—			—		—
Residential mortgages	898		2			939		17
Home equity	419		(1		)	436		—
Consumer	41		1			24		(1		)
Total	$	31,985	$	117		$	31,036	$	259



	Six months ended June 30, 2020					Six months ended June 30, 2019
(Dollars in thousands)	Average recorded investment		Interest income recognized			Average recorded investment		Interest income recognized
Commercial real estate	$	14,781	$	142		$	16,114	$	242
Commercial and industrial	8,236		68			11,696		209
Commercial construction	6,215		5			1,736		52
SBA PPP loans	—		—			—		—
Residential mortgages	1,059		4			914		18
Home equity	410		(1		)	472		—
Consumer	41		1			21		(1		)
Total	$	30,742	$	219		$	30,953	$	520

Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the Company grants the borrower a concession on the terms that would not otherwise be considered. Typically, such concessions may consist of one or a combination of the following: a reduction in interest rate to a below market rate, taking into account the credit quality of the note; extension of additional credit based on receipt of adequate collateral; or a deferment or reduction of payments (principal or interest) which materially alters the Company's position or significantly extends the note's maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan's origination. All loans that are modified are reviewed by the Company to identify if a TDR has occurred. TDR loans are included in the impaired loan category and, as such, these loans are individually reviewed and evaluated, and a specific reserve is assigned for the amount of the estimated probable credit loss.

Total TDR loans, included in the impaired loan balances above, as of June 30, 2020 and December 31, 2019, were $19.3 million and $21.1 million, respectively. TDR loans on accrual status amounted to $12.2 million and $17.1 million at June 30, 2020 and December 31, 2019, respectively. TDR loans included in non-performing loans amounted to $7.1 million at June 30, 2020 and $4.0 million at December 31, 2019. The Company continues to work with customers and enters into loan modifications (which may or may not be TDRs) to the extent deemed to be necessary or appropriate while attempting to achieve the best mutual outcome given the individual financial circumstances and future prospects of the borrower.

The following table sets forth the post modification balances of TDRs listed by type of modification for TDRs that occurred during the periods indicated:



	Six months ended
	June 30, 2020			June 30, 2019
(Dollars in thousands)	Number of restructurings	Amount		Number of restructurings	Amount
Extended maturity date	2	$	1,743	—	$	—
Temporary payment reduction and payment re-amortization of remaining principal over extended term	2	975		7	89
Temporary interest only payment plan	—	—		2	395
Forbearance of post default rights	4	2,509		—	—
Other payment concessions	—	—		3	1,759
Total	8	$	5,227	12	$	2,243
Amount of specific reserves included in the allowance for loan losses associated with TDRs listed above		$	1,320		$	89



	Three months ended
	June 30, 2020					June 30, 2019
(Dollars in thousands)	Number of restructurings	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Number of restructurings	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
Commercial real estate	—	$	—	$	—	2	$	1,626	$	1,626
Commercial and industrial	—	—		—		2	212		216
Commercial construction	2	1,314		1,518		—	—		—
SBA PPP loans	—	—		—		—	—		—
Residential mortgages	—	—		—		—	—		—
Home equity loans and lines	—	—		—		—	—		—
Consumer	—	—		—		1	6		6
Total	2	$	1,314	$	1,518	5	$	1,844	$	1,848



	Three months ended
	June 30, 2020
(Dollars in thousands)	Number of TDRs that defaulted	Post- modification outstanding recorded investment
Commercial real estate	—	$	—
Commercial and industrial	2	64
Commercial construction	—	—
SBA PPP loans	—	—
Residential mortgages	—	—
Home equity loans and lines	—	—
Consumer	—	—
Total	2	$	64



	Six months ended
	June 30, 2020					June 30, 2019
(Dollars in thousands)	Number of restructurings	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Number of restructurings	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
Commercial real estate	—	$	—	$	—	3	$	2,047	$	1,626
Commercial and industrial	1	474		402		7	406		299
Commercial construction	6	4,754		4,825		—	—		—
SBA PPP loans	—	—		—		—	—		—
Residential mortgages	—	—		—		1	315		312
Home equity	—	—		—		—	—		—
Consumer	1	1		—		1	6		6
Total	8	$	5,229	$	5,227	12	$	2,774	$	2,243



	Six months ended
	June 30, 2020			June 30, 2019
(Dollars in thousands)	Number of TDRs that defaulted	Post- modification outstanding recorded investment		Number of TDRs that defaulted	Post- modification outstanding recorded investment
Commercial real estate	—	$	—	—	$	—
Commercial and industrial	2	64		2	172
Commercial construction	2	1,743		—	—
SBA PPP loans	—	—		—	—
Residential mortgages	—	—		—	—
Home equity	—	—		—	—
Consumer	—	—		—	—
Total	4	$	1,807	2	$	172

See "Financial Condition" in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the headings "Credit Risk" and "Allowance for Loan Losses" in this Form 10-Q for additional information about changes in the Company's credit quality indicators since December 31, 2019.

The allowance for loan losses is an estimate of probable credit losses inherent in the loan portfolio as of the specified balance sheet dates. On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated probable credit losses. The Company maintains the allowance at a level that it deems adequate to absorb all reasonably anticipated probable losses from specifically known and other credit risks associated with the portfolio. The allowance for loan losses is established through a provision for loan losses, a direct charge to earnings. Loan losses are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance.

The allowance for loan losses amounted to $42.3 million at June 30, 2020, compared to $33.6 million at December 31, 2019, and $34.4 million at June 30, 2019. The allowance for loan losses to total loans ratio was 1.33% at June 30, 2020, 1.31% at December 31, 2019, and 1.42% at June 30, 2019. Based on management's judgment as to the existing credit risks inherent in the loan portfolio, as discussed above under the heading "Credit Quality Indicators," management believes that the Company's allowance for loan losses is adequate to absorb probable losses from specifically known and other probable credit risks associated with the portfolio as of June 30, 2020.

For the six months ended June 30, 2020, the provision for loan losses amounted to $8.8 million, compared to $555 thousand for the six months ended June 30, 2019. The provision for the six months ended June 30, 2020 consisted of $5.2 million in general reserve factor increases related primarily to economic weakness caused by the pandemic and its impact on credit quality in the loan portfolio, $2.3 million related to classified and impaired loans and $1.3 million related to loan growth and other factors.



(Dollars in thousands)	Cmml Real Estate		Cmml and Industrial			Cmml Constr		Resid. Mortgage		Home Equity			Consumer			Total
Beginning Balance at March 31, 2020	$	20,861	$	10,235		$	6,161	$	1,598	$	636		$	273		$	39,764
Provision	1,616		(345		)	1,337		130		(26		)	(37		)	2,675
Recoveries	—		67			—		—		3			15			85
Less: Charge offs	—		194			—		—		—			6			200
Ending Balance at June 30, 2020	$	22,477	$	9,763		$	7,498	$	1,728	$	613		$	245		$	42,324



(Dollars in thousands)	Cmml Real Estate		Cmml and Industrial		Cmml Constr		Resid. Mortgage		Home Equity		Consumer			Total
Beginning Balance at December 31, 2019	$	18,338	$	9,129	$	4,149	$	1,195	$	536	$	267		$	33,614
Provision	4,139		759		3,349		533		71		(29		)	8,822
Recoveries	—		174		—		—		6		25			205
Less: Charge offs	—		299		—		—		—		18			317
Ending Balance at June 30, 2020	$	22,477	$	9,763	$	7,498	$	1,728	$	613	$	245		$	42,324
Ending allowance balance:
Allocated to loans individually evaluated for impairment	$	37	$	2,351	$	1,440	$	—	$	—	$	39		$	3,867
Allocated to loans collectively evaluated for impairment	$	22,440	$	7,412	$	6,058	$	1,728	$	613	$	206		$	38,457



(Dollars in thousands)	Cmml Real Estate		Cmml and Industrial		Cmml Constr		Resid. Mortgage		Home Equity			Consumer		Total
Beginning Balance at March 31, 2019	$	17,826	$	10,403	$	3,452	$	1,184	$	627		$	237	$	33,729
Provision	2		647		265		3		(1		)	39		955
Recoveries	—		140		—		—		3			8		151
Less: Charge offs	—		459		—		—		—			25		484
Ending Balance at June 30, 2019	$	17,828	$	10,731	$	3,717	$	1,187	$	629		$	259	$	34,351



(Dollars in thousands)	Cmml Real Estate			Cmml and Industrial		Cmml Constr		Resid. Mortgage		Home Equity			Consumer		Total
Beginning Balance at December 31, 2018	$	18,014		$	10,493	$	3,307	$	1,160	$	629		$	246	$	33,849
Provision	(186		)	241		410		27		(5		)	68		555
Recoveries	—			456		—		—		5			13		474
Less: Charge offs	—			459		—		—		—			68		527
Ending Balance at June 30, 2019	$	17,828		$	10,731	$	3,717	$	1,187	$	629		$	259	$	34,351
Ending allowance balance:
Allocated to loans individually evaluated for impairment	$	5		$	2,307	$	—	$	5	$	—		$	32	$	2,349
Allocated to loans collectively evaluated for impairment	$	17,823		$	8,424	$	3,717	$	1,182	$	629		$	227	$	32,002

Real estate acquired by the Company through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as OREO. When property is acquired, it is recorded at estimated fair value of the property acquired, less estimated costs to sell, establishing a new cost basis and carried on the Consolidated Balance Sheet in the line item "Prepaid expenses and other assets." The estimated fair value is based on market appraisals and the Company's internal analysis. Any loan balance in excess of the estimated realizable fair value on the date of transfer is charged to the allowance for loan losses on that date. All costs incurred thereafter in maintaining the property, as well as subsequent declines in fair value are charged to non-interest expense.

The Company had no OREO at June 30, 2020 or December 31, 2019, and the OREO carrying value at June 30, 2019 was $255 thousand. There were no OREO additions during the six months ended June 30, 2020 and one addition during the six months ended June 30, 2019. There were no sales, or subsequent write downs of OREO during the six months ended June 30, 2020 or 2019.

At both June 30, 2020 and December 31, 2019, the Company had no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdictions.