Loans

12 Months Ended

Dec. 31, 2020

Loans The Company specializes in lending to business entities, non-profit organizations, professional practices, and individuals. The Company's primary lending focus is on the development of high-quality commercial relationships achieved through active business development efforts, long-term relationships with established commercial developers, strong community involvement and focused marketing strategies. Commercial loans may include commercial real estate mortgage loans, construction and land development loans, secured and unsecured commercial loans and lines of credit, and letters of credit. Consumer or "retail" loans include conventional residential mortgage loans, home equity loans and lines, residential construction loans on owner-occupied primary and secondary residences, and secured and unsecured personal loans and lines of credit. The Company manages its loan portfolio to avoid concentration by industry, relationship size and source of repayment to lessen its credit risk exposure.

See also Note 4, "Allowance for Loan Losses," to the Company's consolidated financial statements of this Form 10-K, 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 17, "Fair Value Measurements," to the Company's consolidated financial statements of this Form 10-K, contained below, for further information regarding the Company's fair value measurements for loans, and Note 9, "Derivatives and Hedging Activities," to these consolidated financial statements of this Form 10-K, contained below, for information regarding interest-rate swap agreements related to certain commercial loans. For additional information on unadvanced loans and lines, commitments to originate loans, letters of credit and commitments to originate loans for sale or to sell loans see Note 10, "Commitments, Contingencies and Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk" of this Form 10-K, contained below.

Loan Portfolio Classifications

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


(Dollars in thousands)	December 31, 2020		December 31, 2019
Commercial real estate	$	1,478,235	$	1,394,179
Commercial and industrial	435,660		501,227
Commercial construction	373,309		317,477
SBA paycheck protection program	453,084		—
Total commercial loans	2,740,288		2,212,883
Residential mortgages	252,971		247,373
Home equity loans and lines	85,006		98,252
Consumer	8,981		10,054
Total retail loans	346,958		355,679
Gross loans	3,087,246		2,568,562
Deferred loan origination fees, net	(3,372)		(3,103)
Deferred paycheck protection program fees	(10,014)		—
Total loans	3,073,860		2,565,459

Allowance for loan losses	(44,565)		(33,614)
Net loans	$	3,029,295	$	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 $77.1 million at December 31, 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.

Related Party Loans

Certain of the Company's directors, officers, principal stockholders, and their associates are credit customers of the Company in the ordinary course of business. In addition, certain directors are also directors, trustees, officers or stockholders of corporations and non-profit entities or members of partnerships that are customers of the Bank and that enter into loan and other transactions with the Bank in the ordinary course of business. All loans and commitments included in such transactions are on such terms, including interest rates, repayment terms and collateral, as those prevailing at the time for comparable transactions with persons who are not affiliated with the Bank and do not involve more than a normal risk of collectability or present other features unfavorable to the Bank.

As of December 31, 2020, and 2019, the outstanding loan balances to directors, officers, principal stockholders, and their associates were $48.7 million and $35.1 million, respectively. All loans to these related parties were current and accruing at those dates. Unadvanced portions of lines of credit available to these individuals were $23.2 million and $32.1 million, as of December 31, 2020 and 2019, respectively. During 2020, new loans and net increases in loan

balances or lines of credit under existing commitments of $16.1 million were made and principal paydowns of $11.4 million were received. During 2019, new loans and net increases in loan balances or lines of credit under existing commitments of $23.8 million were made and principal paydowns of $3.7 million were received.

Paycheck Protection Program ("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 designed to provide a direct incentive for small businesses to keep workers employed. Businesses may use PPP loan funds to pay payroll costs as well as to cover other eligible business expenses. In an effort to support our communities during the pandemic the Company began participating in the PPP in early April 2020, through the close of the application process in August 2020. PPP loans may be partially or fully forgiven by the SBA if the entity meets certain conditions. The PPP loans carry an interest rate of 1% to be 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, depending on the date of origination. Payments are generally deferred until the date the lender receives the applicable forgiveness amount plus interest from the SBA. Borrowers may submit a loan forgiveness application any time before the maturity date of the loan. All qualifying PPP loans are fully guaranteed by the SBA and are included in total loans outstanding. In the fourth quarter, the Company began to receive PPP loan forgiveness payments from the SBA and as of December 31, 2020, the Company had 2,633 PPP loans outstanding totaling $453.1 million.

In addition to generating interest income, the SBA pays lender’s fees for processing PPP loans. As of December 31, 2020, the Company had received $17.2 million in PPP related SBA fees and is accreting these fees into interest income over the life of the applicable loans. If a PPP loan is forgiven or paid off before maturity, the remaining unearned fee is recognized into income at that time. For the year ended December 31, 2020, the Company has recognized $7.2 million in PPP related SBA fees through accretion. The majority of the remaining $10.0 million in fees are expected to be recognized as the PPP loans are forgiven, which we expect to occur over the next several quarters.

Management believes the SBA PPP portfolio to be of minimal credit risk, the average loan size was approximately $180 thousand, and Management expects that, based on its due diligence at origination and in the forgiveness application process, the majority of balances will be forgiven, with any remaining balance guaranteed by the SBA. Management has segmented the PPP portfolio as a group of loans with similar risk characteristics in its assessment for loan losses.

Loans serviced for others

At December 31, 2020 and 2019, the Company was servicing residential mortgage loans owned by investors amounting to $13.7 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 $65.3 million and $80.2 million at December 31, 2020 and 2019, respectively. See the discussion above under the heading "Loan Portfolio Classifications" for further information regarding commercial participations.

Loans serving as collateral

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


(Dollars in thousands)	December 31, 2020		December 31, 2019
Commercial real estate	$	195,936	$	246,865
Residential mortgages	233,050		231,028
Home equity	5,971		7,676
Total loans pledged to FHLB	$	434,957	$	485,569

Tax-Exempt Interest

Tax-exempt interest earned on qualified commercial loans was $2.0 million for the year ended December 31, 2020, $2.1 million for the year ended December 31, 2019, and $2.3 million for the year ended and December 31, 2018.

Average tax-exempt loan balances were $58.0 million and $59.2 million for the years ended December 31, 2020 and 2019, respectively.