Inherent in the lending process is the risk of loss due to customer non-payment, or "credit risk." The Company's commercial lending focus may entail significant additional credit risks compared to long-term financing on existing, owner-occupied residential real estate. The Company seeks to lessen its credit risk exposure by managing its loan portfolio to avoid concentration by industry, relationship size and source of repayment, and through sound underwriting practices and the credit risk management function; however, management recognizes that loan losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio and economic conditions.

In making its assessment on the adequacy of the allowance, management considers several quantitative and qualitative factors that could have an effect on the credit quality of the portfolio including: the risk classification of individual loans; individual review of larger and higher risk problem assets; the level of delinquent loans and non-performing loans; impaired and restructured loans; the level of foreclosure activity; net charge-offs; commercial concentrations by industry and property type and by real estate location; the growth and composition of the loan portfolio; as well as trends in the general levels of these indicators. In addition, management monitors expansion in geographic market area, the experience level of lenders and any changes in underwriting criteria, the strength of the local and national economy, including general conditions in the multi-family, commercial real estate and development and construction markets in the Company's local region.

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.

When a loan is deemed to be impaired, management estimates the credit loss by comparing the loan's carrying value against either (i) the present value of the expected future cash flows discounted at the loan's effective interest rate; (ii) the loan's observable market price; or (iii) the expected realizable fair value of the collateral, in the case of collateral dependent loans. A specific allowance is assigned to the impaired loan for the amount of estimated credit loss. Impaired loans are charged-off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.

In assessing the general reserves management has segmented the portfolio for groups of loans with similar risk characteristics, by I. Non-adversely classified loans, and II. Regulatory problem-asset segments. These groups are further subdivided by loan category or internal risk rating, respectively. The general loss allocation factors take into account the quantitative historic loss experience, qualitative or environmental factors such as those identified above, as well as regulatory guidance and industry data.

Management has established the modified historic loss factor for non-adversely classified loan segments by first calculating net charge-offs over a period of time, divided by the average loan balance over that same period. The time period utilized equates to the estimated loss emergence period for each loan segment. This average period may be changed from time to time to be reflective of the most appropriate corresponding conditions (market, economic, etc.). These historic loss factors are then adjusted up or down based on management's assessment of current qualitative factors that are likely to cause estimated credit losses as of the evaluation date to differ from the segment's historical loss experience. These key qualitative factors include the following broad categories:

Management weighs the current effect of each of these areas on each particular non-adversely classified loan segment in determining the allowance allocation factors. Management must exercise significant judgment when evaluating the effect of these qualitative factors on the amount of the allowance for loan losses on the non-adversely classified segments because data may not be reasonably available or directly applicable to determine the precise impact of a factor on the collectability of the loan portfolio as of the evaluation date. The methodology contemplates a range of acceptable levels for these factors due to the subjective nature of the factors and the qualitative considerations related to the inherent credit risk in the portfolio.

For determining the reserve percentages for problem-loans, management has segmented the portfolio following the regulatory problem-asset segments by risk rating: Criticized; Substandard; Doubtful; or Loss, after excluding loans that are individually evaluated for impairment. The modified historic loss factor for problem loan segments was determined by first tracking a sampling of these loans over a period of time, to determine the ultimate resolution. Those balances resulting in charge-offs were calculated as a percentage of the segment's loan balance and an average was calculated over that same period. This average period may be changed from time to time to be reflective of the most appropriate corresponding conditions (market, economic, etc.). These historic loss factors are then adjusted up or down based on management's assessment of current qualitative factors that are likely to cause estimated credit losses as of the evaluation date to differ from the segment's historical loss experience. Management also utilizes regulatory guidance and industry data in relation to the Company's own portfolio statistics as a basis for assessing the reasonableness of the allocation factors for each class of regulatory problem-assets.

Management recognizes that additional issues may also impact the estimate of credit losses to some degree. From time to time management will re-evaluate the qualitative factors, regulatory guidance, and industry data in use in order to consider the impact of other issues which, based on changing circumstances, may become more significant in the future.


(Dollars in thousands)	Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Gross Loans
Commercial real estate	$	35,915	$	1,442,320	$	1,478,235
Commercial and industrial	8,409		427,251		435,660
Commercial construction	2,999		370,310		373,309
SBA paycheck protection program	—		453,084		453,084
Residential mortgages	596		252,375		252,971
Home equity	381		84,625		85,006
Consumer	18		8,963		8,981
Total gross loans	$	48,318	$	3,038,928	$	3,087,246


(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

As noted above, the credit risk management function focuses on a wide variety of factors and early detection of credit issues is critical to minimize credit losses. Accordingly, management regularly monitors these factors, among others, through ongoing credit reviews by the Credit Department, an external loan review service, reviews by members of senior management as well as reviews by the Loan Committee and the Board. This review includes the assessment of 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.

Loans classified as substandard include those loans characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. These loans are inadequately protected by the sound net worth and paying capacity of the borrower; repayment has become increasingly reliant on collateral liquidation or reliance on

Loans classified as doubtful have all the weaknesses inherent in a substandard rated loan with the added characteristic that the weaknesses make collection or full payment from liquidation, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until more exact status may be determined.


	December 31, 2020
(Dollars in thousands)	Adversely Classified						Not Adversely Classified		Gross Loans
	Substandard		Doubtful		Loss
Commercial real estate	$	40,088	$	197	$	—	$	1,437,950	$	1,478,235
Commercial and industrial	7,901		2,293		—		425,466		435,660
Commercial construction	3,501		—		—		369,808		373,309
SBA paycheck protection program	—		—		—		453,084		453,084
Residential mortgages	474		—		—		252,497		252,971
Home equity	381		—		—		84,625		85,006
Consumer	41		—		—		8,940		8,981
Total gross loans	$	52,386	$	2,490	$	—	$	3,032,370	$	3,087,246


	December 31, 2019
(Dollars in thousands)	Adversely Classified						Not Adversely Classified		Gross Loans
	Substandard		Doubtful		Loss
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

Loans on which the accrual of interest has been discontinued are designated as non-accrual and the classified portions are credit downgraded to one of the adversely classified categories noted above. Accrual of interest on loans is generally discontinued when a loan becomes contractually past due, with respect to interest or principal, by 90 days, or when reasonable doubt exists as to the full and timely collection of interest or principal. Interest payments received on loans in a non-accrual status are generally applied to principal on the books of the Company. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when payments are brought current and have remained current for a period of 180 days and when, in the judgment of management, the collectability of both principal and interest is reasonably assured.


	Balance at December 31, 2020
(Dollars in thousands)	Past Due 30-59 Days		Past Due 60-89 Days		Past Due 90 Days or More		Total Past Due Loans		Current Loans		Gross Loans		Non-accrual Loans
Commercial real estate	$	6,105	$	499	$	5,592	$	12,196	$	1,466,039	$	1,478,235	$	29,680
Commercial and industrial	417		13		607		1,037		434,623		435,660		4,574
Commercial construction	13,466		—		1,351		14,817		358,492		373,309		2,999
SBA paycheck protection program	—		—		—		—		453,084		453,084		—
Residential mortgages	890		—		290		1,180		251,791		252,971		414
Home equity	—		—		255		255		84,751		85,006		381
Consumer	2		1		—		3		8,978		8,981		2
Total loans	$	20,880	$	513	$	8,095	$	29,488	$	3,057,758	$	3,087,246	$	38,050


	Balance at December 31, 2019
(Dollars in thousands)	Past Due 30-59 Days		Past Due 60-89 Days		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 December 31, 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 $137 thousand at December 31, 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.

The Company's obligation to fulfill the additional funding commitments on impaired loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion. At December 31, 2020, additional funding commitments for non-accrual loans were not material.

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.

Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Management considers the individual payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. An impaired or TDR loan classification will be considered for upgrade based on the borrower's sustained performance over time and their improving financial condition. Consistent with the criteria for returning non-accrual loans to accrual status, the borrower must demonstrate the ability to continue to service the loan in accordance with the original or modified terms and, in the judgment of management, the collectability of the remaining balances, both principal and interest, are reasonably assured. In the case of TDR loans having had a modified interest rate, that rate must be at, or greater than, a market rate for a similar credit at the time of modification for an upgrade to be considered.

Impaired loans are individually evaluated for credit loss and a specific allowance reserve is assigned for the amount of the estimated probable credit loss. Refer to heading "Allowance for probable loan losses methodology" contained within this Note 4 of this Form 10-K for further discussion of management's methodology used to estimate specific reserves for impaired loans.

The carrying value of impaired loans amounted to $48.3 million and $31.9 million at December 31, 2020 and December 31, 2019, respectively. Total accruing impaired loans amounted to $10.3 million and $17.1 million at December 31, 2020 and December 31, 2019, respectively, while non-accrual impaired loans amounted to $38.0 million and $14.8 million as of December 31, 2020 and December 31, 2019, respectively.


	Balance at December 31, 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	$	37,184	$	35,915	$	14,728	$	21,187	$	3,454
Commercial and industrial	10,628		8,409		4,696		3,713		2,713
Commercial construction	3,668		2,999		2,999		—		—
SBA paycheck protection program	—		—		—		—		—
Residential mortgages	699		596		596		—		—
Home equity	539		381		381		—		—
Consumer	18		18		—		18		18
Total	$	52,736	$	48,318	$	23,400	$	24,918	$	6,185


	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


	December 31, 2020				December 31, 2019				December 31, 2018
(Dollars in thousands)	Average recorded investment		Interest income (loss) recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial real estate	$	19,606	$	138	$	17,033	$	509	$	13,971	$	385
Commercial and industrial	8,639		168		11,135		385		11,801		373
Commercial construction	5,991		22		2,158		81		1,691		93
SBA paycheck protection program	—		—		—		—		—		—
Residential mortgages	854		8		1,024		18		644		—
Home equity	410		(1)		447		—		498		—
Consumer	36		2		28		—		56		—
Total	$	35,536	$	337	$	31,825	$	993	$	28,661	$	851

All payments received on impaired loans in non-accrual status are applied to principal. Interest income that was not recognized on loans that were deemed impaired as of December 31, 2020, 2019 and 2018, amounted to $1.4 million, $1.0 million, and $1.1 million, respectively. At December 31, 2020, additional funding commitments for impaired loans was not material. The Company's obligation to fulfill the additional funding commitments on impaired loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion.

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 Bank 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 Bank'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.

Section 4013 of the CARES Act provides financial institutions the option to suspend the application of GAAP to any loan modification related to COVID-19 from treatment as a TDR for the period between March 1, 2020 and the earlier of (i) 60 days after the end of the national emergency proclamation or (ii) January 1, 2022 (as amended by the Consolidated Appropriations Act of 2021). A financial institution may elect to suspend GAAP only for a loan that was not more than 30 days past due as of December 31, 2019. In addition, the temporary suspension of GAAP does not apply to any adverse impact on the credit of a borrower that is not related to COVID-19. The suspension of GAAP is applicable for the entire term of the modification, including an interest rate modification, a forbearance agreement, a repayment plan, or other agreement that defers or delays the payment of principal and/or interest. Accordingly, a financial institution that elects to suspend GAAP should not be required to increase its reported TDRs at the end of the period of relief, unless the loans require further modification after the expiration of that period.

In the first quarter of 2020, the Company, in accordance with the provisions of the CARES Act, suspended TDR accounting for certain short-term loan modifications. This election primarily impacts financial statement disclosure, for loans that have had a short-term payment deferral since March 1, 2020 as long as those loans were current and risk rated as “pass” as of December 31, 2019.

Total TDR loans, included in the impaired loan balances above, as of December 31, 2020 and December 31, 2019, were $17.7 million and $21.1 million, respectively. TDR loans on accrual status amounted to $10.3 million and $17.1 million at December 31, 2020 and December 31, 2019, respectively. TDR loans included in non-performing loans amounted to $7.5 million and $4.0 million at December 31, 2020 and December 31, 2019, respectively. 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.

At December 31, 2020, additional funding commitments for TDR loans was not material. The Company's obligation to fulfill the additional funding commitments on TDR loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion.


	December 31, 2020					December 31, 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	$	1,858	$	1,838	3	$	2,047	$	1,620
Commercial and industrial	5	976		344		11	505		319
Commercial construction	6	4,754		2,765		—	—		—
SBA paycheck protection program	—	—		—		—	—		—
Residential mortgages	—	—		—		1	315		311
Home equity	1	167		167		—	—		—
Consumer	1	1		—		3	34		31
Total	16	$	7,756	$	5,114	18	$	2,901	$	2,281


	December 31, 2020			December 31, 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	3	$	1,838	1	$	1,400
Commercial and industrial	2	172		3	79
Commercial construction	4	1,798		—	—

Residential mortgages	—	—		1	311
Home equity	1	168		—	—
Consumer	—	—		1	4
Total	10	$	3,976	6	$	1,794


	December 31, 2020			December 31, 2019
(Dollars in thousands)	Number of restructurings	Amount		Number of restructurings	Amount

Extended maturity date	2	$	150	—	$	—
Temporary payment reduction and payment re-amortization of remaining principal over extended term	10	3,316		10	112
Temporary interest-only payment plan	—	—		4	400
Forbearance of post default rights	4	1,648
Other payment concessions	—	—		4	1,769
Total	16	$	5,114	18	$	2,281
Amount of specific reserves included in the allowance for loan losses associated with TDRs listed above		$	386		$	320

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

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 $44.6 million at December 31, 2020, compared to $33.6 million at December 31, 2019. The allowance for loan losses to total loans ratio was 1.45% at December 31, 2020, compared to 1.31% at December 31, 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 December 31, 2020.


(Dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Residential Mortgage		Home Equity		Consumer		Total
Beginning Balance	$	18,338	$	9,129	$	4,149	$	1,195	$	536	$	267	$	33,614
Provision	8,417		683		3,280		335		(114)		(102)		12,499
Recoveries	—		265		—		—		45		36		346
Less: Charge-offs	—		561		1,300		—		—		33		1,894
Ending Balance	$	26,755	$	9,516	$	6,129	$	1,530	$	467	$	168	$	44,565

Ending allowance balance:
Allocated to loans individually evaluated for impairment	$	3,454	$	2,713	$	—	$	—	$	—	$	18	$	6,185
Allocated to loans collectively evaluated for impairment	$	23,301	$	6,803	$	6,129	$	1,530	$	467	$	150	$	38,380


(Dollars in thousands)	Commercial Real Estate		Cmml and Industrial		Commercial Construction		Residential Mortgage		Home Equity		Consumer		Total
Beginning Balance	$	18,014	$	10,493	$	3,307	$	1,160	$	629	$	246	$	33,849
Provision	324		(29)		842		35		(102)		110		1,180
Recoveries	—		734		—		—		9		35		778
Less: Charge-offs	—		2,069		—		—		—		124		2,193
Ending Balance	$	18,338	$	9,129	$	4,149	$	1,195	$	536	$	267	$	33,614

Ending allowance balance:
Allocated to loans individually evaluated for impairment	$	31	$	974	$	—	$	—	$	—	$	44	$	1,049
Allocated to loans collectively evaluated for impairment	$	18,307	$	8,155	$	4,149	$	1,195	$	536	$	223	$	32,565

The Company carried no OREO at December 31, 2020 or December 31, 2019. During the year ended December 31, 2020, there were no additions or sales of OREO. During the year ended December 31, 2019, there was one addition to and subsequent sale of OREO. For the years ended December 31, 2020, 2019 and 2018, there were no write downs of OREO.