ALLOWANCE FOR LOAN LOSSES

An allowance for loan losses is maintained to absorb probable incurred losses from the loan portfolio. The allowance for loan losses is based on management's continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of nonaccrual loans.

The Company established an allowance for loan losses associated with PCI loans (accounted for under ASC 310-30) based on credit deterioration subsequent to the acquisition date. As of March 31, 2020, the Company had six PCI loan pools and 16 non-pooled PCI loans. The Company re-estimates cash flows expected to be collected for PCI loans on a semi-annual basis, with any decline in expected cash flows recorded as provision for loan losses on a discounted basis during the period. For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield to be recognized on a prospective basis over the loan's remaining life.

For loans not accounted for under ASC 310-30, the Company individually evaluates certain impaired loans on a quarterly basis and establishes specific allowances for such loans, if required. A loan is considered impaired when it is probable that interest or principal payments will not be made in accordance with the contractual terms of the loan agreement. Consistent with this definition, all loans for which the accrual of interest has been discontinued (nonaccrual loans) and all TDRs are considered impaired. The Company individually evaluates nonaccrual loans with book balances of $250 thousand or more, all loans whose terms have been modified in a TDR, and certain other loans. The threshold for individual evaluation is revised on an infrequent basis, generally when economic circumstances significantly change. Specific allowances for impaired loans are estimated using one of several methods, including the estimated fair value of underlying collateral, observable market value of similar debt or discounted expected future cash flows. All other impaired loans are individually evaluated by identifying its risk characteristics and applying the standard reserve factor for the corresponding loan pool.

Loans which do not meet the criteria to be individually evaluated are evaluated in pools of loans with similar risk characteristics. Business loans are assigned to pools based on the Company's internal risk rating system. Internal risk ratings are assigned to each business loan at the time of approval and are subjected to subsequent periodic reviews by the Company's senior management, generally at least annually or more frequently upon the occurrence of a circumstance that affects the credit risk of the loan. For business loans not individually evaluated, losses inherent to the pool are estimated by applying standard reserve factors to outstanding principal balances.

The allowance for loans not individually evaluated is determined by applying estimated loss rates to various pools of loans within the portfolios with similar risk characteristics. Estimated loss rates for all pools are updated quarterly, incorporating quantitative and qualitative factors such as recent charge-off experience, current economic conditions and trends, changes in collateral values of properties securing loans (using index-based estimates), and trends with respect to past due and nonaccrual amounts.

Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance less any remaining purchase discount.

Loans individually evaluated for impairment are presented below.



(Dollars in thousands)	Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Contractual principal balance		Related allowance
March 31, 2020
Individually evaluated impaired loans:
Commercial real estate	$	3,721	$	—	$	3,721	$	4,014	$	—
Commercial and industrial	9,279		624		9,903		10,437		318
Residential real estate	1,192		188		1,380		1,529		22
Total	$	14,192	$	812	$	15,004	$	15,980	$	340
December 31, 2019
Individually evaluated impaired loans:
Commercial real estate	$	4,832	$	—	$	4,832	$	5,156	$	—
Commercial and industrial	10,739		913		11,652		12,521		363
Residential real estate	1,197		189		1,386		1,570		22
Total	$	16,768	$	1,102	$	17,870	$	19,247	$	385



(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
For the three months ended March 31, 2020
Individually evaluated impaired loans:
Commercial real estate	$	4,015	$	—	$	—
Commercial and industrial	10,998		11		18
Residential real estate	1,383		9		—
Total	$	16,396	$	20	$	18
For the three months ended March 31, 2019
Individually evaluated impaired loans:
Commercial real estate	$	5,467	$	—	$	173
Commercial and industrial	10,868		9		224
Residential real estate	2,746		7		—
Total	$	19,081	$	16	$	397

Activity in the allowance for loan losses and the allocation of the allowance for loans was as follows:



(Dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Consumer			Total
For the three months ended March 31, 2020
Allowance for loan losses:
Beginning balance	$	5,773		$	5,515		$	1,384		$	2		$	12,674
Provision for loan losses	350			87			23			29			489
Gross chargeoffs	—			(187		)	—			(31		)	(218		)
Recoveries	—			8			34			2			44
Net (chargeoffs) recoveries	—			(179		)	34			(29		)	(174		)
Ending allowance for loan losses	$	6,123		$	5,423		$	1,441		$	2		$	12,989
For the three months ended March 31, 2019
Allowance for loan losses:
Beginning balance	$	5,227		$	5,174		$	1,164		$	1		$	11,566
Provision (benefit) for loan losses	(46		)	477			(15		)	6			422
Gross chargeoffs	—			(95		)	—			(6		)	(101		)
Recoveries	—			50			21			2			73
Net (chargeoffs) recoveries	—			(45		)	21			(4		)	(28		)
Ending allowance for loan losses	$	5,181		$	5,606		$	1,170		$	3		$	11,960



(Dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Consumer		Total
March 31, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	318	$	22	$	—	$	340
Collectively evaluated for impairment	5,417		5,076		1,396		2		11,891
Acquired with deteriorated credit quality	706		29		23		—		758
Ending allowance for loan losses	$	6,123	$	5,423	$	1,441	$	2	$	12,989
Balance of loans:
Individually evaluated for impairment	$	3,721	$	9,903	$	1,380	$	—	$	15,004
Collectively evaluated for impairment	722,199		458,545		258,545		5,376		1,444,665
Acquired with deteriorated credit quality	2,990		779		2,969		—		6,738
Total loans	$	728,910	$	469,227	$	262,894	$	5,376	$	1,466,407
December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	363	$	22	$	—	$	385
Collectively evaluated for impairment	5,062		5,124		1,339		2		11,527
Acquired with deteriorated credit quality	711		28		23		—		762
Ending allowance for loan losses	$	5,773	$	5,515	$	1,384	$	2	$	12,674
Balance of loans:
Individually evaluated for impairment	$	4,832	$	11,652	$	1,386	$	—	$	17,870
Collectively evaluated for impairment	596,930		398,441		207,499		896		1,203,766
Acquired with deteriorated credit quality	$	2,884	135		2,954		—		5,973
Total loans	$	604,646	$	410,228	$	211,839	$	896	$	1,227,609