(6) Allowance for Loan Losses (the “Allowance”)

The Allowance is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the Allowance, and subsequent recoveries, if any, are credited to the Allowance.

The Allowance is maintained at a level considered adequate to provide for losses that are probable and estimable. Management’s periodic evaluation of the adequacy of the Allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is subjective as it requires material estimates that may be susceptible to significant revisions as more information becomes available.

Roll-Forward of Allowance by Portfolio Segment

The following tables detail the roll‑forward of the Corporation’s Allowance, by portfolio segment, for the three month period ended March 31, 2020 and 2019, respectively:


	Balance,					Balance,
(dollars in thousands)	December 31, 2019		Charge-offs	Recoveries	Provision	March 31, 2020
Commercial mortgage	$	3,426	—	—	686	4,112
Home Equity lines and loans		342	—	1	141	484
Residential mortgage		179	—	2	38	219
Construction		2,362	—	—	19	2,381
Commercial and industrial		2,684	—	29	456	3,169
Small business loans		509	—	—	216	725
Consumer		6	—	1	(3)	4
Leases		5	—	—	(1)	4
Total	$	9,513	—	33	1,552	11,098


	Balance,					Balance,
(dollars in thousands)	December 31, 2018		Charge-offs	Recoveries	Provision	March 31, 2019
Commercial mortgage	$	3,209	—	3	(49)	3,163
Home Equity lines and loans		323	—	3	15	341
Residential mortgage		191	—	—	21	212
Construction		1,627	—	—	175	1,802
Commercial and industrial		2,612	—	97	51	2,760
Small business loans		78	—	—	8	86
Consumer		3	—	1	—	4
Leases		10	—	—	(2)	8
Total	$	8,053	—	104	219	8,376

Allowance Allocated by Portfolio Segment

The following tables detail the allocation of the allowance for loan and lease losses and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of March 31, 2020 and December 31, 2019.


	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
March 31, 2020	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	4,112	4,112	$	2,117	389,211	391,328
Home Equity lines and loans		36	448	484		761	78,003	78,764
Residential mortgage		—	219	219		3,804	38,297	42,101
Construction		—	2,381	2,381		1,231	174,133	175,364
Commercial and industrial		21	3,148	3,169		1,015	291,408	292,423
Small business loans		—	725	725		228	31,545	31,773
Consumer		—	4	4		—	570	570
Leases		—	4	4		—	559	559
Total	$	57	11,041	11,098	$	9,156	1,003,726	1,012,882	(1)



	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
December 31, 2019	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	3,426	3,426	$	2,138	360,452	362,590
Home Equity lines and loans		46	296	342		536	81,047	81,583
Residential mortgage		—	179	179		854	42,265	43,119
Construction		—	2,362	2,362		1,247	170,797	172,044
Commercial and industrial		27	2,657	2,684		1,288	272,013	273,301
Small business loans		63	446	509		1,244	20,372	21,616
Consumer		—	6	6		—	1,003	1,003
Leases		—	5	5		—	697	697
Total	$	136	9,377	9,513	$	7,307	948,646	955,953	(1)

(1)

Excludes deferred fees and loans carried at fair value.

Loans and Leases by Credit Ratings

As part of the process of determining the Allowance to the different segments of the loan and lease portfolio, Management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by Management. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:

Pass – Loans considered to be satisfactory with no indications of deterioration.

Special mention – Loans classified as special mention have a potential weakness that deserves Management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loan balances classified as doubtful have been reduced by partial charge-offs and are carried at their net realizable values.

The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the allowance for loan and lease losses as of March 31, 2020 and December 31, 2019:


March 31, 2020			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	381,035	7,278	3,015	—	391,328
Home equity lines and loans		78,088	—	676	—	78,764
Construction		174,158	1,206	—	—	175,364
Commercial and industrial		270,780	9,779	11,864	—	292,423
Small business loans		30,238	—	1,535	—	31,773
Total	$	934,299	18,263	17,090	—	969,652


December 31, 2019			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	353,724	5,821	3,045	—	362,590
Home equity lines and loans		81,046	—	537	—	81,583
Construction		170,823	1,221	—	—	172,044
Commercial and industrial		251,320	9,648	12,333	—	273,301
Small business loans		20,351	—	1,265	—	21,616
Total	$	877,264	16,690	17,180	—	911,134

In addition to credit quality indicators as shown in the above tables, allowance allocations for residential mortgages, consumer loans and leases are also applied based on their performance status as of March 31, 2020 and December 31, 2019. No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of March 31, 2020 and December 31, 2019.


	March 31, 2020				December 31, 2019
(dollars in thousands)	Performing		Nonperforming	Total	Performing		Nonperforming	Total
Residential mortgage	$	38,297	3,804	42,101	$	42,265	854	43,119
Consumer		570	—	570		1,003	—	1,003
Leases		559	—	559		697	—	697
Total	$	39,426	3,804	43,230	$	43,965	854	44,819

There were five nonperforming residential mortgage loans at March 31, 2020 and five nonperforming residential mortgage loans at December 31, 2019 with a combined outstanding principal balance of $890 thousand and $839 thousand, respectively, which were carried at fair value and not included in the table above.

Impaired Loans

The following table details the recorded investment and principal balance of impaired loans by portfolio segment, and their related allowance for loan and lease losses.




	As of March 31, 2020				As of December 31, 2019
	Recorded		Principal	Related	Recorded	Principal	Related
(dollars in thousands)	investment		balance	allowance	investment	balance	allowance
Impaired loans with related allowance:
Commercial mortgage	$	—	—	—	—	—	—
Commercial and industrial		449	449	21	617	617	27
Small business loans		—	—	—	1,002	1,002	63
Home equity lines and loans		456	459	36	461	461	46
Residential mortgage		—	—	—	—	—	—
Construction		—	—	—	—	—	—
Total		905	908	57	2,080	2,080	136
Impaired loans without related allowance:
Commercial mortgage	$	2,117	2,158	—	2,138	2,173	—
Commercial and industrial		566	614	—	671	718	—
Small business loans		228	228	—	242	242	—
Home equity lines and loans		305	305	—	75	75	—
Residential mortgage		3,804	3,804	—	854	854	—
Construction		1,231	1,233	—	1,247	1,248	—
Total		8,251	8,342	—	5,227	5,310	—
Grand Total	$	9,156	9,250	57	7,307	7,390	136

The following table details the average recorded investment and interest income recognized on impaired loans by portfolio segment.


		Three Months	Three Months
		Ended March 31,	Ended March 31,
		2020	2019
		Average	Average
		recorded	recorded
(dollars in thousands)		investment	investment
Impaired loans with related allowance:
Commercial mortgage	$	—	—
Commercial and industrial		451	673
Small business loans		—	—
Home equity lines and loans		458	—
Residential mortgage		—	—
Construction		—	—
Total		909	673
Impaired loans without related allowance:
Commercial mortgage	$	2,129	1,926
Commercial and industrial		587	797
Small business loans		934	—
Home equity lines and loans		305	82
Residential mortgage		3,806	857
Construction		1,239	1,287
Total		9,000	4,949
Grand Total	$	9,909	5,622

Interest income recognized on performing impaired loans amounted to $53 thousand and $49 thousand for the three months ended March 31, 2020 and 2019, respectively.

Troubled Debt Restructuring

The restructuring of a loan is considered a “troubled debt restructuring” (“TDR”) if both of the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the creditor has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan, and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower were a concession not granted. The determination of whether a concession has been granted is subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

The balance of TDRs at March 31, 2020 and December 31, 2019 are as follows:


	March 31,		December 31,
(dollars in thousands)	2020		2019
TDRs included in nonperforming loans and leases	$	312	319
TDRs in compliance with modified terms		3,450	3,599
Total TDRs	$	3,762	3,918

There were no loan and lease modifications granted during the three months ended March 31, 2020 and 2019 that were categorized as TDRs. No loan and lease modifications granted during the three months ended March 31, 2020 and 2019 subsequently defaulted during the same time period.

Non-TDR Loan Modifications due to COVID-19

On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief, and Economic Security (“CARES Act”) further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. Accordingly, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The modifications completed in the three months ended March 31, 2020 were immaterial.

As of May 1, 2020, the Corporation executed 230 loan modifications with payment deferrals on outstanding loan balance of $150.9 million in connection with the COVID-19 relief provided by the CARES Act. The Corporation has made the following loan assistance programs available: for commercial customers, payment holidays up to 3 billing cycles and interest only payments; for construction loan customers lowered interest rates, two or three billing cycle payment holidays; and for residential loan customers three month payment holidays. These deferrals were generally no more than three months in duration and were not considered troubled debt restructurings based on interagency guidance issued in March 2020.