ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES

The following table presents changes in the allowance for loan losses disaggregated by the class of loans receivable for the three months ended March 31, 2019 and 2018: ໿

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(Dollars in thousands)	Commercial and Industrial			Construction			Commercial Real Estate			Residential Real Estate			Consumer and Other			Unallocated			Total
Three Months Ended:
March 31, 2019
Beginning balance	$	603		$	663		$	5,575		$	1,371		$	23		$	540		$	8,775
Charge-offs	(45		)	—			(5		)	(93		)	(25		)	—			(168		)
Recoveries	1			—			1			7			3			—			12
Provision	88			(304		)	733			64			18			(28		)	571
Ending balance	$	647		$	359		$	6,304		$	1,349		$	19		$	512		$	9,190

March 31, 2018
Beginning balance	$	208		$	336		$	5,185		$	1,032		$	26		$	548		$	7,335
Charge-offs	(11		)	—			—			(12		)	(11		)	—			(34		)
Recoveries	1			—			1			10			7			—			19
Provision	191			9			615			(58		)	9			(258		)	508
Ending balance	$	389		$	345		$	5,801		$	972		$	31		$	290		$	7,828

The following table presents the balance of the allowance of loan losses and loans receivable by class at March 31, 2019 and December 31, 2018 disaggregated on the basis of our impairment methodology.

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	Allowance for Loan Losses						Loans Receivable
(Dollars in thousands)	Balance		Balance Loans Individually Evaluated for Impairment		Balance Related to Loans Collectively Evaluated for Impairment		Balance		Individually Evaluated for Impairment (a)		Collectively Evaluated for Impairment
March 31, 2019
Commercial and industrial	$	647	$	104	$	543	$	93,567	$	456	$	93,111
Construction	359		—		359		120,340		—		120,340
Commercial real estate	6,304		445		5,859		929,091		16,666		912,425
Residential real estate	1,349		199		1,150		369,100		4,551		364,549
Consumer and other loans	19		—		19		2,654		—		2,654
Unallocated	512		—		—		—		—		—
Total	$	9,190	$	748	$	7,930	$	1,514,752	$	21,673	$	1,493,079



December 31, 2018
Commercial and industrial	$	603	$	152	$	451	$	81,709	$	372	$	81,337
Construction	663		—		663		142,321		—		142,321
Commercial real estate	5,575		274		5,301		878,449		15,760		862,689
Residential real estate	1,371		89		1,282		370,955		4,572		366,383
Consumer and other loans	23		—		23		2,393		—		2,393
Unallocated	540		—		—		—		—		—
Total	$	8,775	$	515	$	7,720	$	1,475,827	$	20,704	$	1,455,123

(a) loans individually evaluated for impairment exclude PCI loans.

An age analysis of loans receivable, which were past due as of March 31, 2019 and December 31, 2018, is as follows:

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(Dollars in thousands)	30-59 Days Past Due		60-89 days Past Due		Greater Than 90 Days (a)		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
March 31, 2019
Commercial and industrial	$	—	$	—	$	323	$	323	$	93,244	$	93,567	$	—
Construction	—		—		—		—		120,340		120,340		—
Commercial real estate	2,643		1,131		16,238		20,012		909,079		929,091		—
Residential real estate	743		269		4,077		5,089		364,011		369,100		—
Consumer and other	55		1		—		56		2,598		2,654		—
Total	$	3,441	$	1,401	$	20,638	$	25,480	$	1,489,272	$	1,514,752	$	—



December 31, 2018
Commercial and industrial	$	491	$	—	$	372	$	863	$	80,846	$	81,709	$	—
Construction	—		582		—		582		141,739		142,321		—
Commercial real estate	2,282		—		15,760		18,042		860,407		878,449		—
Residential real estate	393		35		4,572		5,000		365,955		370,955		—
Consumer and other	4		1		—		5		2,388		2,393		—
Total	$	3,170	$	618	$	20,704	$	24,492	$	1,451,335	$	1,475,827	$	—

(a) includes loans greater than 90 days past due and still accruing and non-accrual loans, excluding PCI loans.

Loans for which the accrual of interest has been discontinued, excluding PCI loans, at March 31, 2019 and December 31, 2018 were:

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(Dollars in thousands)	March 31, 2019		December 31, 2018
Commercial and industrial	$	323	$	372
Commercial real estate	16,238		15,760
Residential real estate	4,077		4,572
Total	$	20,638	$	20,704

In determining the adequacy of the allowance for loan losses, we estimate losses based on the identification of specific problem loans through our credit review process and also estimate losses inherent in other loans on an aggregate basis by loan type. The credit review process includes the independent evaluation of the loan officer assigned risk ratings by the Chief Credit Officer and a third party loan review company. Such risk ratings are assigned loss component factors that reflect our loss estimate for each group of loans. It is management’s and the Board of Directors’ responsibility to oversee the lending process to ensure that all credit risks are properly identified, monitored, and controlled, and that loan pricing, terms and other safeguards against non-performance and default are commensurate with the level of risk undertaken and is rated as such based on a risk-rating system. Factors considered in assigning risk ratings and loss component factors include: borrower specific information related to expected future cash flows and operating results, collateral values, financial condition and payment status; levels of and trends in portfolio charge-offs and recoveries; levels in portfolio delinquencies; effects of changes in loan concentrations and observed trends in the economy and other qualitative measurements.

Our risk-rating system is consistent with the classification system used by regulatory agencies and with industry practices. Loan classifications of Substandard, Doubtful or Loss are consistent with the regulatory definitions of classified assets. The classification system is as follows:


•	Pass: This category represents loans performing to contractual terms and conditions and the primary source of repayment is adequate to meet the obligation. We have five categories within the Pass classification depending on strength of repayment sources, collateral values and financial condition of the borrower.


•	Special Mention: This category represents loans performing to contractual terms and conditions; however the primary source of repayment or the borrower is exhibiting some deterioration or weaknesses in financial condition that could potentially threaten the borrowers’ future ability to repay our loan principal and interest or fees due.

•

Substandard: This category represents loans that the primary source of repayment has significantly deteriorated or weakened which has or could threaten the borrowers’ ability to make scheduled payments. The weaknesses require close supervision by management and there is a distinct possibility that we could sustain some loss if the deficiencies are not corrected. Such weaknesses could jeopardize the timely and ultimate collection of our loan principal and interest or fees due. Loss may not be expected or evident, however, loan repayment is inadequately supported by current financial information or pledged collateral.

•

Doubtful: Loans so classified have all the inherent weaknesses of a substandard loan with the added provision that collection or liquidation in full is highly questionable and not reasonably assured. The probability of at least partial loss is high, but extraneous factors might strengthen the asset to prevent loss. The validity of the extraneous factors must be continuously monitored. Once these factors are questionable the loan should be considered for full or partial charge-off.


•	Loss: Loans so classified are considered uncollectible, and of such little value that their continuance as active assets is not warranted. Such loans are fully charged off.

The following tables illustrate our corporate credit risk profile by creditworthiness category as of March 31, 2019 and December 31, 2018: ໿

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(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2019
Commercial and industrial	$	92,910	$	21	$	636	$	—	$	93,567
Construction	118,666		1,224		450		—		120,340
Commercial real estate	905,959		5,855		17,277		—		929,091
	$	1,117,535	$	7,100	$	18,363	$	—	$	1,142,998



December 31, 2018
Commercial and industrial	$	80,977	$	32	$	700	$	—	$	81,709
Construction	141,871		—		450		—		142,321
Commercial real estate	855,180		3,908		19,361		—		878,449
	$	1,078,028	$	3,940	$	20,511	$	—	$	1,102,479



(Dollars in thousands)	Residential Real Estate		Consumer and other
March 31, 2019
Performing	$	365,023	$	2,654
Non-Performing	4,077		—
Total	$	369,100	$	2,654

December 31, 2018
Performing	$	366,383	$	2,393
Non-Performing	4,572		—
Total	$	370,955	$	2,393

The following table reflects information about our impaired loans, excluding PCI loans, by class as of March 31, 2019 and December 31, 2018:



	March 31, 2019						December 31, 2018
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance

With no related allowance recorded:
Commercial and industrial	$	77	$	180	$	—	$	—	$	10	$	—
Commercial real estate	15,734		16,283		—		13,745		13,745		—
Residential real estate	3,812		4,087		—		2,790		2,790		—



With an allowance recorded:
Commercial and industrial	379	424	104	372	572	152
Commercial real estate	932	1,145	445	2,015	2,437	274
Residential real estate	739	805	199	1,782	2,329	89



Total:
Commercial and industrial	456		604		104		372		582		152
Commercial real estate	16,666		17,428		445		15,760		16,182		274
Residential real estate	4,551		4,892		199		4,572		5,119		89
	$	21,673	$	22,924	$	748	$	20,704	$	21,883	$	515

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The following table presents the average recorded investment and income recognized for our impaired loans, excluding PCI loans, for the three months ended March 31, 2019 and 2018:



	For the Three Months Ended March 31, 2019				For the Three Months Ended March 31, 2018
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	79	$	—	$	10	$	—
Construction	—		—		53		—
Commercial real estate	15,469		124		3,871		12
Residential real estate	3,800		18		2,453		11
Total impaired loans without a related allowance	19,348		142		6,387		23

With an allowance recorded:
Commercial and industrial	335		5		—		—
Commercial real estate	936		5		930		—
Residential real estate	772		—		110		—
Total impaired loans with an allowance	2,043		10		1,040		—
Total impaired loans	$	21,391	$	152	$	7,427	$	23

We recognize interest income on performing impaired loans as payments are received. On non-performing impaired loans we do not recognize interest income as all payments are recorded as a reduction of principal on such loans.

Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, postponement or forgiveness of principal, forbearance or other actions intended to maximize collection. The concessions rarely result in the forgiveness of principal or accrued interest. In addition, we attempt to obtain additional collateral or guarantor support when modifying such loans. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

The following table presents the recorded investment in troubled debt restructured loans, based on payment performance status:



(Dollars in thousands)	Commercial Real Estate		Commercial & Industrial		Residential Real Estate		Total
March 31, 2019
Performing	$	428	$	133	$	474	$	1,035
Non-performing	1,520		—		557		2,077
Total	$	1,948	$	133	$	1,031	$	3,112

December 31, 2018
Performing	$	431	$	—	$	475	$	906
Non-performing	1,531		—		517		2,048
Total	$	1,962	$	—	$	992	$	2,954

Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures in this footnote. As of March 31, 2019, we have not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructuring.

There were two troubled debt restructurings during the three months ended March 31, 2019. There were no troubled debt restructurings during the three months ended March 31, 2018.



(Dollars in thousands)	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
March 31, 2019
Commercial & industrial	1	$	135	$	133
Residential real estate	1	48		47

There was no troubled debt restructuring for which there was a payment default within twelve months following the date of the restructuring for the three months ended March 31, 2019. There was no troubled debt restructuring for which there was a payment default within twelve months following the date of the restructuring for the three months ended March 31, 2018.

We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure on an in-substance repossession. As of March 31, 2019, we had four foreclosed residential real estate properties with a carrying value of $1.0 million. As of December 31, 2018, we had five foreclosed residential real estate properties with a carrying value of $1.3 million. In addition, as of March 31, 2019 and December 31, 2018, respectively, we had consumer loans with a carrying value of $504 thousand and $682 thousand collateralized by residential real estate property for which formal foreclosure proceedings were in process.