ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES | 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 and six months ended June 30, 2019 and 2018 : (Dollars in thousands) Commercial and Industrial Construction Commercial Real Estate Residential Real Estate Consumer and Other Unallocated Total Three Months Ended: June 30, 2019 Beginning balance $ 647 $ 359 $ 6,304 $ 1,349 $ 19 $ 512 $ 9,190 Charge-offs (153 ) — — (337 ) (17 ) — (507 ) Recoveries 1 — 123 43 1 — 168 Provision 246 14 (159 ) 389 14 272 776 Ending balance $ 741 $ 373 $ 6,268 $ 1,444 $ 17 $ 784 $ 9,627 June 30, 2018 Beginning balance $ 389 $ 345 $ 5,801 $ 972 $ 31 $ 290 $ 7,828 Charge-offs — — — (10 ) (31 ) — (41 ) Recoveries 1 — 5 62 11 — 79 Provision 50 57 (317 ) 114 16 478 398 Ending balance $ 440 $ 402 $ 5,489 $ 1,138 $ 27 $ 768 $ 8,264 Six Months Ended: June 30, 2019 Beginning balance $ 603 663 $ 5,575 $ 1,371 $ 23 $ 540 $ 8,775 Charge-offs (198 ) — (5 ) (430 ) (42 ) — (675 ) Recoveries 2 — 124 50 4 — 180 Provision 334 (290 ) 574 453 32 244 1,347 Ending balance $ 741 $ 373 $ 6,268 $ 1,444 $ 17 $ 784 $ 9,627 June 30, 2018 Beginning balance $ 208 336 $ 5,185 $ 1,032 $ 26 $ 548 $ 7,335 Charge-offs (11 ) — — (22 ) (42 ) — (75 ) Recoveries 2 — 6 72 18 — 98 Provision 241 66 298 56 25 220 906 Ending balance $ 440 $ 402 $ 5,489 $ 1,138 $ 27 $ 768 $ 8,264 The following table presents the balance of the allowance of loan losses and loans receivable by class at June 30, 2019 and December 31, 2018 disaggregated on the basis of our impairment methodology. 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 June 30, 2019 Commercial and industrial $ 741 $ 104 $ 637 $ 100,135 $ 453 $ 99,682 Construction 373 — 373 112,020 — 112,020 Commercial real estate 6,268 486 5,782 940,287 12,718 927,569 Residential real estate 1,444 23 1,421 376,595 5,577 371,018 Consumer and other loans 17 — 17 2,686 — 2,686 Unallocated 784 — — — — — Total $ 9,627 $ 613 $ 8,230 $ 1,531,723 $ 18,748 $ 1,512,975 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 June 30, 2019 and December 31, 2018 , is as follows: (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 June 30, 2019 Commercial and industrial $ — $ 491 $ 320 $ 811 $ 99,324 $ 100,135 $ — Construction 3,901 — — 3,901 108,119 112,020 — Commercial real estate 2,564 — 11,515 14,079 926,208 940,287 — Residential real estate 1,878 50 4,408 6,336 370,259 376,595 — Consumer and other 19 1 — 20 2,666 2,686 — Total $ 8,362 $ 542 $ 16,243 $ 25,147 $ 1,506,576 $ 1,531,723 $ — 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 June 30, 2019 and December 31, 2018 were: (Dollars in thousands) June 30, 2019 December 31, 2018 Commercial and industrial $ 320 $ 372 Commercial real estate 11,515 15,760 Residential real estate 4,408 4,572 Total $ 16,243 $ 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. • Doubtfu l: 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 June 30, 2019 and December 31, 2018 : (Dollars in thousands) Pass Special Mention Substandard Doubtful Total June 30, 2019 Commercial and industrial $ 99,507 $ 11 $ 617 $ — $ 100,135 Construction 111,570 — 450 — 112,020 Commercial real estate 922,571 4,998 12,718 — 940,287 $ 1,133,648 $ 5,009 $ 13,785 $ — $ 1,152,442 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 June 30, 2019 Performing $ 372,187 $ 2,686 Non-Performing 4,408 — Total $ 376,595 $ 2,686 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 June 30, 2019 and December 31, 2018 : June 30, 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 $ 349 $ 457 $ — $ — $ 10 $ — Commercial real estate 10,889 11,229 — 13,745 13,745 — Residential real estate 5,474 5,677 — 2,790 2,790 — With an allowance recorded: Commercial and industrial 104 236 104 372 572 152 Commercial real estate 1,829 1,843 486 2,015 2,437 274 Residential real estate 103 103 23 1,782 2,329 89 Total: Commercial and industrial 453 693 104 372 582 152 Commercial real estate 12,718 13,072 486 15,760 16,182 274 Residential real estate 5,577 5,780 23 4,572 5,119 89 $ 18,748 $ 19,545 $ 613 $ 20,704 $ 21,883 $ 515 The following table presents the average recorded investment and income recognized for our impaired loans, excluding PCI loans, for the three and six months ended June 30, 2019 and 2018 : For the Three Months Ended June 30, 2019 For the Three Months Ended June 30, 2018 (Dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial and industrial $ 76 $ — $ — $ — Construction — — 53 — Commercial real estate 12,957 11 8,358 71 Residential real estate 4,378 22 3,499 19 Total impaired loans without a related allowance 17,411 33 11,910 90 With an allowance recorded: Commercial and industrial 379 2 94 — Commercial real estate 1,382 4 929 — Residential real estate 421 — — — Total impaired loans with an allowance 2,182 6 1,023 — Total impaired loans $ 19,593 $ 39 $ 12,933 $ 90 For the Six Months Ended June 30, 2019 For the Six Months Ended June 30, 2018 (Dollars in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial and industrial $ 46 $ — $ 12 $ — Construction — — 21 — Commercial real estate 13,701 135 5,638 83 Residential real estate 4,052 40 2,520 30 Total impaired loans without a related allowance 17,799 175 8,191 113 With an allowance recorded: Commercial and industrial 306 7 38 — Commercial real estate 934 9 1,071 — Residential real estate 349 — 64 — Total impaired loans with an allowance 1,589 16 1,173 — Total impaired loans $ 19,388 $ 191 $ 9,364 $ 113 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 June 30, 2019 Performing $ 424 $ 132 $ 690 $ 1,246 Non-performing 1,502 — 329 1,831 Total $ 1,926 $ 132 $ 1,019 $ 3,077 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 June 30, 2019 , we have not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructuring. There were no troubled debt restructuring during the three months ended June 30, 2019. There was one troubled debt restructuring during the six months ended June 30, 2019. There was one troubled debt restructuring in the amount of $514 thousand that occurred during the three and six months ended June 30, 2018. (Dollars in thousands) Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment June 30, 2019 Residential real estate 1 48 47 (Dollars in thousands) Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment June 30, 2018 Residential real estate 1 $ 514 $ 306 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 June 30, 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 June 30, 2018 . We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure on an in-substance repossession. As of June 30, 2019 , we had five foreclosed residential real estate properties with a carrying value of $1.3 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 June 30, 2019 and December 31, 2018 , respectively, we had consumer loans with a carrying value of $554 thousand and $682 thousand collateralized by residential real estate property for which formal foreclosure proceedings were in process. |