Edgar Filing: WASHINGTON TRUST BANCORP INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended MARCH 31, 2019 or



o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______.

Commission file number: 001-32991

WASHINGTON TRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)



RHODE ISLAND		05-0404671
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



23 BROAD STREET
WESTERLY, RHODE ISLAND		02891
(Address of principal executive offices)		(Zip Code)

(401) 348-1200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Mark one)



Large accelerated filer x		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)		Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No



Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
COMMON STOCK, $.0625 PAR VALUE PER SHARE	WASH	THE NASDAQ STOCK MARKET LLC

The number of shares of common stock of the registrant outstanding as of April 30, 2019 was 17,324,699.



FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended March 31, 2019

TABLE OF CONTENTS
	Page Number
	Page Number
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	3
Consolidated Statements of Income for the three months ended March 31, 2019 and 2018	4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018	5
Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2019 and 2018	6
Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018	7
Condensed Notes to Unaudited Consolidated Financial Statements:	9
Note 1 - Basis of Presentation	9
Note 2 - Recently Issued Accounting Pronouncements	9
Note 3 - Cash and Due from Banks	11
Note 4 - Securities	12
Note 5 - Loans	15
Note 6 - Allowance for Loan Losses	21
Note 7 - Federal Home Loan Bank Advances	23
Note 8 - Shareholders’ Equity	24
Note 9 - Derivative Financial Instruments	25
Note 10 - Fair Value Measurements	28
Note 11 - Revenue from Contracts with Customers	33
Note 12 - Defined Benefit Pension Plans	35
Note 13 - Share-Based Compensation Arrangements	36
Note 14 - Business Segments	36
Note 15 - Other Comprehensive Income (Loss)	38
Note 16 - Earnings Per Common Share	39
Note 17 - Leases	40
Note 18 - Commitments and Contingencies	41
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3. Quantitative and Qualitative Disclosures About Market Risk	69
Item 4. Controls and Procedures	69
PART II. Other Information
Item 1. Legal Proceedings	70
Item 1A. Risk Factors	70
Item 6. Exhibits	70
Signatures	71
Exhibit Index	72

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PART I. Financial Information

Item 1. Financial Statements



Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)	(Dollars in thousands, except par value)



	March 31, 2019			December 31, 2018
Assets:
Cash and due from banks		$88,242			$89,923
Short-term investments	3,317			3,552
Mortgage loans held for sale, at fair value	14,608			20,996
Securities:
Available for sale debt securities, at fair value	994,881			927,810
Held to maturity debt securities, at amortized cost (fair value $10,316 at December 31, 2018)	—			10,415
Total securities	994,881			938,225
Federal Home Loan Bank stock, at cost	48,025			46,068
Loans:
Total loans	3,738,469			3,680,360
Less allowance for loan losses	27,644			27,072
Net loans	3,710,825			3,653,288
Premises and equipment, net	29,822			29,005
Operating lease right-of-use assets	28,249			—
Investment in bank-owned life insurance	80,786			80,463
Goodwill	63,909			63,909
Identifiable intangible assets, net	7,923			8,162
Other assets	84,142			77,175
Total assets		$5,154,729			$5,010,766
Liabilities:
Deposits:
Noninterest-bearing deposits		$577,319			$603,216
Interest-bearing deposits	2,926,941			2,920,832
Total deposits	3,504,260			3,524,048
Federal Home Loan Bank advances	1,056,129			950,722
Junior subordinated debentures	22,681			22,681
Operating lease liabilities	30,187			—
Other liabilities	71,629			65,131
Total liabilities	4,684,886			4,562,582
Commitments and contingencies (Note 18)
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 60,000,000 shares; issued and outstanding 17,305,279 shares at March 31, 2019 and 17,302,037 at December 31, 2018	1,082			1,081
Paid-in capital	120,743			119,888
Retained earnings	365,521			355,524
Accumulated other comprehensive loss	(17,503		)	(28,309		)
Total shareholders’ equity	469,843			448,184
Total liabilities and shareholders’ equity		$5,154,729			$5,010,766

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)	(Dollars and shares in thousands, except per share amounts)



Three months ended March 31,		2019		2018
Interest income:
Interest and fees on loans			$41,744		$34,352
Interest on mortgage loans held for sale		180		226
Taxable interest on debt securities		7,226		5,118
Nontaxable interest on debt securities		9		23
Dividends on Federal Home Loan Bank stock		695		516
Other interest income		340		205
Total interest and dividend income		50,194		40,440
Interest expense:
Deposits		8,696		4,422
Federal Home Loan Bank advances		6,661		3,983
Junior subordinated debentures		253		183
Total interest expense		15,610		8,588
Net interest income		34,584		31,852
Provision for loan losses		650		—
Net interest income after provision for loan losses		33,934		31,852
Noninterest income:
Wealth management revenues		9,252		10,273
Mortgage banking revenues		2,646		2,838
Card interchange fees		997		847
Service charges on deposit accounts		875		863
Loan related derivative income		724		141
Income from bank-owned life insurance		649		515
Other income		224		266
Total noninterest income		15,367		15,743
Noninterest expense:
Salaries and employee benefits		17,619		17,772
Outsourced services		2,606		1,873
Net occupancy		1,998		2,002
Equipment		1,011		1,180
Legal, audit and professional fees		534		726
FDIC deposit insurance costs		429		404
Advertising and promotion		239		177
Amortization of intangibles		239		248
Other expenses		2,289		2,748
Total noninterest expense		26,964		27,130
Income before income taxes		22,337		20,465
Income tax expense		4,842		4,254
Net income			$17,495		$16,211

Net income available to common shareholders			$17,461		$16,173
Weighted average common shares outstanding - basic		17,304		17,234
Weighted average common shares outstanding - diluted		17,401		17,345
Per share information:	Basic earnings per common share		$1.01		$0.94
	Diluted earnings per common share		$1.00		$0.93
	Cash dividends declared per share		$0.47		$0.43

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)	(Dollars in thousands)



Three months ended March 31,	2019			2018
Net income		$17,495			$16,211
Other comprehensive income (loss), net of tax:
Net change in fair value of available for sale debt securities	11,021			(10,414		)
Net change in fair value of cash flow hedges	(442		)	889
Net change in defined benefit plan obligations	227			360
Total other comprehensive income (loss), net of tax	10,806			(9,165		)
Total comprehensive income		$28,301			$7,046

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (unaudited)	(Dollars and shares in thousands)



	Common Shares Outstanding	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
Balance at January 1, 2019	17,302		$1,081		$119,888		$355,524			($28,309	)		$448,184
Net income	—	—		—		17,495			—			17,495
Total other comprehensive income, net of tax	—	—		—		—			10,806			10,806
Cash dividends declared	—	—		—		(8,220		)	—			(8,220		)
Share-based compensation	—	—		740		—			—			740
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered	3	1		115		—			—			116
Cumulative effect of change in accounting principle	—	—		—		722			—			722
Balance at March 31, 2019	17,305		$1,082		$120,743		$365,521			($17,503	)		$469,843



	Common Shares Outstanding	Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance at January 1, 2018	17,227		$1,077		$117,961			$317,756			($23,510	)		$413,284
Net income	—	—		—			16,211			—			16,211
Total other comprehensive loss, net of tax	—	—		—			—			(9,165		)	(9,165		)
Cash dividends declared	—	—		—			(7,462		)	—			(7,462		)
Share-based compensation	—	—		669			—			—			669
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered	35	2		(458		)	—			—			(456		)
Balance at March 31, 2018	17,262		$1,079		$118,172			$326,505			($32,675	)		$413,081

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (unaudited)	(Dollars in thousands)



Three months ended March 31,		2019			2018
Cash flows from operating activities:
Net income			$17,495			$16,211
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		650			—
Depreciation of premises and equipment		838			827
Net amortization of premiums and discounts on securities and loans		822			695
Amortization of intangibles		239			248
Share-based compensation		740			669
Tax benefit from stock option exercises and other equity awards		7			207
Income from bank-owned life insurance		(649		)	(515		)
Net gains on loan sales and commissions on loans originated for others, including fair value adjustments		(2,474		)	(2,679		)
Proceeds from sales of loans		51,673			89,575
Loans originated for sale		(46,864		)	(79,212		)
Decrease in operating lease right-of-use assets		673			—
Decrease in operating lease liabilities		(666		)	—
Increase in other assets		(11,022		)	(10,973		)
Increase in other liabilities		9,532			6,483
Net cash provided by operating activities		20,994			21,536
Cash flows from investing activities:
Purchases of:	Available for sale debt securities: Mortgage-backed	(62,109		)	(40,657		)
	Available for sale debt securities: Other	(10,507		)	(1,064		)
Maturities, calls and principal payments of:	Available for sale debt securities: Mortgage-backed	19,718			20,100
	Available for sale debt securities: Other	10,000			500
	Held to maturity debt securities: Mortgage-backed	—			540
Purchases of Federal Home Loan Bank stock		(1,957		)	(610		)
Net increase in loans		(54,147		)	(15,571		)
Purchases of loans		(161		)	(1,520		)
Purchases of premises and equipment		(1,655		)	(811		)
Proceeds from surrender of bank-owned life insurance		326			—
Net cash used in investing activities		(100,492		)	(39,093		)
Cash flows from financing activities:
Net (decrease) increase in deposits		(19,788		)	13,727
Proceeds from Federal Home Loan Bank advances		532,000			515,000
Repayment of Federal Home Loan Bank advances		(426,593		)	(497,679		)
Payment of contingent consideration liability		—			(1,217		)
Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered		116			(456		)
Cash dividends paid		(8,153		)	(6,739		)
Net cash provided by financing activities		77,582			22,636
Net (decrease) increase in cash and cash equivalents		(1,916		)	5,079
Cash and cash equivalents at beginning of period		93,475			82,923
Cash and cash equivalents at end of period			$91,559			$88,002

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statement of Cash Flows – continued (unaudited)	(Dollars in thousands)



Three months ended March 31,	2019		2018
Noncash Activities:
Loans charged off		$103		$690
Loans transferred to property acquired through foreclosure or repossession	—		3,074
In conjunction with the adoption of ASU 2016-02 as detailed in Note 2 to the Unaudited Consolidated Financial Statements, the following assets and liabilities were recognized:
Operating lease right-of-use assets	28,923		—
Operating lease liabilities	30,853		—
In conjunction with the adoption of ASU 2017-12 as detailed in Note 2 to the Unaudited Consolidated Financial Statements, the following qualifying debt securities classified as held-to-maturity were transferred to available for sale:
Fair value of debt securities transferred from held-to-maturity to available for sale	10,316		—
Supplemental Disclosures:
Interest payments		$14,082		$8,047
Income tax payments	1,136		908

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Condensed Notes to Unaudited Consolidated Financial Statements

Note 1 - Basis of Presentation

Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company that has elected to be a financial holding company. The Bancorp’s subsidiaries include The Washington Trust Company, of Westerly (the “Bank”), a Rhode Island chartered commercial bank founded in 1800, and Weston Securities Corporation (“WSC”). Through its subsidiaries, the Bancorp offers a complete product line of financial services, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut; its automated teller machines (“ATMs”); telephone banking; mobile banking and its internet website (www.washtrust.com).

The Unaudited Consolidated Financial Statements include the accounts of the Bancorp and its subsidiaries (collectively the “Corporation” or “Washington Trust”). All intercompany balances and transactions have been eliminated. Certain previously reported amounts have been reclassified to conform to current year’s presentation.

The Bancorp also owns the common stock of two capital trusts, which have issued trust preferred securities. These capital trusts are variable interest entities in which the Bancorp is not the primary beneficiary and, therefore, are not consolidated. The capital trust’s only assets are junior subordinated debentures issued by the Bancorp, which were acquired by the capital trusts using the proceeds from the issuance of the trust preferred securities and common stock. The Bancorp’s equity interest in the capital trusts, classified in other assets, and the junior subordinated debentures are included in the Unaudited Consolidated Balance Sheets. Interest expense on the junior subordinated debentures is included in the Unaudited Consolidated Statements of Income.

The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates.

The Unaudited Consolidated Financial Statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying Unaudited Consolidated Financial Statements have been included. Interim results are not necessarily indicative of the results of the entire year. The accompanying Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Note 2 - Recently Issued Accounting Pronouncements

Accounting Standards Adopted in 2019

Leases - Topic 842

Accounting Standards Update No. 2016-02, “Leases” (“ASU 2016-02”), was issued in February 2016 and provides revised guidance related to the accounting and reporting of leases. ASU 2016-02 requires lessees to recognize most leases on the balance sheet. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee depends on its classification as a finance or operating lease. ASU 2016-02 requires a modified retrospective transition, with a package of practical expedients that entities may elect to apply. In January 2018, Accounting Standards Update No. 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” was issued to address concerns about the costs and complexity of complying with the transition provisions of ASU 2016-02. In July 2018, Accounting Standards Update No. 2018-10, “Codification Improvements to Topic 842, Leases” was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02. Also in July 2018, Accounting Standards Update No. 2018-11, “Targeted Improvements” (“ASU 2018-11”) was issued and allows for an optional transition method in which the provisions of Topic 842 would be applied upon the adoption date and would not have to be retroactively applied to the earliest reporting period presented in the consolidated financial statements. The Corporation used this optional transition method for the adoption of Topic 842. In December 2018, Accounting Standards Update No. 2018-20, “Leases (Topic 842) Narrow-Scope Improvement for Lessors” was issued to address lessors’ concerns about sales taxes and other similar taxes collected from lessees, certain lessor costs, and recognition of variable payments for contracts with lease and non-lease components. These ASUs were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.

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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Management assembled a project team to address the changes pursuant to Topic 842. The project team identified and reviewed all lease agreements in scope of Topic 842. The Corporation rents premises used in business operations under non-cancelable operating leases, which as of December 31, 2018 were not reflected in its Consolidated Balance Sheets. The Corporation has no finance leases.

The Corporation adopted Topic 842 “Leases” effective January 1, 2019 and has applied the guidance to all operating leases within the scope of Topic 842 at that date. The Corporation elected to adopt the package of practical expedients, which among other things, does not require reassessment of lease classification. The Corporation recognized $28.9 million in operating lease right-of-use-assets, $30.9 million in operating lease liabilities, a reduction in rent-related liabilities of $2.9 million, a reduction of net deferred tax assets of $222 thousand and a cumulative effect adjustment (net of taxes) that increased beginning retained earnings by $722 thousand in the Consolidated Balance Sheets. The cumulative effect adjustment represented the recognition of unamortized deferred gains associated with two leases. There was no change to the timing in recognition of operating lease rent expense on the Corporation’s consolidated financial statements associated with our leases.

In March 2019, Accounting Standards Update No. 2019-01, “Leases (Topic 842) Codification Improvements” (“ASU 2019-01”) was issued to address lessors’ concerns about determining fair value of underlying leased assets and presentation issues in the statement of cash flows for sales-type and direct financing leases. ASU 2019-01 also clarified for both lessees and lessors that transition disclosures related to Topic 250 were not required for annual periods are also not required for interim periods. ASU 2019-01 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. The Corporation early adopted this ASU 2019-01 effective January 1, 2019 and it did not have a material impact on the Corporation’s consolidated financial statements.

Derivatives and Hedging - Topic 815

Accounting Standards Update No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), was issued in August 2017 to better align financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 was effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. In addition, ASU 2017-12 also permitted the reclassification of eligible securities from the held-to-maturity classification to the available for sale classification. The Corporation adopted the provisions of ASU 2017-12 on January 1, 2019 using a modified retrospective transition method. As permitted by ASU 2017-12, qualifying debt securities classified as held to maturity with an amortized cost of $10.4 million and a fair value of $10.3 million were reclassified to available for sale upon the adoption date. An unrealized loss of $75 thousand (net of taxes) was recognized in the accumulated other comprehensive income component of shareholders’ equity at the date of adoption. The adoption of ASU 2017-12 did not have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Update No. 2018-16, “Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes” (“ASU 2018-16”), was issued in October 2018 to permit the use of the Overnight Index Swap rate based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to existing benchmark interest rates that are currently used for hedge accounting. ASU 2018-16 was effective for fiscal years beginning after December 15, 2018, and interim periods with those fiscal years. The provisions required prospective application for qualifying new or re-designated hedging relationships entered into on or after the date of adoption. The Corporation adopted the provisions of ASU 2018-16 on January 1, 2019 and it did not have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Pending Adoption

Financial Instruments - Credit Losses - Topic 326

Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses” (“ASU 2016-13”), was issued in June 2016. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 provides for a modified retrospective transition, resulting in a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective, except for debt securities for which an other-than-temporary impairment has previously been recognized. For these debt securities, a prospective transition approach will be adopted in order to maintain the same amortized cost prior to and subsequent to the effective date of ASU 2016-13. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted in 2019. The Corporation will adopt ASU 2016-03 on

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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

January 1, 2020 and is currently evaluating the effect that this ASU will have on the consolidated financial statements and disclosures.

Management has assembled a project team that meets regularly to address the additional data requirements necessary, to determine the approach for implementation and to identify new internal controls over enhanced processes that will be put into place for estimating the allowance under ASU 2016-13. This has included assessing the adequacy of existing loan and loss data, as well as developing models for default and loss estimates. The Corporation expects to continue the validation of models, the development of accounting policies and internal controls and the execution of “trial” or “parallel” runs of its ASU 2016-13 compliant methodology throughout 2019.

Fair Value Measurement - Topic 820

Accounting Standards Update No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), was issued in August 2018 to modify the disclosure requirements related to fair value. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted, including adoption in an interim period. Certain provisions under ASU 2018-13 require prospective application, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The adoption of ASU 2018-13 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Compensation - Retirement Benefits - Topic 715

Accounting Standards Update No. 2018-14, “Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”), was issued in August 2018 to modify the disclosure requirements associated with defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The provisions under ASU 2018-14 are required to be applied retrospectively. The adoption of ASU 2018-14 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Intangibles - Goodwill and Other - Internal-Use Software - Topic 350

Accounting Standards Update No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” (“ASU 2018-15”), was issued in August 2018 to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those requirements that currently exist in GAAP for capitalizing implementation costs incurred to develop or obtain internal-use software. Implementation costs would either be capitalized or expensed as incurred depending on the project stage. All costs in the preliminary and post-implementation project stages are expensed as incurred, while certain costs within the application development stage are capitalized. The provisions under ASU 2018-15 can either be applied retrospectively or prospectively. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted, including adoption in an interim period. The adoption of ASU 2018-15 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Note 3 - Cash and Due from Banks

The Bank maintains certain average reserve balances to meet the requirements of the Board of Governors of the Federal Reserve System (“FRB”). Some or all of these reserve requirements may be satisfied with vault cash. Reserve balances amounted to $25.7 million at March 31, 2019 and $21.6 million at December 31, 2018 and were included in cash and due from banks in the Unaudited Consolidated Balance Sheets.

As of March 31, 2019 and December 31, 2018, cash and due from banks included interest-bearing deposits in other banks of $38.5 million and $33.7 million, respectively.

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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 4 - Securities

The following tables present the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of securities by major security type and class of security:



(Dollars in thousands)
March 31, 2019	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises		$246,717		$682		($1,927	)		$245,472
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	727,511		4,341		(8,347		)	723,505
Obligations of states and political subdivisions	935		2		—			937
Individual name issuer trust preferred debt securities	13,311		—		(941		)	12,370
Corporate bonds	13,911		9		(1,323		)	12,597
Total available for sale debt securities		$1,002,385		$5,034		($12,538	)		$994,881
Total securities		$1,002,385		$5,034		($12,538	)		$994,881



(Dollars in thousands)
December 31, 2018	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises		$246,708		$442		($4,467	)		$242,683
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	675,368		1,943		(16,518		)	660,793
Obligations of states and political subdivisions	935		2		—			937
Individual name issuer trust preferred debt securities	13,307		—		(1,535		)	11,772
Corporate bonds	13,402		—		(1,777		)	11,625
Total available for sale debt securities		$949,720		$2,387		($24,297	)		$927,810
Held to Maturity Debt Securities:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$10,415		$—		($99	)		$10,316
Total held to maturity debt securities		$10,415		$—		($99	)		$10,316
Total securities		$960,135		$2,387		($24,396	)		$938,126

As discussed in Note 2, on January 1, 2019, the Corporation adopted ASU 2017-12. As permitted by ASU 2017-12, qualifying debt securities classified as held to maturity with an amortized cost of $10.4 million and a fair value of $10.3 million were reclassified to available for sale upon the adoption date. An unrealized loss of $75 thousand (net of taxes) was recognized in the accumulated other comprehensive income component of shareholders’ equity at the date of adoption.

As of March 31, 2019 and December 31, 2018, debt securities with a fair value of $497.5 million and $439.7 million, respectively, were pledged as collateral for FHLB borrowings, potential borrowings with the FRB, certain public deposits and for other purposes. See Note 7 for additional disclosure on FHLB borrowings.

- 12-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The schedule of maturities of available for sale debt securities is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. All other debt securities are included based on contractual maturities. Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.



(Dollars in thousands)	Available for Sale
March 31, 2019	Amortized Cost		Fair Value
Due in one year or less		$74,364		$73,944
Due after one year to five years	345,082		343,090
Due after five years to ten years	351,603		348,484
Due after ten years	231,336		229,363
Total debt securities		$1,002,385		$994,881

Included in the above table are debt securities with an amortized cost balance of $273.4 million and a fair value of $269.8 million at March 31, 2019 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 2 months to 18 years, with call features ranging from 1 month to 4 years.

Other-Than-Temporary Impairment Assessment

Management assesses whether the decline in fair value of investment securities is other-than-temporary on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates impairments in value both qualitatively and quantitatively to assess whether they are other-than-temporary.

The following tables summarize temporarily impaired securities, segregated by length of time the securities have been in a continuous unrealized loss position:



(Dollars in thousands)	Less than 12 Months					12 Months or Longer						Total
March 31, 2019	#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored enterprises	—		$—		$—	14		$139,573		($1,927	)	14		$139,573		($1,927	)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	—	—		—		47	409,374		(8,347		)	47	409,374		(8,347		)
Individual name issuer trust preferred debt securities	—	—		—		5	12,370		(941		)	5	12,370		(941		)
Corporate bonds	—	—		—		7	11,874		(1,323		)	7	11,874		(1,323		)
Total temporarily impaired securities	—		$—		$—	73		$573,191		($12,538	)	73		$573,191		($12,538	)



(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
December 31, 2018	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored enterprises	—		$—		$—		16		$157,032		($4,467	)	16		$157,032		($4,467	)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	10	47,060		(439		)	51	438,701		(16,178		)	61	485,761		(16,617		)
Individual name issuer trust preferred debt securities	—	—		—			5	11,772		(1,535		)	5	11,772		(1,535		)
Corporate bonds	3	1,198		(9		)	5	10,427		(1,768		)	8	11,625		(1,777		)
Total temporarily impaired securities	13		$48,258		($448	)	77		$617,932		($23,948	)	90		$666,190		($24,396	)

- 13-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Further deterioration in credit quality of the underlying issuers of the securities, deterioration in the condition of the financial services industry, worsening of the current economic environment, or additional declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods, and the Corporation may incur write-downs.

Obligations of U.S. Government Agency and U.S. Government-Sponsored Enterprise Securities, including Mortgage-Backed Securities

The gross unrealized losses on U.S. government agency and U.S. government-sponsored debt securities, including mortgage-backed securities, were primarily attributable to relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is not more-likely-than-not that the Corporation will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2019.

Individual Name Issuer Trust Preferred Debt Securities

Included in debt securities in an unrealized loss position at March 31, 2019 were five trust preferred securities issued by four individual companies in the banking sector. Management believes the unrealized losses on these holdings were attributable to the general widening of spreads for this category of debt securities issued by financial services companies since the time these securities were purchased. Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. As of March 31, 2019, individual name issuer trust preferred debt securities with an amortized cost of $6.1 million and unrealized losses of $446 thousand were rated below investment grade by Standard & Poors, Inc. (“S&P”). Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information. We noted no additional downgrades to below investment grade between March 31, 2019 and the filing date of this report. Based on this review, management concluded that it expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is not more-likely-than-not that the Corporation will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2019.

Corporate Bonds

At March 31, 2019, the Corporation had seven corporate bond holdings with unrealized losses totaling $1.3 million. These investment grade corporate bonds were issued by large corporations, primarily in the financial services industry. Management believes the unrealized losses on these bonds are a function of the changes in the investment spreads and interest rate movements and not changes in the credit quality of the issuers of the debt securities. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is not more-likely-than-not that the Corporation will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2019.

- 14-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 5 - Loans

The following is a summary of loans:



(Dollars in thousands)	March 31, 2019		December 31, 2018
Commercial:
Commercial real estate (1)		$1,463,682		$1,392,408
Commercial & industrial (2)	610,608		620,704
Total commercial	2,074,290		2,013,112
Residential Real Estate:
Residential real estate (3)	1,359,072		1,360,387
Consumer:
Home equity	279,938		280,626
Other (4)	25,169		26,235
Total consumer	305,107		306,861
Total loans (5)		$3,738,469		$3,680,360


(1)	Consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.


(2)	Consists of loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.


(3)	Consists of mortgage and homeowner construction loans secured by one- to four-family residential properties.


(4)	Consists of loans to individuals secured by general aviation aircraft and other personal installment loans.


(5)	Includes net unamortized loan origination costs of $4.9 million and $4.7 million, respectively, at March 31, 2019 and December 31, 2018 and net unamortized premiums on purchased loans of $668 thousand and $703 thousand, respectively, at March 31, 2019 and December 31, 2018.

As of both March 31, 2019 and December 31, 2018, loans amounting to $2.0 billion were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRB for the discount window. See Note 7 for additional disclosure regarding borrowings.

Past Due Loans

Past due status is based on the contractual payment terms of the loan. The following tables present an age analysis of past due loans, segregated by class of loans:



(Dollars in thousands)	Days Past Due
March 31, 2019	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Commercial real estate		$—		$—		$926		$926		$1,462,756		$1,463,682
Commercial & industrial	1		—		—		1		610,607		610,608
Total commercial	1		—		926		927		2,073,363		2,074,290
Residential Real Estate:
Residential real estate	5,868		2,749		2,232		10,849		1,348,223		1,359,072
Consumer:
Home equity	1,851		433		627		2,911		277,027		279,938
Other	13		—		—		13		25,156		25,169
Total consumer	1,864		433		627		2,924		302,183		305,107
Total loans		$7,733		$3,182		$3,785		$14,700		$3,723,769		$3,738,469

- 15-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)



(Dollars in thousands)	Days Past Due
December 31, 2018	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Commercial real estate		$155		$925		$—		$1,080		$1,391,328		$1,392,408
Commercial & industrial	—		—		—		—		620,704		620,704
Total commercial	155		925		—		1,080		2,012,032		2,013,112
Residential Real Estate:
Residential real estate	6,318		2,693		1,509		10,520		1,349,867		1,360,387
Consumer:
Home equity	1,281		156		552		1,989		278,637		280,626
Other	33		—		—		33		26,202		26,235
Total consumer	1,314		156		552		2,022		304,839		306,861
Total loans		$7,787		$3,774		$2,061		$13,622		$3,666,738		$3,680,360

Included in past due loans at both March 31, 2019 and December 31, 2018 were nonaccrual loans of $8.6 million.

All loans 90 days or more past due at March 31, 2019 and December 31, 2018 were classified as nonaccrual.

- 16-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Impaired Loans

Impaired loans include nonaccrual loans and loans restructured in a troubled debt restructuring. The Corporation identifies loss allocations for impaired loans on an individual loan basis.

The following is a summary of impaired loans:



(Dollars in thousands)	Recorded Investment (1)				Unpaid Principal				Related Allowance
	Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018
No Related Allowance Recorded
Commercial:
Commercial real estate		$926		$925		$926		$926		$—		$—
Commercial & industrial	4,645		4,681		4,633		4,732		—		—
Total commercial	5,571		5,606		5,559		5,658		—		—
Residential Real Estate:
Residential real estate	9,659		9,347		10,010		9,695		—		—
Consumer:
Home equity	1,297		1,360		1,297		1,360		—		—
Other	—		—		—		—		—		—
Total consumer	1,297		1,360		1,297		1,360		—		—
Subtotal	16,527		16,313		16,866		16,713		—		—
With Related Allowance Recorded
Commercial:
Commercial real estate		$—		$—		$—		$—		$—		$—
Commercial & industrial	—		52		—		73		—		—
Total commercial	—		52		—		73		—		—
Residential Real Estate:
Residential real estate	736		364		762		390		98		100
Consumer:
Home equity	111		85		111		85		111		24
Other	21		22		20		22		1		3
Total consumer	132		107		131		107		112		27
Subtotal	868		523		893		570		210		127
Total impaired loans		$17,395		$16,836		$17,759		$17,283		$210		$127
Total:
Commercial		$5,571		$5,658		$5,559		$5,731		$—		$—
Residential real estate	10,395		9,711		10,772		10,085		98		100
Consumer	1,429		1,467		1,428		1,467		112		27
Total impaired loans		$17,395		$16,836		$17,759		$17,283		$210		$127

(1)

The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs. For accruing impaired loans (troubled debt restructurings for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest.

- 17-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following tables present the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class.




(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Three months ended March 31,	2019		2018		2019		2018
Commercial:
Commercial real estate		$976		$4,100		$1		$—
Commercial & industrial	4,689		5,492		54		66
Total commercial	5,665		9,592		55		66
Residential Real Estate:
Residential real estate	10,151		9,850		115		112
Consumer:
Home equity	1,480		667		14		9
Other	21		144		—		3
Total consumer	1,501		811		14		12
Totals		$17,317		$20,253		$184		$190

Nonaccrual Loans

Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. When loans are placed on nonaccrual status, interest previously accrued but not collected is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.

The following is a summary of nonaccrual loans, segregated by class of loans:



(Dollars in thousands)	Mar 31, 2019		Dec 31, 2018
Commercial:
Commercial real estate		$926		$925
Commercial & industrial	—		—
Total commercial	926		925
Residential Real Estate:
Residential real estate	10,032		9,346
Consumer:
Home equity	1,407		1,436
Other	—		—
Total consumer	1,407		1,436
Total nonaccrual loans		$12,365		$11,707
Accruing loans 90 days or more past due		$—		$—

As of March 31, 2019 and December 31, 2018, loans secured by one- to four-family residential property amounting to $1.7 million and $761 thousand, respectively, were in process of foreclosure.

- 18-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Nonaccrual loans of $3.8 million and $3.1 million, respectively, were current as to the payment of principal and interest at March 31, 2019 and December 31, 2018.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2019.

Troubled Debt Restructurings

Loans are considered to be troubled debt restructurings when the Corporation has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring of a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection.

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.

Troubled debt restructurings are reported as such for at least one year from the date of the restructuring. In years after the restructuring, troubled debt restructured loans are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement.

The recorded investment in troubled debt restructurings consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs, at the time of the restructuring. For accruing troubled debt restructured loans, the recorded investment also includes accrued interest. The recorded investment in troubled debt restructurings was $5.5 million and $5.6 million, respectively, at March 31, 2019 and December 31, 2018. The allowance for loan losses included specific reserves for these troubled debt restructurings of $99 thousand and $103 thousand, respectively, at March 31, 2019 and December 31, 2018.

For the three months ended March 31, 2019, there were no loans modified as a troubled debt restructuring. For the three months ended March 31, 2018, there was one commercial and industrial loan modified as a troubled debt restructuring with a pre-modification and post-modification recorded investment of $608 thousand. This troubled debt restructuring included a combination of concessions pertaining to maturity and interest only payment terms.

For the three months ended March 31, 2019 and 2018, there were no payment defaults on troubled debt restructured loans modified within the previous 12 months.

As of March 31, 2019, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

- 19-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Credit Quality Indicators

Commercial

The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. For non-impaired loans, the Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for loan losses. See Note 6 for additional information.

A description of the commercial loan categories is as follows:

Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality but exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, secondary sources of repayment, or performance inconsistency or may be in an industry or of a loan type known to have a higher degree of risk.

Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies.

Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectability. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset.

The Corporation’s procedures call for loan ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, management reviews the criticized loan portfolio, which generally consists of commercial loans that are risk-rated special mention or worse, and other selected loans. Management’s review focuses on the current status of the loans and strategies to improve the credit. An annual loan review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio.

The following table presents the commercial loan portfolio, segregated by category of credit quality indicator:



(Dollars in thousands)	Pass				Special Mention				Classified
	Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018
Commercial:
Commercial real estate		$1,441,182		$1,387,666		$17,778		$205		$4,722		$4,537
Commercial & industrial	571,489		559,019		27,073		50,426		12,046		11,259
Total commercial		$2,012,671		$1,946,685		$44,851		$50,631		$16,768		$15,796

- 20-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Residential and Consumer

Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type. For non-impaired residential real estate and consumer loans, the Corporation assigns loss allocation factors to each respective loan type.

Other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and consumer loan portfolios. Among these techniques is the periodic tracking of loans with an updated Fair Isaac Corporation (“FICO”) score and an estimated loan to value (“LTV”) ratio. LTV ratio is determined via statistical modeling analyses. The indicated LTV levels are estimated based on such factors as the location, the original LTV ratio, and the date of origination of the loan and do not reflect actual appraisal amounts. The results of these analyses and other loan review procedures are taken into consideration in the determination of loss allocation factors for residential mortgage and home equity consumer credits.

The following table presents the residential and consumer loan portfolios, segregated by loan type and credit quality indicator:



(Dollars in thousands)	Current				Past Due
	Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018
Residential Real Estate:
Self-originated mortgages		$1,240,306		$1,238,402		$9,751		$9,079
Purchased mortgages	107,917		111,465		1,098		1,441
Total residential real estate		$1,348,223		$1,349,867		$10,849		$10,520
Consumer:
Home equity		$277,027		$278,637		$2,911		$1,989
Other	25,156		26,202		13		33
Total consumer		$302,183		$304,839		$2,924		$2,022

Note 6 - Allowance for Loan Losses

The allowance for loan losses is management’s best estimate of incurred losses inherent in the loan portfolio as of the balance sheet date. The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes: (1) the identification of loss allocations for individual loans deemed to be impaired and (2) the application of loss allocation factors for non-impaired loans based on historical loss experience and estimated loss emergence period, with adjustments for various exposures that management believes are not adequately represented by historical loss experience.

The following table presents the activity in the allowance for loan losses for the three months ended March 31, 2019:



(Dollars in thousands)	Commercial										Consumer
	CRE (1)		C&I (2)			Total Commercial			Residential Real Estate		Home Equity			Other			Total Consumer			Total
Beginning Balance		$15,381		$5,847			$21,228			$3,987		$1,603			$254			$1,857			$27,072
Charge-offs	—		(14		)	(14		)	—		(61		)	(28		)	(89		)	(103		)
Recoveries	—		8			8			—		13			4			17			25
Provision	1,810		(1,343		)	467			22		34			127			161			650
Ending Balance		$17,191		$4,498			$21,689			$4,009		$1,589			$357			$1,946			$27,644

(1) Commercial real estate loans.

(2) Commercial & industrial loans.

- 21-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the activity in the allowance for loan losses for the three months ended March 31, 2018:



(Dollars in thousands)	Commercial											Consumer
	CRE (1)			C&I (2)			Total Commercial			Residential Real Estate		Home Equity			Other			Total Consumer			Total
Beginning Balance		$12,729			$5,580			$18,309			$5,427		$2,412			$340			$2,752			$26,488
Charge-offs	(627		)	(6		)	(633		)	—		(35		)	(22		)	(57		)	(690		)
Recoveries	25			29			54			—		7			5			12			66
Provision	(308		)	268			(40		)	67		(192		)	165			(27		)	—
Ending Balance		$11,819			$5,871			$17,690			$5,494		$2,192			$488			$2,680			$25,864

(1) Commercial real estate loans.

(2) Commercial & industrial loans.

The following table presents the Corporation’s loan portfolio and associated allowance for loan losses by portfolio segment and by impairment methodology:



(Dollars in thousands)	March 31, 2019				December 31, 2018
	Loans		Related Allowance		Loans		Related Allowance
Loans Individually Evaluated for Impairment
Commercial:
Commercial real estate		$926		$—		$925		$—
Commercial & industrial	4,626		—		4,714		—
Total commercial	5,552		—		5,639		—
Residential Real Estate:
Residential real estate	10,394		98		9,710		100
Consumer:
Home equity	1,408		111		1,445		24
Other	20		1		22		3
Total consumer	1,428		112		1,467		27
Subtotal	17,374