(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 for Loan and Lease Losses by Portfolio Segment

The following tables detail the roll‑forward of the Corporation’s Allowance, by portfolio segment, for the three month periods ended March 31, 2019 and 2018, respectively:


	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		2,690	—	97	59	2,846
Consumer		3	—	1	—	4
Leases		10	—	—	(2)	8
Total	$	8,053	—	104	219	8,376


	Balance,					Balance,
(dollars in thousands)	December 31, 2017		Charge-offs	Recoveries	Provision	March 31, 2018
Commercial mortgage	$	2,434	—	2	130	2,566
Home Equity lines and loans		280	(66)	2	46	262
Residential mortgage		82	—	—	45	127
Construction		1,689	—	—	172	1,861
Commercial and industrial		2,214	(80)	16	165	2,315
Consumer		5	—	1	(3)	3
Leases		5	—	—	(1)	4
Total	$	6,709	(146)	21	554	7,138

Allowance for Loan and Lease Losses 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, 2019 and December 31, 2018.


	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
March 31, 2019	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	3,163	3,163	$	1,921	323,922	325,843
Home Equity lines and loans		—	341	341		81	81,858	81,939
Residential mortgage		—	212	212		857	43,996	44,853
Construction		—	1,802	1,802		1,294	126,369	127,663
Commercial and industrial		133	2,713	2,846		1,448	267,580	269,028
Consumer		—	4	4		—	751	751
Leases		—	8	8		—	1,159	1,159
Total	$	133	8,243	8,376	$	5,601	845,635	851,236	(1)


	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
December 31, 2018	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	3,209	3,209	$	1,929	323,464	325,393
Home Equity lines and loans		—	323	323		83	82,203	82,286
Residential mortgage		—	191	191		969	40,969	41,938
Construction		—	1,627	1,627		1,281	115,625	116,906
Commercial and industrial		103	2,587	2,690		1,537	258,269	259,806
Consumer		—	3	3		—	701	701
Leases		—	10	10		—	1,335	1,335
Total	$	103	7,950	8,053	$	5,799	822,566	828,365	(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 factors, 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 allocate the allowance for loan and lease losses as of March 31, 2019 and December 31, 2018:


March 31, 2019			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	320,616	3,347	1,880	—	325,843
Home equity lines and loans		81,776	—	163	—	81,939
Construction		125,000	2,663	—	—	127,663
Commercial and industrial		244,843	11,951	12,204	30	269,028
Total	$	772,235	17,961	14,247	30	804,473


December 31, 2018			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	320,130	3,713	1,550	—	325,393
Home equity lines and loans		82,121	—	165	—	82,286
Construction		114,249	2,657	—	—	116,906
Commercial and industrial		239,181	12,620	7,975	30	259,806
Total	$	755,681	18,990	9,690	30	784,391

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, 2019 and December 31, 2018. No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of March 31, 2019 and December 31, 2018.


	March 31, 2019				December 31, 2018
(dollars in thousands)	Performing		Nonperforming	Total	Performing		Nonperforming	Total
Residential mortgage	$	43,996	857	44,853	$	40,969	969	41,938
Consumer		751	—	751		701	—	701
Leases		1,159	—	1,159		1,335	—	1,335
Total	$	45,906	857	46,763	$	43,005	969	43,974

There were six nonperforming residential mortgage loans at March 31, 2019 and December 31, 2018 with a combined outstanding principal balance of $1.2 million and $1.9 million, respectively, which were carried at fair value and not included in the table above.

Impaired Loans

The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related allowance for loan and lease losses and interest income recognized for the periods.


	At March 31, 2019					At December 31, 2018
					Average				Average
	Recorded		Principal	Related	recorded	Recorded	Principal	Related	recorded
(dollars in thousands)	investment		balance	allowance	investment	investment	balance	allowance	investment
Impaired loans with related allowance:
Commercial mortgage	$	—	—	—	—	—	—	—	—
Commercial and industrial		671	674	133	673	676	679	103	680
Home equity lines and loans		—	—	—	—	—	—	—	—
Residential mortgage		—	—	—	—	—	—	—	—
Construction		—	—	—	—	—	—	—	—
Total		671	674	133	673	676	679	103	680
Impaired loans without related allowance:
Commercial mortgage	$	1,921	2,371	—	1,926	1,929	2,379	—	1,982
Commercial and industrial		777	863	—	797	861	945	—	885
Home equity lines and loans		81	89	—	82	83	89	—	84
Residential mortgage		857	857	—	857	969	978	—	978
Construction		1,294	1,294	—	1,287	1,281	1,281	—	1,293
Total		4,930	5,474	—	4,949	5,123	5,672	—	5,222
Grand Total	$	5,601	6,148	133	5,622	5,799	6,351	103	5,902

Interest income recognized on performing impaired loans amounted to $49 thousand and $52 thousand for the three months ended March 31, 2019 and 2018, 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, 2019 and December 31, 2018 are as follows:


	March 31,		December 31,
(dollars in thousands)	2019		2018
TDRs included in nonperforming loans and leases	$	1,213	1,219
TDRs in compliance with modified terms		2,940	3,047
Total TDRs	$	4,153	4,266

There were no loan and lease modifications granted during the three months ended March 31, 2019 and 2018 that were categorized as TDRs. No loan and lease modifications granted during the three months ended March 31, 2019 and 2018 subsequently defaulted during the same time period.