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LOANS AND LEASES | 3 Months Ended
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Mar. 31, 2019
Receivables [Abstract] |
LOANS AND LEASES | LOANS AND LEASES First Financial offers clients a variety of commercial and consumer loan and lease products with distinct interest rates and payment terms. Commercial loan categories include C&I, CRE, construction real estate and lease financing. Consumer loan categories include residential real estate, home equity, installment and credit card. Lending activities are primarily concentrated in states where the Bank operates banking centers (Ohio, Indiana, Kentucky and Illinois). First Financial also offers two nationwide lending platforms, one that provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and another that primarily provides loans that are secured by commissions and cash collateral to insurance agents and brokers. Credit Quality. To facilitate the monitoring of credit quality for commercial loans, and for purposes of determining an appropriate ALLL, First Financial utilizes the following categories of credit grades: Pass - Higher quality loans that do not fit any of the other categories described below. Special Mention - First Financial assigns a special mention rating to loans and leases 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 loan or lease or in First Financial's credit position at some future date. Substandard - First Financial assigns a substandard rating to loans or leases that are inadequately protected by the current sound financial worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans and leases have well-defined weaknesses that jeopardize repayment of the debt. Substandard loans and leases are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not addressed. Doubtful - First Financial assigns a doubtful rating to loans and leases with all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The credit grades previously described are derived from standard regulatory rating definitions and are assigned upon initial approval of credit to borrowers and updated periodically thereafter. First Financial considers repayment performance to be the best indicator of credit quality for consumer loans. Consumer loans that have principal and interest payments that are past due by 90 days or more are generally classified as nonperforming. Additionally, consumer loans that have been modified in a TDR are classified as nonperforming. Purchased impaired loans are not classified as nonperforming as the loans are considered to be performing under FASB ASC Topic 310-30. Commercial and consumer credit exposure by risk attribute was as follows:
|  | As of March 31, 2019
|  | Commercial |  | Real Estate |  | Lease |  |
(Dollars in thousands) |  | & industrial |  | Construction |  | Commercial |  | financing |  | Total
Pass |  | $ | 2,443,488 |  |  | $ | 457,508 |  |  | $ | 3,720,197 |  |  | $ | 92,527 |  |  | $ | 6,713,720 |
Special Mention |  | 36,936 |  |  | 0 |  |  | 25,935 |  |  | 365 |  |  | 63,236 |
Substandard |  | 63,003 |  |  | 605 |  |  | 56,047 |  |  | 2,681 |  |  | 122,336 |
Doubtful |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Total |  | $ | 2,543,427 |  |  | $ | 458,113 |  |  | $ | 3,802,179 |  |  | $ | 95,573 |  |  | $ | 6,899,292 |
(Dollars in thousands) |  | Residential real estate |  | Home equity |  | Installment |  | Credit card |  | Total
Performing |  | $ | 958,185 |  |  | $ | 790,893 |  |  | $ | 90,515 |  |  | $ | 46,827 |  |  | $ | 1,886,420 |
Nonperforming |  | 16,935 |  |  | 6,225 |  |  | 174 |  |  | 155 |  |  | 23,489 |
Total |  | $ | 975,120 |  |  | $ | 797,118 |  |  | $ | 90,689 |  |  | $ | 46,982 |  |  | $ | 1,909,909 |
|  | As of December 31, 2018
|  | Commercial |  | Real Estate |  | Lease |  |
(Dollars in thousands) |  | & industrial |  | Construction |  | Commercial |  | financing |  | Total
Pass |  | $ | 2,432,834 |  |  | $ | 548,323 |  |  | $ | 3,664,434 |  |  | $ | 90,902 |  |  | $ | 6,736,493 |
Special Mention |  | 24,594 |  |  | 603 |  |  | 38,653 |  |  | 0 |  |  | 63,850 |
Substandard |  | 57,233 |  |  | 9 |  |  | 51,594 |  |  | 2,513 |  |  | 111,349 |
Doubtful |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Total |  | $ | 2,514,661 |  |  | $ | 548,935 |  |  | $ | 3,754,681 |  |  | $ | 93,415 |  |  | $ | 6,911,692 |
(Dollars in thousands) |  | Residential real estate |  | Home equity |  | Installment |  | Credit card |  | Total
Performing |  | $ | 939,936 |  |  | $ | 811,108 |  |  | $ | 93,038 |  |  | $ | 46,382 |  |  | $ | 1,890,464 |
Nonperforming |  | 15,710 |  |  | 6,174 |  |  | 174 |  |  | 0 |  |  | 22,058 |
Total |  | $ | 955,646 |  |  | $ | 817,282 |  |  | $ | 93,212 |  |  | $ | 46,382 |  |  | $ | 1,912,522 |
Delinquency. Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the date of the scheduled payment. Loan delinquency, including loans classified as nonaccrual, was as follows:
|  | As of March 31, 2019
(Dollars in thousands) |  | 30 – 59 days past due |  | 60 – 89 days past due |  | > 90 days past due |  | Total past due |  | Current |  | Subtotal |  | Purchased impaired |  | Total |  | > 90 days past due and still accruing
Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial & industrial |  | $ | 917 |  |  | $ | 7,797 |  |  | $ | 8,255 |  |  | $ | 16,969 |  |  | $ | 2,521,040 |  |  | $ | 2,538,009 |  |  | $ | 5,418 |  |  | $ | 2,543,427 |  |  | $ | 23 |
Lease financing |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 95,573 |  |  | 95,573 |  |  | 0 |  |  | 95,573 |  |  | 0 |
Construction real estate |  | 0 |  |  | 598 |  |  | 0 |  |  | 598 |  |  | 457,323 |  |  | 457,921 |  |  | 192 |  |  | 458,113 |  |  | 0 |
Commercial real estate |  | 1,695 |  |  | 1,103 |  |  | 13,462 |  |  | 16,260 |  |  | 3,738,962 |  |  | 3,755,222 |  |  | 46,957 |  |  | 3,802,179 |  |  | 0 |
Residential real estate |  | 3,329 |  |  | 1,495 |  |  | 4,326 |  |  | 9,150 |  |  | 933,896 |  |  | 943,046 |  |  | 32,074 |  |  | 975,120 |  |  | 0 |
Home equity |  | 2,960 |  |  | 1,046 |  |  | 2,702 |  |  | 6,708 |  |  | 787,129 |  |  | 793,837 |  |  | 3,281 |  |  | 797,118 |  |  | 0 |
Installment |  | 317 |  |  | 30 |  |  | 84 |  |  | 431 |  |  | 89,837 |  |  | 90,268 |  |  | 421 |  |  | 90,689 |  |  | 0 |
Credit card |  | 193 |  |  | 206 |  |  | 155 |  |  | 554 |  |  | 46,428 |  |  | 46,982 |  |  | 0 |  |  | 46,982 |  |  | 155 |
Total |  | $ | 9,411 |  |  | $ | 12,275 |  |  | $ | 28,984 |  |  | $ | 50,670 |  |  | $ | 8,670,188 |  |  | $ | 8,720,858 |  |  | $ | 88,343 |  |  | $ | 8,809,201 |  |  | $ | 178 |
|  | As of December 31, 2018
(Dollars in thousands) |  | 30 – 59 days past due |  | 60 – 89 days past due |  | > 90 days past due |  | Total past due |  | Current |  | Subtotal |  | Purchased impaired |  | Total |  | > 90 days past due and still accruing
Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial & industrial |  | $ | 13,369 |  |  | $ | 41 |  |  | $ | 7,423 |  |  | $ | 20,833 |  |  | $ | 2,488,450 |  |  | $ | 2,509,283 |  |  | $ | 5,378 |  |  | $ | 2,514,661 |  |  | $ | 0 |
Lease financing |  | 352 |  |  | 0 |  |  | 0 |  |  | 352 |  |  | 93,063 |  |  | 93,415 |  |  | 0 |  |  | 93,415 |  |  | 0 |
Construction real estate |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 548,687 |  |  | 548,687 |  |  | 248 |  |  | 548,935 |  |  | 0 |
Commercial real estate |  | 6,279 |  |  | 1,158 |  |  | 12,644 |  |  | 20,081 |  |  | 3,682,455 |  |  | 3,702,536 |  |  | 52,145 |  |  | 3,754,681 |  |  | 0 |
Residential real estate |  | 11,060 |  |  | 2,976 |  |  | 4,535 |  |  | 18,571 |  |  | 902,404 |  |  | 920,975 |  |  | 34,671 |  |  | 955,646 |  |  | 0 |
Home equity |  | 5,245 |  |  | 1,228 |  |  | 2,578 |  |  | 9,051 |  |  | 804,835 |  |  | 813,886 |  |  | 3,396 |  |  | 817,282 |  |  | 0 |
Installment |  | 420 |  |  | 37 |  |  | 145 |  |  | 602 |  |  | 92,128 |  |  | 92,730 |  |  | 482 |  |  | 93,212 |  |  | 0 |
Credit card |  | 541 |  |  | 96 |  |  | 63 |  |  | 700 |  |  | 45,682 |  |  | 46,382 |  |  | 0 |  |  | 46,382 |  |  | 63 |
Total |  | $ | 37,266 |  |  | $ | 5,536 |  |  | $ | 27,388 |  |  | $ | 70,190 |  |  | $ | 8,657,704 |  |  | $ | 8,727,894 |  |  | $ | 96,320 |  |  | $ | 8,824,214 |  |  | $ | 63 |
Nonaccrual. Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful or when principal or interest payments are 90 days or more past due. Generally, loans are classified as nonaccrual due to the continued failure to adhere to contractual payment terms by the borrower, coupled with other pertinent factors. When a loan is classified as nonaccrual, the accrual of interest income is discontinued and previously accrued but unpaid interest is reversed. Any payments received while a loan is on nonaccrual status are applied as a reduction to the carrying value of the loan. A loan classified as nonaccrual may return to accrual status if none of the principal and interest due and unpaid, and the Bank expects repayment of the remaining contractual principal and interest. Purchased impaired loans are classified as performing, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period provision for loan and lease losses or prospective yield adjustments. Troubled Debt Restructurings. A loan modification is considered a TDR when the borrower is experiencing financial difficulty and concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. The most common types of modifications include interest rate reductions, maturity extensions and modifications to principal amortization, including interest-only structures. Modified terms are dependent upon the financial position and needs of the individual borrower. If the modification agreement is violated, the loan is managed by the Company’s credit administration group for resolution, which may result in foreclosure in the case of real estate. TDRs are generally classified as nonaccrual for a minimum period of six months and may qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement. First Financial had 201 TDRs totaling $35.9 million at March 31, 2019, including $22.8 million on accrual status and $13.1 million classified as nonaccrual. First Financial had no commitments outstanding to lend additional funds to borrowers whose loan terms have been modified through TDRs, and the ALLL included reserves of $1.4 million related to TDRs at March 31, 2019. Additionally, as of March 31, 2019, $7.5 million of accruing TDRs have been performing in accordance with the restructured terms for more than one year. First Financial had 196 TDRs totaling $38.5 million at December 31, 2018, including $16.1 million of loans on accrual status and $22.4 million classified as nonaccrual. First Financial had no commitments outstanding to lend additional funds to borrowers whose loan terms had been modified through TDRs. At December 31, 2018, the ALLL included reserves of $1.5 million related to TDRs, and $7.9 million of the accruing TDRs had been performing in accordance with the restructured terms for more than one year. The following tables provide information on loan modifications classified as TDRs during the three months ended March 31, 2019 and 2018:
|  | Three months ended
|  | March 31, 2019 |  | March 31, 2018
(Dollars in thousands) |  | Number of loans |  | Pre-modification loan balance |  | Period end balance |  | Number of loans |  | Pre-modification loan balance |  | Period end balance
Commercial & industrial |  | 5 |  |  | $ | 7,637 |  |  | $ | 7,661 |  |  | 4 |  |  | $ | 928 |  |  | $ | 913 |
Construction real estate |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Commercial real estate |  | 6 |  |  | 1,323 |  |  | 1,232 |  |  | 2 |  |  | 72 |  |  | 72 |
Residential real estate |  | 5 |  |  | 458 |  |  | 458 |  |  | 2 |  |  | 93 |  |  | 93 |
Home equity |  | 1 |  |  | 17 |  |  | 17 |  |  | 0 |  |  | 0 |  |  | 0 |
Installment |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Total |  | 17 |  |  | $ | 9,435 |  |  | $ | 9,368 |  |  | 8 |  |  | $ | 1,093 |  |  | $ | 1,078 |
For TDRs identified during the three months ended March 31, 2019 and 2018, there were no chargeoffs for the portion of TDRs determined to be uncollectible. The following table provides information on how TDRs were modified during the three months ended March 31, 2019 and 2018:
|  | Three months ended
|  | March 31,
(Dollars in thousands) |  | 2019 |  | 2018
Extended maturities |  | $ | 2,877 |  |  | $ | 888 |
Adjusted interest rates |  | 5,284 |  |  | 52 |
Combination of rate and maturity changes |  | 508 |  |  | 0 |
Forbearance |  | 557 |  |  | 0 |
Other (1) |  | 142 |  |  | 138 |
Total |  | $ | 9,368 |  |  | $ | 1,078 |
(1) Includes covenant modifications and other concessions, or combination of concessions, that do not consist of interest rate adjustments, forbearance and maturity extensions First Financial considers repayment performance as an indication of the effectiveness of the Company's loan modifications. Borrowers that are 90 days or more past due on any principal or interest payments, or who prematurely terminate a restructured loan agreement without paying the contractual principal balance (for example, in a deed-in-lieu arrangement), are considered to be in payment default of the terms of the TDR agreement. For the three months ended March 31, 2019, there were two TDR relationships for $6.9 million, for which there was a payment default during the period that occurred within twelve months of the loan modification. There were no TDRs for which there was a payment default during the period that occurred within twelve months of the loan modification for the three months ended March 31, 2018.
Impaired Loans. Loans classified as nonaccrual and loans modified as TDRs are considered impaired. The following table provides information on impaired loans, excluding purchased impaired loans:
(Dollars in thousands) |  | March 31, 2019 |  | December 31, 2018
Impaired loans |  |  |  |
Nonaccrual loans (1) |  |  |  |
Commercial & industrial |  | $ | 19,263 |  |  | $ | 30,925 |
Lease financing |  | 301 |  |  | 22 |
Construction real estate |  | 7 |  |  | 9 |
Commercial real estate |  | 21,082 |  |  | 20,500 |
Residential real estate |  | 13,052 |  |  | 13,495 |
Home equity |  | 5,581 |  |  | 5,580 |
Installment |  | 170 |  |  | 169 |
Nonaccrual loans |  | 59,456 |  |  | 70,700 |
Accruing troubled debt restructurings |  | 22,817 |  |  | 16,109 |
Total impaired loans |  | $ | 82,273 |  |  | $ | 86,809 |
(1) Nonaccrual loans include nonaccrual TDRs of $13.1 million and $22.4 million as of March 31, 2019 and December 31, 2018, respectively.
|  | Three months ended
|  | March 31,
(Dollars in thousands) |  | 2019 |  | 2018
Interest income effect on impaired loans |  |  |  |
Gross amount of interest that would have been recorded under original terms |  | $ | 1,613 |  |  | $ | 802 |
Interest included in income |  |  |  |
Nonaccrual loans |  | 335 |  |  | 80 |
Troubled debt restructurings |  | 236 |  |  | 124 |
Total interest included in income |  | 571 |  |  | 204 |
Net impact on interest income |  | $ | 1,042 |  |  | $ | 598 |
First Financial individually reviews all impaired commercial loan relationships, as well as consumer loan TDRs, greater than $250,000, to determine if a specific allowance is necessary based on the borrower’s overall financial condition, payment record, support from guarantors and the realizable value of any collateral. Specific allowances are based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. First Financial's investment in impaired loans was as follows:
|  | As of March 31, 2019 |  | As of December 31, 2018
(Dollars in thousands) |  | Current balance |  | Contractual principal balance |  | Related allowance |  | Current balance |  | Contractual principal balance |  | Related allowance
Loans with no related allowance recorded |  |  |  |  |  |  |  |  |  |
Commercial & industrial |  | $ | 30,142 |  |  | $ | 46,215 |  |  | $ | 0 |  |  | $ | 36,694 |  |  | $ | 42,561 |  |  | $ | 0 |
Lease financing |  | 301 |  |  | 301 |  |  | 0 |  |  | 22 |  |  | 22 |  |  | 0 |
Construction real estate |  | 8 |  |  | 25 |  |  | 0 |  |  | 9 |  |  | 26 |  |  | 0 |
Commercial real estate |  | 22,708 |  |  | 29,530 |  |  | 0 |  |  | 23,513 |  |  | 31,375 |  |  | 0 |
Residential real estate |  | 16,637 |  |  | 19,237 |  |  | 0 |  |  | 17,297 |  |  | 19,975 |  |  | 0 |
Home equity |  | 6,225 |  |  | 7,232 |  |  | 0 |  |  | 6,351 |  |  | 7,461 |  |  | 0 |
Installment |  | 174 |  |  | 310 |  |  | 0 |  |  | 174 |  |  | 563 |  |  | 0 |
Total |  | 76,195 |  |  | 102,850 |  |  | 0 |  |  | 84,060 |  |  | 101,983 |  |  | 0 |
Loans with an allowance recorded |  |  |  |  |  |  |  |  |  |
Commercial & industrial |  | 3,282 |  |  | 3,282 |  |  | 738 |  |  | 939 |  |  | 939 |  |  | 667 |
Lease financing |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Construction real estate |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Commercial real estate |  | 2,498 |  |  | 3,579 |  |  | 651 |  |  | 1,509 |  |  | 1,509 |  |  | 461 |
Residential real estate |  | 298 |  |  | 298 |  |  | 31 |  |  | 301 |  |  | 301 |  |  | 32 |
Home equity |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Installment |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Total |  | 6,078 |  |  | 7,159 |  |  | 1,420 |  |  | 2,749 |  |  | 2,749 |  |  | 1,160 |
Total |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial & industrial |  | 33,424 |  |  | 49,497 |  |  | 738 |  |  | 37,633 |  |  | 43,500 |  |  | 667 |
Lease financing |  | 301 |  |  | 301 |  |  | 0 |  |  | 22 |  |  | 22 |  |  | 0 |
Construction real estate |  | 8 |  |  | 25 |  |  | 0 |  |  | 9 |  |  | 26 |  |  | 0 |
Commercial real estate |  | 25,206 |  |  | 33,109 |  |  | 651 |  |  | 25,022 |  |  | 32,884 |  |  | 461 |
Residential real estate |  | 16,935 |  |  | 19,535 |  |  | 31 |  |  | 17,598 |  |  | 20,276 |  |  | 32 |
Home equity |  | 6,225 |  |  | 7,232 |  |  | 0 |  |  | 6,351 |  |  | 7,461 |  |  | 0 |
Installment |  | 174 |  |  | 310 |  |  | 0 |  |  | 174 |  |  | 563 |  |  | 0 |
Total |  | $ | 82,273 |  |  | $ | 110,009 |  |  | $ | 1,420 |  |  | $ | 86,809 |  |  | $ | 104,732 |  |  | $ | 1,160 |
First Financial's average impaired loans by class and interest income recognized by class was as follows:
|  | Three months ended
|  | March 31, 2019 |  | March 31, 2018
(Dollars in thousands) |  | Average Recorded Investment |  | Interest Income Recognized |  | Average Recorded Investment |  | Interest Income Recognized
Loans with no related allowance recorded |  |  |  |  |  |  |  |
Commercial & industrial |  | $ | 33,418 |  |  | $ | 279 |  |  | $ | 7,867 |  |  | $ | 26 |
Lease financing |  | 162 |  |  | 0 |  |  | 41 |  |  | 0 |
Construction real estate |  | 9 |  |  | 0 |  |  | 28 |  |  | 1 |
Commercial real estate |  | 23,111 |  |  | 103 |  |  | 21,400 |  |  | 99 |
Residential real estate |  | 16,967 |  |  | 86 |  |  | 6,503 |  |  | 47 |
Home equity |  | 6,288 |  |  | 38 |  |  | 4,214 |  |  | 20 |
Installment |  | 174 |  |  | 1 |  |  | 281 |  |  | 0 |
Total |  | 80,129 |  |  | 507 |  |  | 40,334 |  |  | 193 |
Loans with an allowance recorded |  |  |  |  |  |  |  |
Commercial & industrial |  | 2,111 |  |  | 43 |  |  | 204 |  |  | 0 |
Lease financing |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Construction real estate |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Commercial real estate |  | 2,004 |  |  | 19 |  |  | 1,739 |  |  | 3 |
Residential real estate |  | 300 |  |  | 2 |  |  | 1,051 |  |  | 7 |
Home equity |  | 0 |  |  | 0 |  |  | 101 |  |  | 1 |
Installment |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
Total |  | 4,415 |  |  | 64 |  |  | 3,095 |  |  | 11 |
Total |  |  |  |  |  |  |  |
Commercial & industrial |  | 35,529 |  |  | 322 |  |  | 8,071 |  |  | 26 |
Lease financing |  | 162 |  |  | 0 |  |  | 41 |  |  | 0 |
Construction real estate |  | 9 |  |  | 0 |  |  | 28 |  |  | 1 |
Commercial real estate |  | 25,115 |  |  | 122 |  |  | 23,139 |  |  | 102 |
Residential real estate |  | 17,267 |  |  | 88 |  |  | 7,554 |  |  | 54 |
Home equity |  | 6,288 |  |  | 38 |  |  | 4,315 |  |  | 21 |
Installment |  | 174 |  |  | 1 |  |  | 281 |  |  | 0 |
Total |  | $ | 84,544 |  |  | $ | 571 |  |  | $ | 43,429 |  |  | $ | 204 |
Lease financing. The Company prospectively applied Topic 842 in the first quarter of 2019. First Financial originates both sales-type and direct financing leases, and the Company manages and reviews lease residuals in accordance with its credit policies. Sales-type lease contracts contain the ability to purchase the underlying equipment at lease maturity and profit or loss is recognized at lease commencement. Direct financing leases are generally three to five years in length and may be extended at maturity, however, early cancellation may result in a fee to the borrower. For direct financing leases, the net unearned income is deferred and amortized over the life of the lease. Income recognized in first quarter of 2019 related to the implementation of Topic 842 was insignificant. OREO. OREO consists of properties acquired by the Company primarily through the loan foreclosure or repossession process, that results in partial or total satisfaction of problem loans. Changes in OREO were as follows:
|  | Three months ended
|  | March 31,
(Dollars in thousands) |  | 2019 |  | 2018
Balance at beginning of period |  | $ | 1,401 |  |  | $ | 2,781 |
Additions |  |  |  |
Commercial & industrial |  | 0 |  |  | 170 |
Residential real estate |  | 504 |  |  | 459 |
Total additions |  | 504 |  |  | 629 |
Disposals |  |  |  |  |
Commercial & industrial |  | (22 | ) |  | (2,104 | )
Residential real estate |  | (161 | ) |  | (118 | )
Total disposals |  | (183 | ) |  | (2,222 | )
Valuation adjustment |  |  |  |  |
Commercial & industrial |  | 0 |  |  | (97 | )
Residential real estate |  | (57 | ) |  | (26 | )
Total valuation adjustment |  | (57 | ) |  | (123 | )
Balance at end of period |  | $ | 1,665 |  |  | $ | 1,065 |

X
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