Loan and Lease Financings

The Company evaluates loans and leases for credit quality at least annually but more frequently if certain circumstances occur (such as material new information which becomes available and indicates a potential change in credit risk). The Company uses two methods to assess credit risk: loan or lease credit quality grades and credit risk classifications. The purpose of the loan or lease credit quality grade is to document the degree of risk associated with individual credits as well as inform management of the degree of risk in the portfolio taken as a whole. Credit risk classifications are used to categorize loans by degree of risk and to designate individual or committee approval authorities for higher risk credits at the time of origination. Credit risk classifications include categories for: Acceptable, Marginal, Special Attention, Special Risk, Restricted by Policy, Regulated and Prohibited by Law.

All loans and leases, except residential real estate loans and consumer loans, are assigned credit quality grades on a scale from 1 to 12 with grade 1 representing superior credit quality. The criteria used to assign grades to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Company’s safety and soundness. Loans or leases graded 7 or weaker are considered “special attention” credits and, as such, relationships in excess of $100,000 are reviewed quarterly as part of management’s evaluation of the appropriateness of the reserve for loan and lease losses. Grade 7 credits are defined as “watch” and contain greater than average credit risk and are monitored to limit the exposure to increased risk; grade 8 credits are “special mention” and, following regulatory guidelines, are defined as having potential weaknesses that deserve management’s close attention. Credits that exhibit well-defined weaknesses and a distinct possibility of loss are considered “classified” and are graded 9 through 12 corresponding to the regulatory definitions of “substandard” (grades 9 and 10) and the more severe “doubtful” (grade 11) and “loss” (grade 12).

The following table shows the credit quality grades of the recorded investment in loans and leases, segregated by class.



	Credit Quality Grades
(Dollars in thousands)	1-6		7-12		Total
June 30, 2015
Commercial and agricultural	$	703,841	$	16,131	$	719,972
Auto and light truck	426,119		20,612		446,731
Medium and heavy duty truck	247,339		2,706		250,045
Aircraft financing	728,489		23,176		751,665
Construction equipment financing	438,594		6,885		445,479
Commercial real estate	621,689		19,516		641,205
Total	$	3,166,071	$	89,026	$	3,255,097

December 31, 2014
Commercial and agricultural	$	683,169	$	27,589	$	710,758
Auto and light truck	380,425		17,477		397,902
Medium and heavy duty truck	243,798		3,355		247,153
Aircraft financing	691,018		36,647		727,665
Construction equipment financing	393,965		5,975		399,940
Commercial real estate	592,787		23,800		616,587
Total	$	2,985,162	$	114,843	$	3,100,005

For residential real estate and consumer loans, credit quality is based on the aging status of the loan and by payment activity. The following table shows the recorded investment in residential real estate and consumer loans by performing or nonperforming status. Nonperforming loans are those loans which are on nonaccrual status or are 90 days or more past due.



(Dollars in thousands)	Performing		Nonperforming		Total
June 30, 2015
Residential real estate	$	452,182	$	2,548	$	454,730
Consumer	142,607		265		142,872
Total	$	594,789	$	2,813	$	597,602

December 31, 2014
Residential real estate	$	442,918	$	2,841	$	445,759
Consumer	142,476		334		142,810
Total	$	585,394	$	3,175	$	588,569

The following table shows the recorded investment of loans and leases, segregated by class, with delinquency aging and nonaccrual status.



(Dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Accruing		Total Accruing Loans		Nonaccrual		Total Financing Receivables
June 30, 2015
Commercial and agricultural	$	717,653	$	114	$	77	$	—	$	717,844	$	2,128	$	719,972
Auto and light truck	446,507		131		80		—		446,718		13		446,731
Medium and heavy duty truck	250,045		—		—		—		250,045		—		250,045
Aircraft financing	736,085		531		7,748		—		744,364		7,301		751,665
Construction equipment financing	444,001		562		184		—		444,747		732		445,479
Commercial real estate	638,832		—		—		—		638,832		2,373		641,205
Residential real estate	451,216		640		326		221		452,403		2,327		454,730
Consumer	141,713		679		215		57		142,664		208		142,872
Total	$	3,826,052	$	2,657	$	8,630	$	278	$	3,837,617	$	15,082	$	3,852,699

December 31, 2014
Commercial and agricultural	$	696,351	$	—	$	123	$	—	$	696,474	$	14,284	$	710,758
Auto and light truck	397,815		48		1		—		397,864		38		397,902
Medium and heavy duty truck	247,097		—		—		—		247,097		56		247,153
Aircraft financing	699,054		541		15,597		—		715,192		12,473		727,665
Construction equipment financing	396,821		999		1,369		—		399,189		751		399,940
Commercial real estate	611,780		—		—		—		611,780		4,807		616,587
Residential real estate	441,508		1,099		311		873		443,791		1,968		445,759
Consumer	141,577		676		223		109		142,585		225		142,810
Total	$	3,632,003	$	3,363	$	17,624	$	982	$	3,653,972	$	34,602	$	3,688,574

The following table shows impaired loans and leases, segregated by class, and the corresponding reserve for impaired loan and lease losses.



(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Reserve
June 30, 2015
With no related reserve recorded:
Commercial and agricultural	$	656	$	655	$	—
Auto and light truck	—		—		—
Medium and heavy duty truck	—		—		—
Aircraft financing	4,714		4,714		—
Construction equipment financing	728		728		—
Commercial real estate	9,166		9,166		—
Residential real estate	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	15,264		15,263		—
With a reserve recorded:
Commercial and agricultural	1,382		1,382		112
Auto and light truck	—		—		—
Medium and heavy duty truck	—		—		—
Aircraft financing	2,460		2,460		501
Construction equipment financing	—		—		—
Commercial real estate	767		767		38
Residential real estate	369		372		152
Consumer	—		—		—
Total with a reserve recorded	4,978		4,981		803
Total impaired loans	$	20,242	$	20,244	$	803

December 31, 2014
With no related reserve recorded:
Commercial and agricultural	$	14,468	$	14,467	$	—
Auto and light truck	—		—		—
Medium and heavy duty truck	—		—		—
Aircraft financing	12,740		12,741		—
Construction equipment financing	746		746		—
Commercial real estate	11,707		11,707		—
Residential real estate	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	39,661		39,661		—
With a reserve recorded:
Commercial and agricultural	74		74		5
Auto and light truck	—		—		—
Medium and heavy duty truck	—		—		—
Aircraft financing	—		—		—
Construction equipment financing	—		—		—
Commercial real estate	798		798		80
Residential real estate	373		376		156
Consumer	—		—		—
Total with a reserve recorded	1,245		1,248		241
Total impaired loans	$	40,906	$	40,909	$	241

The following table shows average recorded investment and interest income recognized on impaired loans and leases, segregated by class.



	Three Months Ended June 30,								Six Months Ended June 30,
	2015				2014				2015				2014
(Dollars in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Commercial and agricultural	$	2,134	$	6	$	15,261	$	9	$	5,971	$	16	$	13,258	$	24
Auto and light truck	—		—		—		—		—		—		814		—
Medium and heavy duty truck	—		—		—		—		—		—		—		—
Aircraft financing	7,269		—		1,573		4		8,207		6		4,274		14
Construction equipment financing	731		—		1,113		—		735		—		1,031		—
Commercial real estate	10,735		142		12,709		147		11,319		284		13,188		294
Residential real estate	371		4		377		4		372		8		377		8
Consumer	—		—		—		—		—		—		—		—
Total	$	21,240	$	152	$	31,033	$	164	$	26,604	$	314	$	32,942	$	340

There were no loan and lease modifications classified as troubled debt restructurings (TDR) during the three months ended June 30, 2015 and 2014. There were no loan and lease modifications classified as TDR during the six months ended June 30, 2015 and one performing loan modification classified as TDR during the six months ended June 30, 2014. The classification between nonperforming and performing is determined at the time of modification. Modification programs focus on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. The modification did not result in the contractual forgiveness of principal or interest. There were no modifications during the six months ended June 30, 2015 and 2014 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modification was immaterial.

There were no TDRs which had payment defaults within the twelve months following modification during the three and six months ended June 30, 2015 and 2014. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.

The following table shows the recorded investment of loans and leases classified as troubled debt restructurings as of June 30, 2015 and December 31, 2014.



(Dollars in thousands)	June 30, 2015		December 31, 2014
Performing TDRs	$	8,344	$	9,118
Nonperforming TDRs	2,227		14,507
Total TDRs	$	10,571	$	23,625