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 and home equity 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
September 30, 2016
Commercial and agricultural	$	758,615	$	27,552	$	786,167
Auto and light truck	396,001		4,808		400,809
Medium and heavy duty truck	270,255		1,223		271,478
Aircraft	809,233		27,744		836,977
Construction equipment	492,309		5,777		498,086
Commercial real estate	735,076		9,896		744,972
Total	$	3,461,489	$	77,000	$	3,538,489

December 31, 2015
Commercial and agricultural	$	710,030	$	34,719	$	744,749
Auto and light truck	413,836		11,400		425,236
Medium and heavy duty truck	275,367		2,887		278,254
Aircraft	750,264		27,748		778,012
Construction equipment	448,683		6,882		455,565
Commercial real estate	680,304		19,964		700,268
Total	$	3,278,484	$	103,600	$	3,382,084

For residential real estate and home equity 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 home equity 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
September 30, 2016
Residential real estate and home equity	$	488,325	$	1,861	$	490,186
Consumer	149,530		1,212		150,742
Total	$	637,855	$	3,073	$	640,928

December 31, 2015
Residential real estate and home equity	$	462,236	$	1,893	$	464,129
Consumer	148,180		299		148,479
Total	$	610,416	$	2,192	$	612,608

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
September 30, 2016
Commercial and agricultural	$	782,090	$	309	$	—	$	—	$	782,399	$	3,768	$	786,167
Auto and light truck	400,532		250		—		—		400,782		27		400,809
Medium and heavy duty truck	270,883		595		—		—		271,478		—		271,478
Aircraft	822,620		5,548		—		—		828,168		8,809		836,977
Construction equipment	496,701		305		—		—		497,006		1,080		498,086
Commercial real estate	740,847		299		52		—		741,198		3,774		744,972
Residential real estate and home equity	487,304		460		561		551		488,876		1,310		490,186
Consumer	148,897		522		111		58		149,588		1,154		150,742
Total	$	4,149,874	$	8,288	$	724	$	609	$	4,159,495	$	19,922	$	4,179,417

December 31, 2015
Commercial and agricultural	$	740,335	$	52	$	79	$	—	$	740,466	$	4,283	$	744,749
Auto and light truck	424,997		170		23		—		425,190		46		425,236
Medium and heavy duty truck	278,254		—		—		—		278,254		—		278,254
Aircraft	764,074		9,442		108		—		773,624		4,388		778,012
Construction equipment	454,993		33		—		—		455,026		539		455,565
Commercial real estate	698,514		362		—		—		698,876		1,392		700,268
Residential real estate and home equity	460,771		1,038		427		71		462,307		1,822		464,129
Consumer	147,419		552		209		51		148,231		248		148,479
Total	$	3,969,357	$	11,649	$	846	$	122	$	3,981,974	$	12,718	$	3,994,692

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
September 30, 2016
With no related reserve recorded:
Commercial and agricultural	$	327	$	327	$	—
Auto and light truck	—		—		—
Medium and heavy duty truck	—		—		—
Aircraft	—		—		—
Construction equipment	429		429		—
Commercial real estate	844		844		—
Residential real estate and home equity	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	1,600		1,600		—
With a reserve recorded:
Commercial and agricultural	3,188		3,188		767
Auto and light truck	—		—		—
Medium and heavy duty truck	—		—		—
Aircraft	8,809		8,809		1,990
Construction equipment	568		568		128
Commercial real estate	2,809		2,809		361
Residential real estate and home equity	361		363		144
Consumer	—		—		—
Total with a reserve recorded	15,735		15,737		3,390
Total impaired loans	$	17,335	$	17,337	$	3,390

December 31, 2015
With no related reserve recorded:
Commercial and agricultural	$	1,016	$	1,016	$	—
Auto and light truck	—		—		—
Medium and heavy duty truck	—		—		—
Aircraft	4,384		4,384		—
Construction equipment	539		539		—
Commercial real estate	8,494		8,494		—
Residential real estate and home equity	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	14,433		14,433		—
With a reserve recorded:
Commercial and agricultural	2,884		2,884		649
Auto and light truck	—		—		—
Medium and heavy duty truck	—		—		—
Aircraft	—		—		—
Construction equipment	—		—		—
Commercial real estate	—		—		—
Residential real estate and home equity	366		368		148
Consumer	—		—		—
Total with a reserve recorded	3,250		3,252		797
Total impaired loans	$	17,683	$	17,685	$	797

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



	Three Months Ended September 30,								Nine Months Ended September 30,
	2016				2015				2016				2015
(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	$	3,282	$	1	$	3,882	$	11	$	3,480	$	5	$	5,275	$	27
Auto and light truck	—		—		—		—		—		—		—		—
Medium and heavy duty truck	—		—		—		—		—		—		—		—
Aircraft	9,051		2		7,422		1		5,806		2		7,945		6
Construction equipment	618		—		738		—		671		—		736		—
Commercial real estate	2,961		—		9,762		108		5,821		123		10,800		392
Residential real estate and home equity	362		4		369		4		364		12		371		12
Consumer	—		—		—		—		—		—		—		—
Total	$	16,274	$	7	$	22,173	$	124	$	16,142	$	142	$	25,127	$	437

There was one nonperforming loan and lease modification classified as a troubled debt restructuring (TDR) during the three and nine months ended September 30, 2016 and two performing loan modifications classified as TDR during the three and nine months ended September 30, 2015. 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. Modifications do not result in the contractual forgiveness of principal or interest. There was one modification during 2016 and no modifications during 2015 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 nine months ended September 30, 2016 and 2015. 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 September 30, 2016 and December 31, 2015.



(Dollars in thousands)	September 30, 2016		December 31, 2015
Performing TDRs	$	361	$	7,437
Nonperforming TDRs	1,780		1,926
Total TDRs	$	2,141	$	9,363