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
June 30, 2017
Commercial and agricultural	$	850,371	$	26,033	$	876,404
Auto and light truck	494,001		18,020		512,021
Medium and heavy duty truck	285,768		4,919		290,687
Aircraft	766,054		21,462		787,516
Construction equipment	525,618		13,479		539,097
Commercial real estate	711,755		8,323		720,078
Total	$	3,633,567	$	92,236	$	3,725,803

December 31, 2016
Commercial and agricultural	$	784,811	$	27,453	$	812,264
Auto and light truck	407,931		3,833		411,764
Medium and heavy duty truck	291,558		3,232		294,790
Aircraft	772,802		29,612		802,414
Construction equipment	486,923		9,002		495,925
Commercial real estate	707,252		11,918		719,170
Total	$	3,451,277	$	85,050	$	3,536,327

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
June 30, 2017
Residential real estate and home equity	$	523,380	$	3,212	$	526,592
Consumer	128,677		242		128,919
Total	$	652,057	$	3,454	$	655,511

December 31, 2016
Residential real estate and home equity	$	518,896	$	3,035	$	521,931
Consumer	129,585		228		129,813
Total	$	648,481	$	3,263	$	651,744

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, 2017
Commercial and agricultural	$	869,663	$	422	$	—	$	—	$	870,085	$	6,319	$	876,404
Auto and light truck	511,506		106		—		—		511,612		409		512,021
Medium and heavy duty truck	289,719		670		298		—		290,687		—		290,687
Aircraft	782,213		2,014		1,305		—		785,532		1,984		787,516
Construction equipment	537,610		281		—		—		537,891		1,206		539,097
Commercial real estate	717,312		37		—		—		717,349		2,729		720,078
Residential real estate and home equity	522,035		762		583		155		523,535		3,057		526,592
Consumer	128,230		365		82		23		128,700		219		128,919
Total	$	4,358,288	$	4,657	$	2,268	$	178	$	4,365,391	$	15,923	$	4,381,314

December 31, 2016
Commercial and agricultural	$	808,283	$	—	$	—	$	—	$	808,283	$	3,981	$	812,264
Auto and light truck	411,300		298		—		—		411,598		166		411,764
Medium and heavy duty truck	294,790		—		—		—		294,790		—		294,790
Aircraft	791,559		1,429		3,316		—		796,304		6,110		802,414
Construction equipment	493,131		1,546		—		—		494,677		1,248		495,925
Commercial real estate	713,482		133		—		—		713,615		5,555		719,170
Residential real estate and home equity	517,212		1,310		374		394		519,290		2,641		521,931
Consumer	129,000		453		132		22		129,607		206		129,813
Total	$	4,158,757	$	5,169	$	3,822	$	416	$	4,168,164	$	19,907	$	4,188,071

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, 2017
With no related reserve recorded:
Commercial and agricultural	$	196	$	196	$	—
Auto and light truck	—		—		—
Medium and heavy duty truck	—		—		—
Aircraft	1,768		1,768		—
Construction equipment	1,132		1,132		—
Commercial real estate	588		588		—
Residential real estate and home equity	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	3,684		3,684		—
With a reserve recorded:
Commercial and agricultural	5,862		5,862		1,240
Auto and light truck	204		204		21
Medium and heavy duty truck	—		—		—
Aircraft	120		120		120
Construction equipment	—		—		—
Commercial real estate	2,089		2,089		126
Residential real estate and home equity	355		357		137
Consumer	—		—		—
Total with a reserve recorded	8,630		8,632		1,644
Total impaired loans	$	12,314	$	12,316	$	1,644

December 31, 2016
With no related reserve recorded:
Commercial and agricultural	$	1,700	$	1,700	$	—
Auto and light truck	115		115		—
Medium and heavy duty truck	—		—		—
Aircraft	2,918		2,918		—
Construction equipment	605		605		—
Commercial real estate	2,607		2,607		—
Residential real estate and home equity	—		—		—
Consumer	—		—		—
Total with no related reserve recorded	7,945		7,945		—
With a reserve recorded:
Commercial and agricultural	1,890		1,890		297
Auto and light truck	—		—		—
Medium and heavy duty truck	—		—		—
Aircraft	3,192		3,192		1,076
Construction equipment	562		562		35
Commercial real estate	2,765		2,765		322
Residential real estate and home equity	674		676		148
Consumer	—		—		—
Total with a reserve recorded	9,083		9,085		1,878
Total impaired loans	$	17,028	$	17,030	$	1,878

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,
	2017				2016				2017				2016
(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	$	7,067	$	—	$	3,449	$	—	$	4,886	$	1	$	3,579	$	4
Auto and light truck	182		—		—		—		133		—		—		—
Medium and heavy duty truck	—		—		—		—		—		—		—		—
Aircraft	6,174		—		4,341		—		7,484		—		4,184		—
Construction equipment	1,143		—		514		—		1,152		—		697		—
Commercial real estate	2,720		—		6,100		—		3,312		—		7,251		123
Residential real estate and home equity	356		4		364		4		357		8		365		8
Consumer	—		—		—		—		—		—		—		—
Total	$	17,642	$	4	$	14,768	$	4	$	17,324	$	9	$	16,076	$	135

There was one nonperforming loan and lease modification classified as a troubled debt restructuring (TDR) during the three and six months ended June 30, 2017 and no loan and lease modifications classified as TDR during the three and six months ended June 30, 2016. 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 2017 and no modifications during 2016 that resulted in an interest rate reduction below market rate. Consequently, the financial impact of the modification was immaterial.

There was one nonperforming TDR which had a payment default within the twelve months following modification during the three and six months ended June 30, 2017 and no TDRs which had payment defaults within the twelve months following modification during the three and six months ended June 30, 2016. 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, 2017 and December 31, 2016.



(Dollars in thousands)	June 30, 2017		December 31, 2016
Performing TDRs	$	355	$	360
Nonperforming TDRs	2,184		1,642
Total TDRs	$	2,539	$	2,002