Note 4. 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 table below presents 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, 2013
Commercial and agricultural loans	$	623,884	$	28,296	$	652,180
Auto, light truck and environmental equipment	442,616		9,789		452,405
Medium and heavy duty truck	190,921		2,053		192,974
Aircraft financing	662,126		41,946		704,072
Construction equipment financing	299,938		15,408		315,346
Commercial real estate	546,426		27,853		574,279
Total	$	2,765,911	$	125,345	$	2,891,256

December 31, 2012
Commercial and agricultural loans	$	612,567	$	26,502	$	639,069
Auto, light truck and environmental equipment	428,582		9,565		438,147
Medium and heavy duty truck	170,116		1,886		172,002
Aircraft financing	648,316		48,163		696,479
Construction equipment financing	262,980		15,994		278,974
Commercial real estate	507,219		47,749		554,968
Total	$	2,629,780	$	149,859	$	2,779,639

For residential real estate and consumer loans, credit quality is based on the aging status of the loan and by payment activity. The table below presents 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
September 30, 2013
Residential real estate	$	452,561	$	2,766	$	455,327
Consumer	121,109		426		121,535
Total	$	573,670	$	3,192	$	576,862

December 31, 2012
Residential real estate	$	435,962	$	2,679	$	438,641
Consumer	108,814		459		109,273
Total	$	544,776	$	3,138	$	547,914

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

							90 Days
							or More
			30-59 Days		60-89 Days		Past Due		Total				Total Financing
(Dollars in thousands)	Current		Past Due		Past Due		and Accruing		Accruing Loans		Nonaccrual		Receivables
September 30, 2013
Commercial and agricultural loans	$	643,495	$	714	$	750	$	—	$	644,959	$	7,221	$	652,180
Auto, light truck and environmental equipment	451,659		349		110		—		452,118		287		452,405
Medium and heavy duty truck	192,380		—		—		—		192,380		594		192,974
Aircraft financing	688,856		—		3,725		—		692,581		11,491		704,072
Construction equipment financing	313,532		515		—		—		314,047		1,299		315,346
Commercial real estate	566,742		—		51		—		566,793		7,486		574,279
Residential real estate	451,005		956		600		220		452,781		2,546		455,327
Consumer	120,260		517		332		25		121,134		401		121,535
Total	$	3,427,929	$	3,051	$	5,568	$	245	$	3,436,793	$	31,325	$	3,468,118

December 31, 2012
Commercial and agricultural loans	$	629,035	$	807	$	48	$	—	$	629,890	$	9,179	$	639,069
Auto, light truck and environmental equipment	437,087		202		—		—		437,289		858		438,147
Medium and heavy duty truck	171,950		—		—		—		171,950		52		172,002
Aircraft financing	691,187		—		—		—		691,187		5,292		696,479
Construction equipment financing	272,817		598		274		—		273,689		5,285		278,974
Commercial real estate	541,811		102		—		—		541,913		13,055		554,968
Residential real estate	434,434		1,019		509		356		436,318		2,323		438,641
Consumer	107,630		816		368		86		108,900		373		109,273
Total	$	3,285,951	$	3,544	$	1,199	$	442	$	3,291,136	$	36,417	$	3,327,553

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

			Unpaid
	Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Allowance
September 30, 2013
With no related allowance recorded:
Commercial and agricultural loans	$	6,470	$	6,468	$	—
Auto, light truck and environmental equipment	—		—		—
Medium and heavy duty truck	594		594		—
Aircraft financing	2,301		2,301		—
Construction equipment financing	1,214		1,213		—
Commercial real estate	15,339		15,339		—
Residential real estate	—		—		—
Consumer loans	—		—		—
Total with no related allowance recorded	25,918		25,915		—
With an allowance recorded:
Commercial and agricultural loans	5,189		5,189		49
Auto, light truck and environmental equipment	—		—		—
Medium and heavy duty truck	—		—		—
Aircraft financing	9,132		9,132		1,491
Construction equipment financing	—		—		—
Commercial real estate	—		—		—
Residential real estate	—		—		—
Consumer loans	—		—		—
Total with an allowance recorded	14,321		14,321		1,540
Total impaired loans	$	40,239	$	40,236	$	1,540

December 31, 2012
With no related allowance recorded:
Commercial and agricultural loans	$	2,572	$	2,572	$	—
Auto, light truck and environmental equipment	474		474		—
Medium and heavy duty truck	—		—		—
Aircraft financing	3,115		3,115		—
Construction equipment financing	5,109		5,107		—
Commercial real estate	19,597		19,597		—
Residential real estate	101		101		—
Consumer loans	—		—		—
Total with no related allowance recorded	30,968		30,966		—
With an allowance recorded:
Commercial and agricultural loans	6,075		6,074		729
Auto, light truck and environmental equipment	—		—		—
Medium and heavy duty truck	—		—		—
Aircraft financing	2,086		2,086		852
Construction equipment financing	—		—		—
Commercial real estate	1,588		1,588		42
Residential real estate	—		—		—
Consumer loans	—		—		—
Total with an allowance recorded	9,749		9,748		1,623
Total impaired loans	$	40,717	$	40,714	$	1,623

Average recorded investment and interest income recognized on impaired loans and leases, segregated by class, is shown in the table below.

	Three Months Ended September 30,								Nine Months Ended September 30,
	2013				2012				2013				2012
(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 loans	$	11,766	$	98	$	9,111	$	2	$	9,645	$	133	$	9,441	$	12
Auto, light truck and environmental equipment	39		—		2,578		—		221		—		2,474		7
Medium and heavy duty truck	638		—		434		1		292		—		917		2
Aircraft financing	10,361		79		6,100		—		8,832		79		8,831		—
Construction equipment financing	1,447		1		4,512		—		3,376		4		4,399		5
Commercial real estate	16,531		155		22,757		138		18,507		459		22,330		302
Residential real estate	—		—		104		2		—		—		82		4
Consumer	—		—		—		—		—		—		—		—
Total	$	40,782	$	333	$	45,596	$	143	$	40,873	$	675	$	48,474	$	332

The number of loans and leases classified as troubled debt restructuring (TDR) during the three and nine months ended September 30, 2013 and 2012, segregated by class, are shown in the table below as well as the recorded investment as of September 30. The classification between nonperforming and performing is shown at the time of modification. During 2013 and 2012, modification programs focused on extending maturity dates or modifying payment patterns with most TDRs experiencing a combination of concessions. The modifications did not result in the contractual forgiveness of principal or interest or interest rate reductions below market rates. Consequently, the financial impact of the modifications is immaterial.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	Number of	Recorded		Number of	Recorded		Number of	Recorded		Number of	Recorded
(Dollars in thousands)	Modifications	Investment		Modifications	Investment		Modifications	Investment		Modifications	Investment
Performing TDRs:
Commercial and agricultural loans	—	$	—	—	$	—	1	$	750	—	$	—
Auto, light truck and environmental equipment	—	—		—	—		—	—		—	—
Medium and heavy duty truck	—	—		—	—		—	—		—	—
Aircraft financing	—	—		—	—		—	—		—	—
Construction equipment financing	—	—		—	—		—	—		—	—
Commercial real estate	—	—		—	—		—	—		1	7,014
Residential real estate	—	—		—	—		—	—		1	103
Consumer	—	—		—	—		—	—		—	—
Total performing TDR modifications	—	$	—	—	$	—	1	$	750	2	$	7,117

Nonperforming TDRs:
Commercial and agricultural loans	—	$	—	—	$	—	1	$	299	—	$	—
Auto, light truck and environmental equipment	—	—		—	—		—	—		—	—
Medium and heavy duty truck	—	—		—	—		—	—		—	—
Aircraft financing	1	4,201		—	—		1	4,201		—	—
Construction equipment financing	—	—		—	—		—	—		3	1,467
Commercial real estate	—	—		1	1,163		—	—		1	1,163
Residential real estate	—	—		—	—		—	—		—	—
Consumer	—	—		—	—		—	—		—	—
Total nonperforming TDR modifications	1	$	4,201	1	$	1,163	2	$	4,500	4	$	2,630
Total TDR modifications	1	$	4,201	1	$	1,163	3	$	5,250	6	$	9,747

There were no TDRs which had payment defaults within the twelve months following modification during the three months ended September 30, 2013. There was one commercial and agricultural TDR which had payment defaults within the twelve months following modification during the nine months ended September 30, 2013.

This loan was transferred into Other Real Estate during the three months ended June 30, 2013. There were no TDRs which had payment defaults within twelve months following modification during the three and nine months ended September 30, 2012. Default occurs when a loan or lease is 90 days or more past due under the modified terms or transferred to nonaccrual.

The table below presents the recorded investment of loans and leases classified as troubled debt restructurings as of September 30, 2013 and December 31, 2012.

	September 30,		December 31,
(Dollars in thousands)	2013		2012
Performing TDRs	$	9,205	$	8,839
Nonperforming TDRs	11,845		12,869
Total TDRs	$	21,050	$	21,708