Loans

The following is a summary of loans:



(Dollars in thousands)	September 30, 2012				December 31, 2011
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$693,221	31	%		$624,813	29	%
Construction and development (2)	25,132		1		10,955		1
Other (3)	500,974		22		488,860		22
Total commercial	1,219,327		54		1,124,628		52
Residential real estate:
Mortgages (4)	692,659		31		678,582		32
Homeowner construction	22,753		1		21,832		1
Total residential real estate	715,412		32		700,414		33
Consumer:
Home equity lines (5)	227,549		10		223,430		10
Home equity loans (5)	39,452		2		43,121		2
Other (6)	54,957		2		55,566		3
Total consumer	321,958		14		322,117		15
Total loans (7)		$2,256,697	100	%		$2,147,159	100	%


(1)	Amortizing mortgages and lines of credit, primarily secured by income producing property. As of September 30, 2012 and December 31, 2011, $250.1 million and $107.1 million, respectively, of these loans were pledged as collateral for FHLBB borrowings (see Note 8).


(2)	Loans for construction of residential and commercial properties and for land development.

(3)

Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate. As of September 30, 2012, $54.3 million and $32.7 million, respectively, of these loans were pledged as collateral for FHLBB borrowings and were collateralized for the discount window at the Federal Reserve Bank. Comparable amounts for December 31, 2011 were $27.2 million and $42.1 million, respectively (see Note 8).


(4)	As of September 30, 2012 and December 31, 2011, $599.6 million and $611.8 million, respectively, of these loans were pledged as collateral for FHLBB borrowings (see Note 8).


(5)	As of September 30, 2012 and December 31, 2011, $191.2 million and $165.4 million, respectively, of these loans were pledged as collateral for FHLBB borrowings (see Note 8).


(6)	Fixed-rate consumer installment loans.


(7)	Includes net unamortized loan origination costs of $39 thousand and $31 thousand, respectively, and net unamortized premiums on purchased loans of $76 thousand and $67 thousand, respectively, at September 30, 2012 and December 31, 2011.

Nonaccrual Loans

Loans, with the exception of certain well-secured residential mortgage loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest or sooner if considered appropriate by management. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued but not collected on such loans is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management's assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management's opinion, the loans are considered to be fully collectible.

The following is a summary of nonaccrual loans, segregated by class of loans, as of the dates indicated:



(Dollars in thousands)	Sep 30, 2012		Dec 31, 2011
Commercial:
Mortgages		$5,956		$5,709
Construction and development	—		—
Other	3,201		3,708
Residential real estate:
Mortgages	7,127		10,614
Homeowner construction	—		—
Consumer:
Home equity lines	1,013		718
Home equity loans	376		335
Other	74		153
Total nonaccrual loans		$17,747		$21,237
Accruing loans 90 days or more past due		$—		$—

As of September 30, 2012 and December 31, 2011, nonaccrual loans of $3.3 million and $3.6 million, respectively, were current as to the payment of principal and interest.

Past Due Loans

Past due status is based on the contractual payment terms of the loan. The following tables present an age analysis of past due loans, segregated by class of loans, as of the dates indicated:



(Dollars in thousands)	Days Past Due
September 30, 2012	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$3,978		$874		$2,495		$7,347		$685,874		$693,221
Construction and development	—		—		—		—		25,132		25,132
Other	2,719		1,169		1,366		5,254		495,720		500,974
Residential real estate:
Mortgages	2,368		821		3,924		7,113		685,546		692,659
Homeowner construction	—		—		—		—		22,753		22,753
Consumer:
Home equity lines	1,546		914		528		2,988		224,561		227,549
Home equity loans	296		241		250		787		38,665		39,452
Other	34		58		33		125		54,832		54,957
Total loans		$10,941		$4,077		$8,596		$23,614		$2,233,083		$2,256,697



(Dollars in thousands)	Days Past Due
December 31, 2011	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$1,621		$315		$4,995		$6,931		$617,882		$624,813
Construction and development	—		—		—		—		10,955		10,955
Other	3,760		982		633		5,375		483,485		488,860
Residential real estate:
Mortgages	3,969		1,505		6,283		11,757		666,825		678,582
Homeowner construction	—		—		—		—		21,832		21,832
Consumer:
Home equity lines	645		210		525		1,380		222,050		223,430
Home equity loans	362		46		202		610		42,511		43,121
Other	66		7		147		220		55,346		55,566
Total loans		$10,423		$3,065		$12,785		$26,273		$2,120,886		$2,147,159

Included in past due loans as of September 30, 2012 and December 31, 2011, were nonaccrual loans of $14.5 million and $17.6 million, respectively.

Impaired Loans

Impaired loans are loans for which it is probable that the Corporation will not be able to collect all amounts due according to the contractual terms of the loan agreements and loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans.

The following is a summary of impaired loans, as of the dates indicated:



(Dollars in thousands)	Recorded Investment (1)				Unpaid Principal				Related Allowance
	Sep 30, 2012		Dec 31, 2011		Sep 30, 2012		Dec 31, 2011		Sep 30, 2012		Dec 31, 2011
No Related Allowance Recorded:
Commercial:
Mortgages		$914		$7,093		$915		$7,076		$—		$—
Construction and development	—		—		—		—		—		—
Other	2,140		1,622		2,136		1,620		—		—
Residential real estate:
Mortgages	2,641		2,383		2,678		2,471		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		—		—		—		—		—
Home equity loans	—		—		—		—		—		—
Other	—		—		—		—		—		—
Subtotal		$5,695		$11,098		$5,729		$11,167		$—		$—
With Related Allowance Recorded:
Commercial:
Mortgages		$14,205		$5,023		$15,641		$6,760		$939		$329
Construction and development	—		—		—		—		—		—
Other	7,960		8,739		8,611		9,740		571		839
Residential real estate:
Mortgages	1,711		3,606		2,029		4,138		510		495
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	188		278		255		373		1		82
Home equity loans	122		130		145		153		1		1
Other	163		205		171		227		1		69
Subtotal		$24,349		$17,981		$26,852		$21,391		$2,023		$1,815
Total impaired loans		$30,044		$29,079		$32,581		$32,558		$2,023		$1,815
Total:
Commercial		$25,219		$22,477		$27,303		$25,196		$1,510		$1,168
Residential real estate	4,352		5,989		4,707		6,609		510		495
Consumer	473		613		571		753		3		152
Total impaired loans		$30,044		$29,079		$32,581		$32,558		$2,023		$1,815

(1)

The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs. For impaired accruing loans (including those troubled debt restructurings for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest. As of September 30, 2012 and December 31, 2011, recorded investment in impaired loans included accrued interest of $53 thousand and $46 thousand, respectively.

The following tables present the average recorded investment and interest income recognized on impaired loans segregated by loan class for the periods indicated:



(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Three months ended September 30,	2012		2011		2012		2011
Commercial:
Mortgages		$9,611		$14,150		$71		$111
Construction and development	—		—		—		—
Other	10,176		7,330		73		80
Residential real estate:
Mortgages	4,400		5,822		21		38
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	121		116		—		1
Home equity loans	120		167		2		3
Other	144		245		2		4
Totals		$24,572		$27,830		$169		$237



(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Nine months ended September 30,	2012		2011		2012		2011
Commercial:
Mortgages		$8,795		$15,829		$176		$433
Construction and development	—		—		—		—
Other	10,756		9,109		231		291
Residential real estate:
Mortgages	4,867		5,658		66		127
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	167		106		2		4
Home equity loans	138		340		5		14
Other	151		236		7		12
Totals		$24,874		$31,278		$487		$881

At September 30, 2012, there were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status or had been restructured.

Troubled Debt Restructurings

Loans are considered restructured in a troubled debt restructuring when the Corporation has granted concessions to a borrower due to the borrower's financial condition that it otherwise would not have considered. These concessions include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection.

Restructured loans are classified as accruing or non-accruing based on management's assessment of the collectibility of the loan. Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.

Troubled debt restructurings are reported as such for at least one year from the date of the restructuring. In years after the restructuring, troubled debt restructured loans are removed from this classification if the restructuring did not involve a below market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement.

Troubled debt restructurings are classified as impaired loans. The Corporation identifies loss allocations for impaired loans on an individual loan basis. The recorded investment in troubled debt restructurings was $20.7 million and $19.7 million, respectively, at September 30, 2012 and December 31, 2011. Included in these amounts was accrued interest of $51 thousand and $46 thousand, respectively. The allowance for loan losses included specific reserves for these troubled debt restructurings of $1.1 million and $858 thousand, respectively, at September 30, 2012 and December 31, 2011.

The following table presents loans modified as a troubled debt restructuring during the three months ended September 30, 2012 and 2011.



(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications				Post-Modifications
Three months ended September 30,	2012	2011	2012		2011		2012		2011
Commercial:
Mortgages	2	—		$8,183		$—		$8,183		$—
Residential real estate:
Mortgages	—	1	—		139		—		139
Consumer:
Home equity loans	—	1	—		28		—		28
Totals	2	2		$8,183		$167		$8,183		$167


(1)	The recorded investment in troubled debt restructurings consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs, at the time of the restructuring. For accruing troubled debt restructurings the recorded investment also includes accrued interest.

The following table presents loans modified as a troubled debt restructuring during the nine months ended September 30, 2012 and 2011.



(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications				Post-Modifications
Nine months ended September 30,	2012	2011	2012		2011		2012		2011
Commercial:
Mortgages	5	2		$9,044		$215		$9,044		$215
Other	7	7	1,625		1,293		1,625		1,293
Residential real estate:
Mortgages	2	6	651		1,449		651		1,449
Consumer:
Home equity loans	—	1	—		28		—		—
Other	2	1	5		117		5		145
Totals	16	17		$11,325		$3,102		$11,325		$3,102


(1)	The recorded investment in troubled debt restructurings consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs, at the time of the restructuring. For accruing troubled debt restructurings the recorded investment also includes accrued interest.

The following table provides information on how loans were modified as a troubled debt restructuring during the three and nine months ended September 30, 2012 and 2011.



(Dollars in thousands)
	Three Months				Nine Months
Periods ended September 30,	2012		2011		2012		2011
Payment deferral		$—		$139		$240		$2,184
Maturity / amortization concession	—		28		917		694
Interest only payments	—		—		361		15
Below market interest rate concession	—		—		1,426		—
Combination (1)	8,183		—		8,381		209
Total		$8,183		$167		$11,325		$3,102

(1)

Loans included in this classification had a combination of any two of the concessions included in this table. In the third quarter of 2012 , a restructuring involving one accruing commercial real estate relationship with a carrying value of $8.2 million occurred. The restructuring included a modification of certain payment terms and a below market interest rate reduction for a temporary period on approximately $3.1 million of the total balance.

The following tables present loans modified in a troubled debt restructuring within the previous twelve months for which there was a payment default during the three and nine months ended September 30, 2012 and 2011.



(Dollars in thousands)	# of Loans		Recorded Investment (1)
Three months ended September 30,	2012	2011	2012		2011
Commercial:
Other	3	9	428		894
Residential real estate:
Mortgages	2	2	670		383
Consumer:
Other	1	—	13		—
Totals	6	11		$1,111		$1,277


(1)	The recorded investment in troubled debt restructurings consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. For accruing troubled debt restructurings the recorded investment also includes accrued interest.



(Dollars in thousands)	# of Loans		Recorded Investment (1)
Nine months ended September 30,	2012	2011	2012		2011
Commercial:
Mortgages	1	2		$195		$215
Other	3	10	428		929
Residential real estate:
Mortgages	2	2	670		383
Consumer:
Other	1	—	13		—
Totals	7	14		$1,306		$1,527


(1)	The recorded investment in troubled debt restructurings consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. For accruing troubled debt restructurings the recorded investment also includes accrued interest.

Credit Quality Indicators

Commercial

The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan rating system takes into consideration parameters including the borrower's financial condition, the borrower's performance with respect to loan terms, and the adequacy of collateral. As of September 30, 2012 and December 31, 2011, the weighted average risk rating of the Corporation's commercial loan portfolio was 4.81 and 4.87, respectively.

For non-impaired loans, the Corporation assigns a loss allocation factor to each loan, based on its risk rating for purposes of establishing an appropriate allowance for loan losses. See Note 6 for additional information.

Descriptions of the commercial loan categories are as follows:

Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality but exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, or performance inconsistency or may be in an industry or of a loan type known to have a higher degree of risk.

Special Mention - Loans 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 asset or in the Bank's position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies.

Classified - Loans identified as “substandard”, “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A "substandard" loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed in nonaccrual status when management determines there is uncertainty of collectibility. A “doubtful” loan is placed on non-accrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. "Loss" is not intended to imply that the loan has no recovery value but rather it is not practical or desirable to continue to carry the asset.

The Corporation's procedures call for loan ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. The criticized loan portfolio, which consists of commercial and commercial real estate loans that are risk rated special mention or worse, are reviewed by management on a quarterly basis, focusing on the current status and strategies to improve the credit. An annual loan review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio.

The following table presents the commercial loan portfolio, segregated by category of credit quality indicator:



(Dollars in thousands)	Pass				Special Mention				Classified
	Sep 30, 2012		Dec 31, 2011		Sep 30, 2012		Dec 31, 2011		Sep 30, 2012		Dec 31, 2011
Mortgages		$653,639		$583,162		$23,424		$29,759		$16,158		$11,892
Construction and development	25,132		10,955		—		—		—		—
Other	463,527		455,577		30,534		22,731		6,913		10,552
Total commercial loans		$1,142,298		$1,049,694		$53,958		$52,490		$23,071		$22,444

Residential and Consumer

The residential and consumer portfolios are monitored on an ongoing basis by the Corporation using delinquency information and loan type as credit quality indicators. These credit quality indicators are assessed on an aggregate basis in these relatively homogeneous portfolios.

For non-impaired loans, the Corporation assigns loss allocation factors to each respective loan type and delinquency status. See Note 6 for additional information.

Various other techniques are utilized to monitor indicators of credit deterioration in the portfolios of residential real estate mortgages and home equity lines and loans. Among these techniques is the periodic tracking of loans with an updated FICO score and an estimated loan to value (“LTV”) ratio. LTV is determined via statistical modeling analyses. The indicated LTV levels are estimated based on such factors as the location, the original LTV, and the date of origination of the loan and do not reflect actual appraisal amounts. The results of these analyses are taken into consideration in the determination of loss allocation factors for residential mortgage and home equity consumer credits. See Note 6 for additional information.

The following table presents the residential and consumer loan portfolios, segregated by category of credit quality indicator:



(Dollars in thousands)	Under 90 Days Past Due				Over 90 Days Past Due
	Sep 30, 2012		Dec 31, 2011		Sep 30, 2012		Dec 31, 2011
Residential Real Estate:
Accruing mortgages		$685,532		$667,968		$—		$—
Nonaccrual mortgages	3,203		4,331		3,924		6,283
Homeowner construction	22,753		21,832		—		—
Total residential real estate loans		$711,488		$694,131		$3,924		$6,283
Consumer:
Home equity lines		$227,021		$222,905		$528		$525
Home equity loans	39,202		42,919		250		202
Other	54,924		55,419		33		147
Total consumer loans		$321,147		$321,243		$811		$874