Loans

The following is a summary of loans:



(Dollars in thousands)	December 31, 2012				December 31, 2011
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$710,813	31	%		$624,813	29	%
Construction and development (2)	27,842		1	%	10,955		1	%
Other (3)	513,764		23	%	488,860		22	%
Total commercial	1,252,419		55	%	1,124,628		52	%
Residential real estate:
Mortgages (4)	692,798		30	%	678,582		32	%
Homeowner construction	24,883		1	%	21,832		1	%
Total residential real estate	717,681		31	%	700,414		33	%
Consumer:
Home equity lines (5)	226,861		10	%	223,430		10	%
Home equity loans (5)	39,329		2	%	43,121		2	%
Other (6)	57,713		2	%	55,566		3	%
Total consumer	323,903		14	%	322,117		15	%
Total loans (7)		$2,294,003	100	%		$2,147,159	100	%


(1)	Amortizing mortgages and lines of credit, primarily secured by income producing property. As of December 31, 2012 and 2011, $238.6 million and $107.1 million, respectively, of these loans were pledged as collateral for FHLBB borrowings (see Note 11).


(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 December 31, 2012, $51.8 million and $29.5 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 11).


(4)	As of December 31, 2012 and 2011, $627.4 million and $611.8 million, respectively, of these loans were pledged as collateral for FHLBB borrowings (see Note 11).


(5)	As of December 31, 2012 and 2011, $189.4 million and $165.4 million, respectively, of these loans were pledged as collateral for FHLBB borrowings (see Note 11).


(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 $83 thousand and $67 thousand, respectively, at December 31, 2012 and 2011.

Concentrations of Credit Risk

A significant portion of our loan portfolio is concentrated among borrowers in southern New England and a substantial portion of the portfolio is collateralized by real estate in this area. In addition, a portion of the commercial loans and commercial mortgage loans are to borrowers in the hospitality, tourism and recreation industries. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in the Corporation’s market area.

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 balance of loans on nonaccrual status as of December 31, 2012 and 2011 was $22.5 million and $21.2 million, respectively. Interest income that would have been recognized had these loans been current in accordance with their original terms was approximately $1.8 million, $1.7 million and $1.3 million in 2012, 2011 and 2010, respectively. Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $679 thousand, $505 thousand and $831 thousand in 2012, 2011 and 2010, respectively.

The following is a summary of nonaccrual loans, segregated by class of loans:



(Dollars in thousands)
December 31,	2012		2011
Commercial:
Mortgages		$10,681		$5,709
Construction and development	—		—
Other	4,412		3,708
Residential real estate:
Mortgages	6,158		10,614
Homeowner construction	—		—
Consumer:
Home equity lines	840		718
Home equity loans	371		335
Other	81		153
Total nonaccrual loans		$22,543		$21,237
Accruing loans 90 days or more past due		$—		$—

As of December 31, 2012 and 2011, nonaccrual loans of $1.6 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
December 31, 2012	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$373		$408		$10,300		$11,081		$699,732		$710,813
Construction and development	—		—		—		—		27,842		27,842
Other	260		296		3,647		4,203		509,561		513,764
Residential real estate:
Mortgages	4,840		1,951		3,658		10,449		682,349		692,798
Homeowner construction	—		—		—		—		24,883		24,883
Consumer:
Home equity lines	753		207		528		1,488		225,373		226,861
Home equity loans	252		114		250		616		38,713		39,329
Other	129		64		66		259		57,454		57,713
Total loans		$6,607		$3,040		$18,449		$28,096		$2,265,907		$2,294,003



(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 December 31, 2012 and 2011, were nonaccrual loans of $21.0 million and $17.6 million, respectively. All loans 90 days or more past due at December 31, 2012 and 2011 were classified as nonaccrual.

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
	Recorded Investment (1)				Unpaid Principal				Related Allowance
December 31,	2012		2011		2012		2011		2012		2011
No Related Allowance Recorded:
Commercial:
Mortgages		$2,357		$7,093		$2,360		$7,076		$—		$—
Construction and development	—		—		—		—		—		—
Other	1,058		1,622		1,057		1,620		—		—
Residential real estate:
Mortgages	1,294		2,383		1,315		2,471		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		—		—		—		—		—
Home equity loans	—		—		—		—		—		—
Other	—		—		—		—		—		—
Subtotal		$4,709		$11,098		$4,732		$11,167		$—		$—
With Related Allowance Recorded:
Commercial:
Mortgages		$17,897		$5,023		$19,738		$6,760		$1,720		$329
Construction and development	—		—		—		—		—		—
Other	9,939		8,739		10,690		9,740		694		839
Residential real estate:
Mortgages	2,576		3,606		2,947		4,138		463		495
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	187		278		255		373		1		82
Home equity loans	117		130		160		153		—		1
Other	137		205		136		227		2		69
Subtotal		$30,853		$17,981		$33,926		$21,391		$2,880		$1,815
Total impaired loans		$35,562		$29,079		$38,658		$32,558		$2,880		$1,815
Total:
Commercial		$31,251		$22,477		$33,845		$25,196		$2,414		$1,168
Residential real estate	3,870		5,989		4,262		6,609		463		495
Consumer	441		613		551		753		3		152
Total impaired loans		$35,562		$29,079		$38,658		$32,558		$2,880		$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 (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 December 31, 2012 and December 31, 2011, recorded investment in impaired loans included accrued interest of $13 thousand and $46 thousand, respectively.

The following table presents the average recorded investment balance of impaired loans and related interest income recognized during the periods indicated:



(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Years ended December 31,	2012		2011		2012		2011
Commercial:
Mortgages		$10,785		$14,923		$273		$539
Construction and development	—		—		—		—
Other	10,661		8,226		297		388
Residential real estate:
Mortgages	4,651		5,743		88		188
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	172		127		3		5
Home equity loans	131		290		7		17
Other	151		235		11		15
Totals		$26,551		$29,544		$679		$1,152

The average recorded investment in impaired loans was $26.6 million, $29.5 million and $31.9 million at December 31, 2012, 2011 and 2010, respectively. Interest income recognized on impaired loans was $679 thousand, $1.2 million and $1.4 million for the years ended December 31, 2012, 2011 and 2010, respectively.

At December 31, 2012 and 2011, 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 to be troubled debt restructurings 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 generally 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 $20.2 million and $19.7 million at December 31, 2012 and 2011, respectively. Included in these amounts was accrued interest of $13 thousand and $46 thousand, respectively. The allowance for loan losses included specific reserves for these troubled debt restructurings of $898 thousand and $858 thousand at December 31, 2012 and 2011, respectively.

The following table presents loans modified as a troubled debt restructuring during the years ended December 31, 2012 and 2011.



(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications				Post-Modifications
Years ended December 31,	2012	2011	2012		2011		2012		2011
Commercial:
Mortgages	6	2		$9,525		$215		$9,525		$215
Construction and development	—	—	—		—		—		—
Other	8	13	1,889		6,619		1,889		6,619
Residential real estate:
Mortgages	2	8	651		2,127		651		2,127
Homeowner construction	—	—	—		—		—		—
Consumer:
Home equity lines	—	—	—		—		—		—
Home equity loans	—	1	—		28		—		28
Other	2	2	5		131		5		131
Totals	18	26		$12,070		$9,120		$12,070		$9,120


(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 years ended December 31, 2012 and 2011.



(Dollars in thousands)
Years ended December 31,	2012		2011
Payment deferral		$240		$2,744
Maturity / amortization concession	917		1,196
Interest only payments	361		15
Below market interest rate concession	1,426		4,726
Combination (1)	9,126		439
Total		$12,070		$9,120

(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 table presents loans modified in a troubled debt restructuring within the previous twelve months for which there was a payment default during the years ended December 31, 2012 and 2011.



(Dollars in thousands)	# of Loans		Recorded Investment (1)
Years ended December 31,	2012	2011	2012		2011
Commercial:
Mortgages	1	2		$195		$215
Construction and development	—	—	—		—
Other	3	11	866		937
Residential real estate:
Mortgages	—	3	—		913
Homeowner construction	—	—	—		—
Consumer:
Home equity lines	—	—	—		—
Home equity loans	—	—	—		—
Other	—	—	—		—
Totals	4	16		$1,061		$2,065


(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 December 31, 2012 and 2011, the weighted average risk rating of the Corporation’s commercial loan portfolio was 4.77 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.

A description 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 following table presents the commercial loan portfolio, segregated by category of credit quality indicator.



(Dollars in thousands)
	Pass				Special Mention				Classified
December 31,	2012		2011		2012		2011		2012		2011
Mortgages		$669,220		$583,162		$21,649		$29,759		$19,944		$11,892
Construction and development	27,842		10,955		—		—		—		—
Other	483,371		455,577		24,393		22,731		6,000		10,552
Total commercial loans		$1,180,433		$1,049,694		$46,042		$52,490		$25,944		$22,444

The Corporation’s procedures call for loan ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, 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, 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.

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. 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
December 31,	2012		2011		2012		2011
Residential real estate:
Accruing mortgages		$686,640		$667,968		$—		$—
Nonaccrual mortgages	2,500		4,331		3,658		6,283
Homeowner construction	24,883		21,832		—		—
Total residential loans		$714,023		$694,131		$3,658		$6,283
Consumer:
Home equity lines		$226,333		$222,905		$528		$525
Home equity loans	39,078		42,919		251		202
Other	57,648		55,419		65		147
Total consumer loans		$323,059		$321,243		$844		$874

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 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.

Loan Servicing Activities

An analysis of loan servicing rights for the years ended December 31, 2012, 2011 and 2010 follows:



(Dollars in thousands)	Loan Servicing Rights			Valuation Allowance			Total
Balance at December 31, 2009		$969			($167	)		$802
Loan servicing rights capitalized	153			—			153
Amortization (1)	(209		)	—			(209		)
Decrease in impairment reserve (2)	—			11			11
Balance at December 31, 2010	913			(156		)	757
Loan servicing rights capitalized	248			—			248
Amortization (1)	(224		)	—			(224		)
Increase in impairment reserve (2)	—			(16		)	(16		)
Balance at December 31, 2011	937			(172		)	765
Loan servicing rights capitalized	569			—			569
Amortization (1)	(231		)	—			(231		)
Decrease in impairment reserve (2)	—			7			7
Balance at December 31, 2012		$1,275			($165	)		$1,110


(1)	Amortization expense is charged against loan servicing fee income.


(2)	(Increases) decreases in the impairment reserve are recorded as (reductions) additions to loan servicing fee income.

Estimated aggregate amortization expense related to loan servicing assets is as follows:



(Dollars in thousands)
Years ending December 31:	2013		$263
	2014	215
	2015	169
	2016	132
	2017	104
	Thereafter	392
Total estimated amortization expense			$1,275

Mortgage loans and other loans sold to others are serviced on a fee basis under various agreements. Loans serviced for others are not included in the Consolidated Balance Sheets. Balance of loans serviced for others, by type of loan:



(Dollars in thousands)
December 31,	2012		2011
Residential mortgages		$144,360		$87,049
Commercial loans	60,444		56,929
Total		$204,804		$143,978