Loans

The following is a summary of loans:



(Dollars in thousands)	December 31, 2013				December 31, 2012
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$796,249	32	%		$710,813	31	%
Construction and development (2)	36,289		1	%	27,842		1	%
Other (3)	530,797		22	%	513,764		23	%
Total commercial	1,363,335		55	%	1,252,419		55	%
Residential real estate:
Mortgages (4)	749,163		30	%	692,798		30	%
Homeowner construction	23,511		1	%	24,883		1	%
Total residential real estate	772,674		31	%	717,681		31	%
Consumer:
Home equity lines (5)	231,362		9	%	226,861		10	%
Home equity loans (5)	40,212		2	%	39,329		2	%
Other (6)	55,301		3	%	57,713		2	%
Total consumer	326,875		14	%	323,903		14	%
Total loans (7)		$2,462,884	100	%		$2,294,003	100	%


(1)	Amortizing mortgages and lines of credit, primarily secured by income producing property. As of December 31, 2013 and 2012, $190.7 million and $238.6 million, respectively, were pledged as collateral for FHLBB borrowings and letters of credit.


(2)	Loans for construction commercial properties, loans to developers for construction of residential properties and loans 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, 2013, $44.1 million and $21.2 million, respectively, were pledged as collateral for FHLBB borrowings and letters of credit and were collateralized for the discount window at the FRB. Comparable amounts for December 31, 2012 were $51.8 million and $29.5 million, respectively.


(4)	As of December 31, 2013 and 2012, $684.6 million and $627.4 million, respectively were pledged as collateral for FHLBB borrowings and letters of credit.


(5)	As of December 31, 2013 and 2012, $195.3 million and $189.4 million, respectively were pledged as collateral for FHLBB borrowings and letters of credit.


(6)	Fixed rate consumer installment loans.


(7)	Includes net unamortized loan origination costs of $879 thousand and $39 thousand, respectively, and net unamortized premiums on purchased loans of $99 thousand and $83 thousand, respectively, at December 31, 2013 and 2012.

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. 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 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 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 collectibility 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:



(Dollars in thousands)
December 31,	2013		2012
Commercial:
Mortgages		$7,492		$10,681
Construction and development	—		—
Other	1,291		4,412
Residential real estate:
Mortgages	8,315		6,158
Homeowner construction	—		—
Consumer:
Home equity lines	469		840
Home equity loans	687		371
Other	48		81
Total nonaccrual loans		$18,302		$22,543
Accruing loans 90 days or more past due		$—		$—

As of December 31, 2013 and 2012, nonaccrual loans of $2.7 million and $1.6 million, respectively, were current as to the payment of principal and interest.

Interest income that would have been recognized had nonaccrual loans been current in accordance with their original terms was approximately $1.8 million, $1.8 million and $1.7 million in 2013, 2012 and 2011, respectively. Interest income included in the Consolidated Statements of Income on nonaccrual loans amounted to approximately $400 thousand, $679 thousand and $505 thousand in 2013, 2012 and 2011, respectively.

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, 2013	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$—		$7,492		$7,492		$788,757		$796,249
Construction and development	—		—		—		—		36,289		36,289
Other	276		302		731		1,309		529,488		530,797
Residential real estate:
Mortgages	4,040		1,285		5,633		10,958		738,205		749,163
Homeowner construction	—		—		—		—		23,511		23,511
Consumer:
Home equity lines	831		100		269		1,200		230,162		231,362
Home equity loans	448		66		349		863		39,349		40,212
Other	43		—		38		81		55,220		55,301
Total loans		$5,638		$1,753		$14,512		$21,903		$2,440,981		$2,462,884



(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

Included in past due loans as of December 31, 2013 and 2012, were nonaccrual loans of $15.6 million and $21.0 million, respectively. All loans 90 days or more past due at December 31, 2013 and 2012 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
December 31,	2013		2012		2013		2012		2013		2012
No Related Allowance Recorded:
Commercial:
Mortgages		$998		$2,357		$998		$2,360		$—		$—
Construction and development	—		—		—		—		—		—
Other	1,055		1,058		1,050		1,057		—		—
Residential real estate:
Mortgages	1,167		1,294		1,259		1,315		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		—		—		—		—		—
Home equity loans	—		—		—		—		—		—
Other	—		—		—		—		—		—
Subtotal		$3,220		$4,709		$3,307		$4,732		$—		$—
With Related Allowance Recorded:
Commercial:
Mortgages		$29,335		$17,897		$31,731		$19,738		$552		$1,720
Construction and development	—		—		—		—		—		—
Other	1,506		9,939		1,945		10,690		463		694
Residential real estate:
Mortgages	3,122		2,576		3,507		2,947		463		463
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	173		187		174		255		1		1
Home equity loans	55		117		54		160		—		—
Other	127		137		130		136		2		2
Subtotal		$34,318		$30,853		$37,541		$33,926		$1,481		$2,880
Total impaired loans		$37,538		$35,562		$40,848		$38,658		$1,481		$2,880
Total:
Commercial		$32,894		$31,251		$35,724		$33,845		$1,015		$2,414
Residential real estate	4,289		3,870		4,766		4,262		463		463
Consumer	355		441		358		551		3		3
Total impaired loans		$37,538		$35,562		$40,848		$38,658		$1,481		$2,880

(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.

The following table presents the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class, for the periods indicated:



(Dollars in thousands)
	Average Recorded Investment						Interest Income Recognized
Years ended December 31,	2013		2012		2011		2013		2012		2011
Commercial:
Mortgages		$27,496		$10,785		$14,923		$630		$273		$539
Construction and development	—		—		—		—		—		—
Other	6,029		10,661		8,226		190		297		388
Residential real estate:
Mortgages	4,024		4,651		5,743		125		88		188
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	200		172		127		7		3		5
Home equity loans	72		131		290		6		7		17
Other	146		151		235		9		11		15
Totals		$37,967		$26,551		$29,544		$967		$679		$1,152

At December 31, 2013 and 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 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.

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 $26.4 million and $20.2 million, respectively, at December 31, 2013 and 2012. Included in these amounts was accrued interest of $44 thousand and $13 thousand, respectively. The allowance for loan losses included specific reserves for these troubled debt restructurings of $556 thousand and $898 thousand, respectively, at December 31, 2013 and 2012.

The following table presents loans modified as a troubled debt restructuring during the periods indicated:



(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications				Post-Modifications
Years ended December 31,	2013	2012	2013		2012		2013		2012
Commercial:
Mortgages	6	6		$15,974		$9,525		$14,785		$9,525
Construction and development	—	—	—		—		—		—
Other	7	8	1,198		1,889		1,198		1,889
Residential real estate:
Mortgages	1	2	570		651		570		651
Homeowner construction	—	—	—		—		—		—
Consumer:
Home equity lines	1	—	92		—		92		—
Home equity loans	—	—	—		—		—		—
Other	—	2	—		5		—		5
Totals	15	18		$17,834		$12,070		$16,645		$12,070


(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 periods indicated:



(Dollars in thousands)
Years ended December 31,	2013		2012
Below market interest rate concession		$15,836		$1,426
Payment deferral	570		240
Maturity / amortization concession	21		917
Interest only payments	424		361
Combination (1)	983		9,126
Total		$17,834		$12,070


(1)	Loans included in this classification had a combination of any two of the concessions included in this table.

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 periods indicated:



(Dollars in thousands)
	# of Loans		Recorded Investment (1)
Years ended December 31,	2013	2012	2013		2012
Commercial:
Mortgages	1	1		$232		$195
Construction and development	—	—	—		—
Other	2	3	839		866
Residential real estate:
Mortgages	—	—	—		—
Homeowner construction	—	—	—		—
Consumer:
Home equity lines	—	—	—		—
Home equity loans	—	—	—		—
Other	—	—	—		—
Totals	3	4		$1,071		$1,061


(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, 2013 and 2012, the weighted average risk rating of the Corporation’s commercial loan portfolio was 4.64 and 4.77, 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 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
December 31,	2013		2012		2013		2012		2013		2012
Mortgages		$756,838		$669,220		$23,185		$21,649		$16,226		$19,944
Construction and development	36,289		27,842		—		—		—		—
Other	507,962		483,371		19,887		24,393		2,948		6,000
Total commercial loans		$1,301,089		$1,180,433		$43,072		$46,042		$19,174		$25,944

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 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
December 31,	2013		2012		2013		2012
Residential real estate:
Accruing mortgages		$740,848		$686,640		$—		$—
Nonaccrual mortgages	2,682		2,500		5,633		3,658
Homeowner construction	23,511		24,883		—		—
Total residential loans		$767,041		$714,023		$5,633		$3,658
Consumer:
Home equity lines		$231,093		$226,333		$269		$528
Home equity loans	39,864		39,078		348		251
Other	55,262		57,648		39		65
Total consumer loans		$326,219		$323,059		$656		$844

Loan Servicing Activities

An analysis of loan servicing rights is as follows:



(Dollars in thousands)	Loan Servicing Rights			Valuation Allowance			Total
Balance at December 31, 2010		$913			($156	)		$757
Loan servicing rights capitalized	248			—			248
Amortization	(224		)	—			(224		)
Increase in impairment reserve	—			(16		)	(16		)
Balance at December 31, 2011	937			(172		)	765
Loan servicing rights capitalized	569			—			569
Amortization	(231		)	—			(231		)
Decrease in impairment reserve	—			7			7
Balance at December 31, 2012	1,275			(165		)	1,110
Loan servicing rights capitalized	1,897			—			1,897
Amortization	(405		)	—			(405		)
Decrease in impairment reserve	—			96			96
Balance at December 31, 2013		$2,767			($69	)		$2,698

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



(Dollars in thousands)
Years ending December 31:	2014		$387
	2015	328
	2016	280
	2017	240
	2018	206
	Thereafter	1,326
Total estimated amortization expense			$2,767

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. The following table presents the balance of loans serviced for others, by type of loan:



(Dollars in thousands)

December 31,	2013		2012
Residential mortgages		$310,699		$144,360
Commercial loans	69,526		60,444
Total		$380,225		$204,804