Loans

The following is a summary of loans:



(Dollars in thousands)	March 31, 2015				December 31, 2014
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$865,042	30	%		$843,978	30	%
Construction & development (2)	89,851		3		79,592		3
Commercial & industrial (3)	604,630		21		611,918		21
Total commercial	1,559,523		54		1,535,488		54
Residential real estate:
Mortgages	954,905		33		948,731		33
Homeowner construction	32,659		1		36,684		1
Total residential real estate	987,564		34		985,415		34
Consumer:
Home equity lines	239,537		8		242,480		8
Home equity loans	46,727		2		46,967		2
Other (4)	47,241		2		48,926		2
Total consumer	333,505		12		338,373		12
Total loans (5)		$2,880,592	100	%		$2,859,276	100	%


(1)	Loans primarily secured by income producing property.


(2)	Loans for construction of 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.


(4)	Consumer installment loans and loans secured by general aviation aircraft and automobiles.


(5)	Includes net unamortized loan origination costs of $2.2 million and $2.1 million, respectively, and net unamortized premiums on purchased loans of $92 thousand and $94 thousand, respectively, at March 31, 2015 and December 31, 2014.

At March 31, 2015 and December 31, 2014, there were $1.24 billion and $1.21 billion, respectively, of loans pledged as collateral to the FHLBB under a blanket pledge agreement and to the FRB for the discount window. See Note 8 for additional disclosure regarding borrowings.

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)	Mar 31, 2015		Dec 31, 2014
Commercial:
Mortgages		$5,115		$5,315
Construction & development	—		—
Commercial & industrial	2,193		1,969
Residential real estate:
Mortgages	6,956		7,124
Homeowner construction	—		—
Consumer:
Home equity lines	1,051		1,217
Home equity loans	511		317
Other	39		3
Total nonaccrual loans		$15,865		$15,945
Accruing loans 90 days or more past due		$—		$—

As of March 31, 2015 and December 31, 2014, nonaccrual loans of $3.6 million and $3.2 million, respectively, were current as to the payment of principal and interest.

At March 31, 2015, there were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status.

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:



(Dollars in thousands)	Days Past Due
March 31, 2015	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$497		$61		$5,115		$5,673		$859,369		$865,042
Construction & development	—		—		—		—		89,851		89,851
Commercial & industrial	229		229		721		1,179		603,451		604,630
Residential real estate:
Mortgages	4,470		1,352		3,607		9,429		945,476		954,905
Homeowner construction	—		—		—		—		32,659		32,659
Consumer:
Home equity lines	1,244		429		463		2,136		237,401		239,537
Home equity loans	213		111		255		579		46,148		46,727
Other	55		25		5		85		47,156		47,241
Total loans		$6,708		$2,207		$10,166		$19,081		$2,861,511		$2,880,592



(Dollars in thousands)	Days Past Due
December 31, 2014	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$—		$5,315		$5,315		$838,663		$843,978
Construction & development	—		—		—		—		79,592		79,592
Commercial & industrial	2,136		1,202		181		3,519		608,399		611,918
Residential real estate:
Mortgages	2,943		821		3,284		7,048		941,683		948,731
Homeowner construction	—		—		—		—		36,684		36,684
Consumer:
Home equity lines	570		100		841		1,511		240,969		242,480
Home equity loans	349		240		56		645		46,322		46,967
Other	35		5		—		40		48,886		48,926
Total loans		$6,033		$2,368		$9,677		$18,078		$2,841,198		$2,859,276

Included in past due loans as of March 31, 2015 and December 31, 2014, were nonaccrual loans of $12.3 million and $12.7 million, respectively. All loans 90 days or more past due at March 31, 2015 and December 31, 2014 were classified as nonaccrual.

Impaired Loans

Impaired loans consist of nonaccrual commercial loans, troubled debt restructured loans and other loans classified as impaired that are individually evaluated for impairment. 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:



(Dollars in thousands)	Recorded Investment (1)				Unpaid Principal				Related Allowance
	Mar 31, 2015		Dec 31, 2014		Mar 31, 2015		Dec 31, 2014		Mar 31, 2015		Dec 31, 2014
No Related Allowance Recorded:
Commercial:
Mortgages		$205		$432		$205		$432		$—		$—
Construction & development	—		—		—		—		—		—
Commercial & industrial	1,322		1,047		1,323		1,076		—		—
Residential real estate:
Mortgages	1,618		1,477		1,912		1,768		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		—		—		—		—		—
Home equity loans	—		—		—		—		—		—
Other	—		—		—		—		—		—
Subtotal	3,145		2,956		3,440		3,276		—		—
With Related Allowance Recorded:
Commercial:
Mortgages		$14,384		$14,585		$14,564		$14,564		$1,173		$927
Construction & development	—		—		—		—		—		—
Commercial & industrial	1,754		1,878		2,305		2,437		185		177
Residential real estate:
Mortgages	1,296		2,226		1,423		2,338		222		326
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	244		250		250		250		76		141
Home equity loans	72		45		116		62		1		12
Other	151		112		151		114		—		—
Subtotal	17,901		19,096		18,809		19,765		1,657		1,583
Total impaired loans		$21,046		$22,052		$22,249		$23,041		$1,657		$1,583
Total:
Commercial		$17,665		$17,942		$18,397		$18,509		$1,358		$1,104
Residential real estate	2,914		3,703		3,335		4,106		222		326
Consumer	467		407		517		426		77		153
Total impaired loans		$21,046		$22,052		$22,249		$23,041		$1,657		$1,583

(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 (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:



(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Three months ended March 31,	2015		2014		2015		2014
Commercial:
Mortgages		$14,942		$28,340		$79		$165
Construction & development	—		—		—		—
Commercial & industrial	3,036		2,366		19		23
Residential real estate:
Mortgages	3,457		3,744		16		14
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	247		134		—		1
Home equity loans	74		95		—		1
Other	146		125		3		2
Totals		$21,902		$34,804		$117		$206

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 may 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. Restructuring a loan in lieu of 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 $17.7 million and $18.4 million, respectively, at March 31, 2015 and December 31, 2014. These amounts included accrued interest of $30 thousand and $33 thousand, respectively. The allowance for loan losses included specific reserves for these troubled debt restructurings of $1.5 million and $1.2 million, respectively, at March 31, 2015 and December 31, 2014. As of March 31, 2015, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

The following table presents loans modified as a troubled debt restructuring:



(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications				Post-Modifications
Three months ended March 31,	2015	2014	2015		2014		2015		2014
Commercial:
Mortgages	—	—		$—		$—		$—		$—
Construction & development	—	—	—		—		—		—
Commercial & industrial	1	—	300		—		300		—
Residential real estate:
Mortgages	1	2	93		479		93		479
Homeowner construction	—	—	—		—		—		—
Consumer:
Home equity lines	—	—	—		—		—		—
Home equity loans	—	—	—		—		—		—
Other	1	—	35		—		35		—
Totals	3	2		$428		$479		$428		$479


(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 restructured loans, the recorded investment also includes accrued interest.

The following table provides information on how loans were modified as a troubled debt restructuring:



(Dollars in thousands)
Three months ended March 31,	2015		2014
Below-market interest rate concession		$335		$—
Payment deferral	93		479
Maturity / amortization concession	—		—
Interest only payments	—		—
Combination (1)	—		—
Total		$428		$479


(1)	Loans included in this classification were modified with a combination of any two of the concessions listed 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:



(Dollars in thousands)	# of Loans		Recorded Investment (1)
Three months ended March 31,	2015	2014	2015		2014
Commercial:
Mortgages	—	—		$—		$—
Construction & development	—	—	—		—
Commercial & industrial	2	6	11		1,191
Residential real estate:
Mortgages	2	—	338		—
Homeowner construction	—	—	—		—
Consumer:
Home equity lines	—	—	—		—
Home equity loans	—	—	—		—
Other	—	—	—		—
Totals	4	6		$349		$1,191


(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 restructured loans, 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, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. As of March 31, 2015 and December 31, 2014, the weighted average risk rating of the Corporation’s commercial loan portfolio was 4.68 and 4.67, 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, secondary sources of repayment, 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 on 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 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
	Mar 31, 2015		Dec 31, 2014		Mar 31, 2015		Dec 31, 2014		Mar 31, 2015		Dec 31, 2014
Mortgages		$842,516		$819,857		$17,207		$18,372		$5,319		$5,749
Construction & development	89,851		79,592		—		—		—		—
Commercial & industrial	586,370		592,206		15,536		16,311		2,724		3,401
Total commercial loans		$1,518,737		$1,491,655		$32,743		$34,683		$8,043		$9,150

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 and other loan review procedures 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)	Current and Under 90 Days Past Due				Over 90 Days Past Due
	Mar 31, 2015		Dec 31, 2014		Mar 31, 2015		Dec 31, 2014
Residential real estate:
Accruing mortgages		$947,949		$941,607		$—		$—
Nonaccrual mortgages	3,349		3,840		3,607		3,284
Homeowner construction	32,659		36,684		—		—
Total residential loans		$983,957		$982,131		$3,607		$3,284
Consumer:
Home equity lines		$239,074		$241,639		$463		$841
Home equity loans	46,472		46,911		255		56
Other	47,236		48,926		5		—
Total consumer loans		$332,782		$337,476		$723		$897