Loans

The following is a summary of loans:



(Dollars in thousands)	March 31, 2017				December 31, 2016
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$1,076,648	33	%		$1,074,186	33	%
Construction & development (2)	123,841		4		121,371		4
Commercial & industrial (3)	562,010		18		576,109		18
Total commercial	1,762,499		55		1,771,666		55
Residential real estate:
Mortgages	1,100,435		34		1,094,824		34
Homeowner construction	30,775		1		27,924		1
Total residential real estate	1,131,210		35		1,122,748		35
Consumer:
Home equity lines	258,695		8		264,200		8
Home equity loans	36,050		1		37,272		1
Other (4)	36,406		1		38,485		1
Total consumer	331,151		10		339,957		10
Total loans (5)		$3,224,860	100	%		$3,234,371	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)	Loans to individuals secured by general aviation aircraft and other personal installment loans.


(5)	Includes net unamortized loan origination costs of $3.2 million and $3.0 million, respectively, at March 31, 2017 and December 31, 2016 and net unamortized premiums on purchased loans of $907 thousand and $783 thousand, respectively, at March 31, 2017 and December 31, 2016.

As of March 31, 2017 and December 31, 2016, there were $1.5 billion and $1.4 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 7 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 collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest generally for a period of six months, 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, 2017		Dec 31, 2016
Commercial:
Mortgages		$7,809		$7,811
Construction & development	—		—
Commercial & industrial	1,129		1,337
Residential real estate:
Mortgages	12,253		11,736
Homeowner construction	—		—
Consumer:
Home equity lines	91		—
Home equity loans	730		1,058
Other	115		116
Total nonaccrual loans		$22,127		$22,058
Accruing loans 90 days or more past due		$—		$—

As of March 31, 2017 and December 31, 2016, loans secured by one- to four-family residential property amounting to $6.6 million and $5.7 million, respectively, were in process of foreclosure.

Nonaccrual loans of $4.0 million and $3.5 million, respectively, were current as to the payment of principal and interest at March 31, 2017 and December 31, 2016.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2017.

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, 2017	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$—		$7,806		$7,806		$1,068,842		$1,076,648
Construction & development	—		—		—		—		123,841		123,841
Commercial & industrial	7		—		1,039		1,046		560,964		562,010
Residential real estate:
Mortgages	1,826		1,515		7,192		10,533		1,089,902		1,100,435
Homeowner construction	—		—		—		—		30,775		30,775
Consumer:
Home equity lines	517		—		—		517		258,178		258,695
Home equity loans	423		102		380		905		35,145		36,050
Other	14		—		111		125		36,281		36,406
Total loans		$2,787		$1,617		$16,528		$20,932		$3,203,928		$3,224,860



(Dollars in thousands)	Days Past Due
December 31, 2016	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$901		$—		$7,807		$8,708		$1,065,478		$1,074,186
Construction & development	—		—		—		—		121,371		121,371
Commercial & industrial	409		—		745		1,154		574,955		576,109
Residential real estate:
Mortgages	5,381		652		6,193		12,226		1,082,598		1,094,824
Homeowner construction	—		—		—		—		27,924		27,924
Consumer:
Home equity lines	655		26		—		681		263,519		264,200
Home equity loans	776		76		658		1,510		35,762		37,272
Other	32		1		110		143		38,342		38,485
Total loans		$8,154		$755		$15,513		$24,422		$3,209,949		$3,234,371

Included in past due loans as of March 31, 2017 and December 31, 2016, were nonaccrual loans of $18.1 million and $18.6 million, respectively.

All loans 90 days or more past due at March 31, 2017 and December 31, 2016 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.

The following is a summary of impaired loans:



(Dollars in thousands)	Recorded Investment (1)				Unpaid Principal				Related Allowance
	Mar 31, 2017		Dec 31, 2016		Mar 31, 2017		Dec 31, 2016		Mar 31, 2017		Dec 31, 2016
No Related Allowance Recorded:
Commercial:
Mortgages		$4,673		$4,676		$9,014		$9,019		$—		$—
Construction & development	—		—		—		—		—		—
Commercial & industrial	5,618		6,458		5,758		6,550		—		—
Residential real estate:
Mortgages	14,953		14,385		15,092		14,569		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	91		—		91		—		—		—
Home equity loans	730		1,137		752		1,177		—		—
Other	—		116		—		116		—		—
Subtotal	26,065		26,772		30,707		31,431		—		—
With Related Allowance Recorded:
Commercial:
Mortgages		$5,106		$5,104		$6,089		$6,087		$461		$448
Construction & development	—		—		—		—		—		—
Commercial & industrial	1,266		662		1,325		699		201		3
Residential real estate:
Mortgages	1,232		1,285		1,258		1,310		183		151
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		—		—		—		—		—
Home equity loans	—		—		—		—		—		—
Other	143		28		143		29		16		4
Subtotal	7,747		7,079		8,815		8,125		861		606
Total impaired loans		$33,812		$33,851		$39,522		$39,556		$861		$606
Total:
Commercial		$16,663		$16,900		$22,186		$22,355		$662		$451
Residential real estate	16,185		15,670		16,350		15,879		183		151
Consumer	964		1,281		986		1,322		16		4
Total impaired loans		$33,812		$33,851		$39,522		$39,556		$861		$606

(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 tables present 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,	2017		2016		2017		2016
Commercial:
Mortgages		$9,780		$14,740		$26		$93
Construction & development	—		—		—		—
Commercial & industrial	6,965		3,800		76		11
Residential real estate:
Mortgages	16,240		11,069		122		69
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	76		671		2		2
Home equity loans	893		1,175		8		13
Other	143		145		4		2
Totals		$34,097		$31,600		$238		$190

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 6 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 $21.5 million and $22.3 million, respectively, at March 31, 2017 and December 31, 2016. These amounts included insignificant balances of accrued interest. The allowance for loan losses included specific reserves for these troubled debt restructurings of $660 thousand and $567 thousand, respectively, at March 31, 2017 and December 31, 2016.

As of March 31, 2017, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

In the three months ended March 31, 2017 and 2016, there were no loans modified as a troubled debt restructuring. In the three months ended March 31, 2017 and 2016, payment defaults on troubled debt restructured loans modified within the previous 12 months occurred on 1 loan totaling $779 thousand and 6 loans totaling $809 thousand, respectively.

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. The weighted average risk rating of the Corporation’s commercial loan portfolio was 4.67 at March 31, 2017 and 4.68 at December 31, 2016. For non-impaired loans, the Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for loan losses.

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 generally consists of commercial loans that are risk-rated special mention or worse, and other selected loans 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, 2017		Dec 31, 2016		Mar 31, 2017		Dec 31, 2016		Mar 31, 2017		Dec 31, 2016
Commercial:
Mortgages		$1,067,829		$1,065,358		$776		$776		$8,043		$8,052
Construction & development	123,841		121,371		—		—		—		—
Commercial & industrial	545,494		559,416		9,230		8,938		7,286		7,755
Total commercial loans		$1,737,164		$1,746,145		$10,006		$9,714		$15,329		$15,807

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.

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 ratio is determined via statistical modeling analyses. The indicated LTV levels are estimated based on such factors as the location, the original LTV ratio, 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.

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, 2017		Dec 31, 2016		Mar 31, 2017		Dec 31, 2016
Residential real estate:
Accruing mortgages		$1,088,182		$1,083,088		$—		$—
Nonaccrual mortgages	5,061		5,543		7,192		6,193
Homeowner construction	30,775		27,924		—		—
Total residential loans		$1,124,018		$1,116,555		$7,192		$6,193
Consumer:
Home equity lines		$258,695		$264,200		$—		$—
Home equity loans	35,670		36,614		380		658
Other	36,295		38,375		111		110
Total consumer loans		$330,660		$339,189		$491		$768