Loans

The following is a summary of loans:



(Dollars in thousands)	December 31, 2017				December 31, 2016
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$1,072,487	32	%		$1,074,186	33	%
Construction & development (2)	138,008		4		121,371		4
Commercial & industrial (3)	612,334		18		576,109		18
Total commercial	1,822,829		54		1,771,666		55
Residential real estate:
Mortgages	1,206,458		35		1,094,824		34
Homeowner construction	20,790		1		27,924		1
Total residential real estate	1,227,248		36		1,122,748		35
Consumer:
Home equity lines	258,114		8		264,200		8
Home equity loans	34,353		1		37,272		1
Other (4)	31,527		1		38,485		1
Total consumer	323,994		10		339,957		10
Total loans (5)		$3,374,071	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 $3.8 million and $3.0 million, respectively, and net unamortized premiums on purchased loans of $878 thousand and $783 thousand, respectively, at December 31, 2017 and 2016.

At December 31, 2017 and 2016, there were $1.6 billion and $1.4 billion, respectively, of loans pledged as collateral to the FHLB under a blanket pledge agreement and to the FRB for the discount window. See Note 11 for additional disclosure regarding borrowings.

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

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



(Dollars in thousands)
December 31,	2017		2016
Commercial:
Mortgages		$4,954		$7,811
Construction & development	—		—
Commercial & industrial	283		1,337
Residential real estate:
Mortgages	9,414		11,736
Homeowner construction	—		—
Consumer:
Home equity lines	81		—
Home equity loans	463		1,058
Other	16		116
Total nonaccrual loans		$15,211		$22,058
Accruing loans 90 days or more past due		$—		$—

As of December 31, 2017 and 2016, loans secured by one- to four-family residential property amounting to $4.4 million and $5.7 million, respectively, were in process of foreclosure.

Nonaccrual loans of $3.4 million and $3.5 million, respectively, were current as to the payment of principal and interest as of December 31, 2017 and 2016.

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

Interest income that would have been recognized had nonaccrual loans been current in accordance with their original terms was approximately $1.3 million, $1.6 million and $1.5 million in 2017, 2016 and 2015, respectively. Interest income included in the Consolidated Statements of Income on nonaccrual loans amounted to approximately $335 thousand, $640 thousand and $522 thousand, respectively, in 2017, 2016 and 2015.

Past Due Loans

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



(Dollars in thousands)	Days Past Due
December 31, 2017	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$6		$—		$4,954		$4,960		$1,067,527		$1,072,487
Construction & development	—		—		—		—		138,008		138,008
Commercial & industrial	3,793		2		281		4,076		608,258		612,334
Residential real estate:
Mortgages	1,678		2,274		3,903		7,855		1,198,603		1,206,458
Homeowner construction	—		—		—		—		20,790		20,790
Consumer:
Home equity lines	1,340		—		—		1,340		256,774		258,114
Home equity loans	1,458		75		268		1,801		32,552		34,353
Other	29		—		14		43		31,484		31,527
Total loans		$8,304		$2,351		$9,420		$20,075		$3,353,996		$3,374,071



(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 December 31, 2017 and 2016, were nonaccrual loans of $11.8 million and $18.6 million, respectively. All loans 90 days or more past due at December 31, 2017 and 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
December 31,	2017		2016		2017		2016		2017		2016
No Related Allowance Recorded:
Commercial:
Mortgages		$—		$4,676		$—		$9,019		$—		$—
Construction & development	—		—		—		—		—		—
Commercial & industrial	4,986		6,458		5,081		6,550		—		—
Residential real estate:
Mortgages	9,069		14,385		9,256		14,569		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	81		—		81		—		—		—
Home equity loans	476		1,137		476		1,177		—		—
Other	14		116		14		116		—		—
Subtotal	14,626		26,772		14,908		31,431		—		—
With Related Allowance Recorded:
Commercial:
Mortgages	4,954		5,104		9,910		6,087		1,018		448
Construction & development	—		—		—		—		—		—
Commercial & industrial	191		662		212		699		1		3
Residential real estate:
Mortgages	715		1,285		741		1,310		104		151
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		—		—		—		—		—
Home equity loans	—		—		—		—		—		—
Other	133		28		132		29		6		4
Subtotal	5,993		7,079		10,995		8,125		1,129		606
Total impaired loans		$20,619		$33,851		$25,903		$39,556		$1,129		$606
Total:
Commercial		$10,131		$16,900		$15,203		$22,355		$1,019		$451
Residential real estate	9,784		15,670		9,997		15,879		104		151
Consumer	704		1,281		703		1,322		6		4
Total impaired loans		$20,619		$33,851		$25,903		$39,556		$1,129		$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 accruing impaired loans (troubled debt restructurings for which management has concluded that the collectability 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
Years ended December 31,	2017		2016		2015		2017		2016		2015
Commercial:
Mortgages		$8,425		$13,201		$14,847		$79		$239		$327
Construction & development	—		—		—		—		—		—
Commercial & industrial	6,445		3,540		3,415		281		99		130
Residential real estate:
Mortgages	14,571		12,848		5,423		444		322		147
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	79		354		228		7		10		1
Home equity loans	606		1,233		487		24		38		11
Other	143		147		210		10		11		10
Totals		$30,269		$31,323		$24,610		$845		$719		$626

Troubled Debt Restructurings

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 $11.2 million and $22.3 million, respectively, at December 31, 2017 and 2016. These amounts included insignificant balances of accrued interest. The allowance for loan losses included specific reserves for these troubled debt restructurings of $1.1 million and $567 thousand, respectively, at December 31, 2017 and 2016.

As of December 31, 2017, there were no significant commitments to lend additional funds to borrowers whose loans were 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
Years ended December 31,	2017	2016	2017		2016		2017		2016
Commercial:
Mortgages	—	1		$—		$776		$—		$776
Construction & development	—	—	—		—		—		—
Commercial & industrial	—	9	—		6,229		—		6,229
Residential real estate:
Mortgages	—	3	—		4,386		—		4,386
Homeowner construction	—	—	—		—		—		—
Consumer:
Home equity lines	—	—	—		—		—		—
Home equity loans	—	—	—		—		—		—
Other	—	—	—		—		—		—
Totals	—	13		$—		$11,391		$—		$11,391


(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)
Years ended December 31,	2017		2016
Below-market interest rate concession		$—		$—
Payment deferral	—		1,111
Maturity / amortization concession	—		683
Interest only payments	—		4,326
Combination (1)	—		5,271
Total		$—		$11,391


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

In 2017, there were no payment defaults on troubled debt restructured loans modified within the previous 12 months. In 2016, payment defaults on troubled debt restructured loans modified within the previous 12 months occurred on seven loans totaling $1.6 million.

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 December 31, 2017 and 2016, the weighted average risk rating of the Corporation’s commercial loan portfolio was 4.70 and 4.68, respectively. 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. See Note 6 for additional information.

A description of the commercial loan categories is 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 nonaccrual 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
December 31,	2017		2016		2017		2016		2017		2016
Mortgages		$1,067,373		$1,065,358		$—		$776		$5,114		$8,052
Construction & development	138,008		121,371		—		—		—		—
Commercial & industrial	592,749		559,416		9,804		8,938		9,781		7,755
Total commercial loans		$1,798,130		$1,746,145		$9,804		$9,714		$14,895		$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. 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 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. 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				Past Due
December 31,	2017		2016		2017		2016
Residential real estate:
Self-originated mortgages		$1,070,501		$954,867		$6,413		$11,017
Purchased mortgages	128,102		127,731		1,442		1,209
Homeowner construction	20,790		27,924		—		—
Total residential loans		$1,219,393		$1,110,522		$7,855		$12,226
Consumer:
Home equity lines		$256,774		$263,519		$1,340		$681
Home equity loans	32,552		35,762		1,801		1,510
Other	31,484		38,342		43		143
Total consumer loans		$320,810		$337,623		$3,184		$2,334

Loan Servicing Activities

Loans sold with servicing retained result in the capitalization of loan servicing rights. The following table presents an analysis of loan servicing rights:



(Dollars in thousands)	Loan Servicing Rights			Valuation Allowance			Total
Balance at December 31, 2014		$2,989			($2	)		$2,987
Loan servicing rights capitalized	1,406			—			1,406
Amortization	(1,047		)	—			(1,047		)
Decrease in impairment reserve	—			1			1
Balance at December 31, 2015	3,348			(1		)	3,347
Loan servicing rights capitalized	1,412			—			1,412
Amortization	(1,267		)	—			(1,267		)
Decrease in impairment reserve	—			1			1
Balance at December 31, 2016	3,493			—			3,493
Loan servicing rights capitalized	1,104			—			1,104
Amortization	(984		)	—			(984		)
Decrease in impairment reserve	—			—			—
Balance at December 31, 2017		$3,613			$—			$3,613

The following table presents estimated aggregate amortization expense related to loan servicing assets:



(Dollars in thousands)
Years ending December 31:	2018		$899
	2019	675
	2020	507
	2021	381
	2022	286
	Thereafter	865
Total estimated amortization expense			$3,613

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,	2017		2016
Residential mortgages		$568,311		$522,766
Commercial loans	108,539		101,317
Total		$676,850		$624,083