Loans

The following is a summary of loans:



(Dollars in thousands)	September 30, 2018				December 31, 2017
	Amount		%		Amount		%
Commercial:
Commercial real estate (1)		$1,240,350	35	%		$1,210,495	36	%
Commercial & industrial (2)	656,882		18		612,334		18
Total commercial	1,897,232		53		1,822,829		54
Residential Real Estate:
Residential real estate (3)	1,349,340		38		1,227,248		36
Consumer:
Home equity	282,331		8		292,467		9
Other (4)	27,300		1		31,527		1
Total consumer	309,631		9		323,994		10
Total loans (5)		$3,556,203	100	%		$3,374,071	100	%


(1)	Commercial real estate loans consist of commercial mortgages primarily secured by income producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.


(2)	Commercial & industrial consist of loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.


(3)	Residential real estate loans consist of mortgage and homeowner construction loans secured by one- to four- family residential properties.


(4)	Other consumer loans consists of loans to individuals secured by general aviation aircraft and other personal installment loans.


(5)	Includes net unamortized loan origination costs of $4.8 million and $3.8 million, respectively, at September 30, 2018 and December 31, 2017 and net unamortized premiums on purchased loans of $746 thousand and $878 thousand, respectively, at September 30, 2018 and December 31, 2017.

As of September 30, 2018 and December 31, 2017, there were $1.9 billion and $1.6 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 7 for additional disclosure regarding borrowings.

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
September 30, 2018	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Commercial real estate		$—		$931		$—		$931		$1,239,419		$1,240,350
Commercial & industrial	—		20		122		142		656,740		656,882
Total commercial	—		951		122		1,073		1,896,159		1,897,232
Residential Real Estate:
Residential real estate	5,322		2,936		1,140		9,398		1,339,942		1,349,340
Consumer:
Home equity	1,854		534		551		2,939		279,392		282,331
Other	109		—		—		109		27,191		27,300
Total consumer	1,963		534		551		3,048		306,583		309,631
Total loans		$7,285		$4,421		$1,813		$13,519		$3,542,684		$3,556,203



(Dollars in thousands)	Days Past Due
December 31, 2017	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Commercial real estate		$6		$—		$4,954		$4,960		$1,205,535		$1,210,495
Commercial & industrial	3,793		2		281		4,076		608,258		612,334
Total commercial	3,799		2		5,235		9,036		1,813,793		1,822,829
Residential Real Estate:
Residential real estate	1,678		2,274		3,903		7,855		1,219,393		1,227,248
Consumer:
Home equity	2,798		75		268		3,141		289,326		292,467
Other	29		—		14		43		31,484		31,527
Total consumer	2,827		75		282		3,184		320,810		323,994
Total loans		$8,304		$2,351		$9,420		$20,075		$3,353,996		$3,374,071

Included in past due loans as of September 30, 2018 and December 31, 2017, were nonaccrual loans of $6.4 million and $11.8 million, respectively.

All loans 90 days or more past due at September 30, 2018 and December 31, 2017 were classified as nonaccrual.

Impaired Loans

Impaired loans include nonaccrual loans and loans restructured in a troubled debt restructuring. The Corporation identifies loss allocations for impaired loans on an individual loan basis.

The following is a summary of impaired loans:



(Dollars in thousands)	Recorded Investment (1)				Unpaid Principal				Related Allowance
	Sep 30, 2018		Dec 31, 2017		Sep 30, 2018		Dec 31, 2017		Sep 30, 2018		Dec 31, 2017
No Related Allowance Recorded
Commercial:
Commercial real estate		$—		$—		$—		$—		$—		$—
Commercial & industrial	4,825		4,986		4,877		5,081		—		—
Total commercial	4,825		4,986		4,877		5,081		—		—
Residential Real Estate:
Residential real estate	8,737		9,069		8,896		9,256		—		—
Consumer:
Home equity	1,582		557		1,583		557		—		—
Other	—		14		—		14		—		—
Total consumer	1,582		571		1,583		571		—		—
Subtotal	15,144		14,626		15,356		14,908		—		—
With Related Allowance Recorded
Commercial:
Commercial real estate		$—		$4,954		$—		$9,910		$—		$1,018
Commercial & industrial	54		191		75		212		—		1
Total commercial	54		5,145		75		10,122		—		1,019
Residential Real Estate:
Residential real estate	692		715		722		741		101		104
Consumer:
Home equity	52		—		51		—		8		—
Other	23		133		23		132		3		6
Total consumer	75		133		74		132		11		6
Subtotal	821		5,993		871		10,995		112		1,129
Total impaired loans		$15,965		$20,619		$16,227		$25,903		$112		$1,129
Total:
Commercial		$4,879		$10,131		$4,952		$15,203		$—		$1,019
Residential real estate	9,429		9,784		9,618		9,997		101		104
Consumer	1,657		704		1,657		703		11		6
Total impaired loans		$15,965		$20,619		$16,227		$25,903		$112		$1,129

(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 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 September 30,	2018		2017		2018		2017
Commercial:
Commercial real estate		$—		$8,041		$—		$21
Commercial & industrial	5,324		6,427		62		67
Total commercial	5,324		14,468		62		88
Residential Real Estate:
Residential real estate	9,265		15,107		96		102
Consumer:
Home equity	1,424		543		22		5
Other	25		142		—		2
Total consumer	1,449		685		22		7
Totals		$16,038		$30,260		$180		$197




(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Nine months ended September 30,	2018		2017		2018		2017
Commercial:
Commercial real estate		$1,352		$9,117		$—		$73
Commercial & industrial	5,599		6,750		201		219
Total commercial	6,951		15,867		201		292
Residential Real Estate:
Residential real estate	9,709		15,750		293		374
Consumer:
Home equity	1,045		734		41		25
Other	85		142		5		8
Total consumer	1,130		876		46		33
Totals		$17,790		$32,493		$540		$699

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. When loans are placed on nonaccrual status, 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)	Sep 30, 2018		Dec 31, 2017
Commercial:
Commercial real estate		$—		$4,954
Commercial & industrial	122		283
Total commercial	122		5,237
Residential Real Estate:
Residential real estate	9,063		9,414
Consumer:
Home equity	1,624		544
Other	—		16
Total consumer	1,624		560
Total nonaccrual loans		$10,809		$15,211
Accruing loans 90 days or more past due		$—		$—

As of September 30, 2018 and December 31, 2017, loans secured by one- to four-family residential property amounting to $816 thousand and $4.4 million, respectively, were in process of foreclosure.

Nonaccrual loans of $4.4 million and $3.4 million, respectively, were current as to the payment of principal and interest at September 30, 2018 and December 31, 2017.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2018.

Troubled Debt Restructurings

Loans are considered restructured in a troubled debt restructuring when the Corporation has granted concessions, that it otherwise would not have considered, to a borrower experiencing financial difficulties. 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 that 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.

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 recorded investment in troubled debt restructurings was $5.7 million and $11.2 million, respectively, at September 30, 2018 and December 31, 2017. The allowance for loan losses included specific reserves for these troubled debt restructurings of $104 thousand and $1.1 million, respectively, at September 30, 2018 and December 31, 2017.

As of September 30, 2018, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

For the three months ended September 30, 2018, there were no loans modified as a troubled debt restructuring. For the nine months ended September 30, 2018, there was one loan modified as a troubled debt restructuring with a pre-modification and post-modification recorded investment of $608 thousand. This troubled debt restructuring included a combination of concessions pertaining to maturity and interest only payment terms. There were no loans modified as a troubled debt restructuring for the three and nine months ended September 30, 2017.

For both the three and nine months ended September 30, 2018, payment defaults on troubled debt restructured loans modified within the previous 12 months occurred on one loan with a carrying value of $608 thousand at the time of default. For the three months ended September 30, 2017, there were no payment defaults on troubled debt restructured loans modified within the previous 12 months. For the nine months ended September 30, 2017, payment defaults on troubled debt restructured loans modified within the previous 12 months occurred on two loans with a total carrying value of $1.6 million at the time of default.

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 4.74 at September 30, 2018 and 4.70 at December 31, 2017. 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. On a quarterly basis, management reviews the criticized loan portfolio, which generally consists of commercial loans that are risk-rated special mention or worse, and other selected loans. Management’s review focuses on the current status of the loans 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
	Sep 30, 2018		Dec 31, 2017		Sep 30, 2018		Dec 31, 2017		Sep 30, 2018		Dec 31, 2017
Commercial:
Commercial real estate	1,235,579		1,205,381		1,065		—		3,706		5,114
Commercial & industrial	593,673		592,749		55,012		9,804		8,197		9,781
Total commercial		$1,829,252		$1,798,130		$56,077		$9,804		$11,903		$14,895

Residential and Consumer

Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type. For non-impaired residential real estate and consumer loans, the Corporation assigns loss allocation factors to each respective loan type. See Note 6 for additional information.

Other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and consumer loan portfolios. 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 loan type and credit quality indicator:



(Dollars in thousands)	Current				Past Due
	Sep 30, 2018		Dec 31, 2017		Sep 30, 2018		Dec 31, 2017
Residential Real Estate:
Self-originated mortgages		$1,224,575		$1,091,291		$8,172		$6,413
Purchased mortgages	115,367		128,102		1,226		1,442
Total residential real estate		$1,339,942		$1,219,393		$9,398		$7,855
Consumer:
Home equity		$279,392		$289,326		$2,939		$3,141
Other	27,191		31,484		109		43
Total consumer		$306,583		$320,810		$3,048		$3,184