Loans

The following is a summary of loans:



(Dollars in thousands)	December 31, 2018				December 31, 2017
	Amount		%		Amount		%
Commercial:
Commercial real estate (1)		$1,392,408	38	%		$1,210,495	36	%
Commercial & industrial (2)	620,704		17		612,334		18
Total commercial	2,013,112		55		1,822,829		54
Residential Real Estate:
Residential real estate (3)	1,360,387		37		1,227,248		36
Consumer:
Home equity	280,626		8		292,467		9
Other (4)	26,235		—		31,527		1
Total consumer	306,861		8		323,994		10
Total loans (5)		$3,680,360	100	%		$3,374,071	100	%


(1)	Consists 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)	Consists of loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.


(3)	Consists of mortgage and homeowner construction loans secured by one- to four- family residential properties.


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


(5)	Includes net unamortized loan origination costs of $4.7 million and $3.8 million, respectively, at December 31, 2018 and 2017 and net unamortized premiums on purchased loans of $703 thousand and $878 thousand, respectively, at December 31, 2018 and 2017.

As of December 31, 2018 and 2017, loans amounting to $2.0 billion and $1.6 billion, respectively, were 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.

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, 2018	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Commercial real estate		$155		$925		$—		$1,080		$1,391,328		$1,392,408
Commercial & industrial	—		—		—		—		620,704		620,704
Total commercial	155		925		—		1,080		2,012,032		2,013,112
Residential Real Estate:
Residential real estate	6,318		2,693		1,509		10,520		1,349,867		1,360,387
Consumer:
Home equity	1,281		156		552		1,989		278,637		280,626
Other	33		—		—		33		26,202		26,235
Total consumer	1,314		156		552		2,022		304,839		306,861
Total loans		$7,787		$3,774		$2,061		$13,622		$3,666,738		$3,680,360



(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 December 31, 2018 and 2017, were nonaccrual loans of $8.6 million and $11.8 million, respectively.

All loans 90 days or more past due at December 31, 2018 and 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
December 31,	2018		2017		2018		2017		2018		2017
No Related Allowance Recorded
Commercial:
Commercial real estate		$925		$—		$926		$—		$—		$—
Commercial & industrial	4,681		4,986		4,732		5,081		—		—
Total commercial	5,606		4,986		5,658		5,081		—		—
Residential Real Estate:
Residential real estate	9,347		9,069		9,695		9,256		—		—
Consumer:
Home equity	1,360		557		1,360		557		—		—
Other	—		14		—		14		—		—
Total consumer	1,360		571		1,360		571		—		—
Subtotal	16,313		14,626		16,713		14,908		—		—
With Related Allowance Recorded
Commercial:
Commercial real estate		$—		$4,954		$—		$9,910		$—		$1,018
Commercial & industrial	52		191		73		212		—		1
Total commercial	52		5,145		73		10,122		—		1,019
Residential Real Estate:
Residential real estate	364		715		390		741		100		104
Consumer:
Home equity	85		—		85		—		24		—
Other	22		133		22		132		3		6
Total consumer	107		133		107		132		27		6
Subtotal	523		5,993		570		10,995		127		1,129
Total impaired loans		$16,836		$20,619		$17,283		$25,903		$127		$1,129
Total:
Commercial		$5,658		$10,131		$5,731		$15,203		$—		$1,019
Residential real estate	9,711		9,784		10,085		9,997		100		104
Consumer	1,467		704		1,467		703		27		6
Total impaired loans		$16,836		$20,619		$17,283		$25,903		$127		$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 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,	2018		2017		2016		2018		2017		2016
Commercial:
Commercial real estate		$1,050		$8,425		$13,201		$—		$79		$239
Commercial & industrial	5,403		6,445		3,540		259		281		99
Total commercial	6,453		14,870		16,741		259		360		338
Residential real estate:
Residential real estate	9,645		14,571		12,848		393		444		322
Consumer:
Home equity	1,182		685		1,587		52		31		48
Other	69		143		147		5		10		11
Total consumer	1,251		828		1,734		57		41		59
Totals		$17,349		$30,269		$31,323		$709		$845		$719

Nonaccrual Loans

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



(Dollars in thousands)
December 31,	2018		2017
Commercial:
Commercial real estate		$925		$4,954
Commercial & industrial	—		283
Total commercial	925		5,237
Residential Real Estate:
Residential real estate	9,346		9,414
Consumer:
Home equity	1,436		544
Other	—		16
Total consumer	1,436		560
Total nonaccrual loans		$11,707		$15,211
Accruing loans 90 days or more past due		$—		$—

As of December 31, 2018 and 2017, loans secured by one- to four-family residential property amounting to $761 thousand and $4.4 million, respectively, were in process of foreclosure.

Nonaccrual loans of $3.1 million and $3.4 million, respectively, were current as to the payment of principal and interest as of December 31, 2018 and 2017.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2018.

Troubled Debt Restructurings

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 $5.6 million and $11.2 million, respectively, at December 31, 2018 and 2017. The allowance for loan losses included specific reserves for these troubled debt restructurings of $103 thousand and $1.1 million, respectively, at December 31, 2018 and 2017.

In 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 in 2017.

In 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. In 2017, there were no payment defaults on troubled debt restructured loans modified within the previous 12 months.

As of December 31, 2018, there were no significant commitments to lend additional funds to borrowers whose loans were restructured.

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 December 31, 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.

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 collectability. 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
December 31,	2018		2017		2018		2017		2018		2017
Commercial:
Commercial real estate		$1,387,666		$1,205,381		$205		$—		$4,537		$5,114
Commercial & industrial	559,019		592,749		50,426		9,804		11,259		9,781
Total commercial		$1,946,685		$1,798,130		$50,631		$9,804		$15,796		$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.

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 Fair Isaac Corporation (“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 loan type and credit quality indicator:



(Dollars in thousands)	Current				Past Due
December 31,	2018		2017		2018		2017
Residential Real Estate:
Self-originated mortgages		$1,238,402		$1,091,291		$9,079		$6,413
Purchased mortgages	111,465		128,102		1,441		1,442
Total residential real estate		$1,349,867		$1,219,393		$10,520		$7,855
Consumer:
Home equity		$278,637		$289,326		$1,989		$3,141
Other	26,202		31,484		33		43
Total consumer		$304,839		$320,810		$2,022		$3,184

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, 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		)
Balance at December 31, 2017	3,613			—			3,613
Loan servicing rights capitalized	905			—			905
Amortization	(867		)	—			(867		)
Balance at December 31, 2018		$3,651			$—			$3,651

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



(Dollars in thousands)
Years ending December 31:	2019		$768
	2020	606
	2021	479
	2022	378
	2023	299
	2024 and thereafter	1,121
Total estimated amortization expense			$3,651

Loans sold to others are serviced by the Corporation 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,	2018		2017
Residential mortgages		$588,534		$568,311
Commercial loans	142,218		108,539
Total		$730,752		$676,850