Loans

The following is a summary of loans:



(Dollars in thousands)	March 31, 2019		December 31, 2018
Commercial:
Commercial real estate (1)		$1,463,682		$1,392,408
Commercial & industrial (2)	610,608		620,704
Total commercial	2,074,290		2,013,112
Residential Real Estate:
Residential real estate (3)	1,359,072		1,360,387
Consumer:
Home equity	279,938		280,626
Other (4)	25,169		26,235
Total consumer	305,107		306,861
Total loans (5)		$3,738,469		$3,680,360


(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 $4.9 million and $4.7 million, respectively, at March 31, 2019 and December 31, 2018 and net unamortized premiums on purchased loans of $668 thousand and $703 thousand, respectively, at March 31, 2019 and December 31, 2018.

As of both March 31, 2019 and December 31, 2018, loans amounting to $2.0 billion were 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
March 31, 2019	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Commercial real estate		$—		$—		$926		$926		$1,462,756		$1,463,682
Commercial & industrial	1		—		—		1		610,607		610,608
Total commercial	1		—		926		927		2,073,363		2,074,290
Residential Real Estate:
Residential real estate	5,868		2,749		2,232		10,849		1,348,223		1,359,072
Consumer:
Home equity	1,851		433		627		2,911		277,027		279,938
Other	13		—		—		13		25,156		25,169
Total consumer	1,864		433		627		2,924		302,183		305,107
Total loans		$7,733		$3,182		$3,785		$14,700		$3,723,769		$3,738,469



(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

Included in past due loans at both March 31, 2019 and December 31, 2018 were nonaccrual loans of $8.6 million.

All loans 90 days or more past due at March 31, 2019 and December 31, 2018 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
	Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018
No Related Allowance Recorded
Commercial:
Commercial real estate		$926		$925		$926		$926		$—		$—
Commercial & industrial	4,645		4,681		4,633		4,732		—		—
Total commercial	5,571		5,606		5,559		5,658		—		—
Residential Real Estate:
Residential real estate	9,659		9,347		10,010		9,695		—		—
Consumer:
Home equity	1,297		1,360		1,297		1,360		—		—
Other	—		—		—		—		—		—
Total consumer	1,297		1,360		1,297		1,360		—		—
Subtotal	16,527		16,313		16,866		16,713		—		—
With Related Allowance Recorded
Commercial:
Commercial real estate		$—		$—		$—		$—		$—		$—
Commercial & industrial	—		52		—		73		—		—
Total commercial	—		52		—		73		—		—
Residential Real Estate:
Residential real estate	736		364		762		390		98		100
Consumer:
Home equity	111		85		111		85		111		24
Other	21		22		20		22		1		3
Total consumer	132		107		131		107		112		27
Subtotal	868		523		893		570		210		127
Total impaired loans		$17,395		$16,836		$17,759		$17,283		$210		$127
Total:
Commercial		$5,571		$5,658		$5,559		$5,731		$—		$—
Residential real estate	10,395		9,711		10,772		10,085		98		100
Consumer	1,429		1,467		1,428		1,467		112		27
Total impaired loans		$17,395		$16,836		$17,759		$17,283		$210		$127

(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 March 31,	2019		2018		2019		2018
Commercial:
Commercial real estate		$976		$4,100		$1		$—
Commercial & industrial	4,689		5,492		54		66
Total commercial	5,665		9,592		55		66
Residential Real Estate:
Residential real estate	10,151		9,850		115		112
Consumer:
Home equity	1,480		667		14		9
Other	21		144		—		3
Total consumer	1,501		811		14		12
Totals		$17,317		$20,253		$184		$190

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 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 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, 2019		Dec 31, 2018
Commercial:
Commercial real estate		$926		$925
Commercial & industrial	—		—
Total commercial	926		925
Residential Real Estate:
Residential real estate	10,032		9,346
Consumer:
Home equity	1,407		1,436
Other	—		—
Total consumer	1,407		1,436
Total nonaccrual loans		$12,365		$11,707
Accruing loans 90 days or more past due		$—		$—

As of March 31, 2019 and December 31, 2018, loans secured by one- to four-family residential property amounting to $1.7 million and $761 thousand, respectively, were in process of foreclosure.

Nonaccrual loans of $3.8 million and $3.1 million, respectively, were current as to the payment of principal and interest at March 31, 2019 and December 31, 2018.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2019.

Troubled Debt Restructurings

Loans are considered to be troubled debt restructurings 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 of 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 collectability 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.

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 $5.5 million and $5.6 million, respectively, at March 31, 2019 and December 31, 2018. The allowance for loan losses included specific reserves for these troubled debt restructurings of $99 thousand and $103 thousand, respectively, at March 31, 2019 and December 31, 2018.

For the three months ended March 31, 2019, there were no loans modified as a troubled debt restructuring. For the three months ended March 31, 2018, there was one commercial and industrial 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.

For the three months ended March 31, 2019 and 2018, there were no payment defaults on troubled debt restructured loans modified within the previous 12 months.

As of March 31, 2019, there were no significant commitments to lend additional funds to borrowers whose loans had been 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. 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 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
	Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018
Commercial:
Commercial real estate		$1,441,182		$1,387,666		$17,778		$205		$4,722		$4,537
Commercial & industrial	571,489		559,019		27,073		50,426		12,046		11,259
Total commercial		$2,012,671		$1,946,685		$44,851		$50,631		$16,768		$15,796

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
	Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018
Residential Real Estate:
Self-originated mortgages		$1,240,306		$1,238,402		$9,751		$9,079
Purchased mortgages	107,917		111,465		1,098		1,441
Total residential real estate		$1,348,223		$1,349,867		$10,849		$10,520
Consumer:
Home equity		$277,027		$278,637		$2,911		$1,989
Other	25,156		26,202		13		33
Total consumer		$302,183		$304,839		$2,924		$2,022