Loans

The following is a summary of loans:



(Dollars in thousands)	September 30, 2013				December 31, 2012
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$727,375	31	%		$710,813	31	%
Construction and development (2)	51,951		2		27,842		1
Other (3)	518,566		22		513,764		23
Total commercial	1,297,892		55		1,252,419		55
Residential real estate:
Mortgages (4)	711,427		30		692,798		30
Homeowner construction	20,265		1		24,883		1
Total residential real estate	731,692		31		717,681		31
Consumer:
Home equity lines (5)	227,063		10		226,861		10
Home equity loans (5)	41,158		2		39,329		2
Other (6)	55,961		2		57,713		2
Total consumer	324,182		14		323,903		14
Total loans (7)		$2,353,766	100	%		$2,294,003	100	%


(1)	Amortizing mortgages and lines of credit, primarily secured by income producing property. As of September 30, 2013 and December 31, 2012, $204.1 million and $238.6 million, respectively, were pledged as collateral for FHLBB borrowings and letters of credit.


(2)	Loans for construction 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. As of September 30, 2013, $47.5 million and $24.3 million, respectively, were pledged as collateral for FHLBB borrowings and letters of credit and were collateralized for the discount window at the Federal Reserve Bank. Comparable amounts for December 31, 2012 were $51.8 million and $29.5 million, respectively.


(4)	As of September 30, 2013 and December 31, 2012, $647.3 million and $627.4 million, respectively, were pledged as collateral for FHLBB borrowings and letters of credit.


(5)	As of September 30, 2013 and December 31, 2012, $191.8 million and $189.4 million, respectively, were pledged as collateral for FHLBB borrowings and letters of credit.


(6)	Fixed-rate consumer installment loans.


(7)	Includes net unamortized loan origination costs of $531 thousand and $39 thousand, respectively, and net unamortized premiums on purchased loans of $100 thousand and $83 thousand, respectively, at September 30, 2013 and December 31, 2012.

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 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, as of the dates indicated:



(Dollars in thousands)	Sep 30, 2013		Dec 31, 2012
Commercial:
Mortgages		$8,956		$10,681
Construction and development	—		—
Other	1,248		4,412
Residential real estate:
Mortgages	8,095		6,158
Homeowner construction	—		—
Consumer:
Home equity lines	412		840
Home equity loans	768		371
Other	24		81
Total nonaccrual loans		$19,503		$22,543
Accruing loans 90 days or more past due		$—		$—

As of September 30, 2013 and December 31, 2012, nonaccrual loans of $2.2 million and $1.6 million, respectively, were current as to the payment of principal and interest.

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, as of the dates indicated:



(Dollars in thousands)	Days Past Due
September 30, 2013	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$730		$8,226		$8,956		$718,419		$727,375
Construction and development	—		—		—		—		51,951		51,951
Other	2,648		8		929		3,585		514,981		518,566
Residential real estate:
Mortgages	2,624		1,960		4,843		9,427		702,000		711,427
Homeowner construction	—		—		—		—		20,265		20,265
Consumer:
Home equity lines	636		220		262		1,118		225,945		227,063
Home equity loans	339		104		416		859		40,299		41,158
Other	38		4		15		57		55,904		55,961
Total loans		$6,285		$3,026		$14,691		$24,002		$2,329,764		$2,353,766



(Dollars in thousands)	Days Past Due
December 31, 2012	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$373		$408		$10,300		$11,081		$699,732		$710,813
Construction and development	—		—		—		—		27,842		27,842
Other	260		296		3,647		4,203		509,561		513,764
Residential real estate:
Mortgages	4,840		1,951		3,658		10,449		682,349		692,798
Homeowner construction	—		—		—		—		24,883		24,883
Consumer:
Home equity lines	753		207		528		1,488		225,373		226,861
Home equity loans	252		114		250		616		38,713		39,329
Other	129		64		66		259		57,454		57,713
Total loans		$6,607		$3,040		$18,449		$28,096		$2,265,907		$2,294,003

Included in past due loans as of September 30, 2013 and December 31, 2012, were nonaccrual loans of $17.3 million and $21.0 million, respectively. All loans 90 days or more past due at September 30, 2013 and December 31, 2012 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. Impaired loans do not include large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans.

The following is a summary of impaired loans, as of the dates indicated:



(Dollars in thousands)	Recorded Investment (1)				Unpaid Principal				Related Allowance
	Sep 30, 2013		Dec 31, 2012		Sep 30, 2013		Dec 31, 2012		Sep 30, 2013		Dec 31, 2012
No Related Allowance Recorded:
Commercial:
Mortgages		$2,913		$2,357		$6,940		$2,360		$—		$—
Construction and development	—		—		—		—		—		—
Other	1,633		1,058		1,629		1,057		—		—
Residential real estate:
Mortgages	182		1,294		199		1,315		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		—		—		—		—		—
Home equity loans	—		—		—		—		—		—
Other	—		—		—		—		—		—
Subtotal		$4,728		$4,709		$8,768		$4,732		$—		$—
With Related Allowance Recorded:
Commercial:
Mortgages		$29,972		$17,897		$31,596		$19,738		$1,110		$1,720
Construction and development	—		—		—		—		—		—
Other	1,196		9,939		1,572		10,690		331		694
Residential real estate:
Mortgages	3,494		2,576		3,882		2,947		569		463
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	173		187		174		255		1		1
Home equity loans	57		117		57		160		—		—
Other	129		137		130		136		2		2
Subtotal		$35,021		$30,853		$37,411		$33,926		$2,013		$2,880
Total impaired loans		$39,749		$35,562		$46,179		$38,658		$2,013		$2,880
Total:
Commercial		$35,714		$31,251		$41,737		$33,845		$1,441		$2,414
Residential real estate	3,676		3,870		4,081		4,262		569		463
Consumer	359		441		361		551		3		3
Total impaired loans		$39,749		$35,562		$46,179		$38,658		$2,013		$2,880

(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 table presents the average recorded investment and interest income recognized on impaired loans segregated by loan class for the periods indicated:



(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Three months ended September 30,	2013		2012		2013		2012
Commercial:
Mortgages		$29,430		$9,611		$192		$71
Construction and development	—		—		—		—
Other	3,536		10,176		43		73
Residential real estate:
Mortgages	3,818		4,400		51		21
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	173		121		2		—
Home equity loans	58		120		1		2
Other	131		144		2		2
Totals		$37,146		$24,572		$291		$169



(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Nine months ended September 30,	2013		2012		2013		2012
Commercial:
Mortgages		$26,110		$8,795		$444		$176
Construction and development	—		—		—		—
Other	7,159		10,756		157		231
Residential real estate:
Mortgages	4,104		4,867		100		66
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	209		167		6		2
Home equity loans	77		138		5		5
Other	146		151		6		7
Totals		$37,805		$24,874		$718		$487

At September 30, 2013, there were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status.

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 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.

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 $27.2 million and $20.2 million, respectively, at September 30, 2013 and December 31, 2012. These amounts included accrued interest of $44 thousand and $13 thousand, respectively. The allowance for loan losses included specific reserves for these troubled debt restructurings of $381 thousand and $898 thousand, respectively, at September 30, 2013 and December 31, 2012. As of September 30, 2013, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

The following tables present loans modified as a troubled debt restructuring during the periods indicated:



(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications				Post-Modifications
Three months ended September 30,	2013	2012	2013		2012		2013		2012
Commercial:
Mortgages	1	2		$6,018		$8,183		$4,909		$8,183
Construction and development	—	—	—		—		—		—
Other	2	—	30		—		30		—
Residential real estate:
Mortgages	—	—	—		—		—		—
Homeowner construction	—	—	—		—		—		—
Consumer:
Home equity lines	—	—	—		—		—		—
Home equity loans	—	—	—		—		—		—
Other	—	—	—		—		—		—
Totals	3	2		$6,048		$8,183		$4,939		$8,183



(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications				Post-Modifications
Nine months ended September 30,	2013	2012	2013		2012		2013		2012
Commercial:
Mortgages	6	5		$15,974		$9,044		$14,785		$9,044
Construction and development	—	—	—		—		—		—
Other	7	7	1,198		1,625		1,198		1,625
Residential real estate:
Mortgages	—	2	—		651		—		651
Homeowner construction	—	—	—		—		—		—
Consumer:
Home equity lines	1	—	92		—		92		—
Home equity loans	—	—	—		—		—		—
Other	—	2	—		5		—		5
Totals	14	16		$17,264		$11,325		$16,075		$11,325


(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 during the periods indicated.



(Dollars in thousands)
	Three months				Nine months
Periods ended September 30,	2013		2012		2013		2012
Below market interest rate concession	$	6,018	$	—	$	15,836	$	1,426
Payment deferral	—		—		—		240
Maturity / amortization concession	21		—		21		917
Interest only payments	9		—		424		361
Combination (1)	—		8,183		983		8,381
Total		$6,048		$8,183		$17,264		$11,325


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

The following tables present loans modified in a troubled debt restructuring within the previous twelve months for which there was a payment default during the periods indicated:



(Dollars in thousands)	# of Loans		Recorded Investment (1)
Three months ended September 30,	2013	2012	2013		2012
Commercial:
Mortgages	1	—		$482		$—
Construction and development	—	—	—		—
Other	—	3	—		428
Residential real estate:
Mortgages	—	2	—		670
Homeowner construction	—	—	—		—
Consumer:
Home equity lines	—	—	—		—
Home equity loans	—	—	—		—
Other	—	1	—		13
Totals	1	6		$482		$1,111



(Dollars in thousands)	# of Loans		Recorded Investment (1)
Nine months ended September 30,	2013	2012	2013		2012
Commercial:
Mortgages	1	1		$482		$195
Construction and development	—	—	—		—
Other	—	3	—		428
Residential real estate:
Mortgages	—	2	—		670
Homeowner construction	—	—	—		—
Consumer:
Home equity lines	—	—	—		—
Home equity loans	—	—	—		—
Other	—	1	—		13
Totals	1	7		$482		$1,306


(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. For accruing troubled debt restructured loans, the recorded investment also includes accrued interest.

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, and the adequacy of collateral. As of September 30, 2013 and December 31, 2012, the weighted average risk rating of the Corporation’s commercial loan portfolio was 4.69 and 4.77, respectively.

For non-impaired loans, the Corporation assigns a loss allocation factor to each loan, based on its risk rating for purposes of establishing an appropriate allowance for loan losses. See Note 6 for additional information.

Descriptions 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, 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. 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 also supplemented with selected targeted internal reviews of the commercial loan portfolio. The criticized loan portfolio, which consists of commercial and commercial real estate loans that are risk rated special mention or worse, are reviewed by management on a quarterly basis, focusing on the current status and strategies to improve the credit.

The following table presents the commercial loan portfolio, segregated by category of credit quality indicator:



(Dollars in thousands)	Pass				Special Mention				Classified
	Sep 30, 2013		Dec 31, 2012		Sep 30, 2013		Dec 31, 2012		Sep 30, 2013		Dec 31, 2012
Mortgages		$685,924		$669,220		$23,753		$21,649		$17,698		$19,944
Construction and development	51,951		27,842		—		—		—		—
Other	498,231		483,371		16,325		24,393		4,010		6,000
Total commercial loans		$1,236,106		$1,180,433		$40,078		$46,042		$21,708		$25,944

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 and delinquency status. 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 is determined via statistical modeling analyses. The indicated LTV levels are estimated based on such factors as the location, the original LTV, and the date of origination of the loan and do not reflect actual appraisal amounts. The results of these analyses 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)	Under 90 Days Past Due				Over 90 Days Past Due
	Sep 30, 2013		Dec 31, 2012		Sep 30, 2013		Dec 31, 2012
Residential Real Estate:
Accruing mortgages		$703,332		$686,640		$—		$—
Nonaccrual mortgages	3,252		2,500		4,843		3,658
Homeowner construction	20,265		24,883		—		—
Total residential real estate loans		$726,849		$714,023		$4,843		$3,658
Consumer:
Home equity lines		$226,801		$226,333		$262		$528
Home equity loans	40,742		39,078		416		251
Other	55,946		57,648		15		65
Total consumer loans		$323,489		$323,059		$693		$844