Loans

The following is a summary of loans:



(Dollars in thousands)	September 30, 2014				December 31, 2013
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$766,703	29	%		$796,249	32	%
Construction and development (2)	58,750		2		36,289		1
Other (3)	564,920		21		530,797		22
Total commercial	1,390,373		52		1,363,335		55
Residential real estate:
Mortgages	912,956		34		749,163		30
Homeowner construction	32,624		1		23,511		1
Total residential real estate	945,580		35		772,674		31
Consumer:
Home equity lines	240,567		9		231,362		9
Home equity loans	46,455		2		40,212		2
Other (4)	51,072		2		55,301		3
Total consumer	338,094		13		326,875		14
Total loans (5)		$2,674,047	100	%		$2,462,884	100	%


(1)	Amortizing mortgages and lines of credit, primarily secured by income producing property.


(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.


(4)	Fixed-rate consumer installment loans.


(5)	Includes net unamortized loan origination costs of $2.1 million and $879 thousand, respectively, and net unamortized premiums on purchased loans of $97 thousand and $99 thousand, respectively, at September 30, 2014 and December 31, 2013.

At September 30, 2014 and December 31, 2013, there were $1.18 billion and $1.14 billion, respectively, of loans pledged as collateral to the FHLBB under a blanket pledge agreement and to the FRB for the discount window. See Note 8 for additional disclosure regarding borrowings.

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:



(Dollars in thousands)	Sep 30, 2014		Dec 31, 2013
Commercial:
Mortgages		$6,022		$7,492
Construction and development	—		—
Other	1,326		1,291
Residential real estate:
Mortgages	7,890		8,315
Homeowner construction	—		—
Consumer:
Home equity lines	1,426		469
Home equity loans	300		687
Other	1		48
Total nonaccrual loans		$16,965		$18,302
Accruing loans 90 days or more past due		$—		$—

As of September 30, 2014 and December 31, 2013, nonaccrual loans of $2.6 million and $2.7 million, respectively, were current as to the payment of principal and interest.

At September 30, 2014, there were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status.

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, 2014	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$—		$5,995		$5,995		$760,708		$766,703
Construction and development	—		—		—		—		58,750		58,750
Other	1,129		314		970		2,413		562,507		564,920
Residential real estate:
Mortgages	2,582		2,001		3,922		8,505		904,451		912,956
Homeowner construction	—		—		—		—		32,624		32,624
Consumer:
Home equity lines	1,441		346		852		2,639		237,928		240,567
Home equity loans	188		8		136		332		46,123		46,455
Other	48		2		1		51		51,021		51,072
Total loans		$5,388		$2,671		$11,876		$19,935		$2,654,112		$2,674,047



(Dollars in thousands)	Days Past Due
December 31, 2013	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$—		$7,492		$7,492		$788,757		$796,249
Construction and development	—		—		—		—		36,289		36,289
Other	276		302		731		1,309		529,488		530,797
Residential real estate:
Mortgages	4,040		1,285		5,633		10,958		738,205		749,163
Homeowner construction	—		—		—		—		23,511		23,511
Consumer:
Home equity lines	831		100		269		1,200		230,162		231,362
Home equity loans	448		66		348		862		39,350		40,212
Other	43		—		39		82		55,219		55,301
Total loans		$5,638		$1,753		$14,512		$21,903		$2,440,981		$2,462,884

Included in past due loans as of September 30, 2014 and December 31, 2013, were nonaccrual loans of $14.4 million and $15.6 million, respectively. All loans 90 days or more past due at September 30, 2014 and December 31, 2013 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:



(Dollars in thousands)	Recorded Investment (1)				Unpaid Principal				Related Allowance
	Sep 30, 2014		Dec 31, 2013		Sep 30, 2014		Dec 31, 2013		Sep 30, 2014		Dec 31, 2013
No Related Allowance Recorded:
Commercial:
Mortgages		$1,147		$998		$1,176		$998		$—		$—
Construction and development	—		—		—		—		—		—
Other	1,031		1,055		1,031		1,050		—		—
Residential real estate:
Mortgages	2,302		1,167		2,659		1,259		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		—		—		—		—		—
Home equity loans	—		—		—		—		—		—
Other	113		—		112		—		—		—
Subtotal		$4,593		$3,220		$4,978		$3,307		$—		$—
With Related Allowance Recorded:
Commercial:
Mortgages		$14,579		$29,335		$14,558		$31,731		$927		$552
Construction and development	—		—		—		—		—		—
Other	1,335		1,506		1,753		1,945		207		463
Residential real estate:
Mortgages	1,734		3,122		1,790		3,507		256		463
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	82		173		82		174		41		1
Home equity loans	73		55		90		54		12		—
Other	3		127		4		130		1		2
Subtotal		$17,806		$34,318		$18,277		$37,541		$1,444		$1,481
Total impaired loans		$22,399		$37,538		$23,255		$40,848		$1,444		$1,481
Total:
Commercial		$18,092		$32,894		$18,518		$35,724		$1,134		$1,015
Residential real estate	4,036		4,289		4,449		4,766		256		463
Consumer	271		355		288		358		54		3
Total impaired loans		$22,399		$37,538		$23,255		$40,848		$1,444		$1,481

(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 balance of impaired loans 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,	2014		2013		2014		2013
Commercial:
Mortgages		$23,435		$29,430		$175		$192
Construction and development	—		—		—		—
Other	2,570		3,536		25		43
Residential real estate:
Mortgages	4,253		3,818		31		51
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	82		173		—		2
Home equity loans	83		58		1		1
Other	117		131		2		2
Totals		$30,540		$37,146		$234		$291



(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Nine months ended September 30,	2014		2013		2014		2013
Commercial:
Mortgages		$25,605		$26,110		$580		$444
Construction and development	—		—		—		—
Other	2,477		7,159		63		157
Residential real estate:
Mortgages	4,151		4,104		81		100
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	92		209		2		6
Home equity loans	111		77		4		5
Other	120		146		6		6
Totals		$32,556		$37,805		$736		$718

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 $18.4 million at September 30, 2014 and $26.4 million at December 31, 2013. These amounts included accrued interest of $30 thousand and $44 thousand, respectively. The allowance for loan losses included specific reserves for these troubled debt restructurings of $1.2 million and $556 thousand, respectively, at September 30, 2014 and December 31, 2013. As of September 30, 2014, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

The following table presents 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,	2014	2013	2014		2013		2014		2013
Commercial:
Mortgages	—	1		$—		$6,018		$—		$4,909
Construction and development	—	—	—		—		—		—
Other	1	2	63		30		63		30
Residential real estate:
Mortgages	1	—	264		—		264		—
Homeowner construction	—	—	—		—		—		—
Consumer:
Home equity lines	—	—	—		—		—		—
Home equity loans	—	—	—		—		—		—
Other	—	—	—		—		—		—
Totals	2	3		$327		$6,048		$327		$4,939



(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications				Post-Modifications
Nine months ended September 30,	2014	2013	2014		2013		2014		2013
Commercial:
Mortgages	—	6		$—		$15,974		$—		$14,785
Construction and development	—	—	—		—		—		—
Other	10	7	826		1,198		826		1,198
Residential real estate:
Mortgages	3	—	743		—		743		—
Homeowner construction	—	—	—		—		—		—
Consumer:
Home equity lines	—	1	—		92		—		92
Home equity loans	—	—	—		—		—		—
Other	—	—	—		—		—		—
Totals	13	14		$1,569		$17,264		$1,569		$16,075


(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,	2014		2013		2014		2013
Below-market interest rate concession		$—		$6,018		$77		$15,836
Payment deferral	63		—		542		—
Maturity / amortization concession	—		21		599		21
Interest only payments	—		9		—		424
Combination (1)	264		—		351		983
Total		$327		$6,048		$1,569		$17,264


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

The following table presents 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,	2014	2013	2014		2013
Commercial:
Mortgages	—	1		$—		$482
Construction and development	—	—	—		—
Other	3	—	426		—
Residential real estate:
Mortgages	—	—	—		—
Homeowner construction	—	—	—		—
Consumer:
Home equity lines	—	—	—		—
Home equity loans	—	—	—		—
Other	—	—	—		—
Totals	3	1		$426		$482



(Dollars in thousands)	# of Loans		Recorded Investment (1)
Nine months ended September 30,	2014	2013	2014		2013
Commercial:
Mortgages	—	1		$—		$482
Construction and development	—	—	—		—
Other	5	—	666		—
Residential real estate:
Mortgages	—	—	—		—
Homeowner construction	—	—	—		—
Consumer:
Home equity lines	—	—	—		—
Home equity loans	—	—	—		—
Other	—	—	—		—
Totals	5	1		$666		$482


(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, 2014 and December 31, 2013, the weighted average risk rating of the Corporation’s commercial loan portfolio was 4.63 and 4.64, 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. The criticized loan portfolio, which consists of commercial real estate and other commerical 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. 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, 2014		Dec 31, 2013		Sep 30, 2014		Dec 31, 2013		Sep 30, 2014		Dec 31, 2013
Mortgages		$736,646		$756,838		$23,305		$23,185		$6,752		$16,226
Construction and development	58,750		36,289		—		—		—		—
Other	546,663		507,962		14,317		19,887		3,940		2,948
Total commercial loans		$1,342,059		$1,301,089		$37,622		$43,072		$10,692		$19,174

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)	Current and Under 90 Days Past Due				Over 90 Days Past Due
	Sep 30, 2014		Dec 31, 2013		Sep 30, 2014		Dec 31, 2013
Residential real estate:
Accruing mortgages		$905,066		$740,848		$—		$—
Nonaccrual mortgages	3,968		2,682		3,922		5,633
Homeowner construction	32,624		23,511		—		—
Total residential real estate loans		$941,658		$767,041		$3,922		$5,633
Consumer:
Home equity lines		$239,715		$231,093		$852		$269
Home equity loans	46,319		39,864		136		348
Other	51,071		55,262		1		39
Total consumer loans		$337,105		$326,219		$989		$656