Loans

The following is a summary of loans:



(Dollars in thousands)	December 31, 2015				December 31, 2014
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$931,953	31	%		$843,978	30	%
Construction & development (2)	122,297		4		79,592		3
Commercial & industrial (3)	600,297		20		611,918		21
Total commercial	1,654,547		55		1,535,488		54
Residential real estate:
Mortgages	984,437		33		948,731		33
Homeowner construction	29,118		1		36,684		1
Total residential real estate	1,013,555		34		985,415		34
Consumer:
Home equity lines	255,565		8		242,480		8
Home equity loans	46,649		2		46,967		2
Other (4)	42,811		1		48,926		2
Total consumer	345,025		11		338,373		12
Total loans (5)		$3,013,127	100	%		$2,859,276	100	%


(1)	Loans primarily secured by income producing property.


(2)	Loans for construction of 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)	Loans to individuals secured by general aviation aircraft and other personal installment loans.


(5)	Includes net unamortized loan origination costs of $2.6 million and $2.1 million, respectively, and net unamortized premiums on purchased loans of $84 thousand and $94 thousand, respectively, at December 31, 2015 and 2014.

At December 31, 2015 and 2014, there were $1.27 billion and $1.21 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 12 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.

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 approximately 6 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)
December 31,	2015		2014
Commercial:
Mortgages		$5,711		$5,315
Construction & development	—		—
Commercial & industrial	3,018		1,969
Residential real estate:
Mortgages	10,666		7,124
Homeowner construction	—		—
Consumer:
Home equity lines	528		1,217
Home equity loans	1,124		317
Other	—		3
Total nonaccrual loans		$21,047		$15,945
Accruing loans 90 days or more past due		$—		$—

As of December 31, 2015 and 2014, loans secured by one- to four-family residential property amounting to $2.6 million and $1.8 million, respectively, were in process of foreclosure.

Nonaccrual loans of $7.4 million and $3.2 million, respectively, were current as to the payment of principal and interest as of December 31, 2015 and 2014. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2015.

Interest income that would have been recognized had nonaccrual loans been current in accordance with their original terms was approximately $1.5 million, $1.3 million and $1.8 million in 2015, 2014 and 2013, respectively. Interest income included in the Consolidated Statements of Income on nonaccrual loans amounted to approximately $522 thousand, $455 thousand and $400 thousand, respectively, in 2015, 2014 and 2013.

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, 2015	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$51		$—		$4,504		$4,555		$927,398		$931,953
Construction & development	—		—		—		—		122,297		122,297
Commercial & industrial	405		9		48		462		599,835		600,297
Residential real estate:
Mortgages	3,028		2,964		3,294		9,286		975,151		984,437
Homeowner construction	—		—		—		—		29,118		29,118
Consumer:
Home equity lines	883		373		518		1,774		253,791		255,565
Home equity loans	748		490		222		1,460		45,189		46,649
Other	22		—		—		22		42,789		42,811
Total loans		$5,137		$3,836		$8,586		$17,559		$2,995,568		$3,013,127



(Dollars in thousands)	Days Past Due
December 31, 2014	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$—		$5,315		$5,315		$838,663		$843,978
Construction & development	—		—		—		—		79,592		79,592
Commercial & industrial	2,136		1,202		181		3,519		608,399		611,918
Residential real estate:
Mortgages	2,943		821		3,284		7,048		941,683		948,731
Homeowner construction	—		—		—		—		36,684		36,684
Consumer:
Home equity lines	570		100		841		1,511		240,969		242,480
Home equity loans	349		240		56		645		46,322		46,967
Other	35		5		—		40		48,886		48,926
Total loans		$6,033		$2,368		$9,677		$18,078		$2,841,198		$2,859,276

Included in past due loans as of December 31, 2015 and 2014, were nonaccrual loans of $13.6 million and $12.7 million, respectively. All loans 90 days or more past due at December 31, 2015 and 2014 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. In the third quarter of 2015, the Corporation redefined impaired loans to include nonaccrual loans and troubled debt restructured loans. In prior periods, the Corporation had defined impaired loans to include nonaccrual commercial loans, troubled debt restructured loans and certain other loans that were individually evaluated for impairment. The redefinition of impaired loans in 2015 resulted in $7.8 million of well-secured nonaccrual residential real estate mortgage loans and consumer loans being classified as impaired loans in the third quarter of 2015. The redefinition of impaired loans did not result in significant changes to the allowance for loan losses or to the allocation of loss exposure within the allowance for loans losses.

The following is a summary of impaired loans:



(Dollars in thousands)
	Recorded Investment (1)				Unpaid Principal				Related Allowance
December 31,	2015		2014		2015		2014		2015		2014
No Related Allowance Recorded:
Commercial:
Mortgages		$4,292		$432		$5,101		$432		$—		$—
Construction & development	—		—		—		—		—		—
Commercial & industrial	1,849		1,047		1,869		1,076		—		—
Residential real estate:
Mortgages	8,441		1,477		8,826		1,768		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	6		—		64		—		—		—
Home equity loans	530		—		539		—		—		—
Other	—		—		—		—		—		—
Subtotal	15,118		2,956		16,399		3,276		—		—
With Related Allowance Recorded:
Commercial:
Mortgages	10,873		14,585		10,855		14,564		1,633		927
Construction & development	—		—		—		—		—		—
Commercial & industrial	2,024		1,878		2,248		2,437		771		177
Residential real estate:
Mortgages	2,895		2,226		2,941		2,338		156		326
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	522		250		522		250		2		141
Home equity loans	679		45		783		62		21		12
Other	145		112		144		114		—		—
Subtotal	17,138		19,096		17,493		19,765		2,583		1,583
Total impaired loans		$32,256		$22,052		$33,892		$23,041		$2,583		$1,583
Total:
Commercial		$19,038		$17,942		$20,073		$18,509		$2,404		$1,104
Residential real estate	11,336		3,703		11,767		4,106		156		326
Consumer	1,882		407		2,052		426		23		153
Total impaired loans		$32,256		$22,052		$33,892		$23,041		$2,583		$1,583

(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 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,	2015		2014		2013		2015		2014		2013
Commercial:
Mortgages		$14,847		$22,971		$27,496		$327		$658		$630
Construction & development	—		—		—		—		—		—
Commercial & industrial	3,415		2,499		6,029		130		126		190
Residential real estate:
Mortgages	5,423		4,006		4,024		147		101		125
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	228		97		200		1		2		7
Home equity loans	487		100		72		11		4		6
Other	210		119		146		10		8		9
Totals		$24,610		$29,792		$37,967		$626		$899		$967

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 collectability of the loan. Loans which 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.

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 $18.5 million and $18.4 million, respectively, at December 31, 2015 and 2014. These amounts included insignificant balances of accrued interest. The allowance for loan losses included specific reserves for these troubled debt restructurings of $1.8 million and $1.2 million, respectively, at December 31, 2015 and 2014.

As of December 31, 2015, there were no significant commitments to lend additional funds to borrowers whose loans were restructured.

The following table presents loans modified as a troubled debt restructuring:



(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications				Post-Modifications
Years ended December 31,	2015	2014	2015		2014		2015		2014
Commercial:
Mortgages	1	—		$1,190		$—		$1,190		$—
Construction & development	—	—	—		—		—		—
Commercial & industrial	3	12	584		1,191		584		1,191
Residential real estate:
Mortgages	3	4	619		992		619		992
Homeowner construction	—	—	—		—		—		—
Consumer:
Home equity lines	—	—	—		—		—		—
Home equity loans	1	—	70		—		70		—
Other	1	—	35		—		35		—
Totals	9	16		$2,498		$2,183		$2,498		$2,183


(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:



(Dollars in thousands)
Years ended December 31,	2015		2014
Below-market interest rate concession		$335		$77
Payment deferral	903		791
Maturity / amortization concession	70		964
Combination (1)	1,190		351
Total		$2,498		$2,183


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

In 2015 and 2014, payment defaults on troubled debt restructured loans modified within the previous 12 months occurred on 2 loans totaling $290 thousand and 7 loans totaling $669 thousand, respectively.

Credit Quality Indicators

Commercial

The Corporation utilizes an internal rating system to assign a risk rating 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. As of December 31, 2015 and 2014, the weighted average risk rating of the Corporation’s commercial loan portfolio was 4.68 and 4.67, respectively. 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 7 for additional information.

A description 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, 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 in nonaccrual status when management determines there is uncertainty of collectability. 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 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
December 31,	2015		2014		2015		2014		2015		2014
Mortgages		$914,774		$819,857		$3,035		$18,372		$14,144		$5,749
Construction & development	122,297		79,592		—		—		—		—
Commercial & industrial	577,036		592,206		12,012		16,311		11,249		3,401
Total commercial loans		$1,614,107		$1,491,655		$15,047		$34,683		$25,393		$9,150

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. See Note 7 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 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 7 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
December 31,	2015		2014		2015		2014
Residential real estate:
Accruing mortgages		$973,771		$941,607		$—		$—
Nonaccrual mortgages	7,372		3,840		3,294		3,284
Homeowner construction	29,118		36,684		—		—
Total residential loans		$1,010,261		$982,131		$3,294		$3,284
Consumer:
Home equity lines		$255,047		$241,639		$518		$841
Home equity loans	46,427		46,911		222		56
Other	42,811		48,926		—		—
Total consumer loans		$344,285		$337,476		$740		$897

Loan Servicing Activities

The following table presents an analysis of loan servicing rights:



(Dollars in thousands)	Loan Servicing Rights			Valuation Allowance			Total
Balance at December 31, 2012		$1,275			($165	)		$1,110
Loan servicing rights capitalized	1,897			—			1,897
Amortization	(405		)	—			(405		)
Decrease in impairment reserve	—			96			96
Balance at December 31, 2013	2,767			(69		)	2,698
Loan servicing rights capitalized	869			—			869
Amortization	(647		)	—			(647		)
Decrease in impairment reserve	—			67			67
Balance at December 31, 2014	2,989			(2		)	2,987
Loan servicing rights capitalized	1,406			—			1,406
Amortization	(1,047		)	—			(1,047		)
Decrease in impairment reserve	—			1			1
Balance at December 31, 2015		$3,348			($1	)		$3,347

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



(Dollars in thousands)
Years ending December 31:	2016		$1,008
	2017	701
	2018	491
	2019	343
	2020	241
	Thereafter	564
Total estimated amortization expense			$3,348

Mortgage loans and other loans sold to others are serviced 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,	2015		2014
Residential mortgages		$458,629		$378,798
Commercial loans	109,173		90,484
Total		$567,802		$469,282