Loans

The following is a summary of loans:



(Dollars in thousands)	March 31, 2018				December 31, 2017
	Amount		%		Amount		%
Commercial:
Commercial real estate (1)		$1,217,278	36	%		$1,210,495	36	%
Commercial & industrial (2)	603,830		18		612,334		18
Total commercial	1,821,108		54		1,822,829		54
Residential Real Estate:
Residential real estate (3)	1,249,890		37		1,227,248		36
Consumer:
Home equity	285,723		8		292,467		9
Other (4)	30,685		1		31,527		1
Total consumer	316,408		9		323,994		10
Total loans (5)		$3,387,406	100	%		$3,374,071	100	%


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


(3)	Residential real estate loans consist of mortgage and homeowner construction loans secured by one- to four- family residential properties.


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


(5)	Includes net unamortized loan origination costs of $4.1 million and $3.8 million, respectively, at March 31, 2018 and December 31, 2017 and net unamortized premiums on purchased loans of $855 thousand and $878 thousand, respectively, at March 31, 2018 and December 31, 2017.

As of March 31, 2018 and December 31, 2017, there were $1.9 billion and $1.6 billion, respectively, of loans 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, 2018	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Commercial real estate		$—		$—		$—		$—		$1,217,278		$1,217,278
Commercial & industrial	2,898		—		397		3,295		600,535		603,830
Total commercial	2,898		—		397		3,295		1,817,813		1,821,108
Residential Real Estate:
Residential real estate	6,909		789		4,108		11,806		1,238,084		1,249,890
Consumer:
Home equity	3,203		744		288		4,235		281,488		285,723
Other	20		2		—		22		30,663		30,685
Total consumer	3,223		746		288		4,257		312,151		316,408
Total loans		$13,030		$1,535		$4,793		$19,358		$3,368,048		$3,387,406



(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 March 31, 2018 and December 31, 2017, were nonaccrual loans of $7.1 million and $11.8 million, respectively.

All loans 90 days or more past due at March 31, 2018 and December 31, 2017 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.

The following is a summary of impaired loans:



(Dollars in thousands)	Recorded Investment (1)				Unpaid Principal				Related Allowance
	Mar 31, 2018		Dec 31, 2017		Mar 31, 2018		Dec 31, 2017		Mar 31, 2018		Dec 31, 2017
No Related Allowance Recorded
Commercial:
Commercial real estate		$—		$—		$—		$—		$—		$—
Commercial & industrial	5,427		4,986		6,257		5,081		—		—
Total commercial	5,427		4,986		6,257		5,081		—		—
Residential Real Estate:
Residential real estate	8,288		9,069		8,455		9,256		—		—
Consumer:
Home equity	560		557		560		557		—		—
Other	114		14		115		14		—		—
Total consumer	674		571		675		571		—		—
Subtotal	14,389		14,626		15,387		14,908		—		—
With Related Allowance Recorded
Commercial:
Commercial real estate		$—		$4,954		$—		$9,910		$—		$1,018
Commercial & industrial	456		191		508		212		53		1
Total commercial	456		5,145		508		10,122		53		1,019
Residential Real Estate:
Residential real estate	1,421		715		1,467		741		112		104
Consumer:
Home equity	223		—		223		—		108		—
Other	28		133		26		132		5		6
Total consumer	251		133		249		132		113		6
Subtotal	2,128		5,993		2,224		10,995		278		1,129
Total impaired loans		$16,517		$20,619		$17,611		$25,903		$278		$1,129
Total:
Commercial		$5,883		$10,131		$6,765		$15,203		$53		$1,019
Residential real estate	9,709		9,784		9,922		9,997		112		104
Consumer	925		704		924		703		113		6
Total impaired loans		$16,517		$20,619		$17,611		$25,903		$278		$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 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,	2018		2017		2018		2017
Commercial:
Commercial real estate		$4,100		$9,780		$—		$26
Commercial & industrial	5,492		6,965		66		76
Total commercial	9,592		16,745		66		102
Residential Real Estate:
Residential real estate	9,850		16,240		112		122
Consumer:
Home equity	667		969		9		10
Other	144		143		3		4
Total consumer	811		1,112		12		14
Totals		$20,253		$34,097		$190		$238

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 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 generally for a period of six 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)	Mar 31, 2018		Dec 31, 2017
Commercial:
Commercial real estate		$—		$4,954
Commercial & industrial	397		283
Total commercial	397		5,237
Residential Real Estate:
Residential real estate	9,340		9,414
Consumer:
Home equity	771		544
Other	13		16
Total consumer	784		560
Total nonaccrual loans		$10,521		$15,211
Accruing loans 90 days or more past due		$—		$—

As of March 31, 2018 and December 31, 2017, loans secured by one- to four-family residential property amounting to $4.0 million and $4.4 million, respectively, were in process of foreclosure.

Nonaccrual loans of $3.5 million and $3.4 million, respectively, were current as to the payment of principal and interest at March 31, 2018 and December 31, 2017.

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

Troubled Debt Restructurings

Loans are considered restructured in a troubled debt restructuring when the Corporation has granted concessions, that it otherwise would not have considered, to a borrower experiencing financial difficulties. 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 that 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 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 $6.8 million and $11.2 million, respectively, at March 31, 2018 and December 31, 2017. These amounts included insignificant balances of accrued interest. The allowance for loan losses included specific reserves for these troubled debt restructurings of $159 thousand and $1.1 million, respectively, at March 31, 2018 and December 31, 2017.

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

For the three months ended March 31, 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 for the three months ended March 31, 2017.

For the three months ended March 31, 2018, there were no payment defaults on troubled debt restructured loans modified within the previous 12 months. For the three months ended March 31, 2017, payment defaults on troubled debt restructured loans modified within the previous 12 months occurred on one loan totaling $779 thousand.

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 4.73 at March 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. 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 collectibility. 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. The criticized loan portfolio, which generally consists of commercial loans that are risk-rated special mention or worse, and other selected loans 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
	Mar 31, 2018		Dec 31, 2017		Mar 31, 2018		Dec 31, 2017		Mar 31, 2018		Dec 31, 2017
Commercial:
Mortgages		$1,044,335		$1,067,373		$1,077		$—		$—		$5,114
Construction & development	171,866		138,008		—		—		—		—
Commercial real estate	1,216,201		1,205,381		1,077		—		—		5,114
Commercial & industrial	559,377		592,749		37,290		9,804		7,163		9,781
Total commercial		$1,775,578		$1,798,130		$38,367		$9,804		$7,163		$14,895

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 6 for additional information.

Various other techniques are utilized to monitor indicators of credit deterioration in the portfolios of residential real estate loans and consumer loans. Among these techniques is the periodic tracking of loans with an updated 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. 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				Past Due
	Mar 31, 2018		Dec 31, 2017		Mar 31, 2018		Dec 31, 2017
Residential Real Estate:
Self-originated mortgages		$1,112,533		$1,091,291		$10,347		$6,413
Purchased mortgages	125,551		128,102		1,459		1,442
Total residential real estate		$1,238,084		$1,219,393		$11,806		$7,855
Consumer:
Home equity		$281,488		$289,326		$4,235		$3,141
Other	30,663		31,484		22		43
Total consumer		$312,151		$320,810		$4,257		$3,184