(4.) LOANS

The Company's loan portfolio consisted of the following as of the dates indicated (in thousands):


		Principal		Net Deferred
		Amount		Loan Costs
		Outstanding		(Fees)			Loans, Net
March 31, 2014
Commercial business	$	268,308	$	44		$	268,352
Commercial mortgage		469,725		(962	)		468,763
Residential mortgage		110,290		(126	)		110,164
Home equity		326,744		5,604			332,348
Consumer indirect		620,916		26,630			647,546
Other consumer		21,488		179			21,667
Total	$	1,817,471	$	31,369			1,848,840
Allowance for loan losses							(27,152	)
Total loans, net						$	1,821,688

December 31, 2013
Commercial business	$	265,751	$	15		$	265,766
Commercial mortgage		470,312		(1,028	)		469,284
Residential mortgage		113,101		(56	)		113,045
Home equity		320,658		5,428			326,086
Consumer indirect		609,390		26,978			636,368
Other consumer		22,893		177			23,070
Total	$	1,802,105	$	31,514			1,833,619
Allowance for loan losses							(26,736	)
Total loans, net						$	1,806,883

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $900 thousand and $3.4 million as of March 31, 2014 and December 31, 2013, respectively.

Past Due Loans Aging

The Company's recorded investment, by loan class, in current and nonaccrual loans, as well as an analysis of accruing delinquent loans is set forth as of the dates indicated (in thousands):


						Greater
		30-59 Days		60-89 Days		Than 90		Total Past						Total
		Past Due		Past Due		Days		Due		Nonaccrual		Current		Loans
March 31, 2014
Commercial business	$	1,943	$	-	$	-	$	1,943	$	3,706	$	262,659	$	268,308
Commercial mortgage		1,290		-		-		1,290		9,545		458,890		469,725
Residential mortgage		468		-		-		468		760		109,062		110,290
Home equity		378		-		-		378		826		325,540		326,744
Consumer indirect		1,258		354		-		1,612		1,387		617,917		620,916
Other consumer		85		53		6		144		40		21,304		21,488
Total loans, gross	$	5,422	$	407	$	6	$	5,835	$	16,264	$	1,795,372	$	1,817,471

December 31, 2013
Commercial business	$	558	$	199	$	-	$	757	$	3,474	$	261,520	$	265,751
Commercial mortgage		800		-		-		800		9,663		459,849		470,312
Residential mortgage		542		-		-		542		1,078		111,481		113,101
Home equity		750		143		-		893		925		318,840		320,658
Consumer indirect		2,129		476		-		2,605		1,471		605,314		609,390
Other consumer		126		72		6		204		5		22,684		22,893
Total loans, gross	$	4,905	$	890	$	6	$	5,801	$	16,616	$	1,779,688	$	1,802,105

There were no loans past due greater than 90 days and still accruing interest as of March 31, 2014 and December 31, 2013. There were $6 thousand in consumer overdrafts which were past due greater than 90 days as of March 31, 2014 and December 31, 2013. Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue interest.

Troubled Debt Restructurings

A modification of a loan constitutes a troubled debt restructuring ("TDR") when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying loans, however, forgiveness of principal is seldom granted. Commercial loans modified in a TDR may involve temporary interest-only payments, term extensions, reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, requesting additional collateral, releasing collateral for consideration, or substituting or adding a new borrower or guarantor.

The following table presents information related to loans modified in a TDR during the quarterly periods indicated (dollars in thousands).


		Pre-			Post -
		Modification			Modification
		Outstanding			Outstanding
	Number of	Recorded			Recorded
	Contracts	Investment			Investment
March 31, 2014
Commercial business	-	$	-	$	-
Commercial mortgage	-		-		-
Total	-	$	-	$	-

March 31, 2013
Commercial business	2	$	189	$	181
Commercial mortgage	-		-		-
Total	2	$	189	$	181

All of the loans identified as TDRs by the Company during the three month period ended March 31, 2013 were previously on nonaccrual status and reported as impaired loans prior to restructuring. The modifications primarily related to extending the amortization periods of the loans. Nonaccrual loans that are restructured remain on nonaccrual status, but may move to accrual status after they have performed according to the restructured terms for a period of time. The TDR classification did not have a material impact on the Company's determination of the allowance for loan losses because the modified loans were impaired and evaluated for a specific reserve both before and after restructuring.

There were no loans modified as a TDR within the previous 12 months that defaulted during the three months ended March 31, 2014 or 2013. For purposes of this disclosure, a loan modified as a TDR is considered to have defaulted when the borrower becomes 90 days past due.

Impaired Loans

Management has determined that specific commercial loans on nonaccrual status and all loans that have had their terms restructured in a troubled debt restructuring are impaired loans. The following table presents the recorded investment, unpaid principal balance and related allowance of impaired loans as of the dates indicated and average recorded investment and interest income recognized on impaired loans for the three month periods ended as of the dates indicated (in thousands):


				Unpaid				Average		Interest
		Recorded		Principal		Related		Recorded		Income
		Investment⁽¹⁾		Balance⁽¹⁾		Allowance		Investment		Recognized
March 31, 2014
With no related allowance recorded:
Commercial business	$	1,869	$	2,420	$	-	$	1,831	$	-
Commercial mortgage		1,095		1,126		-		937		-
		2,964		3,546		-		2,768		-
With an allowance recorded:
Commercial business		1,837		1,857		397		1,669		-
Commercial mortgage		8,450		8,850		926		8,657		-
		10,287		10,707		1,323		10,326		-
	$	13,251	$	14,253	$	1,323	$	13,094	$	-

December 31, 2013
With no related allowance recorded:
Commercial business	$	1,777	$	2,273	$	-	$	659	$	-
Commercial mortgage		875		906		-		760		-
		2,652		3,179		-		1,419		-
With an allowance recorded:
Commercial business		1,697		1,717		201		3,196		-
Commercial mortgage		8,788		9,188		1,057		3,758		-
		10,485		10,905		1,258		6,954		-
	$	13,137	$	14,084	$	1,258	$	8,373	$	-

(1) Difference between recorded investment and unpaid principal balance represents partial charge-offs.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors such as the fair value of collateral. The Company analyzes commercial business and commercial mortgage loans individually by classifying the loans as to credit risk. Risk ratings are updated any time the situation warrants. The Company uses the following definitions for risk ratings: Special Mention: Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company's credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans that do not meet the criteria above that are analyzed individually as part of the process described above are considered "Uncriticized" or pass-rated loans and are included in groups of homogeneous loans with similar risk and loss characteristics.

The following table sets forth the Company's commercial loan portfolio, categorized by internally assigned asset classification, as of the dates indicated (in thousands):


		Commercial		Commercial
		Business		Mortgage
March 31, 2014
Uncriticized	$	249,625	$	449,042
Special mention		8,133		3,713
Substandard		10,550		16,970
Doubtful		-		-
Total	$	268,308	$	469,725

December 31, 2013
Uncriticized	$	250,553	$	449,447
Special mention		6,311		6,895
Substandard		8,887		13,970
Doubtful		-		-
Total	$	265,751	$	470,312

The Company utilizes payment status as a means of identifying and reporting problem and potential problem retail loans. The Company considers nonaccrual loans and loans past due greater than 90 days and still accruing interest to be non-performing. The following table sets forth the Company's retail loan portfolio, categorized by payment status, as of the dates indicated (in thousands):


		Residential		Home		Consumer		Other
		Mortgage		Equity		Indirect		Consumer
March 31, 2014
Performing	$	109,530	$	325,918	$	619,529	$	21,442
Non-performing		760		826		1,387		46
Total	$	110,290	$	326,744	$	620,916	$	21,488

December 31, 2013
Performing	$	112,023	$	319,733	$	607,919	$	22,882
Non-performing		1,078		925		1,471		11
Total	$	113,101	$	320,658	$	609,390	$	22,893

Allowance for Loan Losses

The following tables set forth the changes in the allowance for loan losses for the three month periods ended as of the dates indicated (in thousands):


		Commercial		Commercial		Residential		Home		Consumer		Other
		Business		Mortgage		Mortgage		Equity		Indirect		Consumer		Total
March 31, 2014
Allowance for loan losses:
Beginning balance	$	4,273	$	7,743	$	676	$	1,367	$	12,230	$	447	$	26,736
Charge-offs		68		-		78		106		2,455		269		2,976
Recoveries		29		7		21		11		1,105		113		1,286
Provision		455		230		53		99		1,104		165		2,106
Ending balance	$	4,689	$	7,980	$	672	$	1,371	$	11,984	$	456	$	27,152
Evaluated for impairment:
Individually	$	397	$	926	$	-	$	-	$	-	$	-	$	1,323
Collectively	$	4,292	$	7,054	$	672	$	1,371	$	11,984	$	456	$	25,829

Loans:
Ending balance	$	268,308	$	469,725	$	110,290	$	326,744	$	620,916	$	21,488	$	1,817,471
Evaluated for impairment:
Individually	$	3,706	$	9,545	$	-	$	-	$	-	$	-	$	13,251
Collectively	$	264,602	$	460,180	$	110,290	$	326,744	$	620,916	$	21,488	$	1,804,220


March 31, 2013
Allowance for loan losses:
Beginning balance	$	4,884	$	6,581	$	740	$	1,282	$	10,715	$	512	$	24,714
Charge-offs		239		3		162		269		1,718		252		2,643
Recoveries		37		14		17		37		805		137		1,047
Provision		485		379		73		233		1,510		29		2,709
Ending balance	$	5,167	$	6,971	$	668	$	1,283	$	11,312	$	426	$	25,827
Evaluated for impairment:
Individually	$	1,335	$	657	$	-	$	-	$	-	$	-	$	1,992
Collectively	$	3,832	$	6,314	$	668	$	1,283	$	11,312	$	426	$	23,835

Loans:
Ending balance	$	259,054	$	425,586	$	126,058	$	287,844	$	563,428	$	24,581	$	1,686,551
Evaluated for impairment:
Individually	$	5,616	$	2,767	$	-	$	-	$	-	$	-	$	8,383
Collectively	$	253,438	$	422,819	$	126,058	$	287,844	$	563,428	$	24,581	$	1,678,168

Risk Characteristics

Commercial business loans primarily consist of loans to small to midsize businesses in our market area in a diverse range of industries. These loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower's operations or on the value of underlying collateral, if any.

Commercial mortgage loans generally have larger balances and involve a greater degree of risk than residential mortgage loans, inferring higher potential losses on an individual customer basis. Loan repayment is often dependent on the successful operation and management of the properties, as well as on the collateral securing the loan. Economic events or conditions in the real estate market could have an adverse impact on the cash flows generated by properties securing the Company's commercial real estate loans and on the value of such properties.

Residential mortgage loans and home equities (comprised of home equity loans and home equity lines) are generally made on the basis of the borrower's ability to make repayment from his or her employment and other income, but are secured by real property whose value tends to be more easily ascertainable. Credit risk for these types of loans is generally influenced by general economic conditions, the characteristics of individual borrowers, and the nature of the loan collateral.

Consumer indirect and other consumer loans may entail greater credit risk than residential mortgage loans and home equities, particularly in the case of other consumer loans which are unsecured or, in the case of indirect consumer loans, secured by depreciable assets, such as automobiles or boats. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances such as job loss, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.