(5.) LOANS

The Companys loan portfolio consisted of the following as of the dates indicated (in thousands):


		Principal		Net Deferred
		Amount		Loan Costs
		Outstanding		(Fees)			Loans, Net
September 30, 2014
Commercial business	$	275,027	$	80		$	275,107
Commercial mortgage		470,566		(1,081	)		469,485
Residential mortgage		103,183		(139	)		103,044
Home equity		376,062		6,641			382,703
Consumer indirect		630,441		25,774			656,215
Other consumer		21,096		195			21,291
Total	$	1,876,375	$	31,470			1,907,845
Allowance for loan losses							(27,244	)
Total loans, net						$	1,880,601

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 $1.0 million and $3.4 million as of September 30, 2014 and December 31, 2013, respectively.

Past Due Loans Aging

The Companys 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
September 30, 2014
Commercial business	$	787	$	27	$	- $		814	$	3,258	$	270,955	$	275,027
Commercial mortgage		-		62		-		62		2,460		468,044		470,566
Residential mortgage		334		-		-		334		656		102,193		103,183
Home equity		521		97		-		618		464		374,980		376,062
Consumer indirect		1,814		492		-		2,306		1,300		626,835		630,441
Other consumer		87		31		7		125		39		20,932		21,096
Total loans, gross	$	3,543	$	709	$	7	$	4,259	$	8,177	$	1,863,939	$	1,876,375

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 September 30, 2014 and December 31, 2013. There were $7 thousand and $6 thousand in consumer overdrafts which were past due greater than 90 days as of September 30, 2014 and December 31, 2013, respectively. 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 periods indicated (dollars in thousands).


	Quarter-to-Date					Year-to-Date
			Pre-		Post-			Pre-		Post-
			Modification		Modification			Modification		Modification
			Outstanding		Outstanding			Outstanding		Outstanding
	Number of		Recorded		Recorded	Number of		Recorded		Recorded
	Contracts		Investment		Investment	Contracts		Investment		Investment
September 30, 2014
Commercial business	-	$	-	$	-	1	$	1,381	$	1,381
Commercial mortgage	-		-		-	-		-		-
Total	-	$	-	$	-	1	$	1,381	$	1,381

September 30, 2013
Commercial business	-	$	-	$	-	3	$	1,462	$	1,454
Commercial mortgage	-		-		-	-		-		-
Total	-	$	-	$	-	3	$	1,462	$	1,454

All of the loans identified as TDRs by the Company during the nine months ended September 30, 2014 and 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 Companys 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 nine months ended September 30, 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
September 30, 2014
With no related allowance recorded:
Commercial business	$	1,536	$	1,998	$	-	$	1,553	$	-
Commercial mortgage		1,108		1,247		-		1,092		-
		2,644		3,245		-		2,645		-
With an allowance recorded:
Commercial business		1,722		1,733		1,331		1,868		-
Commercial mortgage		1,352		1,352		269		1,520		-
		3,074		3,085		1,600		3,388		-
	$	5,718	$	6,330	$	1,600	$	6,033	$	-

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 managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Companys 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 Companys commercial loan portfolio, categorized by internally assigned asset classification, as of the dates indicated (in thousands):


		Commercial		Commercial
		Business		Mortgage
September 30, 2014
Uncriticized	$	255,436	$	453,726
Special mention		8,593		6,898
Substandard		10,998		9,942
Doubtful		-		-
Total	$	275,027	$	470,566

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 Companys retail loan portfolio, categorized by payment status, as of the dates indicated (in thousands):


		Residential		Home		Consumer		Other
		Mortgage		Equity		Indirect		Consumer
September 30, 2014
Performing	$	102,527	$	375,598	$	629,141	$	21,050
Non-performing		656		464		1,300		46
Total	$	103,183	$	376,062	$	630,441	$	21,096

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

Loans and the related allowance for loan losses are presented below as of the dates indicated (in thousands):


		Commercial		Commercial		Residential		Home		Consumer		Other
		Business		Mortgage		Mortgage		Equity		Indirect		Consumer		Total
September 30, 2014
Loans:
Ending balance	$	275,027	$	470,566	$	103,183	$	376,062	$	630,441	$	21,096	$	1,876,375
Evaluated for impairment:
Individually	$	3,258	$	2,460	$	-	$	-	$	-	$	-	$	5,718
Collectively	$	271,769	$	468,106	$	103,183	$	376,062	$	630,441	$	21,096	$	1,870,657

Allowance for loan losses:
Ending balance	$	5,758	$	7,488	$	592	$	1,658	$	11,292	$	456	$	27,244
Evaluated for impairment:
Individually	$	1,331	$	269	$	-	$	-	$	-	$	-	$	1,600
Collectively	$	4,427	$	7,219	$	592	$	1,658	$	11,292	$	456	$	25,644

September 30, 2013
Loans:
Ending balance	$	253,928	$	450,602	$	117,650	$	311,521	$	591,242	$	23,683	$	1,748,626
Evaluated for impairment:
Individually	$	4,078	$	2,835	$	-	$	-	$	-	$	-	$	6,913
Collectively	$	249,850	$	447,767	$	117,650	$	311,521	$	591,242	$	23,683	$	1,741,713

Allowance for loan losses:
Ending balance	$	4,410	$	8,281	$	729	$	1,383	$	11,416	$	466	$	26,685
Evaluated for impairment:
Individually	$	649	$	603	$	-	$	-	$	-	$	-	$	1,252
Collectively	$	3,761	$	7,678	$	729	$	1,383	$	11,416	$	466	$	25,433

The following table sets forth the changes in the allowance for loan losses for the three and nine month periods ended September 30, 2014 (in thousands):


		Commercial		Commercial			Residential			Home		Consumer		Other
		Business		Mortgage			Mortgage			Equity		Indirect		Consumer		Total

Three months ended September 30, 2014
Beginning balance	$	5,402	$	7,633		$	618		$	1,607	$	11,446	$	460	$	27,166
Charge-offs		105		111			16			73		2,606		272		3,183
Recoveries		61		45			5			7		1,029		99		1,246
Provision (credit)		400		(79	)		(15	)		117		1,423		169		2,015
Ending balance	$	5,758	$	7,488		$	592		$	1,658	$	11,292	$	456	$	27,244


Nine months ended September 30, 2014
Beginning balance	$	4,273	$	7,743		$	676		$	1,367	$	12,230	$	447	$	26,736
Charge-offs		176		276			163			335		7,392		765		9,107
Recoveries		158		58			34			47		3,129		310		3,736
Provision (credit)		1,503		(37	)		45			579		3,325		464		5,879
Ending balance	$	5,758	$	7,488		$	592		$	1,658	$	11,292	$	456	$	27,244

The following table sets forth the changes in the allowance for loan losses for the three and nine month periods ended September 30, 2013 (in thousands):


		Commercial			Commercial		Residential		Home			Consumer		Other
		Business			Mortgage		Mortgage		Equity			Indirect		Consumer		Total

Three months ended September 30, 2013
Beginning balance	$	4,755		$	7,125	$	701	$	1,424		$	11,095	$	490	$	25,590
Charge-offs		163			35		34		30			2,131		253		2,646
Recoveries		59			122		12		16			666		96		971
Provision (credit)		(241	)		1,069		50		(27	)		1,786		133		2,770
Ending balance	$	4,410		$	8,281	$	729	$	1,383		$	11,416	$	466	$	26,685


Nine months ended September 30, 2013
Beginning balance	$	4,884		$	6,581	$	740	$	1,282		$	10,715	$	512	$	24,714
Charge-offs		694			144		281		352			5,778		734		7,983
Recoveries		301			279		42		126			2,230		304		3,282
Provision (credit)		(81	)		1,565		228		327			4,249		384		6,672
Ending balance	$	4,410		$	8,281	$	729	$	1,383		$	11,416	$	466	$	26,685

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 borrowers 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 Companys 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, which are primarily automobiles. 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.