(5.) LOANS

The Company's loan portfolio consisted of the following at December 31 (in thousands):


		Principal		Net Deferred
		Amount		Loan (Fees)
		Outstanding		Costs			Loans, Net
2014
Commercial business	$	267,377	$	32		$	267,409
Commercial mortgage		476,407		(1,315	)		475,092
Residential mortgage		100,241		(140	)		100,101
Home equity		379,774		6,841			386,615
Consumer indirect		636,357		25,316			661,673
Other consumer		20,915		197			21,112
Total	$	1,881,071	$	30,931			1,912,002
Allowance for loan losses							(27,637	)
Total loans, net						$	1,884,365

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

The Company's significant concentrations of credit risk in the loan portfolio relate to a geographic concentration in the communities that the Company serves.

Certain executive officers, directors and their business interests are customers of the Company. Transactions with these parties are based on the same terms as similar transactions with unrelated third parties and do not carry more than normal credit risk. Borrowings by these related parties amounted to $11.9 million and $2.9 million at December 31, 2014 and 2013, respectively. During 2014, new borrowings amounted to $10.0 million (including borrowings of executive officers and directors that were outstanding at the time of their appointment), and repayments and other reductions were $1.0 million.

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 December 31 (in thousands):


						Greater
		30-59 Days		60-89 Days		Than 90		Total Past						Total
		Past Due		Past Due		Days		Due		Nonaccrual		Current		Loans
2014
Commercial business	$	28	$	-	$	-	$	28	$	4,288	$	263,061	$	267,377
Commercial mortgage		83		-		-		83		3,020		473,304		476,407
Residential mortgage		321		-		-		321		1,194		98,726		100,241
Home equity		799		67		-		866		463		378,445		379,774
Consumer indirect		2,429		402		-		2,831		1,169		632,357		636,357
Other consumer		148		48		8		204		11		20,700		20,915
Total loans, gross	$	3,808	$	517	$	8	$	4,333	$	10,145	$	1,866,593	$	1,881,071

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 December 31, 2014 and December 31, 2013. There were $8 thousand and $6 thousand in consumer overdrafts which were past due greater than 90 days as of December 31, 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.

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was no interest income recognized on nonaccrual loans during the years ended December 31, 2014, 2013 and 2012. For the years ended December 31, 2014, 2013 and 2012, estimated interest income of $527 thousand, $531 thousand, and $555 thousand, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

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 rarely 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 presents, by loan class, information related to loans modified in a TDR during the years ended December 31 (in thousands).


			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
2014
Commercial business	1	$	1,381	$	1,381
Commercial mortgage	-		-		-
Total	1	$	1,381	$	1,381

2013
Commercial business	4	$	1,465	$	1,456
Commercial mortgage	2		7,335		6,935
Total	6	$	8,800	$	8,391

With the exception of one commercial mortgage loan modified during 2013, all of the loans identified as TDRs by the Company during the years ended December 31, 2014 and 2013 were on nonaccrual status and reported as impaired loans prior to restructuring. For the year ended December 31, 2014, the restructured loan modification related to extending the amortization period of the loan. For the year ended December 31, 2013, restructured loan modifications of commercial business and commercial mortgage loans primarily included maturity date extensions, payment schedule modifications and forgiveness of principal. All loans restructured during the years ended December 31, 2014 and 2013 were on nonaccrual status at the end of those respective years. 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 either classified as substandard, with an increased risk allowance allocation, or impaired and evaluated for a specific reserve both before and after restructuring.

For purposes of this disclosure, a loan modified as a TDR is considered to have defaulted when the borrower becomes 90 days past due. There were no loans modified as a TDR during the previous 12 months which subsequently defaulted during the years ended December 31, 2014 and 2013.

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 data on impaired loans at December 31 (in thousands):


				Unpaid				Average		Interest
		Recorded		Principal		Related		Recorded		Income
		Investment⁽¹⁾		Balance⁽¹⁾		Allowance		Investment		Recognized
2014
With no related allowance recorded:
Commercial business	$	1,408	$	1,741	$	-	$	1,431	$	-
Commercial mortgage		781		920		-		1,014		-
		2,189		2,661		-		2,445		-
With an allowance recorded:
Commercial business		2,880		2,880		1,556		1,998		-
Commercial mortgage		2,239		2,239		911		1,560		-
		5,119		5,119		2,467		3,558		-
	$	7,308	$	7,780	$	2,467	$	6,003	$	-

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 not meeting 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 December 31 (in thousands):


		Commercial		Commercial
		Business		Mortgage
2014
Uncriticized	$	250,961	$	460,880
Special mention		5,530		5,411
Substandard		10,886		10,116
Doubtful		-		-
Total	$	267,377	$	476,407

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 December 31 (in thousands):


		Residential		Home		Consumer		Other
		Mortgage		Equity		Indirect		Consumer
2014
Performing	$	99,047	$	379,311	$	635,188	$	20,896
Non-performing		1,194		463		1,169		19
Total	$	100,241	$	379,774	$	636,357	$	20,915

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 years ended December 31 (in thousands):


		Commercial			Commercial			Residential			Home			Consumer			Other
		Business			Mortgage			Mortgage			Equity			Indirect			Consumer			Total
2014
Allowance for loan losses:
Beginning balance	$	4,273		$	7,743		$	676		$	1,367		$	12,230		$	447		$	26,736
Charge-offs		(204	)		(304	)		(190	)		(340	)		(10,004	)		(972	)		(12,014	)
Recoveries		201			143			39			56			4,321			366			5,126
Provision		1,351			540			45			402			4,836			615			7,789
Ending balance	$	5,621		$	8,122		$	570		$	1,485		$	11,383		$	456		$	27,637
Evaluated for impairment:
Individually	$	1,556		$	911		$	-		$	-		$	-		$	-		$	2,467
Collectively	$	4,065		$	7,211		$	570		$	1,485		$	11,383		$	456		$	25,170

Loans:
Ending balance	$	267,377		$	476,407		$	100,241		$	379,774		$	636,357		$	20,915		$	1,881,071
Evaluated for impairment:
Individually	$	4,288		$	3,020		$	-		$	-		$	-		$	-		$	7,308
Collectively	$	263,089		$	473,387		$	100,241		$	379,774		$	636,357		$	20,915		$	1,873,763

2013
Allowance for loan losses:
Beginning balance	$	4,884		$	6,581		$	740		$	1,282		$	10,715		$	512		$	24,714
Charge-offs		(1,070	)		(553	)		(411	)		(391	)		(8,125	)		(928	)		(11,478	)
Recoveries		349			319			54			157			3,161			381			4,421
Provision		110			1,396			293			319			6,479			482			9,079
Ending balance	$	4,273		$	7,743		$	676		$	1,367		$	12,230		$	447		$	26,736
Evaluated for impairment:
Individually	$	201		$	1,057		$	-		$	-		$	-		$	-		$	1,258
Collectively	$	4,072		$	6,686		$	676		$	1,367		$	12,230		$	447		$	25,478

Loans:
Ending balance	$	265,751		$	470,312		$	113,101		$	320,658		$	609,390		$	22,893		$	1,802,105
Evaluated for impairment:
Individually	$	3,474		$	9,663		$	-		$	-		$	-		$	-		$	13,137
Collectively	$	262,277		$	460,649		$	113,101		$	320,658		$	609,390		$	22,893		$	1,788,968


		Commercial			Commercial			Residential			Home			Consumer			Other
		Business			Mortgage			Mortgage			Equity			Indirect			Consumer			Total
2012
Allowance for loan losses:
Beginning balance	$	4,036		$	6,418		$	858		$	1,242		$	10,189		$	517		$	23,260
Charge-offs		(729	)		(745	)		(326	)		(305	)		(6,589	)		(874	)		(9,568	)
Recoveries		336			261			130			44			2,769			354			3,894
Provision		1,241			647			78			301			4,346			515			7,128
Ending balance	$	4,884		$	6,581		$	740		$	1,282		$	10,715		$	512		$	24,714
Evaluated for impairment:
Individually	$	664		$	310		$	-		$	-		$	-		$	-		$	974
Collectively	$	4,220		$	6,271		$	740		$	1,282		$	10,715		$	512		$	23,740

Loans:
Ending balance	$	258,706		$	414,282		$	133,341		$	282,503		$	559,964		$	26,657		$	1,675,453
Evaluated for impairment:
Individually	$	3,413		$	1,799		$	-		$	-		$	-		$	-		$	5,212
Collectively	$	255,293		$	412,483		$	133,341		$	282,503		$	559,964		$	26,657		$	1,670,241

Risk Characteristics

Commercial business loans primarily consist of loans to small to mid-sized 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.