(5.) 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
June 30, 2015
Commercial business	$	292,674	$	117		$	292,791
Commercial mortgage		538,034		(1,444	)		536,590
Residential mortgage		95,259		(97	)		95,162
Home equity		391,645		7,209			398,854
Consumer indirect		641,871		24,679			666,550
Other consumer		19,141		185			19,326
Total	$	1,978,624	$	30,649			2,009,273
Allowance for loan losses							(27,500	)
Total loans, net						$	1,981,773

December 31, 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

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $448 thousand and $755 thousand as of June 30, 2015 and December 31, 2014, 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
		Past Due		Past Due		Days		Due		Nonaccrual		Current		Total Loans
June 30, 2015
Commercial business	$	605	$	-	$	-	$	605	$	4,643	$	287,426	$	292,674
Commercial mortgage		606		-		-		606		3,070		534,358		538,034
Residential mortgage		192		-		-		192		1,628		93,439		95,259
Home equity		454		78		-		532		619		390,494		391,645
Consumer indirect		1,708		364		-		2,072		728		639,071		641,871
Other consumer		86		52		9		147		11		18,983		19,141
Total loans, gross	$	3,651	$	494	$	9	$	4,154	$	10,699	$	1,963,771	$	1,978,624

December 31, 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

There were no loans past due greater than 90 days and still accruing interest as of June 30, 2015 and December 31, 2014. There were $9 thousand and $8 thousand in consumer overdrafts which were past due greater than 90 days as of June 30, 2015 and December 31, 2014, 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. 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, collateral concessions, forgiveness of principal, forebearance agreements, 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).


			Quarter-to-Date					Year-to-Date

			Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
			Outstanding		Outstanding			Outstanding		Outstanding
	Number of		Recorded		Recorded	Number of		Recorded		Recorded
	Contracts		Investment		Investment	Contracts		Investment		Investment
June 30, 2015
Commercial business	2	$	1,342	$	1,342	2	$	1,342	$	1,342
Commercial mortgage	-		-		-	1		682		330
Total	2	$	1,342	$	1,342	3	$	2,024	$	1,672

June 30, 2014
Commercial business	1	$	1,381	$	1,381	1	$	1,381	$	1,381
Commercial mortgage	-		-		-	-		-		-
Total	1	$	1,381	$	1,381	1	$	1,381	$	1,381

The loans identified as a TDR by the Company during the six month periods ended June 30, 2015 and 2014 were previously on nonaccrual status and reported as impaired loans prior to restructuring. The modifications during the reported periods primarily related to extending amortization periods, forebearance agreements, requesting additional collateral and, in one instance, forgiveness of principal. 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 two commercial business loans with an aggregate pre-default balance of $1.3 million restructured in the 12 months prior to June 30, 2015 that went into default during the six months ended June 30, 2015. There were no loans modified as a TDR within the previous 12 months that defaulted during the six months ended June 30, 2014. 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 six 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
June 30, 2015
With no related allowance recorded:
Commercial business	$	1,348	$	2,807	$	-	$	1,461	$	-
Commercial mortgage		1,159		1,708		-		1,171		-
		2,507		4,515		-		2,632		-
With an allowance recorded:
Commercial business		3,295		3,295		1,247		3,093		-
Commercial mortgage		1,911		1,911		707		2,121		-
		5,206		5,206		1,954		5,214		-
	$	7,713	$	9,721	$	1,954	$	7,846	$	-

December 31, 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	$	-

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

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
June 30, 2015
Uncriticized	$	275,639	$	523,226
Special mention		5,078		6,015
Substandard		11,957		8,793
Doubtful		-		-
Total	$	292,674	$	538,034

December 31, 2014
Uncriticized	$	250,961	$	460,880
Special mention		5,530		5,411
Substandard		10,886		10,116
Doubtful		-		-
Total	$	267,377	$	476,407

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
June 30, 2015
Performing	$	93,631	$	391,026	$	641,143	$	19,121
Non-performing		1,628		619		728		20
Total	$	95,259	$	391,645	$	641,871	$	19,141

December 31, 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

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
June 30, 2015
Loans:
Ending balance	$	292,674	$	538,034	$	95,259	$	391,645	$	641,871	$	19,141	$	1,978,624
Evaluated for impairment:
Individually	$	4,643	$	3,070	$	-	$	-	$	-	$	-	$	7,713
Collectively	$	288,031	$	534,964	$	95,259	$	391,645	$	641,871	$	19,141	$	1,970,911

Allowance for loan losses:
Ending balance	$	5,334	$	9,358	$	465	$	1,198	$	10,676	$	469	$	27,500
Evaluated for impairment:
Individually	$	1,247	$	707	$	-	$	-	$	-	$	-	$	1,954
Collectively	$	4,087	$	8,651	$	465	$	1,198	$	10,676	$	469	$	25,546

June 30, 2014
Loans:
Ending balance	$	277,609	$	469,936	$	106,342	$	363,243	$	626,418	$	21,205	$	1,864,753
Evaluated for impairment:
Individually	$	3,589	$	2,734	$	-	$	-	$	-	$	-	$	6,323
Collectively	$	274,020	$	467,202	$	106,342	$	363,243	$	626,418	$	21,205	$	1,858,430

Allowance for loan losses:
Ending balance	$	5,402	$	7,633	$	618	$	1,607	$	11,446	$	460	$	27,166
Evaluated for impairment:
Individually	$	1,056	$	432	$	-	$	-	$	-	$	-	$	1,488
Collectively	$	4,346	$	7,201	$	618	$	1,607	$	11,446	$	460	$	25,678

The following table sets forth the changes in the allowance for loan losses for the three and six month periods ended June 30, 2015 (in thousands):


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

Three months ended June 30, 2015
Beginning balance	$	5,395		$	8,156	$	558		$	1,430		$	11,205	$	447	$	27,191
Charge-offs		13			201		22			154			1,841		154		2,385
Recoveries		86			7		13			9			1,196		95		1,406
Provision (credit)		(134	)		1,396		(84	)		(87	)		116		81		1,288
Ending balance	$	5,334		$	9,358	$	465		$	1,198		$	10,676	$	469	$	27,500


Six months ended June 30, 2015
Beginning balance	$	5,621		$	8,122	$	570		$	1,485		$	11,383	$	456	$	27,637
Charge-offs		1,154			810		77			238			4,263		413		6,955
Recoveries		134			96		46			19			2,301		193		2,789
Provision		733			1,950		(74	)		(68	)		1,255		233		4,029
Ending balance	$	5,334		$	9,358	$	465		$	1,198		$	10,676	$	469	$	27,500

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


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

Three months ended June 30, 2014
Beginning balance	$	4,689	$	7,980		$	672	$	1,371	$	11,984	$	456	$	27,152
Charge-offs		3		165			69		156		2,331		224		2,948
Recoveries		68		6			8		29		995		98		1,204
Provision (credit)		648		(188	)		7		363		798		130		1,758
Ending balance	$	5,402	$	7,633		$	618	$	1,607	$	11,446	$	460	$	27,166


Six months ended June 30, 2014
Beginning balance	$	4,273	$	7,743		$	676	$	1,367	$	12,230	$	447	$	26,736
Charge-offs		71		165			147		262		4,786		493		5,924
Recoveries		97		13			29		40		2,100		211		2,490
Provision		1,103		42			60		462		1,902		295		3,864
Ending balance	$	5,402	$	7,633		$	618	$	1,607	$	11,446	$	460	$	27,166

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 typically made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. Risk arises primarily due to a difference between expected and actual cash flows of the borrowers. 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, potentially resulting in higher 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.