(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
September 30, 2015
Commercial business	$	297,640	$	236		$	297,876
Commercial mortgage		549,911		(1,382	)		548,529
Residential mortgage		96,298		(19	)		96,279
Home equity		401,103		7,531			408,634
Consumer indirect		641,453		24,261			665,714
Other consumer		19,020		184			19,204
Total	$	2,005,425	$	30,811			2,036,236
Allowance for loan losses							(26,455	)
Total loans, net						$	2,009,781

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 $1.6 million and $755 thousand as of September 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
September 30, 2015
Commercial business	$	657	$	-	$	-	$	657	$	3,064	$	293,919	$	297,640
Commercial mortgage		383		9		-		392		1,802		547,717		549,911
Residential mortgage		99		-		-		99		1,523		94,676		96,298
Home equity		709		122		-		831		792		399,480		401,103
Consumer indirect		1,710		338		-		2,048		1,292		638,113		641,453
Other consumer		100		62		8		170		12		18,838		19,020
Total loans, gross	$	3,658	$	531	$	8	$	4,197	$	8,485	$	1,992,743	$	2,005,425

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 September 30, 2015 and December 31, 2014. There were $8 thousand in consumer overdrafts which were past due greater than 90 days as of September 30, 2015 and December 31, 2014. 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 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, 2015
Commercial business	-	$	-	$	-	2	$	1,342	$	1,342
Commercial mortgage	-		-		-	1		682		330
Total	-	$	-	$	-	3	$	2,024	$	1,672

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

The loans identified as a TDR by the Company during the nine month periods ended September 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 September 30, 2015 that went into default during the nine months ended September 30, 2015. There were no loans modified as a TDR in the 12 months prior to September 30, 2014 that defaulted during the nine months ended September 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 TDR 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 year-to-date 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, 2015
With no related allowance recorded:
Commercial business	$	1,291	$	2,750	$	-	$	1,314	$	-
Commercial mortgage		912		1,260		-		1,077		-
		2,203		4,010		-		2,391		-
With an allowance recorded:
Commercial business		1,773		1,773		806		2,152		-
Commercial mortgage		890		890		278		1,147		-
		2,663		2,663		1,084		3,299		-
	$	4,866	$	6,673	$	1,084	$	5,690	$	-

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.

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
September 30, 2015
Uncriticized	$	282,900	$	532,892
Special mention		4,763		9,247
Substandard		9,977		7,772
Doubtful		-		-
Total	$	297,640	$	549,911

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
September 30, 2015
Performing	$	94,775	$	400,311	$	640,161	$	19,000
Non-performing		1,523		792		1,292		20
Total	$	96,298	$	401,103	$	641,453	$	19,020

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
September 30, 2015
Loans:
Ending balance	$	297,640	$	549,911	$	96,298	$	401,103	$	641,453	$	19,020	$	2,005,425
Evaluated for impairment:
Individually	$	3,064	$	1,802	$	-	$	-	$	-	$	-	$	4,866
Collectively	$	294,576	$	548,109	$	96,298	$	401,103	$	641,453	$	19,020	$	2,000,559

Allowance for loan losses:
Ending balance	$	5,281	$	8,888	$	456	$	1,177	$	10,264	$	389	$	26,455
Evaluated for impairment:
Individually	$	806	$	278	$	-	$	-	$	-	$	-	$	1,084
Collectively	$	4,475	$	8,610	$	456	$	1,177	$	10,264	$	389	$	25,371

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

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


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

Three months ended September 30, 2015
Beginning balance	$	5,334	$	9,358		$	465		$	1,198		$	10,676	$	469	$	27,500
Charge-offs		106		56			37			98			2,380		239		2,916
Recoveries		38		44			34			34			905		62		1,117
Provision (credit)		15		(458	)		(6	)		43			1,063		97		754
Ending balance	$	5,281	$	8,888		$	456		$	1,177		$	10,264	$	389	$	26,455


Nine months ended September 30, 2015
Beginning balance	$	5,621	$	8,122		$	570		$	1,485		$	11,383	$	456	$	27,637
Charge-offs		1,260		866			114			336			6,643		652		9,871
Recoveries		172		140			80			53			3,206		255		3,906
Provision		748		1,492			(80	)		(25	)		2,318		330		4,783
Ending balance	$	5,281	$	8,888		$	456		$	1,177		$	10,264	$	389	$	26,455

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

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 and sufficiency 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.