(5.) LOANS

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


		Principal		Net Deferred
		Amount		Loan (Fees)
		Outstanding		Costs			Loans, Net
June 30, 2016
Commercial business	$	349,076	$	356		$	349,432
Commercial mortgage		615,547		(1,406	)		614,141
Residential real estate loans		402,538		5,829			408,367
Residential real estate lines		122,360		2,694			125,054
Consumer indirect		672,018		24,890			696,908
Other consumer		17,752		177			17,929
Total	$	2,179,291	$	32,540			2,211,831
Allowance for loan losses							(28,525	)
Total loans, net						$	2,183,306

December 31, 2015
Commercial business	$	313,475	$	283		$	313,758
Commercial mortgage		567,481		(1,380	)		566,101
Residential real estate loans		376,023		5,051			381,074
Residential real estate lines		124,766		2,581			127,347
Consumer indirect		652,494		24,446			676,940
Other consumer		18,361		181			18,542
Total	$	2,052,600	$	31,162			2,083,762
Allowance for loan losses							(27,085	)
Total loans, net						$	2,056,677

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $209 thousand and $1.4 million as of June 30, 2016 and December 31, 2015, 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, 2016
Commercial business	$	46	$	-	$	-	$	46	$	2,312	$	346,718	$	349,076
Commercial mortgage		-		-		-		-		1,547		614,000		615,547
Residential real estate loans		562		52		-		614		1,485		400,439		402,538
Residential real estate lines		315		-		-		315		182		121,863		122,360
Consumer indirect		1,221		233		-		1,454		1,015		669,549		672,018
Other consumer		99		25		11		135		4		17,613		17,752
Total loans, gross	$	2,243	$	310	$	11	$	2,564	$	6,545	$	2,170,182	$	2,179,291

December 31, 2015
Commercial business	$	321	$	612	$	-	$	933	$	3,922	$	308,620	$	313,475
Commercial mortgage		68		146		-		214		947		566,320		567,481
Residential real estate loans		723		395		-		1,118		1,848		373,057		376,023
Residential real estate lines		199		34		-		233		235		124,298		124,766
Consumer indirect		1,975		286		-		2,261		1,467		648,766		652,494
Other consumer		98		13		8		119		13		18,229		18,361
Total loans, gross	$	3,384	$	1,486	$	8	$	4,878	$	8,432	$	2,039,290	$	2,052,600

There were no loans past due greater than 90 days and still accruing interest as of June 30, 2016 and December 31, 2015. There were $11 thousand and $8 thousand in consumer overdrafts which were past due greater than 90 days as of June 30, 2016 and December 31, 2015, 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, reductions in the interest rate for the remaining term of the loan, extensions of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, collateral concessions, forgiveness of principal, forbearance 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-		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
June 30, 2016
Commercial business	1	$	214	$	214	3	$	526	$	526
Commercial mortgage	-		-		-	1		550		550
Total	1	$	214	$	214	4	$	1,076	$	1,076

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

The loans identified as a TDR by the Company during the six month periods ended June 30, 2016 and 2015 were previously reported as impaired loans prior to restructuring. Each of the loans restructured during the six months ended June 30, 2016 and 2015 were on nonaccrual status at the end of the respective period. The modifications related to collateral concessions and forbearance agreements. 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 classifications 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 six months ended June 30, 2016 or 2015. 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, 2016
With no related allowance recorded:
Commercial business	$	1,209	$	1,752	$	-	$	1,678	$	-
Commercial mortgage		777		986		-		1,114		-
		1,986		2,738		-		2,792		-
With an allowance recorded:
Commercial business		1,103		1,103		476		1,323		-
Commercial mortgage		770		900		131		510		-
		1,873		2,003		607		1,833		-
	$	3,859	$	4,741	$	607	$	4,625	$	-

December 31, 2015
With no related allowance recorded:
Commercial business	$	1,441	$	1,810	$	-	$	1,352	$	-
Commercial mortgage		937		1,285		-		1,013		-
		2,378		3,095		-		2,365		-
With an allowance recorded:
Commercial business		2,481		2,481		996		1,946		-
Commercial mortgage		10		10		10		449		-
		2,491		2,491		1,006		2,395		-

	$	4,869	$	5,586	$	1,006	$	4,760	$	-

(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
June 30, 2016
Uncriticized	$	333,564	$	594,576
Special mention		8,796		15,098
Substandard		6,716		5,873
Doubtful		-		-
Total	$	349,076	$	615,547

December 31, 2015
Uncriticized	$	298,413	$	551,603
Special mention		4,916		9,015
Substandard		10,146		6,863
Doubtful		-		-
Total	$	313,475	$	567,481

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		Residential
		Real Estate		Real Estate		Consumer		Other
		Loans		Lines		Indirect		Consumer
June 30, 2016
Performing	$	401,053	$	122,178	$	671,003	$	17,737
Non-performing		1,485		182		1,015		15
Total	$	402,538	$	122,360	$	672,018	$	17,752

December 31, 2015
Performing	$	374,175	$	124,531	$	651,027	$	18,340
Non-performing		1,848		235		1,467		21
Total	$	376,023	$	124,766	$	652,494	$	18,361

Allowance for Loan Losses

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


						Residential		Residential
		Commercial		Commercial		Real Estate		Real Estate		Consumer		Other
		Business		Mortgage		Loans		Lines		Indirect		Consumer		Total
June 30, 2016
Loans:
Ending balance	$	349,076	$	615,547	$	402,538	$	122,360	$	672,018	$	17,752	$	2,179,291
Evaluated for impairment:
Individually	$	2,281	$	1,532	$	-	$	-	$	-	$	-	$	3,813
Collectively	$	346,795	$	614,015	$	402,538	$	122,360	$	672,018	$	17,752	$	2,175,478

Allowance for loan losses:
Ending balance	$	6,197	$	9,496	$	1,444	$	318	$	10,696	$	374	$	28,525
Evaluated for impairment:
Individually	$	466	$	129	$	-	$	-	$	-	$	-	$	595
Collectively	$	5,731	$	9,367	$	1,444	$	318	$	10,696	$	374	$	27,930
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

The following table sets forth the changes in the allowance for loan losses for the three and six month periods ended June 30, 2016 (in thousands):


								Residential			Residential
		Commercial			Commercial			Real Estate			Real Estate			Consumer			Other
		Business			Mortgage			Loans			Lines			Indirect			Consumer			Total

Three months ended June 30, 2016
Beginning balance	$	5,436		$	9,715		$	1,384		$	345		$	10,297		$	391		$	27,568
Charge-offs		(42	)		(8	)		(134	)		(47	)		(1,898	)		(119	)		(2,248	)
Recoveries		69			6			100			3			994			81			1,253
Provision (credit)		734			(217	)		94			17			1,303			21			1,952
Ending balance	$	6,197		$	9,496		$	1,444		$	318		$	10,696		$	374		$	28,525


Six months ended June 30, 2016
Beginning balance	$	5,540		$	9,027		$	1,347		$	345		$	10,458		$	368		$	27,085
Charge-offs		(644	)		(12	)		(180	)		(51	)		(4,396	)		(276	)		(5,559	)
Recoveries		169			11			125			7			2,164			203			2,679
Provision		1,132			470			152			17			2,470			79			4,320
Ending balance	$	6,197		$	9,496		$	1,444		$	318		$	10,696		$	374		$	28,525

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):


								Residential			Residential
		Commercial			Commercial			Real Estate			Real Estate			Consumer			Other
		Business			Mortgage			Loans			Lines			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

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, 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 real estate loans (comprised of conventional mortgages and home equity loans) and residential real estate lines (comprised of 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.