(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
March 31, 2017
Commercial business	$	374,992	$	526		$	375,518
Commercial mortgage		676,455		(1,448	)		675,007
Residential real estate loans		421,614		6,557			428,171
Residential real estate lines		118,056		2,818			120,874
Consumer indirect		758,761		27,359			786,120
Other consumer		16,762		175			16,937
Total	$	2,366,640	$	35,987			2,402,627
Allowance for loan losses							(31,081	)
Total loans, net						$	2,371,546

December 31, 2016
Commercial business	$	349,079	$	468		$	349,547
Commercial mortgage		671,552		(1,494	)		670,058
Residential real estate loans		421,476		6,461			427,937
Residential real estate lines		119,745		2,810			122,555
Consumer indirect		725,754		26,667			752,421
Other consumer		17,465		178			17,643
Total	$	2,305,071	$	35,090			2,340,161
Allowance for loan losses							(30,934	)
Total loans, net						$	2,309,227

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $2.1 million and $1.1 million as of March 31, 2017 and December 31, 2016, 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
March 31, 2017
Commercial business	$	976	$	97	$	-	$	1,073	$	3,753	$	370,166	$	374,992
Commercial mortgage		99		-		-		99		1,267		675,089		676,455
Residential real estate loans		1,052		198		-		1,250		1,601		418,763		421,614
Residential real estate lines		202		63		-		265		336		117,455		118,056
Consumer indirect		1,239		303		-		1,542		1,040		756,179		758,761
Other consumer		71		12		10		93		13		16,656		16,762
Total loans, gross	$	3,639	$	673	$	10	$	4,322	$	8,010	$	2,354,308	$	2,366,640

December 31, 2016
Commercial business	$	1,337	$	-	$	-	$	1,337	$	2,151	$	345,591	$	349,079
Commercial mortgage		48		-		-		48		1,025		670,479		671,552
Residential real estate loans		1,073		253		-		1,326		1,236		418,914		421,476
Residential real estate lines		216		-		-		216		372		119,157		119,745
Consumer indirect		2,320		488		-		2,808		1,526		721,420		725,754
Other consumer		134		15		9		158		7		17,300		17,465
Total loans, gross	$	5,128	$	756	$	9	$	5,893	$	6,317	$	2,292,861	$	2,305,071

There were no loans past due greater than 90 days and still accruing interest as of March 31, 2017 and December 31, 2016. There were $10 thousand and $9 thousand in consumer overdrafts which were past due greater than 90 days as of March 31, 2017 and December 31, 2016, 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).


			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
March 31, 2017
Commercial business	-	$	-	$	-
Commercial mortgage	-		-		-
Total	-	$	-	$	-

March 31, 2016
Commercial business	2	$	312	$	312
Commercial mortgage	1		550		550
Total	3	$	862	$	862

The loans identified as TDRs by the Company during the three month period ended March 31, 2016 were previously reported as impaired loans prior to restructuring. All loans restructured during the three months ended March 31, 2016 were on nonaccrual status at the end of those respective periods. The modifications related to collateral concessions. 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.

There were no loans modified as a TDR within the previous 12 months that defaulted during the three months ended March 31, 2017 or 2016. 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
March 31, 2017
With no related allowance recorded:
Commercial business	$	424	$	625	$	-	$	686	$	-
Commercial mortgage		589		589		-		620		-
		1,013		1,214		-		1,306		-
With an allowance recorded:
Commercial business		3,329		3,329		1,897		2,296		-
Commercial mortgage		678		678		126		432		-
		4,007		4,007		2,023		2,728		-
	$	5,020	$	5,221	$	2,023	$	4,034	$	-

December 31, 2016
With no related allowance recorded:
Commercial business	$	645	$	1,044	$	-	$	1,032	$	-
Commercial mortgage		673		882		-		725		-
		1,318		1,926		-		1,757		-
With an allowance recorded:
Commercial business		1,506		1,506		694		1,141		-
Commercial mortgage		352		352		124		486		-
		1,858		1,858		818		1,627		-
	$	3,176	$	3,784	$	818	$	3,384	$	-

(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
March 31, 2017
Uncriticized	$	351,108	$	658,453
Special mention		10,636		11,660
Substandard		13,248		6,342
Doubtful		-		-
Total	$	374,992	$	676,455

December 31, 2016
Uncriticized	$	326,254	$	652,550
Special mention		10,377		12,690
Substandard		12,448		6,312
Doubtful		-		-
Total	$	349,079	$	671,552

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
March 31, 2017
Performing	$	420,013	$	117,720	$	757,721	$	16,739
Non-performing		1,601		336		1,040		23
Total	$	421,614	$	118,056	$	758,761	$	16,762

December 31, 2016
Performing	$	420,240	$	119,373	$	724,228	$	17,449
Non-performing		1,236		372		1,526		16
Total	$	421,476	$	119,745	$	725,754	$	17,465

Allowance for Loan Losses

The following tables set forth the changes in the allowance for loan losses for the three month periods ended as of the dates indicated (in thousands):


								Residential			Residential
		Commercial			Commercial			Real Estate			Real Estate			Consumer			Other
		Business			Mortgage			Loans			Lines			Indirect			Consumer			Total
March 31, 2017
Allowance for loan losses:
Beginning balance	$	7,225		$	10,315		$	1,478		$	303		$	11,311		$	302		$	30,934
Charge-offs		(1,122	)		(10	)		(14	)		(43	)		(2,809	)		(203	)		(4,201	)
Recoveries		158			214			40			10			1,051			94			1,567
Provision		7,742			(6,852	)		(64	)		(56	)		1,909			102			2,781
Ending balance	$	14,003		$	3,667		$	1,440		$	214		$	11,462		$	295		$	31,081
Evaluated for impairment:
Individually	$	1,842		$	120		$	-		$	-		$	-		$	-		$	1,962
Collectively	$	12,161		$	3,547		$	1,440		$	214		$	11,462		$	295		$	29,119

Loans:
Ending balance	$	374,992		$	676,455		$	421,614		$	118,056		$	758,761		$	16,762		$	2,366,640
Evaluated for impairment:
Individually	$	3,549		$	1,195		$	-		$	-		$	-		$	-		$	4,744
Collectively	$	371,443		$	675,260		$	421,614		$	118,056		$	758,761		$	16,762		$	2,361,896


March 31, 2016
Allowance for loan losses:
Beginning balance	$	5,540		$	9,027		$	1,347		$	345		$	10,458		$	368		$	27,085
Charge-offs		(602	)		(4	)		(46	)		(4	)		(2,498	)		(157	)		(3,311	)
Recoveries		100			5			25			4			1,170			122			1,426
Provision (credit)		398			687			58			-			1,167			58			2,368
Ending balance	$	5,436		$	9,715		$	1,384		$	345		$	10,297		$	391		$	27,568
Evaluated for impairment:
Individually	$	791		$	120		$	-		$	-		$	-		$	-		$	911
Collectively	$	4,645		$	9,595		$	1,384		$	345		$	10,297		$	391		$	26,657

Loans:
Ending balance	$	317,420		$	591,800		$	377,406		$	123,894		$	655,348		$	17,889		$	2,083,757
Evaluated for impairment:
Individually	$	3,924		$	1,730		$	-		$	-		$	-		$	-		$	5,654
Collectively	$	313,496		$	590,070		$	377,406		$	123,894		$	655,348		$	17,889		$	2,078,103

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, potentially resulting in 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 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.