(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, 2018
Commercial business	$	463,526	$	613		$	464,139
Commercial mortgage		823,305		(2,214	)		821,091
Residential real estate loans		470,111		7,824			477,935
Residential real estate lines		112,428		2,918			115,346
Consumer indirect		866,598		31,501			898,099
Other consumer		16,482		172			16,654
Total	$	2,752,450	$	40,814			2,793,264
Allowance for loan losses							(35,594	)
Total loans, net						$	2,757,670

December 31, 2017
Commercial business	$	449,763	$	563		$	450,326
Commercial mortgage		810,851		(1,943	)		808,908
Residential real estate loans		457,761		7,522			465,283
Residential real estate lines		113,422		2,887			116,309
Consumer indirect		845,682		30,888			876,570
Other consumer		17,443		178			17,621
Total	$	2,694,922	$	40,095			2,735,017
Allowance for loan losses							(34,672	)
Total loans, net						$	2,700,345

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $1.5 million and $2.7 million as of March 31, 2018 and December 31, 2017, 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, 2018
Commercial business	$	127	$	-	$	-	$	127	$	4,312	$	459,087	$	463,526
Commercial mortgage		388		-		-		388		2,310		820,607		823,305
Residential real estate loans		853		110		-		963		2,224		466,924		470,111
Residential real estate lines		167		-		-		167		372		111,889		112,428
Consumer indirect		1,443		370		-		1,813		1,467		863,318		866,598
Other consumer		91		13		17		121		15		16,346		16,482
Total loans, gross	$	3,069	$	493	$	17	$	3,579	$	10,700	$	2,738,171	$	2,752,450

December 31, 2017
Commercial business	$	64	$	36	$	-	$	100	$	5,344	$	444,319	$	449,763
Commercial mortgage		56		375		-		431		2,623		807,797		810,851
Residential real estate loans		1,908		56		-		1,964		2,252		453,545		457,761
Residential real estate lines		349		-		-		349		404		112,669		113,422
Consumer indirect		2,806		672		-		3,478		1,895		840,309		845,682
Other consumer		174		15		11		200		2		17,241		17,443
Total loans, gross	$	5,357	$	1,154	$	11	$	6,522	$	12,520	$	2,675,880	$	2,694,922

There were no loans past due greater than 90 days and still accruing interest as of March 31, 2018 and December 31, 2017. There were $17 thousand and $11 thousand in consumer overdrafts which were past due greater than 90 days as of March 31, 2018 and December 31, 2017, 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.

There were no loans modified as a TDR during the three months ended March 31, 2018 or 2017. There were no loans modified as a TDR within the previous 12 months that defaulted during the three months ended March 31, 2018 or 2017. 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 period ended March 31, 2018 and twelve month period ended December 31, 2017 (in thousands):


				Unpaid				Average		Interest
		Recorded		Principal		Related		Recorded		Income
		Investment⁽¹⁾		Balance⁽¹⁾		Allowance		Investment		Recognized
March 31, 2018
With no related allowance recorded:
Commercial business	$	1,259	$	1,775	$	-	$	1,523	$	-
Commercial mortgage		569		569		-		576		-
		1,828		2,344		-		2,099		-
With an allowance recorded:
Commercial business		3,194		3,286		1,699		3,587		-
Commercial mortgage		2,222		2,222		719		2,370		-
		5,416		5,508		2,418		5,957		-
	$	7,244	$	7,852	$	2,418	$	8,056	$	-

December 31, 2017
With no related allowance recorded:
Commercial business	$	1,635	$	2,370	$	-	$	853	$	-
Commercial mortgage		584		584		-		621		-
		2,219		2,954		-		1,474		-
With an allowance recorded:
Commercial business		3,853		3,853		2,056		4,468		-
Commercial mortgage		2,528		2,528		115		1,516		-
		6,381		6,381		2,171		5,984		-
	$	8,600	$	9,335	$	2,171	$	7,458	$	-

(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, 2018
Uncriticized	$	441,798	$	804,177
Special mention		9,872		12,057
Substandard		11,856		7,071
Doubtful		-		-
Total	$	463,526	$	823,305

December 31, 2017
Uncriticized	$	429,692	$	791,127
Special mention		7,120		12,185
Substandard		12,951		7,539
Doubtful		-		-
Total	$	449,763	$	810,851

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, 2018
Performing	$	467,887	$	112,056	$	865,131	$	16,450
Non-performing		2,224		372		1,467		32
Total	$	470,111	$	112,428	$	866,598	$	16,482

December 31, 2017
Performing	$	455,509	$	113,018	$	843,787	$	17,430
Non-performing		2,252		404		1,895		13
Total	$	457,761	$	113,422	$	845,682	$	17,443

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, 2018
Allowance for loan losses:
Beginning balance	$	15,668		$	3,696		$	1,322		$	180		$	13,415		$	391		$	34,672
Charge-offs		(105	)		(4	)		(19	)		(94	)		(2,994	)		(433	)		(3,649	)
Recoveries		120			7			69			3			1,330			93			1,622
Provision (credit)		(741	)		1,774			28			129			1,481			278			2,949
Ending balance	$	14,942		$	5,473		$	1,400		$	218		$	13,232		$	329		$	35,594
Evaluated for impairment:
Individually	$	1,699		$	719		$	-		$	-		$	-		$	-		$	2,418
Collectively	$	13,243		$	4,754		$	1,400		$	218		$	13,232		$	329		$	33,176

Loans:
Ending balance	$	463,526		$	823,305		$	470,111		$	112,428		$	866,598		$	16,482		$	2,752,450
Evaluated for impairment:
Individually	$	4,453		$	2,791		$	-		$	-		$	-		$	-		$	7,244
Collectively	$	459,073		$	820,514		$	470,111		$	112,428		$	866,598		$	16,482		$	2,745,206


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 (credit)		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

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.