(5.) LOANS

The Company's loan portfolio consisted of the following at December 31 (in thousands):


		Principal		Net Deferred
		Amount		Loan (Fees)
		Outstanding		Costs			Loans, Net
2015
Commercial business	$	313,475	$	283		$	313,758
Commercial mortgage		567,481		(1,380	)		566,101
Residential mortgage		98,302		7			98,309
Home equity		402,487		7,625			410,112
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

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

The Company's significant concentrations of credit risk in the loan portfolio relate to a geographic concentration in the communities that the Company serves.

Certain executive officers, directors and their business interests are customers of the Company. Transactions with these parties are based on the same terms as similar transactions with unrelated third parties and do not carry more than normal credit risk. Borrowings by these related parties amounted to $3.5 million and $11.9 million at December 31, 2015 and 2014, respectively. During 2015, new borrowings amounted to $2.9 million (including borrowings of executive officers and directors that were outstanding at the time of their appointment), and repayments and other reductions were $11.3 million.

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 December 31 (in thousands):


		30-59 Days		60-89 Days		Greater Than		Total Past
		Past Due		Past Due		90 Days		Due		Nonaccrual		Current		Total Loans
2015
Commercial business	$	321	$	612	$	-	$	933	$	3,922	$	308,620	$	313,475
Commercial mortgage		68		146		-		214		947		566,320		567,481
Residential mortgage		203		-		-		203		1,325		96,774		98,302
Home equity		719		429		-		1,148		758		400,581		402,487
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

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 December 31, 2015 and 2014. There were $8 thousand in consumer overdrafts which were past due greater than 90 days as of December 31, 2015 and 2014. Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue interest.

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was no interest income recognized on nonaccrual loans during the years ended December 31, 2015, 2014 and 2013. For the years ended December 31, 2015, 2014 and 2013, estimated interest income of $432 thousand, $527 thousand, and $531 thousand, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

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 presents, by loan class, information related to loans modified in a TDR during the years ended December 31 (in thousands).


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

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

The loans identified as TDRs by the Company during the years ended December 31, 2015 and 2014 were on nonaccrual status and reported as impaired loans prior to restructuring. The modifications during the year ended December 31, 2015 primarily related to extending amortization periods, forebearance agreements, requesting additional collateral and, in one instance, forgiveness of principal. For the year ended December 31, 2014, the restructured loan modification related to extending the amortization period of the loan. All loans restructured during the years ended December 31, 2015 and 2014 were on nonaccrual status at the end of those respective years. 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 two commercial business loans with an aggregate pre-default balance of $1.3 million that went into default and were restructured during the year ended December 31, 2015. There were no loans modified as a TDR during the year ended December 31, 2014 that defaulted during the year ended December 31, 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 data on impaired loans at December 31 (in thousands):


				Unpaid				Average		Interest
		Recorded		Principal		Related		Recorded		Income
		Investment⁽¹⁾		Balance⁽¹⁾		Allowance		Investment		Recognized
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	$	-

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 not meeting 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 December 31 (in thousands):


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

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 December 31 (in thousands):


		Residential		Home		Consumer		Other
		Mortgage		Equity		Indirect		Consumer
2015
Performing	$	96,977	$	401,729	$	651,027	$	18,340
Non-performing		1,325		758		1,467		21
Total	$	98,302	$	402,487	$	652,494	$	18,361

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

The following tables set forth the changes in the allowance for loan losses for the years ended December 31 (in thousands):


		Commercial Commercial Residential									Home			Consumer			Other
		Business			Mortgage			Mortgage			Equity			Indirect			Consumer			Total
2015
Allowance for loan losses:
Beginning balance	$	5,621		$	8,122		$	570		$	1,485		$	11,383		$	456		$	27,637
Charge-offs		(1,433	)		(895	)		(175	)		(421	)		(9,156	)		(878	)		(12,958	)
Recoveries		212			146			82			63			4,200			322			5,025
Provision (credit)		1,140			1,654			(13	)		101			4,031			468			7,381
Ending balance	$	5,540		$	9,027		$	464		$	1,228		$	10,458		$	368		$	27,085
Evaluated for impairment:
Individually	$	996		$	10		$	-		$	-		$	-		$	-		$	1,006
Collectively	$	4,544		$	9,017		$	464		$	1,228		$	10,458		$	368		$	26,079

Loans:
Ending balance	$	313,475		$	567,481		$	98,302		$	402,487		$	652,494		$	18,361		$	2,052,600
Evaluated for impairment:
Individually	$	3,922		$	947		$	-		$	-		$	-		$	-		$	4,869
Collectively	$	309,553		$	566,534		$	98,302		$	402,487		$	652,494		$	18,361		$	2,047,731

2014
Allowance for loan losses:
Beginning balance	$	4,273		$	7,743		$	676		$	1,367		$	12,230		$	447		$	26,736
Charge-offs		(204	)		(304	)		(190	)		(340	)		(10,004	)		(972	)		(12,014	)
Recoveries		201			143			39			56			4,321			366			5,126
Provision		1,351			540			45			402			4,836			615			7,789
Ending balance	$	5,621		$	8,122		$	570		$	1,485		$	11,383		$	456		$	27,637
Evaluated for impairment:
Individually	$	1,556		$	911		$	-		$	-		$	-		$	-		$	2,467
Collectively	$	4,065		$	7,211		$	570		$	1,485		$	11,383		$	456		$	25,170

Loans:
Ending balance	$	267,377		$	476,407		$	100,241		$	379,774		$	636,357		$	20,915		$	1,881,071
Evaluated for impairment:
Individually	$	4,288		$	3,020		$	-		$	-		$	-		$	-		$	7,308
Collectively	$	263,089		$	473,387		$	100,241		$	379,774		$	636,357		$	20,915		$	1,873,763


		Commercial Commercial Residential									Home				Consumer			Other
		Business		Mortgage			Mortgage				Equity				Indirect			Consumer			Total
2013
Allowance for loan losses:
Beginning balance	$	4,884		$	6,581		$	740			$	1,282		$	10,715		$	512		$	24,714
Charge-offs		(1,070	)		(553	)		(411	)			(391	)		(8,125	)		(928	)		(11,478	)
Recoveries		349			319			54				157			3,161			381			4,421
Provision		110			1,396			293				319			6,479			482			9,079
Ending balance	$	4,273		$	7,743		$	676			$	1,367		$	12,230		$	447		$	26,736
Evaluated for impairment:
Individually	$	201		$	1,057		$	-			$	-		$	-		$	-		$	1,258
Collectively	$	4,072		$	6,686		$	676			$	1,367		$	12,230		$	447		$	25,478

Loans:
Ending balance	$	265,751		$	470,312		$	113,101		$	320,658			$	609,390		$	22,893		$	1,802,105
Evaluated for impairment:
Individually	$	3,474		$	9,663		$	-			$	-		$	-		$	-		$	13,137
Collectively	$	262,277		$	460,649		$	113,101		$	320,658			$	609,390		$	22,893		$	1,788,968

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, inferring 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 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.