Loans | (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 September 30, 2016 Commercial business $ 350,181 $ 407 $ 350,588 Commercial mortgage 637,799 (1,461 ) 636,338 Residential real estate loans 419,547 6,335 425,882 Residential real estate lines 120,901 2,762 123,663 Consumer indirect 703,499 26,145 729,644 Other consumer 17,700 179 17,879 Total $ 2,249,627 $ 34,367 2,283,994 Allowance for loan losses (29,350 ) Total loans, net $ 2,254,644 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 $844 thousand and $1.4 million as of September 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 September 30, 2016 Commercial business $ 659 $ - $ - $ 659 $ 2,157 $ 347,365 $ 350,181 Commercial mortgage 1,105 - - 1,105 1,345 635,349 637,799 Residential real estate loans 846 - - 846 1,239 417,462 419,547 Residential real estate lines 122 23 - 145 274 120,482 120,901 Consumer indirect 1,596 311 - 1,907 1,077 700,515 703,499 Other consumer 106 31 8 145 1 17,554 17,700 Total loans, gross $ 4,434 $ 365 $ 8 $ 4,807 $ 6,093 $ 2,238,727 $ 2,249,627 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 September 30, 2016 and December 31, 2015. There was $8 thousand in consumer overdrafts which were past due greater than 90 days as of September 30, 2016 and December 31, 2015. 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 September 30, 2016 Commercial business - $ - $ - 3 $ 526 $ 526 Commercial mortgage - - - 1 550 550 Total - $ - $ - 4 $ 1,076 $ 1,076 September 30, 2015 Commercial business - $ - $ - 2 $ 1,342 $ 1,342 Commercial mortgage - - - 1 682 330 Total - $ - $ - 3 $ 2,024 $ 1,672 The loans identified as a TDR by the Company during the nine month periods ended September 30, 2016 and 2015 were previously reported as impaired loans prior to restructuring. Each of the loans restructured during the nine months ended September 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 nine months ended September 30, 2016. There were two 1.3 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 nine 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 September 30, 2016 With no related allowance recorded: Commercial business $ 1,074 $ 1,594 $ - $ 1,149 $ - Commercial mortgage 729 938 - 737 - 1,803 2,532 - 1,886 - With an allowance recorded: Commercial business 1,083 1,083 460 1,058 - Commercial mortgage 616 616 124 745 - 1,699 1,699 584 1,803 - $ 3,502 $ 4,231 $ 584 $ 3,689 $ - 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 not meeting the criteria above 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, 2016 Uncriticized $ 330,433 $ 616,955 Special mention 10,676 14,182 Substandard 9,072 6,662 Doubtful - - Total $ 350,181 $ 637,799 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 September 30, 2016 Performing $ 418,308 $ 120,627 $ 702,422 $ 17,691 Non-performing 1,239 274 1,077 9 Total $ 419,547 $ 120,901 $ 703,499 $ 17,700 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 September 30, 2016 Loans: Ending balance $ 350,181 $ 637,799 $ 419,547 $ 120,901 $ 703,499 $ 17,700 $ 2,249,627 Evaluated for impairment: Individually $ 2,081 $ 1,334 $ - $ - $ - $ - $ 3,415 Collectively $ 348,100 $ 636,465 $ 419,547 $ 120,901 $ 703,499 $ 17,700 $ 2,246,212 Allowance for loan losses: Ending balance $ 6,524 $ 9,710 $ 1,428 $ 315 $ 11,041 $ 332 $ 29,350 Evaluated for impairment: Individually $ 436 $ 122 $ - $ - $ - $ - $ 558 Collectively $ 6,088 $ 9,588 $ 1,428 $ 315 $ 11,041 $ 332 $ 28,792 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 The following table sets forth the changes in the allowance for loan losses for the three and nine month periods ended September 30, 2016 (in thousands): Residential Residential Commercial Commercial Real Estate Real Estate Consumer Other Business Mortgage Loans Lines Indirect Consumer Total Three months ended September 30, 2016 Beginning balance $ 6,197 $ 9,496 $ 1,444 $ 318 $ 10,696 $ 374 $ 28,525 Charge-offs (44 ) (156 ) (78 ) (8 ) (2,056 ) (158 ) (2,500 ) Recoveries 75 29 17 4 1,160 79 1,364 Provision 296 341 45 1 1,241 37 1,961 Ending balance $ 6,524 $ 9,710 $ 1,428 $ 315 $ 11,041 $ 332 $ 29,350 Nine months ended Septembe r 30, 2016 Beginning balance $ 5,540 $ 9,027 $ 1,347 $ 345 $ 10,458 $ 368 $ 27,085 Charge-offs (688 ) (168 ) (258 ) (59 ) (6,452 ) (434 ) (8,059 ) Recoveries 244 40 142 11 3,324 282 4,043 Provision 1,428 811 197 18 3,711 116 6,281 Ending balance $ 6,524 $ 9,710 $ 1,428 $ 315 $ 11,041 $ 332 $ 29,350 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): Residential Residential Commercial Commercial Real Estate Real Estate Consumer Other Business Mortgage Loans Lines 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 (credit) 748 1,492 (80 ) (25 ) 2,318 330 4,783 Ending balance $ 5,281 $ 8,888 $ 456 $ 1,177 $ 10,264 $ 389 $ 26,455 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 that can be recovered on such loans. |