Loans | (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 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 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 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 $ 6.6 3.5 5.7 2.6 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): Greater 30-59 Days 60-89 Days Than 90 Total Past Past Due Past Due Days Due Nonaccrual Current Total Loans 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 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 11 9 Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was no 481 234 432 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, forbearance 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 2017 Commercial business 1 $ 3,081 $ 565 Commercial mortgage - - - Total 1 $ 3,081 $ 565 2016 Commercial business 3 $ 526 $ 526 Commercial mortgage 1 550 550 Total 4 $ 1,076 $ 1,076 The loans identified as TDRs by the Company during the years ended December 31, 2017 and 2016 were previously reported as impaired loans prior to restructuring. The modifications during the year ended December 31, 2017 primarily related to collateral concessions. For the year ended December 31, 2016, the restructured loan modifications primarily related to collateral concessions and forbearance. All loans restructured during the years ended December 31, 2017 and 2016 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 no loans modified as a TDR during the years ended December 31, 2017 and 2016 that defaulted during the year ended December 31, 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 data on impaired loans at December 31 (in thousands): Unpaid Average Interest Recorded Principal Related Recorded Income Investment (1) Balance (1) Allowance Investment Recognized 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 $ - 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 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 2017 Uncriticized $ 429,692 $ 791,127 Special mention 7,120 12,185 Substandard 12,951 7,539 Doubtful - - Total $ 449,763 $ 810,851 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 December 31 (in thousands): Residential Residential Real Estate Real Estate Consumer Other Loans Lines Indirect Consumer 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 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 years ended December 31 (in thousands): Residential Residential Commercial Commercial Real Estate Real Estate Consumer Other Business Mortgage Loans Lines Indirect Consumer Total 2017 Allowance for loan losses: Beginning balance $ 7,225 $ 10,315 $ 1,478 $ 303 $ 11,311 $ 302 $ 30,934 Charge-offs (3,614 ) (10 ) (431 ) (106 ) (10,164 ) (926 ) (15,251 ) Recoveries 416 262 130 60 4,444 316 5,628 Provision (credit) 11,641 (6,871 ) 145 (77 ) 7,824 699 13,361 Ending balance $ 15,668 $ 3,696 $ 1,322 $ 180 $ 13,415 $ 391 $ 34,672 Evaluated for impairment: Individually $ 2,001 $ 107 $ - $ - $ - $ - $ 2,108 Collectively $ 13,667 $ 3,589 $ 1,322 $ 180 $ 13,415 $ 391 $ 32,564 Loans: Ending balance $ 449,763 $ 810,851 $ 457,761 $ 113,422 $ 845,682 $ 17,443 $ 2,694,922 Evaluated for impairment: Individually $ 5,322 $ 2,852 $ - $ - $ - $ - $ 8,174 Collectively $ 444,441 $ 807,999 $ 457,761 $ 113,422 $ 845,682 $ 17,443 $ 2,686,748 2016 Allowance for loan losses: Beginning balance $ 5,540 $ 9,027 $ 1,347 $ 345 $ 10,458 $ 368 $ 27,085 Charge-offs (943 ) (385 ) (289 ) (104 ) (8,748 ) (607 ) (11,076 ) Recoveries 447 45 174 15 4,259 347 5,287 Provision 2,181 1,628 246 47 5,342 194 9,638 Ending balance $ 7,225 $ 10,315 $ 1,478 $ 303 $ 11,311 $ 302 $ 30,934 Evaluated for impairment: Individually $ 663 $ 105 $ - $ - $ - $ - $ 768 Collectively $ 6,562 $ 10,210 $ 1,478 $ 303 $ 11,311 $ 302 $ 30,166 Loans: Ending balance $ 349,079 $ 671,552 $ 421,476 $ 119,745 $ 725,754 $ 17,465 $ 2,305,071 Evaluated for impairment: Individually $ 2,052 $ 935 $ - $ - $ - $ - $ 2,987 Collectively $ 347,027 $ 670,617 $ 421,476 $ 119,745 $ 725,754 $ 17,465 $ 2,302,084 Commercial Commercial Residential Home Consumer Other Business Mortgage Mortgage Equity Indirect Consumer Total 2015 Allowance for loan losses: Beginning balance $ 5,621 $ 8,122 $ 1,620 $ 435 $ 11,383 $ 456 $ 27,637 Charge-offs (1,433 ) (895 ) (397 ) (199 ) (9,156 ) (878 ) (12,958 ) Recoveries 212 146 114 31 4,200 322 5,025 Provision 1,140 1,654 10 78 4,031 468 7,381 Ending balance $ 5,540 $ 9,027 $ 1,347 $ 345 $ 10,458 $ 368 $ 27,085 Evaluated for impairment: Individually $ 996 $ 10 $ - $ - $ - $ - $ 1,006 Collectively $ 4,544 $ 9,017 $ 1,347 $ 345 $ 10,458 $ 368 $ 26,079 Loans: Ending balance $ 313,475 $ 567,481 $ 376,023 $ 124,766 $ 652,494 $ 18,361 $ 2,052,600 Evaluated for impairment: Individually $ 3,922 $ 947 $ - $ - $ - $ - $ 4,869 Collectively $ 309,553 $ 566,534 $ 376,023 $ 124,766 $ 652,494 $ 18,361 $ 2,047,731 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. |