Loans | (5.) The Company’s loan portfolio consisted of the following as of the dates indicated (in thousands): Principal Amount Outstanding Net Deferred Loan (Fees) Costs Loans, Net June 30, 2018 Commercial business $ 506,265 $ 756 $ 507,021 Commercial mortgage 869,192 (2,143 ) 867,049 Residential real estate loans 481,841 8,099 489,940 Residential real estate lines 110,319 2,968 113,287 Consumer indirect 874,718 31,519 906,237 Other consumer 16,508 170 16,678 Total $ 2,858,843 $ 41,369 2,900,212 Allowance for loan losses (33,955 ) Total loans, net $ 2,866,257 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 $2.0 million and $2.7 million as of June 30, 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): 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days Total Past Due Nonaccrual Current Total Loans June 30, 2018 Commercial business $ 51 $ — $ — $ 51 $ 4,026 $ 502,188 $ 506,265 Commercial mortgage 387 — — 387 2,151 866,654 869,192 Residential real estate loans 605 64 — 669 2,138 479,034 481,841 Residential real estate lines 79 107 — 186 288 109,845 110,319 Consumer indirect 1,869 492 — 2,361 1,124 871,233 874,718 Other consumer 58 18 4 80 — 16,428 16,508 Total loans, gross $ 3,049 $ 681 $ 4 $ 3,734 $ 9,727 $ 2,845,382 $ 2,858,843 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 (5.) There were no loans past due greater than 90 days and still accruing interest as of June 30, 2018 and December 31, 2017. There were $4 thousand and $11 thousand in consumer overdrafts which were past due greater than 90 days as of June 30, 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, forbearance agreements, or substituting or adding a new borrower or guarantor. There were no loans modified as a TDR during the six months ended June 30, 2018 and 2017. There were no loans modified as a TDR within the previous 12 months that defaulted during the six months ended June 30, 2018 and 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 six months ended June 30, 2018 and twelve-month period ended December 31, 2017 (in thousands): Recorded Investment (1) Unpaid Principal Balance (1) Related Allowance Average Recorded Investment Interest Income Recognized June 30, 2018 With no related allowance recorded: Commercial business $ 1,174 $ 1,639 $ — $ 1,347 $ — Commercial mortgage 557 557 — 579 — 1,731 2,196 — 1,926 — With an allowance recorded: Commercial business 2,990 2,990 1,226 3,397 — Commercial mortgage 2,071 2,071 517 2,255 — 5,061 5,061 1,743 5,652 — $ 6,792 $ 7,257 $ 1,743 $ 7,578 $ — 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. (5.) 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 Business Commercial Mortgage June 30, 2018 Uncriticized $ 473,370 $ 850,919 Special mention 21,413 10,457 Substandard 11,482 7,816 Doubtful — — Total $ 506,265 $ 869,192 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 Real Estate Loans Residential Real Estate Lines Consumer Indirect Other Consumer June 30, 2018 Performing $ 479,703 $ 110,031 $ 873,594 $ 16,504 Non-performing 2,138 288 1,124 4 Total $ 481,841 $ 110,319 $ 874,718 $ 16,508 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 (5.) Allowance for Loan Losses Loans and the related allowance for loan losses are presented below as of the dates indicated (in thousands): Commercial Business Commercial Mortgage Residential Real Estate Loans Residential Real Estate Lines Consumer Indirect Other Consumer Total June 30, 2018 Loans: Ending balance $ 506,265 $ 869,192 $ 481,841 $ 110,319 $ 874,718 $ 16,508 $ 2,858,843 Evaluated for impairment: Individually $ 4,164 $ 2,628 $ — $ — $ — $ — $ 6,792 Collectively $ 502,101 $ 866,564 $ 481,841 $ 110,319 $ 874,718 $ 16,508 $ 2,852,051 Allowance for loan losses: Ending balance $ 14,242 $ 5,371 $ 1,255 $ 248 $ 12,520 $ 319 $ 33,955 Evaluated for impairment: Individually $ 1,226 $ 517 $ — $ — $ — $ — $ 1,743 Collectively $ 13,016 $ 4,854 $ 1,255 $ 248 $ 12,520 $ 319 $ 32,212 June 30, 2017 Loans: Ending balance $ 397,802 $ 725,793 $ 425,285 $ 115,768 $ 797,469 $ 16,917 $ 2,479,034 Evaluated for impairment: Individually $ 7,258 $ 2,164 $ — $ — $ — $ — $ 9,422 Collectively $ 390,544 $ 723,629 $ 425,285 $ 115,768 $ 797,469 $ 16,917 $ 2,469,612 Allowance for loan losses: Ending balance $ 14,622 $ 3,906 $ 1,247 $ 232 $ 12,833 $ 319 $ 33,159 Evaluated for impairment: Individually $ 2,683 $ 120 $ — $ — $ — $ — $ 2,803 Collectively $ 11,939 $ 3,786 $ 1,247 $ 232 $ 12,833 $ 319 $ 30,356 The following table sets forth the changes in the allowance for loan losses for the three and six-month periods ended June 30, 2018 (in thousands): Commercial Business Commercial Mortgage Residential Real Estate Loans Residential Real Estate Lines Consumer Indirect Other Consumer Total Three months ended June 30, 2018 Beginning balance $ 14,942 $ 5,473 $ 1,400 $ 218 $ 13,232 $ 329 $ 35,594 Charge-offs (336 ) - (10 ) (7 ) (2,621 ) (235 ) (3,209 ) Recoveries 77 1 63 12 1,304 73 1,530 Provision (credit) (441 ) (103 ) (198 ) 25 605 152 40 Ending balance $ 14,242 $ 5,371 $ 1,255 $ 248 $ 12,520 $ 319 $ 33,955 Six months ended June 30, 2018 Beginning balance $ 15,668 $ 3,696 $ 1,322 $ 180 $ 13,415 $ 391 $ 34,672 Charge-offs (441 ) (4 ) (29 ) (101 ) (5,615 ) (668 ) (6,858 ) Recoveries 197 8 132 15 2,634 166 3,152 Provision (credit) (1,182 ) 1,671 (170 ) 154 2,086 430 2,989 Ending balance $ 14,242 $ 5,371 $ 1,255 $ 248 $ 12,520 $ 319 $ 33,955 (5.) The following table sets forth the changes in the allowance for loan losses for the three and six-month periods ended June 30, 2017 (in thousands): Commercial Business Commercial Mortgage Residential Real Estate Loans Residential Real Estate Lines Consumer Indirect Other Consumer Total Three months ended June 30, 2017 Beginning balance $ 14,003 $ 3,667 $ 1,440 $ 214 $ 11,462 $ 295 $ 31,081 Charge-offs (656 ) - (86 ) - (2,204 ) (187 ) (3,133 ) Recoveries 88 38 8 46 1,122 77 1,379 Provision (credit) 1,187 201 (115 ) (28 ) 2,453 134 3,832 Ending balance $ 14,622 $ 3,906 $ 1,247 $ 232 $ 12,833 $ 319 $ 33,159 Six months ended June 30, 2017 Beginning balance $ 7,225 $ 10,315 $ 1,478 $ 303 $ 11,311 $ 302 $ 30,934 Charge-offs (1,778 ) (10 ) (100 ) (43 ) (5,013 ) (390 ) (7,334 ) Recoveries 246 252 48 56 2,173 171 2,946 Provision (credit) 8,929 (6,651 ) (179 ) (84 ) 4,362 236 6,613 Ending balance $ 14,622 $ 3,906 $ 1,247 $ 232 $ 12,833 $ 319 $ 33,159 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 based on 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. |