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 September 30, 2019 Commercial business $ 573,610 $ 845 $ 574,455 Commercial mortgage 1,037,304 (1,854 ) 1,035,450 Residential real estate loans 547,839 10,817 558,656 Residential real estate lines 104,545 3,070 107,615 Consumer indirect 834,968 28,646 863,614 Other consumer 16,467 163 16,630 Total $ 3,114,733 $ 41,687 3,156,420 Allowance for loan losses (31,668 ) Total loans, net $ 3,124,752 December 31, 2018 Commercial business $ 557,040 $ 821 $ 557,861 Commercial mortgage 960,265 (2,071 ) 958,194 Residential real estate loans 514,981 9,174 524,155 Residential real estate lines 106,712 3,006 109,718 Consumer indirect 888,732 31,185 919,917 Other consumer 16,590 163 16,753 Total $ 3,044,320 $ 42,278 3,086,598 Allowance for loan losses (33,914 ) Total loans, net $ 3,052,684 Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $6.4 million and $2.9 million as of September 30, 2019 and December 31, 2018, 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 September 30, 2019 Commercial business $ 628 $ — $ — $ 628 $ 2,884 $ 570,098 $ 573,610 Commercial mortgage 286 — — 286 2,867 1,034,151 1,037,304 Residential real estate loans 797 207 — 1,004 2,526 544,309 547,839 Residential real estate lines 173 46 — 219 182 104,144 104,545 Consumer indirect 2,672 592 — 3,264 1,326 830,378 834,968 Other consumer 73 6 3 82 — 16,385 16,467 Total loans, gross $ 4,629 $ 851 $ 3 $ 5,483 $ 9,785 $ 3,099,465 $ 3,114,733 December 31, 2018 Commercial business $ 227 $ 1 $ — $ 228 $ 912 $ 555,900 $ 557,040 Commercial mortgage 574 — — 574 1,586 958,105 960,265 Residential real estate loans 1,295 242 — 1,537 2,391 511,053 514,981 Residential real estate lines 102 — — 102 255 106,355 106,712 Consumer indirect 2,424 698 — 3,122 1,989 883,621 888,732 Other consumer 139 3 8 150 — 16,440 16,590 Total loans, gross $ 4,761 $ 944 $ 8 $ 5,713 $ 7,133 $ 3,031,474 $ 3,044,320 (5.) There were no loans past due greater than 90 days and still accruing interest as of September 30, 2019 and December 31, 2018. There were $3 thousand and $8 thousand in consumer overdrafts which were past due greater than 90 days as of September 30, 2019 and December 31, 2018, 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 nine months ended September 30, 2019 and 2018. There were no loans modified as a TDR within the previous 12 months that defaulted during the nine months ended September 30, 2019 and 2018. 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 nine months ended September 30, 2019 and twelve-month period ended December 31, 2018 (in thousands): Recorded Investment (1) Unpaid Principal Balance (1) Related Allowance Average Recorded Investment Interest Income Recognized September 30, 2019 With no related allowance recorded: Commercial business $ 307 $ 373 $ — $ 365 $ — Commercial mortgage 3,278 7,047 — 1,727 — 3,585 7,420 — 2,092 — With an allowance recorded: Commercial business 2,703 2,703 1,563 883 — Commercial mortgage 12 12 1 1,891 — 2,715 2,715 1,564 2,774 — $ 6,300 $ 10,135 $ 1,564 $ 4,866 $ — December 31, 2018 With no related allowance recorded: Commercial business $ 319 $ 487 $ — $ 1,156 $ — Commercial mortgage 2,013 2,789 — 692 — 2,332 3,276 — 1,848 — With an allowance recorded: Commercial business 725 725 205 2,458 — Commercial mortgage 21 21 1 1,936 — 746 746 206 4,394 — $ 3,078 $ 4,022 $ 206 $ 6,242 $ — (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 September 30, 2019 Uncriticized $ 545,110 $ 1,025,219 Special mention 19,519 6,008 Substandard 8,981 6,077 Doubtful — — Total $ 573,610 $ 1,037,304 December 31, 2018 Uncriticized $ 531,756 $ 943,991 Special mention 16,499 10,633 Substandard 8,785 5,641 Doubtful — — Total $ 557,040 $ 960,265 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 September 30, 2019 Performing $ 545,313 $ 104,363 $ 833,642 $ 16,464 Non-performing 2,526 182 1,326 3 Total $ 547,839 $ 104,545 $ 834,968 $ 16,467 December 31, 2018 Performing $ 512,590 $ 106,457 $ 886,743 $ 16,582 Non-performing 2,391 255 1,989 8 Total $ 514,981 $ 106,712 $ 888,732 $ 16,590 (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 September 30, 2019 Loans: Ending balance $ 573,610 $ 1,037,304 $ 547,839 $ 104,545 $ 834,968 $ 16,467 $ 3,114,733 Evaluated for impairment: Individually $ 3,010 $ 3,290 $ — $ — $ — $ — $ 6,300 Collectively $ 570,600 $ 1,034,014 $ 547,839 $ 104,545 $ 834,968 $ 16,467 $ 3,108,433 Allowance for loan losses: Ending balance $ 12,155 $ 5,922 $ 1,183 $ 146 $ 11,842 $ 420 $ 31,668 Evaluated for impairment: Individually $ 1,563 $ 1 $ — $ — $ — $ — $ 1,564 Collectively $ 10,592 $ 5,921 $ 1,183 $ 146 $ 11,842 $ 420 $ 30,104 September 30, 2018 Loans: Ending balance $ 537,160 $ 907,107 $ 498,883 $ 108,227 $ 878,316 $ 16,975 $ 2,946,668 Evaluated for impairment: Individually $ 2,338 $ 2,363 $ — $ — $ — $ — $ 4,701 Collectively $ 534,822 $ 904,744 $ 498,883 $ 108,227 $ 878,316 $ 16,975 $ 2,941,967 Allowance for loan losses: Ending balance $ 14,231 $ 5,422 $ 1,305 $ 212 $ 12,355 $ 430 $ 33,955 Evaluated for impairment: Individually $ 431 $ 460 $ — $ — $ — $ — $ 891 Collectively $ 13,800 $ 4,962 $ 1,305 $ 212 $ 12,355 $ 430 $ 33,064 The following table sets forth the changes in the allowance for loan losses for the three and nine-month periods ended September 30, 2019 (in thousands): Commercial Business Commercial Mortgage Residential Real Estate Loans Residential Real Estate Lines Consumer Indirect Other Consumer Total Three months ended September 30, 2019 Beginning balance $ 11,717 $ 8,790 $ 1,217 $ 145 $ 12,157 $ 408 $ 34,434 Charge-offs (112 ) (2,994 ) (54 ) (8 ) (2,420 ) (315 ) (5,903 ) Recoveries 102 — 14 1 1,103 73 1,293 Provision (credit) 448 126 6 8 1,002 254 1,844 Ending balance $ 12,155 $ 5,922 $ 1,183 $ 146 $ 11,842 $ 420 $ 31,668 Nine months ended September 30, 2019 Beginning balance $ 14,312 $ 5,219 $ 1,112 $ 210 $ 12,572 $ 489 $ 33,914 Charge-offs (380 ) (2,997 ) (172 ) (10 ) (8,102 ) (867 ) (12,528 ) Recoveries 333 17 31 6 4,205 299 4,891 Provision (credit) (2,110 ) 3,683 212 (60 ) 3,167 499 5,391 Ending balance $ 12,155 $ 5,922 $ 1,183 $ 146 $ 11,842 $ 420 $ 31,668 (5.) The following table sets forth the changes in the allowance for loan losses for the three and nine-month periods ended September 30, 2018 (in thousands): Commercial Business Commercial Mortgage Residential Real Estate Loans Residential Real Estate Lines Consumer Indirect Other Consumer Total Three months ended September 30, 2018 Beginning balance $ 14,242 $ 5,371 $ 1,255 $ 248 $ 12,520 $ 319 $ 33,955 Charge-offs (672 ) (113 ) (24 ) (23 ) (2,474 ) (301 ) (3,607 ) Recoveries 241 3 8 2 1,228 64 1,546 Provision (credit) 420 161 66 (15 ) 1,081 348 2,061 Ending balance $ 14,231 $ 5,422 $ 1,305 $ 212 $ 12,355 $ 430 $ 33,955 Nine months ended September 30, 2018 Beginning balance $ 15,668 $ 3,696 $ 1,322 $ 180 $ 13,415 $ 391 $ 34,672 Charge-offs (1,113 ) (117 ) (53 ) (124 ) (8,089 ) (969 ) (10,465 ) Recoveries 438 11 140 17 3,862 230 4,698 Provision (credit) (762 ) 1,832 (104 ) 139 3,167 778 5,050 Ending balance $ 14,231 $ 5,422 $ 1,305 $ 212 $ 12,355 $ 430 $ 33,955 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. 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. |