Allowance for Loan Losses and Credit Quality of Loans

12 Months Ended

Dec. 31, 2014

Allowance for Loan Losses and Credit Quality of Loans [Abstract]

Allowance for Loan Losses and Credit Quality of Loans and Leases

(5)  Allowance for Loan Losses and Credit Quality of Loans

Allowance for Loan Losses

The allowance for loan losses is maintained at a level estimated by management to provide adequately for risk of probable losses inherent in the current loan portfolio. The adequacy of the allowance for loan losses is continuously monitored. It is assessed for adequacy using a methodology designed to ensure the level of the allowance reasonably reflects the loan portfolio’s risk profile. It is evaluated to ensure that it is sufficient to absorb all reasonably estimable credit losses inherent in the current loan portfolio.

To develop and document a systematic methodology for determining the allowance for loan losses, the Company has divided the loan portfolio into three segments, each with different risk characteristics and methodologies for assessing risk. Those segments are further segregated between our loans accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired in a business combination (referred to as “acquired” loans). Prior to 2013, separate disclosures for acquired loans were not significant and were included with originated loans in the Company’s asset quality disclosures. Each portfolio segment is broken down into class segments where appropriate. Class segments contain unique measurement attributes, risk characteristics and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses. Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class segment. The following table illustrates the portfolio and class segments for the Company’s loan portfolio:

Portfolio	Class
Commercial Loans	Commercial
	Commercial Real Estate
	Agricultural
	Agricultural Real Estate
	Business Banking
Consumer Loans	Indirect
	Home Equity
	Direct
Residential Real Estate Mortgages

COMMERCIAL LOANS

Commercial– The Company offers a variety of loan options to meet the specific needs of our commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital such as inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment or other assets owned by the borrower. These loans carry a higher risk than commercial real estate loans by the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable and is generally less liquid than real estate. To reduce the risk, management also attempts to secure real estate as collateral and obtain personal guarantees of the borrowers.

Commercial Real Estate – The Company offers commercial real estate loans to finance real estate purchases, refinancings, expansions and improvements to commercial properties. Commercial real estate loans are made to finance the purchases of real property which generally consists of real estate with completed structures. These commercial real estate loans are secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities, and other non owner-occupied facilities. These loans are typically less risky than commercial loans, since they are secured by real estate and buildings. The Company’s underwriting analysis includes credit verification, independent appraisals, a review of the borrower's financial condition, and a detailed analysis of the borrower’s underlying cash flows. These loans are typically originated in amounts of no more than 80% of the appraised value of the property.

Agricultural – The Company offers a variety of agricultural loans to meet the needs of our agricultural customers including term loans, time notes, and lines of credit. These loans are made to purchase livestock, purchase and modernize equipment, and finance seasonal crop expenses. Generally, a collateral lien is placed on the livestock, equipment, produce inventories, and/or receivables owned by the borrower. These loans may carry a higher risk than commercial and agricultural real estate loans due to the industry price volatility and the perishable nature of the underlying collateral. To reduce these risks, management may attempt to secure these loans with additional real estate collateral, obtain personal guarantees of the borrowers, or obtain government loan guarantees to provide further support.

Agricultural Real Estate – The Company offers real estate loans to our agricultural customers to finance farm related real estate purchases, refinancings, expansions, and improvements to agricultural properties. Agricultural real estate loans are made to finance the purchases and improvements of farm properties that generally consist of barns, production facilities, and land. The agricultural real estate loans are secured by first liens on the farm real estate. Because they are secured by land and buildings, these loans may be less risky than agricultural loans. The Company's underwriting analysis includes credit verification, independent appraisals, a review of the borrower's financial condition, and a detailed analysis of the borrower’s underlying cash flows. These loans are typically originated in amounts of no more than 75% of the appraised value of the property. Government loan guarantees may be obtained to provide further support.

Business Banking - The Company offers a variety of loan options to meet the specific needs of our small business customers including term loans, small business mortgages and lines of credit. Such loans are generally less than $500 thousand and are made available to businesses for working capital such as inventory and receivables, business expansion, equipment purchases, and agricultural needs. Generally, a collateral lien is placed on equipment or other assets owned by the borrower such as inventory and/or receivables. These loans carry a higher risk than commercial loans due to the smaller size of the borrower and lower levels of capital. To reduce the risk, the Company obtains personal guarantees of the owners for a majority of the loans.

CONSUMER LOANS

Indirect – The Company maintains relationships with many dealers primarily in the communities that we serve. Through these relationships, the company finances the purchases of automobiles and recreational vehicles (such as campers, boats, etc.) indirectly through dealer relationships. Approximately 70% of the indirect relationships represent automobile financing. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from three to six years, based upon the nature of the collateral and the size of the loan. The majority of indirect consumer loans are underwritten on a secured basis using the underlying collateral being financed.

Home Equity –The Company offers fixed home equity loans as well as home equity lines of credit to consumers to finance home improvements, debt consolidation, education and other uses. Consumers are able to borrower up to 85% of the equity in their homes. The Company originates home equity lines of credit and second mortgage loans (loans secured by a second lien position on one-to-four-family residential real estate). These loans carry a higher risk than first mortgage residential loans as they are in a second position with respect to collateral. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

Direct – The Company offers a variety of consumer installment loans to finance vehicle purchases, mobile home purchases and personal expenditures. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to ten years, based upon the nature of the collateral and the size of the loan. The majority of consumer loans are underwritten on a secured basis using the underlying collateral being financed or a customer's deposit account. In addition to installment loans, the Company also offers personal lines of credit and overdraft protection. A minimal amount of loans are unsecured, which carry a higher risk of loss.

RESIDENTIAL REAL ESTATE LOANS

Residential real estate loans consist primarily of loans secured by first or second deeds of trust on primary residences. We originate adjustable-rate and fixed-rate, one-to-four-family residential real estate loans for the construction, purchase or refinancing of a mortgage. These loans are collateralized by owner-occupied properties located in the Company’s market area. When market conditions are favorable, for longer term, fixed-rate residential mortgages without escrow, the Company retains the servicing, but sells the right to receive principal and interest to Freddie Mac when market conditions are favorable.  This practice allows the Company to manage interest rate risk, liquidity risk, and credit risk. Loans on one-to-four-family residential real estate are generally originated in amounts of no more than 85% of the purchase price or appraised value (whichever is lower), or have private mortgage insurance. Mortgage title insurance and hazard insurance are normally required. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period.

Allowance for Loan Loss Calculation

Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that such judgments can have on the consolidated results of operations.

In addition, various regulatory agencies, as an integral component of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make loan grade changes as well as recognize additions to the allowance based on their examinations.

After a thorough consideration of the factors discussed above, any required additions to the allowance for loan losses are made periodically by charges to the provision for loan losses. These charges are necessary to maintain the allowance at a level which management believes is reasonably reflective of overall inherent risk of probable loss in the portfolio. While management uses available information to recognize losses on loans, additions to the allowance may fluctuate from one reporting period to another. These fluctuations are reflective of changes in risk associated with portfolio content and/or changes in management’s assessment of any or all of the determining factors discussed above.

The following table illustrates the changes in the allowance for loan losses by portfolio segment for the years ended December 31, 2014, 2013 and 2012:

Allowance for Loan Losses

(in thousands)

	Commercial Loans			Consumer Loans			Residential Real Estate Mortgages			Unallocated			Total
Balance as of December 31, 2013	$	35,090		$	27,694		$	6,520		$	130		$	69,434
Charge-offs		(9,414	)		(16,642	)		(1,417	)		-			(27,473	)
Recoveries		1,774			2,800			285			-			4,859
Provision		4,983			12,868			1,742			(54	)		19,539
Ending Balance as of December 31, 2014	$	32,433		$	26,720		$	7,130		$	76		$	66,359
Balance as of December 31, 2012	$	35,624		$	27,162		$	6,252		$	296		$	69,334
Charge-offs		(10,459	)		(15,459	)		(1,771	)		-			(27,689	)
Recoveries		1,957			3,136			272			-			5,365
Provision		7,968			12,855			1,767			(166	)		22,424
Ending Balance as of December 31, 2013	$	35,090		$	27,694		$	6,520		$	130		$	69,434
Balance as of December 31, 2011	$	38,831		$	26,049		$	6,249		$	205		$	71,334
Charge-offs		(8,750	)		(15,848	)		(1,906	)		-			(26,504	)
Recoveries		1,641			2,556			38			-			4,235
Provision		3,902			14,405			1,871			91			20,269
Ending Balance as of December 31, 2012	$	35,624		$	27,162		$	6,252		$	296		$	69,334

For acquired loans, to the extent that we experience deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.  As of December 31, 2014 the allowance for loan losses for the acquired loan portfolio totaled $0.5 million. There was no allowance for the acquired loan portfolio as of December 31, 2013.  Net charge-offs related to acquired loans totaled approximately $4.8 million and $0.4 million during the years ended December 31, 2014 and December 31, 2013, respectively, and are included in the table above.

The following table illustrates the allowance for loan losses and the recorded investment by portfolio segment as of December 31, 2014 and 2013:

Allowance for Loan Losses and Recorded Investment in Loans

(in thousands)

	Commercial Loans		Consumer Loans		Residential Real Estate Mortgages		Unallocated		Total
As of December 31, 2014
Allowance for loan losses	$	32,433	$	26,720	$	7,130	$	76	$	66,359
Allowance for loans individually evaluated for impairment		1,100		-		-				1,100
Allowance for loans collectively evaluated for impairment	$	31,333	$	26,720	$	7,130	$	76	$	65,259
Ending balance of loans	$	2,473,702	$	2,005,980	$	1,115,589			$	5,595,271
Ending balance of originated loans individually evaluated for impairment		11,079		5,498		3,544				20,121
Ending balance of acquired loans individually evaluated for impairment		5,675		-		-				5,675
Ending balance of acquired loans collectively evaluated for impairment		327,656		147,256		266,747				741,659
Ending balance of originated loans collectively evaluated for impairment	$	2,129,292	$	1,853,226	$	845,298			$	4,827,816
As of December 31, 2013
Allowance for loan losses	$	35,090	$	27,694	$	6,520	$	130	$	69,434
Allowance for loans individually evaluated for impairment		715		-		-				715
Allowance for loans collectively evaluated for impairment	$	34,375	$	27,694	$	6,520	$	130	$	68,719
Ending balance of loans	$	2,392,621	$	1,972,537	$	1,041,637			$	5,406,795
Ending balance of originated loans individually evaluated for impairment		16,120		3,248		2,012				21,380
Ending balance of acquired loans individually evaluated for impairment		10,060		-		-				10,060
Ending balance of acquired loans collectively evaluated for impairment		392,329		219,587		308,416				920,332
Ending balance of originated loans collectively evaluated for impairment	$	1,974,112	$	1,749,702	$	731,209			$	4,455,023

The following table illustrates the Company’s nonaccrual loans by loan class as of December 31, 2014 and 2013:

(In thousands)	December 31, 2014		December 31, 2013
ORIGINATED
Commercial Loans
Commercial	$	1,012	$	3,669
Commercial Real Estate		4,127		7,834
Agricultural		817		1,135
Agricultural Real Estate		565		961
Business Banking		6,910		5,701
		13,431		19,300
Consumer Loans
Indirect		1,964		1,461
Home Equity		6,596		5,931
Direct		84		86
		8,644		7,478
Residential Real Estate Mortgages		8,770		7,105
	$	30,845	$	33,883
ACQUIRED
Commercial Loans
Commercial	$	3,009	$	6,599
Commercial Real Estate		2,666		3,559
Business Banking		665		1,340
		6,340		11,498
Consumer Loans
Indirect		106		93
Home Equity		557		570
Direct		33		49
		696		712
Residential Real Estate Mortgages		3,193		3,872
	$	10,229	$	16,082
TOTAL NONACCRUAL LOANS	$	41,074	$	49,965

The following table sets forth information with regard to past due and nonperforming loans by loan class:

Age Analysis of Past Due Financing Receivables

As of December 31, 2014

(in thousands)

	31-60 Days Past Due Accruing		61-90 Days Past Due Accruing		Greater Than 90 Days Past Due Accruing		Total Past Due Accruing		Non-Accrual		Current		Recorded Total Loans
ORIGINATED
Commercial Loans
Commercial	$	-	$	735	$	-	$	735	$	1,012	$	613,400	$	615,147
Commercial Real Estate		192		-		-		192		4,127		1,064,549		1,068,868
Agricultural		-		-		-		-		817		32,130		32,947
Agricultural Real Estate		19		-		-		19		565		24,390		24,974
Business Banking		799		235		84		1,118		6,910		390,407		398,435
		1,010		970		84		2,064		13,431		2,124,876		2,140,371
Consumer Loans
Indirect		16,434		3,154		1,991		21,579		1,964		1,286,507		1,310,050
Home Equity		4,591		1,428		821		6,840		6,596		479,444		492,880
Direct		560		157		52		769		84		54,941		55,794
		21,585		4,739		2,864		29,188		8,644		1,820,892		1,858,724
Residential Real Estate Mortgages		2,901		96		1,256		4,253		8,770		835,819		848,842
	$	25,496	$	5,805	$	4,204	$	35,505	$	30,845	$	4,781,587	$	4,847,937
ACQUIRED
Commercial Loans
Commercial	$	-	$	-	$	-	$	-	$	3,009	$	72,255	$	75,264
Commercial Real Estate		-		-		-		-		2,666		197,222		199,888
Business Banking		5		15		-		20		665		57,494		58,179
		5		15		-		20		6,340		326,971		333,331
Consumer Loans
Indirect		518		5		54		577		106		64,540		65,223
Home Equity		190		60		5		255		557		75,904		76,716
Direct		31		-		7		38		33		5,246		5,317
		739		65		66		870		696		145,690		147,256
Residential Real Estate Mortgages		1,162		265		671		2,098		3,193		261,456		266,747
	$	1,906	$	345	$	737	$	2,988	$	10,229	$	734,117	$	747,334
Total Loans	$	27,402	$	6,150	$	4,941	$	38,493	$	41,074	$	5,515,704	$	5,595,271

Age Analysis of Past Due Financing Receivables

As of December 31, 2013

(in thousands)

	31-60 Days Past Due Accruing		61-90 Days Past Due Accruing		Greater Than 90 Days Past Due Accruing		Total Past Due Accruing		Non-Accrual		Current		Recorded Total Loans
ORIGINATED
Commercial Loans
Commercial	$	105	$	247	$	-	$	352	$	3,669	$	612,402	$	616,423
Commercial Real Estate		1,366		-		-		1,366		7,834		925,116		934,316
Agricultural		150		21		-		171		1,135		63,856		65,162
Agricultural Real Estate		519		-		-		519		961		35,172		36,652
Business Banking		1,228		122		105		1,455		5,701		330,523		337,679
		3,368		390		105		3,863		19,300		1,967,069		1,990,232
Consumer Loans
Indirect		14,093		2,878		1,583		18,554		1,461		1,141,829		1,161,844
Home Equity		6,033		1,888		1,115		9,036		5,931		517,856		532,823
Direct		679		125		46		850		86		57,347		58,283
		20,805		4,891		2,744		28,440		7,478		1,717,032		1,752,950
Residential Real Estate Mortgages		3,951		379		808		5,138		7,105		720,978		733,221
	$	28,124	$	5,660	$	3,657	$	37,441	$	33,883	$	4,405,079	$	4,476,403
ACQUIRED
Commercial Loans
Commercial	$	24	$	-	$	-	$	24	$	6,599	$	96,603	$	103,226
Commercial Real Estate		-		-		-		-		3,559		225,455		229,014
Business Banking		320		2		-		322		1,340		68,487		70,149
		344		2		-		346		11,498		390,545		402,389
Consumer Loans
Indirect		939		113		71		1,123		93		123,870		125,086
Home Equity		753		63		-		816		570		85,690		87,076
Direct		76		56		9		141		49		7,235		7,425
		1,768		232		80		2,080		712		216,795		219,587
Residential Real Estate Mortgages		1,725		-		-		1,725		3,872		302,819		308,416
	$	3,837	$	234	$	80	$	4,151	$	16,082	$	910,159	$	930,392
Total Loans	$	31,961	$	5,894	$	3,737	$	41,592	$	49,965	$	5,315,238	$	5,406,795

There were no material commitments to extend further credit to borrowers with nonperforming loans.

The methodology used to establish the allowance for loan losses on impaired loans incorporates specific allocations on loans analyzed individually.  Classified loans, including all TDRs and nonaccrual commercial loans that are graded substandard or below, with outstanding balances of $500 thousand or more are evaluated for impairment through the Company’s quarterly status review process.  In determining that we will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreements, we consider factors such as payment history and changes in the financial condition of individual borrowers, local economic conditions, historical loss experience and the conditions of the various markets in which the collateral may be liquidated.  For loans that are evaluated for impairment, impairment is measured by one of three methods: 1) the fair value of collateral less cost to sell, 2) present value of expected future cash flows or 3) the loan’s observable market price.  These impaired loans are reviewed on a quarterly basis for changes in the measurement of impairment.  For impaired loans measured using the present value of expected cash flow method, any change to the previously recognized impairment loss is recognized as a change to the allowance account and recorded in the consolidated statement of income as a component of the provision for credit losses.

The following provides additional information on loans specifically evaluated for impairment for the years ended December 31, 2014 and 2013

Impaired Loans

	December 31, 2014							December 31, 2013
(in thousands)	Recorded Investment Balance (Book)		Unpaid Principal Balance (Legal)		Related Allowance			Recorded Investment Balance (Book)		Unpaid Principal Balance (Legal)		Related Allowance
ORIGINATED
With no related allowance recorded:
Commercial Loans
Commercial	$	1,748	$	1,901				$	4,721	$	4,777
Commercial Real Estate		4,505		4,520					4,613		5,164
Agricultural		20		26					125		195
Agricultural Real Estate		1,147		1,441					1,431		1,708
Business Banking		896		1,301					210		602
Total Commercial Loans		8,316		9,189					11,100		12,446
Consumer Loans
Home Equity		5,498		6,033					3,248		3,472
Residential Real Estate Mortgages		3,544		3,959					2,012		2,255
Total		17,358		19,181					16,360		18,173
With an allowance recorded:
Commercial Loans
Commercial Real Estate		2,763		4,611			600		5,020		6,877			715
ACQUIRED
With no related allowance recorded:
Commercial Loans
Commercial		-		-					6,501		6,538
Commercial Real Estate		2,666		3,830					3,559		3,842
Total Commercial Loans		2,666		3,830					10,060		10,380
With an  allowance recorded:
Commercial Loans
Commercial		3,009		4,668			500		-		-			-
Total	$	25,796	$	32,290		$	1,100	$	31,440	$	35,430		$	715

The following table summarizes the average recorded investments on loans specifically evaluated for impairment and the interest income recognized for the years ended December 31, 2014, 2013 and 2012:

	December 31, 2014				December 31, 2013				December 31, 2012
(in thousands)	Average Recorded Investment		Interest Income Recognized Accrual		Average Recorded Investment		Interest Income Recognized Accrual		Average Recorded Investment		Interest Income Recognized Accrual
ORIGINATED
Commercial Loans
Commercial	$	1,954	$	115	$	3,488	$	-	$	6,682	$	56
Commercial Real Estate		9,679		169		11,085		95		4,944		230
Agricultural		91		1		1,035		1		1,767		43
Agricultural Real Estate		1,346		46		1,067		47		922		72
Business Banking		610		55		127		61		68		65
Consumer Loans
Home Equity		5,198		267		3,120		145		1,877		123
Residential Real Estate Mortgages		3,039		119		2,085		69		1,143		54
ACQUIRED
Commercial Loans
Commercial		5,756		-		-		-		-		-
Commercial Real Estate		3,386		-		1,310		-		-		-
Total	$	31,059	$	772	$	23,317	$	418	$	17,403	$	643

While we continue to adhere to prudent underwriting standards, as a lender we may be adversely impacted by general economic weaknesses and, in particular, a sharp downturn in the housing market nationally.  Decreases in real estate values could adversely affect the value of property used as collateral for our loans.  Adverse changes in the economy may have a negative effect on the ability of our borrowers to make timely loan payments, which would have an adverse impact on our earnings.  A further increase in loan delinquencies would decrease our net interest income and adversely impact our loan loss experience, causing increases in our provision and allowance for loan losses.

The Company has developed an internal loan grading system to evaluate and quantify the Bank’s loan portfolio with respect to quality and risk.  The system focuses on, among other things, financial strength of borrowers, experience and depth of management, primary and secondary sources of repayment, payment history, nature of the business, outlook on particular industries.  The internal grading system enables the Company to monitor the quality of the entire loan portfolio on a continuous basis and provide management with an early warning system, enabling recognition and response to problem loans and potential problem loans.

Commercial Grading System

For commercial and agricultural loans, the Company uses a grading system that relies on quantifiable and measurable characteristics when available.  This would include comparison of financial strength to available industry averages, comparison of transaction factors (loan terms and conditions) to loan policy, and comparison of credit history to stated repayment terms and industry averages. Some grading factors are necessarily more subjective such as economic and industry factors, regulatory environment, and management.  The grading system for commercial and agricultural loans is as follows:

 ● Doubtful

A doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Pending events can include mergers, acquisitions, liquidations, capital injections, the perfection of liens on additional collateral, the valuation of collateral, and refinancing. Generally, pending events should be resolved within a relatively short period and the ratings will be adjusted based on the new information. Because of high probability of loss, nonaccrual treatment is required for doubtful assets.

● Substandard

Substandard loans have a high probability of payment default, or they have other well-defined weaknesses. They require more intensive supervision by bank management. Substandard loans are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants. For some substandard loans, the likelihood of full collection of interest and principal may be in doubt and should be placed on nonaccrual. Although substandard assets in the aggregate will have a distinct potential for loss, an individual asset’s loss potential does not have to be distinct for the asset to be rated substandard.

●Special Mention

Special Mention loans have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These loans pose elevated risk, but their weakness does not yet justify a substandard classification. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or may be struggling with an ill-proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating. Although a Special Mention loan has a higher probability of default than a pass asset, its default is not imminent.

●Pass

Loans graded as Pass encompass all loans not graded as Doubtful, Substandard, or Special Mention.  Pass loans are in compliance with loan covenants, and payments are generally made as agreed.  Pass loans range from superior quality to fair quality.

Business Banking Grading System

Business Banking loans are graded as either Classified or Non-classified:

●Classified 

Classified loans are inadequately protected by the current worth and paying capacity of the obligor or, if applicable, the collateral pledged.   These loans have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt, or in some cases make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Classified loans have a high probability of payment default, or a high probability of total or substantial loss.  These loans require more intensive supervision by management and are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization.  Repayment may depend on collateral or other credit risk mitigants.  When the likelihood of full collection of interest and principal may be in doubt; classified loans are considered to have a nonaccrual status.   In some cases, classified loans are considered uncollectible and of such little value that their continuance as assets is not warranted.

●   Non-classified

Loans graded as Non-classified encompass all loans not graded as Classified.  Non-classified loans are in compliance with loan covenants, and payments are generally made as agreed.

Consumer and Residential Mortgage Grading System

Consumer and Residential Mortgage loans are graded as either Performing or Nonperforming.   Nonperforming loans are loans that are 1) over 90 days past due and interest is still accruing or 2) on nonaccrual status.  All loans not meeting any of these three criteria are considered Performing.

The following tables illustrate the Company’s credit quality by loan class for the years ended December 31, 2014 and 2013:

Credit Quality Indicators

December 31, 2014

(In thousands)
ORIGINATED
Commercial Credit Exposure
By Internally Assigned Grade:	Commercial		Commercial Real Estate		Agricultural		Agricultural Real Estate		Total
Pass	$	$570,884	$	1,023,856	$	30,481	$	23,443	$	1,648,664
Special Mention		6,022		17,341		275		42		23,680
Substandard		38,241		27,671		2,183		1,489		69,584
Doubtful		-		-		8		-		8
Total	$	615,147	$	1,068,868	$	32,947	$	24,974	$	1,741,936

Business Banking Credit Exposure
By Internally Assigned Grade:	Business Banking						Total
Non-classified	$	379,445					$	379,445
Classified		18,990						18,990
Total	$	398,435					$	398,435
Consumer Credit Exposure
By Payment Activity:	Indirect		Home Equity		Direct		Total
Performing	$	1,306,095	$	485,463	$	55,658	$	1,847,216
Nonperforming		3,955		7,417		136		11,508
Total	$	1,310,050	$	492,880	$	55,794	$	1,858,724

Residential Mortgage Credit Exposure
By Payment Activity:	Residential Mortgage		Total
Performing	$	838,816	$	838,816
Nonperforming		10,026		10,026
Total	$	848,842	$	848,842

Credit Quality Indicators

December 31, 2014

(In thousands) 

ACQUIRED
Commercial Credit Exposure
By Internally Assigned Grade:	Commercial		Commercial Real Estate		Agricultural		Total
Pass	$	63,630	$	186,036	$	-	$	249,666
Special Mention		2,840		2,646		-		5,486
Substandard		8,794		11,206		-		20,000
Doubtful		-		-		-		-
Total	$	75,264	$	199,888	$	-	$	275,152

Business Banking Credit Exposure
By Internally Assigned Grade:	Business Banking		Total
Non-classified	$	53,264	$	53,264
Classified		4,915		4,915
Total	$	58,179	$	58,179

Consumer Credit Exposure
By Payment Activity:	Indirect		Home Equity		Direct		Total
Performing	$	65,063	$	76,154	$	5,277	$	146,494
Nonperforming		160		562		40		762
Total	$	65,223	$	76,716	$	5,317	$	147,256

Residential Mortgage Credit Exposure
By Payment Activity:	Residential Mortgage		Total
Performing	$	262,883	$	262,883
Nonperforming		3,864		3,864
Total	$	266,747	$	266,747

Credit Quality Indicators

December 31, 2013

 (In thousands)

Commercial Credit Exposure
By Internally Assigned Grade:	Commercial		Commercial Real Estate		Agricultural		Agricultural Real Estate		Total
Pass	$	576,079	$	878,411	$	60,043	$	33,136	$	1,547,669
Special Mention		16,836		22,777		381		43		40,037
Substandard		23,508		33,128		4,726		3,473		64,835
Doubtful		-		-		12		-		12
Total	$	616,423	$	934,316	$	65,162	$	36,652	$	1,652,553

Business Banking Credit Exposure
By Internally Assigned Grade:	Business Banking						Total
Non-classified	$	319,578					$	319,578
Classified		18,101						18,101
Total	$	337,679					$	337,679
Consumer Credit Exposure
By Payment Activity:	Indirect		Home Equity		Direct		Total
Performing	$	1,158,800	$	525,777	$	58,151	$	1,742,728
Nonperforming		3,044		7,046		132		10,222
Total	$	1,161,844	$	532,823	$	58,283	$	1,752,950

Residential Mortgage Credit Exposure
By Payment Activity:	Residential Mortgage		Total
Performing	$	725,308	$	725,308
Nonperforming		7,913		7,913
Total	$	733,221	$	733,221

Credit Quality Indicators

December 31, 2013

(In thousands) 

ACQUIRED
Commercial Credit Exposure
By Internally Assigned Grade:	Commercial		Commercial Real Estate		Agricultural		Total
Pass	$	85,692	$	205,010	$	-	$	290,702
Special Mention		2,230		6,183		-		8,413
Substandard		15,304		17,821		-		33,125
Doubtful		-		-		-		-
Total	$	103,226	$	229,014	$	-	$	332,240

Business Banking Credit Exposure
By Internally Assigned Grade:	Business Banking		Total
Non-classified	$	65,437	$	65,437
Classified		4,712		4,712
Total	$	70,149	$	70,149

Consumer Credit Exposure
By Payment Activity:	Indirect		Home Equity		Direct		Total
Performing	$	124,922	$	86,506	$	7,367	$	218,795
Nonperforming		164		570		58		792
Total	$	125,086	$	87,076	$	7,425	$	219,587

Residential Mortgage Credit Exposure
By Payment Activity:	Residential Mortgage		Total
Performing	$	304,544	$	304,544
Nonperforming		3,872		3,872
Total	$	308,416	$	308,416

Troubled Debt Restructuring

Troubled debt restructurings made during the year ended December 31, 2014 consisted of three business banking loans totaling $0.9 million, 9 home equity loans totaling $0.3 million, one indirect consumer loan totaling less than $0.1 million, 47 direct consumer loans totaling $3.0 million and 27 residential real estate mortgages totaling $2.7 million.  During the year ended December 31, 2014, there was one indirect consumer loan classified as TDRs totaling less than $0.1 million, one home equity loan classified as a TDR totaling less than $0.1 million, 5 direct consumer loans classified as TDRs totaling $0.2 million, and six residential real estate mortgages classified as TDRs totaling $0.4 million that subsequently defaulted on their renegotiated terms.

Troubled debt restructurings made during the year ended December 31, 2013 consisted of four commercial loans totaling $7.0 million, 23 home equity loans totaling $1.0 million, and six residential real estate mortgages totaling $0.5 million.  During the year ended December 31, 2013, there was one commercial loan classified as a TDR totaling $0.9 million and eight home equity loans classified as TDRs totaling $0.4 million that subsequently defaulted on their renegotiated terms.

Substantially all modifications include one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; temporary reduction in the interest rate; or change in scheduled payment amount.