Loans | LOANS Total net loans at June 30, 2020 and December 31, 2019 are summarized as follows: June 30, 2020 December 31, 2019 Commercial, industrial and agricultural $ 1,263,521 $ 1,046,665 Commercial mortgages 865,401 814,002 Residential real estate 805,413 814,030 Consumer 93,409 124,785 Credit cards 6,760 7,569 Overdrafts 284 2,146 Less: unearned discount (4,617) (5,162) allowance for loan losses (24,529) (19,473) Loans, net $ 3,005,642 $ 2,784,562 At June 30, 2020 and December 31, 2019, net unamortized loan fees of $9,313 and $3,092, respectively, have been included in the carrying value of loans. The Corporation’s outstanding loans and related unfunded commitments are primarily concentrated within central and northwest Pennsylvania, central and northeast Ohio and western New York. The Bank attempts to limit concentrations within specific industries by utilizing dollar limitations to single industries or customers, and by entering into participation agreements with third parties. Collateral requirements are established based on management’s assessment of the customer. The Corporation maintains lending policies to control the quality of the loan portfolio. These policies delegate the authority to extend loans under specific guidelines and underwriting standards. These policies are prepared by the Corporation’s management and reviewed and ratified annually by the Corporation’s Board of Directors. Pursuant to the Corporation’s lending policies, management considers a variety of factors when determining whether to extend credit to a customer, including loan-to-value ratios, FICO scores, quality of the borrower’s financial statements, and the ability to obtain personal guarantees. Commercial, industrial and agricultural loans comprised 42% and 37% of the Corporation’s total loan portfolio at June 30, 2020 and December 31, 2019, respectively. Commercial mortgage loans comprised 29% and 29% of the Corporation’s total loan portfolio at June 30, 2020 and December 31, 2019, respectively. Management assigns a risk rating to all commercial loans at loan origination. The loan-to-value policy guidelines for commercial, industrial and agricultural loans are generally a maximum of 80% of the value of business equipment, a maximum of 70% of the value of accounts receivable, and a maximum of 60% of the value of business inventory at loan origination. The loan-to-value policy guideline for commercial mortgage loans is generally a maximum of 85% of the appraised value of the real estate. Residential real estate loans comprised 27% and 29% of the Corporation’s total loan portfolio at June 30, 2020 and December 31, 2019, respectively. The loan-to-value policy guidelines for residential real estate loans vary depending on the collateral position and the specific type of loan. Higher loan-to-value terms may be approved with the appropriate private mortgage insurance coverage. The Corporation also originates and prices loans for sale into the secondary market. Loans so originated are classified as loans held for sale and are excluded from residential real estate loans reported above. The rationale for these sales is to mitigate interest rate risk associated with holding lower rate, long-term residential mortgages in the loan portfolio and to generate fee revenue from sales and servicing the loan. The Corporation also offers a variety of unsecured and secured consumer loan and credit card products which represented less than 3% of the total loan portfolio at both June 30, 2020 and December 31, 2019. Terms and collateral requirements vary depending on the size and nature of the loan. Transactions in the allowance for loan losses for the three months ended June 30, 2020 were as follows: Commercial, Industrial Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses, April 1, 2020 $ 10,532 $ 7,492 $ 1,458 $ 2,138 $ 112 $ 183 $ 21,915 Charge-offs (2,623) 0 (19) (413) (41) (95) (3,191) Recoveries 7 2 0 38 10 68 125 Provision for loan losses 1,886 2,134 1,237 377 33 13 5,680 Allowance for loan losses, June 30, 2020 $ 9,802 $ 9,628 $ 2,676 $ 2,140 $ 114 $ 169 $ 24,529 Transactions in the allowance for loan losses for the six months ended June 30, 2020 were as follows: Commercial, Industrial Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses, January 1, 2020 $ 8,287 $ 6,952 $ 1,499 $ 2,411 $ 84 $ 240 $ 19,473 Charge-offs (2,648) 0 (162) (1,005) (72) (214) (4,101) Recoveries 25 174 3 81 11 104 398 Provision for loan losses 4,138 2,502 1,336 653 91 39 8,759 Allowance for loan losses, June 30, 2020 $ 9,802 $ 9,628 $ 2,676 $ 2,140 $ 114 $ 169 $ 24,529 Transactions in the allowance for loan losses for the three months ended June 30, 2019 were as follows: Commercial, Industrial Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses, April 1, 2019 $ 7,787 $ 8,846 $ 1,383 $ 2,040 $ 105 $ 185 $ 20,346 Charge-offs 0 0 (146) (513) (26) (88) (773) Recoveries 4 16 2 28 1 25 76 Provision (benefit) for loan losses 317 676 164 586 7 38 1,788 Allowance for loan losses, June 30, 2019 $ 8,108 $ 9,538 $ 1,403 $ 2,141 $ 87 $ 160 $ 21,437 Transactions in the allowance for loan losses for the six months ended June 30, 2019 were as follows: Commercial, Industrial Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses, January 1, 2019 $ 7,341 $ 7,490 $ 2,156 $ 2,377 $ 103 $ 237 $ 19,704 Charge-offs 0 (2) (244) (1,062) (52) (216) (1,576) Recoveries 8 1 67 74 6 59 215 Provision (benefit) for loan losses 759 2,049 (576) 752 30 80 3,094 Allowance for loan losses, June 30, 2019 $ 8,108 $ 9,538 $ 1,403 $ 2,141 $ 87 $ 160 $ 21,437 The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and is based on the Corporation’s impairment method as of June 30, 2020 and December 31, 2019. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance. June 30, 2020 Commercial, Industrial Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 642 $ 1,539 $ 53 $ 0 $ 0 $ 0 $ 2,234 Collectively evaluated for impairment 8,653 7,780 2,623 2,140 114 169 21,479 Acquired with deteriorated credit quality 0 0 0 0 0 0 0 Modified in a troubled debt restructuring 507 309 0 0 0 0 816 Total ending allowance balance $ 9,802 $ 9,628 $ 2,676 $ 2,140 $ 114 $ 169 $ 24,529 Loans: Individually evaluated for impairment $ 4,813 $ 12,520 $ 461 $ 0 $ 0 $ 0 $ 17,794 Collectively evaluated for impairment 1,254,203 845,886 804,838 93,409 6,760 284 3,005,380 Acquired with deteriorated credit quality 0 501 0 0 0 0 501 Modified in a troubled debt restructuring 4,505 6,494 114 0 0 0 11,113 Total ending loans balance $ 1,263,521 $ 865,401 $ 805,413 $ 93,409 $ 6,760 $ 284 $ 3,034,788 December 31, 2019 Commercial, Industrial Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 645 $ 1,264 $ 34 $ 0 $ 0 $ 0 $ 1,943 Collectively evaluated for impairment 7,614 5,358 1,465 2,411 84 240 17,172 Acquired with deteriorated credit quality 0 0 0 0 0 0 0 Modified in a troubled debt restructuring 28 330 0 0 0 0 358 Total ending allowance balance $ 8,287 $ 6,952 $ 1,499 $ 2,411 $ 84 $ 240 $ 19,473 Loans: Individually evaluated for impairment $ 8,078 $ 2,410 $ 465 $ 0 $ 0 $ 0 $ 10,953 Collectively evaluated for impairment 1,035,494 804,360 813,565 124,785 7,569 2,146 2,787,919 Acquired with deteriorated credit quality 0 523 0 0 0 0 523 Modified in a troubled debt restructuring 3,093 6,709 0 0 0 0 9,802 Total ending loans balance $ 1,046,665 $ 814,002 $ 814,030 $ 124,785 $ 7,569 $ 2,146 $ 2,809,197 The following tables present information related to loans individually evaluated for impairment, including loans modified in troubled debt restructurings, by portfolio segment as of June 30, 2020 and December 31, 2019 and for the three and six months ended June 30, 2020 and 2019: June 30, 2020 Unpaid Principal Recorded Allowance for Loan With an allowance recorded: Commercial, industrial and agricultural $ 2,111 $ 2,051 $ 1,149 Commercial mortgage 6,563 4,330 1,848 Residential real estate 480 461 53 With no related allowance recorded: Commercial, industrial and agricultural 10,037 7,267 0 Commercial mortgage 15,310 14,684 0 Residential real estate 115 114 0 Total $ 34,616 $ 28,907 $ 3,050 December 31, 2019 Unpaid Principal Recorded Allowance for Loan With an allowance recorded: Commercial, industrial and agricultural $ 2,657 $ 1,476 $ 673 Commercial mortgage 6,541 4,349 1,594 Residential real estate 485 465 34 With no related allowance recorded: Commercial, industrial and agricultural 9,845 9,695 0 Commercial mortgage 4,903 4,770 0 Residential real estate 0 0 0 Total $ 24,431 $ 20,755 $ 2,301 The unpaid principal balance of impaired loans includes the Corporation’s recorded investment in the loan and amounts that have been charged off. Three months ended June 30, 2020 Three months ended June 30, 2019 Average Interest Cash Basis Average Interest Cash Basis With an allowance recorded: Commercial, industrial and agricultural $ 2,052 $ 28 $ 28 $ 1,273 $ 27 $ 27 Commercial mortgage $ 4,330 $ 4 $ 4 7,807 46 46 Residential real estate $ 461 $ 0 $ 0 0 0 0 With no related allowance recorded: Commercial, industrial and agricultural $ 7,367 $ 49 $ 49 3,811 32 32 Commercial mortgage $ 14,684 $ 66 $ 66 3,257 20 20 Residential real estate $ 114 $ 2 $ 2 485 4 4 Total $ 29,008 $ 149 $ 149 $ 16,633 $ 129 $ 129 Six months ended June 30, 2020 Six months ended June 30, 2019 Average Interest Cash Basis Average Interest Cash Basis With an allowance recorded: Commercial, industrial and agricultural $ 3,532 $ 45 $ 45 $ 1,861 $ 65 $ 65 Commercial mortgage 4,330 41 41 7,441 86 86 Residential real estate 462 5 5 0 0 0 With no related allowance recorded: Commercial, industrial and agricultural 7,196 91 91 3,499 86 86 Commercial mortgage 11,293 224 224 3,767 38 38 Residential real estate 38 2 2 490 11 11 Total $ 26,851 $ 408 $ 408 $ 17,058 $ 286 $ 286 The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of June 30, 2020 and December 31, 2019: June 30, 2020 December 31, 2019 Nonaccrual Past Due Nonaccrual Past Due Commercial, industrial and agricultural $ 9,762 $ 116 $ 11,644 $ 0 Commercial mortgages 14,715 0 4,533 0 Residential real estate 4,307 0 4,724 59 Consumer 485 0 835 0 Credit cards 0 12 0 2 Total $ 29,269 $ 128 $ 21,736 $ 61 Nonaccrual loans and loans past due over 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The following table presents the aging of the recorded investment in past due loans as of June 30, 2020 and December 31, 2019 by class of loans. June 30, 2020 30-59 Days 60-89 Days Greater Than Total Loans Not Total Commercial, industrial and agricultural $ 445 $ 451 $ 6,551 $ 7,447 $ 1,256,074 $ 1,263,521 Commercial mortgages 0 0 2,754 2,754 862,647 865,401 Residential real estate 809 1,496 2,162 4,467 800,946 805,413 Consumer 249 190 204 643 92,766 93,409 Credit cards 30 11 12 53 6,707 6,760 Overdrafts 0 0 0 0 284 284 Total $ 1,533 $ 2,148 $ 11,683 $ 15,364 $ 3,019,424 $ 3,034,788 December 31, 2019 30-59 Days 60-89 Days Greater Than Total Loans Not Total Commercial, industrial and agricultural $ 1,273 $ 548 $ 3,784 $ 5,605 $ 1,041,060 $ 1,046,665 Commercial mortgages 162 183 2,594 2,939 811,063 814,002 Residential real estate 3,383 1,270 2,714 7,367 806,663 814,030 Consumer 412 311 415 1,138 123,647 124,785 Credit cards 48 54 2 104 7,465 7,569 Overdrafts 0 0 0 0 2,146 2,146 Total $ 5,278 $ 2,366 $ 9,509 $ 17,153 $ 2,792,044 $ 2,809,197 Troubled Debt Restructurings The terms of certain loans have been modified as troubled debt restructurings. The modification of the terms of such loans included either or both of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. The following table presents the number of loans, loan balances, and specific reserves for loans that have been restructured in a troubled debt restructuring as of June 30, 2020 and December 31, 2019. June 30, 2020 December 31, 2019 Number of Loan Specific Number of Loan Specific Commercial, industrial and agricultural 18 $ 4,505 $ 507 10 $ 3,093 $ 28 Commercial mortgages 13 6,494 309 13 6,709 330 Residential real estate 1 114 0 0 0 0 Consumer 0 0 0 0 0 0 Credit cards 0 0 0 0 0 0 Total 32 $ 11,113 $ 816 23 $ 9,802 $ 358 There were nine loans modified as troubled debt restructurings during the three and six months ended June 30, 2020 and no loans modified as troubled debt restructurings during the three and six months ended June 30, 2019. Three and six months ended June 30, 2020 Number of Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Commercial, industrial and agricultural 8 $ 1,593 $ 1,593 Commercial mortgages 0 0 0 Residential real estate 1 116 116 Consumer 0 0 0 Credit cards 0 0 0 Total 9 $ 1,709 $ 1,709 A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no loans modified as troubled debt restructurings for which there was a payment default within a twelve-month cycle following the modification during the three and six months ended June 30, 2020 and June 30, 2019. There were no principal balances forgiven in connection with the loan restructurings. In order to determine whether a borrower is experiencing financial difficulty, the Corporation evaluates the probability that the borrower will default on any of its debt payments in the foreseeable future without a loan modification. This evaluation is performed using the Corporation’s internal underwriting policies. The Corporation has no further loan commitments to customers whose loans are classified as a troubled debt restructuring. Generally, nonperforming troubled debt restructurings are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Credit Quality Indicators The Corporation classifies commercial, industrial and agricultural loans and commercial mortgage 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. The Corporation 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 Corporation’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 Corporation 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 rated as special mention, substandard, or doubtful are considered to be pass rated loans. All loans included in the following tables have been assigned a risk rating within 12 months of the balance sheet date. June 30, 2020 Pass Special Substandard Doubtful Total Commercial, industrial and agricultural $ 1,226,388 $ 10,889 $ 26,244 $ 0 $ 1,263,521 Commercial mortgages 818,811 13,465 33,125 0 865,401 Total $ 2,045,199 $ 24,354 $ 59,369 $ 0 $ 2,128,922 December 31, 2019 Pass Special Substandard Doubtful Total Commercial, industrial and agricultural $ 1,004,445 $ 16,696 $ 25,524 $ 0 $ 1,046,665 Commercial mortgages 780,798 18,837 14,367 0 814,002 Total $ 1,785,243 $ 35,533 $ 39,891 $ 0 $ 1,860,667 The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate, consumer, and credit card loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential, consumer, and credit card loans based on payment activity as of June 30, 2020 and December 31, 2019: June 30, 2020 December 31, 2019 Residential Consumer Credit Residential Consumer Credit Performing $ 801,106 $ 92,924 $ 6,748 $ 809,247 $ 123,950 $ 7,567 Nonperforming 4,307 485 12 4,783 835 2 Total $ 805,413 $ 93,409 $ 6,760 $ 814,030 $ 124,785 $ 7,569 The Corporation’s portfolio of residential real estate and consumer loans maintained within Holiday Financial Services Corporation (“Holiday”) are considered to be subprime loans. Holiday is a subsidiary that offers small balance unsecured and secured loans, primarily collateralized by automobiles and equipment, to borrowers with higher risk characteristics than are typical in the Bank’s consumer loan portfolio. Holiday’s loan portfolio is summarized as follows at June 30, 2020 and December 31, 2019: June 30, 2020 December 31, 2019 Consumer $ 25,760 $ 28,122 Less: unearned discount (4,617) (5,162) Total $ 21,143 $ 22,960 |