Loans | 5. LOANS Total net loans at June 30, 2015 and December 31, 2014 are summarized as follows: June 30, 2015 December 31, 2014 Commercial, industrial, and agricultural $ 439,810 $ 428,458 Commercial mortgages 399,255 352,752 Residential real estate 538,329 502,317 Consumer 71,584 69,648 Credit cards 5,130 5,233 Overdrafts 1,560 1,188 Less: unearned discount (4,204 ) (4,307 ) allowance for loan losses (17,504 ) (17,373 ) Loans, net $ 1,433,960 $ 1,337,916 At June 30, 2015 and December 31, 2014, net unamortized loan fees and costs of $(165) and $483, 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 Western Pennsylvania and Central Ohio. 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. All relevant documentation, such as the loan application, financial statements and tax returns, required under the lending policies is summarized and provided to management in connection with the loan approval process. Such documentation is subsequently electronically archived in the Corporation’s document management system. 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 31% and 32% of the Corporation’s total loan portfolio at June 30, 2015 and December 31, 2014, respectively. Commercial mortgage loans comprised 28% and 26% of the Corporation’s total loan portfolio at June 30, 2015 and December 31, 2014. Management assigns a risk rating to all commercial loans in excess of $250,000. 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 75% of the value of accounts receivable, and a maximum of 60% of the value of business inventory. 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 38% and 37% of the Corporation’s total loan portfolio at June 30, 2015 and December 31, 2014, 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 through Freddie Mac. Loans originated for sale into the secondary market 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 represent less than 10% of the total loan portfolio at both June 30, 2015 and December 31, 2014. Terms and collateral requirements vary depending on the size and nature of the loan. CNB has not underwritten any hybrid loans, payment option loans, or low documentation/no documentation loans. Variable rate loans are generally underwritten at the fully indexed rate. Loan underwriting policies and procedures have not changed materially between any periods presented. Transactions in the allowance for loan losses for the three months ended June 30, 2015 were as follows: Commercial, Residential Industrial, and Commercial Real Credit Agricultural Mortgages Estate Consumer Cards Overdrafts Total Allowance for loan losses, April 1, 2015 $ 7,223 $ 5,296 $ 2,786 $ 2,129 $ 74 $ 174 $ 17,682 Charge-offs (65 ) 0 (90 ) (477 ) (44 ) (48 ) (724 ) Recoveries 12 0 0 26 2 20 60 Provision (benefit) for loan losses (572 ) 632 (84 ) 440 66 4 486 Allowance for loan losses, June 30, 2015 $ 6,598 $ 5,928 $ 2,612 $ 2,118 $ 98 $ 150 $ 17,504 Transactions in the allowance for loan losses for the six months ended June 30, 2015 were as follows: Commercial, Residential Industrial, and Commercial Real Credit Agricultural Mortgages Estate Consumer Cards Overdrafts Total Allowance for loan losses, January 1, 2015 $ 7,114 $ 5,310 $ 2,479 $ 2,205 $ 71 $ 194 $ 17,373 Charge-offs (139 ) 0 (156 ) (1,000 ) (86 ) (105 ) (1,486 ) Recoveries 27 50 1 55 5 50 188 Provision (benefit) for loan losses (404 ) 568 288 858 108 11 1,429 Allowance for loan losses, June 30, 2015 $ 6,598 $ 5,928 $ 2,612 $ 2,118 $ 98 $ 150 $ 17,504 Transactions in the allowance for loan losses for the three months ended June 30, 2014 were as follows: Commercial, Industrial, and Agricultural Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses, April 1, 2014 $ 8,278 $ 3,704 $ 2,455 $ 1,972 $ 68 $ 197 $ 16,674 Charge-offs (319 ) 0 (76 ) (369 ) (2 ) (64 ) (830 ) Recoveries 1 10 0 31 1 27 70 Provision for loan losses 136 867 88 362 21 27 1,501 Allowance for loan losses, June 30, 2014 $ 8,096 $ 4,581 $ 2,467 $ 1,996 $ 88 $ 187 $ 17,415 Transactions in the allowance for loan losses for the six months ended June 30, 2014 were as follows: Commercial, Industrial, and Agricultural Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses, January 1, 2014 $ 8,212 $ 3,536 $ 2,450 $ 1,763 $ 66 $ 207 $ 16,234 Charge-offs (319 ) (50 ) (198 ) (768 ) (23 ) (122 ) (1,480 ) Recoveries 1 10 19 53 3 55 141 Provision for loan losses 202 1,085 196 948 42 47 2,520 Allowance for loan losses, June 30, 2014 $ 8,096 $ 4,581 $ 2,467 $ 1,996 $ 88 $ 187 $ 17,415 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, 2015 and December 31, 2014. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance. June 30, 2015 Commercial, Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 282 $ 490 $ 190 $ 0 $ 0 $ 0 $ 962 Collectively evaluated for impairment 5,655 2,987 2,422 2,118 98 150 13,430 Acquired with deteriorated credit quality 0 0 0 0 0 0 0 Modified in a troubled debt restructuring 661 2,451 0 0 0 0 3,112 Total ending allowance balance $ 6,598 $ 5,928 $ 2,612 $ 2,118 $ 98 $ 150 $ 17,504 Loans: Individually evaluated for impairment $ 4,106 $ 490 $ 400 $ 0 $ 0 $ 0 $ 4,996 Collectively evaluated for impairment 431,721 384,841 537,929 71,584 5,130 1,560 1,432,765 Acquired with deteriorated credit quality 0 704 0 0 0 0 704 Modified in a troubled debt restructuring 3,983 13,220 0 0 0 0 17,203 Total ending loans balance $ 439,810 $ 399,255 $ 538,329 $ 71,584 $ 5,130 $ 1,560 $ 1,455,668 December 31, 2014 Commercial, Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 254 $ 294 $ 197 $ 0 $ 0 $ 0 $ 745 Collectively evaluated for impairment 6,703 2,503 2,282 2,205 71 194 13,958 Acquired with deteriorated credit quality 0 0 0 0 0 0 0 Modified in a troubled debt restructuring 157 2,513 0 0 0 0 2,670 Total ending allowance balance $ 7,114 $ 5,310 $ 2,479 $ 2,205 $ 71 $ 194 $ 17,373 Loans: Individually evaluated for impairment $ 3,394 $ 494 $ 657 $ 0 $ 0 $ 0 $ 4,545 Collectively evaluated for impairment 421,144 336,801 501,660 69,648 5,233 1,188 1,335,674 Acquired with deteriorated credit quality 0 719 0 0 0 0 719 Modified in a troubled debt restructuring 3,920 14,738 0 0 0 0 18,658 Total ending loans balance $ 428,458 $ 352,752 $ 502,317 $ 69,648 $ 5,233 $ 1,188 $ 1,359,596 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, 2015 and December 31, 2014 and for the three and six months ended June 30, 2015 and 2014: June 30, 2015 Unpaid Principal Recorded Allowance for Loan With an allowance recorded: Commercial, industrial, and agricultural $ 6,405 $ 6,405 $ 943 Commercial mortgage 9,554 9,022 2,941 Residential real estate 400 400 190 With no related allowance recorded: Commercial, industrial, and agricultural 2,642 1,684 0 Commercial mortgage 4,687 4,688 0 Residential real estate 0 0 0 Total $ 23,688 $ 22,199 $ 4,074 December 31, 2014 Unpaid Principal Recorded Allowance for Loan With an allowance recorded: Commercial, industrial, and agricultural $ 5,737 $ 5,737 $ 411 Commercial mortgage 10,651 10,212 2,807 Residential real estate 400 400 197 With no related allowance recorded: Commercial, industrial, and agricultural 2,530 1,577 0 Commercial mortgage 5,020 5,020 0 Residential real estate 319 257 0 Total $ 24,657 $ 23,203 $ 3,415 Three Months Ended June 30, 2015 Six Months Ended June 30, 2015 Average Interest Cash Basis Average Interest Cash Basis Recorded Income Interest Recorded Income Interest Investment Recognized Recognized Investment Recognized Recognized With an allowance recorded: Commercial, industrial, and agricultural $ 6,315 $ 7 $ 7 $ 6,071 $ 42 $ 42 Commercial mortgage 9,646 0 0 9,617 0 0 Residential real estate 400 11 11 400 13 13 With no related allowance recorded: Commercial, industrial, and agricultural 1,689 2 2 1,631 12 12 Commercial mortgage 4,719 0 0 4,854 0 0 Residential real estate 129 4 4 129 6 6 Total $ 22,898 $ 24 $ 24 $ 22,702 $ 73 $ 73 Three Months Ended June 30, 2014 Six Months Ended June 30, 2014 Average Interest Cash Basis Average Interest Cash Basis Recorded Income Interest Recorded Income Interest Investment Recognized Recognized Investment Recognized Recognized With an allowance recorded: Commercial, industrial, and agricultural $ 4,318 $ 1 $ 1 $ 4,438 $ 2 $ 2 Commercial mortgage 5,402 0 0 5,416 0 0 Residential real estate 200 3 3 133 11 11 With no related allowance recorded: Commercial, industrial, and agricultural 2,234 0 0 2,167 0 0 Commercial mortgage 6,249 0 0 6,217 0 0 Residential real estate 0 0 0 0 0 0 Total $ 18,403 $ 4 $ 4 $ 18,371 $ 13 $ 13 The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still accruing interest by class of loans as of June 30, 2015 and December 31, 2014: June 30, 2015 December 31, 2014 Nonaccrual Past Due Over 90 Days Still on Accrual Nonaccrual Past Due Over 90 Days Still on Accrual Commercial, industrial, and agricultural $ 4,184 $ 0 $ 796 $ 0 Commercial mortgages 3,716 0 4,323 0 Residential real estate 3,359 50 3,026 213 Consumer 730 17 1,045 0 Credit cards 0 0 0 0 Total $ 11,989 $ 67 $ 9,190 $ 213 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. Generally, loans 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. The following table presents the aging of the recorded investment in past due loans as of June 30, 2015 and December 31, 2014 by class of loans. June 30, 2015 30-59 Days 60-89 Days Greater Than Past Due Total Past Loans Not Total Commercial, industrial, and agricultural $ 1,012 $ 1,775 $ 1,106 $ 3,893 $ 435,917 $ 439,810 Commercial mortgages 1,136 0 3,716 4,852 394,403 399,255 Residential real estate 1,047 896 3,409 5,352 532,977 538,329 Consumer 287 159 747 1,193 70,391 71,584 Credit cards 0 0 0 0 5,130 5,130 Overdrafts 0 0 0 0 1,560 1,560 Total $ 3,482 $ 2,830 $ 8,978 $ 15,290 $ 1,440,378 $ 1,455,668 December 31, 2014 Greater Than 30-59 Days 60-89 Days 90 Days Total Loans Not Past Due Past Due Past Due Past Due Past Due Total Commercial, industrial, and agricultural $ 888 $ 588 $ 294 $ 1,770 $ 426,688 $ 428,458 Commercial mortgages 20 1,351 4,323 5,694 347,058 352,752 Residential real estate 2,719 1,191 3,239 7,149 495,168 502,317 Consumer 265 122 1,045 1,432 68,216 69,648 Credit cards 0 83 0 83 5,150 5,233 Overdrafts 0 0 0 0 1,188 1,188 Total $ 5,083 $ 2,144 $ 8,901 $ 16,128 $ 1,343,468 $ 1,359,596 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, 2015 and December 31, 2014. June 30, 2015 December 31, 2014 Number of Loans Loan Balance Specific Reserve Number of Loans Loan Balance Specific Reserve Commercial, industrial, and agricultural 7 $ 3,983 $ 661 7 $ 4,076 $ 179 Commercial mortgages 8 13,220 2,451 8 14,582 2,491 Residential real estate 0 0 0 0 0 0 Consumer 0 0 0 0 0 0 Credit cards 0 0 0 0 0 0 Total 15 $ 17,203 $ 3,112 15 $ 18,658 $ 2,670 There were no loans modified as troubled debt restructurings during the three or six months ended June 30, 2015 or June 30, 2014. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. All loans modified in troubled debt restructurings are performing in accordance with their modified terms as of June 30, 2015 and December 31, 2014 and no principal balances were forgiven in connection with the loan restructurings. In order to determine whether a borrower is experiencing financial difficulty, the Corporation performs an evaluation using the its internal underwriting policies of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without a loan modification. The Corporation has no further loan commitments to customers whose loans are classified as a troubled debt restructuring. Generally, non-performing 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. Loans with outstanding balances greater than $1 million are analyzed at least semiannually and loans with outstanding balances of less than $1 million are analyzed at least annually. 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, 2015 Pass Special Substandard Doubtful Total Commercial, industrial, and agricultural $ 418,471 $ 3,824 $ 17,237 $ 278 $ 439,810 Commercial mortgages 386,302 0 12,520 433 399,255 Total $ 804,773 $ 3,824 $ 29,757 $ 711 $ 839,065 December 31, 2014 Pass Special Substandard Doubtful Total Commercial, industrial, and agricultural $ 402,923 $ 6,703 $ 18,525 $ 307 $ 428,458 Commercial mortgages 328,614 0 23,699 439 352,752 Total $ 731,537 $ 6,703 $ 42,224 $ 746 $ 781,210 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, 2015 and December 31, 2014: June 30, 2015 December 31, 2014 Residential Consumer Credit Residential Consumer Credit Performing $ 534,920 $ 70,837 $ 5,130 $ 499,078 $ 68,603 $ 5,233 Non-performing 3,409 747 0 3,239 1,045 0 Total $ 538,329 $ 71,584 $ 5,130 $ 502,317 $ 69,648 $ 5,233 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, 2015 and December 31, 2014: June 30, December 31, 2015 2014 Consumer $ 27,431 $ 27,916 Residential real estate 1,192 1,270 Less: unearned discount (4,204 ) (4,307 ) Total $ 24,419 $ 24,879 |