Loans | 5. LOANS Total net loans at September 30, 2015 and December 31, 2014 are summarized as follows: September 30, 2015 December 31, 2014 Commercial, industrial, and agricultural $ 450,969 $ 428,458 Commercial mortgages 421,799 352,752 Residential real estate 566,045 502,317 Consumer 75,126 69,648 Credit cards 5,037 5,233 Overdrafts 1,543 1,188 Less: unearned discount (4,398 ) (4,307 ) allowance for loan losses (17,236 ) (17,373 ) Loans, net $ 1,498,885 $ 1,337,916 At September 30, 2015 and December 31, 2014, net unamortized loan fees and costs of $(160) 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 30% and 32% of the Corporation’s total loan portfolio at September 30, 2015 and December 31, 2014, respectively. Commercial mortgage loans comprised 28% and 26% of the Corporation’s total loan portfolio at September 30, 2015 and December 31, 2014, respectively. 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 37% and 37% of the Corporation’s total loan portfolio at September 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 September 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 September 30, 2015 were as follows: Commercial, Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses, July 1, 2015 $ 6,598 $ 5,928 $ 2,612 $ 2,118 $ 98 $ 150 $ 17,504 Charge-offs (80 ) 0 (191 ) (448 ) (17 ) (54 ) (790 ) Recoveries 12 1 4 21 3 18 59 Provision (benefit) for loan losses 89 (384 ) 115 585 14 44 463 Allowance for loan losses, September 30, 2015 $ 6,619 $ 5,545 $ 2,540 $ 2,276 $ 98 $ 158 $ 17,236 Transactions in the allowance for loan losses for the nine months ended September 30, 2015 were as follows: Commercial, Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses, January 1, 2015 $ 7,114 $ 5,310 $ 2,479 $ 2,205 $ 71 $ 194 $ 17,373 Charge-offs (219 ) 0 (347 ) (1,448 ) (103 ) (159 ) (2,276 ) Recoveries 39 51 5 76 8 68 247 Provision (benefit) for loan losses (315 ) 184 403 1,443 122 55 1,892 Allowance for loan losses, September 30, 2015 $ 6,619 $ 5,545 $ 2,540 $ 2,276 $ 98 $ 158 $ 17,236 Transactions in the allowance for loan losses for the three months ended September 30, 2014 were as follows: Commercial, Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses, July 1, 2014 $ 8,096 $ 4,581 $ 2,467 $ 1,996 $ 88 $ 187 $ 17,415 Charge-offs (60 ) (92 ) (17 ) (415 ) (16 ) (75 ) (675 ) Recoveries 0 0 18 25 4 18 65 Provision for loan losses 690 (291 ) 93 467 3 76 1,038 Allowance for loan losses, September 30, 2014 $ 8,726 $ 4,198 $ 2,561 $ 2,073 $ 79 $ 206 $ 17,843 Transactions in the allowance for loan losses for the nine months ended September 30, 2014 were as follows: Commercial, 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 (379 ) (142 ) (215 ) (1,183 ) (39 ) (197 ) (2,155 ) Recoveries 1 10 37 78 7 73 206 Provision for loan losses 892 794 289 1,415 45 123 3,558 Allowance for loan losses, September 30, 2014 $ 8,726 $ 4,198 $ 2,561 $ 2,073 $ 79 $ 206 $ 17,843 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 September 30, 2015 and December 31, 2014. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance. September 30, 2015 Commercial, Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 371 $ 486 $ 186 $ 0 $ 0 $ 0 $ 1,043 Collectively evaluated for impairment 5,288 3,121 2,354 2,276 98 158 13,295 Acquired with deteriorated credit quality 0 0 0 0 0 0 0 Modified in a troubled debt restructuring 960 1,938 0 0 0 0 2,898 Total ending allowance balance $ 6,619 $ 5,545 $ 2,540 $ 2,276 $ 98 $ 158 $ 17,236 Loans: Individually evaluated for impairment $ 4,056 $ 486 $ 400 $ 0 $ 0 $ 0 $ 4,942 Collectively evaluated for impairment 443,035 410,555 565,645 75,126 5,037 1,543 1,500,941 Acquired with deteriorated credit quality 0 695 0 0 0 0 695 Modified in a troubled debt restructuring 3,878 10,063 0 0 0 0 13,941 Total ending loans balance $ 450,969 $ 421,799 $ 566,045 $ 75,126 $ 5,037 $ 1,543 $ 1,520,519 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 September 30, 2015 and December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014: September 30, 2015 Unpaid Principal Recorded Allowance for Loan With an allowance recorded: Commercial, industrial, and agricultural $ 6,520 $ 6,520 $ 1,331 Commercial mortgage 6,716 5,926 2,424 Residential real estate 400 400 186 With no related allowance recorded: Commercial, industrial, and agricultural 2,305 1,414 0 Commercial mortgage 4,624 4,623 0 Residential real estate 0 0 0 Total $ 20,565 $ 18,883 $ 3,941 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 September 30, 2015 Nine Months Ended September 30, 2015 Average Interest Cash Basis Average Interest Cash Basis With an allowance recorded: Commercial, industrial, and agricultural $ 6,463 $ 0 $ 0 $ 6,129 $ 42 $ 42 Commercial mortgage 7,474 0 0 8,069 0 0 Residential real estate 400 5 5 400 18 18 With no related allowance recorded: Commercial, industrial, and agricultural 1,549 0 0 1,496 10 10 Commercial mortgage 4,656 0 0 4,822 0 0 Residential real estate 0 0 0 129 6 6 Total $ 20,542 $ 5 $ 5 $ 21,045 $ 76 $ 76 Three Months Ended September 30, 2014 Nine Months Ended September 30, 2014 Average Interest Cash Basis Average Interest Cash Basis With an allowance recorded: Commercial, industrial, and agricultural $ 4,023 $ 62 $ 62 $ 4,342 $ 64 $ 64 Commercial mortgage 5,511 18 18 5,415 18 18 Residential real estate 400 45 45 200 56 56 With no related allowance recorded: Commercial, industrial, and agricultural 2,012 32 32 2,071 32 32 Commercial mortgage 6,288 22 22 6,080 22 22 Residential real estate 76 0 0 38 0 0 Total $ 18,310 $ 179 $ 179 $ 18,146 $ 192 $ 192 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 September 30, 2015 and December 31, 2014: September 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 $ 3,346 $ 0 $ 796 $ 0 Commercial mortgages 4,176 0 4,323 0 Residential real estate 3,715 104 3,026 213 Consumer 924 89 1,045 0 Credit cards 0 0 0 0 Total $ 12,161 $ 193 $ 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 September 30, 2015 and December 31, 2014 by class of loans. September 30, 2015 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 $ 823 $ 428 $ 286 $ 1,537 $ 449,432 $ 450,969 Commercial mortgages 137 0 4,176 4,313 417,486 421,799 Residential real estate 856 685 3,819 5,360 560,685 566,045 Consumer 190 93 1,013 1,296 73,830 75,126 Credit cards 0 0 0 0 5,037 5,037 Overdrafts 0 0 0 0 1,543 1,543 Total $ 2,006 $ 1,206 $ 9,294 $ 12,506 $ 1,508,013 $ 1,520,519 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 September 30, 2015 and December 31, 2014. September 30, 2015 December 31, 2014 Number of Loans Loan Balance Specific Reserve Number of Loans Loan Balance Specific Reserve Commercial, industrial, and agricultural 7 $ 3,878 $ 960 7 $ 4,076 $ 179 Commercial mortgages 8 10,063 1,938 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 $ 13,941 $ 2,898 15 $ 18,658 $ 2,670 There were no loans modified as troubled debt restructurings during the three or nine months ended September 30, 2015 and September 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 September 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 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. September 30, 2015 Pass Special Substandard Doubtful Total Commercial, industrial, and agricultural $ 423,173 $ 4,438 $ 23,134 $ 224 $ 450,969 Commercial mortgages 405,251 0 16,120 428 421,799 Total $ 828,424 $ 4,438 $ 39,254 $ 652 $ 872,768 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 September 30, 2015 and December 31, 2014: September 30, 2015 December 31, 2014 Residential Consumer Credit Residential Consumer Credit Performing $ 562,226 $ 74,113 $ 5,037 $ 499,078 $ 68,603 $ 5,233 Non-performing 3,819 1,013 0 3,239 1,045 0 Total $ 566,045 $ 75,126 $ 5,037 $ 502,317 $ 69,648 $ 5,233 The Corporation’s portfolio of residential real estate and consumer loans maintained within Holiday Financial Services Corporation (“Holiday”) is considered to be subprime. 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 September 30, 2015 and December 31, 2014: September 30, December 31, 2015 2014 Consumer $ 28,790 $ 27,916 Residential real estate 1,184 1,270 Less: unearned discount (4,398 ) (4,307 ) Total $ 25,576 $ 24,879 |