Loans | 5. Loans Total net loans at December 31, 2015 and 2014 are summarized as follows: 2015 2014 Commercial, industrial, and agricultural $ 475,364 $ 428,458 Commercial mortgages 448,179 352,752 Residential real estate 574,225 502,317 Consumer 78,345 69,648 Credit cards 5,201 5,233 Overdrafts 1,040 1,188 Less: unearned discount (4,556 ) (4,307 ) allowance for loan losses (16,737 ) (17,373 ) Loans, net $ 1,561,061 $ 1,337,916 At December 31, 2015 and 2014 net unamortized loan (fees) costs of $(636) 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. 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 December 31, 2015 and 2014, respectively. Commercial mortgage loans comprised 28% and 26% of the Corporation’s total loan portfolio at December 31, 2015 and 2014, 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 75% 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 36% and 37% of the Corporation’s total loan portfolio at December 31, 2015 and 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 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 represent less than 10% of the total loan portfolio at both December 31, 2015 and 2014. Terms and collateral requirements vary depending on the size and nature of the loan. During 2014, management reviewed its loan portfolio segments resulting in the reclassification of approximately $136 million into Commercial, Industrial and Agricultural. $124 million was reclassified out of Commercial Mortgages and $12 million was reclassified out of Residential Real Estate. Accordingly, the December 31, 2013 loan portfolio segment balances and the related allowance for loan loss segments were reclassified to conform to the December 31, 2014 presentation. To roll forward the allowance for loan losses by segments for the year ended 2013, the net effect of this reclassification was adjusted through provisions for loan losses. The effect of this reclassification was not considered material to the overall allowance for loan losses, did not change total loan balances, and is not considered material to the consolidated financial statements taken as a whole. Transactions in the allowance for loan losses for the year ended December 31, 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 (307 ) (486 ) (632 ) (1,956 ) (116 ) (221 ) (3,718 ) Recoveries 267 52 8 96 14 85 522 Provision for loan losses (1,039 ) 729 620 2,026 121 103 2,560 Allowance for loan losses, December 31, 2015 $ 6,035 $ 5,605 $ 2,475 $ 2,371 $ 90 $ 161 $ 16,737 Transactions in the allowance for loan losses for the year ended December 31, 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 (618 ) (50 ) (436 ) (1,744 ) (78 ) (256 ) (3,182 ) Recoveries 1 210 41 93 25 111 481 Provision for loan losses (481 ) 1,614 424 2,093 58 132 3,840 Allowance for loan losses, December 31, 2014 $ 7,114 $ 5,310 $ 2,479 $ 2,205 $ 71 $ 194 $ 17,373 Transactions in the allowance for loan losses for the year ended December 31, 2013 were as follows: Commercial, Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses, January 1, 2013 $ 4,940 $ 4,697 $ 2,466 $ 1,699 $ 83 $ 175 $ 14,060 Charge-offs (958 ) (1,931 ) (467 ) (1,919 ) (97 ) (258 ) (5,630 ) Recoveries 7 1,430 5 114 16 94 1,666 Provision for loan losses 4,223 (660 ) 446 1,869 64 196 6,138 Allowance for loan losses, December 31, 2013 $ 8,212 $ 3,536 $ 2,450 $ 1,763 $ 66 $ 207 $ 16,234 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 December 31, 2015 and 2014. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance. December 31, 2015 Commercial, Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 239 $ 0 $ 39 $ 0 $ 0 $ 0 $ 278 Collectively evaluated for impairment 4,909 3,580 2,436 2,371 90 161 13,547 Acquired with deteriorated credit quality 0 0 0 0 0 0 0 Modified in a troubled debt restructuring 887 2,025 0 0 0 0 2,912 Total ending allowance balance $ 6,035 $ 5,605 $ 2,475 $ 2,371 $ 90 $ 161 $ 16,737 Loans: Individually evaluated for impairment $ 1,196 $ 393 $ 248 $ 0 $ 0 $ 0 $ 1,837 Collectively evaluated for impairment 469,128 437,200 573,977 78,345 5,201 1,040 1,564,891 Acquired with deteriorated credit quality 0 685 0 0 0 0 685 Modified in a troubled debt restructuring 5,040 9,901 0 0 0 0 14,941 Total ending loans balance $ 475,364 $ 448,179 $ 574,225 $ 78,345 $ 5,201 $ 1,040 $ 1,582,354 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 December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014, and 2013: December 31, 2015 Unpaid Balance Recorded Investment Allowance Losses With an allowance recorded: Commercial, industrial, and agricultural $ 3,448 $ 3,448 $ 1,126 Commercial mortgage 5,985 5,343 2,025 Residential real estate 351 248 39 With no related allowance recorded: Commercial, industrial, and agricultural 3,716 2,788 0 Commercial mortgage 5,001 4,951 0 Residential real estate 0 0 0 Total $ 18,501 $ 16,778 $ 3,190 December 31, 2014 Unpaid Balance Recorded Investment Allowance Losses 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 The unpaid principal balance of impaired loans includes the Corporation’s recorded investment in the loan and amounts that have been charged off. Year Ended December 31, 2015 Average Recorded Investment Interest Income Recognized Cash Basis Interest Recognized With an allowance recorded: Commercial, industrial, and agricultural $ 5,667 $ 44 $ 44 Commercial mortgage 8,154 0 0 Residential real estate 370 21 21 With no related allowance recorded: Commercial, industrial, and agricultural 1,831 14 14 Commercial mortgage 4,806 0 0 Residential real estate 103 6 6 Total $ 20,931 $ 85 $ 85 Year Ended December 31, 2014 Average Recorded Investment Interest Income Recognized Cash Basis Interest Recognized With an allowance recorded: Commercial, industrial, and agricultural $ 4,621 $ 73 $ 73 Commercial mortgage 6,374 85 85 Residential real estate 240 46 46 With no related allowance recorded: Commercial, industrial, and agricultural 1,972 31 31 Commercial mortgage 5,868 78 78 Residential real estate 82 16 16 Total $ 19,157 $ 329 $ 329 Year Ended December 31, 2013 Average Recorded Investment Interest Income Recognized Cash Basis Interest Recognized With an allowance recorded: Commercial, industrial, and agricultural $ 1,989 $ 7 $ 7 Commercial mortgage 6,572 3 3 Residential real estate 101 7 7 With no related allowance recorded: Commercial, industrial, and agricultural 2,124 0 0 Commercial mortgage 11,885 0 0 Residential real estate 86 0 0 Total $ 22,757 $ 17 $ 17 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 December 31, 2015 and 2014: December 31, 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 $ 3,560 $ 3 $ 796 $ 0 Commercial mortgages 3,651 0 4,323 0 Residential real estate 3,671 87 3,026 213 Consumer 1,277 15 1,045 0 Credit cards 0 0 0 0 Total $ 12,159 $ 105 $ 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. The following table presents the aging of the recorded investment in past due loans as of December 31, 2015 and 2014 by class of loans. December 31, 2015 30-59 Days 60-89 Days Greater Than Past Due Total Loans Not Total Commercial, industrial, and agricultural $ 131 $ 622 $ 698 $ 1,451 $ 473,913 $ 475,364 Commercial mortgages 7 343 3,651 4,001 444,178 448,179 Residential real estate 2,834 378 3,001 6,213 568,012 574,225 Consumer 216 179 1,292 1,687 76,658 78,345 Credit cards 0 0 0 0 5,201 5,201 Overdrafts 0 0 0 0 1,040 1,040 Total $ 3,188 $ 1,522 $ 8,642 $ 13,352 $ 1,569,002 $ 1,582,354 December 31, 2014 30-59 Days 60-89 Days Greater Than Past Due Total Loans Not 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 During the years ended December 31, 2015 and 2014, the terms of certain loans were 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 December 31, 2015 and December 31, 2014. December 31, 2015 December 31, 2014 Number of Loans Loan Balance Specific Reserve Number of Loans Loan Balance Specific Reserve Commercial, industrial, and agricultural 8 $ 5,040 $ 887 7 $ 4,076 $ 179 Commercial mortgages 8 9,901 2,025 9 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 16 $ 14,941 $ 2,912 16 $ 18,658 $ 2,670 The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2015, 2014 and 2013: Year Ended December 31, 2015 Number of Loans Pre-Modification Post-Modification Commercial, industrial, and agricultural 1 $ 1,327 $ 1,327 Commercial mortgages 0 0 0 Residential real estate 0 0 0 Consumer 0 0 0 Credit cards 0 0 0 Total 1 $ 1,327 $ 1,327 Year Ended December 31, 2014 Number of Loans Pre-Modification Post-Modification Commercial, industrial, and agricultural 1 $ 2,315 $ 2,315 Commercial mortgages 3 4,879 4,879 Residential real estate 0 0 0 Consumer 0 0 0 Credit cards 0 0 0 Total 4 $ 7,194 $ 7,194 Year Ended December 31, 2013 Number of Loans Pre-Modification Post-Modification Commercial, industrial, and agricultural 1 $ 132 $ 132 Commercial mortgages 2 3,615 3,549 Residential real estate 0 0 0 Consumer 0 0 0 Credit cards 0 0 0 Total 3 $ 3,747 $ 3,681 The troubled debt restructurings described above increased the allowance for loan losses by $0 and $319 during the years ended December 31, 2015 and 2014, respectively. Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 4-15 A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. Except as discussed below, all loans modified in troubled debt restructurings are performing in accordance with their modified terms as of December 31, 2015 and 2014 and no principal balances were forgiven in connection with the loan restructurings. During the year ended December 31, 2015 one impaired commercial industrial loan having a balance of $1,327 was modified in troubled debt restructurings. The Corporation did not record any additional provision for loan losses for this loan during the year ended December 31, 2015. During the year ended December 31, 2014, three impaired commercial mortgage loans having combined balances of $4,879 were modified in troubled debt restructurings. The Corporation recorded additional provision for loan losses of $271 for these loans during the year ended December 31, 2014. In addition, an impaired commercial industrial loan having a balance of $2,315 was modified in a troubled debt restructuring. The Corporation recorded an additional provision for loan losses of $48 for this loan during the year ended December 31, 2014. During the year ended December 31, 2013, the Corporation recorded a partial charge-off of $974 for a commercial mortgage loan with a balance of $1,660 that had defaulted under its restructured terms in 2012 and was placed on nonaccrual status. The Corporation recorded an additional provision for loan losses of $262 on this loan during the year ended December 31, 2013. A commercial mortgage loan with a balance of $1,086 defaulted under its restructured terms in 2013 and was placed on nonaccrual status. The Corporation recorded an additional provision for loan losses of $615 during the year ended December 31, 2013. In addition, an impaired commercial mortgage loan that was placed on non-accrual status in 2013 and having a balance of $3,269 was modified in a troubled debt restructuring. The Corporation recorded an additional provision for loan losses of $514 for this loan during the year ended December 31, 2013. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt 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, 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. December 31, 2015 Pass Special Substandard Doubtful Total Commercial, industrial, and agricultural $ 447,449 $ 4,749 $ 22,943 $ 223 $ 475,364 Commercial mortgages 426,870 1,735 19,148 426 448,179 Total $ 874,319 $ 6,484 $ 42,091 $ 649 $ 923,543 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 December 31, 2015 and December 31, 2014: December 31, 2015 December 31, 2014 Residential Consumer Credit Residential Consumer Credit Performing $ 570,467 $ 77,053 $ 5,201 $ 499,078 $ 68,603 $ 5,233 Non-performing 3,758 1,292 0 3,239 1,045 0 Total $ 574,225 $ 78,345 $ 5,201 $ 502,317 $ 69,648 $ 5,233 The Corporation’s portfolio of residential real estate and consumer loans maintained within Holiday Financial Services Corporation (“Holiday”), 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, are considered to be subprime loans. Holiday’s loan portfolio, included in consumer and residential loans above, is summarized as follows at December 31, 2015 and 2014: 2015 2014 Consumer $ 30,001 $ 27,916 Residential real estate 1,263 1,270 Less: unearned discount (4,556 ) (4,307 ) Total $ 26,708 $ 24,879 |