Loans | 5. LOANS Total net loans at March 31, 2017 and December 31, 2016 are summarized as follows: March 31, December 31, Commercial, industrial, and agricultural $ 587,738 $ 567,800 Commercial mortgages 583,653 574,826 Residential real estate 659,930 652,883 Consumer 74,187 74,816 Credit cards 6,076 6,046 Overdrafts 591 595 Less: unearned discount (3,224 ) (3,430 ) allowance for loan losses (16,546 ) (16,330 ) Loans, net $ 1,892,405 $ 1,857,206 At March 31, 2017 and December 31, 2016, net unamortized loan (fees) costs of $(1,753) and $(1,507), 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, Central and Northeastern 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 31% and 30% of the Corporation’s total loan portfolio at March 31, 2017 and December 31, 2016, respectively. Commercial mortgage loans comprised 31% and 31% of the Corporation’s total loan portfolio at March 31, 2017 and December 31, 2016, 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 35% and 35% of the Corporation’s total loan portfolio at March 31, 2017 and December 31, 2016, 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 represent less than 10% of the total loan portfolio at both March 31, 2017 and December 31, 2016. 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 March 31, 2017 were as follows: Commercial, Residential Industrial, and Commercial Real Credit Agricultural Mortgages Estate Consumer Cards Overdrafts Total Allowance for loan losses, January 1, 2017 $ 5,428 $ 6,753 $ 1,653 $ 2,215 $ 93 $ 188 $ 16,330 Charge-offs (1 ) 0 (68 ) (735 ) (58 ) (69 ) (931 ) Recoveries 12 2 71 2 11 33 131 Provision (benefit) for loan losses (654 ) 602 366 607 59 36 1,016 Allowance for loan losses, March 31, 2017 $ 4,785 $ 7,357 $ 2,022 $ 2,089 $ 105 $ 188 $ 16,546 Transactions in the allowance for loan losses for the three months ended March 31, 2016 were as follows: Commercial, Residential Industrial, and Commercial Real Credit Agricultural Mortgages Estate Consumer Cards Overdrafts Total Allowance for loan losses, January 1, 2016 $ 6,035 $ 5,605 $ 2,475 $ 2,371 $ 90 $ 161 $ 16,737 Charge-offs (271 ) 0 (25 ) (987 ) (9 ) (51 ) (1,343 ) Recoveries 8 5 59 44 12 20 148 Provision (benefit) for loan losses (145) 434 65 846 (12 ) 8 1,196 Allowance for loan losses, March 31, 2016 $ 5,627 $ 6,044 $ 2,574 $ 2,274 $ 81 $ 138 $ 16,738 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 March 31, 2017 and December 31, 2016. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance. Commercial, Residential Industrial, and Commercial Real Credit March 31, 2017 Agricultural Mortgages Estate Consumer Cards Overdrafts Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 189 $ 1,548 $ 0 $ 0 $ 0 $ 0 $ 1,737 Collectively evaluated for impairment 4,473 3,762 2,022 2,089 105 188 12,639 Acquired with deteriorated credit quality 0 0 0 0 0 0 0 Modified in a troubled debt restructuring 123 2,047 0 0 0 0 2,170 Total ending allowance balance $ 4,785 $ 7,357 $ 2,022 $ 2,089 $ 105 $ 188 $ 16,546 Loans: Individually evaluated for impairment $ 686 $ 6,171 $ 0 $ 0 $ 0 $ 0 $ 6,857 Collectively evaluated for impairment 584,252 566,967 659,930 74,187 6,076 591 1,892,003 Acquired with deteriorated credit quality 205 1,514 0 0 0 0 1,719 Modified in a troubled debt restructuring 2,595 9,001 0 0 0 0 11,596 Total ending loans balance $ 587,738 $ 583,653 $ 659,930 $ 74,187 $ 6,076 $ 591 $ 1,912,175 Commercial, Residential Industrial, and Commercial Real Credit December 31, 2016 Agricultural Mortgages Estate Consumer Cards Overdrafts Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 188 $ 996 $ 0 $ 0 $ 0 $ 0 $ 1,184 Collectively evaluated for impairment 5,115 3,543 1,653 2,215 93 188 12,807 Acquired with deteriorated credit quality 0 0 0 0 0 0 0 Modified in a troubled debt restructuring 125 2,214 0 0 0 0 2,339 Total ending allowance balance $ 5,428 $ 6,753 $ 1,653 $ 2,215 $ 93 $ 188 $ 16,330 Loans: Individually evaluated for impairment $ 775 $ 6,176 $ 0 $ 0 $ 0 $ 0 $ 6,951 Collectively evaluated for impairment 564,180 557,932 652,883 74,816 6,046 595 1,856,452 Acquired with deteriorated credit quality 205 1,527 0 0 0 0 1,732 Modified in a troubled debt restructuring 2,640 9,191 0 0 0 0 11,831 Total ending loans balance $ 567,800 $ 574,826 $ 652,883 $ 74,816 $ 6,046 $ 595 $ 1,876,966 The following tables present information related to loans individually evaluated for impairment, including loans modified in troubled debt restructurings, by portfolio segment as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016: March 31, 2017 Unpaid Principal Recorded Allowance for Loan Balance Investment Losses Allocated With an allowance recorded: Commercial, industrial, and agricultural $ 1,639 $ 1,628 $ 312 Commercial mortgage 16,140 15,172 3,595 Residential real estate 0 0 0 With no related allowance recorded: Commercial, industrial, and agricultural 2,534 1,653 0 Commercial mortgage 0 0 0 Residential real estate 0 0 0 Total $ 20,313 $ 18,453 $ 3,907 December 31, 2016 Unpaid Principal Recorded Allowance for Loan Balance Investment Losses Allocated With an allowance recorded: Commercial, industrial, and agricultural $ 1,644 $ 1,644 $ 313 Commercial mortgage 16,200 15,367 3,210 Residential real estate 0 0 0 With no related allowance recorded: Commercial, industrial, and agricultural 2,669 1,771 0 Commercial mortgage 0 0 0 Residential real estate 0 0 0 Total $ 20,513 $ 18,782 $ 3,523 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 March 31, 2017 Average Interest Cash Basis Recorded Income Interest Investment Recognized Recognized With an allowance recorded: Commercial, industrial, and agricultural $ 1,636 $ 18 $ 18 Commercial mortgage 15,270 145 145 Residential real estate 0 0 0 With no related allowance recorded: Commercial, industrial, and agricultural 1,712 16 16 Commercial mortgage 0 0 0 Residential real estate 0 0 0 Total $ 18,618 $ 179 $ 179 Three Months Ended March 31, 2016 Average Interest Cash Basis Recorded Income Interest Investment Recognized Recognized With an allowance recorded: Commercial, industrial, and agricultural $ 3,379 $ 0 $ 0 Commercial mortgage 5,408 0 0 Residential real estate 124 5 5 With no related allowance recorded: Commercial, industrial, and agricultural 2,691 0 0 Commercial mortgage 4,720 0 0 Residential real estate 0 1 1 Total $ 16,322 $ 6 $ 6 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 March 31, 2017 and December 31, 2016: March 31, 2017 December 31, 2016 Nonaccrual Past Due Nonaccrual Past Due Commercial, industrial, and agricultural $ 2,578 $ 420 $ 2,734 $ 0 Commercial mortgages 11,254 0 5,996 0 Residential real estate 5,551 255 5,600 0 Consumer 579 13 999 0 Credit cards 0 10 0 10 Total $ 19,962 $ 698 $ 15,329 $ 10 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 March 31, 2017 and December 31, 2016 by class of loans. Greater Than 30-59 Days 60-89 Days 89 Days Total Loans Not March 31, 2017 Past Due Past Due Past Due Past Due Past Due Total Commercial, industrial, and agricultural $ 736 $ 1,703 $ 1,599 $ 4,038 $ 583,700 $ 587,738 Commercial mortgages 299 0 1,050 1,349 582,304 583,653 Residential real estate 2,148 996 4,242 7,386 652,544 659,930 Consumer 612 314 567 1,493 72,694 74,187 Credit cards 32 22 10 64 6,012 6,076 Overdrafts 0 0 0 0 591 591 Total $ 3,827 $ 3,035 $ 7,468 $ 14,330 $ 1,897,845 $ 1,912,175 Greater Than 30-59 Days 60-89 Days 89 Days Total Loans Not December 31, 2016 Past Due Past Due Past Due Past Due Past Due Total Commercial, industrial, and agricultural $ 1,558 $ 299 $ 1,294 $ 3,151 $ 564,649 $ 567,800 Commercial mortgages 559 0 1,516 2,075 572,751 574,826 Residential real estate 2,155 737 3,710 6,602 646,281 652,883 Consumer 648 890 974 2,512 72,304 74,816 Credit cards 105 0 10 115 5,931 6,046 Overdrafts 0 0 0 0 595 595 Total $ 5,025 $ 1,926 $ 7,504 $ 14,455 $ 1,862,511 $ 1,876,966 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 March 31, 2017 and December 31, 2016. March 31, 2017 December 31, 2016 Number of Loan Specific Number of Loan Specific Commercial, industrial, and agricultural 7 $ 2,595 $ 123 7 $ 2,640 $ 125 Commercial mortgages 8 9,001 2,047 8 9,191 2,214 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 $ 11,596 $ 2,170 15 $ 11,831 $ 2,339 There were no loans modified as troubled debt restructurings during the three months ended March 31, 2017 or March 31, 2016. 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 March 31, 2017 and December 31, 2016 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. March 31, 2017 Pass Special Substandard Doubtful Total Commercial, industrial, and agricultural $ 553,488 $ 13,816 $ 20,434 $ 0 $ 587,738 Commercial mortgages 561,394 3,050 19,209 0 583,653 Total $ 1,114,882 $ 16,866 $ 39,643 $ 0 $ 1,171,391 December 31, 2016 Pass Special Substandard Doubtful Total Commercial, industrial, and agricultural $ 531,320 $ 14,638 $ 21,831 $ 11 $ 567,800 Commercial mortgages 551,474 1,809 21,543 0 574,826 Total $ 1,082,794 $ 16,447 $ 43,374 $ 11 $ 1,142,626 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 March 31, 2017 and December 31, 2016: March 31, 2017 December 31, 2016 Residential Credit Residential Credit Real Estate Consumer Cards Real Estate Consumer Cards Performing $ 654,124 $ 73,595 $ 6,066 $ 647,283 $ 73,817 $ 6,036 Nonperforming 5,806 592 10 5,600 999 10 Total $ 659,930 $ 74,187 $ 6,076 $ 652,883 $ 74,816 $ 6,046 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 March 31, 2017 and December 31, 2016: March 31, December 31, 2017 2016 Consumer $ 21,385 $ 24,026 Residential real estate 1,165 1,209 Less: unearned discount (3,224 ) (3,430 ) Total $ 19,326 $ 21,805 |