Loans | 5. LOANS Total net loans at September 30, 2017 and December 31, 2016 are summarized as follows: September 30, December 31, Commercial, industrial, and agricultural $ 663,944 $ 567,800 Commercial mortgages 656,130 574,826 Residential real estate 697,059 652,883 Consumer 78,264 74,816 Credit cards 6,249 6,046 Overdrafts 549 595 Less: unearned discount (3,621 ) (3,430 ) allowance for loan losses (17,849 ) (16,330 ) Loans, net $ 2,080,725 $ 1,857,206 At September 30, 2017 and December 31, 2016, net unamortized loan (fees) costs of $(2,744) 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 Commercial, industrial, and agricultural loans comprised 32% and 30% of the Corporation’s total loan portfolio at September 30, 2017 and December 31, 2016, respectively. Commercial mortgage loans comprised 31% and 31% of the Corporation’s total loan portfolio at September 30, 2017 and December 31, 2016, respectively. Management assigns a risk rating to all commercial loans at loan origination. The loan-to-value loan-to-value Residential real estate loans comprised 33% and 35% of the Corporation’s total loan portfolio at September 30, 2017 and December 31, 2016, respectively. The loan-to-value loan-to-value Transactions in the allowance for loan losses for the three months ended September 30, 2017 were as follows: Commercial, Residential Industrial, and Commercial Real Credit Agricultural Mortgages Estate Consumer Cards Overdrafts Total Allowance for loan losses, July 1, 2017 $ 5,563 $ 7,641 $ 1,670 $ 2,068 $ 142 $ 185 $ 17,269 Charge-offs (20 ) (22 ) (130 ) (703 ) (39 ) (63 ) (977 ) Recoveries 36 3 0 96 8 14 157 Provision (benefit) for loan losses (223 ) 472 468 627 0 56 1,400 Allowance for loan losses, September 30, 2017 $ 5,356 $ 8,094 $ 2,008 $ 2,088 $ 111 $ 192 $ 17,849 Transactions in the allowance for loan losses for the nine months ended September 30, 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 (50 ) (22 ) (328 ) (1,969 ) (111 ) (192 ) (2,672 ) Recoveries 167 197 73 110 23 71 641 Provision (benefit) for loan losses (189 ) 1,166 610 1,732 106 125 3,550 Allowance for loan losses, September 30, 2017 $ 5,356 $ 8,094 $ 2,008 $ 2,088 $ 111 $ 192 $ 17,849 Transactions in the allowance for loan losses for the three months ended September 30, 2016 were as follows: Commercial, Residential Industrial, and Commercial Real Credit Agricultural Mortgages Estate Consumer Cards Overdrafts Total Allowance for loan losses, July 1, 2016 $ 5,218 $ 6,207 $ 2,299 $ 2,066 $ 50 $ 148 $ 15,988 Charge-offs (86 ) 0 (95 ) (709 ) (17 ) (86 ) (993 ) Recoveries 37 2 10 20 3 14 86 Provision (benefit) for loan losses (24 ) 27 (65 ) 545 36 103 622 Allowance for loan losses, September 30, 2016 $ 5,145 $ 6,236 $ 2,149 $ 1,922 $ 72 $ 179 $ 15,703 Transactions in the allowance for loan losses for the nine months ended September 30, 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 (519 ) (20 ) (244 ) (2,397 ) (54 ) (167 ) (3,401 ) Recoveries 84 7 72 94 18 54 329 Provision (benefit) for loan losses (455 ) 644 (154 ) 1,854 18 131 2,038 Allowance for loan losses, September 30, 2016 $ 5,145 $ 6,236 $ 2,149 $ 1,922 $ 72 $ 179 $ 15,703 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, 2017 and December 31, 2016. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance. September 30, 2017 Commercial, Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Collectively evaluated for impairment 5,236 4,186 2,008 2,088 111 192 13,821 Acquired with deteriorated credit quality 0 0 0 0 0 0 0 Modified in a troubled debt restructuring 120 3,908 0 0 0 0 4,028 Total ending allowance balance $ 5,356 $ 8,094 $ 2,008 $ 2,088 $ 111 $ 192 $ 17,849 Loans: Individually evaluated for impairment $ 602 $ 51 $ 0 $ 0 $ 0 $ 0 $ 653 Collectively evaluated for impairment 660,461 639,965 697,059 78,264 6,249 549 2,082,547 Acquired with deteriorated credit quality 0 1,487 0 0 0 0 1,487 Modified in a troubled debt restructuring 2,881 14,627 0 0 0 0 17,508 Total ending loans balance $ 663,944 $ 656,130 $ 697,059 $ 78,264 $ 6,249 $ 549 $ 2,102,195 December 31, 2016 Commercial, Commercial Residential Consumer Credit 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 Commercial and commercial real estate loans greater than $250,000 are individually evaluated for impairment. 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, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016: September 30, 2017 Unpaid Principal Recorded Allowance for Loan With an allowance recorded: Commercial, industrial, and agricultural $ 1,212 $ 1,213 $ 120 Commercial mortgage 9,995 9,611 3,908 Residential real estate 0 0 0 With no related allowance recorded: Commercial, industrial, and agricultural 3,089 2,270 0 Commercial mortgage 5,836 5,067 0 Residential real estate 0 0 0 Total $ 20,132 $ 18,161 $ 4,028 December 31, 2016 Unpaid Principal Recorded Allowance for Loan 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 September 30, 2017 Three Months Ended September 30, 2016 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 $ 1,190 $ 20 $ 20 $ 2,340 $ 34 $ 34 Commercial mortgage 9,724 77 77 7,253 57 57 Residential real estate 0 0 0 0 0 0 With no related allowance recorded: Commercial, industrial, and agricultural 2,142 23 23 2,148 24 24 Commercial mortgage 4,981 33 33 2,214 17 17 Residential real estate 0 0 0 0 0 0 Total $ 18,037 $ 153 $ 153 $ 13,955 $ 132 $ 132 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016 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 $ 1,413 $ 56 $ 56 $ 2,859 $ 36 $ 36 Commercial mortgage 12,497 293 293 6,331 61 61 Residential real estate 0 0 0 83 6 6 With no related allowance recorded: Commercial, industrial, and agricultural 1,927 73 73 2,420 26 26 Commercial mortgage 2,490 100 100 3,467 20 20 Residential real estate 0 0 0 0 0 0 Total $ 18,327 $ 522 $ 522 $ 15,160 $ 149 $ 149 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, 2017 and December 31, 2016: September 30, 2017 December 31, 2016 Nonaccrual Past Due Nonaccrual Past Due Commercial, industrial, and agricultural $ 1,885 $ 408 $ 2,734 $ 0 Commercial mortgages 11,526 0 5,996 0 Residential real estate 5,663 163 5,600 0 Consumer 712 0 999 0 Credit cards 0 21 0 10 Total $ 19,786 $ 592 $ 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 September 30, 2017 and December 31, 2016 by class of loans. September 30, 2017 30-59 Days 60-89 Days Greater Than Total Loans Not Total Commercial, industrial, and agricultural $ 1,827 $ 486 $ 947 $ 3,260 $ 660,684 $ 663,944 Commercial mortgages 0 40 704 744 655,386 656,130 Residential real estate 1,688 1,932 4,647 8,267 688,792 697,059 Consumer 484 305 677 1,466 76,798 78,264 Credit cards 63 36 21 120 6,129 6,249 Overdrafts 0 0 0 0 549 549 Total $ 4,062 $ 2,799 $ 6,996 $ 13,857 $ 2,088,338 $ 2,102,195 December 31, 2016 30-59 Days 60-89 Days Greater Than Total Loans Not 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 September 30, 2017 and December 31, 2016. September 30, 2017 December 31, 2016 Number of Loan Specific Number of Loan Specific Commercial, industrial, and agricultural 8 $ 2,881 $ 120 7 $ 2,640 $ 125 Commercial mortgages 10 14,627 3,908 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 18 $ 17,508 $ 4,028 15 $ 11,831 $ 2,339 The following tables present loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2017. There were no loans modified as a troubled debt restructuring during the nine months ended September 30, 2016. There were four loans modified as a troubled debt restructuring during the three months ended September 30, 2017, and no loans modified as troubled debt restructurings during the three months ended September 30, 2016. Nine Months Ended September 30, 2017 Number of Pre-Modification Post-Modification Commercial, industrial, and agricultural 2 $ 324 $ 379 Commercial mortgages 2 6,227 6,276 Residential real estate 0 0 0 Consumer 0 0 0 Credit cards 0 0 0 Total 4 $ 6,551 $ 6,655 The troubled debt restructurings described above increased the allowance for loan losses by $169 and $0 during the three months ended September 30, 2017 and 2016 and $1,324 and $0 during the nine months ended September 30, 2017 and 2016. A troubled debt restructured loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. 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 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. September 30, 2017 Pass Special Substandard Doubtful Total Commercial, industrial, and agricultural $ 631,550 $ 9,312 $ 23,082 $ 0 $ 663,944 Commercial mortgages 636,522 3,129 16,479 0 656,130 Total $ 1,268,072 $ 12,441 $ 39,561 $ 0 $ 1,320,074 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 September 30, 2017 and December 31, 2016: September 30, 2017 December 31, 2016 Residential Credit Residential Credit Real Estate Consumer Cards Real Estate Consumer Cards Performing $ 691,233 $ 77,552 $ 6,228 $ 647,283 $ 73,817 $ 6,036 Nonperforming 5,826 712 21 5,600 999 10 Total $ 697,059 $ 78,264 $ 6,249 $ 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 September 30, 2017 and December 31, 2016: September 30, December 31, 2017 2016 Consumer $ 22,393 $ 24,026 Residential real estate 0 1,209 Less: unearned discount (3,621 ) (3,430 ) Total $ 18,772 $ 21,805 |