Loans | 5. Loans Total net loans at December 31, 2017 and 2016 are summarized as follows: 2017 2016 Commercial, industrial, and agricultural $ 749,138 $ 567,800 Commercial mortgages 600,065 574,826 Residential real estate 713,347 652,883 Consumer 80,193 74,816 Credit cards 6,753 6,046 Overdrafts 352 595 Less: unearned discount (3,889 ) (3,430 ) allowance for loan losses (19,693 ) (16,330 ) Loans, net $ 2,126,266 $ 1,857,206 At December 31, 2017 and 2016 net unamortized loan (fees) costs of ($2,574) 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 northwest Pennsylvania, central and northeast 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 35% and 30% of the Corporation’s total loan portfolio at December 31, 2017 and 2016, respectively. Commercial mortgage loans comprised 28% and 31% of the Corporation’s total loan portfolio at December 31, 2017 and 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 33% and 35% of the Corporation’s total loan portfolio at December 31, 2017 and 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 December 31, 2017 and 2016. Terms and collateral requirements vary depending on the size and nature of the loan. Transactions in the allowance for loan losses for the year ended December 31, 2017 were as follows: Commercial, Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses, January 1, 2017 $ 5,428 $ 6,753 $ 1,653 $ 2,215 $ 93 $ 188 $ 16,330 Charge-offs (544 ) (116 ) (466 ) (2,555 ) (144 ) (252 ) (4,077 ) Recoveries 235 197 78 161 27 87 785 Provision for loan losses 1,041 2,173 768 2,358 144 171 6,655 Allowance for loan losses, December 31, 2017 $ 6,160 $ 9,007 $ 2,033 $ 2,179 $ 120 $ 194 $ 19,693 Transactions in the allowance for loan losses for the year ended December 31, 2016 were as follows: Commercial, Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses, January 1, 2016 $ 6,035 $ 5,605 $ 2,475 $ 2,371 $ 90 $ 161 $ 16,737 Charge-offs (601 ) (201 ) (499 ) (3,324 ) (96 ) (240 ) (4,961 ) Recoveries 89 8 93 122 22 71 405 Provision for loan losses (95 ) 1,341 (416 ) 3,046 77 196 4,149 Allowance for loan losses, December 31, 2016 $ 5,428 $ 6,753 $ 1,653 $ 2,215 $ 93 $ 188 $ 16,330 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 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, 2017 and 2016. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance. December 31, 2017 Commercial, Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 47 $ 0 $ 0 $ 0 $ 0 $ 0 $ 47 Collectively evaluated for impairment 5,868 3,563 2,033 2,179 120 194 13,957 Acquired with deteriorated credit quality 0 0 0 0 0 0 0 Modified in a troubled debt restructuring 245 5,444 0 0 0 0 5,689 Total ending allowance balance $ 6,160 $ 9,007 $ 2,033 $ 2,179 $ 120 $ 194 $ 19,693 Loans: Individually evaluated for impairment $ 1,187 $ 51 $ 0 $ 0 $ 0 $ 0 $ 1,238 Collectively evaluated for impairment 742,738 586,845 713,347 80,193 6,753 352 2,130,228 Acquired with deteriorated credit quality 0 1,079 0 0 0 0 1,079 Modified in a troubled debt restructuring 5,213 12,090 0 0 0 0 17,303 Total ending loans balance $ 749,138 $ 600,065 $ 713,347 $ 80,193 $ 6,753 $ 352 $ 2,149,848 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 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, 2017 and 2016 and for the years ended December 31, 2017, 2016, and 2015: December 31, 2017 Unpaid Balance Recorded Investment Allowance Losses With an allowance recorded: Commercial, industrial, and agricultural $ 1,915 $ 1,915 $ 292 Commercial mortgage 9,940 9,731 5,444 Residential real estate 0 0 0 With no related allowance recorded: Commercial, industrial, and agricultural 5,264 4,485 0 Commercial mortgage 3,211 2,410 0 Residential real estate 0 0 0 Total $ 20,330 $ 18,541 $ 5,736 December 31, 2016 Unpaid Balance Recorded Investment Allowance Losses 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. Year Ended December 31, 2017 Average Interest Cash Basis With an allowance recorded: Commercial, industrial, and agricultural $ 1,513 $ 97 $ 97 Commercial mortgage 11,944 327 327 Residential real estate 0 0 0 With no related allowance recorded: Commercial, industrial, and agricultural 2,438 114 114 Commercial mortgage 2,474 122 122 Residential real estate 0 0 0 Total $ 18,369 $ 660 $ 660 Year Ended December 31, 2016 Average Interest Cash Basis With an allowance recorded: Commercial, industrial, and agricultural $ 2,616 $ 2 $ 2 Commercial mortgage 8,138 0 0 Residential real estate 50 6 6 With no related allowance recorded: Commercial, industrial, and agricultural 2,290 0 0 Commercial mortgage 2,773 0 0 Residential real estate 0 0 0 Total $ 15,867 $ 8 $ 8 Year Ended December 31, 2015 Average Interest Cash Basis 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 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, 2017 and 2016: December 31, 2017 December 31, 2016 Nonaccrual Past Due Over 90 Days Still on Accrual Nonaccrual Past Due Over 90 Days Still on Accrual Commercial, industrial, and agricultural $ 1,869 $ 78 $ 2,734 $ 0 Commercial mortgages 11,065 0 5,996 0 Residential real estate 5,470 338 5,600 0 Consumer 828 17 999 0 Credit cards 0 44 0 10 Total $ 19,232 $ 477 $ 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 December 31, 2017 and 2016 by class of loans. December 31, 2017 30-59 Days 60-89 Days Greater Than Total Loans Not Total Commercial, industrial, and agricultural $ 2,745 $ 646 $ 748 $ 4,139 $ 744,999 $ 749,138 Commercial mortgages 233 0 292 525 599,540 600,065 Residential real estate 2,290 1,494 4,655 8,439 704,908 713,347 Consumer 454 307 812 1,573 78,620 80,193 Credit cards 31 10 44 85 6,668 6,753 Overdrafts 0 0 0 0 352 352 Total $ 5,753 $ 2,457 $ 6,551 $ 14,761 $ 2,135,087 $ 2,149,848 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 During the years ended December 31, 2017 and 2016, 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, 2017 and December 31, 2016. December 31, 2017 December 31, 2016 Number of Loans Loan Balance Specific Reserve Number of Loans Loan Balance Specific Reserve Commercial, industrial, and agricultural 10 $ 5,213 $ 245 7 $ 2,640 $ 125 Commercial mortgages 9 12,090 5,444 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 19 $ 17,303 $ 5,689 15 $ 11,831 $ 2,339 The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2017, 2016, and 2015: Year Ended December 31, 2017 Number of Loans Pre-Modification Post-Modification Commercial, industrial, and agricultural 4 $ 2,750 $ 2,750 Commercial mortgages 2 6,421 6,421 Residential real estate 0 0 0 Consumer 0 0 0 Credit cards 0 0 0 Total 6 $ 9,171 $ 9,171 Year Ended December 31, 2016 Number of Loans Pre-Modification Post-Modification Commercial, industrial, and agricultural 1 $ 109 $ 109 Commercial mortgages 0 0 0 Residential real estate 0 0 0 Consumer 0 0 0 Credit cards 0 0 0 Total 1 $ 109 $ 109 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 The troubled debt restructurings described above increased the allowance for loan losses by $4,024, $0 and $0 during the years ended December 31, 2017, 2016, and 2015, respectively. Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 4-15 years. Modifications involving an extension of the maturity date were for periods ranging from 4-18 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, 2017 and 2016 and no principal balances were forgiven in connection with the loan restructurings. During the year ended December 31, 2017 four impaired commercial industrial loans totaling $2,750 were modified in troubled debt restructurings. The Corporation recorded an additional provision for loan losses of $129 and there were no chargeoffs for these loans during the year ended December 31, 2017. During the year ended December 31, 2017 two impaired commercial real estate loans totaling $6,421 were modified in troubled debt restructurings. The Corporation recorded an additional provision for loan losses of $3,895 and there were no chargeoffs for these loans during the year ended December 31, 2017. During the year ended December 31, 2016 one impaired commercial industrial loan having a balance of $109 was modified in troubled debt restructurings. The Corporation did not record any additional provision for loan losses and there were no chargeoffs for this loan during the year ended December 31, 2016. 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 and there were no chargeoffs for this loan during the year ended December 31, 2015. 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, nonperforming 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, 2017 Pass Special Substandard Doubtful Total Commercial, industrial, and agricultural $ 713,102 $ 16,726 $ 19,310 $ 0 $ 749,138 Commercial mortgages 581,631 4,419 14,015 0 600,065 Total $ 1,294,733 $ 21,145 $ 33,325 $ 0 $ 1,349,203 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 performance status of the loan, which was previously presented, and by payment activity. Nonperforming loans include loans on nonaccrual status and loans past due over 90 days and still accruing interest. The following table presents the recorded investment in residential, consumer, and credit card loans based on performance status as of December 31, 2017 and December 31, 2016: December 31, 2017 December 31, 2016 Residential Consumer Credit Residential Consumer Credit Performing $ 707,539 $ 79,348 $ 6,709 $ 647,283 $ 73,817 $ 6,036 Nonperforming 5,808 845 44 5,600 999 10 Total $ 713,347 $ 80,193 $ 6,753 $ 652,883 $ 74,816 $ 6,046 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, 2017 and 2016: 2017 2016 Consumer $ 23,428 $ 24,026 Residential real estate 0 1,209 Less: unearned discount (3,889 ) (3,430 ) Total $ 19,539 $ 21,805 |