Loans | 5. LOANS Total net loans at March 31, 2018 and December 31, 2017 are summarized as follows: March 31, December 31, Commercial, industrial, and agricultural $ 773,473 $ 749,138 Commercial mortgages 694,517 600,065 Residential real estate 725,683 713,347 Consumer 77,981 80,193 Credit cards 6,965 6,753 Overdrafts 1,134 352 Less: unearned discount (3,629 ) (3,889 ) allowance for loan losses (20,756 ) (19,693 ) Loans, net $ 2,255,368 $ 2,126,266 At March 31, 2018 and December 31, 2017, net unamortized loan fees of $3,211 and $2,574, 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 34% and 35% of the Corporation’s total loan portfolio at March 31, 2018 and December 31, 2017, respectively. Commercial mortgage loans comprised 31% and 28% of the Corporation’s total loan portfolio at March 31, 2018 and December 31, 2017, 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 32% and 33% of the Corporation’s total loan portfolio at March 31, 2018 and December 31, 2017, respectively. The loan-to-value loan-to-value Transactions in the allowance for loan losses for the three months ended March 31, 2018 were as follows: Commercial, Residential Industrial, and Commercial Real Credit Agricultural Mortgages Estate Consumer Cards Overdrafts Total Allowance for loan losses, January 1, 2018 $ 6,160 $ 9,007 $ 2,033 $ 2,179 $ 120 $ 194 $ 19,693 Charge-offs (31 ) 0 0 (590 ) (19 ) (86 ) (726 ) Recoveries 68 0 3 49 7 31 158 Provision for loan losses 85 1,013 16 427 15 75 1,631 Allowance for loan losses, March 31, 2018 $ 6,282 $ 10,020 $ 2,052 $ 2,065 $ 123 $ 214 $ 20,756 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 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, 2018 and December 31, 2017. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance. March 31, 2018 Commercial, Commercial Residential Consumer Credit Overdrafts Total Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $ 20 $ 2 $ 0 $ 0 $ 0 $ 0 $ 22 Collectively evaluated for impairment 5,984 3,850 2,052 2,065 123 214 14,288 Acquired with deteriorated credit quality 0 0 0 0 0 0 0 Modified in a troubled debt restructuring 278 6,168 0 0 0 0 6,446 Total ending allowance balance $ 6,282 $ 10,020 $ 2,052 $ 2,065 $ 123 $ 214 $ 20,756 Loans: Individually evaluated for impairment $ 1,418 $ 1,892 $ 0 $ 0 $ 0 $ 0 $ 3,310 Collectively evaluated for impairment 766,905 679,271 725,683 77,981 6,965 1,134 2,257,939 Acquired with deteriorated credit quality 0 1,144 0 0 0 0 1,144 Modified in a troubled debt restructuring 5,150 12,210 0 0 0 0 17,360 Total ending loans balance $ 773,473 $ 694,517 $ 725,683 $ 77,981 $ 6,965 $ 1,134 $ 2,279,753 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 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, 2018 and December 31, 2017 and for the three months ended March 31, 2018 and 2017: March 31, 2018 Unpaid Principal Recorded Allowance for Loan With an allowance recorded: Commercial, industrial, and agricultural $ 1,861 $ 1,852 $ 298 Commercial mortgage 9,290 9,007 6,170 Residential real estate 0 0 0 With no related allowance recorded: Commercial, industrial, and agricultural 5,478 4,716 0 Commercial mortgage 6,054 5,095 0 Residential real estate 0 0 0 Total $ 22,683 $ 20,670 $ 6,468 December 31, 2017 Unpaid Principal Recorded Allowance for Loan 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 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, 2018 Average Interest Cash Basis Recorded Income Interest Investment Recognized Recognized With an allowance recorded: Commercial, industrial, and agricultural $ 1,884 $ 22 $ 22 Commercial mortgage 9,234 18 18 Residential real estate 0 0 0 With no related allowance recorded: Commercial, industrial, and agricultural 4,600 46 46 Commercial mortgage 3,753 13 13 Residential real estate 0 0 0 Total $ 19,491 $ 99 $ 99 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 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, 2018 and December 31, 2017: March 31, 2018 December 31, 2017 Nonaccrual Past Due Nonaccrual Past Due Commercial, industrial, and agricultural $ 2,737 $ 0 $ 1,869 $ 78 Commercial mortgages 11,361 0 11,065 0 Residential real estate 5,038 425 5,470 338 Consumer 614 13 828 17 Credit cards 0 37 0 44 Total $ 19,750 $ 475 $ 19,232 $ 477 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, 2018 and December 31, 2017 by class of loans. March 31, 2018 30-59 Days 60-89 Days Greater Than Total Loans Not Total Commercial, industrial, and agricultural $ 2,371 $ 173 $ 935 $ 3,479 $ 769,994 $ 773,473 Commercial mortgages 3 314 1,714 2,031 692,486 694,517 Residential real estate 1,565 1,596 4,471 7,632 718,051 725,683 Consumer 376 447 580 1,403 76,578 77,981 Credit cards 30 5 37 72 6,893 6,965 Overdrafts 0 0 0 0 1,134 1,134 Total $ 4,345 $ 2,535 $ 7,737 $ 14,617 $ 2,265,136 $ 2,279,753 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 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, 2018 and December 31, 2017. March 31, 2018 December 31, 2017 Number of Loan Specific Number of Loan Specific Commercial, industrial, and agricultural 10 $ 5,150 $ 278 10 $ 5,213 $ 245 Commercial mortgages 9 12,210 6,168 9 12,090 5,444 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 $ 17,360 $ 6,446 19 $ 17,303 $ 5,689 There were no loans modified as troubled debt restructurings during the three months ended March 31, 2018 or March 31, 2017. 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, 2018 and December 31, 2017 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 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, 2018 Pass Special Substandard Doubtful Total Commercial, industrial, and agricultural $ 740,558 $ 9,513 $ 23,402 $ 0 $ 773,473 Commercial mortgages 676,688 2,771 15,058 0 694,517 Total $ 1,417,246 $ 12,284 $ 38,460 $ 0 $ 1,467,990 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 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, 2018 and December 31, 2017: March 31, 2018 December 31, 2017 Residential Credit Residential Credit Real Estate Consumer Cards Real Estate Consumer Cards Performing $ 720,220 $ 77,354 $ 6,928 $ 707,539 $ 79,348 $ 6,709 Nonperforming 5,463 627 37 5,808 845 44 Total $ 725,683 $ 77,981 $ 6,965 $ 713,347 $ 80,193 $ 6,753 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, 2018 and December 31, 2017: March 31, December 31, 2018 2017 Consumer $ 21,892 $ 23,428 Less: unearned discount (3,629 ) (3,889 ) Total $ 18,263 $ 19,539 |