Loans

Total net loans at December 31, 2018 and 2017 are summarized as follows:



	2018			2017
Commercial, industrial, and agricultural	$	916,297		$	704,606
Commercial mortgages	697,776			644,597
Residential real estate	771,309			713,347
Consumer	86,035			80,193
Credit cards	7,623			6,753
Overdrafts	308			352
Less: unearned discount	(4,791		)	(3,889		)
allowance for loan losses	(19,704		)	(19,693		)
Loans, net	$	2,454,853		$	2,126,266

At December 31, 2018 and 2017 net unamortized fees of $3,175 and $3,157, 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 37% and 33% of the Corporation’s total loan portfolio at December 31, 2018 and 2017, respectively. Commercial mortgage loans comprised 28% and 30% of the Corporation’s total loan portfolio at December 31, 2018 and 2017, 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 31% and 33% of the Corporation’s total loan portfolio at December 31, 2018 and 2017, 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 4% of the total loan portfolio at both December 31, 2018 and 2017. 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, 2018 were as follows:



	Commercial, Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2018	$	6,160		$	9,007		$	2,033		$	2,179		$	120		$	194		$	19,693
Charge-offs	(253		)	(3,337		)	(315		)	(2,279		)	(90		)	(319		)	(6,593		)
Recoveries	171			30			67			141			33			90			532
Provision for loan losses	1,263			1,790			371			2,336			40			272			6,072
Allowance for loan losses, December 31, 2018	$	7,341		$	7,490		$	2,156		$	2,377		$	103		$	237		$	19,704

Transactions in the allowance for loan losses for the year ended December 31, 2017 were as follows:



	Commercial, Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			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, Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			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

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, 2018 and 2017. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.



December 31, 2018	Commercial, Industrial, and Agricultural		Commercial Mortgages		Residential Real Estate		Consumer		Credit Cards		Overdrafts		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	54	$	4	$	100	$	0	$	0	$	10	$	168
Collectively evaluated for impairment	7,183		3,036		2,056		2,377		103		227		14,982
Acquired with deteriorated credit quality	0		0		0		0		0		0		0
Modified in a troubled debt restructuring	104		4,450		0		0		0		0		4,554
Total ending allowance balance	$	7,341	$	7,490	$	2,156	$	2,377	$	103	$	237	$	19,704
Loans:
Individually evaluated for impairment	$	1,334	$	1,446	$	502	$	0	$	0	$	10	$	3,292
Collectively evaluated for impairment	910,386		685,714		770,807		86,035		7,623		298		2,460,863
Acquired with deteriorated credit quality	0		567		0		0		0		0		567
Modified in a troubled debt restructuring	4,577		10,049		0		0		0		0		14,626
Total ending loans balance	$	916,297	$	697,776	$	771,309	$	86,035	$	7,623	$	308	$	2,479,348



December 31, 2017	Commercial, Industrial, and Agricultural		Commercial Mortgages		Residential Real Estate		Consumer		Credit Cards		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	698,206		631,377		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	$	704,606	$	644,597	$	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 December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017, and 2016:



December 31, 2018	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	3,053	$	3,037	$	158
Commercial mortgage	10,799		6,709		4,454
Residential real estate	502		502		100
Overdrafts	10		10		10
With no related allowance recorded:
Commercial, industrial, and agricultural	3,684		2,874		0
Commercial mortgage	5,659		4,786		0
Residential real estate	0		0		0
Overdrafts	0		0		0
Total	$	23,707	$	17,918	$	4,722



December 31, 2017	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
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.



	Year Ended December 31, 2018
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	2,745	$	254	$	249
Commercial mortgage	8,456		338		326
Residential real estate	304		20		19
Overdrafts	2		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural	4,642		157		148
Commercial mortgage	4,566		146		144
Residential real estate	0		0		0
Overdrafts	0		0		0
Total	$	20,715	$	915	$	886



	Year Ended December 31, 2017
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
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 Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
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

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, 2018 and 2017:



	December 31, 2018				December 31, 2017
	Nonaccrual		Past Due Over 90 Days Still on Accrual		Nonaccrual		Past Due Over 90 Days Still on Accrual
Commercial, industrial, and agricultural	$	2,839	$	489	$	1,869	144
Commercial mortgages	7,694		53		11,065		0
Residential real estate	6,023		299		5,470		429
Consumer	683		44		828		37
Credit cards	0		5		0		54
Total	$	17,239	$	890	$	19,232	$	664

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, 2018 and 2017 by class of loans.



December 31, 2018	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial, industrial, and agricultural	$	2,379	$	16	$	2,341	$	4,736	$	911,561	$	916,297
Commercial mortgages	858		3,058		297		4,213		693,563		697,776
Residential real estate	4,064		1,319		4,494		9,877		761,432		771,309
Consumer	474		283		367		1,124		84,911		86,035
Credit cards	59		15		5		79		7,544		7,623
Overdrafts	0		0		0		0		308		308
Total	$	7,834	$	4,691	$	7,504	$	20,029	$	2,459,319	$	2,479,348



December 31, 2017	30-59 Days Past Due		60-89 Days Past Due		Greater Than 89 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial, industrial, and agricultural	$	2,745	$	646	$	748	$	4,139	$	700,467	$	704,606
Commercial mortgages	233		0		292		525		644,072		644,597
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	29		2		54		85		6,668		6,753
Overdrafts	0		0		0		0		352		352
Total	$	5,751	$	2,449	$	6,561	$	14,761	$	2,135,087	$	2,149,848

Troubled Debt Restructurings

During the years ended December 31, 2018 and 2017, 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, 2018 and December 31, 2017.



	December 31, 2018					December 31, 2017
	Number of Loans	Loan Balance		Specific Reserve		Number of Loans	Loan Balance		Specific Reserve
Commercial, industrial, and agricultural	10	$	4,577	$	104	11	$	5,213	$	245
Commercial mortgages	15	10,049		4,450		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	25	$	14,626	$	4,554	20	$	17,303	$	5,689

The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2018, 2017, and 2016:



	Year Ended December 31, 2018
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural	0	$	0	$	0
Commercial mortgages	5	1,570		1,570
Residential real estate	0	0		0
Consumer	0	0		0
Credit cards	0	0		0
Total	5	$	1,570	$	1,570



	Year Ended December 31, 2017
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
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 Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
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

The troubled debt restructurings described above increased the allowance for loan losses by $351, $4,024 and $0 during the years ended December 31, 2018, 2017, and 2016, respectively.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 4-18 years. Modifications involving an extension of the maturity date were for periods ranging from 4-18 years.

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, 2018 and 2017 and no principal balances were forgiven in connection with the loan restructurings.

During the year ended December 31, 2018 five impaired commercial real estate loans totaling $1,677 were modified in troubled debt restructurings. The Corporation recorded an additional provision for loan losses of $351 and there were no chargeoffs for these loans during the year ended December 31, 2018. During the year ended December 31, 2018, one impaired commercial real estate loan that was modified in a troubled debt restructuring in 2017 began not to perform in accordance with its modified terms. As a result, an additional provision for loan losses of $1,847 was recorded, and the Corporation recorded a partial chargeoff of the loan of $3,336 during the year ended December 31, 2018.

During the year ended December 31, 2017 four impaired commercial industrial loan having a balance of $2,750 was modified in troubled debt restructurings. The Corporation did not record any additional provision for loan losses and there were no chargeoffs or defaults 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 or defaults 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 was no chargeoff or default for this loan during the year ended December 31, 2016.

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.

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, 2018	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	889,547	$	10,519	$	16,231	$	0	$	916,297
Commercial mortgages	683,413		3,241		11,122		0		697,776
Total	$	1,572,960	$	13,760	$	27,353	$	0	$	1,614,073



December 31, 2017	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	668,570	$	16,726	$	19,310	$	0	$	704,606
Commercial mortgages	626,163		4,419		14,015		0		644,597
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 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, 2018 and December 31, 2017:



	December 31, 2018						December 31, 2017
	Residential Real Estate		Consumer		Credit Cards		Residential Real Estate		Consumer		Credit Cards
Performing	$	764,987	$	85,308	$	7,618	$	707,448	$	79,328	$	6,699
Nonperforming	6,322		727		5		5,899		865		54
Total	$	771,309	$	86,035	$	7,623	$	713,347	$	80,193	$	6,753

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, 2018 and 2017:



	2018			2017
Consumer	$	26,568		$	23,428
Less: unearned discount	(4,791		)	(3,889		)
Total	$	21,777		$	19,539