LOANS

Total net loans at March 31, 2019 and December 31, 2018 are summarized as follows:



	3/31/2019			12/31/2018
Commercial, industrial, and agricultural	$	950,865		$	916,297
Commercial mortgages	709,726			697,776
Residential real estate	775,599			771,309
Consumer	86,780			86,035
Credit cards	7,341			7,623
Overdrafts	450			308
Less: unearned discount	(4,671		)	(4,791		)
allowance for loan losses	(20,346		)	(19,704		)
Loans, net	$	2,505,744		$	2,454,853

At March 31, 2019 and December 31, 2018, net unamortized loan fees of $3,158 and $3,175, 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 38% and 37% of the Corporation’s total loan portfolio at March 31, 2019 and December 31, 2018, respectively. Commercial mortgage loans comprised 28% of the Corporation’s total loan portfolio at both March 31, 2019 and December 31, 2018. 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% of the Corporation’s total loan portfolio at both March 31, 2019 and December 31, 2018. 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 March 31, 2019 and December 31, 2018. 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, 2019 were as follows:



	Commercial, Industrial, and Agricultural		Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2019	$	7,341	$	7,490		$	2,156		$	2,377		$	103		$	237		$	19,704
Charge-offs	0		(17		)	(98		)	(549		)	(26		)	(128		)	(818		)
Recoveries	4		—			65			46			5			34			154
Provision (benefit) for loan losses	442		1,373			(740		)	166			23			42			1,306
Allowance for loan losses, March 31, 2019	$	7,787	$	8,846		$	1,383		$	2,040		$	105		$	185		$	20,346

Transactions in the allowance for loan losses for the three months ended March 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	(31		)	0		0		(590		)	(19		)	(86		)	(726		)
Recoveries	68			0		3		49			7			31			158
Provision (benefit) 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

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, 2019 and December 31, 2018. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

March 31, 2019



	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	$	330	$	312	$	0	$	0	$	0	$	0	$	642
Collectively evaluated for impairment	7,350		3,775		1,383		2,040		105		185		14,838
Acquired with deteriorated credit quality	0		0		0		0		0		0		0
Modified in a troubled debt restructuring	107		4,759		0		0		0		0		4,866
Total ending allowance balance	$	7,787	$	8,846	$	1,383	$	2,040	$	105	$	185	$	20,346
Loans:
Individually evaluated for impairment	$	1,754	$	1,468	$	498	$	0	$	0	$	0	$	3,720
Collectively evaluated for impairment	945,710		698,004		775,101		86,780		7,341		450		2,513,386
Acquired with deteriorated credit quality	0		556		0		0		0		0		556
Modified in a troubled debt restructuring	3,401		9,698		0		0		0		0		13,099
Total ending loans balance	$	950,865	$	709,726	$	775,599	$	86,780	$	7,341	$	450	$	2,530,761

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

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, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018:

March 31, 2019



	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	2,840	$	1,278	$	437
Commercial mortgage	8,205		7,824		5,071
Residential real estate	0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural	4,556		3,877		0
Commercial mortgage	4,225		3,342		0
Residential real estate	498		498		0
Total	$	20,324	$	16,819	$	5,508

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

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, 2019
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	2,158	$	38	$	38
Commercial mortgage	7,267		40		40
Residential real estate	0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural	3,376		54		54
Commercial mortgage	4,065		18		18
Residential real estate	500		7		7
Total	$	17,366	$	157	$	157



	Three Months Ended March 31, 2018
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest 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

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, 2019 and December 31, 2018:



	March 31, 2019				December 31, 2018
	Nonaccrual		Past Due Over 90 Days Still on Accrual		Nonaccrual		Past Due Over 90 Days Still on Accrual
Commercial, industrial, and agricultural	$	3,414	$	529	$	2,839	$	489
Commercial mortgages	7,724		0		7,694		53
Residential real estate	5,821		285		6,023		299
Consumer	491		24		683		44
Credit cards	0		28		0		5
Total	$	17,450	$	866	$	17,239	$	890

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, 2019 and December 31, 2018 by class of loans.

March 31, 2019



	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	$	1,917	$	310	$	2,834	$	5,061	$	945,804	$	950,865
Commercial mortgages	387		3,532		1,702		5,621		704,105		709,726
Residential real estate	1,453		1,039		3,546		6,038		769,561		775,599
Consumer	286		182		353		821		85,959		86,780
Credit cards	16		33		28		77		7,264		7,341
Overdrafts	0		0		0		0		450		450
Total	$	4,059	$	5,096	$	8,463	$	17,618	$	2,513,143	$	2,530,761

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

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, 2019 and December 31, 2018.



	March 31, 2019					December 31, 2018
	Number of Loans	Loan Balance		Specific Reserve		Number of Loans	Loan Balance		Specific Reserve
Commercial, industrial, and agricultural	10	$	3,401	$	107	10	$	4,577	$	104
Commercial mortgages	15	9,698		4,759		15	10,049		4,450
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	$	13,099	$	4,866	25	$	14,626	$	4,554

There were no loans modified as troubled debt restructurings during the three months ended March 31, 2019 or March 31, 2018.

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, 2019 and December 31, 2018 and no principal balances were forgiven in connection with the loan restructurings.

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.

March 31, 2019



	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	922,618	$	10,149	$	18,098	$	0	$	950,865
Commercial mortgages	689,587		9,037		11,102		0		709,726
Total	$	1,612,205	$	19,186	$	29,200	$	0	$	1,660,591

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

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, 2019 and December 31, 2018:



	March 31, 2019						December 31, 2018
	Residential Real Estate		Consumer		Credit Cards		Residential Real Estate		Consumer		Credit Cards
Performing	$	769,493	$	86,265	$	7,313	$	764,987	$	85,308	$	7,618
Nonperforming	6,106		515		28		6,322		727		5
Total	$	775,599	$	86,780	$	7,341	$	771,309	$	86,035	$	7,623

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, 2019 and December 31, 2018:



	3/31/2019			12/31/2018
Consumer	$	25,897		$	26,568
Less: unearned discount	(4,671		)	(4,791		)
Total	$	21,226		$	21,777