LOANS

Total net loans at September 30, 2014 and December 31, 2013 are summarized as follows:


	September 30, 2014			December 31, 2013
Commercial, industrial, and agricultural	$	424,059		$	427,715
Commercial mortgages		338,445			343,465
Residential real estate		494,799			459,114
Consumer		67,753			63,491
Credit cards		5,079			5,065
Overdrafts		445			409
Less: unearned discount		(4,205	)		(3,896	)
allowance for loan losses		(17,843	)		(16,234	)

Loans, net	$	1,308,532		$	1,279,129

At September 30, 2014 and December 31, 2013, net unamortized loan costs of $657 and $911, 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 and Central Ohio. 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.

All relevant documentation, such as the loan application, financial statements and tax returns, required under the lending policies is summarized and provided to management and/or the Corporation’s Board of Directors in connection with the loan approval process. Such documentation is subsequently electronically archived in the Corporation’s document management system. 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 32% of the Corporation’s total loan portfolio at September 30, 2014 and 33% as of December 31, 2013. Commercial mortgage loans comprised 26% of the Corporation’s total loan portfolio at September 30, 2014 and 27% as of December 31, 2013. Management assigns a risk rating to all commercial loans. 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. 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 38% and 36% of the Corporation’s total loan portfolio at September 30, 2014 and December 31, 2013, 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 through Freddie Mac. Loans so originated are classified as loans held for sale and are excluded from residential real estate loans reported above. Loans held for sale as of September 30, 2014 totaled $1.3 million. 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 September 30, 2014 and December 31, 2013. Terms and collateral requirements vary depending on the size and nature of the loan.

The Corporation has not underwritten any hybrid loans, payment option loans, or low documentation/no documentation loans. Variable rate loans are generally underwritten at the fully indexed rate. Loan underwriting policies and procedures have not changed materially between any periods presented.

During the first quarter of 2014, management reviewed its loan portfolio segments resulting in the reclassification of approximately $66 million into Commercial, Industrial and Agricultural. $54 million was reclassified out of Commercial Mortgages and $12 million was reclassified out of Residential Real Estate. During the second quarter of 2014, management further identified a reclassification of approximately $70 million into the Commercial, Industrial and Agricultural segment from the Commercial Mortgage segment. Accordingly, the December 31, 2013 loan portfolio segment balances were reclassified to conform to the September 30, 2014 presentation. The effect of this reclassification was not considered material to the overall allowance for loan losses, did not change the total loan balances, and is not considered material to the consolidated financial statements taken as a whole.

Transactions in the allowance for loan losses for the three months ended September 30, 2014 were as follows:


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, July 1, 2014	$	8,096		$	4,581		$	2,467		$	1,996		$	88		$	187		$	17,415
Charge-offs		(60	)		(92	)		(17	)		(415	)		(16	)		(75	)		(675	)
Recoveries		0			0			18			25			4			18			65
Provision for loan losses		690			(291	)		93			467			3			76			1,038

Allowance for loan losses, September 30, 2014	$	8,726		$	4,198		$	2,561		$	2,073		$	79		$	206		$	17,843

Transactions in the allowance for loan losses for the nine months ended September 30, 2014 were as follows:


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2014	$	8,212		$	3,536		$	2,450		$	1,763		$	66		$	207		$	16,234
Charge-offs		(379	)		(142	)		(215	)		(1,183	)		(39	)		(197	)		(2,155	)
Recoveries		1			10			37			78			7			73			206
Provision for loan losses		892			794			289			1,415			45			123			3,558

Allowance for loan losses, September 30, 2014	$	8,726		$	4,198		$	2,561		$	2,073		$	79		$	206		$	17,843

Transactions in the allowance for loan losses for the three months ended September 30, 2013 were as follows:


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, July 1, 2013	$	5,338		$	5,896		$	2,508		$	1,555		$	55		$	148		$	15,500
Charge-offs		(169	)		(4	)		(57	)		(269	)		(19	)		(72	)		(590	)
Recoveries		0			1,424			1			21			3			16			1,465
Provision (benefit) for loan losses		384			(275	)		189			454			18			76			846

Allowance for loan losses, September 30, 2013	$	5,553		$	7,041		$	2,641		$	1,761		$	57		$	168		$	17,221

Transactions in the allowance for loan losses for the nine months ended September 30, 2013 were as follows:


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2013	$	4,940		$	4,697		$	2,466		$	1,699		$	83		$	175		$	14,060
Charge-offs		(253	)		(1,534	)		(398	)		(946	)		(48	)		(163	)		(3,342	)
Recoveries		7			1,427			5			95			13			65			1,612
Provision (benefit) for loan losses		859			2,451			568			913			9			91			4,891

Allowance for loan losses, September 30, 2013	$	5,553		$	7,041		$	2,641		$	1,761		$	57		$	168		$	17,221

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, 2014 and December 31, 2013. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

September 30, 2014


	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	$	339	$	296	$	201	$	0	$	0	$	0	$	836
Collectively evaluated for impairment		8,276		2,288		2,360		2,073		79		206		15,282
Acquired with deteriorated credit quality		0		0		0		0		0		0		0
Modified in a troubled debt restructuring		111		1,614		0		0		0		0		1,725

Total ending allowance balance	$	8,726	$	4,198	$	2,561	$	2,073	$	79	$	206	$	17,843

Loans:
Individually evaluated for impairment	$	4,173	$	1,084	$	551	$	0	$	0	$	0	$	5,808
Collectively evaluated for impairment		418,225		325,143		494,248		67,753		5,079		445		1,310,893
Acquired with deteriorated credit quality		0		2,217		0		0		0		0		2,217
Modified in a troubled debt restructuring		1,661		10,001		0		0		0		0		11,662

Total ending loans balance	$	424,059	$	338,445	$	494,799	$	67,753	$	5,079	$	445	$	1,330,580

December 31, 2013


	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	$	372	$	55	$	0	$	0	$	0	$	0	$	427
Collectively evaluated for impairment		7,725		2,141		2,450		1,763		66		207		14,352
Acquired with deteriorated credit quality		0		0		0		0		0		0		0
Modified in a troubled debt restructuring		115		1,340		0		0		0		0		1,455

Total ending allowance balance	$	8,212	$	3,536	$	2,450	$	1,763	$	66	$	207	$	16,234

Loans:
Individually evaluated for impairment	$	4,923	$	1,249	$	0	$	0	$	0	$	0	$	6,172
Collectively evaluated for impairment		421,002		329,645		459,114		63,491		5,065		409		1,278,726
Acquired with deteriorated credit quality		0		2,225		0		0		0		0		2,225
Modified in a troubled debt restructuring		1,790		10,346		0		0		0		0		12,136

Total ending loans balance	$	427,715	$	343,465	$	459,114	$	63,491	$	5,065	$	409	$	1,299,259

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, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013:

September 30, 2014


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	4,051	$	4,051	$	450
Commercial mortgage		5,800		5,413		1,910
Residential real estate		400		400		201
With no related allowance recorded:
Commercial, industrial, and agricultural		2,680		1,783		0
Commercial mortgage		5,671		5,672		0
Residential real estate		152		151		0

Total	$	18,754	$	17,470	$	2,561

December 31, 2013


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	5,929	$	4,679	$	487
Commercial mortgage		5,646		5,443		1,395
Residential real estate		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural		2,055		2,034		0
Commercial mortgage		6,178		6,152		0
Residential real estate		0		0		0

Total	$	19,808	$	18,308	$	1,882


	Three Months Ended September 30, 2014						Nine Months Ended September 30, 2014
	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	$	4,023	$	62	$	62	$	4,342	$	64	$	64
Commercial mortgage		5,511		18		18		5,415		18		18
Residential real estate		400		45		45		200		56		56
With no related allowance recorded:
Commercial, industrial, and agricultural		2,012		32		32		2,071		32		32
Commercial mortgage		6,288		22		22		6,080		22		22
Residential real estate		76		0		0		38		0		0

Total	$	18,310	$	179	$	179	$	18,146	$	192	$	192


	Three Months Ended September 30, 2013						Nine Months Ended September 30, 2013
	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	$	1,267	$	3	$	3	$	1,439	$	4	$	4
Commercial mortgage		8,337		0		0		7,657		3		3
Residential real estate		0		1		1		191		4		4
With no related allowance recorded:
Commercial, industrial, and agricultural		2,055		0		0		2,121		0		0
Commercial mortgage		10,602		0		0		10,888		0		0
Residential real estate		69		0		0		138		0		0

Total	$	22,330	$	4	$	4	$	22,434	$	11	$	11

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, 2014 and December 31, 2013:


	September 30, 2014				December 31, 2013
	Nonaccrual		Past Due Over 90 Days Still on Accrual		Nonaccrual		Past Due Over 90 Days Still on Accrual
Commercial, industrial, and agricultural	$	1,272	$	0	$	1,006	$	0
Commercial mortgages		5,002		199		7,236		0
Residential real estate		3,048		106		2,389		150
Consumer		1,090		0		942		170
Credit cards		0		45		0		24

Total	$	10,412	$	350	$	11,573	$	344

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.

Generally, loans 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.

The following table presents the aging of the recorded investment in past due loans as of September 30, 2014 and December 31, 2013 by class of loans.

September 30, 2014


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial, industrial, and agricultural	$	1,114	$	834	$	665	$	2,613	$	421,446	$	424,059
Commercial mortgages		0		1,160		5,201		6,361		332,084		338,445
Residential real estate		2,300		689		3,154		6,143		488,656		494,799
Consumer		202		70		1,090		1,362		66,391		67,753
Credit cards		0		56		45		101		4,978		5,079
Overdrafts		0		0		0		0		445		445

Total	$	3,616	$	2,809	$	10,155	$	16,580	$	1,314,000	$	1,330,580

December 31, 2013


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial, industrial, and agricultural	$	211	$	542	$	855	$	1,608	$	426,107	$	427,715
Commercial mortgages		1,258		713		7,236		9,207		334,258		343,465
Residential real estate		4,216		114		2,539		6,869		452,245		459,114
Consumer		334		1,049		1,112		2,495		60,996		63,491
Credit cards		0		29		24		53		5,012		5,065
Overdrafts		0		0		0		0		409		409

Total	$	6,019	$	2,447	$	11,766	$	20,232	$	1,279,027	$	1,299,259

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, 2014 and December 31, 2013.


	September 30, 2014						December 31, 2013
	Number of Loans		Loan Balance		Specific Reserve		Number of Loans		Loan Balance		Specific Reserve
Commercial, industrial, and agricultural		5	$	1,661	$	111		5	$	1,790	$	115
Commercial mortgages		7		10,001		1,614		7		10,346		1,340
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		12	$	11,662	$	1,725		12	$	12,136	$	1,455

There were no loans modified as troubled debt restructurings during the three or nine months ended September 30, 2014. The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2013. There were no loans modified as troubled debt restructurings during the three months ended September 30, 2013.


	Nine Months Ended September 30, 2013
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural		0	$	0	$	0
Commercial mortgages		2		3,615		3,549
Residential real estate		0		0		0
Consumer		0		0		0
Credit cards		0		0		0

Total		2	$	3,615	$	3,549

The troubled debt restructurings described above increased the allowance for loan losses by $562 during the three months and nine months ended September 30, 2013.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 4 to 15 years. Modifications involving an extension of the maturity date were for periods ranging from 4 to 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 September 30, 2014 and December 31, 2013 and no principal balances were forgiven in connection with the loan restructurings.

In the first quarter of 2013, the Corporation recorded a partial chargeoff of $595 for a commercial mortgage loan with a balance of $1,660 that had defaulted under its restructured terms in 2012 and was placed on nonaccrual status. The Corporation recorded an additional provision for loan losses of $127 and $262 on this loan during the three and nine months ended September 30, 2013.

During the year ended December 31, 2013, a commercial mortgage loan with a balance of $1,086 defaulted under its restructured terms in 2013 and was placed on nonaccrual status. The Corporation recorded an additional provision for loan losses of $615 on this loan during the year ended December 31, 2013.

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, non-performing 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.

As discussed earlier, during the first and second quarters of 2014, management reviewed its loan portfolio segments and reclassified certain loan balances into the Commercial, Industrial and Agricultural segment and out of the Commercial and Residential Mortgage segments. Accordingly, the December 31, 2013 loan portfolio segment balances, along with the special mention, substandard and doubtful categories, were reclassified to conform to the September 30, 2014 presentation. These reclassifications resulted in increasing the Commercial, Industrial and Agriculture special mention category by $3.0 million and the substandard category by $10.6 million. Corresponding reclassification decreases were made to the Commercial Mortgage category. Total special mention and substandard loans were not changed.

September 30, 2014


	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	386,235	$	8,630	$	28,874	$	320	$	424,059
Commercial mortgages		311,135		147		26,722		441		338,445

Total	$	697,370	$	8,777	$	55,596	$	761	$	762,504

December 31, 2013


			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	388,868	$	8,510	$	29,956	$	381	$	427,715
Commercial mortgages		295,060		13,622		34,298		485		343,465

Total	$	683,928	$	22,132	$	64,254	$	866	$	771,180

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, 2014 and December 31, 2013:


	September 30, 2014						December 31, 2013
	Residential				Credit		Residential				Credit
	Real Estate		Consumer		Cards		Real Estate		Consumer		Cards
Performing	$	491,645	$	66,663	$	5,034	$	456,575	$	62,379	$	5,041
Non-performing		3,154		1,090		45		2,539		1,112		24

Total	$	494,799	$	67,753	$	5,079	$	459,114	$	63,491	$	5,065

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 is summarized as follows at September 30, 2014 and December 31, 2013:


	September 30,			December 31,
	2014			2013
Consumer	$	26,976		$	24,891
Residential real estate		1,332			1,552
Less: unearned discount		(4,205	)		(3,896	)

Total	$	24,103		$	22,547