LOANS

Total net loans at September 30, 2017 and December 31, 2016 are summarized as follows:


	September 30, 2017			December 31, 2016
Commercial, industrial, and agricultural	$	663,944		$	567,800
Commercial mortgages		656,130			574,826
Residential real estate		697,059			652,883
Consumer		78,264			74,816
Credit cards		6,249			6,046
Overdrafts		549			595
Less: unearned discount		(3,621	)		(3,430	)
allowance for loan losses		(17,849	)		(16,330	)

Loans, net	$	2,080,725		$	1,857,206

At September 30, 2017 and December 31, 2016, net unamortized loan (fees) costs of $(2,744) 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 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 ratios, FICO scores, quality of the borrower’s financial statements, and the ability to obtain personal guarantees.

Commercial, industrial, and agricultural loans comprised 32% and 30% of the Corporation’s total loan portfolio at September 30, 2017 and December 31, 2016, respectively. Commercial mortgage loans comprised 31% and 31% of the Corporation’s total loan portfolio at September 30, 2017 and December 31, 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 September 30, 2017 and December 31, 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 September 30, 2017 and December 31, 2016. 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 September 30, 2017 were as follows:


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, July 1, 2017	$	5,563		$	7,641		$	1,670		$	2,068		$	142		$	185		$	17,269
Charge-offs		(20	)		(22	)		(130	)		(703	)		(39	)		(63	)		(977	)
Recoveries		36			3			0			96			8			14			157
Provision (benefit) for loan losses		(223	)		472			468			627			0			56			1,400

Allowance for loan losses, September 30, 2017	$	5,356		$	8,094		$	2,008		$	2,088		$	111		$	192		$	17,849

Transactions in the allowance for loan losses for the nine months ended September 30, 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		(50	)		(22	)		(328	)		(1,969	)		(111	)		(192	)		(2,672	)
Recoveries		167			197			73			110			23			71			641
Provision (benefit) for loan losses		(189	)		1,166			610			1,732			106			125			3,550

Allowance for loan losses, September 30, 2017	$	5,356		$	8,094		$	2,008		$	2,088		$	111		$	192		$	17,849

Transactions in the allowance for loan losses for the three months ended September 30, 2016 were as follows:


	Commercial,					Residential
	Industrial, and			Commercial		Real						Credit
	Agricultural			Mortgages		Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, July 1, 2016	$	5,218		$	6,207	$	2,299		$	2,066		$	50		$	148		$	15,988
Charge-offs		(86	)		0		(95	)		(709	)		(17	)		(86	)		(993	)
Recoveries		37			2		10			20			3			14			86
Provision (benefit) for loan losses		(24	)		27		(65	)		545			36			103			622

Allowance for loan losses, September 30, 2016	$	5,145		$	6,236	$	2,149		$	1,922		$	72		$	179		$	15,703

Transactions in the allowance for loan losses for the nine months ended September 30, 2016 were as follows:


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2016	$	6,035		$	5,605		$	2,475		$	2,371		$	90		$	161		$	16,737
Charge-offs		(519	)		(20	)		(244	)		(2,397	)		(54	)		(167	)		(3,401	)
Recoveries		84			7			72			94			18			54			329
Provision (benefit) for loan losses		(455	)		644			(154	)		1,854			18			131			2,038

Allowance for loan losses, September 30, 2016	$	5,145		$	6,236		$	2,149		$	1,922		$	72		$	179		$	15,703

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, 2017 and December 31, 2016. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

September 30, 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	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment		5,236		4,186		2,008		2,088		111		192		13,821
Acquired with deteriorated credit quality		0		0		0		0		0		0		0
Modified in a troubled debt restructuring		120		3,908		0		0		0		0		4,028

Total ending allowance balance	$	5,356	$	8,094	$	2,008	$	2,088	$	111	$	192	$	17,849

Loans:
Individually evaluated for impairment	$	602	$	51	$	0	$	0	$	0	$	0	$	653
Collectively evaluated for impairment		660,461		639,965		697,059		78,264		6,249		549		2,082,547
Acquired with deteriorated credit quality		0		1,487		0		0		0		0		1,487
Modified in a troubled debt restructuring		2,881		14,627		0		0		0		0		17,508

Total ending loans balance	$	663,944	$	656,130	$	697,059	$	78,264	$	6,249	$	549	$	2,102,195

December 31, 2016


	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	$	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

Commercial and commercial real estate loans greater than $250,000 are individually evaluated for impairment. 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, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016:

September 30, 2017


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	1,212	$	1,213	$	120
Commercial mortgage		9,995		9,611		3,908
Residential real estate		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural		3,089		2,270		0
Commercial mortgage		5,836		5,067		0
Residential real estate		0		0		0

Total	$	20,132	$	18,161	$	4,028

December 31, 2016


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
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.


	Three Months Ended September 30, 2017						Three Months Ended September 30, 2016
	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	$	1,190	$	20	$	20	$	2,340	$	34	$	34
Commercial mortgage		9,724		77		77		7,253		57		57
Residential real estate		0		0		0		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural		2,142		23		23		2,148		24		24
Commercial mortgage		4,981		33		33		2,214		17		17
Residential real estate		0		0		0		0		0		0

Total	$	18,037	$	153	$	153	$	13,955	$	132	$	132


	Nine Months Ended September 30, 2017						Nine Months Ended September 30, 2016
	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	$	1,413	$	56	$	56	$	2,859	$	36	$	36
Commercial mortgage		12,497		293		293		6,331		61		61
Residential real estate		0		0		0		83		6		6
With no related allowance recorded:
Commercial, industrial, and agricultural		1,927		73		73		2,420		26		26
Commercial mortgage		2,490		100		100		3,467		20		20
Residential real estate		0		0		0		0		0		0

Total	$	18,327	$	522	$	522	$	15,160	$	149	$	149

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, 2017 and December 31, 2016:


	September 30, 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	$	1,885	$	408	$	2,734	$	0
Commercial mortgages		11,526		0		5,996		0
Residential real estate		5,663		163		5,600		0
Consumer		712		0		999		0
Credit cards		0		21		0		10

Total	$	19,786	$	592	$	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 September 30, 2017 and December 31, 2016 by class of loans.

September 30, 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	$	1,827	$	486	$	947	$	3,260	$	660,684	$	663,944
Commercial mortgages		0		40		704		744		655,386		656,130
Residential real estate		1,688		1,932		4,647		8,267		688,792		697,059
Consumer		484		305		677		1,466		76,798		78,264
Credit cards		63		36		21		120		6,129		6,249
Overdrafts		0		0		0		0		549		549

Total	$	4,062	$	2,799	$	6,996	$	13,857	$	2,088,338	$	2,102,195

December 31, 2016


	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	$	1,558	$	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

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, 2017 and December 31, 2016.


	September 30, 2017						December 31, 2016
	Number of Loans		Loan Balance		Specific Reserve		Number of Loans		Loan Balance		Specific Reserve
Commercial, industrial, and agricultural		8	$	2,881	$	120		7	$	2,640	$	125
Commercial mortgages		10		14,627		3,908		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		18	$	17,508	$	4,028		15	$	11,831	$	2,339

The following tables present loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2017. There were no loans modified as a troubled debt restructuring during the nine months ended September 30, 2016. There were four loans modified as a troubled debt restructuring during the three months ended September 30, 2017, and no loans modified as troubled debt restructurings during the three months ended September 30, 2016.


	Nine Months Ended September 30, 2017
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural		2	$	324	$	379
Commercial mortgages		2		6,227		6,276
Residential real estate		0		0		0
Consumer		0		0		0
Credit cards		0		0		0

Total		4	$	6,551	$	6,655

The troubled debt restructurings described above increased the allowance for loan losses by $169 and $0 during the three months ended September 30, 2017 and 2016 and $1,324 and $0 during the nine months ended September 30, 2017 and 2016.

A troubled debt restructured loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

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 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.

September 30, 2017


	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	631,550	$	9,312	$	23,082	$	0	$	663,944
Commercial mortgages		636,522		3,129		16,479		0		656,130

Total	$	1,268,072	$	12,441	$	39,561	$	0	$	1,320,074

December 31, 2016


	Pass		Special Mention		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 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, 2017 and December 31, 2016:


	September 30, 2017						December 31, 2016
	Residential				Credit		Residential				Credit
	Real Estate		Consumer		Cards		Real Estate		Consumer		Cards
Performing	$	691,233	$	77,552	$	6,228	$	647,283	$	73,817	$	6,036
Nonperforming		5,826		712		21		5,600		999		10

Total	$	697,059	$	78,264	$	6,249	$	652,883	$	74,816	$	6,046

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 September 30, 2017 and December 31, 2016:


	September 30,			December 31,
	2017			2016
Consumer	$	22,393		$	24,026
Residential real estate		0			1,209
Less: unearned discount		(3,621	)		(3,430	)

Total	$	18,772		$	21,805