LOANS

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


	March 31, 2017			December 31, 2016
Commercial, industrial, and agricultural	$	587,738		$	567,800
Commercial mortgages		583,653			574,826
Residential real estate		659,930			652,883
Consumer		74,187			74,816
Credit cards		6,076			6,046
Overdrafts		591			595
Less: unearned discount		(3,224	)		(3,430	)
allowance for loan losses		(16,546	)		(16,330	)

Loans, net	$	1,892,405		$	1,857,206

At March 31, 2017 and December 31, 2016, net unamortized loan (fees) costs of $(1,753) 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 31% and 30% of the Corporation’s total loan portfolio at March 31, 2017 and December 31, 2016, respectively. Commercial mortgage loans comprised 31% and 31% of the Corporation’s total loan portfolio at March 31, 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 35% and 35% of the Corporation’s total loan portfolio at March 31, 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 March 31, 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 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

Transactions in the allowance for loan losses for the three months ended March 31, 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		(271	)		0		(25	)		(987	)		(9	)		(51	)		(1,343	)
Recoveries		8			5		59			44			12			20			148
Provision (benefit) for loan losses		(145)			434		65			846			(12	)		8			1,196

Allowance for loan losses, March 31, 2016	$	5,627		$	6,044	$	2,574		$	2,274		$	81		$	138		$	16,738

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


	Commercial,				Residential
	Industrial, and		Commercial		Real				Credit
March 31, 2017	Agricultural		Mortgages		Estate		Consumer		Cards		Overdrafts		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	189	$	1,548	$	0	$	0	$	0	$	0	$	1,737
Collectively evaluated for impairment		4,473		3,762		2,022		2,089		105		188		12,639
Acquired with deteriorated credit quality		0		0		0		0		0		0		0
Modified in a troubled debt restructuring		123		2,047		0		0		0		0		2,170

Total ending allowance balance	$	4,785	$	7,357	$	2,022	$	2,089	$	105	$	188	$	16,546

Loans:
Individually evaluated for impairment	$	686	$	6,171	$	0	$	0	$	0	$	0	$	6,857
Collectively evaluated for impairment		584,252		566,967		659,930		74,187		6,076		591		1,892,003
Acquired with deteriorated credit quality		205		1,514		0		0		0		0		1,719
Modified in a troubled debt restructuring		2,595		9,001		0		0		0		0		11,596

Total ending loans balance	$	587,738	$	583,653	$	659,930	$	74,187	$	6,076	$	591	$	1,912,175


	Commercial,				Residential
	Industrial, and		Commercial		Real				Credit
December 31, 2016	Agricultural		Mortgages		Estate		Consumer		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

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, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016:


March 31, 2017	Unpaid Principal		Recorded		Allowance for Loan
	Balance		Investment		Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	1,639	$	1,628	$	312
Commercial mortgage		16,140		15,172		3,595
Residential real estate		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural		2,534		1,653		0
Commercial mortgage		0		0		0
Residential real estate		0		0		0

Total	$	20,313	$	18,453	$	3,907


December 31, 2016	Unpaid Principal		Recorded		Allowance for Loan
	Balance		Investment		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 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


	Three Months Ended March 31, 2016
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	3,379	$	0	$	0
Commercial mortgage		5,408		0		0
Residential real estate		124		5		5
With no related allowance recorded:
Commercial, industrial, and agricultural		2,691		0		0
Commercial mortgage		4,720		0		0
Residential real estate		0		1		1

Total	$	16,322	$	6	$	6

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, 2017 and December 31, 2016:


	March 31, 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	$	2,578	$	420	$	2,734	$	0
Commercial mortgages		11,254		0		5,996		0
Residential real estate		5,551		255		5,600		0
Consumer		579		13		999		0
Credit cards		0		10		0		10

Total	$	19,962	$	698	$	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 March 31, 2017 and December 31, 2016 by class of loans.


					Greater Than
	30-59 Days		60-89 Days		89 Days		Total		Loans Not
March 31, 2017	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial, industrial, and agricultural	$	736	$	1,703	$	1,599	$	4,038	$	583,700	$	587,738
Commercial mortgages		299		0		1,050		1,349		582,304		583,653
Residential real estate		2,148		996		4,242		7,386		652,544		659,930
Consumer		612		314		567		1,493		72,694		74,187
Credit cards		32		22		10		64		6,012		6,076
Overdrafts		0		0		0		0		591		591

Total	$	3,827	$	3,035	$	7,468	$	14,330	$	1,897,845	$	1,912,175


					Greater Than
	30-59 Days		60-89 Days		89 Days		Total		Loans Not
December 31, 2016	Past Due		Past Due		Past Due		Past Due		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 March 31, 2017 and December 31, 2016.


	March 31, 2017						December 31, 2016
	Number of Loans		Loan Balance		Specific Reserve		Number of Loans		Loan Balance		Specific Reserve
Commercial, industrial, and agricultural		7	$	2,595	$	123		7	$	2,640	$	125
Commercial mortgages		8		9,001		2,047		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		15	$	11,596	$	2,170		15	$	11,831	$	2,339

There were no loans modified as troubled debt restructurings during the three months ended March 31, 2017 or March 31, 2016.

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, 2017 and December 31, 2016 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 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.


March 31, 2017	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	553,488	$	13,816	$	20,434	$	0	$	587,738
Commercial mortgages		561,394		3,050		19,209		0		583,653

Total	$	1,114,882	$	16,866	$	39,643	$	0	$	1,171,391


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 March 31, 2017 and December 31, 2016:


	March 31, 2017						December 31, 2016
	Residential				Credit		Residential				Credit
	Real Estate		Consumer		Cards		Real Estate		Consumer		Cards
Performing	$	654,124	$	73,595	$	6,066	$	647,283	$	73,817	$	6,036
Nonperforming		5,806		592		10		5,600		999		10

Total	$	659,930	$	74,187	$	6,076	$	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 March 31, 2017 and December 31, 2016:


	March 31,			December 31,
	2017			2016
Consumer	$	21,385		$	24,026
Residential real estate		1,165			1,209
Less: unearned discount		(3,224	)		(3,430	)

Total	$	19,326		$	21,805