LOANS

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


	June 30, 2017			December 31, 2016
Commercial, industrial, and agricultural	$	636,836		$	567,800
Commercial mortgages		618,262			574,826
Residential real estate		684,294			652,883
Consumer		76,476			74,816
Credit cards		6,080			6,046
Overdrafts		2,359			595
Less: unearned discount		(3,478	)		(3,430	)
allowance for loan losses		(17,269	)		(16,330	)

Loans, net	$	2,003,560		$	1,857,206

At June 30, 2017 and December 31, 2016, net unamortized loan (fees) costs of $(2,347) 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 June 30, 2017 and December 31, 2016, respectively. Commercial mortgage loans comprised 31% and 31% of the Corporation’s total loan portfolio at June 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 34% and 35% of the Corporation’s total loan portfolio at June 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 June 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 June 30, 2017 were as follows:


	Commercial,					Residential
	Industrial, and			Commercial		Real						Credit
	Agricultural			Mortgages		Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, April 1, 2017	$	4,785		$	7,357	$	2,022		$	2,089		$	105		$	188		$	16,546
Charge-offs		(29	)		0		(130	)		(531	)		(14	)		(60	)		(764	)
Recoveries		119			192		2			12			4			24			353
Provision (benefit) for loan losses		688			92		(224	)		498			47			33			1,134

Allowance for loan losses, June 30, 2017	$	5,563		$	7,641	$	1,670		$	2,068		$	142		$	185		$	17,269

Transactions in the allowance for loan losses for the six months ended June 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		(30	)		0		(198	)		(1,266	)		(72	)		(129	)		(1,695	)
Recoveries		131			194		73			14			15			57			484
Provision (benefit) for loan losses		34			694		142			1,105			106			69			2,150

Allowance for loan losses, June 30, 2017	$	5,563		$	7,641	$	1,670		$	2,068		$	142		$	185		$	17,269

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


	Commercial,						Residential
	Industrial, and			Commercial			Real						Credit
	Agricultural			Mortgages			Estate			Consumer			Cards			Overdrafts			Total
Allowance for loan losses, April 1, 2016	$	5,627		$	6,044		$	2,574		$	2,274		$	81		$	138		$	16,738
Charge-offs		(162	)		(20	)		(124	)		(701	)		(28	)		(30	)		(1,065	)
Recoveries		39			0			3			30			3			20			95
Provision (benefit) for loan losses		(286	)		183			(154	)		463			(6	)		20			220

Allowance for loan losses, June 30, 2016	$	5,218		$	6,207		$	2,299		$	2,066		$	50		$	148		$	15,988

Transactions in the allowance for loan losses for the six months ended June 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		(433	)		(20	)		(149	)		(1,688	)		(37	)		(81	)		(2,408	)
Recoveries		47			5			62			74			15			40			243
Provision (benefit) for loan losses		(431	)		617			(89	)		1,309			(18	)		28			1,416

Allowance for loan losses, June 30, 2016	$	5,218		$	6,207		$	2,299		$	2,066		$	50		$	148		$	15,988

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 June 30, 2017 and December 31, 2016. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance. June 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		$	2,151		$	0		$	0		$	0		$	0		$	2,151
Collectively evaluated for impairment		5,442			3,862			1,670			2,068			142			185			13,369
Acquired with deteriorated credit quality		0			0			0			0			0			0			0
Modified in a troubled debt restructuring		121			1,628			0			0			0			0			1,749

Total ending allowance balance	$	5,563		$	7,641		$	1,670		$	2,068		$	142		$	185		$	17,269

Loans:
Individually evaluated for impairment	$	630		$	6,094		$	0		$	0		$	0		$	0		$	6,724
Collectively evaluated for impairment		633,655			602,031			684,294			76,476			6,080			2,359			2,004,895
Acquired with deteriorated credit quality		0			1,501			0			0			0			0			1,501
Modified in a troubled debt restructuring		2,551			8,636			0			0			0			0			11,187

Total ending loans balance	$	636,836		$	618,262		$	684,294		$	74,476		$	6,080		$	2,359		$	2,024,307

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 June 30, 2017 and December 31, 2016 and for the six months ended June 30, 2017 and 2016:

June 30, 2017


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	1,168	$	1,168	$	121
Commercial mortgage		10,167		9,836		3,779
Residential real estate		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural		2,856		2,013		0
Commercial mortgage		5,629		4,894		0
Residential real estate		0		0		0

Total	$	19,820	$	17,911	$	3,900

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 June 30, 2017						Three Months Ended June 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	$	1,398	$	18	$	18	$	3,150	$	2	$	2
Commercial mortgage		12,505		71		71		5,309		4		4
Residential real estate		0		0		0		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural		1,833		34		34		2,525		2		2
Commercial mortgage		2,447		67		67		4,458		3		3
Residential real estate		0		0		0		0		0		0

Total	$	18,183	$	190	$	190	$	15,442	$	11	$	11


	Six Months Ended June 30, 2017						Six Months Ended June 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	$	1,480	$	36	$	36	$	3,249	$	2	$	2
Commercial mortgage		13,459		216		216		5,320		4		4
Residential real estate		0		0		0		83		6		6
With no related allowance recorded:
Commercial, industrial, and agricultural		1,812		50		50		2,612		2		2
Commercial mortgage		1,631		67		67		4,622		3		3
Residential real estate		0		0		0		0		0		0

Total	$	18,382	$	369	$	369	$	15,886	$	17	$	17

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 June 30, 2017 and December 31, 2016:


	June 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	$	2,288	$	0	$	2,734	$	0
Commercial mortgages		11,579		0		5,996		0
Residential real estate		5,406		282		5,600		0
Consumer		722		20		999		0
Credit cards		0		12		0		10

Total	$	19,995	$	314	$	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 June 30, 2017 and December 31, 2016 by class of loans.

June 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	$	2,366	$	464	$	948	$	3,778	$	633,058	$	636,836
Commercial mortgages		41		0		1,450		1,491		616,771		618,262
Residential real estate		1,851		1,077		4,385		7,313		676,981		684,294
Consumer		517		277		718		1,512		74,964		76,476
Credit cards		28		32		12		72		6,008		6,080
Overdrafts		0		0		0		0		2,359		2,359

Total	$	4,803	$	1,850	$	7,513	$	14,166	$	2,010,141	$	2,024,307

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 June 30, 2017 and December 31, 2016.


	June 30, 2017						December 31, 2016
	Number of Loans		Loan Balance		Specific Reserve		Number of Loans		Loan Balance		Specific Reserve
Commercial, industrial, and agricultural		6	$	2,551	$	121		7	$	2,640	$	125
Commercial mortgages		8		8,636		1,628		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		14	$	11,187	$	1,749		15	$	11,831	$	2,339

There were no loans modified as troubled debt restructurings during the three or six months ended June 30, 2017 or June 30, 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. All loans modified in troubled debt restructurings are performing in accordance with their modified terms as of June 30, 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.

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.

June 30, 2017


	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	601,561	$	9,575	$	25,700	$	0	$	636,836
Commercial mortgages		599,015		3,100		16,147		0		618,262

Total	$	1,200,576	$	12,675	$	41,847	$	0	$	1,255,098

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 June 30, 2017 and December 31, 2016:


	June 30, 2017						December 31, 2016
	Residential				Credit		Residential				Credit
	Real Estate		Consumer		Cards		Real Estate		Consumer		Cards
Performing	$	678,606	$	75,734	$	6,068	$	647,283	$	73,817	$	6,036
Nonperforming		5,688		742		12		5,600		999		10

Total	$	684,294	$	76,476	$	6,080	$	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 June 30, 2017 and December 31, 2016:


	June 30,			December 31,
	2017			2016
Consumer	$	22,011		$	24,026
Residential real estate		1,142			1,209
Less: unearned discount		(3,478	)		(3,430	)

Total	$	19,675		$	21,805