5. Loans

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


	2017			2016

Commercial, industrial, and agricultural	$	749,138		$	567,800
Commercial mortgages		600,065			574,826
Residential real estate		713,347			652,883
Consumer		80,193			74,816
Credit cards		6,753			6,046
Overdrafts		352			595
Less: unearned discount		(3,889	)		(3,430	)
allowance for loan losses		(19,693	)		(16,330	)

Loans, net	$	2,126,266		$	1,857,206

At December 31, 2017 and 2016 net unamortized loan (fees) costs of ($2,574) 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 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 35% and 30% of the Corporation’s total loan portfolio at December 31, 2017 and 2016, respectively. Commercial mortgage loans comprised 28% and 31% of the Corporation’s total loan portfolio at December 31, 2017 and 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 December 31, 2017 and 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 December 31, 2017 and 2016. Terms and collateral requirements vary depending on the size and nature of the loan.

Transactions in the allowance for loan losses for the year ended December 31, 2017 were as follows:


	Commercial, Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2017	$	5,428		$	6,753		$	1,653		$	2,215		$	93		$	188		$	16,330
Charge-offs		(544	)		(116	)		(466	)		(2,555	)		(144	)		(252	)		(4,077	)
Recoveries		235			197			78			161			27			87			785
Provision for loan losses		1,041			2,173			768			2,358			144			171			6,655

Allowance for loan losses, December 31, 2017	$	6,160		$	9,007		$	2,033		$	2,179		$	120		$	194		$	19,693

Transactions in the allowance for loan losses for the year ended December 31, 2016 were as follows:


	Commercial, Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2016	$	6,035		$	5,605		$	2,475		$	2,371		$	90		$	161		$	16,737
Charge-offs		(601	)		(201	)		(499	)		(3,324	)		(96	)		(240	)		(4,961	)
Recoveries		89			8			93			122			22			71			405
Provision for loan losses		(95	)		1,341			(416	)		3,046			77			196			4,149

Allowance for loan losses, December 31, 2016	$	5,428		$	6,753		$	1,653		$	2,215		$	93		$	188		$	16,330

Transactions in the allowance for loan losses for the year ended December 31, 2015 were as follows:


	Commercial, Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2015	$	7,114		$	5,310		$	2,479		$	2,205		$	71		$	194		$	17,373
Charge-offs		(307	)		(486	)		(632	)		(1,956	)		(116	)		(221	)		(3,718	)
Recoveries		267			52			8			96			14			85			522
Provision for loan losses		(1,039	)		729			620			2,026			121			103			2,560

Allowance for loan losses, December 31, 2015	$	6,035		$	5,605		$	2,475		$	2,371		$	90		$	161		$	16,737

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


December 31, 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	$	47	$	0	$	0	$	0	$	0	$	0	$	47
Collectively evaluated for impairment		5,868		3,563		2,033		2,179		120		194		13,957
Acquired with deteriorated credit quality		0		0		0		0		0		0		0
Modified in a troubled debt restructuring		245		5,444		0		0		0		0		5,689

Total ending allowance balance	$	6,160	$	9,007	$	2,033	$	2,179	$	120	$	194	$	19,693

Loans:
Individually evaluated for impairment	$	1,187	$	51	$	0	$	0	$	0	$	0	$	1,238
Collectively evaluated for impairment		742,738		586,845		713,347		80,193		6,753		352		2,130,228
Acquired with deteriorated credit quality		0		1,079		0		0		0		0		1,079
Modified in a troubled debt restructuring		5,213		12,090		0		0		0		0		17,303

Total ending loans balance	$	749,138	$	600,065	$	713,347	$	80,193	$	6,753	$	352	$	2,149,848


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

The following tables present information related to loans individually evaluated for impairment, including loans modified in troubled debt restructurings, by portfolio segment as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016, and 2015:


December 31, 2017	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	1,915	$	1,915	$	292
Commercial mortgage		9,940		9,731		5,444
Residential real estate		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural		5,264		4,485		0
Commercial mortgage		3,211		2,410		0
Residential real estate		0		0		0

Total	$	20,330	$	18,541	$	5,736


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


	Year Ended December 31, 2017
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	1,513	$	97	$	97
Commercial mortgage		11,944		327		327
Residential real estate		0		0		0
With no related allowance recorded:
Commercial, industrial, and agricultural		2,438		114		114
Commercial mortgage		2,474		122		122
Residential real estate		0		0		0

Total	$	18,369	$	660	$	660


	Year Ended December 31, 2016
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	2,616	$	2	$	2
Commercial mortgage		8,138		0		0
Residential real estate		50		6		6
With no related allowance recorded:
Commercial, industrial, and agricultural		2,290		0		0
Commercial mortgage		2,773		0		0
Residential real estate		0		0		0

Total	$	15,867	$	8	$	8


	Year Ended December 31, 2015
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	5,667	$	44	$	44
Commercial mortgage		8,154		0		0
Residential real estate		370		21		21
With no related allowance recorded:
Commercial, industrial, and agricultural		1,831		14		14
Commercial mortgage		4,806		0		0
Residential real estate		103		6		6

Total	$	20,931	$	85	$	85

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of December 31, 2017 and 2016:


	December 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	$	1,869	$	78	$	2,734	$	0
Commercial mortgages		11,065		0		5,996		0
Residential real estate		5,470		338		5,600		0
Consumer		828		17		999		0
Credit cards		0		44		0		10

Total	$	19,232	$	477	$	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 December 31, 2017 and 2016 by class of loans.


December 31, 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	$	2,745	$	646	$	748	$	4,139	$	744,999	$	749,138
Commercial mortgages		233		0		292		525		599,540		600,065
Residential real estate		2,290		1,494		4,655		8,439		704,908		713,347
Consumer		454		307		812		1,573		78,620		80,193
Credit cards		31		10		44		85		6,668		6,753
Overdrafts		0		0		0		0		352		352

Total	$	5,753	$	2,457	$	6,551	$	14,761	$	2,135,087	$	2,149,848


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

During the years ended December 31, 2017 and 2016, the terms of certain loans were 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 December 31, 2017 and December 31, 2016.


	December 31, 2017						December 31, 2016
	Number of Loans		Loan Balance		Specific Reserve		Number of Loans		Loan Balance		Specific Reserve
Commercial, industrial, and agricultural		10	$	5,213	$	245		7	$	2,640	$	125
Commercial mortgages		9		12,090		5,444		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		19	$	17,303	$	5,689		15	$	11,831	$	2,339

The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2017, 2016, and 2015:


	Year Ended December 31, 2017
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural		4	$	2,750	$	2,750
Commercial mortgages		2		6,421		6,421
Residential real estate		0		0		0
Consumer		0		0		0
Credit cards		0		0		0

Total		6	$	9,171	$	9,171


	Year Ended December 31, 2016
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural		1	$	109	$	109
Commercial mortgages		0		0		0
Residential real estate		0		0		0
Consumer		0		0		0
Credit cards		0		0		0

Total		1	$	109	$	109


	Year Ended December 31, 2015
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural		1	$	1,327	$	1,327
Commercial mortgages		0		0		0
Residential real estate		0		0		0
Consumer		0		0		0
Credit cards		0		0		0

Total		1	$	1,327	$	1,327

The troubled debt restructurings described above increased the allowance for loan losses by $4,024, $0 and $0 during the years ended December 31, 2017, 2016, and 2015, respectively.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 4-15 years. Modifications involving an extension of the maturity date were for periods ranging from 4-18 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 December 31, 2017 and 2016 and no principal balances were forgiven in connection with the loan restructurings.

During the year ended December 31, 2017 four impaired commercial industrial loans totaling $2,750 were modified in troubled debt restructurings. The Corporation recorded an additional provision for loan losses of $129 and there were no chargeoffs for these loans during the year ended December 31, 2017.

During the year ended December 31, 2017 two impaired commercial real estate loans totaling $6,421 were modified in troubled debt restructurings. The Corporation recorded an additional provision for loan losses of $3,895 and there were no chargeoffs for these loans during the year ended December 31, 2017.

During the year ended December 31, 2016 one impaired commercial industrial loan having a balance of $109 was modified in troubled debt restructurings. The Corporation did not record any additional provision for loan losses and there were no chargeoffs for this loan during the year ended December 31, 2016.

During the year ended December 31, 2015 one impaired commercial industrial loan having a balance of $1,327 was modified in troubled debt restructurings. The Corporation did not record any additional provision for loan losses and there were no chargeoffs for this loan during the year ended December 31, 2015.

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. 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.


December 31, 2017	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	713,102	$	16,726	$	19,310	$	0	$	749,138
Commercial mortgages		581,631		4,419		14,015		0		600,065

Total	$	1,294,733	$	21,145	$	33,325	$	0	$	1,349,203


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 performance status of the loan, which was previously presented, and by payment activity. Nonperforming loans include loans on nonaccrual status and loans past due over 90 days and still accruing interest. The following table presents the recorded investment in residential, consumer, and credit card loans based on performance status as of December 31, 2017 and December 31, 2016:


	December 31, 2017						December 31, 2016
	Residential Real Estate		Consumer		Credit Cards		Residential Real Estate		Consumer		Credit Cards
Performing	$	707,539	$	79,348	$	6,709	$	647,283	$	73,817	$	6,036
Nonperforming		5,808		845		44		5,600		999		10

Total	$	713,347	$	80,193	$	6,753	$	652,883	$	74,816	$	6,046

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, included in consumer and residential loans above, is summarized as follows at December 31, 2017 and 2016:


	2017			2016
Consumer	$	23,428		$	24,026
Residential real estate		0			1,209
Less: unearned discount		(3,889	)		(3,430	)

Total	$	19,539		$	21,805