LOANS

Total net loans at September 30, 2018 and December 31, 2017 are summarized as follows:



	September 30, 2018			December 31, 2017
Commercial, industrial, and agricultural	$	853,495		$	749,138
Commercial mortgages	683,979			600,065
Residential real estate	760,342			713,347
Consumer	85,888			80,193
Credit cards	7,434			6,753
Overdrafts	325			352
Less: unearned discount	(4,508		)	(3,889		)
allowance for loan losses	(22,510		)	(19,693		)
Loans, net	$	2,364,445		$	2,126,266

At September 30, 2018 and December 31, 2017, net unamortized loan fees of $3,331 and $2,574, 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 36% and 35% of the Corporation’s total loan portfolio at September 30, 2018 and December 31, 2017, respectively. Commercial mortgage loans comprised 29% and 28% of the Corporation’s total loan portfolio at September 30, 2018 and December 31, 2017, 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 32% and 33% of the Corporation’s total loan portfolio at September 30, 2018 and December 31, 2017, 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 represented less than 10% of the total loan portfolio at

both September 30, 2018 and December 31, 2017. 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, 2018 were as follows:



	Commercial, Industrial, and Agricultural			Commercial Mortgages		Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, July 1, 2018	$	7,143		$	10,615	$	1,900		$	2,156		$	101		$	207		$	22,122
Charge-offs	(30		)	—		(212		)	(469		)	(8		)	(94		)	(813		)
Recoveries	3			—		55			28			3			17			106
Provision (benefit) for loan losses	(536		)	682		235			608			11			95			1,095
Allowance for loan losses, September 30, 2018	$	6,580		$	11,297	$	1,978		$	2,323		$	107		$	225		$	22,510

Transactions in the allowance for loan losses for the nine months ended September 30, 2018 were as follows:



	Commercial, Industrial, and Agricultural			Commercial Mortgages		Residential Real Estate			Consumer			Credit Cards			Overdrafts			Total
Allowance for loan losses, January 1, 2018	$	6,160		$	9,007	$	2,033		$	2,179		$	120		$	194		$	19,693
Charge-offs	(61		)	—		(289		)	(1,610		)	(53		)	(236		)	(2,249		)
Recoveries	165			—		67			112			27			64			435
Provision for loan losses	316			2,290		167			1,642			13			203			4,631
Allowance for loan losses, September 30, 2018	$	6,580		$	11,297	$	1,978		$	2,323		$	107		$	225		$	22,510

Transactions in the allowance for loan losses for the three months ended September 30, 2017 were as follows:



	Commercial, Industrial, and Agricultural			Commercial Mortgages			Residential Real Estate			Consumer			Credit 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			—			96			8			14			157
Provision (benefit) for loan losses	(223		)	472			468			627			—			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, 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	(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

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, 2018 and December 31, 2017. The recorded investment in loans excludes accrued interest and unearned discounts due to their insignificance.

September 30, 2018



	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	$	—	$	1	$	—	$	—	$	—	$	—	$	1
Collectively evaluated for impairment	6,343		5,062		1,978		2,323		107		225		16,038
Acquired with deteriorated credit quality	—		—		—		—		—		—		—
Modified in a troubled debt restructuring	237		6,234		—		—		—		—		6,471
Total ending allowance balance	$	6,580	$	11,297	$	1,978	$	2,323	$	107	$	225	$	22,510
Loans:
Individually evaluated for impairment	$	1,500	$	467	$	—	$	—	$	—	$	—	$	1,967
Collectively evaluated for impairment	847,197		669,989		760,342		85,888		7,434		325		2,371,175
Acquired with deteriorated credit quality	—		577		—		—		—		—		577
Modified in a troubled debt restructuring	4,798		12,946		—		—		—		—		17,744
Total ending loans balance	$	853,495	$	683,979	$	760,342	$	85,888	$	7,434	$	325	$	2,391,463

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	$	—	$	—	$	—	$	—	$	—	$	47
Collectively evaluated for impairment	5,868		3,563		2,033		2,179		120		194		13,957
Acquired with deteriorated credit quality	—		—		—		—		—		—		—
Modified in a troubled debt restructuring	245		5,444		—		—		—		—		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	$	—	$	—	$	—	$	—	$	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	—		1,079		—		—		—		—		1,079
Modified in a troubled debt restructuring	5,213		12,090		—		—		—		—		17,303
Total ending loans balance	$	749,138	$	600,065	$	713,347	$	80,193	$	6,753	$	352	$	2,149,848

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, 2018 and December 31, 2017 and for the three and nine months ended September 30, 2018 and 2017:

September 30, 2018



	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded:
Commercial, industrial, and agricultural	$	1,096	$	1,096	$	237
Commercial mortgage	9,717		8,991		6,235
Residential real estate	—		—		—
With no related allowance recorded:
Commercial, industrial, and agricultural	5,918		5,202		—
Commercial mortgage	5,464		4,422		—
Residential real estate	—		—		—
Total	$	22,195	$	19,711	$	6,472

December 31, 2017



	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	—		—		—
With no related allowance recorded:
Commercial, industrial, and agricultural	5,264		4,485		—
Commercial mortgage	3,211		2,410		—
Residential real estate	—		—		—
Total	$	20,330	$	18,541	$	5,736

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, 2018						Three months ended September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	3,460	$	11	$	11	$	1,190	$	20	$	20
Commercial mortgage	9,042		37		37		9,724		77		77
Residential real estate	—		—		—		—		—		—
With no related allowance recorded:
Commercial, industrial, and agricultural	5,569		69		69		2,142		23		23
Commercial mortgage	5,153		20		20		4,981		33		33
Residential real estate	—		—		—		—		—		—
Total	$	23,224	$	137	$	137	$	18,037	$	153	$	153



	Nine months ended September 30, 2018						Nine months ended September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With an allowance recorded:
Commercial, industrial, and agricultural	$	2,672	$	54	$	54	$	1,413	$	56	$	56
Commercial mortgage	9,147		111		111		12,497		293		293
Residential real estate	—		—		—		—		—		—
With no related allowance recorded:
Commercial, industrial, and agricultural	5,084		160		160		1,927		73		73
Commercial mortgage	4,511		66		66		2,490		100		100
Residential real estate	—		—		—		—		—		—
Total	$	21,414	$	391	$	391	$	18,327	$	522	$	522

The following table presents the recorded investment in non-accrual loans and loans past due over 90 days still accruing interest by class of loans as of September 30, 2018 and December 31, 2017:



	September 30, 2018				December 31, 2017
	Non-accrual		Past Due Over 90 Days Still on Accrual		Non-accrual		Past Due Over 90 Days Still on Accrual
Commercial, industrial, and agricultural	$	3,824	$	265	$	1,869	$	78
Commercial mortgages	10,151		—		11,065		—
Residential real estate	4,767		1,488		5,470		338
Consumer	140		82		828		17
Credit cards	—		26		—		44
Total	$	18,882	$	1,861	$	19,232	$	477

Non-accrual 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, 2018 and December 31, 2017 by class of loans.

September 30, 2018



	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	$	76	$	587	$	1,557	$	2,220	$	851,275	$	853,495
Commercial mortgages	614		—		58		672		683,307		683,979
Residential real estate	2,039		844		4,937		7,820		752,522		760,342
Consumer	526		605		830		1,961		83,927		85,888
Credit cards	30		33		26		89		7,345		7,434
Overdrafts	—		—		—		—		325		325
Total	$	3,285	$	2,069	$	7,408	$	12,762	$	2,378,701	$	2,391,463

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		—		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	—		—		—		—		352		352
Total	$	5,753	$	2,457	$	6,551	$	14,761	$	2,135,087	$	2,149,848

Troubled Debt Restructurings

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 September 30, 2018 and December 31, 2017 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.

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, 2018 and December 31, 2017.



	September 30, 2018					December 31, 2017
	Number of Loans	Loan Balance		Specific Reserve		Number of Loans	Loan Balance		Specific Reserve
Commercial, industrial, and agricultural	11	$	4,798	$	237	11	$	5,213	$	245
Commercial mortgages	13	12,946		6,234		9	12,090		5,444
Residential real estate	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Credit cards	—	—		—		—	—		—
Total	24	$	17,744	$	6,471	20	$	17,303	$	5,689

The following table presents information associated with the loans that were modified as troubled debt restructurings during the nine months ended September 30, 2018 and the three and nine months ended September 30, 2017. There were no loans modified as troubled debt restructurings during the three months ended September 30, 2018.



	Nine months ended September 30, 2018					Three and Nine months ended September 30, 2017
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial, industrial, and agricultural	—	$	—	$	—	2	$	324	$	379
Commercial mortgages	4	1,091		1,091		2	6,227		6,276
Residential real estate	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Credit cards	—	—		—		—	—		—
Total	4	$	1,091	$	1,091	4	$	6,551	$	6,655

The troubled debt restructurings described above increased the allowance for loan losses by $113 and resulted in charge-offs of zero during the nine months ended September 30, 2018. The troubled debt restructurings described above increased the allowance for loan losses by $169 and $1,324 during the three and nine months ended September 30, 2017, respectively.

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.

September 30, 2018



	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	827,425	$	10,304	$	15,766	$	—	$	853,495
Commercial mortgages	665,896		3,309		14,774		—		683,979
Total	$	1,493,321	$	13,613	$	30,540	$	—	$	1,537,474

December 31, 2017



	Pass		Special Mention		Substandard		Doubtful		Total
Commercial, industrial, and agricultural	$	713,102	$	16,726	$	19,310	$	—	$	749,138
Commercial mortgages	581,631		4,419		14,015		—		600,065
Total	$	1,294,733	$	21,145	$	33,325	$	—	$	1,349,203

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, 2018 and December 31, 2017:



	September 30, 2018						December 31, 2017
	Residential Real Estate		Consumer		Credit Cards		Residential Real Estate		Consumer		Credit Cards
Performing	$	754,087	$	85,666	$	7,408	$	707,539	$	79,348	$	6,709
Nonperforming	6,255		222		26		5,808		845		44
Total	$	760,342	$	85,888	$	7,434	$	713,347	$	80,193	$	6,753

The Corporation’s portfolio of 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, 2018 and December 31, 2017:



	September 30, 2018			December 31, 2017
Consumer	$	25,242		$	23,428
Less: unearned discount	(4,508		)	(3,889		)
Total	$	20,734		$	19,539