LOANS AND ALLOWANCE FOR LOAN LOSSES

The Corporation grants commercial, residential, and consumer loans to customers primarily within southcentral Pennsylvania and northern Maryland and the surrounding area. A large portion of the loan portfolio is secured by real estate. Although the Bank has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy.

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of December 31, 2017 and 2016:



In thousands	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2017
Originated Loans
Commercial and industrial	$	154,177	$	3,466	$	1,812	$	—	$	159,455
Commercial real estate	325,002		17,666		9,277		—		351,945
Commercial real estate construction	27,413		767		250		—		28,430
Residential mortgage	363,195		3,251		478		—		366,924
Home equity lines of credit	81,976		360		—		—		82,336
Consumer	14,454		—		—		—		14,454
Total Originated Loans	966,217		25,510		11,817		—		1,003,544
Acquired Loans
Commercial and industrial	6,120		244		10		—		6,374
Commercial real estate	124,852		12,734		3,228		—		140,814
Commercial real estate construction	6,742		388		—		—		7,130
Residential mortgage	52,959		2,762		3,248		—		58,969
Home equity lines of credit	24,990		88		378		—		25,456
Consumer	1,525		358		—		—		1,883
Total Acquired Loans	217,188		16,574		6,864		—		240,626
Total Loans
Commercial and industrial	160,297		3,710		1,822		—		165,829
Commercial real estate	449,854		30,400		12,505		—		492,759
Commercial real estate construction	34,155		1,155		250		—		35,560
Residential mortgage	416,154		6,013		3,726		—		425,893
Home equity lines of credit	106,966		448		378		—		107,792
Consumer	15,979		358		—		—		16,337
Total Loans	$	1,183,405	$	42,084	$	18,681	$	—	$	1,244,170

December 31, 2016
Commercial and industrial	$	134,088	$	2,355	$	3,901	$	—	$	140,344
Commercial real estate	291,762		17,376		9,842		—		318,980
Commercial real estate construction	13,606		1,202		463		—		15,271
Residential mortgage	344,048		3,617		874		—		348,539
Home equity lines of credit	69,190		756		126		—		70,072
Consumer	14,704		—		—		—		14,704
Total	$	867,398	$	25,306	$	15,206	$	—	$	907,910

The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.



In thousands	Year Ended December 31, 2017
Balance at beginning of period	$	—
Acquisitions of impaired loans	1,458
Reclassification from non-accretable differences	—
Accretion to loan interest income	(224		)
Balance at end of period	$	1,234

Cash flows expected to be collected on acquired loans are estimated quarterly by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default and the amount of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Improved cash flow expectations for loans or pools are recorded first as a reversal of previously recorded impairment, if any, and then as an increase in prospective yield when all previously recorded impairment has been recaptured. Decreases in expected cash flows are recognized as impairment through a charge to the provision for loan losses and credit to the allowance for loan losses.

The following table summarizes information relative to impaired loans by loan portfolio class as of December 31, 2017 and 2016:



	Impaired Loans with Allowance						Impaired Loans with No Allowance
In thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance
December 31, 2017
Commercial and industrial	$	1,311	$	1,311	$	792	$	188	$	188
Commercial real estate	832		832		60		7,528		7,528
Commercial real estate construction	—		—		—		—		—
Residential mortgage	377		377		377		101		101
Total	$	2,520	$	2,520	$	1,229	$	7,817	$	7,817
December 31, 2016
Commercial and industrial	$	948	$	948	$	599	$	1,178	$	1,178
Commercial real estate	—		—		—		8,764		8,965
Commercial real estate construction	—		—		—		300		300
Residential mortgage	376		376		333		379		379
Total	$	1,324	$	1,324	$	932	$	10,621	$	10,822

The following table summarizes information in regards to average of impaired loans and related interest income by loan portfolio class:



	Impaired Loans with Allowance				Impaired Loans with No Allowance
In thousands	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
December 31, 2017
Commercial and industrial	$	1,184	$	—	$	785	$	—
Commercial real estate	499		—		8,030		330
Commercial real estate construction	—		—		60		25
Residential mortgage	377		—		210		15
Total	$	2,060	$	—	$	9,085	$	370
December 31, 2016
Commercial and industrial	$	190	$	—	$	1,356	$	3
Commercial real estate	—		—		8,377		371
Commercial real estate construction	—		—		330		—
Residential mortgage	224		—		424		17
Total	$	414	$	—	$	10,487	$	391
December 31, 2015
Commercial and industrial	$	—	$	—	$	1,591	$	129
Commercial real estate	—		—		9,057		449
Commercial real estate construction	—		—		276		—
Residential mortgage	278		—		463		18
Total	$	278	$	—	$	11,387	$	596

No additional funds are committed to be advanced in connection with impaired loans.

If interest on all nonaccrual loans had been accrued at original contract rates, interest income would have increased by $437,000 in 2017, $369,000 in 2016, and $456,000 in 2015.

The following table presents nonaccrual loans by loan portfolio class as of December 31, 2017 and 2016, the table below excludes $6.9 million in purchase credit impaired loans, net of unamortized fair value adjustments:



In thousands	2017		2016
Commercial and industrial	$	1,499	$	2,126
Commercial real estate	4,378		1,593
Commercial real estate construction	—		300
Residential mortgage	478		483
Total	$	6,355	$	4,502

The following table summarizes information relative to troubled debt restructurings by loan portfolio class at December 31, 2017 and 2016:



In thousands	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Recorded Investment at period end
December 31, 2017
Nonaccruing troubled debt restructurings:
Commercial real estate	$	4,015	$	4,073	$	3,405
Total nonaccruing troubled debt restructurings	4,015		4,073		3,405
Accruing troubled debt restructurings:
Commercial real estate	4,577		4,577		3,982
Total accruing troubled debt restructurings	4,577		4,577		3,982
Total Troubled Debt Restructurings	$	8,592	$	8,650	$	7,387

December 31, 2016
Nonaccruing troubled debt restructurings:
Commercial real estate	$	648	$	648	$	377
Total nonaccruing troubled debt restructurings	648		648		377
Accruing troubled debt restructurings:
Commercial real estate	7,944		8,002		7,171
Residential mortgage	336		336		272
Total accruing troubled debt restructurings	8,280		8,338		7,443
Total Troubled Debt Restructurings	$	8,928	$	8,986	$	7,820

All of the Corporation’s troubled debt restructured loans are also impaired loans, of which some have resulted in a specific allocation and, subsequently, a charge-off as appropriate. There were no defaulted troubled debt restructured loans as of December 31, 2017 and 2016, however two borrowers advised that further payments were unlikely, therefore they were moved to nonaccrual status in the second quarter of 2017. There were no charge-offs on any of the troubled debt restructured loans for the years ended December 31, 2017 and 2016. One troubled debt restructured loan had a specific allocation in the amount of $60,000 at December 31, 2017. There was no specific allocation on any troubled debt restructured loans for the year ended December 31, 2016. One troubled debt restructured loan paid off during 2017 in the amount of $283,000. One troubled debt restructured loan paid off during 2016 in the amount of $74,000. All other troubled debt restructured loans were current with respect to their associated forbearance agreement, except for one loan which has had periodic late payments. As of December 31, 2017, only one of the loans classified as a troubled debt restructured loan has an active forbearance agreement. The loan was negotiated during 2016. All other forbearance agreements have expired or the loans have paid off.

The following table summarizes loans whose terms have been modified resulting in troubled debt restructurings during the years ended December 31, 2017 and 2016:



Dollars in thousands	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Recorded Investment at Period End
2017
Troubled debt restructurings	—	$	—	$	—	$	—
2016
Troubled debt restructurings	1	$	826	$	832	$	832

Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at December 31, 2017 and 2016, totaled $848,000 and $471,000, respectively.

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.

The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2017 and 2016:



In thousands	30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due		Total Past Due		Current		Total Loans Receivable		Loans Receivable >90 Days and Accruing
December 31, 2017
Originated Loans
Commercial and industrial	$	55	$	76	$	1,503	$	1,634	$	157,821	$	159,455	$	4
Commercial real estate	436		317		1,400		2,153		349,792		351,945		88
Commercial real estate construction	252		—		—		252		28,178		28,430		—
Residential mortgage	3,006		646		1,500		5,152		361,772		366,924		1,022
Home equity lines of credit	254		29		183		466		81,870		82,336		183
Consumer	72		26		3		101		14,353		14,454		3
Total originated loans	4,075		1,094		4,589		9,758		993,786		1,003,544		1,300
Acquired Loans
Commercial and industrial	83		—		—		83		6,291		6,374		—
Commercial real estate	916		—		—		916		139,898		140,814		—
Commercial real estate construction	—		—		—		—		7,130		7,130		—
Residential mortgage	930		304		137		1,371		57,598		58,969		137
Home equity lines of credit	83		—		70		153		25,303		25,456		70
Consumer	—		—		—		—		1,883		1,883		—
Total acquired loans	2,012		304		207		2,523		238,103		240,626		207
Total Loans
Commercial and industrial	138		76		1,503		1,717		164,112		165,829		4
Commercial real estate	1,352		317		1,400		3,069		489,690		492,759		88
Commercial real estate construction	252		—		—		252		35,308		35,560		—
Residential mortgage	3,936		950		1,637		6,523		419,370		425,893		1,159
Home equity lines of credit	337		29		253		619		107,173		107,792		253
Consumer	72		26		3		101		16,236		16,337		3
Total Loans	$	6,087	$	1,398	$	4,796	$	12,281	$	1,231,889	$	1,244,170	$	1,507
December 31, 2016
Commercial and industrial	$	26	$	1	$	1,178	$	1,205	$	139,139	$	140,344	$	—
Commercial real estate	325		674		—		999		317,981		318,980		—
Commercial real estate construction	—		—		300		300		14,971		15,271		—
Residential mortgage	2,866		657		1,413		4,936		343,603		348,539		937
Home equity lines of credit	310		56		408		774		69,298		70,072		408
Consumer	31		47		—		78		14,626		14,704		—
Total	$	3,558	$	1,435	$	3,299	$	8,292	$	899,618	$	907,910	$	1,345

The following table summarizes the allowance for loan losses and recorded investment in loans:



In thousands	Commercial and Industrial			Commercial Real Estate			Commercial Real Estate Construction			Residential Mortgage			Home Equity Lines of Credit			Consumer			Unallocated			Total
December 31, 2017
Allowance for loan losses
Beginning balance- January 1, 2017	$	3,055		$	4,968		$	147		$	3,478		$	648		$	923		$	975		$	14,194
Charge-offs	(181		)	—			—			(132		)	(9		)	(139		)	—			(461		)
Recoveries	21			61			80			62			—			19			—			243
Provisions	324			199			(101		)	(182		)	(27		)	(54		)	(159		)	—
Ending balance- December 31, 2017	$	3,219		$	5,228		$	126		$	3,226		$	612		$	749		$	816		$	13,976
Ending balance: individually evaluated for impairment	$	792		$	60		$	—		$	377		$	—		$	—		$	—		$	1,229
Ending balance: collectively evaluated for impairment	$	2,427		$	5,168		$	126		$	2,849		$	612		$	749		$	816		$	12,747
Loans receivables
Ending balance	$	165,829		$	492,759		$	35,560		$	425,893		$	107,792		$	16,337		$	—		$	1,244,170
Ending balance: individually evaluated for impairment	$	1,499		$	8,360		$	—		$	478		$	—		$	—		$	—		$	10,337
Ending balance: collectively evaluated for impairment	$	164,330		$	484,399		$	35,560		$	425,415		$	107,792		$	16,337		$	—		$	1,233,833
December 31, 2016
Allowance for loan losses
Beginning balance- January 1, 2016	$	2,508		$	5,216		$	112		$	3,349		$	619		$	1,083		$	1,860		$	14,747
Charge-offs	(318		)	—			(135		)	(189		)	(74		)	(50		)	—			(766		)
Recoveries	45			—			132			25			—			11			—			213
Provisions	820			(248		)	38			293			103			(121		)	(885		)	—
Ending balance- December 31, 2016	$	3,055		$	4,968		$	147		$	3,478		$	648		$	923		$	975		$	14,194
Ending balance: individually evaluated for impairment	$	599		$	—		$	—		$	333		$	—		$	—		$	—		$	932
Ending balance: collectively evaluated for impairment	$	2,456		$	4,968		$	147		$	3,145		$	648		$	923		$	975		$	13,262
Loans receivables
Ending balance	$	140,344		$	318,980		$	15,271		$	348,539		$	70,072		$	14,704		$	—		$	907,910
Ending balance: individually evaluated for impairment	$	2,126		$	8,764		$	300		$	755		$	—		$	—		$	—		$	11,945
Ending balance: collectively evaluated for impairment	$	138,218		$	310,216		$	14,971		$	347,784		$	70,072		$	14,704		$	—		$	895,965



In thousands	Commercial and Industrial			Commercial Real Estate			Commercial Real Estate Construction			Residential Mortgage			Home Equity Lines of Credit			Consumer			Unallocated		Total
December 31, 2015
Allowance for loan losses
Beginning balance- January 1, 2015	$	2,048		$	5,872		$	194		$	3,845		$	557		$	1,050		$	1,606	$	15,172
Charge-offs	(150		)	—			(39		)	(622		)	(15		)	(111		)	—		(937		)
Recoveries	369			—			—			136			—			7			—		512
Provisions	241			(656		)	(43		)	(10		)	77			137			254		—
Ending balance- December 31, 2015	$	2,508		$	5,216		$	112		$	3,349		$	619		$	1,083		$	1,860	$	14,747
Ending balance: individually evaluated for impairment	$	—		$	—		$	—		$	—		$	—		$	—		$	—	$	—
Ending balance: collectively evaluated for impairment	$	2,508		$	5,216		$	112		$	3,349		$	619		$	1,083		$	1,860	$	14,747
Loans receivables
Ending balance	$	117,692		$	289,899		$	13,429		$	357,228		$	60,124		$	14,588		$	—	$	852,960
Ending balance: individually evaluated for impairment	$	1,471		$	8,185		$	374		$	461		$	—		$	—		$	—	$	10,491
Ending balance: collectively evaluated for impairment	$	116,221		$	281,714		$	13,055		$	356,767		$	60,124		$	14,588		$	—	$	842,469

The Bank has granted loans to certain of its executive officers, directors and their related interests. These loans were made on substantially the same basis, including interest rates and collateral as those prevailing for comparable transactions with other borrowers at the same time. The aggregate amount of these loans was $5,703,000 and $4,578,000 at December 31, 2017 and 2016, respectively. During 2017, $1,612,000 new loans or advances were extended and repayments totaled $487,000. None of these loans were past due, in nonaccrual status, or restructured at December 31, 2017.