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, 2018 and 2017:



In thousands	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2018
Originated Loans
Commercial and industrial	$	166,035	$	2,902	$	161	$	—	$	169,098
Commercial real estate	393,987		18,079		7,899		—		419,965
Commercial real estate construction	15,471		835		—		—		16,306
Residential mortgage	381,525		6,492		733		—		388,750
Home equity lines of credit	90,941		334		—		—		91,275
Consumer	14,174		—		—		—		14,174
Total Originated Loans	1,062,133		28,642		8,793		—		1,099,568
Acquired Loans
Commercial and industrial	4,803		134		147		—		5,084
Commercial real estate	120,321		5,112		3,525		—		128,958
Commercial real estate construction	3,276		716		—		—		3,992
Residential mortgage	41,193		1,896		2,460		—		45,549
Home equity lines of credit	18,614		88		386		—		19,088
Consumer	226		—		—		—		226
Total Acquired Loans	188,433		7,946		6,518		—		202,897
Total Loans
Commercial and industrial	170,838		3,036		308		—		174,182
Commercial real estate	514,308		23,191		11,424		—		548,923
Commercial real estate construction	18,747		1,551		—		—		20,298
Residential mortgage	422,718		8,388		3,193		—		434,299
Home equity lines of credit	109,555		422		386		—		110,363
Consumer	14,400		—		—		—		14,400
Total Loans	$	1,250,566	$	36,588	$	15,311	$	—	$	1,302,465



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

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, 2018
Balance at beginning of period	$	1,234
Acquisitions of impaired loans	—
Reclassification from non-accretable differences	402
Accretion to loan interest income	(745		)
Balance at end of period	$	891

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, 2018 and 2017:



	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, 2018
Commercial and industrial	$	—	$	—	$	—	$	—	$	—
Commercial real estate	—		—		—		6,763		6,763
Commercial real estate construction	—		—		—		—		—
Residential mortgage	—		—		—		537		537
Home equity lines of credit	—		—		—		—		—
Total	$	—	$	—	$	—	$	7,300	$	7,300
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

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, 2018
Commercial and industrial	$	436	$	—	$	73	$	44
Commercial real estate	—		—		7,372		216
Commercial real estate construction	—		—		—		—
Residential mortgage	75		—		275		—
Home equity lines of credit	30		—		—		—
Total	$	541	$	—	$	7,720	$	260
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

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 $269,000 in 2018 and $437,000 in 2017.

The following table presents nonaccrual loans by loan portfolio class as of December 31, 2018 and 2017, the table below excludes $6.9 million in purchase credit impaired loans, net of unamortized fair value adjustments:



In thousands	2018		2017
Commercial and industrial	$	—	$	1,499
Commercial real estate	2,880		4,378
Commercial real estate construction	—		—
Residential mortgage	537		478
Home equity lines of credit	—		—
Total	$	3,417	$	6,355

There were no loans whose terms have been modified resulting in a troubled debt restructuring during the years ended December 31, 2018 and 2017. The Corporation classifies certain loans as troubled debt restructurings when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term and/or the restructuring of scheduled principal payments. The Corporation had pre-existing nonaccruing and accruing troubled debt restructurings of $6,226,000 and $7,387,000 at December 31, 2018 and 2017, respectively. 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. Included in the non-accrual loan total at December 31, 2018 and 2017, were $2,343,000 and $3,405,000, respectively, of troubled debt restructurings. In addition to the troubled debt restructurings included in non-accrual loans, the Corporation also has loans classified as accruing troubled debt restructurings at December 31, 2018 and 2017, which total $3,883,000 and $3,982,000, respectively. There were no defaulted troubled debt restructured loans as of December 31, 2018 and 2017, 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, 2018 and 2017. There was no specific allocation on any troubled debt restructured loans for the year ended December 31, 2018. One troubled debt restructured loan had a specific allocation in the amount of $60,000 at December 31, 2017. One troubled debt restructured loan paid off during 2018 in the amount of $832,000 and one troubled debt restructured loan paid off during 2017 in the amount of $283,000. 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, 2018, 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.

Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at December 31, 2018 and 2017, totaled $661,000 and $848,000, 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, 2018 and 2017:



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, 2018
Originated Loans
Commercial and industrial	$	49	$	49	$	4	$	102	$	168,996	$	169,098	$	4
Commercial real estate	775		550		114		1,439		418,526		419,965		—
Commercial real estate construction	—		—		—		—		16,306		16,306		—
Residential mortgage	1,783		529		2,361		4,673		384,077		388,750		1,824
Home equity lines of credit	16		38		375		429		90,846		91,275		375
Consumer	36		14		—		50		14,124		14,174		—
Total originated loans	2,659		1,180		2,854		6,693		1,092,875		1,099,568		2,203
Acquired Loans
Commercial and industrial	27		—		—		27		5,057		5,084		—
Commercial real estate	64		—		851		915		128,043		128,958		851
Commercial real estate construction	343		—		77		420		3,572		3,992		77
Residential mortgage	1,235		251		907		2,393		43,156		45,549		125
Home equity lines of credit	227		—		89		316		18,772		19,088		89
Consumer	—		7		—		7		219		226		—
Total acquired loans	1,896		258		1,924		4,078		198,819		202,897		1,142
Total Loans
Commercial and industrial	76		49		4		129		174,053		174,182		4
Commercial real estate	839		550		965		2,354		546,569		548,923		851
Commercial real estate construction	343		—		77		420		19,878		20,298		77
Residential mortgage	3,018		780		3,268		7,066		427,233		434,299		1,949
Home equity lines of credit	243		38		464		745		109,618		110,363		464
Consumer	36		21		—		57		14,343		14,400		—
Total Loans	$	4,555	$	1,438	$	4,778	$	10,771	$	1,291,694	$	1,302,465	$	3,345



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

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, 2018
Allowance for loan losses
Beginning balance- January 1, 2018	$	3,219		$	5,228		$	126		$	3,226		$	612		$	749		$	816		$	13,976
Charge-offs	(934		)	(33		)	—			(530		)	(148		)	(165		)	—			(1,810		)
Recoveries	36			—			103			32			—			7			—			178
Provisions	276			1,013			(26		)	86			147			101			23			1,620
Ending balance- December 31, 2018	$	2,597		$	6,208		$	203		$	2,814		$	611		$	692		$	839		$	13,964
Ending balance: individually evaluated for impairment	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Ending balance: collectively evaluated for impairment	$	2,597		$	6,208		$	203		$	2,814		$	611		$	692		$	839		$	13,964
Loans receivables
Ending balance	$	174,182		$	548,923		$	20,298		$	434,299		$	110,363		$	14,400		$	—		$	1,302,465
Ending balance: individually evaluated for impairment	$	—		$	6,763		$	—		$	537		$	—		$	—		$	—		$	7,300
Ending balance: collectively evaluated for impairment	$	174,182		$	542,160		$	20,298		$	433,762		$	110,363		$	14,400		$	—		$	1,295,165
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

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 $5,858,000 and $5,703,000 at December 31, 2018 and 2017, respectively. During 2018, $600,000 new loans or advances were extended and repayments totaled $445,000. None of these loans were past due, in nonaccrual status, or restructured at December 31, 2018.