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, 2019 and 2018:



In thousands	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2019
Originated Loans
Commercial and industrial	$	132,791	$	12,249	$	716	$	—	$	145,756
Commercial real estate	414,077		28,264		9,595		—		451,936
Commercial real estate construction	22,905		1,272		—		—		24,177
Residential mortgage	364,814		6,279		251		—		371,344
Home equity lines of credit	92,372		627		83		—		93,082
Consumer	13,331		—		—		—		13,331
Total Originated Loans	1,040,290		48,691		10,645		—		1,099,626
Acquired Loans
Commercial and industrial	3,007		374		178		—		3,559
Commercial real estate	100,199		11,537		3,376		—		115,112
Commercial real estate construction	1,542		697		—		—		2,239
Residential mortgage	33,349		2,089		1,555		—		36,993
Home equity lines of credit	14,603		45		317		—		14,965
Consumer	107		—		—		—		107
Total Acquired Loans	152,807		14,742		5,426		—		172,975
Total Loans
Commercial and industrial	135,798		12,623		894		—		149,315
Commercial real estate	514,276		39,801		12,971		—		567,048
Commercial real estate construction	24,447		1,969		—		—		26,416
Residential mortgage	398,163		8,368		1,806		—		408,337
Home equity lines of credit	106,975		672		400		—		108,047
Consumer	13,438		—		—		—		13,438
Total Loans	$	1,193,097	$	63,433	$	16,071	$	—	$	1,272,601



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

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, 2019			Year Ended December 31, 2018
Balance at beginning of period	$	891		$	1,234
Acquisitions of impaired loans	—			—
Reclassification from non-accretable differences	492			402
Accretion to loan interest income	(741		)	(745		)
Balance at end of period	$	642		$	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, 2019 and 2018:



	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, 2019
Commercial and industrial	$	65	$	65	$	42	$	—	$	—
Commercial real estate	—		—		—		7,383		7,383
Commercial real estate construction	—		—		—		—		—
Residential mortgage	—		—		—		171		171
Home equity lines of credit	—		—		—		83		83
Total	$	65	$	65	$	42	$	7,637	$	7,637
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

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, 2019
Commercial and industrial	$	27	$	—	$	—	$	—
Commercial real estate	—		—		6,625		612
Commercial real estate construction	—		—		—		—
Residential mortgage	—		—		422		8
Home equity lines of credit	—		—		35		—
Total	$	27	$	—	$	7,082	$	620
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

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 $249,000 in 2019 and $269,000 in 2018.

The following table presents nonaccrual loans by loan portfolio class as of December 31, 2019 and 2018, the table below excludes $6.9 million in purchase credit impaired loans, net of unamortized fair value adjustments:



In thousands	2019		2018
Commercial and industrial	$	65	$	—
Commercial real estate	3,600		2,880
Commercial real estate construction	—		—
Residential mortgage	171		537
Home equity lines of credit	83		—
Total	$	3,919	$	3,417

There were no loans whose terms have been modified resulting in a troubled debt restructuring during the years ended December 31, 2019 and 2018. 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 $3,974,000 and $6,226,000 at December 31, 2019 and 2018, 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, 2019 and 2018, were $191,000 and $2,343,000, 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, 2019 and 2018, which total $3,783,000 and $3,883,000, respectively. There were no defaulted troubled debt restructured loans as of December 31, 2019 and 2018. There were no charge-offs on any of the troubled debt restructured loans for the years ended December 31, 2019 and 2018. There were no specific allocations on any troubled debt restructured loans for the years ended December 31, 2019 and 2018. One troubled debt restructured loan paid off during 2019 in the amount of $2,198,000 and one troubled debt restructured loan paid off during 2018 in the amount of $832,000. All other troubled debt restructured loans were current as of December 31, 2019, with respect to their associated forbearance agreement, except for one loan which has had periodic late payments. As of December 31, 2019, there are no active forbearance agreements. All 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, 2019 and 2018, totaled $822,000 and $661,000, 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, 2019 and 2018:



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, 2019
Originated Loans
Commercial and industrial	$	16	$	—	$	4	$	20	$	145,736	$	145,756	$	4
Commercial real estate	325		2,247		1,286		3,858		448,078		451,936		—
Commercial real estate construction	78		—		—		78		24,099		24,177		—
Residential mortgage	1,625		949		1,232		3,806		367,538		371,344		1,061
Home equity lines of credit	141		77		—		218		92,864		93,082		—
Consumer	38		8		19		65		13,266		13,331		19
Total originated loans	2,223		3,281		2,541		8,045		1,091,581		1,099,626		1,084
Acquired Loans
Commercial and industrial	—		23		—		23		3,536		3,559		—
Commercial real estate	1,063		—		—		1,063		114,049		115,112		—
Commercial real estate construction	—		—		—		—		2,239		2,239		—
Residential mortgage	293		257		120		670		36,323		36,993		120
Home equity lines of credit	236		93		15		344		14,621		14,965		15
Consumer	—		—		—		—		107		107		—
Total acquired loans	1,592		373		135		2,100		170,875		172,975		135
Total Loans
Commercial and industrial	16		23		4		43		149,272		149,315		4
Commercial real estate	1,388		2,247		1,286		4,921		562,127		567,048		—
Commercial real estate construction	78		—		—		78		26,338		26,416		—
Residential mortgage	1,918		1,206		1,352		4,476		403,861		408,337		1,181
Home equity lines of credit	377		170		15		562		107,485		108,047		15
Consumer	38		8		19		65		13,373		13,438		19
Total Loans	$	3,815	$	3,654	$	2,676	$	10,145	$	1,262,456	$	1,272,601	$	1,219



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

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, 2019
Allowance for loan losses
Beginning balance- January 1, 2019	$	2,597		$	6,208		$	203		$	2,814		$	611		$	692		$	839		$	13,964
Charge-offs	(163		)	(78		)	—			(173		)	(301		)	(202		)	—			(917		)
Recoveries	66			10			—			37			12			63			—			188
Provisions	(100		)	553			95			(123		)	297			97			(219		)	600
Ending balance- December 31, 2019	$	2,400		$	6,693		$	298		$	2,555		$	619		$	650		$	620		$	13,835
Ending balance: individually evaluated for impairment	$	42		$	—		$	—		$	—		$	—		$	—		$	—		$	42
Ending balance: collectively evaluated for impairment	$	2,358		$	6,693		$	298		$	2,555		$	619		$	650		$	620		$	13,793
Loans receivables
Ending balance	$	149,315		$	567,048		$	26,416		$	408,337		$	108,047		$	13,438		$	—		$	1,272,601
Ending balance: individually evaluated for impairment	$	65		$	7,383		$	—		$	171		$	83		$	—		$	—		$	7,702
Ending balance: collectively evaluated for impairment	$	149,250		$	559,665		$	26,416		$	408,166		$	107,964		$	13,438		$	—		$	1,264,899
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

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 $5,016,000 and $5,858,000 at December 31, 2019 and 2018, respectively. During 2019, no new loans or advances were extended and repayments totaled $843,000. None of these loans were past due, in nonaccrual status, or restructured at December 31, 2019.