Loans | NOTE 4-Loans Loan Portfolio Composition The table below provides the composition of the loan portfolio at December 31, 2021 and 2020. The portfolio is comprised of two segments, commercial and consumer loans. The commercial loan segment is disaggregated by industry class which allows the Corporation to monitor risk and performance. Those industries representing the largest dollar investment and most risk are listed separately. The “Other” commercial loans category is comprised of various industries. The consumer related segment is comprised of residential mortgages, home equity and other consumer loans. The Corporation has not engaged in sub-prime residential mortgage originations. December 31, % Total December 31, % Total(dollars in thousands) 2021 Loans 2020 LoansBuilder & developer $ 156,462 10.2 $ 147,609 9.6Commercial real estate investor 322,887 21.1 236,924 15.3Residential real estate investor 227,017 14.8 238,458 15.4Hotel/Motel 70,254 4.6 79,421 5.2Wholesale & retail 76,340 5.0 108,425 7.0Manufacturing 72,720 4.8 79,142 5.1Agriculture 95,317 6.2 80,450 5.2Service 65,163 4.3 76,838 5.0Other 222,179 14.5 280,616 18.2Total commercial related loans 1,308,339 85.5 1,327,883 86.0Residential mortgages 103,741 6.8 95,751 6.2Home equity 94,842 6.2 96,711 6.3Other 22,829 1.5 24,244 1.5Total consumer related loans 221,412 14.5 216,706 14.0Total loans $ 1,529,751 100.0 $ 1,544,589 100.0 Concentrations of Credit Risk Concentrations of credit risk arise when a number of clients are engaged in similar business activities in the same geographic region or have similar economic features that could cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Most of the Corporation's business is with clients in south central Pennsylvania, specifically York County and Lancaster County and north central Maryland, specifically Baltimore County, Harford County and Baltimore City. At December 31, 2021, the Corporation had three industry concentrations that exceeded 10 percent of the total loan portfolio: commercial real estate investor, which represented 21.1 percent of the portfolio; residential real estate investor, which represented 14.8 percent of the portfolio and builder & developer, which represented 10.2 percent of the portfolio. At December 31, 2020, the Corporation had two industry concentrations that exceeded 10 percent of the total loan portfolio: residential real estate investor, which represented 15.4 percent of the portfolio and commercial real estate investor, which represented 15.3 percent of the portfolio. Loans to borrowers within these industries are usually collateralized by real estate. The principal balance of outstanding loans to directors, executive officers, principal shareholders and any affiliates of such persons was $9,516,000 at December 31, 2021 and $8,376,000 at December 31, 2020. During 2021, total additions were $5,760,000 and total repayments and reductions were $4,620,000. As of year-end 2021, all loans to this group were current and performing in accordance with contractual terms. Loan Risk Ratings The Corporation’s internal risk rating system follows regulatory guidance as to risk classifications and definitions. Every approved loan is assigned a risk rating. Generally, risk ratings for commercial related loans are determined by a formal evaluation of risk factors performed by the Corporation’s underwriting staff. For consumer and residential mortgage loans, the bank follows the Uniform Retail Credit Classification guidance. Commercial loans up to $500,000 may be scored using third-party credit scoring software models for risk rating purposes. The loan portfolio is monitored on a continuous basis by loan officers, loan review personnel and senior management. Adjustments of loan risk ratings within the Watch, Criticized and Classified categories are generally performed by the Special Asset Committee, which includes senior management. The Committee, which typically meets at least quarterly, makes changes, as appropriate, to risk ratings when it becomes aware of credit events such as payment delinquency, cessation of a business or project, bankruptcy or death of the borrower, or changes in collateral value. In addition to review by the Committee, existing loans are monitored by the primary loan officer and loan review officer to determine if any changes, upward or downward, in risk ratings are appropriate. Primary loan officers may recommend a change to a risk rating and internal loan review officers may downgrade existing loans, except to non-accrual status. Only the Committee or President/CEO may downgrade a loan to non-accrual status or upgrade a loan that is criticized or classified. The Corporation uses ten risk ratings to grade commercial loans. The first seven ratings are considered “pass” ratings. A pass rating is a satisfactory credit rating, which applies to a loan that is expected to perform in accordance with the loan agreement and has a low probability of loss. A loan rated “special mention” has a potential weakness which may, if not corrected, weaken the loan or inadequately protect the Corporation’s position at some future date. A loan rated “substandard” is inadequately protected by the current sound worth and paying capacity of the obligor, or of the collateral pledged. A “substandard” loan must have a well-defined weakness or weaknesses that could jeopardize liquidation of the loan, which exposes the Corporation to potential loss if the deficiencies are not corrected. When circumstances indicate that collection of the loan is doubtful, the loan is risk-rated “nonaccrual,” the accrual of interest income is discontinued, and any unpaid interest previously credited to income is reversed. The table below does not include the regulatory classification of “doubtful,” nor does it include the regulatory classification of “loss”, because the Corporation promptly charges off loan losses. The table below presents a summary of loan risk ratings by loan class at December 31, 2021 and 2020. Special (dollars in thousands) Pass Mention Substandard Nonaccrual Total December 31, 2021 Builder & developer $ 142,983 $ 6,016 $ 6,656 $ 807 $ 156,462Commercial real estate investor 316,976 929 1,039 3,943 322,887Residential real estate investor 226,126 0 611 280 227,017Hotel/Motel 40,789 0 17,273 12,192 70,254Wholesale & retail 73,821 1,346 1,173 0 76,340Manufacturing 67,544 0 51 5,125 72,720Agriculture 90,226 80 714 4,297 95,317Service 57,667 404 6,121 971 65,163Other 201,226 1,384 14,197 5,372 222,179Total commercial related loans 1,217,358 10,159 47,835 32,987 1,308,339Residential mortgage 103,669 0 10 62 103,741Home equity 94,358 47 0 437 94,842Other 22,733 0 0 96 22,829Total consumer related loans 220,760 47 10 595 221,412Total loans $ 1,438,118 $ 10,206 $ 47,845 $ 33,582 $ 1,529,751 December 31, 2020 Builder & developer $ 133,804 $ 11,305 $ 2,121 $ 379 $ 147,609Commercial real estate investor 230,113 6,379 231 201 236,924Residential real estate investor 234,316 1,215 130 2,797 238,458Hotel/Motel 48,264 542 18,143 12,472 79,421Wholesale & retail 99,821 8,591 13 0 108,425Manufacturing 67,968 0 3,610 7,564 79,142Agriculture 72,829 416 3,776 3,429 80,450Service 75,618 249 0 971 76,838Other 256,040 1,481 13,804 9,291 280,616Total commercial related loans 1,218,773 30,178 41,828 37,104 1,327,883Residential mortgage 95,466 123 11 151 95,751Home equity 96,026 55 0 630 96,711Other 23,954 0 0 290 24,244Total consumer related loans 215,446 178 11 1,071 216,706Total loans $ 1,434,219 $ 30,356 $ 41,839 $ 38,175 $ 1,544,589 Impaired Loans The table below presents a summary of impaired loans at December 31, 2021 and 2020. Generally, impaired loans are all loans risk rated nonaccrual or classified as troubled debt restructurings. An allowance is established for those individual loans that are commercial related where the Corporation has doubt as to full recovery of the outstanding principal balance. Typically, impaired consumer related loans are partially or fully charged-off eliminating the need for a specific allowance. The recorded investment represents outstanding unpaid principal loan balances adjusted for payments collected on a non-cash basis and charge-offs. With No Allowance With A Related Allowance Total Recorded Unpaid Recorded Unpaid Related Recorded Unpaid(dollars in thousands) Investment Principal Investment Principal Allowance Investment Principal December 31, 2021 Builder & developer $ 991 $ 1,078 $ 0 $ 0 $ 0 $ 991 $ 1,078Commercial real estate investor 2,834 2,854 1,878 1,878 1,464 4,712 4,732Residential real estate investor 280 438 0 0 0 280 438Hotel/Motel 12,192 12,754 0 0 0 12,192 12,754Wholesale & retail 0 0 0 0 0 0 0Manufacturing 5,125 5,501 0 0 0 5,125 5,501Agriculture 2,709 2,893 1,588 1,784 467 4,297 4,677Service 0 0 971 1,061 377 971 1,061Other commercial 3,622 4,376 1,750 2,389 1,750 5,372 6,765Total impaired commercial related loans 27,753 29,894 6,187 7,112 4,058 33,940 37,006Residential mortgage 62 64 0 0 0 62 64Home equity 437 474 0 0 0 437 474Other consumer 96 104 0 0 0 96 104Total impaired consumer related loans 595 642 0 0 0 595 642Total impaired loans $ 28,348 $ 30,536 $ 6,187 $ 7,112 $ 4,058 $ 34,535 $ 37,648 December 31, 2020 Builder & developer $ 575 $ 790 $ 0 $ 0 $ 0 $ 575 $ 790Commercial real estate investor 1,163 1,170 0 0 0 1,163 1,170Residential real estate investor 581 862 2,216 2,216 216 2,797 3,078Hotel/Motel 12,472 12,472 0 0 0 12,472 12,472Wholesale & retail 237 237 0 0 0 237 237Manufacturing 7,564 7,564 0 0 0 7,564 7,564Agriculture 2,270 2,382 1,159 1,217 615 3,429 3,599Service 971 1,061 0 0 0 971 1,061Other commercial 5,739 5,954 3,552 3,888 2,481 9,291 9,842Total impaired commercial related loans 31,572 32,492 6,927 7,321 3,312 38,499 39,813Residential mortgage 151 151 0 0 0 151 151Home equity 630 653 0 0 0 630 653Other consumer 290 301 0 0 0 290 301Total impaired consumer related loans 1,071 1,105 0 0 0 1,071 1,105Total impaired loans $ 32,643 $ 33,597 $ 6,927 $ 7,321 $ 3,312 $ 39,570 $ 40,918 The table below presents a summary of average impaired loans and related interest income that was included in net income for the years ended December 31, 2021 and 2020. Interest income on loans is the result of interest collected on a cash basis, except accruing TDRs. With No Related AllowanceWith A Related AllowanceTotal Average Total Average Total Average Total Recorded Interest Recorded Interest Recorded Interest (dollars in thousands) Investment Income Investment Income Investment Income December 31, 2021 Builder & developer $ 919 $ 0 $ 0 $ 0 $ 919 $ 0 Commercial real estate investor 1,431 45 376 0 1,807 45 Residential real estate investor 1,302 72 1,044 17 2,346 89 Hotel/Motel 12,443 0 0 0 12,443 0 Wholesale & retail 94 13 0 0 94 13 Manufacturing 7,025 19 0 0 7,025 19 Agriculture 3,334 125 1,202 0 4,536 125 Service 583 0 388 0 971 0 Other commercial 4,621 26 3,542 61 8,163 87 Total impaired commercial related loans 31,752 300 6,552 78 38,304 378 Residential mortgage 56 0 0 0 56 0 Home equity 561 0 0 0 561 0 Other consumer 197 6 0 0 197 6 Total impaired consumer related loans 814 6 0 0 814 6 Total impaired loans $ 32,566 $ 306 $ 6,552 $ 78 $ 39,118 $ 384 December 31, 2020 Builder & developer $ 732 $ 36 $ 151 $ 0 $ 883 $ 36 Commercial real estate investor 1,269 72 0 0 1,269 72 Residential real estate investor 1,165 31 3,535 0 4,700 31 Hotel/Motel 2,494 0 0 0 2,494 0 Wholesale & retail 252 8 2,851 0 3,103 8 Manufacturing 1,518 3 429 0 1,947 3 Agriculture 2,228 123 1,117 0 3,345 123 Service 914 22 0 0 914 22 Other commercial 3,833 64 3,686 0 7,519 64 Total impaired commercial related loans 14,405 359 11,769 0 26,174 359 Residential mortgage 177 6 0 0 177 6 Home equity 640 47 0 0 640 47 Other consumer 230 11 0 0 230 11 Total impaired consumer related loans 1,047 64 0 0 1,047 64 Total impaired loans $ 15,452 $ 423 $ 11,769 $ 0 $ 27,221 $ 423 Past Due and Nonaccrual The performance and credit quality of the loan portfolio is also monitored by using an aging schedule which shows the length of time a loan is past due. The table below presents a summary of past due loans, nonaccrual loans and current loans by loan segment and class at December 31, 2021 and 2020. ≥ 90 Days 30-59 60-89 Past Due Total Past Days Days and Due and Total(dollars in thousands) Past Due Past Due Accruing Nonaccrual Nonaccrual Current Loans December 31, 2021 Builder & developer $ 0 $ 0 $ 0 $ 807 $ 807 $ 155,655 $ 156,462Commercial real estate investor 0 812 0 3,943 4,755 318,132 322,887Residential real estate investor 0 0 0 280 280 226,737 227,017Hotel/Motel 0 0 0 12,192 12,192 58,062 70,254Wholesale & retail 0 183 0 0 183 76,157 76,340Manufacturing 0 0 0 5,125 5,125 67,595 72,720Agriculture 0 0 324 4,297 4,621 90,696 95,317Service 0 0 0 971 971 64,192 65,163Other 9 34 0 5,372 5,415 216,764 222,179Total commercial related loans 9 1,029 324 32,987 34,349 1,273,990 1,308,339Residential mortgage 0 308 0 62 370 103,371 103,741Home equity 193 0 0 437 630 94,212 94,842Other 5,869 132 0 96 6,097 16,732 22,829Total consumer related loans 6,062 440 0 595 7,097 214,315 221,412Total loans $ 6,071 $ 1,469 $ 324 $ 33,582 $ 41,446 $ 1,488,305 $ 1,529,751 December 31, 2020 Builder & developer $ 427 $ 489 $ 322 $ 379 $ 1,617 $ 145,992 $ 147,609Commercial real estate investor 0 0 0 201 201 236,723 236,924Residential real estate investor 136 0 0 2,797 2,933 235,525 238,458Hotel/Motel 0 0 0 12,472 12,472 66,949 79,421Wholesale & retail 29 0 0 0 29 108,396 108,425Manufacturing 0 0 0 7,564 7,564 71,578 79,142Agriculture 0 0 0 3,429 3,429 77,021 80,450Service 0 709 0 971 1,680 75,158 76,838Other 679 887 0 9,291 10,857 269,759 280,616Total commercial related loans 1,271 2,085 322 37,104 40,782 1,287,101 1,327,883Residential mortgage 0 0 937 151 1,088 94,663 95,751Home equity 206 177 36 630 1,049 95,662 96,711Other 717 321 0 290 1,328 22,916 24,244Total consumer related loans 923 498 973 1,071 3,465 213,241 216,706Total loans $ 2,194 $ 2,583 $ 1,295 $ 38,175 $ 44,247 $ 1,500,342 $ 1,544,589 Troubled Debt Restructurings Loans classified as troubled debt restructurings (TDRs) are designated impaired and arise when the Corporation grants borrowers experiencing financial difficulties concessions that it would not otherwise consider. Concessions granted with respect to these loans involve an extension of the maturity date or a below market interest rate relative to new debt with similar credit risk. The principal balance of outstanding TDRs was $954,000 at December 31, 2021 and $1,395,000 at December 31, 2020. There were no allowances allocated to any TDRs at December 31, 2021 or 2020. There are no commitments to lend to existing TDRs. A TDR is considered to be in payment default once it is contractually past due pursuant to the terms of the loan documents. Generally, these loans are secured by real estate. If repayment of the loan is determined to be collateral dependent, the loan is evaluated for impairment loss based on the fair value of the collateral. For loans that are not collateral dependent, the present value of expected future cash flows, discounted at the loan’s original effective interest rate, is used to determine any impairment loss. A nonaccrual TDR represents a nonaccrual loan, as previously defined, which includes an economic concession. Nonaccrual TDRs are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive payments after the modification and future principal and interest payments are reasonably assured. In contrast, an accruing TDR represents a loan that, at the time of the modification, has a demonstrated history of payments and with respect to which management believes that future loan payments are reasonably assured under the modified terms. At December 31, 2021, there are modifications remaining for two mortgage loans totaling $1,694,000, five commercial loans totaling $33,352,000 and no consumer loans under the CARES Act, which are not considered TDRs. At December 31, 2020, there were modifications remaining for eight mortgage loans totaling $3,792,000, 12 commercial loans totaling $22,105,000 and no consumer loans under the CARES Act, which are not considered TDRs. There were no loans whose terms have been modified under TDR’s during the twelve months ended December 31, 2021 and 2020. There were no defaults for the twelve months ended December 31, 2021 and 2020 for TDR’s entered into during the previous 12 month period. |