Loans | NOTE 4-Loans Loan Portfolio Composition The table below provides the composition of the loan portfolio at December 31, 2022 and 2021. 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) 2022 Loans 2021 Loans Builder & developer $ 128,327 7.9 $ 156,462 10.2 Commercial real estate investor 367,366 22.5 322,887 21.1 Residential real estate investor 263,262 16.1 227,017 14.8 Hotel/Motel 94,471 5.8 70,254 4.6 Wholesale & retail 60,672 3.7 76,340 5.0 Manufacturing 86,593 5.3 72,720 4.8 Agriculture 91,449 5.6 95,317 6.2 Service 73,094 4.5 65,163 4.3 Other 209,116 12.8 222,179 14.5 Total commercial related loans 1,374,350 84.2 1,308,339 85.5 Residential mortgages 135,340 8.3 103,741 6.8 Home equity 98,030 6.0 94,842 6.2 Other 25,137 1.5 22,829 1.5 Total consumer related loans 258,507 15.8 221,412 14.5 Total loans $ 1,632,857 100.0 $ 1,529,751 100.0 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 or other correlations that could cause their ability to meet contractual obligations to be similarly affected. 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, 2022, the Corporation had two industry concentrations that exceeded 10 percent of the total loan portfolio : commercial real estate investor, which represented 22.5 percent of the portfolio and residential real estate investor, which represented 16.1 percent of the portfolio. 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. 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 $ 11,041,000 at December 31, 2022 and $ 9,516,000 at December 31, 2021. During 2022, total additions were $ 3,249,000 and total repayments and reductions were $ 1,724,000 . As of year-end 2022, 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 Corporation 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 Watch & Special Asset Committee, which includes senior management. The Committee, which typically meets at least quarterly, makes changes, as appropriate, to risk ratings. 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 President/CEO or CFO may downgrade a loan to non-accrual status. The Special Assets Committee or President/CEO may upgrade a loan that is criticized or classified. The Corporation uses eleven risk ratings to grade commercial loans. The first six 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, 2022 and 2021. Special (dollars in thousands) Pass Mention Substandard Nonaccrual Total December 31, 2022 Builder & developer $ 124,572 $ 1,010 $ 972 $ 1,773 $ 128,327 Commercial real estate investor 367,144 0 0 222 367,366 Residential real estate investor 262,406 0 0 856 263,262 Hotel/Motel 89,710 0 4,761 0 94,471 Wholesale & retail 59,930 56 686 0 60,672 Manufacturing 81,552 1,444 632 2,965 86,593 Agriculture 87,896 2,260 381 912 91,449 Service 68,373 384 4,337 0 73,094 Other 192,194 4,934 8,552 3,436 209,116 Total commercial related loans 1,333,777 10,088 20,321 10,164 1,374,350 Residential mortgage 134,850 0 141 349 135,340 Home equity 97,573 0 0 457 98,030 Other 25,137 0 0 0 25,137 Total consumer related loans 257,560 0 141 806 258,507 Total loans $ 1,591,337 $ 10,088 $ 20,462 $ 10,970 $ 1,632,857 December 31, 2021 Builder & developer $ 142,983 $ 6,016 $ 6,656 $ 807 $ 156,462 Commercial real estate investor 316,976 929 1,039 3,943 322,887 Residential real estate investor 226,126 0 611 280 227,017 Hotel/Motel 40,789 0 17,273 12,192 70,254 Wholesale & retail 73,821 1,346 1,173 0 76,340 Manufacturing 67,544 0 51 5,125 72,720 Agriculture 90,226 80 714 4,297 95,317 Service 57,667 404 6,121 971 65,163 Other 201,226 1,384 14,197 5,372 222,179 Total commercial related loans 1,217,358 10,159 47,835 32,987 1,308,339 Residential mortgage 103,669 0 10 62 103,741 Home equity 94,358 47 0 437 94,842 Other 22,733 0 0 96 22,829 Total consumer related loans 220,760 47 10 595 221,412 Total loans $ 1,438,118 $ 10,206 $ 47,845 $ 33,582 $ 1,529,751 Impaired Loans The table below presents a summary of impaired loans at December 31, 2022 and 2021. 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, 2022 Builder & developer $ 1,901 $ 2,644 $ 44 $ 44 $ 44 $ 1,945 $ 2,688 Commercial real estate investor 500 500 0 0 0 500 500 Residential real estate investor 647 665 209 215 152 856 880 Hotel/Motel 0 0 0 0 0 0 0 Wholesale & retail 0 0 0 0 0 0 0 Manufacturing 2,783 2,877 182 183 33 2,965 3,060 Agriculture 164 210 748 930 655 912 1,140 Service 0 0 0 0 0 0 0 Other commercial 1,836 3,037 1,600 2,338 1,600 3,436 5,375 Total impaired commercial related loans 7,831 9,933 2,783 3,710 2,484 10,614 13,643 Residential mortgage 1,112 1,115 0 0 0 1,112 1,115 Home equity 457 512 0 0 0 457 512 Other consumer 0 0 0 0 0 0 0 Total impaired consumer related loans 1,569 1,627 0 0 0 1,569 1,627 Total impaired loans $ 9,400 $ 11,560 $ 2,783 $ 3,710 $ 2,484 $ 12,183 $ 15,270 December 31, 2021 Builder & developer $ 991 $ 1,078 $ 0 $ 0 $ 0 $ 991 $ 1,078 Commercial real estate investor 2,834 2,854 1,878 1,878 1,464 4,712 4,732 Residential real estate investor 280 438 0 0 0 280 438 Hotel/Motel 12,192 12,754 0 0 0 12,192 12,754 Wholesale & retail 0 0 0 0 0 0 0 Manufacturing 5,125 5,501 0 0 0 5,125 5,501 Agriculture 2,709 2,893 1,588 1,784 467 4,297 4,677 Service 0 0 971 1,061 377 971 1,061 Other commercial 3,622 4,376 1,750 2,389 1,750 5,372 6,765 Total impaired commercial related loans 27,753 29,894 6,187 7,112 4,058 33,940 37,006 Residential mortgage 62 64 0 0 0 62 64 Home equity 437 474 0 0 0 437 474 Other consumer 96 104 0 0 0 96 104 Total impaired consumer related loans 595 642 0 0 0 595 642 Total impaired loans $ 28,348 $ 30,536 $ 6,187 $ 7,112 $ 4,058 $ 34,535 $ 37,648 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, 2022 and 2021. Interest income on loans is the result of interest collected on a cash basis, except accruing TDRs. With No Related Allowance With A Related Allowance Total Average Total Average Total Average Total Recorded Interest Recorded Interest Recorded Interest (dollars in thousands) Investment Income Investment Income Investment Income December 31, 2022 Builder & developer $ 1,168 $ 0 $ 605 $ 0 $ 1,773 $ 0 Commercial real estate investor 2,494 22 376 0 2,870 22 Residential real estate investor 502 27 127 0 629 27 Hotel/Motel 4,854 0 0 0 4,854 0 Wholesale & retail 0 0 0 0 0 0 Manufacturing 4,139 37 37 5 4,176 42 Agriculture 1,219 534 766 0 1,985 534 Service 0 0 388 0 388 0 Other commercial 1,164 177 3,197 0 4,361 177 Total impaired commercial related loans 15,540 797 5,496 5 21,036 802 Residential mortgage 584 19 224 8 808 27 Home equity 459 30 0 0 459 30 Other consumer 55 15 0 0 55 15 Total impaired consumer related loans 1,098 64 224 8 1,322 72 Total impaired loans $ 16,638 $ 861 $ 5,720 $ 13 $ 22,358 $ 874 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 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, 2022 and 2021. ≥ 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, 2022 Builder & developer $ 3,500 $ 0 $ 0 $ 1,773 $ 5,273 $ 123,054 $ 128,327 Commercial real estate investor 0 0 0 222 222 367,144 367,366 Residential real estate investor 0 0 0 856 856 262,406 263,262 Hotel/Motel 0 0 0 0 0 94,471 94,471 Wholesale & retail 0 0 0 0 0 60,672 60,672 Manufacturing 0 0 0 2,965 2,965 83,628 86,593 Agriculture 8 0 0 912 920 90,529 91,449 Service 0 0 0 0 0 73,094 73,094 Other 0 0 0 3,436 3,436 205,680 209,116 Total commercial related loans 3,508 0 0 10,164 13,672 1,360,678 1,374,350 Residential mortgage 207 0 0 349 556 134,784 135,340 Home equity 345 94 0 457 896 97,134 98,030 Other 7 42 0 0 49 25,088 25,137 Total consumer related loans 559 136 0 806 1,501 257,006 258,507 Total loans $ 4,067 $ 136 $ 0 $ 10,970 $ 15,173 $ 1,617,684 $ 1,632,857 December 31, 2021 Builder & developer $ 0 $ 0 $ 0 $ 807 $ 807 $ 155,655 $ 156,462 Commercial real estate investor 0 812 0 3,943 4,755 318,132 322,887 Residential real estate investor 0 0 0 280 280 226,737 227,017 Hotel/Motel 0 0 0 12,192 12,192 58,062 70,254 Wholesale & retail 0 183 0 0 183 76,157 76,340 Manufacturing 0 0 0 5,125 5,125 67,595 72,720 Agriculture 0 0 324 4,297 4,621 90,696 95,317 Service 0 0 0 971 971 64,192 65,163 Other 9 34 0 5,372 5,415 216,764 222,179 Total commercial related loans 9 1,029 324 32,987 34,349 1,273,990 1,308,339 Residential mortgage 0 308 0 62 370 103,371 103,741 Home equity 193 0 0 437 630 94,212 94,842 Other 5,869 132 0 96 6,097 16,732 22,829 Total consumer related loans 6,062 440 0 595 7,097 214,315 221,412 Total loans $ 6,071 $ 1,469 $ 324 $ 33,582 $ 41,446 $ 1,488,305 $ 1,529,751 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 $ 2,813,000 at December 31, 2022 and $ 954,000 at December 31, 2021. There was a $ 1,600,000 allowance allocated at December 31, 2022 and none at December 31, 2021. 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, 2022, there are no modifications remaining under the CARES Act, which are not considered TDRs. At December 31, 2021, there were modifications remaining for five commercial loans totaling $ 33,352,000 and two mortgage loans totaling $ 1,694,000 and no consumer loans under the CARES Act, which are not considered TDRs. The below table shows loans whose terms have been modified as TDR’s during the 12 months ended December 31, 2022 and 2021. There were no defaults for the twelve months ended December 31, 2022 and 2021 for TDR’s entered into during the previous 12 month period. Modifications Number Recorded of Investment (dollars in thousands) Contracts at Period End Years ended: December 31, 2022 Commercial related loans nonaccrual 2 $ 0 Consumer related loans accruing 2 $ 763 Consumer related loans nonaccrual 1 $ 0 December 31, 2021 None |