NOTE 4-Loans 

Loan Portfolio Composition

 

The table below provides the composition of the loan portfolio at December 31, 2014 and 2013.  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.      

 

 

Concentrations of Credit Risk

 

Concentrations of credit risk arise when a number of customers 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 customers in York County, Pennsylvania and northern-central Maryland, specifically Baltimore, Harford and Carroll counties.  Although this focus may pose a concentration risk geographically, the Corporation believes that the diverse local economy and our detailed knowledge of the customer base lessens this risk.  At December 31, 2014, the Corporation had three industry concentrations that exceeded 10 percent of the total loan portfolio:  commercial real estate investor, which was 15.7 percent of the portfolio; builder & developer, which was 12.5 percent of the portfolio; and residential real estate investor, which was 10.6 percent of the portfolio.  At December 31, 2013, the Corporation had two industry concentrations that exceeded 10 percent of the total loan portfolio:  commercial real estate investor, which was 16.5 percent of the portfolio, and builder & developer, which was 12.4 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 associates of such persons was $132,000 at December 31, 2014 and $178,000 at December 31, 2013.  During 2014, total additions were $110,000 and total repayments and reductions were $156,000.  Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collection.  As of year-end 2014, 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 and residential mortgages held for investment are determined by a formal evaluation of risk factors performed by the Corporation’s underwriting staff.   For consumer loans, and commercial loans up to $750,000, the Corporation uses 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 are generally performed by the Special Asset Committee, which includes senior management.  The Committee, which meets monthly, 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.  

 

The Corporation uses ten risk ratings to grade loans.  The first seven ratings, representing the lowest risk, are combined and given a “pass” rating.  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 net worth or paying capacity of the borrower, or of the collateral pledged.  A “substandard” loan has a well-defined weakness or weaknesses that could jeopardize liquidation of the loan, which exposes the Corporation to 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, which presents a summary of loan risk ratings by loan class at December 31, 2014 and 2013, 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, 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans

 

The table below presents a summary of impaired loans at December 31, 2014 and 2013. Generally, impaired loans are loans risk rated substandard and nonaccrual.  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.   The recorded investment represents outstanding unpaid principal loan balances adjusted for charge-offs.  

 

 

 

 

 

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, 2014, 2013 and 2012.  Generally impaired loans are loans risk rated substandard and nonaccrual or classified as troubled debt restructurings. An allowance is established for individual commercial related loans 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 obviating the need for a specific allowance. The recorded investment represents outstanding unpaid principal loan balances adjusted for charge-offs. 

 

 

 

 

 

 

 

 

 

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 payment is past due.  The table below presents a summary of past due loans, current loans and nonaccrual loans by loan segment and class at December 31, 2014 and 2013.   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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. 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.

 

The table below shows loans whose terms have been modified under TDRs during the years ended December 31, 2014 and 2013.  There was no impairment loss recognized on any of these TDRs.

One commercial loan with a recorded investment of $188,000 as of December 31, 2014, was modified under a TDR during 2013.  The loan defaulted, was modified again in 2014, and subsequently defaulted under the terms of the new modification agreement.