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LOANS AND ALLOWANCE FOR CREDIT LOSSES

3 Months Ended

Mar. 31, 2024

LOANS AND ALLOWANCE FOR CREDIT LOSSES

LOANS AND ALLOWANCE FOR CREDIT LOSSES

6. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans receivable at March 31, 2024 and December 31, 2023 are summarized as follows:

Summary of Loans by Type

(In Thousands)


	March 31,		December 31,
	2024		2023
Commercial real estate - non-owner occupied	$	739,829	$	737,342
Commercial real estate - owner occupied		250,145		237,246
All other commercial loans		412,805		399,693
Residential mortgage loans		409,663		413,714
Consumer loans		60,007		60,144
Total		1,872,449		1,848,139
Less: allowance for credit losses on loans		(20,023)		(19,208)
Loans, net	$	1,852,426	$	1,828,931

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $4,482,000 at March 31, 2024 and $4,459,000 at December 31, 2023.

The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in Northcentral Pennsylvania, the Southern tier of New York State, Southeastern Pennsylvania and Southcentral Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region.

Acquired loans were initially recorded at fair value, with adjustments made to gross amortized cost based on movements in interest rates (market rate adjustment) and based on credit fair value adjustments on non-impaired loans and impaired loans. Subsequently, the Corporation has recognized amortization and accretion of a portion of the market rate adjustments and credit adjustments on performing loans. For the three-month periods ended March 31, 2024 and 2023, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:


(In Thousands)	Three Months Ended
	March 31,		March 31,
	2024		2023
Market Rate Adjustment
Adjustments to gross amortized cost of loans at beginning of period	$	(970)	$	(916)
Accretion (amortization) recognized in interest income		28		(52)
Adjustments to gross amortized cost of loans at end of period	$	(942)	$	(968)
Credit Adjustment on Non-impaired Loans
Adjustments to gross amortized cost of loans at beginning of period	$	(1,163)	$	(1,840)
Accretion recognized in interest income		115		198
Adjustments to gross amortized cost of loans at end of period	$	(1,048)	$	(1,642)

The following tables presents an analysis of past due loans as of March 31, 2024 and December 31, 2023:


(In Thousands)	As of March 31, 2024
	Past Due		Past Due
	30-89		90+		Nonaccrual		Current		Total
	Days		Days		Loans		Loans		Loans
Commercial real estate - non-owner occupied	$	69	$	201	$	8,430	$	731,129	$	739,829
Commercial real estate - owner occupied		799		0		2,304		247,042		250,145
All other commercial loans		368		0		4,071		408,366		412,805
Residential mortgage loans		4,738		0		3,947		400,978		409,663
Consumer loans		586		26		317		59,078		60,007
Total	$	6,560	$	227	$	19,069	$	1,846,593	$	1,872,449


(In Thousands)	As of December 31, 2023
	Past Due		Past Due
	30-89		90+		Nonaccrual		Current		Total
	Days		Days		Loans		Loans		Loans
Commercial real estate - non-owner occupied	$	2,215	$	126	$	8,412	$	726,589	$	737,342
Commercial real estate - owner occupied		849		0		1,575		234,822		237,246
All other commercial loans		229		2,593		1,323		395,548		399,693
Residential mortgage loans		5,365		326		3,627		404,396		413,714
Consumer loans		617		145		240		59,142		60,144
Total	$	9,275	$	3,190	$	15,177	$	1,820,497	$	1,848,139

The Corporation uses an internal risk rating system. Under the risk rating system, the Corporation classifies problem or potential problem loans as “Special Mention,” “Substandard,” or “Doubtful” on the basis of currently existing facts, conditions and values. Loans that do not currently expose the Corporation to sufficient risk to warrant classification as Substandard or Doubtful, but possess weaknesses that deserve management’s close attention, are deemed to be Special Mention. Substandard loans include those characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Risk ratings are updated any time that conditions or the situation warrants. Loans not classified are included in the “Pass” rows in the table that follows.

The following table presents the recorded investment in loans by credit quality indicators by year of origination as of March 31, 2024:


(In Thousands)	Term Loans by Year of Origination
	2024		2023		2022		2021		2020		Prior		Revolving		Total
Commercial real estate - non-owner occupied
Pass	$	10,903	$	97,427	$	174,949	$	86,706	$	54,833	$	274,326	$	0	$	699,144
Special Mention		0		0		19,961		2,417		0		6,068		0		28,446
Substandard		0		0		0		0		0		12,239		0		12,239
Doubtful		0		0		0		0		0		0		0		0
Total commercial real estate - non-owner occupied	$	10,903	$	97,427	$	194,910	$	89,123	$	54,833	$	292,633	$	0	$	739,829

Year-to-date gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

Commercial real estate - owner occupied
Pass	$	15,504	$	33,783	$	37,808	$	51,259	$	12,533	$	87,536	$	0	$	238,423
Special Mention		0		0		0		0		0		165		0		165
Substandard		0		5,261		745		2,517		0		3,034		0		11,557
Doubtful		0		0		0		0		0		0		0		0
Total commercial real estate - owner occupied	$	15,504	$	39,044	$	38,553	$	53,776	$	12,533	$	90,735	$	0	$	250,145

Year-to-date gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

All other commercial loans
Pass	$	16,341	$	61,142	$	80,711	$	51,981	$	26,821	$	38,804	$	111,171	$	386,971
Special Mention		0		0		5,464		0		7		397		416		6,284
Substandard		0		0		1,317		6,115		435		1,510		10,173		19,550
Doubtful		0		0		0		0		0		0		0		0
Total all other commercial loans	$	16,341	$	61,142	$	87,492	$	58,096	$	27,263	$	40,711	$	121,760	$	412,805

Year-to-date gross charge-offs	$	0	$	0	$	0	$	60	$	0	$	0	$	0	$	60

Residential mortgage loans
Pass	$	6,467	$	56,820	$	85,955	$	54,081	$	38,238	$	162,254	$	0	$	403,815
Special Mention		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		276		5,572		0		5,848
Doubtful		0		0		0		0		0		0		0		0
Total residential mortgage loans	$	6,467	$	56,820	$	85,955	$	54,081	$	38,514	$	167,826	$	0	$	409,663

Year-to-date gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

Consumer loans
Pass	$	1,492	$	5,459	$	4,091	$	1,635	$	1,073	$	931	$	44,671	$	59,352
Special Mention		0		0		0		0		0		0		0		0
Substandard		0		0		0		7		0		112		536		655
Doubtful		0		0		0		0		0		0		0		0
Total consumer loans	$	1,492	$	5,459	$	4,091	$	1,642	$	1,073	$	1,043	$	45,207	$	60,007

Year-to-date gross charge-offs	$	0	$	0	$	86	$	0	$	8	$	0	$	26	$	120

The following table presents the recorded investment in loans by credit quality indicators by year of origination as of December 31, 2023:


	Term Loans by Year of Origination
(In Thousands)	2023		2022		2021		2020		2019		Prior		Revolving		Total
Commercial real estate - non-owner occupied
Pass	$	96,615	$	167,484	$	89,582	$	55,390	$	80,020	$	207,017		0		696,108
Special Mention		0		20,072		2,446		0		116		6,188		0		28,822
Substandard		0		0		0		18		566		11,828		0		12,412
Doubtful		0		0		0		0		0		0		0		0
Total commercial real estate - non-owner occupied	$	96,615	$	187,556	$	92,028	$	55,408	$	80,702	$	225,033	$	0	$	737,342

Year-to-date gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

Commercial real estate - owner occupied
Pass	$	33,761	$	37,429	$	52,090	$	12,858	$	17,505	$	71,775	$	0	$	225,418
Special Mention		104		746		0		0		0		166		0		1,016
Substandard		5,200		0		2,567		0		0		3,045		0		10,812
Doubtful		0		0		0		0		0		0		0		0
Total commercial real estate - owner occupied	$	39,065	$	38,175	$	54,657	$	12,858	$	17,505	$	74,986	$	0	$	237,246

Year-to-date gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

All other commercial loans
Pass	$	58,393	$	90,560	$	51,813	$	27,718	$	16,421	$	24,326	$	107,234	$	376,465
Special Mention		0		2,690		5,043		8		0		794		301		8,836
Substandard		0		1,267		1,250		453		679		1,085		9,658		14,392
Doubtful		0		0		0		0		0		0		0		0
Total all other commercial loans	$	58,393	$	94,517	$	58,106	$	28,179	$	17,100	$	26,205	$	117,193	$	399,693

Year-to-date gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	0	$	12	$	12

Residential mortgage loans
Pass	$	57,300	$	87,519	$	56,183	$	39,411	$	32,401	$	135,546	$	0	$	408,360
Special Mention		0		0		0		0		0		0		0		0
Substandard		0		0		0		285		369		4,700		0		5,354
Doubtful		0		0		0		0		0		0		0		0
Total residential mortgage loans	$	57,300	$	87,519	$	56,183	$	39,696	$	32,770	$	140,246	$	0	$	413,714

Year-to-date gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	33	$	0	$	33

Consumer loans
Pass	$	6,020	$	4,664	$	1,944	$	1,205	$	175	$	913	$	44,312	$	59,233
Special Mention		0		0		0		0		0		0		0		0
Substandard		0		0		5		11		1		58		836		911
Doubtful		0		0		0		0		0		0		0		0
Total consumer loans	$	6,020	$	4,664	$	1,949	$	1,216	$	176	$	971	$	45,148	$	60,144

Year-to-date gross charge-offs	$	0	$	149	$	0	$	18	$	3	$	3	$	138	$	311

The following tables are a summary of the Corporation’s nonaccrual loans by major categories for the periods indicated.


	March 31, 2024
	Nonaccrual Loans with		Nonaccrual Loans		Total Nonaccrual
(In Thousands)	No Allowance		with an Allowance		Loans
Commercial real estate - non-owner occupied	$	1,137	$	7,293	$	8,430
Commercial real estate - owner occupied		2,020		284		2,304
All other commercial loans		1,586		2,485		4,071
Residential mortgage loans		3,947		0		3,947
Consumer loans		317		0		317
Total	$	9,007	$	10,062	$	19,069


	December 31, 2023
	Nonaccrual Loans with		Nonaccrual Loans		Total Nonaccrual
(In Thousands)	No Allowance		with an Allowance		Loans
Commercial real estate - non-owner occupied	$	1,111	$	7,301	$	8,412
Commercial real estate - owner occupied		1,281		294		1,575
All other commercial loans		1,132		191		1,323
Residential mortgage loans		3,627		0		3,627
Consumer loans		240		0		240
Total	$	7,391	$	7,786	$	15,177

The Corporation recognized interest income on nonaccrual loans of $231,000 in the three months ended March 31, 2024 and $231,000 in the three months ended March 31, 2023.

The following table represents the accrued interest receivable written off by reversing interest income during the three-month periods ended March 31,2024 and 2023:


	Three Months Ended		Three Months Ended
(In Thousands)	March 31, 2024		March 31, 2023
Commercial real estate - non-owner occupied	$	12	$	26
All other commercial loans		116		0
Residential mortgage loans		13		3
Consumer loans		2		2
Total	$	143	$	31

The Corporation has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:

●

Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.

●

All other commercial loans include loans typically secured by business assets including inventory, equipment and receivables. Also within this category, commercial construction and land loans and some commercial lines of credit are secured by real estate.

●

Residential mortgage loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage.

●

Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral.

The following table details the amortized cost of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related allowance for credit losses on loans allocated to these loans:


	March 31, 2024				December 31, 2023
	Amortized				Amortized
(In Thousands)	Cost		Allowance		Cost		Allowance
Commercial real estate - non-owner occupied	$	8,430	$	623	$	8,412	$	648
Commercial real estate - owner occupied		2,304		244		1,575		5
All other commercial loans		4,071		536		1,277		90
Total	$	14,805	$	1,403	$	11,264	$	743

The following table summarizes the activity related to the allowance for credit losses for the three-month periods ended March 31, 2024 and 2023.


	Commercial		Commercial		All
	real estate -		real estate -		other		Residential
	nonowner		owner		commercial		mortgage		Consumer
(In Thousands)	occupied		occupied		loans		loans		loans		Total
Balance, December 31, 2023	$	12,010	$	2,116	$	2,918	$	1,764	$	400	$	19,208
Charge-offs		0		0		(60)		0		(120)		(180)
Recoveries		0		0		20		3		12		35
Provision (credit) for credit losses on loans		523		602		702		(998)		131		960
Balance, March 31, 2024	$	12,533	$	2,718	$	3,580	$	769	$	423	$	20,023


	Commercial		Commercial		All
	real estate -		real estate -		other		Residential
	nonowner		owner		commercial		mortgage		Consumer
(In Thousands)	occupied		occupied		loans		loans		loans		Unallocated		Total
Balance, December 31, 2022	$	6,305	$	1,942	$	4,142	$	2,751	$	475	$	1,000	$	16,615
Adoption of ASU 2016-13 (CECL)		3,763		7		(88)		(344)		(234)		(1,000)		2,104
Charge-offs		0		0		(5)		(19)		(43)		0		(67)
Recoveries		0		0		0		1		5		0		6
(Credit) provision for credit losses on loans		(414)		(7)		(469)		475		103		0		(312)
Balance, March 31, 2023	$	9,654	$	1,942	$	3,580	$	2,864	$	306	$	0	$	18,346

Modifications Made to Borrowers Experiencing Financial Difficulty

The Corporation closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. During the three months ended March 31, 2024 and March 31, 2023, the Corporation had no modifications to borrowers experiencing financial difficulty.

The Corporation closely monitors the performance of the loans modified to borrowers experiencing financial difficultly to understand the effectiveness of its modification efforts. The following table depicts the performance of two loans which were in non-accrual status at March 31, 2024 that were modified in the past twelve months:


(In Thousands)	Payment Status (Amortized Costs Basis)
March 31, 2024	Current		90+ Days Past Due		Total
Commercial real estate - non-owner occupied:
Non-owner occupied	$	2,518	$	1,381	$	3,899

The loan that was past due more than 90 days in the table above was in default with its modified terms at March 31, 2024.

At March 31, 2024 and December 31, 2023, the Corporation had no commitments to lend any additional funds on modified loans. Except as described above, at March 31, 2024 and March 31, 2023, the Corporation had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification.

The carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession (included in foreclosed assets held for sale in the unaudited consolidated balance sheets) is as follows:

The recorded investment of consumer mortgage loans secured by residential real properties for which formal foreclosure proceedings were in process is as follows:


(In Thousands)	March 31,		December 31,
	2024		2023
Residential real estate in process of foreclosure	$	764	$	1,227

The Corporation maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, commercial letters of credit and credit enhancement obligations related to residential mortgage loans sold with recourse, when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. The allowance for credit losses for off-balance sheet exposures of $684,000 at March 31, 2024 and $690,000 at December 31, 2023, is included in accrued interest and other liabilities on the unaudited consolidated balance sheets.

The following table presents the balance and activity in the allowance for credit losses for off-balance sheet exposures for the three-months period ended March 31 2024 and 2023:


	Three Months		Three Months
	Ended		Ended
(In Thousands)	March 31, 2024		March 31, 2023
Beginning Balance	$	690	$	425
Adjustment to allowance for off-balance sheet exposures for adoption of ASU 2016-13		0		793
Credit for unfunded commitments		(6)		(40)
Ending Balance, March 31	$	684	$	1,178

(In Thousands)

March 31,

December 31,

Foreclosed residential real estate