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Loans

3 Months Ended

Mar. 31, 2022

Note 5 – Loans

The Company grants commercial, industrial, agricultural, residential, and consumer loans primarily to customers throughout north central, central and south central Pennsylvania, southern New York and Wilmington and Dover, Delaware. Although the Company had a diversified loan portfolio at March 31, 2022 and December 31, 2021, a substantial portion of its debtors’ ability to honor their contracts is dependent on the economic conditions within these regions. The following table summarizes the primary segments of the loan portfolio and how those segments are analyzed within the allowance for loan losses as of March 31, 2022 and December 31, 2021 (in thousands):

March 31, 2022	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	201,567	$	602	$	12	$	200,953
Commercial		724,876		8,189		2,109		714,578
Agricultural		305,517		5,288		1,606		298,623
Construction		66,738		-		-		66,738
Consumer		21,460		-		-		21,460
Other commercial loans		69,051		612		-		68,439
Other agricultural loans		39,904		921		-		38,983
State and political subdivision loans		49,582		-		-		49,582
Total		1,478,695		15,612		3,727		1,459,356
Allowance for loan losses		17,556		510		-		17,046
Net loans	$	1,461,139	$	15,102	$	3,727	$	1,442,310

December 31, 2021	Total Loans		Individually evaluated for impairment		Loans acquired with deteriorated credit quality		Collectively evaluated for impairment
Real estate loans:
Residential	$	201,097	$	620	$	14	$	200,463
Commercial		687,338		8,381		2,145		676,812
Agricultural		312,011		5,355		1,643		305,013
Construction		55,036		-		-		55,036
Consumer		25,858		-		-		25,858
Other commercial loans		74,585		186		-		74,399
Other agricultural loans		39,852		991		-		38,861
State and political subdivision loans		45,756		-		-		45,756
Total		1,441,533		15,533		3,802		1,422,198
Allowance for loan losses		17,304		121		-		17,183
Net loans	$	1,424,229	$	15,412	$	3,802	$	1,405,015

During 2022 the Company continued its participation in the Paycheck Protection Program (“PPP”), administered directly by the U.S. Small Business Administration (the “SBA”) through the processing of forgiveness of PPP loans. During 2021, the Company originated $24.3 million of loans. As of March 31, 2022 and December 31, 2021, the Company had outstanding principal balances of $2.8 million and $6.8 million, respectively, of PPP loans that are included in other commercial loans. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. The SBA has issued guidance for forgiveness with a streamlined approach for loans of $150,000 or less.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $150,000 in fees associated with the processing of the loans outstanding as of March 31, 2022. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2. As of March 31, 2022, $109,000 of deferred fees related to the PPP loans remain to be amortized.

The Company evaluated whether loans acquired as part of the MidCoast acquisition were within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired (“PCI”) loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. There were no material increases or decreases in the expected cash flows of these loans between April 17, 2020 (the “acquisition date”) and March 31, 2022. The fair value of PCI loans, on the acquisition date, was determined, primarily based on the fair value of loan collateral. The carrying value of purchased loans acquired with deteriorated credit quality as a result of the MidCoast acquisition was $3,444,000 at March 31, 2022.

Changes in the accretable yield for PCI loans were as follows for the three months ended March 31, 2022 and 2021 (in thousands):

	Three months ended March 31
	2022			2021
Balance at beginning of period	$	370		$	788
Reclassification of non-accretable discount		228			-
Accretion		(203	)		(100	)
Balance at end of period	$	395		$	688

The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality under ASC 310-30 (in thousands):

	March 31, 2022		December 31, 2021
Outstanding balance	$	6,584	$	6,159
Carrying amount		3,727		3,802

The segments of the Company’s loan portfolio are disaggregated into classes to a level that allows management to monitor risk and performance. Residential real estate mortgages consist primarily of 15 to 30 year first mortgages on residential real estate, while residential real estate home equity loans are consumer purpose installment loans or lines of credit with terms of 15 years or less secured by a mortgage which is often a second lien on residential real estate. Commercial real estate loans are business purpose loans secured by a mortgage on commercial real estate. Agricultural real estate loans are loans secured by a mortgage on real estate used in agriculture production. Construction real estate loans are loans secured by residential, commercial or agricultural real estate used during the construction phase of residential, commercial or agricultural projects. Consumer loans are typically unsecured or primarily secured by assets other than real estate and overdraft lines of credit are typically secured by customer deposit accounts. Other commercial loans are loans for commercial purposes primarily secured by non-real estate collateral. Other agricultural loans are loans for agricultural purposes primarily secured by non-real estate collateral. State and political subdivision loans are loans to state and local municipalities for capital and operating expenses or tax free loans used to finance commercial development.

Management considers other commercial loans, other agricultural loans, state and political subdivision loans, commercial real estate loans and agricultural real estate loans which are 90 days or more past due to be impaired. Management will also consider a loan impaired based on other factors it becomes aware of, including the customer’s results of operations and cash flows or if the loan is modified in a troubled debt restructuring. In addition, certain residential mortgages, home equity and consumer loans that are cross collateralized with commercial relationships that are determined to be impaired may also be classified as impaired. Impaired loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allocation to the allowance for loan losses or a charge-off to the allowance for loan losses.

The following table includes the recorded investment and unpaid principal balances for impaired loan receivables by class, excluding PCI loans, with the associated allowance amount, if applicable (in thousands):

March 31, 2022	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate loans:
Mortgages	$	713	$	482	$	44	$	526	$	6
Home Equity		95		35		41		76		5
Commercial		9,180		7,908		281		8,189		56
Agricultural		5,673		5,100		188		5,288		14
Construction		-		-		-		-		-
Consumer		-		-		-		-		-
Other commercial loans		1,241		92		520		612		429
Other agricultural loans		1,241		921		-		921		-
Total	$	18,143	$	14,538	$	1,074	$	15,612	$	510

December 31, 2021	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Real estate loans:
Mortgages	$	697	$	495	$	45	$	540	$	6
Home Equity		97		37		43		80		6
Commercial		9,330		8,096		285		8,381		61
Agricultural		5,694		5,167		188		5,355		14
Construction		-		-		-		-		-
Consumer		-		-		-		-		-
Other commercial loans		813		92		94		186		34
Other agricultural loans		1,274		991		-		991		-
Total	$	17,905	$	14,878	$	655	$	15,533	$	121

The following tables includes the average balance of impaired loan receivables by class and the income recognized on these receivables for the three month periods ended March 31, 2022 and 2021 (in thousands):

	For the Three Months Ended
	March 31, 2022						March 31, 2021
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized Cash Basis
Real estate loans:
Mortgages	$	531	$	2	$	-	$	851	$	5	$	-
Home Equity		77		1		-		124		1		-
Commercial		8,260		66		-		9,238		67		7
Agricultural		5,316		28		-		4,590		22		-
Consumer		-		-		-		1		-		-
Other commercial loans		326		1		-		1,121		1		-
Other agricultural loans		953		1		-		1,103		2		-
Total	$	15,463	$	99	$	-	$	17,028	$	98	$	7

Credit Quality Information

For commercial real estate, agricultural real estate, construction, other commercial, other agricultural and state and political subdivision loans, management uses a nine grade internal risk rating system to monitor and assess credit quality. The first five categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The definitions of each rating are defined below:

•

Pass (Grades 1-5) – These loans are to customers with credit quality ranging from an acceptable to very high quality and are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

•

Special Mention (Grade 6) – This loan grade is in accordance with regulatory guidance and includes loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

•

Substandard (Grade 7) – This loan grade is in accordance with regulatory guidance and includes loans that have a well-defined weakness based on objective evidence and be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

•

Doubtful (Grade 8) – This loan grade is in accordance with regulatory guidance and includes loans that have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

•

Loss (Grade 9) – This loan grade is in accordance with regulatory guidance and includes loans that are considered uncollectible, or of such value that continuance as an asset is not warranted.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay the loan as agreed, the Company’s loan rating process includes several layers of internal and external oversight. The Company’s loan officers are responsible for the timely and accurate risk rating of the loans in each of their portfolios at origination and on an ongoing basis under the supervision of management. All commercial, agricultural and state and political relationships over $500,000 are reviewed annually to ensure the appropriateness of the loan grade. In addition, the Company engages an external consultant on at least an annual basis to: 1) review a minimum of 50% of the dollar volume of the commercial, agricultural and municipal loan portfolios on an annual basis, 2) review a sample of new loans originated for over $1.0 million in the last year, 3) review a sample of borrowers with commitments greater than or equal to $1.0 million, 4) review selected loan relationships over $750,000 which are over 30 days past due or classified Special Mention, Substandard, Doubtful, or Loss, and 5) such other loans which management or the consultant deems appropriate.

The following tables represent credit exposures by internally assigned grades as of March 31, 2022 and December 31, 2021 (in thousands):

March 31, 2022	Pass		Special Mention		Substandard		Doubtful		Loss		Ending Balance
Real estate loans:
Commercial	$	687,595	$	29,919	$	7,362	$	-	$	-	$	724,876
Agricultural		286,986		12,665		5,866		-		-		305,517
Construction		66,738		-		-		-		-		66,738
Other commercial loans		64,635		3,520		860		36		-		69,051
Other agricultural loans		37,989		1,156		759		-		-		39,904
State and political subdivision loans		49,582		-		-		-		-		49,582
Total	$	1,193,525	$	47,260	$	14,847	$	36	$	-	$	1,255,668

December 31, 2021
Real estate loans:
Commercial	$	646,137	$	35,332	$	5,869	$	-	$	-	$	687,338
Agricultural		291,537		15,105		5,369		-		-		312,011
Construction		55,036		-		-		-		-		55,036
Other commercial loans		70,932		3,289		316		48		-		74,585
Other agricultural loans		37,800		1,351		701		-		-		39,852
State and political subdivision loans		45,588		168		-		-		-		45,756
Total	$	1,147,030	$	55,245	$	12,255	$	48	$	-	$	1,214,578

For residential real estate mortgages, home equity and consumer loans, credit quality is monitored based on whether the loan is performing or non-performing, which is typically based on the aging status of the loan and payment activity, unless a specific action, such as bankruptcy, repossession, death or significant delay in payment occurs to raise awareness of a possible credit event. Non-performing loans include those loans that are considered nonaccrual, described in more detail below, and all loans past due 90 or more days and still accruing. The following table presents the recorded investment in those loan classes based on payment activity as of March 31, 2022 and December 31, 2021 (in thousands):

March 31, 2022	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	152,183	$	455	$	12	$	152,650
Home Equity		48,917		-		-		48,917
Consumer		21,460		-		-		21,460
Total	$	222,560	$	455	$	12	$	223,027

December 31, 2021	Performing		Non-performing		PCI		Total
Real estate loans:
Mortgages	$	150,320	$	608	$	14	$	150,942
Home Equity		50,122		33		-		50,155
Consumer		25,858		-		-		25,858
Total	$	226,300	$	641	$	14	$	226,955

Aging Analysis of Past Due Loan Receivables

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table includes an aging analysis of the recorded investment of past due loan receivables as of March 31, 2022 and December 31, 2021 (in thousands):

March 31, 2022	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		PCI		Total Loan Receivables		90 Days or Greater and Accruing
Real estate loans:
Mortgages	$	567	$	86	$	207	$	860	$	151,778	$	12	$	152,650	$	12
Home Equity		60		24		-		84		48,833		-		48,917		-
Commercial		97		719		1,940		2,756		720,011		2,109		724,876		-
Agricultural		671		-		1,368		2,039		301,872		1,606		305,517		-
Construction		-		-		-		-		66,738		-		66,738		-
Consumer		186		3		-		189		21,271		-		21,460		-
Other commercial loans		100		313		117		530		68,521		-		69,051		-
Other agricultural loans		-		-		-		-		39,904		-		39,904		-
State and political subdivision loans		-		-		-		-		49,582		-		49,582		-
Total	$	1,681	$	1,145	$	3,632	$	6,458	$	1,468,510	$	3,727	$	1,478,695	$	12

Loans considered non-accrual	$	272	$	457	$	3,620	$	4,349	$	3,461	$	-	$	7,810
Loans still accruing		1,409		688		12		2,109		1,465,049		3,727		1,470,885
Total	$	1,681	$	1,145	$	3,632	$	6,458	$	1,468,510	$	3,727	$	1,478,695

December 31, 2021
Real estate loans:
Mortgages	$	220	$	170	$	209	$	599	$	150,329	$	14	$	150,942	$	13
Home Equity		103		-		33		136		50,019		-		50,155		33
Commercial		127		115		1,969		2,211		682,982		2,145		687,338		-
Agricultural		31		-		1,367		1,398		308,970		1,643		312,011		-
Construction		-		-		-		-		55,036		-		55,036		-
Consumer		163		1		-		164		25,694		-		25,858		-
Other commercial loans		17		10		92		119		74,466		-		74,585		-
Other agricultural loans		10		-		-		10		39,842		-		39,852		-
State and political subdivision loans		-		-		-		-		45,756		-		45,756		-
Total	$	671	$	296	$	3,670	$	4,637	$	1,433,094	$	3,802	$	1,441,533	$	46
Loans considered non-accrual	$	-	$	-	$	3,624	$	3,624	$	3,992	$	-	$	7,616
Loans still accruing		671		296		46		1,013		1,429,102		3,802		1,433,917
Total	$	671	$	296	$	3,670	$	4,637	$	1,433,094	$	3,802	$	1,441,533

Nonaccrual Loans

Loans are considered for non-accrual status upon reaching 90 days delinquency, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans, or if full payment of principal and interest is not expected. Additionally, if management is made aware of other information including bankruptcy, repossession, death, or legal proceedings, the loan may be placed on non-accrual status. If a loan is 90 days or more past due and is well secured and in the process of collection, it may still be considered accruing.

The following table reflects the loan receivables, excluding PCI loans, on non-accrual status as of March 31, 2022 and December 31, 2021, respectively. The balances are presented by class of loan receivable (in thousands):

	March 31, 2022		December 31, 2021
Real estate loans:
Mortgages	$	443	$	595
Commercial		2,984		2,945
Agricultural		3,083		3,133
Other commercial loans		567		140
Other agricultural loans		733		803
	$	7,810	$	7,616

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a Troubled Debt Restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to structure more affordable terms before their loan reaches nonaccrual status. These restructured terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of interest or principal, or both, management measures any impairment on the restructuring by calculating the present value of the revised loan terms and comparing this balance to the Company’s investment in the loan prior to the restructuring. As these loans are individually evaluated, they are excluded from pooled portfolios when calculating the allowance for loan and lease losses and a separate allocation within the allowance for loan and lease losses is provided. Management continually evaluates loans that are considered TDRs, including payment history under the modified loan terms, the borrower’s ability to continue to repay the loan based on continued evaluation of their operating results and cash flows from operations. As of March 31, 2022 and December 31, 2021, included within the allowance for loan losses are reserves of $26,000 that are associated with loans modified as TDRs.

There were no loan modifications that were considered TDRs during the three months ended March 31, 2022. Loan modifications that are considered TDRs completed during the three months ended March 31, 2021 were as follows (dollars in thousands):

	For the Three Months Ended March 31, 2021
	Number of contracts				Pre-modification Outstanding Recorded Investment				Post-Modification Outstanding Recorded Investment
	Interest Modification		Term Modification		Interest Modification		Term Modification		Interest Modification		Term Modification

Real estate loans:
Commercial		-		2	$	-	$	290	$	-	$	290
Total		-		2	$	-	$	290	$	-	$	290

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism on modified loans occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans.

Allowance for Loan Losses

The following table segregates the allowance for loan losses (ALLL) into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of March 31, 2022 and December 31, 2021, respectively (in thousands):

	March 31, 2022						December 31, 2021
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Real estate loans:
Residential	$	11	$	1,059	$	1,070	$	12	$	1,135	$	1,147
Commercial		56		8,338		8,394		61		8,038		8,099
Agricultural		14		4,502		4,516		14		4,715		4,729
Construction		-		497		497		-		434		434
Consumer		-		210		210		-		262		262
Other commercial loans		429		951		1,380		34		989		1,023
Other agricultural loans		-		551		551		-		558		558
State and political subdivision loans		-		285		285		-		281		281
Unallocated		-		653		653		-		771		771
Total	$	510	$	17,046	$	17,556	$	121	$	17,183	$	17,304

The following tables roll forward the balance of the ALLL by portfolio segment for the three months ended March 31, 2022 and 2021, respectively (in thousands):

	For the three months ended March 31, 2022
	Balance at December 31, 2021		Charge-offs			Recoveries		Provision			Balance at March 31, 2022
Real estate loans:
Residential	$	1,147	$	-		$	-	$	(77	)	$	1,070
Commercial		8,099		-			-		295			8,394
Agricultural		4,729		-			-		(213	)		4,516
Construction		434		-			-		63			497
Consumer		262		(5	)		5		(52	)		210
Other commercial loans		1,023		-			2		355			1,380
Other agricultural loans		558		-			-		(7	)		551
State and political subdivision loans		281		-			-		4			285
Unallocated		771		-			-		(118	)		653
Total	$	17,304	$	(5	)	$	7	$	250		$	17,556

	For the three months ended March 31, 2021
	Balance at December 31, 2020		Charge-offs			Recoveries		Provision			Balance at March 31, 2021
Real estate loans:
Residential	$	1,174	$	-		$	-	$	(7	)	$	1,167
Commercial		6,216		-			89		378			6,683
Agricultural		4,953		-			-		(36	)		4,917
Construction		122		-			-		29			151
Consumer		321		(4	)		6		(86	)		237
Other commercial loans		1,226		-			4		274			1,504
Other agricultural loans		864		-			-		(75	)		789
State and political subdivision loans		479		-			-		(9	)		470
Unallocated		460		-			-		182			642
Total	$	15,815	$	(4	)	$	99	$	650		$	16,560

The Company allocates the ALLL based on the factors described below, which conform to the Company’s loan classification policy and credit quality measurements. In reviewing risk within the Company’s loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The ALLL consists of amounts applicable to: (i) residential real estate loans; (ii) residential real estate home equity loans; (iii) commercial real estate loans; (iv) agricultural real estate loans; (v) real estate construction loans; (vi) other commercial and agricultural loans; (vii) consumer loans; (viii) other agricultural loans and (ix) state and political subdivision loans. Factors considered in this process include general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are evaluated to determine additional inherent risks in the loan portfolio, which are not necessarily reflected in the historical loss percentages. These factors are then added to the historical allocation percentage to get the adjusted factor to be applied to non-classified loans. The following qualitative factors are analyzed:

•

Level of and trends in delinquencies and impaired/classified loans

▪

Change in volume and severity of past due loans

▪

Volume and severity of non-accrual loans

▪

Volume and severity of classified, adversely or graded loans;

•

Level of and trends in charge-offs and recoveries;

•

Trends in volume, terms and nature of the loan portfolio;

•

Effects of any changes in risk selection and underwriting standards and any other changes in lending and recovery policies, procedures and practices;

•

Changes in the quality of the Company’s loan review system;

•

Experience, ability and depth of lending management and other relevant staff;

•

National, state, regional and local economic trends and business conditions

▪

General economic conditions

▪

Unemployment rates

▪

Inflation rate/ Consumer Price Index

▪

Changes in values of underlying collateral for collateral-dependent loans;

•

Industry conditions including the effects of external factors such as competition, legal, and regulatory requirements on the level of estimated credit losses;

•

Existence and effect of any credit concentrations, and changes in the level of such concentrations; and

•

Any change in the level of board oversight.

The Company analyzes its loan portfolio at least each quarter to determine the adequacy of its ALLL.

Loans determined to be TDRs are impaired and for purposes of estimating the ALLL must be individually evaluated for impairment. In calculating the impairment, the Company calculates the present value utilizing an analysis of discounted cash flows. If the present value calculated is below the recorded investment of the loan, impairment is recognized by a charge to the provision for loan and lease losses and a credit to the ALLL.

For the three months ended March 31, 2022, the allowance for all categories was decreased due to a general improvement in economic activity and unemployment and a return to levels experienced prior to the the Covid-19 pandemic.

For the three months ended March 31, 2021, the allowance for commercial real estate and other commercial loans increased due to loans acquired as part of the MidCoast acquisition maturing and then renewed and becoming subject to the Company’s allowance calculation. The factor related to level of past due loans for residential real estate was decreased due to a decrease in past due loans. The factor related to the volume and severity of classified, adversely or graded loans was decreased for other agricultural loans due to a decrease in classified loans.

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of March 31, 2022 and December 31, 2021, included within other assets are $1,131,000 and $1,180,000, respectively, of foreclosed assets. As of March 31, 2022, included within the foreclosed assets are $381,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of March 31, 2022, the Company had initiated formal foreclosure proceedings on $160,000 of consumer residential mortgages, which had not yet been transferred into foreclosed assets.