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LOANS AND ALLOWANCE FOR CREDIT LOSSES

9 Months Ended

Sep. 30, 2024

LOANS AND ALLOWANCE FOR CREDIT LOSSES

LOANS AND ALLOWANCE FOR CREDIT LOSSES

6. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans receivable at September 30, 2024 and December 31, 2023 are summarized as follows:

Summary of Loans by Type

(In Thousands)


	September 30,		December 31,
	2024		2023
Commercial real estate - non-owner occupied	$	721,103	$	737,342
Commercial real estate - owner occupied		266,477		237,246
All other commercial loans		431,985		399,693
Residential mortgage loans		407,429		413,714
Consumer loans		65,770		60,144
Total		1,892,764		1,848,139
Less: allowance for credit losses on loans		(20,442)		(19,208)
Loans, net	$	1,872,322	$	1,828,931

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $4,309,000 at September 30, 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.

The following tables presents an analysis of past due loans as of September 30, 2024 and December 31, 2023:


(In Thousands)	As of September 30, 2024
	Past Due		Past Due
	30-89		90+		Nonaccrual		Current		Total
	Days		Days		Loans		Loans		Loans
Commercial real estate - non-owner occupied	$	7,867	$	0	$	7,799	$	705,437	$	721,103
Commercial real estate - owner occupied		467		0		1,741		264,269		266,477
All other commercial loans		4,999		0		10,151		416,835		431,985
Residential mortgage loans		2,284		0		4,325		400,820		407,429
Consumer loans		289		56		385		65,040		65,770
Total	$	15,906	$	56	$	24,401	$	1,852,401	$	1,892,764


(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 September 30, 2024:


(In Thousands)	Term Loans by Year of Origination
	2024		2023		2022		2021		2020		Prior		Revolving		Total
Commercial real estate - non-owner occupied
Pass	$	29,241	$	98,545	$	158,232	$	78,742	$	53,094	$	256,743	$	0	$	674,597
Special Mention		0		0		26,222		2,359		0		6,468		0		35,049
Substandard		119		0		63		0		0		11,275		0		11,457
Doubtful		0		0		0		0		0		0		0		0
Total commercial real estate - non-owner occupied	$	29,360	$	98,545	$	184,517	$	81,101	$	53,094	$	274,486	$	0	$	721,103
Year-to-date gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	757	$	0	$	757
Commercial real estate - owner occupied
Pass	$	23,389	$	33,835	$	52,785	$	50,098	$	11,856	$	82,977	$	0	$	254,940
Special Mention		0		0		0		0		0		0		0		0
Substandard		0		5,172		733		2,417		0		3,215		0		11,537
Doubtful		0		0		0		0		0		0		0		0
Total commercial real estate - owner occupied	$	23,389	$	39,007	$	53,518	$	52,515	$	11,856	$	86,192	$	0	$	266,477
Year-to-date gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
All other commercial loans
Pass	$	56,294	$	71,062	$	61,114	$	46,638	$	23,682	$	27,489	$	118,178	$	404,457
Special Mention		555		0		6,348		0		23		8		962		7,896
Substandard		44		0		3,546		5,229		302		1,240		9,271		19,632
Doubtful		0		0		0		0		0		0		0		0
Total all other commercial loans	$	56,893	$	71,062	$	71,008	$	51,867	$	24,007	$	28,737	$	128,411	$	431,985
Year-to-date gross charge-offs	$	0	$	0	$	427	$	60	$	21	$	122	$	0	$	630
Residential mortgage loans
Pass	$	28,053	$	52,234	$	81,960	$	51,686	$	36,947	$	151,334	$	0	$	402,214
Special Mention		0		0		0		0		0		0		0		0
Substandard		0		35		31		0		245		4,904		0		5,215
Doubtful		0		0		0		0		0		0		0		0
Total residential mortgage loans	$	28,053	$	52,269	$	81,991	$	51,686	$	37,192	$	156,238	$	0	$	407,429
Year-to-date gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Consumer loans
Pass	$	7,897	$	3,941	$	3,267	$	1,184	$	674	$	752	$	47,547	$	65,262
Special Mention		0		0		0		0		0		0		0		0
Substandard		0		2		0		0		0		55		451		508
Doubtful		0		0		0		0		0		0		0		0
Total consumer loans	$	7,897	$	3,943	$	3,267	$	1,184	$	674	$	807	$	47,998	$	65,770
Year-to-date gross charge-offs	$	0	$	67	$	130	$	7	$	8	$	1	$	84	$	297
Total Loans
Pass	$	144,874	$	259,617	$	357,358	$	228,348	$	126,253	$	519,295	$	165,725	$	1,801,470
Special Mention		555		0		32,570		2,359		23		6,476		962		42,945
Substandard		163		5,209		4,373		7,646		547		20,689		9,722		48,349
Doubtful		0		0		0		0		0		0		0		0
Total	$	145,592	$	264,826	$	394,301	$	238,353	$	126,823	$	546,460	$	176,409	$	1,892,764
Year-to-date gross charge-offs	$	0	$	67	$	557	$	67	$	29	$	880		84	$	1,684

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
Total Loans
Pass	$	252,089	$	387,656	$	251,612	$	136,582	$	146,522	$	439,577	$	151,546	$	1,765,584
Special Mention		104		23,508		7,489		8		116		7,148		301		38,674
Substandard		5,200		1,267		3,822		767		1,615		20,716		10,494		43,881
Doubtful		0		0		0		0		0		0		0		0
Total	$	257,393	$	412,431	$	262,923	$	137,357	$	148,253	$	467,441	$	162,341	$	1,848,139
Year-to-date gross charge-offs	$	0	$	149	$	0	$	18	$	3	$	36		150	$	356

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


	September 30, 2024
	Nonaccrual Loans with		Nonaccrual Loans		Total Nonaccrual
(In Thousands)	No Allowance		with an Allowance		Loans
Commercial real estate - non-owner occupied	$	6,442	$	1,357	$	7,799
Commercial real estate - owner occupied		1,476		265		1,741
All other commercial loans		10,151		0		10,151
Residential mortgage loans		4,325		0		4,325
Consumer loans		385		0		385
Total	$	22,779	$	1,622	$	24,401


	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 $234,000 and $750,000 in the three and nine months ended September 30, 2024 and $317,000 and $744,000 in the three and nine months ended September 30, 2023.

The following table represents the accrued interest receivable written off by reversing interest income during the three-month and nine-month periods ended September 30, 2024 and 2023:


	Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended
(In Thousands)	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Commercial real estate - non-owner occupied	$	0	$	22	$	19	$	48
Commercial real estate - owner occupied		0		0		10		0
All other commercial loans		79		0		197		0
Residential mortgage loans		6		11		24		17
Consumer loans		4		0		8		2
Total	$	89	$	33	$	258	$	67

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:


	September 30, 2024				December 31, 2023
	Amortized				Amortized
(In Thousands)	Cost		Allowance		Cost		Allowance
Commercial real estate - non-owner occupied	$	7,799	$	14	$	8,412	$	648
Commercial real estate - owner occupied		1,741		159		1,575		5
All other commercial loans		10,151		0		1,277		90
Total	$	19,691	$	173	$	11,264	$	743

Allowance for Credit Losses

The allowance for credit losses (“ACL”) on loans represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The ACL on loans includes two primary components: (i) an allowance established on loans which share similar risk characteristics which are collectively evaluated for credit losses, and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and which are individually evaluated for credit losses.

Management determines the ACL on loans that are collectively evaluated by considering the following: (a) the weighted-average remaining maturity (WARM) method is used to estimate credit losses, based on the Corporation’s historical loss experience, for pools of loans with similar risk and cash flow characteristics; (b) subjective adjustments are made, generally increasing the ACL, for qualitative risk factors that are deemed likely to cause estimated credit losses to differ from historical experience; and (c) an additional adjustment to expected credit losses is made, based on an economic forecast, and applied for the first 2 years of the weighted-average remaining life of the portfolio.

The following table summarizes the activity related to the allowance for credit losses for the three and nine months ended September 30, 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, June 30, 2024	$	12,177	$	2,901	$	3,678	$	1,112	$	514	$	20,382
Charge-offs		(640)		0		(570)		0		(58)		(1,268)
Recoveries		0		0		5		1		25		31
Provision (credit) for credit losses on loans		381		(28)		311		647		(14)		1,297
Balance, September 30, 2024	$	11,918	$	2,873	$	3,424	$	1,760	$	467	$	20,442


	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		(757)		0		(630)		0		(297)		(1,684)
Recoveries		0		0		40		4		51		95
Provision (credit) for credit losses on loans		665		757		1,096		(8)		313		2,823
Balance, September 30, 2024	$	11,918	$	2,873	$	3,424	$	1,760	$	467	$	20,442


	Commercial		Commercial		All
	real estate -		real estate -		other		Residential
	nonowner		owner		commercial		mortgage		Consumer
(In Thousands)	occupied		occupied		loans		loans		loans		Total
Balance, June 30, 2023	$	10,603	$	2,025	$	3,686	$	2,464	$	278	$	19,056
Charge-offs		0		0		(7)		0		(91)		(98)
Recoveries		0		0		34		8		18		60
Provision (credit) for credit losses on loans		(268)		(161)		(161)		(479)		136		(933)
Balance, September 30, 2023	$	10,335	$	1,864	$	3,552	$	1,993	$	341	$	18,085


	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		(12)		(33)		(254)		0		(299)
Recoveries		0		0		34		10		30		0		74
Provision (credit) for credit losses on loans		267		(85)		(524)		(391)		324		0		(409)
Balance, September 30, 2023	$	10,335	$	1,864	$	3,552	$	1,993	$	341	$	0	$	18,085

The ACL on loans individually evaluated decreased to $173,000 at September 30, 2024 from $1,230,000 at June 30, 2024 and $743,000 at December 31, 2023, primarily from partial charge-offs on three loans with individual ACLs at June 30, 2024, including two loans with individual ACLs at December 31, 2023.

The ACL on loans collectively evaluated was $20,269,000 at September 30, 2024, $19,152,000 at June 30, 2024 and $18,465,000 at December 31, 2023. The increase in the ACL at September 30, 2024 as compared to June 30, 2024 included an increase related to the economic forecast, an increase in the WARM method estimate based on the Corporation’s net charge-off experience and a net increase related to changes in qualitative adjustments. The increase in the ACL at September 30, 2024 as compared to December 31, 2023 included a net increase related to changes in qualitative adjustments and the net impact of an increase in loans receivable, partially offset by a decrease in the WARM method estimate.

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 and nine months ended September 30, 2024 and September 30, 2023, the Corporation made no modifications to borrowers experiencing financial difficulty.

The following table depicts the performance of two loans which were in nonaccrual status at September 30, 2024 that were modified in the fourth quarter 2023:


(In Thousands)	Payment Status (Amortized Cost Basis)
September 30, 2024	Current		90+ Days Past Due		Total
Commercial real estate - non-owner occupied:
Non-owner occupied	$	1,846	$	1,357	$	3,203

The loan that was current at September 30, 2024 matured October 5, 2024, and the Corporation and borrower are engaged in negotiations regarding an extension of the loan term. The Corporation received principal payments totaling $40,000 during the nine months ended September 30, 2024 and recorded a partial charge-off of $640,000 on this loan in the third quarter 2024. There was no specific allowance

on this loan at September 30, 2024, while the specific allowance on the loan was $455,000 at June 30, 2024 and $486,000 at December 30, 2023.

The loan that was past due more than 90 days in the table above was in default with its modified terms at September 30, 2024. The Corporation received payments totaling $24,000 during the nine months September 30, 2024, all of which were applied to principal. There was a specific allowance on this loan of $14,000 at September 30, 2024 and $38,000 at June 30, 2024 and December 31, 2023.

Except as described above, at September 30, 2024 and December 31, 2023, the Corporation had no commitments to lend any additional funds on modified loans and during the three month and nine month periods ended September 30, 2024 and September 30, 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)	September 30,		December 31,
	2024		2023
Residential real estate in process of foreclosure	$	616	$	1,227

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. The contract amounts of these financial instruments at September 30, 2024 and December 31, 2023 are as follows:


	September 30,		December 31,
(In Thousands)	2024		2023
Commitments to extend credit	$	378,535	$	395,997
Standby letters of credit		64,938		19,158

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 $593,000 at September 30, 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 and nine months ended September 30, 2024 and 2023:


		Three Months Ended				Nine Months Ended
(In Thousands)	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Beginning Balance	$	683	$	1,154	$	690	$	425
Adjustment to allowance for off-balance sheet exposures for adoption of ASU 2016-13		0		0		0		793
Recoveries		0		38		0		38
Credit for unfunded commitments		(90)		(292)		(97)		(356)
Ending Balance, September 30	$	593	$	900	$	593	$	900

(In Thousands)

September 30,

December 31,

Foreclosed residential real estate