The loans receivable portfolio is segmented into commercial, residential mortgage and consumer loans. Loans outstanding at March 31, 2023 and December 31, 2022 are summarized by segment, and by classes within each segment, as follows:

(1) Total loans at December 31, 2022 include purchased credit impaired loans of $1,027,000.

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $4,506,000 at March 31, 2023 and $4,725,000 at December 31, 2022.

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 non-impaired (performing) loans, and a partial recovery of PCI loans. For the three-month periods ended March 31, 2023 and 2022, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:

The following table presents an analysis of past due loans as of March 31, 2023:

The following table presents an analysis of past due loans as of December 31, 2022:

In determining the larger loan relationships for detailed assessment under the specific allowance component, 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. 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. 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. 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, 2023:

The following table presents the recorded investment in loans by credit quality indicators as of December 31, 2022:

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

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

The following table represents the accrued interest receivable written off by reversing interest income during the three months ended March 31, 2023:

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:

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, 2023
	Amortized
(In Thousands)	Cost		Allowance
Commercial real estate - nonowner occupied	$	6,017	$	609
Commercial real estate - owner occupied		1,612		183
All other commercial loans		1,680		103
Total	$	9,309	$	895

The following table summarizes the activity related to the allowance for credit losses for the three months ended March 31, 2023 under the CECL methodology.


	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

Prior to the adoption of ASC 326 on January 1, 2023, the Corporation calculated the allowance for loan losses under the incurred loss methodology. The following tables are disclosed related to the allowance for loan losses in prior periods.


Three Months Ended March 31, 2022	December 31, 2021								March 31, 2022
(In Thousands)	Balance		Charge-offs		Recoveries		Provision (Credit)		Balance
Allowance for Loan Losses:
Commercial:
Commercial loans secured by real estate	$	4,405	$	0	$	0	$	612	$	5,017
Commercial and industrial		2,723		(150)		0		268		2,841
Commercial construction and land		637		0		0		(246)		391
Loans secured by farmland		115		0		0		14		129
Multi-family (5 or more) residential		215		0		0		152		367
Agricultural loans		25		0		0		2		27
Other commercial loans		173		0		0		(23)		150
Total commercial		8,293		(150)		0		779		8,922
Residential mortgage:
Residential mortgage loans - first liens		3,650		0		1		159		3,810
Residential mortgage loans - junior liens		184		0		0		(3)		181
Home equity lines of credit		302		0		15		(11)		306
1-4 Family residential construction		202		0		0		(54)		148
Total residential mortgage		4,338		0		16		91		4,445
Consumer		235		(30)		7		25		237
Unallocated		671		0		0		(4)		667
Total Allowance for Loan Losses	$	13,537	$	(180)	$	23	$	891	$	14,271

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of December 31, 2022.


December 31, 2022	Loans:						Allowance for Loan Losses:
(In Thousands)
	Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Commercial:
Commercial loans secured by real estate	$	7,154	$	675,095	$	682,249	$	427	$	6,647	$	7,074
Commercial and industrial		11,223		167,048		178,271		26		2,883		2,909
Paycheck Protection Program - 1st Draw		0		5		5		0		0		0
Paycheck Protection Program - 2nd Draw		0		163		163		0		0		0
Political subdivisions		0		90,719		90,719		0		0		0
Commercial construction and land		244		73,719		73,963		0		647		647
Loans secured by farmland		76		12,874		12,950		0		112		112
Multi-family (5 or more) residential		0		55,886		55,886		0		411		411
Agricultural loans		57		2,378		2,435		0		21		21
Other commercial loans		0		14,857		14,857		0		124		124
Total commercial		18,754		1,092,744		1,111,498		453		10,845		11,298
Residential mortgage:
Residential mortgage loans - first liens		506		509,276		509,782		0		3,413		3,413
Residential mortgage loans - junior liens		30		24,919		24,949		0		167		167
Home equity lines of credit		68		43,730		43,798		0		282		282
1-4 Family residential construction		0		30,577		30,577		0		211		211
Total residential mortgage		604		608,502		609,106		0		4,073		4,073
Consumer		0		19,436		19,436		0		244		244
Unallocated												1,000

Total	$	19,358	$	1,720,682	$	1,740,040	$	453	$	15,162	$	16,615

Prior to the adoption of ASU 2016-13, loans were classified as impaired when, based on current information and events, it was probable that the Corporation would be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment included payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experienced insignificant payment delays and payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of shortfall in relation to the principal and interest owed. Impairment was measured on a loan-by-loan basis for commercial loans by the fair value of the collateral (if the loan is collateral dependent), by future cash flows discounted at the loan’s effective rate or by the loan’s observable market price.

The scope of loans reviewed individually each quarter to determine if they were impaired included all commercial loan relationships greater than $200,000 and any residential mortgage or consumer loans of $400,000 or more for which there was at least one extension of credit graded Special Mention, Substandard or Doubtful. All loans classified as troubled debt restructurings and all commercial loan relationships less than $200,000 or other loan relationships less than $400,000 in the aggregate, but with an estimated loss of $100,000 or more, were individually evaluated for impairment.

Summary information related to impaired loans at December 31, 2022 is provided in the table immediately below.


(In Thousands)	December 31, 2022
	Unpaid
	Principal		Recorded		Related
	Balance		Investment		Allowance
With no related allowance recorded:
Commercial loans secured by real estate	$	8,563	$	3,754	$	0
Commercial and industrial		12,926		11,163		0
Residential mortgage loans - first liens		506		506		0
Residential mortgage loans - junior liens		68		30		0
Home equity lines of credit		68		68		0
Loans secured by farmland		76		76		0
Agricultural loans		57		57		0
Construction and other land loans		244		244		0
Total with no related allowance recorded		22,508		15,898		0

With a related allowance recorded:
Commercial loans secured by real estate		3,400		3,400		427
Commercial and industrial		60		60		26
Total with a related allowance recorded		3,460		3,460		453
Total	$	25,968	$	19,358	$	453

The average balance of impaired loans and interest income recognized on these impaired loans is as follows:


(In Thousands)	Average Investment in		Interest Income Recognized on
	Impaired Loans		Impaired Loans on a Cash Basis
	Three Months Ended		Three Months Ended
	March 31,		March 31,
	2022		2022
Commercial:
Commercial loans secured by real estate	$	10,735	$	129
Commercial and industrial		1,626		4
Commercial construction and land		48		1
Loans secured by farmland		82		0
Multi-family (5 or more) residential		789		0
Agricultural loans		63		2
Total commercial		13,343		136
Residential mortgage:
Residential mortgage loans - first lien		565		7
Residential mortgage loans - junior lien		37		1
Home equity lines of credit		0		1
Total residential mortgage		602		9
Total	$	13,945	$	145

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty, such as extensions of terms, insignificant payment delays and interest rate reductions, 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.

Occasionally, the Corporation modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

There were no loans modified to borrowers experiencing financial difficulty in the first quarter 2023.

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:


(In Thousands)	March 31,		December 31,
	2023		2022
Foreclosed residential real estate	$	184	$	0

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,
	2023		2022
Residential real estate in process of foreclosure	$	1,154	$	1,229

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 $1,178,000 at March 31, 2023 and $425,000 at December 31, 2022, 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 ended March 31, 2023.


	Total Allowance for
	Credit Losses -
(In Thousands)	Off-Balance Sheet Exposures
Balance, December 31, 2022	$	425
Adjustment to allowance for off-balance sheet exposures for adoption of ASU 2016-13		793
Credit for unfunded commitments		(40)
Balance, March 31, 2023	$	1,178