Loans Receivable and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2020

Loans Receivable and Allowance for Loan Losses [Abstract]

Loans Receivable and Allowance for Loan Losses

8.           Loans Receivable and Allowance for Loan Losses

Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated (dollars in thousands):

	September 30, 2020				December 31, 2019
Real Estate Loans:
Residential	$	263,404	18.6	%	$	229,781	24.9	%
Commercial		574,123	40.5			391,327	42.3
Agricultural		68,340	4.8			—	—
Construction		20,797	1.5			17,732	1.9
Commercial loans		285,295	20.1			134,150	14.5
Other agricultural loans		42,297	3.0			—	—
Consumer loans to individuals		162,217	11.5			151,686	16.4
Total loans		1,416,473	100.0	%		924,676	100.0	%
Deferred fees, net		(1,811)				(95)
Total loans receivable		1,414,662				924,581
Allowance for loan losses		(11,674)				(8,509)
Net loans receivable	$	1,402,988			$	916,072

During 2020 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the United States Small Business Administration (“SBA”). The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. As of September 30, 2020, the Company had outstanding principal balances of $95,035,000 in PPP 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. PPP loans are included in the Commercial loan category.

In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $2.5 million in fees associated with the processing of these loans. 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.

The following table presents information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands):

	September 30, 2020		December 31, 2019
Outstanding Balance	$	15,344	$	793
Carrying Amount	$	8,586	$	696

As a result of the acquisition of UpState New York Bancorp, Inc. (“UpState”), the Company added $15,410,000 of loans that were accounted for in accordance with ASC 310-30. Based on a review of the loans acquired by the Company’s senior lending management, which included an analysis of credit deterioration of the loans since origination, the Company recorded a specific credit fair value adjustment of $6,937,000.  For loans that were acquired with specific evidence of deterioration in credit quality, loan losses will be accounted for through a reduction of the specific reserve and will not impact the allowance for loan losses until actual losses exceed the allotted reserves. For loans acquired without a deterioration of credit quality, losses incurred will result in adjustments to the allowance for loan losses through the allowance for loan loss adequacy calculation.

Changes in the accretable yield for purchased credit impaired loans for the nine-months ended September 30, 2019 and 2020, were as follows:

	2020		2019
Balance at beginning of period	$	97	$	168
Additions		1,724		—
Accretion		(179)		(29)
Reclassification and other		(96)		—
Balance at end of period	$	1,546	$	139

Loans acquired with credit deterioration of $15,410,000 and accounted for in accordance with ASC 310-30 were individually evaluated to estimate credit losses and a net recovery amount for each loan. The net cash flows for each loan were then discounted to present value using a risk-adjusted market rate. The table below presents the components of the purchase accounting adjustments:

(In Thousands)	July 7, 2020
Contractually required principal and interest	$	15,410
Non-accretable discount		(5,213)
Expected cash flows		10,197
Accretable discount		(1,724)
Estimated fair value	$	8,473

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. We do not aggregate such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of September 30, 2020 and December 31, 2019, foreclosed real estate owned totaled $965,000 and $1,556,000, respectively. During the nine months ended September 30, 2020, there were no additions to the foreclosed real estate category. The Company disposed of one property that was previously transferred to foreclosed real estate owned with a carrying value of $591,000 through the sale of the property. As of September 30, 2020, the Company has initiated formal foreclosure proceedings on three properties classified as consumer residential mortgages with an aggregate carrying value of $440,000.

The following table shows the amount of loans in each category that were individually and collectively evaluated for impairment at the dates indicated:

	Real Estate Loans
									Commercial			Other	Consumer
	Residential		Commercial			Agricultural	Construction		Loans			Agricultural	Loans		Total
September 30, 2020	(In thousands)
Individually evaluated for impairment	$	—	$	1,654	$	—	$	—	$	—	$	—	$	—	$	1,654
Loans acquired with deteriorated credit quality		122		3,771		2,078		190		245		2,180		—		8,586
Collectively evaluated for impairment		263,282		568,698		66,262		20,607		285,050		40,117		162,217		1,406,233
Total Loans	$	263,404	$	574,123	$	68,340	$	20,797	$	285,295	$	42,297	$	162,217	$	1,416,473

	Real Estate Loans
							Commercial		Consumer
	Residential		Commercial		Construction		Loans		Loans		Total
December 31, 2019	(In thousands)
Individually evaluated for impairment	$	-	$	2,144	$	-	$	-	$	-	$	2,144
Loans acquired with deteriorated credit quality		476		220		-		-		-		696
Collectively evaluated for impairment		229,305		388,963		17,732		134,150		151,686		921,836
Total Loans	$	229,781	$	391,327	$	17,732	$	134,150	$	151,686	$	924,676

The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable.

			Unpaid
	Recorded		Principal		Associated
	Investment		Balance		Allowance
September 30, 2020				(in thousands)
With no related allowance recorded:
Real Estate Loans:
Commercial	$	1,654	$	2,287		—
Total Impaired Loans	$	1,654	$	2,287		—

			Unpaid
	Recorded		Principal		Associated
	Investment		Balance		Allowance
December 31, 2019				(in thousands)
With no related allowance recorded:
Real Estate Loans:
Commercial	$	143	$	394	$	—
Subtotal		143		394		—
With an allowance recorded:
Real Estate Loans
Commercial		2,001		2,001		417
Subtotal		2,001		2,001		417
Total:
Real Estate Loans:
Commercial		2,144		2,395		417
Total Impaired Loans	$	2,144	$	2,395	$	417

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the three-month periods ended September 30, 2020 and 2019, respectively (in thousands):

	Average Recorded				Interest Income
	Investment				Recognized
	2020		2019		2020		2019
Real Estate Loans:
Commercial		1,874		633		2		—
Total	$	1,874	$	633	$	2	$	—

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the nine-month periods ended September 30, 2020 and 2019, respectively (in thousands):

	Average Recorded				Interest Income
	Investment				Recognized
	2020		2019		2020		2019
Real Estate Loans:
Commercial		1,986		759		8		24
Total	$	1,986	$	759	$	8	$	24

Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources. As of September 30, 2020 and December 31, 2019, troubled debt restructured loans totaled $91,000 and $99,000, respectively, with no specific reserve. For the nine-month period ended September 30, 2020 and 2019, there were no new loans identified as troubled debt restructurings. During 2019, the Company recognized a charge-off $451,000 on a loan that was previously identified as a troubled debt restructuring. The loan was transferred to foreclosed real estate during the first quarter of 2019 with a carrying value of $608,000.

On April 7, 2020, federal banking regulators issued a revised interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.

Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as nonperformance, repossession, or death occurs to raise awareness of a possible credit event. The Company’s Loan Review Department is responsible for the timely and accurate risk rating of the loans on an ongoing basis. Every credit which must be approved by Loan Committee or the Board of Directors is assigned a risk rating at time of consideration. Loan Review also annually reviews relationships of $1,500,000 and over to assign or re-affirm risk ratings. Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of September 30, 2020 and December 31, 2019 (in thousands):

			Special				Doubtful
	Pass		Mention		Substandard		or Loss		Total
September 30, 2020
Commercial real estate loans	$	558,137	$	10,341	$	5,645	$	—	$	574,123
Agricultural real estate loans		—		5,554		3,529		—		68,340
Commercial loans		284,625		275		395		—		285,295
Other agricultural loans		—		2,595		2,270		—		42,297
Total	$	842,762	$	18,765	$	11,839	$	—	$	970,055

			Special				Doubtful
	Pass		Mention		Substandard		or Loss		Total
December 31, 2019
Commercial real estate loans	$	376,109	$	12,268	$	2,950	$	—	$	391,327
Commercial loans		133,695		248		207		—		134,150
Total	$	509,804	$	12,516	$	3,157	$	—	$	525,477

For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. The following table presents the recorded investment in the loan classes based on payment activity as of September 30, 2020 and December 31, 2019 (in thousands):

	Performing		Nonperforming		Total
September 30, 2020
Residential real estate loans	$	262,741	$	663	$	263,404
Construction		20,797		—		20,797
Consumer loans		162,078		139		162,217
Total	$	445,616	$	802	$	446,418

	Performing		Nonperforming		Total
December 31, 2019
Residential real estate loans	$	229,214	$	567	$	229,781
Construction		17,732		—		17,732
Consumer loans		151,607		79		151,686
Total	$	398,553	$	646	$	399,199

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 presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2020 and December 31, 2019 (in thousands):

	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and still accruing		Nonaccrual		Total Past Due and Non-Accrual		Purchased Credit-Impaired		Total Loans
September 30, 2020
Real Estate loans
Residential	$	261,906	$	443	$	270	$	-	$	663	$	1,376	$	122	$	263,404
Commercial		568,601		420		51		-		1,280		1,751		3,771		574,123
Agricultural		65,557		29						676		705		2,078		68,340
Construction		20,607		-		-		-		-		-		190		20,797
Commercial loans		283,130		878		19		1,000		23		1,920		245		285,295
Other agricultural loans		39,844		10						263		273		2,180		42,297
Consumer loans		161,682		346		50		-		139		535		-		162,217
Total	$	1,401,327	$	2,126	$	390	$	1,000	$	3,044	$	6,560	$	8,586	$	1,416,473

	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and still accruing		Nonaccrual		Total Past Due and Non-Accrual			Purchased Credit-Impaired		Total Loans
December 31, 2019
Real Estate loans
Residential	$	227,766	$	727	$	245	$	-	$	567	$	1,539	-	$	476	$	229,781
Commercial		387,897		176		2,935		-		99		3,210	-		220		391,327
Construction		17,695		-		37		-		-		37	-		-		17,732
Commercial loans		134,018		82		-		-		50		132	-		-		134,150
Consumer loans		151,309		233		65		-		79		377	-		-		151,686
Total	$	918,685	$	1,218	$	3,282	$	-	$	795	$	5,295	-	$	696	$	924,676

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the allowance for loan losses. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the allowance.

As of September 30, 2020, the allocation of the allowance pertaining to each major category of loans is higher than the allocation as of December 31, 2019. This increase is due primarily to an increase in the qualitative factor for economic conditions which worsened as a result of the COVID-19 pandemic. The increase in the economic factor added $2.2 million to the required allowance for loan losses. As of September 30, 2020, the Company has also added qualitative factors related to the pandemic to capture some of the risk associated with higher-risk industries and to recognize risk related to loans that have been granted deferral of payments due to COVID-19. At September 30, 2020, the allowance for loan losses includes $1.5 million of COVID related factors. These increases in the required allowance were offset partially by a decrease in the qualitative factor relating to loan growth which decreased by $986,000 due to a reduction in loan growth from 8.75% in 2019 to projected growth of approximately 2.00% for the year

of 2020. The 2020 growth excludes growth in Paycheck Protection Program loans which are fully guaranteed by the Small Business Association as well as loans acquired from UpState.

The following table presents the allowance for loan losses by the classes of the loan portfolio:

(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, December 31, 2019	$	1,552	$	4,687	$	95	$	949	$	1,226	$	8,509
Charge Offs		(41)		(433)		—		(18)		(275)		(767)
Recoveries		5		10		—		36		31		82
Provision for loan losses		162		2,904		30		242		512		3,850
Ending balance, September 30, 2020	$	1,678	$	7,168	$	125	$	1,209	$	1,494	$	11,674
Ending balance individually evaluated ‎for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance collectively evaluated ‎for impairment	$	1,678	$	7,168	$	125	$	1,209	$	1,494	$	11,674

(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, June 30, 2020	$	1,652	$	6,079	$	86	$	1,076	$	1,419	$	10,312
Charge Offs		(40)		(400)		-		-		(83)		(523)
Recoveries		2		4		-		18		11		35
Provision for loan losses		64		1,485		39		115		147		1,850
Ending balance, September 30, 2020	$	1,678	$	7,168	$	125	$	1,209	$	1,494	$	11,674

(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, December 31, 2018	$	1,328	$	5,455	$	93	$	712	$	864	$	8,452
Charge Offs		(90)		(615)		—		(254)		(246)		(1,205)
Recoveries		20		18		—		31		39		108
Provision for loan losses		310		(292)		14		454		564		1,050
Ending balance, September 30, 2019	$	1,568	$	4,566	$	107	$	943	$	1,221	$	8,405
Ending balance individually evaluated ‎for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance collectively evaluated ‎for impairment	$	1,568	$	4,566	$	107	$	943	$	1,221	$	8,405

(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, June 30, 2019	$	1,447	$	4,694	$	112	$	896	$	1,079	$	8,228
Charge Offs		(15)		—		—		(20)		(111)		(146)
Recoveries		5		4		—		10		4		23
Provision for loan losses		131		(132)		(5)		57		249		300
Ending balance, September 30, 2019	$	1,568	$	4,566	$	107	$	943	$	1,221	$	8,405

The Company’s primary business activity as of September 30, 2020 was with customers located in northeastern Pennsylvania and the New York counties of Delaware, Sullivan, Ontario, Otsego and Yates. Accordingly, the Company has extended credit primarily to commercial entities and individuals in this area whose ability to honor their contracts is influenced by the region’s economy.

As of September 30, 2020, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $119.7 million of loans outstanding, or 8.5% of total loans outstanding, and residential rentals with loans outstanding of $117.2 million, or 8.3% of loans outstanding. During 2020, the Company did not recognize any charge offs on loans in the named concentrations.