Loans Receivable and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2020

Loans Receivable and Allowance for Loan Losses [Abstract]

Loans Receivable and Allowance for Loan Losses

NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

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

	December 31, 2020				December 31, 2019
Real Estate:
Residential	$	263,127	18.6	%	$	229,781	24.9	%
Commercial		579,104	41.0			391,327	42.3
Agricultural		66,334	4.7			—	—
Construction		21,005	1.5			17,732	1.9
Commercial loans		283,741	20.1			134,150	14.5
Other agricultural loans		40,929	2.9			—	—
Consumer loans to individuals		158,049	11.2			151,686	16.4
Total loans		1,412,289	100.0	%		924,676	100.0	%
Deferred fees, net		(1,557)				(95)
Total loans receivable		1,410,732				924,581
Allowance for loan losses		(13,150)				(8,509)
Net loans receivable	$	1,397,582			$	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 December 31, 2020, the Company had outstanding principal balances of $95,043,000 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.

As a result of the acquisition of 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 were as follows for the twelve months ended December 31:

(In thousands)

	2020		2019
Balance at beginning of period	$	—	$	29
Additions		1,724		—
Accretion		(353)		(29)
Reclassification and other		(6)		—
Balance at end of period	$	1,365	$	—

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

	December 31, 2020		December 31, 2019
Outstanding Balance
	$	15,570	$	793
Carrying Amount
	$	9,281	$	696

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

There were no material increases or decreases in the expected cash flows of these loans since the acquisition date. There has been no allowance for loan losses recorded for acquired loans with specific evidence of deterioration in credit quality. As of December 31, 2020, for loans that were acquired prior to 2020 with or without specific evidence of deterioration in credit quality, adjustments to the allowance for loan losses have been accounted for through the allowance for loan loss adequacy calculation.

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. The 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. The Company does 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.

The following tables show 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
	(In thousands)
December 31, 2020
Individually evaluated for impairment	$	—	$	2,582	$	—	$	—	$	80	$	—	$	—	$	2,662
Loans acquired with deteriorated credit quality		591		3,995		2,043		194		246		2,212		—		9,281
Collectively evaluated for impairment		262,536		572,527		64,291		20,811		283,415		38,717		158,049		1,400,346
Total Loans	$	263,127	$	579,104	$	66,334	$	21,005	$	283,741	$	40,929	$	158,049	$	1,412,289

	Real Estate Loans
									Commercial			Other	Consumer
	Residential		Commercial			Agricultural	Construction		Loans			Agricultural	Loans		Total
	(In thousands)
December 31, 2019
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 Principal
	Recorded		Principal		Associated
	Investment		Balance		Allowance
December 31, 2020	(In thousands)
With no related allowance recorded:
Real Estate Loans
Commercial	$	2,582	$	3,234	$	—
Commercial loans		80		80		—
Subtotal		2,662		3,314		—
Total:
Real Estate Loans
Commercial	$	2,582	$	3,234	$	—
Commercial loans		80		80		—
Total Impaired Loans	$	2,662	$	3,314	$	—

			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 information for impaired loans is presented for the years ended December 31, 2020 and 2019:

	Average Recorded				Interest Income
	Investment				Recognized
	2020		2019		2020		2019
	(In thousands)
Total:
Real Estate Loans
Commercial	$	2,105	$	1,036	$	14	$	233
Commercial loans		16		—		—		—
Total Loans	$	2,121	$	1,036	$	14	$	233

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 December 31, 2020, troubled debt restructured loans totaled $75,000 and did not require a specific reserve. During 2020, there were no new loan relationships identified as troubled debt restructurings. During 2020, there was a charge-off in the amount of $20,000 on loans classified as troubled debt restructurings.

As of December 31, 2019, troubled debt restructured loans totaled $99,000 and did not require a specific reserve. During 2019, there were no new loan relationships identified as troubled debt restructurings, while one loan identified as troubled debt restructuring with a balance of $977,000 as of December 31, 2018 was transferred to foreclosed real estate during 2019.

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.

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 December 31, 2020 and 2019, foreclosed real estate owned totaled $965,000 and $1,556,000, respectively. As of December 31, 2020, included within foreclosed real estate owned is one commercial property that was received via a deed in lieu. As of December 31, 2020, the Company has initiated formal foreclosure proceedings on four consumer residential mortgage loans with an outstanding balance of $454,000.

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. Loans greater than 90 days past due are considered Substandard unless full payment is expected. 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 Company 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 December 31, 2020 and December 31, 2019 (in thousands):

			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
December 31, 2020
Commercial real estate loans	$	566,418	$	6,346	$	6,340	$	—	$	—	$	579,104
Real estate - agricultural		58,322		5,111		2,901		—		—		66,334
Commercial loans		282,915		437		389		—		—		283,741
Other agricultural loans		35,772		2,786		2,371		—		—		40,929
Total	$	943,427	$	14,680	$	12,001	$	—	$	—	$	970,108

			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
December 31, 2019
Commercial real estate loans	$	376,109	$	12,268	$	2,950	$	-	$	-	$	391,327
Commercial		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. Nonperforming loans include loans that have been placed on nonaccrual status and loans remaining in accrual status on which the contractual payment of principal and interest has become 90 days past due.

The following table presents the recorded investment in the loan classes based on payment activity as of December 31, 2020 and December 31, 2019 (in thousands):

	Performing		Nonperforming		Total
December 31, 2020
Residential real estate loans	$	262,556	$	571	$	263,127
Construction		21,005		—		21,005
Consumer loans to individuals		157,864		185		158,049
Total	$	441,425	$	756	$	442,181

	Performing		Nonperforming		Total
December 31, 2019
Residential real estate loans	$	229,214	$	567	$	229,781
Construction		17,732		—		17,732
Consumer loans to individuals		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 December 31, 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		Non-Accrual		Total Past Due and Non-Accrual		Purchased Credit Impaired Loans		Total Loans
December 31, 2020
Real Estate loans
Residential	$	261,406	$	355	$	204	$	—	$	571	$	1,130	$	591	$	263,127
Commercial		573,376		59		—		—		1,674		1,733		3,995		579,104
Agricultural		63,615		—		—		—		676		676		2,043		66,334
Construction		20,811		—		—		—		—		—		194		21,005
Commercial loans		282,374		1,009		90		—		22		1,121		246		283,741
Other agricultural loans		38,454		—		—		—		263		263		2,212		40,929
Consumer loans		157,538		233		93		—		185		511		-		158,049
Total	$	1,397,574	$	1,656	$	387	$	—	$	3,391	$	5,434	$	9,281	$	1,412,289

	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and still accruing		Non-Accrual		Total Past Due and Non-Accrual		Purchased Credit Impaired Loans		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

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)		(452)		—		(18)		(431)		(942)
Recoveries		6		39		—		44		44		133
Provision for loan losses		443		3,730		55		385		837		5,450
Ending balance, December 31, 2020	$	1,960	$	8,004	$	150	$	1,360	$	1,676	$	13,150
Ending balance individually evaluated ‎for impairment	$	—	$	—	$	—	$	—	$	—	$	—
Ending balance collectively evaluated for impairment	$	1,960	$	8,004	$	150	$	1,360	$	1,676	$	13,150

(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		(102)		(627)		—		(284)		(420)		(1,433)
Recoveries		24		125		—		48		43		240
Provision for loan losses		302		(266)		2		473		739		1,250
Ending balance, December 31, 2019	$	1,552	$	4,687	$	95	$	949	$	1,226	$	8,509
Ending balance individually evaluated ‎for impairment	$	—	$	417	$	—	$	—	$	—	$	417
Ending balance collectively evaluated for impairment	$	1,552	$	4,270	$	95	$	949	$	1,226	$	8,092

During the period ended December 31, 2020, the allowance for loan losses increased from $8,509,000 to $13,150,000. This $4,641,000 increase in the required allowance was due primarily to a $2.3 million increase in the qualitative factor related to economic conditions and a $2.2 million increase due to new qualitative factors directly related to the COVID-19 pandemic.

During the period ended December 31, 2019, the allowance for loan losses increased from $8,452,000 to $8,509,000. This $57,000 increase in the required allowance was due primarily to a $417,000 specific reserve for impaired loans and a $447,000 increase in the qualitative factor related to economic conditions. This increase was partially offset by a reduction in the historical loss factor from 0.26% at December 31, 2018 to 0.15% on December 31, 2019.

Interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of the loans was $727,000 and $101,000 for 2020 and 2019, respectively.

As of December 31, 2020 and 2019, the Company considered its concentration of credit risk to be acceptable. As of December 31, 2020, the highest concentrations are in commercial rentals and the residential rentals category, with loans outstanding of $125.3 million, or 86.4% of bank capital, to commercial rentals, and $117.8 million, or 81.2% of bank capital to residential rentals. There were no charge-offs on loans within these concentrations for the years ended December 31, 2020 and 2019, respectively.

During 2020, the Company sold residential mortgage loans totaling $12,312,000. During 2019, the Company sold residential mortgage loans totaling $4,715,000. Gross realized gains and gross realized losses on sales of residential mortgage loans were $527,000 and $0, respectively, in 2020 and $169,000 and $0, respectively, in 2019. The proceeds from the sales of residential mortgage loans totaled $12,839,000 and $4,838,000 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, the outstanding value of loans serviced for others totaled $72.5 million and $28.5 million, respectively.