Loans Receivable and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2021

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):

	March 31, 2021				December 31, 2020
Real Estate Loans:
Residential	$	261,450	18.4	%	$	263,127	18.6	%
Commercial		581,329	40.8			579,104	41.0
Agricultural		64,954	4.6			66,334	4.7
Construction		20,237	1.4			21,005	1.5
Commercial loans		302,431	21.2			283,741	20.1
Other agricultural loans		40,122	2.8			40,929	2.9
Consumer loans to individuals		153,805	10.8			158,049	11.2
Total loans		1,424,328	100.0	%		1,412,289	100.0	%
Deferred fees, net		(2,760)				(1,557)
Total loans receivable		1,421,568				1,410,732
Allowance for loan losses		(14,509)				(13,150)
Net loans receivable	$	1,407,059			$	1,397,582

During 2020 and 2021 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 March 31, 2021 and December 31, 2020, the Company had outstanding principal balances of $119.3 million and $95.0 million, respectively, 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. As of March 31, 2021, $30.0 million of PPP loans have been forgiven. 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 $3.6 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):

	March 31, 2021		December 31, 2020
Outstanding Balance	$	15,204	$	15,570
Carrying Amount	$	9,165	$	9,281

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 three-months ended March 31, 2021 and 2020, were as follows (in thousands):

	2021		2020
Balance at beginning of period	$	1,365	$	—
Additions		—		—
Accretion		(176)		—
Reclassification and other		43		—
Balance at end of period	$	1,232	$	—

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 March 31, 2021 and December 31, 2020, foreclosed real estate owned totaled $844,000 and $965,000, respectively. During the three months ended March 31, 2021, there were no additions to

the foreclosed real estate category. The Company disposed of a parcel of the one property that was previously transferred to foreclosed real estate owned with a carrying value of $121,000 through the sale of the property. As of March 31, 2021, the Company has initiated formal foreclosure proceedings on five properties classified as consumer residential mortgages with an aggregate carrying value of $1,061,000.

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
March 31, 2021	(In thousands)
Individually evaluated for impairment	$	—	$	2,586	$	—	$	—	$	163	$	—	$	—	$	2,749
Loans acquired with deteriorated credit quality		582		3,966		2,006		198		240		2,173		—		9,165
Collectively evaluated for impairment		260,868		574,777		62,948		20,039		302,028		37,949		153,805		1,412,414
Total Loans	$	261,450	$	581,329	$	64,954	$	20,237	$	302,431	$	40,122	$	153,805	$	1,424,328

	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

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
March 31, 2021				(in thousands)
With no related allowance recorded:
Real Estate Loans:
Commercial	$	2,586	$	3,238	$	—
Commercial Loans		125		125		—
Subtotal	$	2,711	$	3,363	$	—
With an allowance recorded:
Commercial Loans	$	38	$	38	$	38
Subtotal	$	38	$	38	$	38
Total:
Real Estate Loans:
Commercial	$	2,586		3,238	$	—
Commercial Loans		163		163		38
Total Impaired Loans	$	2,749	$	3,401	$	38

			Unpaid
	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		—
With an allowance recorded:
Real Estate Loans
Commercial		—		—		—
Subtotal		—		—		—
Total:
Real Estate Loans:
Commercial		2,582		3,234		—
Commercial Loans		80		80		—
Total Impaired Loans	$	2,662	$	3,314	$	—

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 March 31, 2021 and 2020, respectively (in thousands):

	Average Recorded				Interest Income
	Investment				Recognized
	2021		2020		2021		2020
Real Estate Loans:
Commercial	$	2,566	$	2,098	$	1	$	3
Commercial Loans		122		—		—		—
Total	$	2,688	$	2,098	$	1	$	3

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 March 31, 2021 and December 31, 2020, troubled debt restructured loans totaled $75,000, with no specific reserve. For the three-month period ended March 31, 2021 and 2020, there were no new loans identified as troubled debt restructurings. During 2020, the Company recognized a charge-off $20,000 on a loan that was previously identified as a troubled debt restructuring.

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 March 31, 2021 and December 31, 2020 (in thousands):

			Special				Doubtful
	Pass		Mention		Substandard		or Loss		Total
March 31, 2021
Commercial real estate loans	$	568,817	$	6,207	$	6,305	$	—	$	581,329
Real estate - agricultural		60,967		1,123		2,864		—		64,954
Commercial loans		301,648		395		388		—		302,431
Other agricultural loans		36,523		1,300		2,299		—		40,122
Total	$	967,955	$	9,025	$	11,856	$	—	$	988,836

			Special				Doubtful
	Pass		Mention		Substandard		or 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

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 March 31, 2021 and December 31, 2020 (in thousands):

	Performing		Nonperforming		Total
March 31, 2021
Residential real estate loans	$	261,033	$	417	$	261,450
Construction		20,237		—		20,237
Consumer loans to individuals		153,684		121		153,805
Total	$	434,954	$	538	$	435,492

	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

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 March 31, 2021 and December 31, 2020 (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
March 31, 2021
Real Estate loans
Residential	$	259,978	$	413	$	60	$	-	$	417	$	890	$	582	$	261,450
Commercial		575,207		518		-		-		1,638		2,156		3,966		581,329
Agricultural		62,176		96		-		-		676		772		2,006		64,954
Construction		20,039		-		-		-		-		-		198		20,237
Commercial loans		300,486		1,667		-		-		38		1,705		240		302,431
Other agricultural loans		37,587		54				-		308		362		2,173		40,122
Consumer loans		153,460		141		83		-		121		345		-		153,805
Total	$	1,408,933	$	2,889	$	143	$	-	$	3,198	$	6,230	$	9,165	$	1,424,328

	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, 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

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 March 31, 2021, the allocation of the allowance pertaining to each major category of loans is higher than the allocation as of December 31, 2020. This increase is due primarily to an increase in the qualitative factors related to Lending Management and External Factors resulting from the resignation of the Company’s Chief Lending Officer. As of March 31, 2021, the Company has also continued to incorporate 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 March 31, 2021, the allowance for loan losses includes $2.3 million of COVID related factors. The 2021 allowance for loan losses excludes growth in Paycheck Protection Program loans which are fully guaranteed by the Small Business Association as well as loans acquired from UpState which were recorded at fair value.

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, 2020	$	1,960	$	8,004	$	150	$	1,360	$	1,676	$	13,150
Charge Offs		(5)		—		—		(60)		(103)		(168)
Recoveries		2		4		—		8		13		27
Provision for loan losses		167		1,076		(28)		97		188		1,500
Ending balance, March 31, 2021	$	2,124	$	9,084	$	122	$	1,405	$	1,774	$	14,509
Ending balance individually evaluated ‎for impairment	$	—	$	—	$	—	$	38	$	—	$	38
Ending balance collectively evaluated ‎for impairment	$	2,124	$	9,084	$	122	$	1,367	$	1,774	$	14,471

(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		(1)		(33)		—		—		(116)		(150)
Recoveries		2		4		—		10		13		29
Provision for loan losses		91		257		(8)		105		255		700
Ending balance, March 31, 2020	$	1,644	$	4,915	$	87	$	1,064	$	1,378	$	9,088
Ending balance individually evaluated ‎for impairment	$	—	$	392	$	—	$	—	$	—	$	392
Ending balance collectively evaluated ‎for impairment	$	1,644	$	4,523	$	87	$	1,064	$	1,378	$	8,696

The Company’s primary business activity as of March 31, 2021 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 March 31, 2021, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $130.9 million of loans outstanding, or 9.2% of total loans outstanding, and residential rentals with loans outstanding of $115.6 million, or 8.1% of loans outstanding. During 2021, the Company did not recognize any charge offs on loans in the named concentrations.