Loans Receivable and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2022

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):

	June 30, 2022				December 31, 2021
Real Estate Loans:
Residential	$	289,157	20.6	%	$	273,040	20.1	%
Commercial		645,404	45.9			628,724	46.4
Agricultural		65,334	4.6			61,925	4.6
Construction		21,856	1.6			21,990	1.6
Commercial loans		187,206	13.3			186,031	13.7
Other agricultural loans		36,092	2.6			37,930	2.8
Consumer loans to individuals		159,968	11.4			146,400	10.8
Total loans		1,405,017	100.0	%		1,356,040	100.0	%
Deferred fees, net		(700)				(1,109)
Total loans receivable		1,404,317				1,354,931
Allowance for loan losses		(17,017)				(16,442)
Net loans receivable	$	1,387,300			$	1,338,489

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 June 30, 2022 and December 31, 2021, the Company had outstanding principal balances of $983,000 and $15.2 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 June 30, 2022, $150.5 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 $5.1 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 of June 30, 2022, the carrying value of these unamortized loan fees was $30,000.

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

	June 30, 2022		December 31, 2021
Outstanding Balance	$	9,701	$	12,862
Carrying Amount	$	6,631	$	8,304

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 six-months ended June 30, 2022 and 2021, were as follows (in thousands):

	2022		2021
Balance at beginning of period	$	1,884	$	1,365
Additions		—		—
Accretion		(420)		(357)
Reclassification and other		(395)		11
Balance at end of period	$	1,069	$	1,019

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 June 30, 2022 and December 31, 2021, foreclosed real estate owned totaled $346,000 and $1,742,000, respectively. During the six months ended June 30, 2022, there were no additions to the foreclosed real estate category. The Company disposed of a parcel of one property that was previously transferred to foreclosed real estate owned with a carrying value of $364,000, and disposed of another property with a carrying value of $1,032,000 through the sale of the property. As of June 30, 2022, the Company has initiated formal foreclosure proceedings on four properties classified as consumer residential mortgages with an aggregate carrying value of $180,000.

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
June 30, 2022	(In thousands)
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	13	$	—	$	—	$	13
Loans acquired with deteriorated credit quality		577		2,685		1,971		—		—		1,398		—		6,631
Collectively evaluated for impairment		288,580		642,719		63,363		21,856		187,193		34,694		159,968		1,398,373
Total Loans	$	289,157	$	645,404	$	65,334	$	21,856	$	187,206	$	36,092	$	159,968	$	1,405,017

	Real Estate Loans
									Commercial			Other	Consumer
	Residential		Commercial			Agricultural	Construction		Loans			Agricultural	Loans		Total
	(In thousands)
December 31, 2021
Individually evaluated for impairment	$	-	$	1,658	$	—	$	-	$	16	$	—	$	-	$	1,674
Loans acquired with deteriorated credit quality		784		3,285		1,918		-		198		2,119		-		8,304
Collectively evaluated for impairment		272,256		623,781		60,007		21,990		185,817		35,811		146,400		1,346,062
Total Loans	$	273,040	$	628,724	$	61,925	$	21,990	$	186,031	$	37,930	$	146,400	$	1,356,040

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
June 30, 2022				(in thousands)
With no related allowance recorded:
Commercial Loans	$	13	$	13		—
Subtotal	$	13	$	13	$	—
Total:
Commercial Loans	$	13	$	13		—
Total Impaired Loans	$	13	$	13	$	—

			Unpaid
	Recorded		Principal		Associated
	Investment		Balance		Allowance
December 31, 2021				(in thousands)
With no related allowance recorded:
Real Estate Loans:
Commercial	$	141	$	141	$	—
Commercial Loans		16		16		—
Subtotal		157		157		—
With an allowance recorded:
Real Estate Loans
Commercial		1,517		1,517		272
Subtotal		1,517		1,517		272
Total:
Real Estate Loans:
Commercial		1,658		1,658		272
Commercial Loans		16		16		—
Total Impaired Loans	$	1,674	$	1,674	$	272

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 June 30, 2022 and 2021, respectively (in thousands):

	Average Recorded				Interest Income
	Investment				Recognized
	2022		2021		2022		2021
Real Estate Loans:
Commercial	$	822	$	1,467	$	20	$	—
Agriculture		—		858		—		—
Commercial Loans		13		29		3		—
Other agricultural loans		—		125		—		—
Total	$	835	$	2,479	$	23	$	—

The following table presents the average recorded investment in impaired loans and the related amount of interest income recognized during the six-month periods ended June 30, 2022 and 2021, respectively (in thousands):

	Average Recorded				Interest Income
	Investment				Recognized
	2022		2021		2022		2021
Real Estate Loans:
Commercial	$	1,100	$	1,541	$	37	$	1
Agriculture		—		858		—		—
Commercial Loans		15		19		3		—
Other agricultural loans		—		110		—		—
Total	$	1,115	$	2,528	$	40	$	1

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 June 30, 2022 and December 31, 2021, the Company had no troubled debt restructured loans to report. For the six-month period ended June 30, 2022 and 2021, there were no new loans identified as troubled debt restructurings.

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 June 30, 2022 and December 31, 2021 (in thousands):

			Special				Doubtful
	Pass		Mention		Substandard		or Loss		Total
June 30, 2022
Commercial real estate loans	$	640,130	$	1,141	$	4,133	$	—	$	645,404
Real estate - agricultural		62,599		155		2,580		—		65,334
Commercial loans		186,935		190		81		—		187,206
Other agricultural loans		34,013		884		1,195		—		36,092
Total	$	923,677	$	2,370	$	7,989	$	—	$	934,036

			Special				Doubtful
	Pass		Mention		Substandard		or Loss		Total
December 31, 2021
Commercial real estate loans	$	618,541	$	5,146	$	4,765	$	272	$	628,724
Real estate - agricultural		60,193		—		1,732		—		61,925
Commercial loans		185,729		199		103		—		186,031
Other agricultural loans		35,573		210		2,147		—		37,930
Total	$	900,036	$	5,555	$	8,747	$	272	$	914,610

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 June 30, 2022 and December 31, 2021 (in thousands):

	Performing		Nonperforming		Total
June 30, 2022
Residential real estate loans	$	288,701	$	456	$	289,157
Construction		21,856		—		21,856
Consumer loans to individuals		159,814		154		159,968
Total	$	470,371	$	610	$	470,981

	Performing		Nonperforming		Total
December 31, 2021
Residential real estate loans	$	272,571	$	469	$	273,040
Construction		21,990		—		21,990
Consumer loans to individuals		146,345		55		146,400
Total	$	440,906	$	524	$	441,430

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 June 30, 2022 and December 31, 2021 (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
June 30, 2022
Real Estate loans
Residential	$	287,483	$	574	$	67	$	-	$	456	$	1,097	$	577	$	289,157
Commercial		642,634		36		-		-		49		85		2,685		645,404
Agricultural		63,339		24		-		-		-		24		1,971		65,334
Construction		21,829		27		-		-		-		27		-		21,856
Commercial loans		187,184		9		-		-		13		22		-		187,206
Other agricultural loans		34,694		-				-		-		-		1,398		36,092
Consumer loans		159,289		449		76		-		154		679		-		159,968
Total	$	1,396,452	$	1,119	$	143	$	-	$	672	$	1,934	$	6,631	$	1,405,017

	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, 2021
Real Estate loans
Residential	$	271,622	$	155	$	10	$	-	$	469	$	634	-	$	784	$	273,040
Commercial		625,336		-		-		-		103		103	-		3,285		628,724
Agricultural		59,982		25		-				-		25			1,918		61,925
Construction		21,990		-		-		-		-		-	-		-		21,990
Commercial loans		185,801		3		13		91		16		32	-		198		186,031
Other agricultural loans		35,811		-		-				-		-			2,119		37,930
Consumer loans		145,986		248		111		-		55		414	-		-		146,400
Total	$	1,346,528	$	431	$	134	$	91	$	643	$	1,208	-	$	8,304	$	1,356,040

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 June 30, 2022, the allocation of the allowance pertaining to each major category of loans includes an allocation for loans secured by farmland and other agricultural loans. As of June 30 2022, the Company has also continued to incorporate qualitative factors related to the pandemic to capture some of the risk associated with higher-risk industries, although the factor has been reduced from the December 31, 2021 level. The qualitative factor related to the deferral of payments due to COVID-19 has been eliminated. At June 30, 2022, the allowance for loan losses includes $1.2 million of COVID related factors, compared to $2.3 million at December 31, 2021. The 2022 allowance for loan losses excludes 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			Agricultural		Construction	Commercial			Other Agricultural	Consumer		Total
Beginning balance, December 31, 2021	$	2,175	$	10,878	$	-	$	133	$	1,490	$	-	$	1,766	$	16,442
Charge Offs		(120)		-		-		-		(15)		-		(134)		(269)
Recoveries		118		80		-		-		23		-		23		244
Provision for loan losses		567		(1,803)		218		109		1,006		112		391		600
Ending balance, June 30, 2022	$	2,740	$	9,155	$	218	$	242	$	2,504	$	112	$	2,046	$	17,017
Ending balance individually evaluated ‎for impairment	$	-	$	—	$	-	$	-	$	—	$	-	$	-	$	—
Ending balance collectively evaluated ‎for impairment	$	2,740	$	9,155	$	218	$	242	$	2,504	$	112	$	2,046	$	17,017

(In thousands)	Residential Real Estate		Commercial Real Estate			Farmland		Construction	Commercial			Other Agricultural	Consumer		Total
Beginning balance, March 31, 2022	$	2,326	$	10,287	$	504	$	134	$	1,495	$	292	$	1,622	$	16,660
Charge Offs		(5)		-		-		-		-		-		(82)		(87)
Recoveries		116		6		-		-		14		-		8		144
Provision for loan losses		303		(1,138)		(286)		108		995		(180)		498		300
Ending balance, June 30, 2022	$	2,740	$	9,155	$	218	$	242	$	2,504	$	112	$	2,046	$	17,017

(In thousands)	Residential Real Estate		Commercial Real Estate			Agricultural		Construction	Commercial			Other Agricultural	Consumer		Total
Beginning balance, December 31, 2020	$	1,960	$	8,004	$	-	$	150	$	1,360	$	-	$	1,676	$	13,150
Charge Offs		(5)		(439)		-		-		(174)		-		(261)		(879)
Recoveries		5		10		-		-		24		-		30		69
Provision for loan losses		273		2,005		-		(13)		293		-		442		3,000
Ending balance, June 30, 2021	$	2,233	$	9,580	$	—	$	137	$	1,503	$	—	$	1,887	$	15,340
Ending balance individually evaluated ‎for impairment	$	-	$	-	$	-	$	-	$	—	$	-	$	—	$	—
Ending balance collectively evaluated ‎for impairment	$	2,233	$	9,580	$	—	$	137	$	1,503	$	—	$	1,887	$	15,340

(In thousands)	Residential Real Estate		Commercial Real Estate			Farmland		Construction	Commercial			Other Agricultural	Consumer		Total
Beginning balance, March 31, 2021	$	2,124	$	9,084	$	-	$	122	$	1,405	$	-	$	1,774	$	14,509
Charge Offs		—		(439)		-		—		(114)		-		(158)		(711)
Recoveries		3		6		-		—		16		-		17		42
Provision for loan losses		106		929		-		15		196		-		254		1,500
Ending balance, June 30, 2021	$	2,233	$	9,580	$	—	$	137	$	1,503	$	—	$	1,887	$	15,340

The Company’s primary business activity as of June 30, 2022 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 repay their loans is influenced by the region’s economy.

As of June 30, 2022, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in commercial rentals with $145.0 million of loans outstanding, or 10.3 % of total loans outstanding, and residential rentals with loans outstanding of $115.5 million, or 8.2% of loans outstanding. For the six months ended June 30, 2022, the Company did not recognize any charge offs on loans in the named concentrations.