Loans | Note 6: Loans Major classifications of loans at the indicated dates are as follows: September 30, December 31, (In thousands) 2017 2016 Residential mortgage loans: 1-4 family first-lien residential mortgages $ 209,147 $ 199,000 Construction 5,924 8,505 Total residential mortgage loans 215,071 207,505 Commercial loans: Real estate 187,960 150,698 Lines of credit 53,888 50,477 Other commercial and industrial 43,779 40,394 Tax exempt loans 11,064 12,523 Total commercial loans 296,691 254,092 Consumer loans: Home equity and junior liens 25,408 24,722 Other consumer 29,733 6,293 Total consumer loans 55,141 31,015 Total loans 566,903 492,612 Net deferred loan fees (407 ) (465 ) Less allowance for loan losses (6,628 ) (6,247 ) Loans receivable, net $ 559,868 $ 485,900 Although the Bank may occasionally purchase or fund loan participation interests outside of its primary market areas, the Bank generally originates residential mortgage, commercial, and consumer loans largely to customers throughout Oswego and Onondaga counties. Although the Bank has a diversified loan portfolio, a substantial portion of its borrowers’ abilities to honor their loan contracts is dependent upon the counties’ employment and economic conditions. The Bank acquired $15.6 million and $10.2 million of loans originated by an unrelated financial institution, located outside of the Bank’s market area, in January 2017 and April 2017, respectively. The acquired loan pools represented a 90% participating interest in a total of 1,231 loans secured by liens on automobiles with maturities ranging primarily from two to six years. These loans will be serviced through their respective maturities by the originating financial institution. At September 30, 2017 there were 1,131 loans outstanding with a remaining outstanding carrying value of $21.4 million. Since the acquisition of these loan pools, a total of two loans, with a combined outstanding balance of $13,300, have been charged-off as uncollectible. As of September 30, 2017 and December 31, 2016, residential mortgage loans with a carrying value of $148.1 million and $140.3 million, respectively, have been pledged by the Company to the Federal Home Loan Bank of New York (“FHLBNY”) under a blanket collateral agreement to secure the Company’s line of credit and term borrowings. Loan Origination / Risk Management The Company’s lending policies and procedures are presented in Note 5 to the audited consolidated financial statements included in the 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2017 and have not changed. As part of the execution of the Company’s overall balance sheet management strategies, the Bank will acquire participating interests in loans originated by unrelated third parties on a sporadic basis. The purchase of participations in loans that are originated by third parties only occurs after the completion of thorough pre-acquisition due diligence. Loans in which the Company acquires a participating interest are determined to meet, in all material respects, the Company’s internal underwriting policies, including credit and collateral suitability thresholds, prior to acquisition. In addition, the financial condition of the originating financial institutions, which are generally retained as the ongoing loan servicing provider for participations acquired by the Bank, are analyzed prior to the acquisition of the participating interests and monitored on a regular basis thereafter for the life of those interests. To develop and document a systematic methodology for determining the allowance for loan losses, the Company has divided the loan portfolio into three portfolio segments, each with different risk characteristics but with similar methodologies for assessing risk. Each portfolio segment is broken down into loan classes where appropriate. Loan classes contain unique measurement attributes, risk characteristics, and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses. Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class. The following table illustrates the portfolio segments and classes for the Company’s loan portfolio: Portfolio Segment Class Residential Mortgage Loans 1-4 family first-lien residential mortgages Construction Commercial Loans Real estate Lines of credit Other commercial and industrial Tax exempt loans Consumer Loans Home equity and junior liens Other consumer The following tables present the classes of the loan portfolio, not including net deferred loan costs, summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of the dates indicated: As of September 30, 2017 Special (In thousands) Pass Mention Substandard Doubtful Total Residential mortgage loans: 1-4 family first-lien residential mortgages $ 204,636 $ 1,050 $ 1,604 $ 1,857 $ 209,147 Construction 5,924 - - - 5,924 Total residential mortgage loans 210,560 1,050 1,604 1,857 215,071 Commercial loans: Real estate 179,951 3,483 3,748 778 187,960 Lines of credit 52,748 280 814 46 53,888 Other commercial and industrial 42,469 566 476 268 43,779 Tax exempt loans 11,064 - - - 11,064 Total commercial loans 286,232 4,329 5,038 1,092 296,691 Consumer loans: Home equity and junior liens 24,783 130 203 292 25,408 Other consumer 29,711 14 8 - 29,733 Total consumer loans 54,494 144 211 292 55,141 Total loans $ 551,286 $ 5,523 $ 6,853 $ 3,241 $ 566,903 As of December 31, 2016 Special (In thousands) Pass Mention Substandard Doubtful Total Residential mortgage loans: 1-4 family first-lien residential mortgages $ 194,377 $ 1,445 $ 2,115 $ 1,063 $ 199,000 Construction 8,505 - - - 8,505 Total residential mortgage loans 202,882 1,445 2,115 1,063 207,505 Commercial loans: Real estate 143,126 3,714 3,858 - 150,698 Lines of credit 49,393 684 400 - 50,477 Other commercial and industrial 39,027 661 702 4 40,394 Tax exempt loans 12,523 - - - 12,523 Total commercial loans 244,069 5,059 4,960 4 254,092 Consumer loans: Home equity and junior liens 23,963 170 389 200 24,722 Other consumer 6,224 17 8 44 6,293 Total consumer loans 30,187 187 397 244 31,015 Total loans $ 477,138 $ 6,691 $ 7,472 $ 1,311 $ 492,612 Management has reviewed its loan portfolio and determined that, to the best of its knowledge, no material exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of originating these types of loans. At September 30, 2017, there were $3.2 million in loans classified as doubtful as compared to $1.3 million of those loans at December 31, 2016. The $1.9 million increase in loans classified as doubtful at September 30, 2017, as compared to December 31, 2016, was due to increases in loans categorized as doubtful in 1-4 family first-lien residential mortgages, commercial real estate loans, and in all other loan categories in aggregate of $794,000, $778,000 and $358,000, respectively. The $794,000 increase in 1-4 family first-lien residential mortgages classified as doubtful was primarily due to a single loan with an outstanding balance of $406,000, with the remaining balance of $372,000 being comprised of four additional loans. The $778,000 increase in commercial real estate loans classified as doubtful was due to the addition of two loans with aggregate outstanding balances of that amount. The net aggregate increase of $358,000 in loans classified as doubtful in all other loan categories was primarily due to the addition of four commercial and industrial loans, the largest of which had an outstanding balance of $124,000 at September 30, 2017. Management thoroughly reviews all relevant factors in determining the collectability of doubtful loans, including the estimated fair value of the underlying collateral, in determining the adequacy of specific reserves against potential losses arising from doubtful loans. Management believes that it has established sufficient specific reserves within its overall allowance for loan and lease losses to mitigate any material impact to the Company’s financial results related to the future disposition of these loans. Nonaccrual and Past Due Loans Loans are placed on nonaccrual when the contractual payment of principal and interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing. Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date. An age analysis of past due loans, not including net deferred loan costs, segregated by portfolio segment and class of loans, as of September 30, 2017 and December 31, 2016, are detailed in the following tables: As of September 30, 2017 30-59 Days 60-89 Days 90 Days Past Due Past Due and Total Total Loans (In thousands) And Accruing And Accruing Over Past Due Current Receivable Residential mortgage loans: 1-4 family first-lien residential mortgages $ 1,237 $ 676 $ 2,265 $ 4,178 $ 204,969 $ 209,147 Construction - - - - 5,924 5,924 Total residential mortgage loans 1,237 676 2,265 4,178 210,893 215,071 Commercial loans: Real estate 3,868 162 1,635 5,665 182,295 187,960 Lines of credit 992 600 40 1,632 52,256 53,888 Other commercial and industrial 569 139 514 1,222 42,557 43,779 Tax exempt loans - - - - 11,064 11,064 Total commercial loans 5,429 901 2,189 8,519 288,172 296,691 Consumer loans: Home equity and junior liens 185 - 339 524 24,884 25,408 Other consumer 17 14 51 82 29,651 29,733 Total consumer loans 202 14 390 606 54,535 55,141 Total loans $ 6,868 $ 1,591 $ 4,844 $ 13,303 $ 553,600 $ 566,903 As of December 31, 2016 30-59 Days 60-89 Days 90 Days Past Due Past Due and Total Total Loans (In thousands) And Accruing And Accruing Over Past Due Current Receivable Residential mortgage loans: 1-4 family first-lien residential mortgages $ 1,247 $ 832 $ 2,560 $ 4,639 $ 194,361 $ 199,000 Construction - - - - 8,505 8,505 Total residential mortgage loans 1,247 832 2,560 4,639 202,866 207,505 Commercial loans: Real estate 1,063 375 1,223 2,661 148,037 150,698 Lines of credit 819 - - 819 49,658 50,477 Other commercial and industrial 333 - 640 973 39,421 40,394 Tax exempt loans - - - - 12,523 12,523 Total commercial loans 2,215 375 1,863 4,453 249,639 254,092 Consumer loans: Home equity and junior liens 105 157 338 600 24,122 24,722 Other consumer 8 13 50 71 6,222 6,293 Total consumer loans 113 170 388 671 30,344 31,015 Total loans $ 3,575 $ 1,377 $ 4,811 $ 9,763 $ 482,849 $ 492,612 At September 30, 2017, there were $13.3 million in loans past due including $6.9 million in loans 30-59 days past due. At December 31, 2016, there were $9.8 million in loans past due including $3.6 million in loans 30-59 days past due. The increase of $3.5 million in total loans past due at September 30, 2017, as compared to December 31, 2016, was primarily due to an increase of $3.3 million in loans 30-59 days past due. The increase in loans 30-59 days past due at September 30, 2017, as compared to December 31, 2016, was primarily due to one commercial real estate loan with an outstanding balance of $2.0 million that was 30-59 days past due at September 30, 2017. In addition, two commercial lines of credit, with combined balances of $491,000, were added to the 30-59 days past due loans at September 30, 2017. The aggregate remaining increase of $1.0 million in the 30-59 days past due loans at September 30, 2017, as compared to December 31, 2016, was due to a large number of individually immaterial additions and deletions within the 30-59 days past due categories. Nonaccrual loans, segregated by class of loan, were as follows: September 30, December 31, (In thousands) 2017 2016 Residential mortgage loans: 1-4 family first-lien residential mortgages $ 2,265 $ 2,560 2,265 2,560 Commercial loans: Real estate 1,635 1,223 Lines of credit 40 - Other commercial and industrial 514 640 2,189 1,863 Consumer loans: Home equity and junior liens 339 338 Other consumer 51 50 390 388 Total nonaccrual loans $ 4,844 $ 4,811 The Company is required to disclose certain activities related to Troubled Debt Restructurings (“TDR”) in accordance with accounting guidance. Certain loans have been modified in a TDR where economic concessions have been granted to a borrower who is experiencing, or expected to experience, financial difficulties. These economic concessions could include a reduction in the loan interest rate, extension of payment terms, reduction of principal amortization, or other actions that it would not otherwise consider for a new loan with similar risk characteristics. The Company is required to disclose new TDRs for each reporting period for which an income statement is being presented. Pre-modification outstanding recorded investment is the principal loan balance less the provision for loan losses before the loan was modified as a TDR. Post-modification outstanding recorded investment is the principal balance less the provision for loan losses after the loan was modified as a TDR. Additional provision for loan losses is the change in the allowance for loan losses between the pre-modification outstanding recorded investment and post-modification outstanding recorded investment. The table below details loans that have been modified as TDRs for the three months ended September 30, 2017. For the three months ended September 30, 2017 (In thousands) Number of loans Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Additional provision for loan losses Individually evaluated for impairment: Commercial real estate loans 1 $ 2,024 $ 2,024 $ - The table below details loans that have been modified as TDRs for the nine months ended September 30, 2017. For the nine months ended September 30, 2017 (In thousands) Number of loans Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Additional provision for loan losses Individually evaluated for impairment: Commercial real estate loans 1 $ 2,024 $ 2,024 $ - The TDR individually evaluated for impairment, for the three and nine months ended September 30, 2017, has been classified as a TDR due to economic concessions granted, which included extended interest only payment terms. The Company had no loans that have been modified as TDRs for the three months ended September 30, 2016. The table below details loans that have been modified as TDRs for the nine months ended September 30, 2016. For the nine months ended September 30, 2016 (In thousands) Number of loans Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Additional provision for loan losses Collectively evaluated for impairment: Residential mortgage loans 2 $ 97 $ 100 $ - The TDRs collectively evaluated for impairment have been classified as TDRs due to economic concessions granted, which consisted of additional funds advanced without associated increases in collateral, interest rate reductions and extended terms. The Company is required to disclose loans that have been modified as TDRs within the previous 12 months in which there was payment default after the restructuring. The Company defines payment default as any loans 90 days past due on contractual payments. The Company had no loans that had been modified as TDRs during the twelve months prior to September 30, 2017, which had subsequently defaulted during the three months ended September 30, 2017. The Company had one loan that had been modified as a TDR during the twelve months prior to September 30, 2017, which had subsequently defaulted during the nine months ended September 30, 2017 The Company had no loans that had been modified as TDRs during the twelve months prior to September 30, 2016, which had subsequently defaulted during the three or nine months ended September 30, 2016. When the Company modifies a loan within a portfolio segment that is individually evaluated for impairment, a potential impairment is analyzed either based on the present value of the expected future cash flows discounted at the interest rate of the original loan terms or the fair value of the collateral less costs to sell. If it is determined that the value of the loan is less than its recorded investment, then impairment is recognized as a component of the provision for loan losses, an associated increase to the allowance for loan losses or as a charge-off to the allowance for loan losses in the current period. Impaired Loans The following tables summarize impaired loan information by portfolio class at the indicated dates: September 30, 2017 December 31, 2016 Unpaid Unpaid Recorded Principal Related Recorded Principal Related (In thousands) Investment Balance Allowance Investment Balance Allowance With no related allowance recorded: 1-4 family first-lien residential mortgages $ 582 $ 591 $ - $ 850 $ 857 $ - Commercial real estate 5,473 5,577 - 4,254 4,344 - Commercial lines of credit 414 414 - 400 400 - Other commercial and industrial 414 415 - 470 470 - Home equity and junior liens - - - 140 140 - With an allowance recorded: 1-4 family first-lien residential mortgages 882 882 181 763 763 117 Commercial real estate 423 423 14 818 872 455 Commercial lines of credit 40 40 40 - - - Other commercial and industrial 429 429 381 552 552 553 Home equity and junior liens 212 212 142 345 345 5 Total: 1-4 family first-lien residential mortgages 1,464 1,473 181 1,613 1,620 117 Commercial real estate 5,896 6,000 14 5,072 5,216 455 Commercial lines of credit 454 454 40 400 400 - Other commercial and industrial 843 844 381 1,022 1,022 553 Home equity and junior liens 212 212 142 485 485 5 Totals $ 8,869 $ 8,983 $ 758 $ 8,592 $ 8,743 $ 1,130 The following table presents the average recorded investment in impaired loans for the periods indicated: For the three months ended For the nine months ended September 30, September 30, (In thousands) 2017 2016 2017 2016 1-4 family first-lien residential mortgages $ 1,343 $ 598 $ 1,477 $ 568 Commercial real estate 5,185 3,884 4,996 4,138 Commercial lines of credit 438 615 422 599 Other commercial and industrial 905 351 958 549 Home equity and junior liens 213 282 282 285 Other consumer 2 - 3 Total $ 8,084 $ 5,732 $ 8,135 $ 6,142 The following table presents the cash basis interest income recognized on impaired loans for the periods indicated: For the three months ended For the nine months ended September 30, September 30, (In thousands) 2017 2016 2017 2016 1-4 family first-lien residential mortgages $ 13 $ 7 $ 34 $ 19 Commercial real estate 89 22 184 74 Commercial lines of credit 4 20 16 20 Other commercial and industrial 6 - 20 21 Home equity and junior liens 3 2 7 6 Total $ 115 $ 51 $ 261 $ 140 |