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Pathfinder Bancorp, Inc. - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from _______ to _______

 

(Exact Name of Company as Specified in its Charter)

 

Maryland

(State of Other Jurisdiction of Incorporation)

001-36695

(Commission File No.)

38-3941859

(I.R.S. Employer Identification No.)

 

214 West First Street, Oswego, NY 13126

(Address of Principal Executive Office) (Zip Code)

(315) 343-0057

(Issuer's Telephone Number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES         NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES         NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

    Large accelerated filer    Accelerated filer   Non-accelerated filer    Smaller reporting company    Emerging growth company

(Do not check if a smaller reporting company)

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   YES     NO

As of August 10, 2018, there were 4,347,413 shares outstanding of the registrant’s common stock.

 


Table of Contents

PATHFINDER BANCORP, INC.

INDEX

 

PART I - FINANCIAL INFORMATION

 

PAGE NO.

 

 

 

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

3

 

Consolidated Statements of Condition

 

3

 

Consolidated Statements of Income

 

4

 

Consolidated Statements of Comprehensive Income

 

5

 

Consolidated Statements of Changes in Shareholders' Equity

 

6

 

Consolidated Statements of Cash Flows

 

7

 

Notes to Consolidated Financial Statements

 

8

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)

 

39

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

61

 

 

 

 

Item 4.

Controls and Procedures

 

61

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

63

Item 1A.

Risk Factors

 

63

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

63

Item 3.

Defaults upon Senior Securities

 

63

Item 4.

Mine Safety Disclosures

 

63

Item 5.

Other information

 

63

Item 6.

Exhibits

 

63

 

 

 

 

SIGNATURES

 

64

 

 


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

Pathfinder Bancorp, Inc.

Consolidated Statements of Condition

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

(In thousands, except share and per share data)

 

2018

 

 

2017

 

ASSETS:

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

8,787

 

 

$

9,708

 

Interest-earning deposits (including restricted balances of $4,365 and $6,342, respectively)

 

 

27,953

 

 

 

12,283

 

Total cash and cash equivalents

 

 

36,740

 

 

 

21,991

 

Available-for-sale securities, at fair value

 

 

184,030

 

 

 

171,138

 

Held-to-maturity securities, at amortized cost (fair value of $26,244 and $66,426, respectively)

 

 

26,647

 

 

 

66,196

 

Marketable equity securities, at fair value

 

 

541

 

 

 

-

 

Federal Home Loan Bank stock, at cost

 

 

4,388

 

 

 

3,855

 

Loans

 

 

607,185

 

 

 

580,831

 

Less: Allowance for loan losses

 

 

7,605

 

 

 

7,126

 

Loans receivable, net

 

 

599,580

 

 

 

573,705

 

Premises and equipment, net

 

 

16,692

 

 

 

16,117

 

Accrued interest receivable

 

 

2,725

 

 

 

3,047

 

Foreclosed real estate

 

 

97

 

 

 

468

 

Intangible assets, net

 

 

173

 

 

 

182

 

Goodwill

 

 

4,536

 

 

 

4,536

 

Bank owned life insurance

 

 

16,695

 

 

 

11,742

 

Other assets

 

 

10,638

 

 

 

8,280

 

Total assets

 

$

903,482

 

 

$

881,257

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Interest-bearing

 

$

624,718

 

 

$

633,820

 

Noninterest-bearing

 

 

108,451

 

 

 

89,783

 

Total deposits

 

 

733,169

 

 

 

723,603

 

Short-term borrowings

 

 

26,600

 

 

 

30,600

 

Long-term borrowings

 

 

57,503

 

 

 

43,288

 

Subordinated loans

 

 

15,076

 

 

 

15,059

 

Accrued interest payable

 

 

255

 

 

 

186

 

Other liabilities

 

 

8,010

 

 

 

6,377

 

Total liabilities

 

 

840,613

 

 

 

819,113

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.01; 25,000,000 authorized shares; 4,332,076 and  4,280,227

   shares outstanding, respectively

 

 

43

 

 

 

43

 

Additional paid in capital

 

 

28,629

 

 

 

28,170

 

Retained earnings

 

 

40,540

 

 

 

39,020

 

Accumulated other comprehensive loss

 

 

(5,471

)

 

 

(4,208

)

Unearned ESOP

 

 

(1,124

)

 

 

(1,214

)

Total Pathfinder Bancorp, Inc. shareholders' equity

 

 

62,617

 

 

 

61,811

 

Noncontrolling interest

 

 

252

 

 

 

333

 

Total equity

 

 

62,869

 

 

 

62,144

 

Total liabilities and shareholders' equity

 

$

903,482

 

 

$

881,257

 

 

The accompanying notes are an integral part of the consolidated financial statements.

- 3 -


Table of Contents

Pathfinder Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

 

 

 

For the three

 

 

For the three

 

 

For the six

 

 

For the six

 

 

 

months ended

 

 

months ended

 

 

months ended

 

 

months ended

 

(In thousands, except per share data)

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

7,018

 

 

$

5,869

 

 

$

13,736

 

 

$

11,610

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,171

 

 

 

825

 

 

 

2,299

 

 

 

1,577

 

Tax-exempt

 

 

217

 

 

 

312

 

 

 

465

 

 

 

590

 

Dividends

 

 

61

 

 

 

50

 

 

 

129

 

 

 

104

 

Federal funds sold and interest earning deposits

 

 

49

 

 

 

28

 

 

 

96

 

 

 

73

 

Total interest and dividend income

 

 

8,516

 

 

 

7,084

 

 

 

16,725

 

 

 

13,954

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

1,566

 

 

 

895

 

 

 

2,911

 

 

 

1,660

 

Interest on short-term borrowings

 

 

70

 

 

 

283

 

 

 

163

 

 

 

578

 

Interest on long-term borrowings

 

 

203

 

 

 

128

 

 

 

378

 

 

 

248

 

Interest on subordinated loans

 

 

210

 

 

 

197

 

 

 

413

 

 

 

390

 

Total interest expense

 

 

2,049

 

 

 

1,503

 

 

 

3,865

 

 

 

2,876

 

Net interest income

 

 

6,467

 

 

 

5,581

 

 

 

12,860

 

 

 

11,078

 

Provision for loan losses

 

 

297

 

 

 

423

 

 

 

910

 

 

 

812

 

Net interest income after provision for loan losses

 

 

6,170

 

 

 

5,158

 

 

 

11,950

 

 

 

10,266

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

273

 

 

 

274

 

 

 

547

 

 

 

537

 

Earnings and gain on bank owned life insurance

 

 

108

 

 

 

62

 

 

 

181

 

 

 

133

 

Loan servicing fees

 

 

42

 

 

 

32

 

 

 

83

 

 

 

68

 

Net (losses) gains on sales and redemptions of investment securities

 

 

(22

)

 

 

135

 

 

 

(129

)

 

 

206

 

Gains on equity securities

 

 

13

 

 

 

-

 

 

 

26

 

 

 

-

 

Net gains (losses) on sales of loans and foreclosed real estate

 

 

13

 

 

 

(21

)

 

 

16

 

 

 

(45

)

Debit card interchange fees

 

 

148

 

 

 

147

 

 

 

291

 

 

 

268

 

Other charges, commissions & fees

 

 

449

 

 

 

421

 

 

 

904

 

 

 

820

 

Total noninterest income

 

 

1,024

 

 

 

1,050

 

 

 

1,919

 

 

 

1,987

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,429

 

 

 

2,819

 

 

 

6,513

 

 

 

5,669

 

Building occupancy

 

 

553

 

 

 

531

 

 

 

1,144

 

 

 

1,070

 

Data processing

 

 

476

 

 

 

416

 

 

 

955

 

 

 

843

 

Professional and other services

 

 

405

 

 

 

219

 

 

 

736

 

 

 

410

 

Advertising

 

 

285

 

 

 

172

 

 

 

476

 

 

 

348

 

FDIC assessments

 

 

135

 

 

 

81

 

 

 

255

 

 

 

137

 

Audits and exams

 

 

105

 

 

 

85

 

 

 

210

 

 

 

169

 

Other expenses

 

 

739

 

 

 

688

 

 

 

1,297

 

 

 

1,338

 

Total noninterest expense

 

 

6,127

 

 

 

5,011

 

 

 

11,586

 

 

 

9,984

 

Income before income taxes

 

 

1,067

 

 

 

1,197

 

 

 

2,283

 

 

 

2,269

 

Provision for income taxes

 

 

166

 

 

 

238

 

 

 

348

 

 

 

483

 

Net income attributable to noncontrolling interest and

   Pathfinder Bancorp, Inc.

 

 

901

 

 

 

959

 

 

 

1,935

 

 

 

1,786

 

Net income attributable to noncontrolling interest

 

 

(44

)

 

 

39

 

 

 

(14

)

 

 

66

 

Net income attributable to Pathfinder Bancorp Inc.

 

$

945

 

 

$

920

 

 

$

1,949

 

 

$

1,720

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.23

 

 

$

0.23

 

 

$

0.47

 

 

$

0.42

 

Earnings per common share - diluted

 

$

0.22

 

 

$

0.22

 

 

$

0.46

 

 

$

0.41

 

Dividends per common share

 

$

0.06

 

 

$

0.0525

 

 

$

0.12

 

 

$

0.1025

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

- 4 -


Table of Contents

Pathfinder Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

For the three months ended

 

 

For the six months ended

 

(In thousands)

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

Net Income

 

$

901

 

 

$

959

 

 

$

1,935

 

 

$

1,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive (Loss) Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement Plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement plan net losses recognized in plan expenses

 

 

43

 

 

 

37

 

 

 

86

 

 

 

73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains arising during the period

 

 

(1,156

)

 

 

1,387

 

 

 

(2,502

)

 

 

2,408

 

Reclassification adjustment for net (losses) gains included in net income

 

 

22

 

 

 

(135

)

 

 

129

 

 

 

(206

)

Net unrealized (losses) gains on available-for-sale securities

 

 

(1,134

)

 

 

1,252

 

 

 

(2,373

)

 

 

2,202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of net unrealized loss on securities transferred to held-to-

   maturity(1)

 

 

470

 

 

 

22

 

 

 

163

 

 

 

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, before tax

 

 

(621

)

 

 

1,311

 

 

 

(2,124

)

 

 

2,333

 

Tax effect

 

 

162

 

 

 

(524

)

 

 

555

 

 

 

(931

)

Other comprehensive (loss) income, net of tax

 

 

(459

)

 

 

787

 

 

 

(1,569

)

 

 

1,402

 

Comprehensive income

 

$

442

 

 

$

1,746

 

 

$

366

 

 

$

3,188

 

Comprehensive (loss) income, attributable to noncontrolling interest

 

$

(44

)

 

$

39

 

 

$

(14

)

 

$

66

 

Comprehensive income attributable to Pathfinder Bancorp, Inc.

 

$

486

 

 

$

1,707

 

 

$

380

 

 

$

3,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax Effect Allocated to Each Component of Other Comprehensive (Loss) Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement plan net losses recognized in plan expenses

 

$

(11

)

 

$

(15

)

 

$

(22

)

 

$

(28

)

Unrealized holding (losses) gains arising during the period

 

 

302

 

 

 

(555

)

 

 

654

 

 

 

(963

)

Reclassification adjustment for net (losses) gains included in net income

 

 

(6

)

 

 

55

 

 

 

(34

)

 

 

83

 

Accretion of net unrealized loss on securities transferred to held-to-

   maturity(1)

 

 

(123

)

 

 

(9

)

 

 

(43

)

 

 

(23

)

Income tax effect related to other comprehensive (loss) income

 

$

162

 

 

$

(524

)

 

$

555

 

 

$

(931

)

 

(1) The accretion of the unrealized holding losses in accumulated other comprehensive loss at the date of transfer at September 30, 2013 partially offsets the amortization of the difference between the par value and the fair value of the investment securities at the date of transfer, and is an adjustment of yield.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

- 5 -


Table of Contents

Pathfinder Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

Six months ended June 30, 2018 and June 30, 2017

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other Com-

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Common

 

 

Paid in

 

 

Retained

 

 

prehensive

 

 

Unearned

 

 

controlling

 

 

 

 

 

(In thousands, except share and per share data)

 

Stock

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

ESOP

 

 

Interest

 

 

Total

 

Balance, January 1, 2018

 

$

43

 

 

$

28,170

 

 

$

39,020

 

 

$

(4,208

)

 

$

(1,214

)

 

$

333

 

 

$

62,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

-

 

 

 

1,949

 

 

 

-

 

 

 

-

 

 

 

(14

)

 

 

1,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,569

)

 

 

-

 

 

 

-

 

 

 

(1,569

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ESOP shares earned (12,221 shares)

 

 

-

 

 

 

101

 

 

 

-

 

 

 

-

 

 

 

90

 

 

 

-

 

 

 

191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock units (14,490 shares)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 

-

 

 

 

162

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

-

 

 

 

204

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of change in measurement of equity securities (1)

 

 

-

 

 

 

-

 

 

 

53

 

 

 

(53

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of change in investment securities transfer (2)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

359

 

 

 

-

 

 

 

-

 

 

 

359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends declared ($0.12 per share)

 

 

-

 

 

 

-

 

 

 

(497

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(497

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of affiliate capital allocation

 

 

-

 

 

 

(8

)

 

 

15

 

 

 

-

 

 

 

-

 

 

 

(7

)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions from affiliates

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(60

)

 

 

(60

)

Balance, June 30, 2018

 

$

43

 

 

$

28,629

 

 

$

40,540

 

 

$

(5,471

)

 

$

(1,124

)

 

$

252

 

 

$

62,869

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2017

 

$

43

 

 

$

27,483

 

 

$

35,619

 

 

$

(3,822

)

 

$

(1,394

)

 

$

432

 

 

$

58,361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

-

 

 

 

1,720

 

 

 

-

 

 

 

-

 

 

 

66

 

 

 

1,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,402

 

 

 

-

 

 

 

-

 

 

 

1,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ESOP shares earned (12,221 shares)

 

 

-

 

 

 

90

 

 

 

-

 

 

 

-

 

 

 

90

 

 

 

-

 

 

 

180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock units (15,720 shares)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation

 

 

-

 

 

 

189

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

-

 

 

 

61

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock dividends declared ($0.1025 per share)

 

 

-

 

 

 

-

 

 

 

(417

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(417

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions from affiliates

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(31

)

 

 

(31

)

Balance, June 30, 2017

 

$

43

 

 

$

27,823

 

 

$

36,922

 

 

$

(2,420

)

 

$

(1,304

)

 

$

467

 

 

$

61,531

 

 

(1)

Cumulative effect of unrealized gain on marketable equity securities based on the adoption of ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities.

 

(2)

Cumulative effect of unrealized gains on the transfer of 52 investment securities from held-to-maturity classification to available-for-sale classification based on the adoption of ASU 2017-12: Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.

 

The accompanying notes are an integral part of the consolidated financial statements.

- 6 -


Table of Contents

Pathfinder Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the six months ended June 30,

 

(In thousands)

 

2018

 

 

2017

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income attributable to Pathfinder Bancorp, Inc.

 

$

1,949

 

 

$

1,720

 

Adjustments to reconcile net income to net cash flows from operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

910

 

 

 

812

 

Realized (gains) losses on sales, redemptions and calls of:

 

 

 

 

 

 

 

 

Real estate acquired through foreclosure

 

 

(16

)

 

 

49

 

Loans

 

 

-

 

 

 

(4

)

Available-for-sale investment securities

 

 

131

 

 

 

59

 

Held-to-maturity investment securities

 

 

(2

)

 

 

(15

)

Premises and equipment

 

 

(8

)

 

 

-

 

Depreciation

 

 

578

 

 

 

503

 

Amortization of mortgage servicing rights

 

 

22

 

 

 

6

 

Amortization of deferred loan costs

 

 

150

 

 

 

100

 

Amortization of deferred financing from subordinated debt

 

 

17

 

 

 

17

 

Earnings and gain on bank owned life insurance

 

 

(181

)

 

 

(133

)

Net amortization of premiums and discounts on investment securities

 

 

994

 

 

 

825

 

Amortization of intangible assets

 

 

9

 

 

 

8

 

Stock based compensation and ESOP expense

 

 

353

 

 

 

369

 

Net change in accrued interest receivable

 

 

322

 

 

 

(147

)

Pension plan contribution

 

 

(825

)

 

 

-

 

Net change in other assets and liabilities

 

 

648

 

 

 

(786

)

Net cash flows from operating activities

 

 

5,051

 

 

 

3,383

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchase of investment securities available-for-sale

 

 

(34,427

)

 

 

(53,077

)

Purchase of investment securities held-to-maturity

 

 

-

 

 

 

(18,636

)

Purchase of Federal Home Loan Bank stock

 

 

(4,660

)

 

 

(1,200

)

Proceeds from redemption of Federal Home Loan Bank stock

 

 

4,127

 

 

 

-

 

Proceeds from maturities and principal reductions of investment securities available-for-sale

 

 

24,941

 

 

 

18,746

 

Proceeds from maturities and principal reductions of investment securities held-to-maturity

 

 

4,688

 

 

 

3,906

 

Proceeds from sales, redemptions and calls of:

 

 

 

 

 

 

 

 

Available-for-sale investment securities

 

 

27,125

 

 

 

40,357

 

Held-to-maturity investment securities

 

 

967

 

 

 

213

 

Real estate acquired through foreclosure

 

 

496

 

 

 

556

 

Premise and equipment

 

 

14

 

 

 

-

 

Purchase of bank owned life insurance

 

 

(5,000

)

 

 

-

 

Proceeds from bank owned life insurance

 

 

228

 

 

 

-

 

Realized gains on hedging activity

 

 

-

 

 

 

(250

)

Net change in loans

 

 

(27,044

)

 

 

(58,265

)

Purchase of premises and equipment

 

 

(1,159

)

 

 

(1,108

)

Net cash flows from investing activities

 

 

(9,704

)

 

 

(68,758

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net change in demand deposits, NOW accounts, savings accounts, money management deposit accounts,

     MMDA accounts and escrow deposits

 

 

(2,634

)

 

 

38,884

 

Net change in time deposits

 

 

1,842

 

 

 

8,737

 

Net change in brokered deposits

 

 

10,358

 

 

 

(14,761

)

Net change in short-term borrowings

 

 

(4,000

)

 

 

(411

)

Payments on long-term borrowings

 

 

-

 

 

 

(3,000

)

Proceeds from long-term borrowings

 

 

14,215

 

 

 

29,160

 

Proceeds from exercise of stock options

 

 

204

 

 

 

61

 

Cash dividends paid to common shareholders

 

 

(502

)

 

 

(425

)

Change in noncontrolling interest, net

 

 

(81

)

 

 

35

 

Net cash flows from financing activities

 

 

19,402

 

 

 

58,280

 

Change in cash and cash equivalents

 

 

14,749

 

 

 

(7,095

)

Cash and cash equivalents at beginning of period

 

 

21,991

 

 

 

22,419

 

Cash and cash equivalents at end of period

 

$

36,740

 

 

$

15,324

 

CASH PAID DURING THE PERIOD FOR:

 

 

 

 

 

 

 

 

Interest

 

$

3,793

 

 

$

2,845

 

Income taxes

 

 

645

 

 

 

210

 

NON-CASH INVESTING ACTIVITY

 

 

 

 

 

 

 

 

Real estate acquired in exchange for loans

 

 

109

 

 

 

686

 

RESTRICTED CASH

 

 

 

 

 

 

 

 

Federal Reserve Bank Reserve Requirements included in interest earning deposits

 

 

4,365

 

 

 

4,255

 

 

The accompanying notes are an integral part of the consolidated financial statements.


- 7 -


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Notes to Consolidated Financial Statements (Unaudited)

 

Note 1:   Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Pathfinder Bancorp, Inc., (the “Company”), Pathfinder Bank (the “Bank”) and its other wholly owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions for Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes necessary for a complete presentation of consolidated financial condition, results of operations and cash flows in conformity with generally accepted accounting principles.  In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included.  Certain amounts in the 2017 consolidated financial statements may have been reclassified to conform to the current period presentation.  These reclassifications had no effect on net income or comprehensive income as previously reported.  Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2018 or any other interim period.  

 

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow practices within the banking industry.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.  Certain accounting policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.  Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event.  Carrying assets and liabilities at fair value inherently results in more financial statement volatility.  The fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices or are provided by unaffiliated third-party sources, when available.  When third party information is not available, valuation adjustments are estimated in good faith by management.

 

Although the Company owns, through its subsidiary Pathfinder Risk Management Company, Inc., 51% of the membership interest in FitzGibbons Agency, LLC (“Agency”), the Company is required to consolidate 100% of the Agency within the consolidated financial statements.  The 49% of which the Company does not own is accounted for separately as noncontrolling interests within the consolidated financial statements.

 

Note 2:   New Accounting Pronouncements

 

The Financial Accounting Standards Board (“FASB”) and, to a lesser extent, other authoritative rulemaking bodies promulgate generally accepted accounting principles (“GAAP”) to regulate the standards of accounting in the United States.  From time to time, the FASB issues new GAAP standards, known as Accounting Standards Updates (“ASUs”) some of which, upon adoption, may have the potential to change the way in which the Company recognizes or reports within its consolidated financial statements.  The following presentation provides a description of an accounting standard that was adopted in the second quarter of 2018 as well as standards that are not currently effective but could have an impact on the Company's consolidated financial statements upon adoption.

 

Standards Adopted in the Quarter Ended June 30, 2018

 

Standard: Improvements to Accounting for Hedging Activities (ASU 2017-12: Derivatives and Hedging [Topic 815]: Targeted Improvements to Accounting for Hedging Activities)

Description: The amended guidance expands and clarifies hedge accounting for nonfinancial and financial risk components, aligns the recognition and presentation of the effects of the hedging instrument and hedged item in the financial statements, and simplifies the requirements for assessing effectiveness in a hedging relationship.

- 8 -


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Required Date of Implementation: January 1, 2019 (early adoption permitted)

Effect on Consolidated Financial Statements:  The Company adopted this guidance, effective January 1, 2018, in the second quarter of 2018.  As a result of the adoption of this Update, the Company transferred 52 securities with an aggregate amortized cost before transfer of $35.2 million from the held-to-maturity classification to the available-for-sale classification on that date.  The transfer of these securities resulted in a decrease in accumulated other comprehensive loss of $359,000 on the adoption date.  The Company had no derivative or hedging positions at June 30, 2018 and, as a result, the adoption of this Update had no other material impact on the consolidated financial statements of the Company at the date of adoption or at June 30, 2018.

Standards Not Yet Adopted as of June 30, 2018

 

Standard:  Leases (ASU 2016-02: Leases [Topic 842])

 

Description:  The new guidance requires lessees to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months.  While the guidance requires all leases to be recognized in the balance sheet, there continues to be a differentiation between finance leases and operating leases for purposes of income statement recognition and cash flow statement presentation.  For finance leases, interest on the lease liability and amortization of the right-of-use asset will be recognized separately in the statement of income.  Repayments of principal on those lease liabilities will be classified within financing activities and payments of interest on the lease liability will be classified within operating activities in the statement of cash flows.  For operating leases, a single lease cost is recognized in the statement of income and allocated over the lease term, generally on a straight-line basis.  All cash payments are presented within operating activities in the statement of cash flows. The accounting applied by lessors is largely unchanged from existing GAAP, however, the guidance eliminates the accounting model for leveraged leases for leases that commence after the effective date of the guidance.

 

Required Date of Implementation:  January 1, 2019 (early adoption permitted)

 

Effect on Consolidated Financial Statements:  The Company occupies certain banking offices and uses certain equipment under noncancelable operating lease agreements which currently are not reflected in its consolidated balance sheet.  Upon adoption of the guidance, the Company expects to report increased assets and increased liabilities as a result of recognizing right-of-use assets and lease liabilities on its consolidated balance sheet. The Company was committed to $1.1 million of minimum lease payments under noncancelable operating lease agreements at June 30, 2018.  In addition, the Company leases office and similar use space, also under noncancelable operating lease agreements to unrelated entities within a limited number of its real estate locations.  At June 30, 2018, the Company expects to receive approximately $1.0 million of minimum lease payments under those agreements.  The Company does not expect the new guidance will have a material impact to its consolidated statement of income.

___

 

Standard:  Leases (ASU 2018-10: Codification Improvements to Topic 842, Leases)

 

Description: The Board has an ongoing project on its agenda about improvements to clarify the Codification or to correct unintended application of guidance related to ASU 2016-02. Those items generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities. The amendments in this Update are of a similar nature to the items typically addressed in the Codification improvements project. However, the Board decided to issue a separate Update for the improvements related to Update 2016-02 to increase stakeholders’ awareness of the amendments and to expedite the improvements.

 

Required Date of Implementation: January 1, 2019 (early adoption permitted)

 

Effect on Consolidated Financial Statements:  See comments, above, related to the adoption of ASU 2016-02

___

 

 

 

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Standard:  Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08: Receivables—Nonrefundable Fees and Other Costs [Subtopic 310-20]: Premium Amortization on Purchased Callable Debt Securities)

 

Description:  The amended guidance requires the premium on callable debt securities to be amortized to the earliest call date.  The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.

 

Required Date of Implementation:  January 1, 2019 (early adoption permitted)

 

Effect on Consolidated Financial Statements:  The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does not expect the guidance to have a material impact on its consolidated financial statements.

____

 

Standard:  Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07: Compensation - Stock Compensation [Topic 718])

 

Description:  Consistent with the accounting requirement for employee share-based payment awards, under the new guidance, nonemployee share-based payment awards within the scope of Topic 718 are measured on the grant date at the grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied.  The amendments in this Update affect all entities that enter into share-based payment transactions for acquiring goods and services from nonemployees.

 

Required Date of Implementation:  January 1, 2019 (early adoption permitted)

 

Effect on Consolidated Financial Statements:  The amendments should be applied using a prospective transition method. The Company does not expect the guidance will have a material impact on its consolidated financial statements.

____

 

Standard: Measurement of Credit Losses on Financial Instruments (ASU 2016-13: Financial Instruments—Credit Losses [Topic 326]: Measurement of Credit Losses on Financial Instruments)

 

Description: The amended guidance replaces the current incurred loss model for determining the allowance for credit losses. The guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected.  The allowance for credit losses will represent a valuation account that is deducted from the amortized cost basis of the financial assets to present their net carrying value at the amount expected to be collected. The income statement will reflect the measurement of credit losses for newly recognized financial assets as well as expected increases or decreases of expected credit losses that have taken place during the period. When determining the allowance, expected credit losses over the contractual term of the financial asset(s) (taking into account prepayments) will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.  The amended guidance also requires recording an allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination.  The initial allowance for these assets will be added to the purchase price at acquisition rather than being reported as an expense.  Subsequent changes in the allowance will be recorded through the income statement as an expense adjustment.  In addition, the amended guidance requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. The calculation of credit losses for available-for-sale securities will be similar to how it is determined under existing guidance.

Required Date of Implementation:  January 1, 2020 (early adoption permitted as of January 1, 2019)

 

Effect on Consolidated Financial Statements:  The Company is assessing the new guidance to determine what modifications to existing credit estimation processes may be required.  The Company expects that the new guidance will result in an increase in its allowance for credit losses as a result of considering credit losses over the expected life of its

- 10 -


Table of Contents

loan and debt securities portfolios.  Increases in the level of allowances will also reflect new requirements to include estimated credit losses on investment securities classified as held-to-maturity, if any.  The Company has formed an Implementation Committee, whose membership includes representatives of senior management, to develop plans that will encompass: (1) internal methodology changes (2) data collection and management activities, (3) internal communication requirements, and (4) estimation of the projected impact of this guidance.  The amount of any change in the allowance for credit losses resulting from the new guidance will ultimately be impacted by the provisions of this guidance as well as by the loan and debt security portfolios composition and asset quality at the adoption date, and economic conditions and forecasts at the time of adoption.

____

 

Standard:  Simplifying the Test for Goodwill Impairment (ASU 2017-04: Intangibles—Goodwill and Other [Topic 350]: Simplifying the Test for Goodwill Impairment)

 

Description:  Current guidance requires a two-step approach to determining if recorded goodwill is impaired.  In Step 1, reporting entities must first evaluate whether or not the carrying value of a reporting unit is greater than its fair value . In Step 2, if a reporting unit’s carrying value is greater than its fair value, then the entity should calculate the implied fair value of goodwill. If the carrying value of goodwill is more than the implied fair value, an impairment charge for the difference must be recorded.  The amended guidance eliminates Step 2 from the goodwill impairment test.  Therefore, under the new guidance, if the carrying value of a reporting unit is greater than its fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of the recorded goodwill).

 

Required Date of Implementation: January 1, 2020 (early adoption permitted)

 

Effect on Consolidated Financial Statements:  The amendments should be applied using a prospective transition method. The Company does not expect the guidance will have a material impact on its consolidated financial statements, unless at some point in the future one of its reporting units were to fail Step 1 of the goodwill impairment test.

____

 

Standard:  Leases (ASU 2018-11: Codification Improvements to Topic 842, Leases)

 

Description:  The amendments in this Update provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with preparers’ requests. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). An entity that elects this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. The amendments do not change the existing disclosure requirements in Topic 840 (for example, they do not create interim disclosure requirements that entities previously were not required to provide).  

 

The amendments in this Update provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance (Topic 606) and both of the following are met:

 

1.

The timing and pattern of transfer of the nonlease component(s) and associated lease component are the same.

2.

The lease component, if accounted for separately, would be classified as an operating lease.

 

If the nonlease component or components associated with the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with Topic 606. Otherwise, the entity must account for the combined component as an operating lease in accordance with Topic 842.

 

An entity electing this practical expedient (including an entity that accounts for the combined component entirely in Topic 606) is required to disclose the following by class of underlying asset:

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Table of Contents

 

1.

The fact that it elected the expedient

2.

Which class(es) of underlying asset the lessor made the election to

3.

The nature of (a) the lease component and nonlease component(s) that were combined as a result of applying the   practical expedient and (b) any nonlease components that were not eligible for the practical expedient and, thus, not combined

4.

The Topic the entity applies to the combined component (Topic 606 or Topic 842).

 

Required Date of Implementation: January 1, 2019 (early adoption permitted)

 

Effect on Consolidated Financial Statements:  See comments, above, related to the adoption of ASU 2016-02

 

 

Note 3:   Earnings per Common Share

 

Basic earnings per share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period.  Net income available to common shareholders is net income to Pathfinder Bancorp, Inc. less the total of preferred dividends declared, if any. Diluted earnings per share include the potential dilutive effect that could occur upon the assumed exercise of issued stock options using the Treasury Stock method.  Anti-dilutive stock options, not included in the computation below, were -0- for the three and six months ended June 30, 2018 and were -0- for the three months ended June 30, 2017 and 46,131 for the six months ended June 30, 2017.  Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released to plan participants.

 

The following table sets forth the calculation of basic and diluted earnings per share.  

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands, except per share data)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Basic Earnings Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

945

 

 

$

920

 

 

$

1,949

 

 

$

1,720

 

Weighted average common shares outstanding

 

 

4,157

 

 

 

4,074

 

 

 

4,138

 

 

 

4,063

 

Basic earnings per common share

 

$

0.23

 

 

$

0.23

 

 

$

0.47

 

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders

 

$

945

 

 

$

920

 

 

$

1,949

 

 

$

1,720

 

Weighted average common shares outstanding

 

 

4,157

 

 

 

4,074

 

 

 

4,138

 

 

 

4,063

 

Effect of assumed exercise of stock options

 

 

99

 

 

 

109

 

 

 

108

 

 

 

105

 

Diluted weighted average common shares outstanding

 

 

4,256

 

 

 

4,183

 

 

 

4,246

 

 

 

4,168

 

Diluted earnings per common share

 

$

0.22

 

 

$

0.22

 

 

$

0.46

 

 

$

0.41

 

 

- 12 -


Table of Contents

Note 4:   Investment Securities

 

The amortized cost and estimated fair value of investment securities are summarized as follows:

 

 

 

June 30, 2018

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Available-for-Sale Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

21,256

 

 

$

-

 

 

$

(221

)

 

$

21,035

 

State and political subdivisions

 

 

28,659

 

 

 

67

 

 

 

(738

)

 

 

27,988

 

Corporate

 

 

13,148

 

 

 

158

 

 

 

(301

)

 

 

13,005

 

Asset backed securities

 

 

10,845

 

 

 

3

 

 

 

(63

)

 

 

10,785

 

Residential mortgage-backed - US agency

 

 

34,000

 

 

 

21

 

 

 

(988

)

 

 

33,033

 

Collateralized mortgage obligations - US agency

 

 

60,087

 

 

 

8

 

 

 

(1,975

)

 

 

58,120

 

Collateralized mortgage obligations - Private label

 

 

20,227

 

 

 

18

 

 

 

(386

)

 

 

19,859

 

Total

 

 

188,222

 

 

 

275

 

 

 

(4,672

)

 

 

183,825

 

Equity investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock - financial services industry

 

 

205

 

 

 

-

 

 

 

-

 

 

 

205

 

Total

 

 

205

 

 

 

-

 

 

 

-

 

 

 

205

 

Total available-for-sale

 

$

188,427

 

 

$

275

 

 

$

(4,672

)

 

$

184,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

3,982

 

 

$

-

 

 

$

(44

)

 

$

3,938

 

State and political subdivisions

 

 

5,309

 

 

 

27

 

 

 

(83

)

 

 

5,253

 

Corporate

 

 

6,306

 

 

 

2

 

 

 

(217

)

 

 

6,091

 

Residential mortgage-backed - US agency

 

 

3,813

 

 

 

-

 

 

 

(78

)

 

 

3,735

 

Collateralized mortgage obligations - US agency

 

 

4,341

 

 

 

9

 

 

 

(24

)

 

 

4,326

 

Collateralized mortgage obligations - Private label

 

 

2,896

 

 

 

16

 

 

 

(11

)

 

 

2,901

 

Total held-to-maturity

 

$

26,647

 

 

$

54

 

 

$

(457

)

 

$

26,244

 

- 13 -


Table of Contents

 

 

 

December 31, 2017

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Estimated

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

(In thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Available-for-Sale Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

41,489

 

 

$

1

 

 

$

(154

)

 

$

41,336

 

State and political subdivisions

 

 

13,960

 

 

 

12

 

 

 

(291

)

 

 

13,681

 

Corporate

 

 

8,584

 

 

 

108

 

 

 

(92

)

 

 

8,600

 

Asset backed securities

 

 

6,662

 

 

 

12

 

 

 

(30

)

 

 

6,644

 

Residential mortgage-backed - US agency

 

 

36,214

 

 

 

23

 

 

 

(495

)

 

 

35,742

 

Collateralized mortgage obligations - US agency

 

 

54,481

 

 

 

-

 

 

 

(1,133

)

 

 

53,348

 

Collateralized mortgage obligations - Private label

 

 

11,193

 

 

 

62

 

 

 

(203

)

 

 

11,052

 

Total

 

 

172,583

 

 

 

218

 

 

 

(2,398

)

 

 

170,403

 

Equity investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock - financial services industry

 

 

663

 

 

 

72

 

 

 

-

 

 

 

735

 

Total

 

 

663

 

 

 

72

 

 

 

-

 

 

 

735

 

Total available-for-sale

 

$

173,246

 

 

$

290

 

 

$

(2,398

)

 

$

171,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

4,948

 

 

$

14

 

 

$

(14

)

 

$

4,948

 

State and political subdivisions

 

 

35,130

 

 

 

641

 

 

 

(311

)

 

 

35,460

 

Corporate

 

 

8,311

 

 

 

151

 

 

 

(159

)

 

 

8,303

 

Residential mortgage-backed - US agency

 

 

6,853

 

 

 

53

 

 

 

(10

)

 

 

6,896

 

Collateralized mortgage obligations - US agency

 

 

7,574

 

 

 

83

 

 

 

(215

)

 

 

7,442

 

Collateralized mortgage obligations - Private label

 

 

3,380

 

 

 

7

 

 

 

(10

)

 

 

3,377

 

Total held-to-maturity

 

$

66,196

 

 

$

949

 

 

$

(719

)

 

$

66,426

 

 

The amortized cost and estimated fair value of debt investments at June 30, 2018 by contractual maturity are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

 

 

 

Available-for-Sale

 

 

Held-to-Maturity

 

 

 

Amortized

 

 

Estimated

 

 

Amortized

 

 

Estimated

 

(In thousands)

 

Cost

 

 

Fair Value

 

 

Cost

 

 

Fair Value

 

Due in one year or less

 

$

8,236

 

 

$

8,215

 

 

$

1,211

 

 

$

1,207

 

Due after one year through five years

 

 

25,042

 

 

 

24,758

 

 

 

6,503

 

 

 

6,474

 

Due after five years through ten years

 

 

18,331

 

 

 

18,081

 

 

 

4,940

 

 

 

4,864

 

Due after ten years

 

 

22,299

 

 

 

21,759

 

 

 

2,943

 

 

 

2,737

 

Sub-total

 

 

73,908

 

 

 

72,813

 

 

 

15,597

 

 

 

15,282

 

Residential mortgage-backed - US agency

 

 

34,000

 

 

 

33,033

 

 

 

3,813

 

 

 

3,735

 

Collateralized mortgage obligations - US agency

 

 

60,087

 

 

 

58,120

 

 

 

4,341

 

 

 

4,326

 

Collateralized mortgage obligations - Private label

 

 

20,227

 

 

 

19,859

 

 

 

2,896

 

 

 

2,901

 

Totals

 

$

188,222

 

 

$

183,825

 

 

$

26,647

 

 

$

26,244

 

 

- 14 -


Table of Contents

The Company’s investment securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

 

 

 

June 30, 2018

 

 

 

Less than Twelve Months

 

 

Twelve Months or More

 

 

Total

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

 

Individual

 

 

Unrealized

 

 

Fair

 

 

Individual

 

 

Unrealized

 

 

Fair

 

 

Individual

 

 

Unrealized

 

 

Fair

 

(Dollars in thousands)

 

Securities

 

 

Losses

 

 

Value

 

 

Securities

 

 

Losses

 

 

Value

 

 

Securities

 

 

Losses

 

 

Value

 

Available-for-Sale Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSE's

 

 

4

 

 

$

(206

)

 

$

15,031

 

 

 

2

 

 

$

(15

)

 

$

5,984

 

 

 

6

 

 

$

(221

)

 

$

21,015

 

State and political subdivisions

 

 

18

 

 

 

(186

)

 

 

9,113

 

 

 

15

 

 

 

(552

)

 

 

10,486

 

 

 

33

 

 

 

(738

)

 

 

19,599

 

Corporate

 

 

7

 

 

 

(134

)

 

 

5,062

 

 

 

2

 

 

 

(167

)

 

 

1,640

 

 

 

9

 

 

 

(301

)

 

 

6,702

 

Asset backed securities

 

 

5

 

 

 

(63

)

 

 

5,939

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5

 

 

 

(63

)

 

 

5,939

 

Residential mortgage-backed - US agency

 

 

19

 

 

 

(452

)

 

 

20,238

 

 

 

9

 

 

 

(536

)

 

 

10,054

 

 

 

28

 

 

 

(988

)

 

 

30,292

 

Collateralized mortgage obligations - US agency

 

 

15

 

 

 

(365

)

 

 

22,610

 

 

 

23

 

 

 

(1,610

)

 

 

27,986

 

 

 

38

 

 

 

(1,975

)

 

 

50,596

 

Collateralized mortgage obligations - Private label

 

 

7

 

 

 

(278

)

 

 

13,833

 

 

 

3

 

 

 

(108

)

 

 

3,229

 

 

 

10

 

 

 

(386

)

 

 

17,062

 

Totals

 

 

75

 

 

$

(1,684

)

 

$

91,826

 

 

 

54

 

 

$

(2,988

)

 

$

59,379

 

 

 

129

 

 

$

(4,672

)

 

$

151,205

 

Held-to-Maturity Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSE's

 

 

3

 

 

$

(20

)

 

$

2,963

 

 

 

1

 

 

$

(24

)

 

$

976

 

 

 

4

 

 

$

(44

)

 

$

3,939

 

State and political subdivisions

 

 

5

 

 

 

(8

)

 

 

1,071

 

 

 

3

 

 

 

(75

)

 

 

1,986

 

 

 

8

 

 

 

(83

)

 

 

3,057

 

Corporate

 

 

2

 

 

 

(37

)

 

 

1,278

 

 

 

1

 

 

 

(180

)

 

 

2,048

 

 

 

3

 

 

 

(217

)

 

 

3,326

 

Residential mortgage-backed - US agency

 

 

6

 

 

 

(78

)

 

 

3,735

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6

 

 

 

(78

)

 

 

3,735

 

Collateralized mortgage obligations - US agency

 

 

2

 

 

 

(24

)

 

 

2,379

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

(24

)

 

 

2,379

 

Collateralized mortgage obligations - Private label

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

(11

)

 

 

949

 

 

 

1

 

 

 

(11

)

 

 

949

 

Totals

 

 

18

 

 

$

(167

)

 

$

11,426

 

 

 

6

 

 

$

(290

)

 

$

5,959

 

 

 

24

 

 

$

(457

)

 

$

17,385

 

 

 

 

December 31, 2017

 

 

 

Less than Twelve Months

 

 

Twelve Months or More

 

 

Total

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

 

 

Individual

 

 

Unrealized

 

 

Fair

 

 

Individual

 

 

Unrealized

 

 

Fair

 

 

Individual

 

 

Unrealized

 

 

Fair

 

(Dollars in thousands)

 

Securities

 

 

Losses

 

 

Value

 

 

Securities

 

 

Losses

 

 

Value

 

 

Securities

 

 

Losses

 

 

Value

 

Available-for-Sale Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSE's

 

 

5

 

 

$

(105

)

 

$

27,359

 

 

 

4

 

 

$

(49

)

 

$

13,957

 

 

 

9

 

 

$

(154

)

 

$

41,316

 

State and political subdivisions

 

 

18

 

 

 

(24

)

 

 

2,480

 

 

 

12

 

 

 

(267

)

 

 

5,041

 

 

 

30

 

 

 

(291

)

 

 

7,521

 

Corporate

 

 

2

 

 

 

(19

)

 

 

1,791

 

 

 

1

 

 

 

(73

)

 

 

1,727

 

 

 

3

 

 

 

(92

)

 

 

3,518

 

Asset backed securities

 

 

2

 

 

 

(17

)

 

 

3,123

 

 

 

1

 

 

 

(13

)

 

 

742

 

 

 

3

 

 

 

(30

)

 

 

3,865

 

Residential mortgage-backed - US agency

 

 

15

 

 

 

(159

)

 

 

21,551

 

 

 

9

 

 

 

(336

)

 

 

10,463

 

 

 

24

 

 

 

(495

)

 

 

32,014

 

Collateralized mortgage obligations - US agency

 

 

14

 

 

 

(195

)

 

 

23,790

 

 

 

21

 

 

 

(938

)

 

 

25,395

 

 

 

35

 

 

 

(1,133

)

 

 

49,185

 

Collateralized mortgage obligations - Private label

 

 

4

 

 

 

(203

)

 

 

7,439

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

(203

)

 

 

7,439

 

Totals

 

 

60

 

 

$

(722

)

 

$

87,533

 

 

 

48

 

 

$

(1,676

)

 

$

57,325

 

 

 

108

 

 

$

(2,398

)

 

$

144,858

 

Held-to-Maturity Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSE's

 

 

2

 

 

$

(2

)

 

$

1,990

 

 

 

1

 

 

$

(12

)

 

$

988

 

 

 

3

 

 

$

(14

)

 

$

2,978

 

State and political subdivisions

 

 

8

 

 

 

(55

)

 

 

5,668

 

 

 

11

 

 

 

(256

)

 

 

8,644

 

 

 

19

 

 

 

(311

)

 

 

14,312

 

Corporate

 

 

3

 

 

 

(10

)

 

 

1,412

 

 

 

1

 

 

 

(149

)

 

 

2,087

 

 

 

4

 

 

 

(159

)

 

 

3,499

 

Residential mortgage-backed - US agency

 

 

2

 

 

 

(10

)

 

 

1,909

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

(10

)

 

 

1,909

 

Collateralized mortgage obligations - US agency

 

 

2

 

 

 

(215

)

 

 

4,418

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

(215

)

 

 

4,418

 

Collateralized mortgage obligations - Private label

 

 

1

 

 

 

(10

)

 

 

1,119

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

(10

)

 

 

1,119

 

Totals

 

 

18

 

 

$

(302

)

 

$

16,516

 

 

 

13

 

 

$

(417

)

 

$

11,719

 

 

 

31

 

 

$

(719

)

 

$

28,235

 

 

Excluding the effects of changes in the characteristics of individual debt securities that potentially give rise to other-than-temporary impairment (“OTTI”), as described below, the fair market value of a debt security as of a particular measurement date is highly dependent upon prevailing market and economic environmental factors at the measurement date relative to the prevailing market and economic environmental factors present at the time the debt security was acquired.  The most significant market and environmental factors include, but are not limited to (1) the general level of interest rates, (2) the relationship between shorter-term interest rates and longer-term interest rates (referred to as the “slope” of the interest rate yield curve), (3) general bond market liquidity, (4) the recent and expected near-term volume of new issuances of similar debt securities, and (5) changes in the market values of individual loan collateral underlying mortgage-backed debt securities.  Changes in interest rates affect the fair market values of debt securities by influencing the discount rate applied to the securities’ future expected cash flows.  The higher the discount rate, the lower the resultant security price.  Conversely, the lower the discount rate, the higher the resultant security price.  In addition, the cumulative amount and timing of undiscounted cash flows of debt securities may be also affected by changes in interest rates.  For any given level of movement in the general market and economic environmental factors described above, the magnitude of any particular debt security’s price changes will also depend heavily upon security-specific factors such as (1) the

- 15 -


Table of Contents

duration of the security, (2) imbedded optionality contractually granted to the issuer of the security with respect to principal prepayments, and (3) changes in the level of market premiums demanded by investors for securities with imbedded credit risk (where applicable).

 

The Company conducts a formal review of investment securities on a quarterly basis for the presence of OTTI.  The Company assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the statement of condition date.  Under these circumstances, OTTI is considered to have occurred (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not anticipated to be sufficient to recover the entire amortized cost basis.  The guidance requires that credit-related OTTI is recognized in earnings while non-credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”).  Non-credit-related OTTI is based on other factors, including illiquidity and changes in the general interest rate environment.  Presentation of OTTI is made in the consolidated statement of income on a gross basis, including both the portion recognized in earnings as well as the portion recorded in OCI.  The gross OTTI would then be offset by the amount of non-credit-related OTTI, showing the net as the impact on earnings.

Management does not believe any individual unrealized loss in securities within the portfolio as of June 30, 2018 represents OTTI.  At June 30, 2018, the Bank had the following securities, in a loss position for 12 months or more relative to their amortized historical cost, which were deemed to have no credit impairment, thus, the disclosed unrealized losses relate directly to changes in interest rates subsequent to the acquisition of the individual securities.  The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.

 

Fifteen state and political subdivision securities, categorized as available-for-sale, with an aggregate amortized historical cost of $11.0 million and an aggregate market value of $10.5  million (unrealized aggregate loss of $552,000, or 5.27%).  Each of the securities maintains a credit rating established by one or more nationally-recognized statistical rating organization (“NRSRO”) that is well above the minimum investment grade and, therefore, no credit-related OTTI is deemed to be present.

 

Two corporate securities, categorized as available-for-sale, with an aggregate amortized historical cost of $1.8 million and an aggregate market value of $1.6 million (unrealized loss of $167,000, or 10.14%).  The securities maintain credit ratings established by one or more NRSRO that are above the minimum investment grade and, therefore, no credit-related OTTI is deemed to be present.

 

Three privately-issued mortgage-backed securities, categorized as available-for-sale, with an aggregate amortized historical cost of $3.3 million and an aggregate market value of $3.3 million (unrealized loss of $108,000, or 3.35%).  Two of the securities, with aggregate book values of $2.8 million were unrated at the time of their issuance but remain significantly collateralized through subordination. Therefore, no credit-related OTTI is deemed to be present.  The third security, with a book value of $521,000 is rated at the highest investment grade rating by one or more NRSRO and therefore, no credit-related OTTI is deemed to be present.

 

One privately-issued mortgaged-backed security, categorized as held-to-maturity, with an amortized historical cost of $960,000 and a market value of $949,000 (unrealized loss of $11,000, or 1.13%).  This security was unrated at the time of its issuance but remains significantly collateralized through subordination and, therefore, no credit-related OTTI is deemed to be present.

 

Three state and political subdivision securities, categorized as held-to-maturity, with an aggregate amortized historical cost of $2.0 million and an aggregate market value of $2.0 million (unrealized aggregate loss of $75,000, or 3.78%).  Each of the securities maintains a credit rating established by one or more NRSRO that is above the minimum investment grade and, therefore, no credit-related OTTI is deemed to be present.

 

One corporate security, categorized as held-to-maturity, with an amortized historical cost of $2.2 million and a market value of $2.0 million (unrealized aggregate loss of $180,000, or 8.79%).  This security maintains a credit rating established by one or more NRSRO well above the minimum investment grade and, therefore, no credit-related OTTI is deemed to be present.

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All other securities with market values less than their amortized historical costs for twelve or more months are issued by United States agencies or government sponsored enterprises and consist of mortgage-backed securities, collateralized mortgage obligations and direct agency financings.  These positions in US government agency and government-sponsored enterprises are deemed to have no credit impairment, thus, the disclosed unrealized losses relate directly to changes in interest rates subsequent to the acquisition of the individual securities.  The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.

 

In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the length of time the equity security’s fair value has been below the carrying amount. The Company had no equity securities that were impaired at June 30, 2018 or December 31, 2017.

 

Gross realized gains (losses) on sales of securities for the indicated periods are detailed below:

 

 

 

For the three months

For the six months

 

 

 

ended June 30,

ended June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Realized gains on investments

 

$

133

 

 

$

70

 

 

$

160

 

 

$

148

 

Realized gains on hedging activity

 

 

-

 

 

 

156

 

 

 

-

 

 

 

250

 

Realized losses on investments

 

 

(155

)

 

 

(91

)

 

 

(289

)

 

 

(192

)

 

 

$

(22

)

 

$

135

 

 

$

(129

)

 

$

206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains on equity securities

 

 

13

 

 

 

-

 

 

 

26

 

 

 

-

 

 

 

$

13

 

 

$

-

 

 

$

26

 

 

$

-

 

 

The Company adopted ASU 2017-12: Derivatives and Hedging [Topic 815]: Targeted Improvements to Accounting for Hedging Activities, effective January 1, 2018, in the second quarter of 2018.  The amended guidance within this Update expands and clarifies hedge accounting for nonfinancial and financial risk components, aligns the recognition and presentation of the effects of the hedging instrument and hedged item in the financial statements, and simplifies the requirements for assessing effectiveness in a hedging relationship.  The Company did not have any hedging activities in the first half of 2018 but expects to utilize hedging in the future to improve the management of its risk profiles.  In order to facilitate potential future hedging activities, the Company transferred 52 investment securities with an aggregate amortized cost before transfer of $35.2 million from the held-to-maturity classification to the available-for-sale classification at the date of adoption.

 

As of June 30, 2018 and December 31, 2017, securities with a fair value of $108.5 million and $113.0 million, respectively, were pledged to collateralize certain municipal deposit relationships.  As of the same dates, securities with a fair value of $25.4 million and $19.9 million were pledged against the Company’s established borrowing arrangements.  

 

Management has reviewed its loan and mortgage-backed securities portfolios and determined that, to the best of its knowledge, only minimal exposure exists to sub-prime or other high-risk residential mortgages.  With limited exceptions in the Company’s investment portfolio involving the most senior tranches of securitized bonds, the Company is not in the practice of investing in, or originating, these types of investments or loans.

 

Note 5:   Pension and Postretirement Benefits

 

The Company has a noncontributory defined benefit pension plan covering most employees. The plan provides defined benefits based on years of service and final average salary. On May 14, 2012, the Company informed its employees of its decision to freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan.  The plan was frozen on June 30, 2012.  Compensation earned by employees up to June 30, 2012 is used for purposes of calculating benefits under the plan but there are no future benefit accruals after this date.  Participants as of June 30, 2012 will continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work. In addition, the Company provides certain health and life insurance benefits for a limited number of eligible retired employees.  The healthcare plan is contributory with participants’

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contributions adjusted annually; the life insurance plan is noncontributory.  Employees with less than 14 years of service as of January 1, 1995, are not eligible for the health and life insurance retirement benefits.

 

The composition of net periodic pension plan and postretirement plan costs for the indicated periods is as follows:

 

 

 

Pension Benefits

 

 

Postretirement Benefits

 

 

Pension Benefits

 

 

Postretirement Benefits

 

 

 

For the three months ended June 30,

 

 

For the six months ended June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service cost

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Interest cost

 

 

118

 

 

 

118

 

 

 

6

 

 

 

2

 

 

 

236

 

 

 

237

 

 

 

11

 

 

 

4

 

Expected return on plan assets

 

 

(259

)

 

 

(236

)

 

 

-

 

 

 

-

 

 

 

(518

)

 

 

(473

)

 

 

-

 

 

 

-

 

Amortization of prior service credits

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2

)

 

 

-

 

Amortization of net losses/(gains)

 

 

41

 

 

 

39

 

 

 

3

 

 

 

(2

)

 

 

82

 

 

 

77

 

 

 

6

 

 

 

(4

)

Net periodic benefit plan (benefit) cost

 

$

(100

)

 

$

(79

)

 

$

8

 

 

$

-

 

 

$

(200

)

 

$

(159

)

 

$

15

 

 

$

-

 

 

The Company has made a contribution in the amount of $825,000 to the defined benefit pension plan during the second quarter of 2018.  The Company will evaluate the need for further contributions to the defined benefit pension plan during 2018.  The prepaid pension asset is recorded in other assets on the statement of condition as of June 30, 2018 and December 31, 2017.

 

Note 6:   Loans

 

Major classifications of loans at the indicated dates are as follows:

 

 

 

June 30,

 

 

December 31,

 

(In thousands)

 

2018

 

 

2017

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

$

225,864

 

 

$

216,793

 

Construction

 

 

3,288

 

 

 

5,558

 

Total residential mortgage loans

 

 

229,152

 

 

 

222,351

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

Real estate

 

 

206,960

 

 

 

192,525

 

Lines of credit

 

 

49,314

 

 

 

51,285

 

Other commercial and industrial

 

 

58,742

 

 

 

50,097

 

Tax exempt loans

 

 

9,860

 

 

 

10,405

 

Total commercial loans

 

 

324,876

 

 

 

304,312

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

26,262

 

 

 

25,935

 

Other consumer

 

 

27,037

 

 

 

28,646

 

Total consumer loans

 

 

53,299

 

 

 

54,581

 

 

 

 

 

 

 

 

 

 

Total loans

 

 

607,327

 

 

 

581,244

 

Net deferred loan fees

 

 

(142

)

 

 

(413

)

Less allowance for loan losses

 

 

(7,605

)

 

 

(7,126

)

Loans receivable, net

 

$

599,580

 

 

$

573,705

 

 

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

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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 are serviced through their respective maturities by the originating financial institution.  As of June 30, 2018 and December 31, 2017 there were 1,000 loans outstanding with a remaining outstanding carrying value of $16.3 million and 1,082 loans outstanding with a remaining outstanding carrying value of $19.6 million, respectively.  Since the acquisition of these loan pools, a total of nine loans had cumulative net charge-offs totaling $79,000 with $34,000 in net charge-offs for the six months ended June 30, 2018.

 

As of June 30, 2018 and December 31, 2017, residential mortgage loans with a carrying value of $154.1 million and $148.1 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 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2018 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

 

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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  June 30, 2018

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Pass

 

 

Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

$

221,719

 

 

$

485

 

 

$

1,284

 

 

$

2,376

 

 

$

225,864

 

Construction

 

 

3,288

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,288

 

Total residential mortgage loans

 

 

225,007

 

 

 

485

 

 

 

1,284

 

 

 

2,376

 

 

 

229,152

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

201,733

 

 

 

1,533

 

 

 

1,913

 

 

 

1,781

 

 

 

206,960

 

Lines of credit

 

 

48,941

 

 

 

164

 

 

 

169

 

 

 

40

 

 

 

49,314

 

Other commercial and industrial

 

 

57,411

 

 

 

407

 

 

 

628

 

 

 

296

 

 

 

58,742

 

Tax exempt loans

 

 

9,860

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,860

 

Total commercial loans

 

 

317,945

 

 

 

2,104

 

 

 

2,710

 

 

 

2,117

 

 

 

324,876

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

25,906

 

 

 

127

 

 

 

140

 

 

 

89

 

 

 

26,262

 

Other consumer

 

 

26,864

 

 

 

161

 

 

 

12

 

 

 

-

 

 

 

27,037

 

Total consumer loans

 

 

52,770

 

 

 

288

 

 

 

152

 

 

 

89

 

 

 

53,299

 

Total loans

 

$

595,722

 

 

$

2,877

 

 

$

4,146

 

 

$

4,582

 

 

$

607,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of  December 31, 2017

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Pass

 

 

Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

$

211,825

 

 

$

891

 

 

$

1,869

 

 

$

2,208

 

 

$

216,793

 

Construction

 

 

5,558

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,558

 

Total residential mortgage loans

 

 

217,383

 

 

 

891

 

 

 

1,869

 

 

 

2,208

 

 

 

222,351

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

187,073

 

 

 

1,372

 

 

 

2,024

 

 

 

2,056

 

 

 

192,525

 

Lines of credit

 

 

50,507

 

 

 

195

 

 

 

523

 

 

 

60

 

 

 

51,285

 

Other commercial and industrial

 

 

48,738

 

 

 

407

 

 

 

532

 

 

 

420

 

 

 

50,097

 

Tax exempt loans

 

 

10,405

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,405

 

Total commercial loans

 

 

296,723

 

 

 

1,974

 

 

 

3,079

 

 

 

2,536

 

 

 

304,312

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

25,396

 

 

 

61

 

 

 

304

 

 

 

174

 

 

 

25,935

 

Other consumer

 

 

28,584

 

 

 

55

 

 

 

7

 

 

 

-

 

 

 

28,646

 

Total consumer loans

 

 

53,980

 

 

 

116

 

 

 

311

 

 

 

174

 

 

 

54,581

 

Total loans

 

$

568,086

 

 

$

2,981

 

 

$

5,259

 

 

$

4,918

 

 

$

581,244

 

 

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.

 


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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 June 30, 2018 and December 31, 2017, are detailed in the following tables:

 

 

 

As of  June 30, 2018

 

 

 

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

 

$

1,095

 

 

$

87

 

 

$

2,090

 

 

$

3,272

 

 

$

222,592

 

 

$

225,864

 

Construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,288

 

 

 

3,288

 

Total residential mortgage loans

 

 

1,095

 

 

 

87

 

 

 

2,090

 

 

 

3,272

 

 

 

225,880

 

 

 

229,152

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

54

 

 

 

387

 

 

 

2,469

 

 

 

2,910

 

 

 

204,050

 

 

 

206,960

 

Lines of credit

 

 

161

 

 

 

17

 

 

 

133

 

 

 

311

 

 

 

49,003

 

 

 

49,314

 

Other commercial and industrial

 

 

100

 

 

 

9

 

 

 

550

 

 

 

659

 

 

 

58,083

 

 

 

58,742

 

Tax exempt loans

 

 

-

 

 

 

238

 

 

 

-

 

 

 

238

 

 

 

9,622

 

 

 

9,860

 

Total commercial loans

 

 

315

 

 

 

651

 

 

 

3,152

 

 

 

4,118

 

 

 

320,758

 

 

 

324,876

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

55

 

 

 

10

 

 

 

140

 

 

 

205

 

 

 

26,057

 

 

 

26,262

 

Other consumer

 

 

107

 

 

 

64

 

 

 

63

 

 

 

234

 

 

 

26,803

 

 

 

27,037

 

Total consumer loans

 

 

162

 

 

 

74

 

 

 

203

 

 

 

439

 

 

 

52,860

 

 

 

53,299

 

Total loans

 

$

1,572

 

 

$

812

 

 

$

5,445

 

 

$

7,829

 

 

$

599,498

 

 

$

607,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of  December 31, 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

 

$

1,196

 

 

$

925

 

 

$

2,088

 

 

$

4,209

 

 

$

212,584

 

 

$

216,793

 

Construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,558

 

 

 

5,558

 

Total residential mortgage loans

 

 

1,196

 

 

 

925

 

 

 

2,088

 

 

 

4,209

 

 

 

218,142

 

 

 

222,351

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

720

 

 

 

2,056

 

 

 

1,545

 

 

 

4,321

 

 

 

188,204

 

 

 

192,525

 

Lines of credit

 

 

1,482

 

 

 

31

 

 

 

132

 

 

 

1,645

 

 

 

49,640

 

 

 

51,285

 

Other commercial and industrial

 

 

575

 

 

 

60

 

 

 

766

 

 

 

1,401

 

 

 

48,696

 

 

 

50,097

 

Tax exempt loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10,405

 

 

 

10,405

 

Total commercial loans

 

 

2,777

 

 

 

2,147

 

 

 

2,443

 

 

 

7,367

 

 

 

296,945

 

 

 

304,312

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

94

 

 

 

74

 

 

 

300

 

 

 

468

 

 

 

25,467

 

 

 

25,935

 

Other consumer

 

 

192

 

 

 

50

 

 

 

63

 

 

 

305

 

 

 

28,341

 

 

 

28,646

 

Total consumer loans

 

 

286

 

 

 

124

 

 

 

363

 

 

 

773

 

 

 

53,808

 

 

 

54,581

 

Total loans

 

$

4,259

 

 

$

3,196

 

 

$

4,894

 

 

$

12,349

 

 

$

568,895

 

 

$

581,244

 

 

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Table of Contents

Nonaccrual loans, segregated by class of loan, were as follows:

 

 

 

June 30,

 

 

December 31,

 

(In thousands)

 

2018

 

 

2017

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

$

2,090

 

 

$

2,088

 

 

 

 

2,090

 

 

 

2,088

 

Commercial loans:

 

 

 

 

 

 

 

 

Real estate

 

 

2,469

 

 

 

1,545

 

Lines of credit

 

 

133

 

 

 

132

 

Other commercial and industrial

 

 

550

 

 

 

766

 

 

 

 

3,152

 

 

 

2,443

 

Consumer loans:

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

140

 

 

 

300

 

Other consumer

 

 

63

 

 

 

63

 

 

 

 

203

 

 

 

363

 

Total nonaccrual loans

 

$

5,445

 

 

$

4,894

 

 

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.  The pre-modification outstanding recorded investment is the principal loan balance less the provision for loan losses before the loan was modified as a TDR.  The 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 Company had no loans that have been modified as TDRs for the three months ended June 30, 2018.

 

The table below details a loan that has been modified as a TDR for the six months ended June 30, 2018.

 

 

For the six months ended June 30, 2018

 

(In thousands)

Number of loans

 

Pre-modification outstanding recorded investment

 

 

Post-modification outstanding recorded investment

 

 

Additional provision for loan losses

 

Other commercial and industrial loans

1

 

$

300

 

 

$

300

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The TDR evaluated for impairment for the six months ended June 30, 2018, has been classified as a TDR due to economic concessions granted, which included an extended maturity date that will result in a delay in payment from the original contractual maturity.

 

The Company had no loans that have been modified as TDRs for the three or six months ended June 30, 2017.

 

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 June 30, 2018, which had subsequently defaulted during the six months ended June 30, 2018.

 

- 22 -


Table of Contents

The Company had no loans that had been modified as TDRs during the twelve months prior to June 30, 2017, which had subsequently defaulted during the six months ended June 30, 2017.

 

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 table summarizes impaired loan information by portfolio class at the indicated dates:

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

 

 

 

 

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

 

$

872

 

 

$

876

 

 

$

-

 

 

$

900

 

 

$

909

 

 

$

-

 

Commercial real estate

 

 

2,351

 

 

 

2,405

 

 

 

-

 

 

 

3,314

 

 

 

3,360

 

 

 

-

 

Commercial lines of credit

 

 

162

 

 

 

162

 

 

 

-

 

 

 

507

 

 

 

507

 

 

 

-

 

Other commercial and industrial

 

 

732

 

 

 

733

 

 

 

-

 

 

 

523

 

 

 

524

 

 

 

-

 

Home equity and junior liens

 

 

-

 

 

 

-

 

 

 

-

 

 

 

80

 

 

 

80

 

 

 

-

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

 

972

 

 

 

972

 

 

 

111

 

 

 

958

 

 

 

958

 

 

 

210

 

Commercial real estate

 

 

2,179

 

 

 

2,179

 

 

 

596

 

 

 

2,186

 

 

 

2,187

 

 

 

320

 

Commercial lines of credit

 

 

47

 

 

 

47

 

 

 

47

 

 

 

40

 

 

 

40

 

 

 

40

 

Other commercial and industrial

 

 

306

 

 

 

306

 

 

 

276

 

 

 

525

 

 

 

525

 

 

 

391

 

Home equity and junior liens

 

 

207

 

 

 

207

 

 

 

141

 

 

 

210

 

 

 

210

 

 

 

142

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

 

1,844

 

 

 

1,848

 

 

 

111

 

 

 

1,858

 

 

 

1,867

 

 

 

210

 

Commercial real estate

 

 

4,530

 

 

 

4,584

 

 

 

596

 

 

 

5,500

 

 

 

5,547

 

 

 

320

 

Commercial lines of credit

 

 

209

 

 

 

209

 

 

 

47

 

 

 

547

 

 

 

547

 

 

 

40

 

Other commercial and industrial

 

 

1,038

 

 

 

1,039

 

 

 

276

 

 

 

1,048

 

 

 

1,049

 

 

 

391

 

Home equity and junior liens

 

 

207

 

 

 

207

 

 

 

141

 

 

 

290

 

 

 

290

 

 

 

142

 

Totals

 

$

7,828

 

 

$

7,887

 

 

$

1,171

 

 

$

9,243

 

 

$

9,300

 

 

$

1,103

 

 

 


- 23 -


Table of Contents

The following table presents the average recorded investment in impaired loans for the periods indicated:

 

 

 

For the three months ended

 

 

For the six months ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

1-4 family first-lien residential mortgages

 

$

1,846

 

 

$

1,416

 

 

$

1,850

 

 

$

1,482

 

Commercial real estate

 

 

4,971

 

 

 

4,508

 

 

 

5,147

 

 

 

4,696

 

Commercial lines of credit

 

 

376

 

 

 

418

 

 

 

433

 

 

 

412

 

Other commercial and industrial

 

 

1,050

 

 

 

984

 

 

 

1,049

 

 

 

997

 

Home equity and junior liens

 

 

208

 

 

 

215

 

 

 

235

 

 

 

305

 

Total

 

$

8,451

 

 

$

7,541

 

 

$

8,714

 

 

$

7,892

 

 

The following table presents the cash basis interest income recognized on impaired loans for the periods indicated:

 

 

 

For the three months ended

 

 

For the six months ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

1-4 family first-lien residential mortgages

 

$

14

 

 

$

10

 

 

$

32

 

 

$

21

 

Commercial real estate

 

 

18

 

 

 

50

 

 

 

66

 

 

 

95

 

Commercial lines of credit

 

 

10

 

 

 

7

 

 

 

21

 

 

 

13

 

Other commercial and industrial

 

 

13

 

 

 

6

 

 

 

19

 

 

 

13

 

Home equity and junior liens

 

 

3

 

 

 

3

 

 

 

6

 

 

 

4

 

Total

 

$

58

 

 

$

76

 

 

$

144

 

 

$

146

 

 

- 24 -


Table of Contents

Note 7:   Allowance for Loan Losses

Summarized in the tables below are changes in the allowance for loan losses for the indicated periods and information pertaining to the allocation of the allowance for loan losses, balances of the allowance for loan losses, loans receivable based on individual, and collective impairment evaluation by loan portfolio class.  An allocation of a portion of the allowance to a given portfolio class does not limit the Company’s ability to absorb losses in another portfolio class.

 

 

 

For the three months ended June 30, 2018

 

 

 

1-4 family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

first-lien

 

 

Residential

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

residential

 

 

construction

 

 

Commercial

 

 

Commercial

 

 

commercial

 

(In thousands)

 

mortgage

 

 

mortgage

 

 

real estate

 

 

lines of credit

 

 

and industrial

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

751

 

 

$

-

 

 

$

3,895

 

 

$

719

 

 

$

1,309

 

Charge-offs

 

 

(74

)

 

 

-

 

 

 

-

 

 

 

(50

)

 

 

(48

)

Recoveries

 

 

-

 

 

 

-

 

 

 

-

 

 

 

66

 

 

 

-

 

Provisions (credits)

 

 

45

 

 

 

-

 

 

 

246

 

 

 

(4

)

 

 

10

 

Ending balance

 

$

722

 

 

$

-

 

 

$

4,141

 

 

$

731

 

 

$

1,271

 

Ending balance: related to loans

   individually evaluated for impairment

 

 

111

 

 

 

-

 

 

 

596

 

 

 

47

 

 

 

276

 

Ending balance: related to loans

   collectively evaluated for impairment

 

$

611

 

 

$

-

 

 

$

3,545

 

 

$

684

 

 

$

995

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

225,864

 

 

$

3,288

 

 

$

206,960

 

 

$

49,314

 

 

$

58,742

 

Ending balance: individually

   evaluated for impairment

 

 

1,844

 

 

 

-

 

 

 

4,530

 

 

 

209

 

 

 

1,038

 

Ending balance: collectively

   evaluated for impairment

 

$

224,020

 

 

$

3,288

 

 

$

202,430

 

 

$

49,105

 

 

$

57,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

and junior liens

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1

 

 

$

507

 

 

$

260

 

 

$

9

 

 

$

7,451

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

(48

)

 

 

-

 

 

 

(220

)

Recoveries

 

 

-

 

 

 

1

 

 

 

10

 

 

 

-

 

 

 

77

 

Provisions (credits)

 

 

-

 

 

 

(74

)

 

 

69

 

 

 

5

 

 

 

297

 

Ending balance

 

$

1

 

 

$

434

 

 

$

291

 

 

$

14

 

 

$

7,605

 

Ending balance: related to loans

   individually evaluated for impairment

 

 

-

 

 

 

141

 

 

 

-

 

 

 

-

 

 

 

1,171

 

Ending balance: related to loans

   collectively evaluated for impairment

 

$

1

 

 

$

293

 

 

$

291

 

 

$

14

 

 

$

6,434

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

9,860

 

 

$

26,262

 

 

$

27,037

 

 

 

 

 

 

$

607,327

 

Ending balance: individually

   evaluated for impairment

 

 

-

 

 

 

207

 

 

 

-

 

 

 

 

 

 

 

7,828

 

Ending balance: collectively

   evaluated for impairment

 

$

9,860

 

 

$

26,055

 

 

$

27,037

 

 

 

 

 

 

$

599,499

 

 


- 25 -


Table of Contents

 

 

For the six months ended June 30, 2018

 

 

 

1-4 family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

first-lien

 

 

Residential

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

residential

 

 

construction

 

 

Commercial

 

 

Commercial

 

 

commercial

 

(In thousands)

 

mortgage

 

 

mortgage

 

 

real estate

 

 

lines of credit

 

 

and industrial

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

865

 

 

$

-

 

 

$

3,589

 

 

$

735

 

 

$

1,214

 

Charge-offs

 

 

(192

)

 

 

-

 

 

 

-

 

 

 

(50

)

 

 

(171

)

Recoveries

 

 

20

 

 

 

-

 

 

 

-

 

 

 

66

 

 

 

-

 

Provisions (credits)

 

 

29

 

 

 

-

 

 

 

552

 

 

 

(20

)

 

 

228

 

Ending balance

 

$

722

 

 

$

-

 

 

$

4,141

 

 

$

731

 

 

$

1,271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

and junior liens

 

 

consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1

 

 

$

514

 

 

$

208

 

 

$

-

 

 

$

7,126

 

Charge-offs

 

 

-

 

 

 

(17

)

 

 

(111

)

 

 

-

 

 

 

(541

)

Recoveries

 

 

-

 

 

 

1

 

 

 

23

 

 

 

-

 

 

 

110

 

Provisions (credits)

 

 

-

 

 

 

(64

)

 

 

171

 

 

 

14

 

 

 

910

 

Ending balance

 

$

1

 

 

$

434

 

 

$

291

 

 

$

14

 

 

$

7,605

 

- 26 -


Table of Contents

 

 

 

 

For the three months ended June 30, 2017

 

 

 

1-4 family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

first-lien

 

 

Residential

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

residential

 

 

construction

 

 

Commercial

 

 

Commercial

 

 

commercial

 

(In thousands)

 

mortgage

 

 

mortgage

 

 

real estate

 

 

lines of credit

 

 

and industrial

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

943

 

 

$

-

 

 

$

2,532

 

 

$

365

 

 

$

1,480

 

   Charge-offs

 

 

(143

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

   Recoveries

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

13

 

   Provisions

 

 

13

 

 

 

-

 

 

 

272

 

 

 

8

 

 

 

119

 

Ending balance

 

$

813

 

 

$

-

 

 

$

2,804

 

 

$

373

 

 

$

1,611

 

Ending balance: related to loans

   individually evaluated for impairment

 

 

193

 

 

 

-

 

 

 

-

 

 

 

7

 

 

 

376

 

Ending balance: related to loans

   collectively evaluated for impairment

 

$

620

 

 

$

-

 

 

$

2,804

 

 

$

366

 

 

$

1,235

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

204,117

 

 

$

6,640

 

 

$

175,737

 

 

$

21,132

 

 

$

74,375

 

Ending balance: individually

   evaluated for impairment

 

 

1,220

 

 

 

-

 

 

 

4,474

 

 

 

421

 

 

 

967

 

Ending balance: collectively

   evaluated for impairment

 

$

202,897

 

 

$

6,640

 

 

$

171,263

 

 

$

20,711

 

 

$

73,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

and junior liens

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1

 

 

$

509

 

 

$

133

 

 

$

1

 

 

$

5,964

 

   Charge-offs

 

 

-

 

 

 

-

 

 

 

(8

)

 

 

-

 

 

 

(152

)

   Recoveries

 

 

-

 

 

 

1

 

 

 

9

 

 

 

-

 

 

 

23

 

   Provisions (credits)

 

 

-

 

 

 

(17

)

 

 

29

 

 

 

(1

)

 

 

423

 

Ending balance

 

$

1

 

 

$

493

 

 

$

163

 

 

$

-

 

 

$

6,258

 

Ending balance: related to loans

   individually evaluated for impairment

 

 

-

 

 

 

142

 

 

 

-

 

 

 

-

 

 

 

718

 

Ending balance: related to loans

   collectively evaluated for impairment

 

$

1

 

 

$

351

 

 

$

163

 

 

$

-

 

 

 

5,540

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

11,446

 

 

$

25,257

 

 

$

30,497

 

 

 

 

 

 

$

549,201

 

Ending balance: individually

   evaluated for impairment

 

 

-

 

 

 

214

 

 

 

-

 

 

 

 

 

 

 

7,296

 

Ending balance: collectively

   evaluated for impairment

 

$

11,446

 

 

$

25,043

 

 

$

30,497

 

 

 

 

 

 

$

541,905

 

 

- 27 -


Table of Contents

 

 

For the six months ended June 30, 2017

 

 

 

1-4 family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

first-lien

 

 

Residential

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

residential

 

 

construction

 

 

Commercial

 

 

Commercial

 

 

commercial

 

(In thousands)

 

mortgage

 

 

mortgage

 

 

real estate

 

 

lines of credit

 

 

and industrial

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

759

 

 

$

-

 

 

$

2,935

 

 

$

397

 

 

$

1,658

 

   Charge-offs

 

 

(156

)

 

 

-

 

 

 

(505

)

 

 

(53

)

 

 

(17

)

   Recoveries

 

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

15

 

   Provisions (credits)

 

 

209

 

 

 

-

 

 

 

374

 

 

 

29

 

 

 

(45

)

Ending balance

 

$

813

 

 

$

-

 

 

$

2,804

 

 

$

373

 

 

$

1,611

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

and junior liens

 

 

consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1

 

 

$

331

 

 

$

166

 

 

$

-

 

 

$

6,247

 

   Charge-offs

 

 

-

 

 

 

(69

)

 

 

(40

)

 

 

-

 

 

 

(840

)

   Recoveries

 

 

-

 

 

 

1

 

 

 

22

 

 

 

-

 

 

 

39

 

   Provisions

 

 

-

 

 

 

230

 

 

 

15

 

 

 

-

 

 

 

812

 

Ending balance

 

$

1

 

 

$

493

 

 

$

163

 

 

$

-

 

 

$

6,258

 

 

The Company’s methodology for determining its allowance for loan losses includes an analysis of qualitative factors that are added to the historical loss rates in arriving at the total allowance for loan losses needed for this general pool of loans.  The qualitative factors include:

 

Changes in national and local economic trends;

 

The rate of growth in the portfolio;

 

Trends of delinquencies and nonaccrual balances;

 

Changes in loan policy; and

 

Changes in lending management experience and related staffing.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation.  These qualitative factors, applied to each product class, make the evaluation inherently subjective, as it requires material estimates that may be susceptible to significant revision as more information becomes available.  Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan losses analysis and calculation.

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Table of Contents

The allocation of the allowance for loan losses summarized on the basis of the Company’s calculation methodology was as follows:

 

 

 

June 30, 2018

 

 

 

1-4 family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

first-lien

 

 

Residential

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

residential

 

 

construction

 

 

Commercial

 

 

Commercial

 

 

commercial

 

(In thousands)

 

mortgage

 

 

mortgage

 

 

real estate

 

 

lines of credit

 

 

and industrial

 

Specifically reserved

 

$

111

 

 

$

-

 

 

$

596

 

 

$

47

 

 

$

276

 

Historical loss rate

 

 

111

 

 

 

-

 

 

 

86

 

 

 

24

 

 

 

17

 

Qualitative factors

 

 

500

 

 

 

-

 

 

 

3,459

 

 

 

660

 

 

 

978

 

Total

 

$

722

 

 

$

-

 

 

$

4,141

 

 

$

731

 

 

$

1,271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

and junior liens

 

 

consumer

 

 

Unallocated

 

 

Total

 

Specifically reserved

 

$

-

 

 

$

141

 

 

$

-

 

 

$

-

 

 

$

1,171

 

Historical loss rate

 

 

-

 

 

 

24

 

 

 

112

 

 

 

-

 

 

 

374

 

Qualitative factors

 

 

1

 

 

 

269

 

 

 

179

 

 

 

-

 

 

 

6,046

 

Other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

14

 

 

 

14

 

Total

 

$

1

 

 

$

434

 

 

$

291

 

 

$

14

 

 

$

7,605

 

 

 

 

June 30, 2017

 

 

 

1-4 family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

first-lien

 

 

Residential

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

residential

 

 

construction

 

 

Commercial

 

 

Commercial

 

 

commercial

 

(In thousands)

 

mortgage

 

 

mortgage

 

 

real estate

 

 

lines of credit

 

 

and industrial

 

Specifically reserved

 

$

193

 

 

$

-

 

 

$

-

 

 

$

7

 

 

$

376

 

Historical loss rate

 

 

75

 

 

 

-

 

 

 

105

 

 

 

39

 

 

 

24

 

Qualitative factors

 

 

545

 

 

 

-

 

 

 

2,699

 

 

 

327

 

 

 

1,211

 

Total

 

$

813

 

 

$

-

 

 

$

2,804

 

 

$

373

 

 

$

1,611

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

and junior liens

 

 

consumer

 

 

Unallocated

 

 

Total

 

Specifically reserved

 

$

-

 

 

$

142

 

 

$

-

 

 

$

-

 

 

$

718

 

Historical loss rate

 

 

-

 

 

 

50

 

 

 

29

 

 

 

-

 

 

 

322

 

Qualitative factors

 

 

1

 

 

 

301

 

 

 

134

 

 

 

-

 

 

 

5,218

 

Total

 

$

1

 

 

$

493

 

 

$

163

 

 

$

-

 

 

$

6,258

 

 

Note 8:   Foreclosed Real Estate

The Company is required to disclose the carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession of the property at each reporting period.

 

(Dollars in thousands)

 

Number of

properties

 

 

June 30,

2018

 

 

Number of properties

 

 

December 31,

2017

 

Foreclosed residential real estate

 

 

4

 

 

$

97

 

 

 

5

 

 

$

468

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2018, the Company reported $1.3 million in residential real estate loans in the process of foreclosure.

 

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Note 9:   Guarantees

 

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Generally, all letters of credit, when issued have expiration dates within one year.  The credit risks involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers.  The Company generally holds collateral and/or personal guarantees supporting these commitments.  The Company had $1.8 million of standby letters of credit as of June 30, 2018.  Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.   The fair value of standby letters of credit was not significant to the Company’s consolidated financial statements.

 

Note 10:   Fair Value Measurements

Accounting guidance related to fair value measurements and disclosures specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs, minimize the use of unobservable inputs, to the extent possible, and considers counterparty credit risk in its assessment of fair value.

The Company used the following methods and significant assumptions to estimate fair value:

Investment securities: The fair values of available-for-sale and marketable equity securities are obtained from an independent third party and are based on quoted prices on nationally recognized securities exchanges where available (Level 1).  If quoted prices are not available, fair values are measured by utilizing matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).  Management made no adjustment to the fair value quotes that were received from the independent third party pricing service. Level 3 securities are assets whose fair value cannot be determined by using observable measures, such as market prices or pricing models. Level 3 assets are typically very illiquid, and fair values can only be calculated using estimates or risk-adjusted value ranges. Management applies known factors, such as currently applicable discount rates, to the valuation of those investments in order to determine fair value at the reporting date.

Impaired loans: Impaired loans are those loans in which the Company has measured impairment based on the fair value of the loan’s collateral or the discounted value of expected future cash flows.  Fair value is generally determined based upon market value evaluations by third parties of the properties and/or estimates by management of working capital collateral or discounted cash flows based upon expected proceeds.  These appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property), and the cost approach.  Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as, changes in absorption rates or market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition.  Such modifications to the appraised values could result in lower

- 30 -


Table of Contents

valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets.  These measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment.  A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.

Foreclosed real estate:  Fair values for foreclosed real estate are initially recorded based on market value evaluations by third parties, less costs to sell (“initial cost basis”).  Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to foreclosed real estate are charged to the allowance for loan losses.  Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash flow analysis.  Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis.  In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as, changes in absorption rates and market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition.  Either change could result in adjustment to lower the property value estimates indicated in the appraisals.  These measurements are classified as Level 3 within the fair value hierarchy.

The following tables summarize assets measured at fair value on a recurring basis as of the indicated dates, segregated by the level of valuation inputs within the hierarchy utilized to measure fair value:

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

Available-for-Sale Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

-

 

 

$

21,035

 

 

$

-

 

 

$

21,035

 

State and political subdivisions

 

 

-

 

 

 

27,988

 

 

 

-

 

 

 

27,988

 

Corporate

 

 

-

 

 

 

13,005

 

 

 

-

 

 

 

13,005

 

Asset backed securities

 

 

-

 

 

 

10,785

 

 

 

-

 

 

 

10,785

 

Residential mortgage-backed - US agency

 

 

-

 

 

 

33,033

 

 

 

-

 

 

 

33,033

 

Collateralized mortgage obligations - US agency

 

 

-

 

 

 

58,120

 

 

 

-

 

 

 

58,120

 

Collateralized mortgage obligations - Private label

 

 

-

 

 

 

19,859

 

 

 

-

 

 

 

19,859

 

Equity investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock - Financial services industry

 

 

-

 

 

 

205

 

 

 

 

 

 

 

205

 

Total available-for-sale securities

 

$

-

 

 

$

184,030

 

 

$

-

 

 

$

184,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

$

-

 

 

$

541

 

 

$

-

 

 

$

541

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

Available-for-Sale Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

-

 

 

$

41,336

 

 

$

-

 

 

$

41,336

 

State and political subdivisions

 

 

-

 

 

 

13,681

 

 

 

-

 

 

 

13,681

 

Corporate

 

 

-

 

 

 

8,600

 

 

 

-

 

 

 

8,600

 

Asset backed securities

 

 

-

 

 

 

6,644

 

 

 

-

 

 

 

6,644

 

Residential mortgage-backed - US agency

 

 

-

 

 

 

35,742

 

 

 

-

 

 

 

35,742

 

Collateralized mortgage obligations - US agency

 

 

-

 

 

 

53,348

 

 

 

-

 

 

 

53,348

 

Collateralized mortgage obligations - Private label

 

 

-

 

 

 

11,052

 

 

 

-

 

 

 

11,052

 

Equity investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock - Financial services industry

 

 

-

 

 

 

220

 

 

 

515

 

 

 

735

 

Total available-for-sale securities

 

$

-

 

 

$

170,623

 

 

$

515

 

 

$

171,138

 

 


- 31 -


Table of Contents

The following table summarizes the valuation techniques and significant unobservable inputs used for the Company's investments that are categorized within Level 3 of the fair value hierarchy at the indicated dates:

 

(In thousands)

 

At December 31, 2017

 

Investment Type

 

Fair Value

 

 

Valuation Techniques

 

Unobservable Input

 

Weight

 

Common Stock - Financial

   Services Industry

 

$

515

 

 

Inputs to comparables

 

Weight ascribed to comparable companies

 

100%

 

 

Pathfinder Bank had the following assets measured at fair value on a nonrecurring basis as of June 30, 2018 and December 31, 2017: 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

Impaired loans

 

$

-

 

 

$

-

 

 

$

1,832

 

 

$

1,832

 

Foreclosed real estate

 

$

-

 

 

$

-

 

 

$

61

 

 

$

61

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

Impaired loans

 

$

-

 

 

$

-

 

 

$

4,887

 

 

$

4,887

 

Foreclosed real estate

 

$

-

 

 

$

-

 

 

$

434

 

 

$

434

 

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value at the indicated dates.

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

Valuation

Unobservable

Range

 

Techniques

Input

(Weighted Avg.)

At June 30, 2018

 

 

 

Impaired loans

Appraisal of collateral

Appraisal Adjustments

5% - 10% (5%)

 

(Sales Approach)

Costs to Sell

7% - 13% (11%)

 

Discounted Cash Flow

 

 

 

 

 

 

Foreclosed real estate

Appraisal of collateral

Appraisal Adjustments

15% - 15% (15%)

 

(Sales Approach)

Costs to Sell

6% - 8% (7%)

 

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

Valuation

Unobservable

Range

 

Techniques

Input

(Weighted Avg.)

At December 31, 2017

 

 

 

Impaired loans

Appraisal of collateral

Appraisal Adjustments

5% - 30% (9%)

 

(Sales Approach)

Costs to Sell

7% - 13% (11%)

 

Discounted Cash Flow

 

 

 

 

 

 

Foreclosed real estate

Appraisal of collateral

Appraisal Adjustments

15% - 15% (15%)

 

(Sales Approach)

Costs to Sell

6% - 8% (7%)

 

The Company owns a small percentage of the common stock of a single, otherwise unaffiliated, financial institution with a fair market value of $541,000 at June 30, 2018.  This financial institution had been recently formed, was relatively limited in the scope of its business activities, and was relatively small in asset size at the time the shares of common stock were initially acquired by the Company.  The shares of this financial institution are not, and have never been, listed on any public stock exchange.  Through December 31, 2017, the Company determined the fair market value of these shares using Level 3 methodologies.  The relatively unique characteristics of the institution precluded the use of significant inputs and value drivers observable in active markets through that date.  During the three months ended March 31, 2018, the Company’s management reevaluated the fair value methodology it had previously used with respect to this investment

- 32 -


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and determined that the institution’s increased size and current business activities had become reasonably comparable over time with applicable peer institutions.   Consequently, relevant significant inputs and value drivers observable in active markets were deemed to be present and available beginning with the three months ended March 31, 2018.  Accordingly, the Company transferred this asset from Level 3 to Level 2 at March 31, 2018 for purposes of the accompanying fair value disclosure. The investment was valued using Level 2 methodologies at June 30, 2018 and it is expected to be valued using Level 2 methodologies prospectively.  There have been no transfers of assets into or out of any fair value measurement during the three months ended June 30, 2018.

Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated statement of condition, for which it is practicable to estimate that value.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

The Company has various processes and controls in place to ensure that fair value is reasonably estimated. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. 

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective period-ends, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.

FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the financial assets and liabilities were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.  

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.  The Company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:

Cash and cash equivalents – The carrying amounts of these assets approximate their fair value and are classified as Level 1.

Investment securities – The fair values of available-for-sale, held-to-maturity and marketable equity securities are obtained from an independent third party and are based on quoted prices on nationally recognized exchange where available (Level 1).  If quoted prices are not available, fair values are measured by utilizing matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).  Management made no adjustment to the fair value quotes that were received from the independent third party pricing service.  Level 3 securities are assets whose fair value cannot be determined by using observable measures, such as market prices or pricing models. Level 3 assets are typically very illiquid, and fair values can only be calculated using estimates or risk-adjusted value ranges. Management applies known factors, such as currently applicable discount rates, to the valuation of those investments in order to determine fair value at the reporting date.

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Table of Contents

Federal Home Loan Bank stock – The carrying amount of these assets approximates their fair value and are classified as Level 2.

Net loans – For variable-rate loans that re-price frequently, fair value is based on carrying amounts.  The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans, and commercial and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality.  Loan value estimates include judgments based on expected prepayment rates.  The measurement of the fair value of loans, including impaired loans, is classified within Level 3 of the fair value hierarchy.

Accrued interest receivable and payable – The carrying amount of these assets approximates their fair value and are classified as Level 1.

Deposits – The fair values disclosed for demand deposits (e.g., interest-bearing and noninterest-bearing checking, passbook savings and certain types of money management accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) and are classified within Level 1 of the fair value hierarchy.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates of deposits to a schedule of aggregated expected monthly maturities on time deposits.  Measurements of the fair value of time deposits are classified within Level 2 of the fair value hierarchy.

Borrowings – Fixed/variable term “bullet” structures are valued using a replacement cost of funds approach.  These borrowings are discounted to the FHLBNY advance curve.  Option structured borrowings’ fair values are determined by the FHLB for borrowings that include a call or conversion option.  If market pricing is not available from this source, current market indications from the FHLBNY are obtained and the borrowings are discounted to the FHLBNY advance curve less an appropriate spread to adjust for the option. These measurements are classified as Level 2 within the fair value hierarchy.

Subordinated loans – The Company secures quotes from its pricing service based on a discounted cash flow methodology or utilizes observations of recent highly-similar transactions which result in a Level 2 classification.

The carrying amounts and fair values of the Company’s financial instruments as of the indicated dates are presented in the following table:

 

 

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

Fair Value

 

Carrying

 

 

Estimated

 

 

Carrying

 

 

Estimated

 

(In thousands)

 

Hierarchy

 

Amounts

 

 

Fair Values

 

 

Amounts

 

 

Fair Values

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

1

 

$

36,740

 

 

$

36,740

 

 

$

21,991

 

 

$

21,991

 

Investment securities - available-for-sale

 

2

 

 

184,030

 

 

 

184,030

 

 

 

170,623

 

 

 

170,623

 

Investment securities - available-for-sale

 

3

 

 

-

 

 

 

-

 

 

 

515

 

 

 

515

 

Investment securities - marketable equity

 

2

 

 

541

 

 

 

541

 

 

 

-

 

 

 

-

 

Investment securities - held-to-maturity

 

2

 

 

26,647

 

 

 

26,244

 

 

 

66,196

 

 

 

66,426

 

Federal Home Loan Bank stock

 

2

 

 

4,388

 

 

 

4,388

 

 

 

3,855

 

 

 

3,855

 

Net loans

 

3

 

 

599,580

 

 

 

587,127

 

 

 

573,705

 

 

 

570,439

 

Accrued interest receivable

 

1

 

 

2,725

 

 

 

2,725

 

 

 

3,047

 

 

 

3,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand Deposits, Savings, NOW and MMDA

 

1

 

$

507,549

 

 

$

507,549

 

 

$

510,176

 

 

$

510,176

 

Time Deposits

 

2

 

 

225,620

 

 

 

223,874

 

 

 

213,427

 

 

 

212,453

 

Borrowings

 

2

 

 

84,103

 

 

 

83,704

 

 

 

73,888

 

 

 

73,575

 

Subordinated loans

 

2

 

 

15,076

 

 

 

14,793

 

 

 

15,059

 

 

 

14,953

 

Accrued interest payable

 

1

 

 

255

 

 

 

255

 

 

 

186

 

 

 

186

 

 

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Note 11:   Interest Rate Derivatives

 

Derivative instruments are entered into by the Company primarily as a risk management tool.  Financial derivatives are recorded at fair value as other liabilities.  The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability are recognized currently in earnings.  For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in other comprehensive income and subsequently reclassified to earnings as the hedged transaction impacts net income.  Any ineffective portion of a cash flow hedge is recognized currently in earnings.     

 

On four occasions during the first half of 2017, the Company sold, and subsequently repurchased, a U.S. Treasury security in the approximate amount of $40.0 million for each transaction.  These transactions were intended to act as hedges against rising short-term interest rates.  The Company was in controlling possession of, but did not own, the securities at the time of each sale. The securities had been received by the Company, under industry-standard repurchase agreements, from an unrelated third party as collateral for a series of 30-day loans of approximately $40.0 million on each occasion which were made at market rates of interest to that third party. The security sale on each occasion provided the funds necessary to advance the loan to the third party and placed the Company in what is generally described as a “short position” with respect to the sold U.S. Treasury security.  These transactions acted as a hedge against rising short-term interest rates because the price of each sold security would be expected to decline in a rising short-term interest rate environment and could therefore be re-acquired at the conclusion of each 30-day loan period at a price lower than the price at which the security was originally sold.  Short-term rates rose over the combined duration of these transactions and, consequently, the Company recognized aggregate gains on the sale and repurchase of the securities in the amounts of $156,000 and $250,000 for the three and six months ended June 30, 2017, respectively.  The transactions’ gains were characterized as capital gains for tax purposes.  These capital gains utilized existing, previously reserved-for, capital loss tax carryforwards that were established in 2013.  The Company recognized tax benefits related to these transactions of $60,000 and $96,000 for the three and six months ended June 30, 2017, respectively.  The tax benefits arose from the reversal of reserves established in 2013 against the portion of the Company’s deferred tax asset related to existing capital loss carryforward positions.  The reserves were originally established due to the uncertainty of the Company’s ability to generate future capital gain income within the five-year statutory life of the capital loss carryforward position under the Internal Revenue Code. The recognized tax benefit from the reversal of those reserves reduced the Company’s effective tax rate from what would have been 26.7% to 21.3% in the second quarter of 2017 and from would have been 27.1% to 22.6% for the six months ended June 30, 2017.  

 

The capital gain income and the additional recognized tax benefits derived from these transactions during the three months ended June 30, 2017, were partially offset by an additional $137,000 in after-tax interest expense on borrowings derived from additional pre-tax interest expense on those borrowings of $222,000 that reduced pretax net interest margin by that amount in the three-month period.  The capital gain income and the additional recognized tax benefits derived from these transactions were partially offset by an additional $266,000 in after-tax interest expense on borrowings derived from additional pre-tax interest expense on borrowings of $430,000 that reduced pretax net interest margin by that amount in the six-month period.  In total, after-tax net income increased by $79,000 and $80,000 for the three and six months ended June 30, 2017, respectively, as a result of these hedging transactions. The Company did not have any hedging activities in the first half of 2018.     

 

The Company adopted ASU 2017-12: Derivatives and Hedging [Topic 815]: Targeted Improvements to Accounting for Hedging Activities, effective January 1, 2018, in the second quarter of 2018.  The amended guidance within this Update expands and clarifies hedge accounting for nonfinancial and financial risk components, aligns the recognition and presentation of the effects of the hedging instrument and hedged item in the financial statements, and simplifies the requirements for assessing effectiveness in a hedging relationship.  The Company did not have any hedging activities in the first half of 2018 but expects to utilize hedging in the future to improve the management of its risk profiles.  In order to facilitate potential future hedging activities, the Company transferred 52 investment securities with an aggregate amortized cost before transfer of $35.2 million from the held-to-maturity classification to the available-for-sale classification at the date of adoption.

 

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Note 12:   Accumulated Other Comprehensive Income (Loss)

 

Changes in the components of accumulated other comprehensive income (loss) (“AOCI”), net of tax, for the periods indicated are summarized in the table below.

 

 

 

For the three months ended June 30, 2018

 

(In thousands)

 

Retirement

Plans

 

 

Unrealized Gains and

Losses on Available-

for-Sale Securities

 

 

Unrealized Loss on

Securities Transferred

to Held-to-Maturity

 

 

Total

 

Beginning balance

 

$

(2,188

)

 

$

(2,410

)

 

$

(414

)

 

$

(5,012

)

Other comprehensive income before reclassifications

 

 

-

 

 

 

(854

)

 

 

347

 

 

 

(507

)

Amounts reclassified from AOCI

 

 

32

 

 

 

16

 

 

 

-

 

 

 

48

 

Ending balance

 

$

(2,156

)

 

$

(3,248

)

 

$

(67

)

 

$

(5,471

)

 

 

 

 

For the three months ended June 30, 2017

 

(In thousands)

 

Retirement

Plans

 

 

Unrealized Gains and

Losses on Available-

for-Sale Securities

 

 

Unrealized Loss on

Securities Transferred

to Held-to-Maturity

 

 

Total

 

Beginning balance

 

$

(1,490

)

 

$

(1,275

)

 

$

(442

)

 

$

(3,207

)

Other comprehensive income before reclassifications

 

 

-

 

 

 

832

 

 

 

13

 

 

 

845

 

Amounts reclassified from AOCI

 

 

22

 

 

 

(80

)

 

 

-

 

 

 

(58

)

Ending balance

 

$

(1,468

)

 

$

(523

)

 

$

(429

)

 

$

(2,420

)

 

 

 

 

For the six months ended June 30, 2018

 

(In thousands)

 

Retirement

Plans

 

 

Unrealized Gains and

Losses on Available-

for-Sale Securities

 

 

Unrealized Loss on

Securities Transferred

to Held-to-Maturity

 

 

Total

 

Beginning balance

 

$

(2,220

)

 

$

(1,558

)

 

$

(430

)

 

$

(4,208

)

Other comprehensive income before reclassifications

 

 

-

 

 

 

(1,848

)

 

 

120

 

 

 

(1,728

)

Amounts reclassified from AOCI

 

 

64

 

 

 

95

 

 

 

-

 

 

 

159

 

Cumulative effect of change in measurement of equity

   securities (1)

 

 

-

 

 

 

(53

)

 

 

-

 

 

 

(53

)

Cumulative effect of change in investment securities transfer (2)

 

 

-

 

 

 

116

 

 

 

243

 

 

 

359

 

Ending balance

 

$

(2,156

)

 

$

(3,248

)

 

$

(67

)

 

$

(5,471

)

 

(1)

Cumulative effect of unrealized gain on marketable equity securities based on the adoption of ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities.

 

 

(2)

Cumulative effect of unrealized gains on the transfer of 52 investment securities from held-to-maturity classification to available-for-sale classification based on the adoption of ASU 2017-12: Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.

 

 

 

 

 

For the six months ended June 30, 2017

 

(In thousands)

 

Retirement

Plans

 

 

Unrealized Gains and

Losses on Available-

for-Sale Securities

 

 

Securities

reclassified from

AFS to HTM

 

 

Total

 

Beginning balance

 

$

(1,513

)

 

$

(1,845

)

 

$

(464

)

 

$

(3,822

)

Other comprehensive income before reclassifications

 

 

-

 

 

 

1,445

 

 

 

35

 

 

 

1,480

 

Amounts reclassified from AOCI

 

 

45

 

 

 

(123

)

 

 

-

 

 

 

(78

)

Ending balance

 

$

(1,468

)

 

$

(523

)

 

$

(429

)

 

$

(2,420

)

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Table of Contents

 

The following table presents the amounts reclassified out of each component of AOCI for the indicated period:

 

 

 

Amount Reclassified

 

 

 

 

Amount Reclassified

 

 

 

from AOCI (1)

 

 

 

 

from AOCI1

 

 

 

(Unaudited)

 

 

 

 

(Unaudited)

 

(In thousands)

 

For the three months ended

 

 

 

 

For the six months ended

 

Details about AOCI (1) components

 

June 30, 2018

 

 

June 30, 2017

 

 

Affected Line Item in the Statement of Income

 

June 30, 2018

 

 

June 30, 2017

 

Retirement plan items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement plan net losses

   recognized in plan expenses (2)

 

$

(43

)

 

$

(37

)

 

Salaries and employee benefits

 

$

(86

)

 

$

(73

)

Tax effect

 

 

11

 

 

 

15

 

 

Provision for income taxes

 

 

22

 

 

 

28

 

 

 

$

(32

)

 

$

(22

)

 

Net Income

 

$

(64

)

 

$

(45

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gain on sale of securities

 

$

(22

)

 

$

135

 

 

Net gains on sales and redemptions of

   investment securities

 

$

(129

)

 

$

206

 

Tax effect

 

 

6

 

 

 

(55

)

 

Provision for income taxes

 

 

34

 

 

 

(83

)

 

 

$

(16

)

 

$

80

 

 

Net Income

 

$

(95

)

 

$

123

 

 

(1) Amounts in parentheses indicates debits in net income.

(2) These items are included in net periodic pension cost.  

      See Note 5 for additional information.

 


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Note 13: Noninterest Income

 

The Company adopted the revenue recognition guidance effective January 1, 2018, and applied the new accounting guidance using a modified retrospective approach for reporting purposes.  A significant amount of the Company’s revenues are derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance.

 

The Company recognizes revenue as it is earned.  The adoption of ASU 2014-09 required that credit card interchange revenue be presented net of rewards expense in noninterest income.  For the three months ended June 30, 2018 and 2017, the Company recognized credit cards reward program expense as a reduction of noninterest income in the amounts of $24,000 and $13,000, respectively.  For the six months ended June 30, 2018 and 2017, the Company recognized credit cards reward program expense as a reduction of noninterest income in the amounts of $38,000 and $39,000, respectively.

 

The Company has included the following table regarding the Company’s noninterest income for the periods presented.

 

 

 

 

For the three months

 

 

For the six months

 

 

 

ended June 30,

 

 

ended June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insufficient funds fees

 

$

200

 

 

$

205

 

 

$

400

 

 

$

394

 

Deposit related fees

 

 

48

 

 

 

44

 

 

 

99

 

 

 

95

 

ATM fees

 

 

25

 

 

 

25

 

 

 

48

 

 

 

48

 

    Total service fees

 

 

273

 

 

 

274

 

 

 

547

 

 

 

537

 

Fee Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance commissions

 

 

234

 

 

 

234

 

 

 

460

 

 

 

451

 

Investment services revenue

 

 

83

 

 

 

65

 

 

 

149

 

 

 

146

 

ATM fees surcharge

 

 

61

 

 

 

60

 

 

 

106

 

 

 

106

 

Banking house rents collected

 

 

36

 

 

 

31

 

 

 

66

 

 

 

55

 

    Total fee income

 

 

414

 

 

 

390

 

 

 

781

 

 

 

758

 

Card income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debit card interchange fees

 

 

148

 

 

 

147

 

 

 

291

 

 

 

268

 

Merchant card fees

 

 

20

 

 

 

12

 

 

 

33

 

 

 

25

 

    Total card income

 

 

168

 

 

 

159

 

 

 

324

 

 

 

293

 

Mortgage fee income and realized gain on sale of loans

  and foreclosed real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing fees

 

 

42

 

 

 

32

 

 

 

83

 

 

 

68

 

Net gains (losses) on sales of loans and foreclosed real estate

 

 

13

 

 

 

(21

)

 

 

16

 

 

 

(45

)

Total mortgage fee income and realized gain on sale of

   loans and foreclosed real estate

 

 

55

 

 

 

11

 

 

 

99

 

 

 

23

 

Total

 

 

910

 

 

 

834

 

 

 

1,751

 

 

 

1,611

 

Earnings and gain on bank owned life insurance

 

 

108

 

 

 

62

 

 

 

181

 

 

 

133

 

Net (losses) gains on sales and redemptions of investment

   securities

 

 

(22

)

 

 

135

 

 

 

(129

)

 

 

206

 

Gains on equity securities

 

 

13

 

 

 

-

 

 

 

26

 

 

 

-

 

Other miscellaneous income

 

 

15

 

 

 

19

 

 

 

90

 

 

 

37

 

Total noninterest income

 

$

1,024

 

 

$

1,050

 

 

$

1,919

 

 

$

1,987

 

 

The following is a discussion of key revenues within the scope of the new revenue guidance:

 

Service fees – Revenue is earned through insufficient funds fees, customer initiated activities or passage of time for deposit related fees, and ATM service fees. Transaction-based fees are recognized as the time the transaction is executed, which is the same time the Company’s performance obligation is satisfied.  Account maintenance fees are earned over the course of the month as the monthly maintenance performance obligation to the customer is satisfied.

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Fee income – Revenue is earned through commissions on insurance, investment products and investment advisory services, ATM surcharge fees, and banking house rents collected.  The Company earns investment advisory services fee income by providing investment management services to customers under investment management contracts.  As investment management services are provided over time, the performance obligation to customers is satisfied over time, and therefore, revenue is recognized over time.    

 

Card income – Card income consists of interchange fees from consumer debit card networks and other related services.  Interchange rates are set by the card networks.  Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur.

 

Mortgage fee income and realized gain on sale of loans and foreclosed real estate – Revenue from mortgage fee income and realized gain on sale of loans and foreclosed real estate is earned through the origination of residential and commercial mortgage loans, sales of one-to-four family residential mortgage loans and sales of foreclosed real estate, and is earned as the individual transactions occur.

 

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)

General

The Company is a Maryland corporation headquartered in Oswego, New York.  The Company is 100% owned by public shareholders.  The primary business of the Company is its investment in Pathfinder Bank (the "Bank"), a New York State chartered commercial bank, which is 100% owned by the Company.  The Bank has two wholly owned operating subsidiaries, Pathfinder Risk Management Company, Inc. (“PRMC”) and Whispering Oaks Development Corp. All significant inter-company accounts and activity have been eliminated in consolidation.  Although the Company owns, through its subsidiary PRMC, 51% of the membership interest in FitzGibbons Agency, LLC (“Agency”), the Company is required to consolidate 100% of FitzGibbons within the consolidated financial statements.  The 49% of which the Company does not own is accounted for separately as noncontrolling interests within the consolidated financial statements.  At June 30, 2018, the Company and subsidiaries had total consolidated assets of $903.5 million, total consolidated liabilities of $840.6 million and shareholders' equity of $62.6 million plus noncontrolling interest of $252,000, which represents the 49% of FitzGibbons not owned by the Company.

The following discussion reviews the Company's financial condition at June 30, 2018 and the results of operations for the three and six month periods ended June 30, 2018 and 2017. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

The following material under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is written with the presumption that the users of the interim financial statements have read, or have access to, the Company's latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2018 (“the consolidated annual financial statements”) as of December 31, 2017 and 2016 and for the two years then ended.  Therefore, only material changes in financial condition and results of operations are discussed in the remainder of Item 2.

Statement Regarding Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:

 

Credit quality and the effect of credit quality on the adequacy of our allowance for loan losses;

 

Deterioration in financial markets that may result in impairment charges relating to our securities portfolio;

 

Competition in our primary market areas;

 

Changes in interest rates and national or regional economic conditions;

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Table of Contents

 

Changes in monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;

 

Significant government regulations, legislation and potential changes thereto;

 

A reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;

 

Increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;

 

Cyberattacks, computer viruses and other technological threats that may breach the security of our websites or other systems;

 

Technological changes that may be more difficult or expensive than expected;

 

Limitations on our ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations; and

 

Other risks described herein and in the other reports and statements we file with the SEC.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Application of Critical Accounting Policies

The Company's consolidated annual financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow practices within the banking industry.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated annual financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.  Certain accounting policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported.  Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event.  Carrying assets and liabilities at fair value inherently results in more financial statement volatility.  The fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices or are provided by unaffiliated third-party sources, when available.  When third party information is not available, valuation adjustments are estimated in good faith by management.

The most significant accounting policies followed by the Company are presented in Note 1 to the annual audited consolidated financial statements.  These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated annual financial statements and how those values are determined.  Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the allowance for loan losses, deferred income taxes, pension obligations, the evaluation of investment securities for other than temporary impairment, the estimation of fair values for accounting and disclosure purposes, and the evaluation of goodwill for impairment to be the accounting areas that require the most subjective and complex judgments.  These areas could be the most subject to revision as new information becomes available.

The allowance for loan losses represents management's estimate of probable loan losses inherent in the loan portfolio.  Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment on the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.

Our Allowance for Loan and Lease Losses policy establishes criteria for selecting loans to be measured for impairment based on the following:

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Residential and Consumer Loans:

 

 

All loans rated substandard or worse, on nonaccrual, and above our total related credit (“TRC”) threshold balance of $300,000.

 

All Troubled Debt Restructured Loans

 

Commercial Lines and Loans, Commercial Real Estate and Tax-exempt loans:

 

 

All loans rated substandard or worse, on nonaccrual, and above our TRC threshold balance of $100,000.

 

All Troubled Debt Restructured Loans  

 

Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses as compared to the loan carrying value.  For all other loans and leases, the Company uses the general allocation methodology that establishes an allowance to estimate the probable incurred loss for each risk-rating category.  

Deferred income tax assets and liabilities are determined using the liability method.  Under this method, the net deferred tax asset or liability is recognized for the future tax consequences.  This is attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating and capital loss carry forwards.  Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.  If current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is established.  The judgment about the level of future taxable income, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and business factors change.  No valuation allowances were maintained at June 30, 2018 and December 31, 2017.  The Tax Cuts and Jobs Act of 2017 (“Tax Act”), which was effective on January 1, 2018, reduced the Company’s corporate federal tax rate from 34% to 21%, starting on that date, and affected the valuation of its net deferred tax assets calculated under GAAP, at December 31, 2017. The Company’s effective tax rate differs from the federal statutory tax rate due primarily to tax-exempt income from specific types of investment securities and loans, and bank owned life insurance.  The Company’s effective New York State tax rate differs from the state statutory tax rate of 6.5% due primarily to state tax-exempt income that can now be calculated under a newly-available modification of the state’s tax laws.  This modification allows the Company to exclude up to 50% of interest income derived from qualified lending activities within the State from its state taxable income.  The exclusion of this substantial portion of interest income from the Company’s New York State tax calculation significantly reduces the Company’s state income-based tax to a level where only immaterial capital-based or minimum franchise taxes apply.  

We maintain a noncontributory defined benefit pension plan covering most employees. The plan provides defined benefits based on years of service and final average salary. On May 14, 2012, we informed our employees of our decision to freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan.  Pension and post-retirement benefit plan liabilities and expenses are based upon actuarial assumptions of future events; including fair value of plan assets, interest rates, and the length of time the Company will have to provide those benefits.  The assumptions used by management are discussed in Note 14 to the consolidated annual financial statements.  

The Company carries all of its available-for-sale investments at fair value with any unrealized gains or losses reported, net of tax, as an adjustment to shareholders' equity and included in accumulated other comprehensive income (loss), except for the credit-related portion of debt securities impairment losses and OTTI of equity securities which are charged to earnings.  The Company's ability to fully realize the value of its investments in various securities, including corporate debt securities, is dependent on the underlying creditworthiness of the issuing organization.  In evaluating the debt securities (both available-for-sale and held-to-maturity) portfolio for other-than-temporary impairment losses, management considers (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) if the present value of expected cash flows is not sufficient to recover

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the entire amortized cost basis. When the fair value of a held-to-maturity or available-for-sale security is less than its amortized cost basis, an assessment is made as to whether OTTI is present.  The Company considers numerous factors when determining whether a potential OTTI exists and the period over which the debt security is expected to recover.  The principal factors considered are (1) the length of time and the extent to which the fair value has been less than the amortized cost basis, (2) the financial condition of the issue and (guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (3) failure of the issuer of the security to make scheduled interest or principal payments, (4) any changes to the rating of the security by a NRSRO, and (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

The estimation of fair value is significant to several of our assets; including loans, available-for-sale and marketable equity investment securities, intangible assets, foreclosed real estate, and the value of loan collateral when valuing impaired loans.  These are all recorded at either fair value, or the lower of cost or fair value. Fair values are determined based on third party sources, when available.  Furthermore, accounting principles generally accepted in the United States require disclosure of the fair value of financial instruments as a part of the notes to the annual audited consolidated financial statements.  Fair values on our available-for-sale securities may be influenced by a number of factors; including market interest rates, prepayment speeds, discount rates, and the shape of yield curves.

Fair values for securities available-for-sale are obtained from unaffiliated third party pricing services.  Where available, fair values are based on quoted prices on a nationally recognized securities exchange.  If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management made no adjustments to the fair value quotes that were provided by the pricing sources. Fair values for marketable equity securities are based on quoted prices on a nationally recognized securities exchange for similar benchmark securities.  The fair values of foreclosed real estate and the underlying collateral value of impaired loans are typically determined based on evaluations by third parties, less estimated costs to sell.  When necessary, appraisals are updated to reflect changes in market conditions. On January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2016-01: Financial Instruments – Overall [Subtopic 825-10]: Recognition and Measurement of Financial Assets and Financial Liabilities.  The ASU requires the use of exit pricing in disclosures related to the fair value of financial instruments.  Accordingly, at June 30, 2018, the financial assets and liabilities of the Company were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred. The adoption of the ASU did not materially affect the fair value evaluations of the financial assets and financial liabilities of the Company at the adoption date. Further information on the estimation of fair values can be found in Note 22 to the consolidated annual financial statements.

Management performs an evaluation of our goodwill for possible impairment of the recorded value of goodwill for each of our reporting units at fiscal each year end or if events or circumstances warrant an evaluation. Based on the results of the December 31, 2017 evaluation, management has determined that the carrying value of goodwill was not impaired as of that date. No events or circumstances arose during the six months ended June 30, 2018 to adversely affect the Company’s recorded goodwill. The evaluation approach is described in Note 10 of the consolidated annual financial statements.

Recent Events

On June 29, 2018, the Company announced that the Board of Directors declared a quarterly cash dividend of $0.06 per common share.  The dividend is payable on August 10, 2018 to shareholders of record on July 20, 2018.

Overview and Results of Operations

The following represents the significant highlights of the Company’s operating results between the second quarter of 2018 and the second quarter of 2017.

 

Net income increased $25,000, or 2.7%, to $945,000.

 

Basic and diluted earnings per share each remained unchanged at $0.23 and $0.22 per share, respectively.

 

Return on average assets decreased three basis points to 0.43% as the increase in average assets outpaced the increase in net income.

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Net interest income, after provision for loan losses, increased $1.0 million, or 19.6% to $6.2 million.  This increase in earnings was primarily due to the increase in average balances of interest-earning assets and an increase in the average yield earned on those assets of 34 basis points.

 

Net interest margin increased by 14 basis points to 3.07%, primarily as a result of a 34 basis point increase in the average yield earned on interest-earning assets.

 

The effective income tax rate decreased 7.0% to 14.3% for the three months ended June 30, 2018 as compared to 21.3% for the same three month period in 2017.  This eduction in the effective tax rate was primarily the result of the combined effects of the Tax Act and changes to the New York State tax code that became effective on January 1, 2018.

The following represents significant highlights of the Company’s operating results between the first six months of 2018 and the first six months of 2017.

Net income improved by $229,000, or 13.3%, to $1.9 million.

Basic and diluted earnings per share each improved by $0.05 to $0.47 and $0.46 per share, respectively.  

 

Return on average assets increased by one basis point to 0.44% as the increase in the Company’s net income slightly outpaced the increase in average assets.

 

Net interest income, after provision for loan losses, increased by $1.7 million, or 16.4%, to $12.0 million.  This increase in earnings was primarily due to the increase in average balances of interest earning assets, accompanied by an increase in the yield earned on interest-earning assets.

 

Net interest margin increased by 10 basis points to 3.05%, primarily as a result of a 25 basis point increase in average yields earned on investments and loans in aggregate.

 

The effective income tax rate decreased 7.5% to 15.1% for the six months ended June 30, 2018 as compared to 22.6% for the same six month period in 2017.  This reduction in the effective tax rate was primarily the result of the combined effects of the Tax Act and changes to the New York State tax code that became effective on January 1, 2018.

The following reflects the significant changes in financial condition between the periods of December 31, 2017 and June 30, 2018.  In addition, the following reflects significant changes in asset quality metrics between June 30, 2017 and June 30, 2018.

 

Total assets increased $22.2 million, or 2.5% to $903.5 million at June 30, 2018, as compared to December 31, 2017, primarily due to increases in loans and cash and cash equivalents partially offset by a decrease in investment securities.  These increases were funded largely by increases in long-term borrowing from the FHLB and increases in deposits, including brokered deposits, as well as the cash flow from the sale and maturity of investment securities.

 

Asset quality metrics remained stable in comparison to recent reporting periods and are comparable to peer group averages. The Company’s consistent asset quality metrics are reflective of its disciplined risk management process, along with the relative economic stability of its Central New York State market area. During the first quarter of 2018, a single commercial real estate loan with an outstanding balance of $1.7 million was added to nonperforming assets.  This loan currently is expected to be financed with a new borrower and no materially significant additional losses are anticipated beyond the specific reserves previously recorded during the fourth quarter of 2017 and the second quarter of 2018.  Primarily as a result of this addition, nonperforming loans to total loans increased to 0.90% at June 30, 2018, compared to 0.84% at December 31, 2017, and 0.80% at June 30, 2017.  Correspondingly, the ratio of the allowance for loan losses to nonperforming loans for second quarter 2018 was 139.7%, as compared to 145.6% at December 31, 2017 and 142.5% at June 30, 2017. Annualized net loan charge-offs to average loans ratio remained favorable and was 0.14% for the second quarter of 2018, compared to 0.16% for the fourth quarter of 2017 and 0.31% for the second quarter of 2017.

The Company had net income of $945,000 for the three months ended June 30, 2018 compared to net income of $920,000 for the three months ended June 30, 2017.  The $25,000 increase in net income was due primarily to a $1.4 million increase in interest and dividend income, a decrease of $126,000 in provision for loan losses and a $72,000 decrease in

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income tax expense.  These increases were partially offset by a $1.1 million increase in noninterest expense, a $546,000 increase in interest expense, and a decrease in noninterest income of $26,000.  

Net interest income before the provision for loan losses increased $886,000, or 15.9%, to $6.5 million for the three months ended June 30, 2018 as compared to $5.6 million for the same three month period in 2017.  The increase was primarily the result of the increase in average interest-earning asset balances due to increases in average loans, and average taxable and tax-exempt investment securities.  The positive effects of increased average interest-earning assets for the three months ended June 30, 2018, as compared to the same three month period in 2017, were also enhanced by an increase in the average yield of those assets of 34 basis points to 4.05% for the three months ended June 30, 2018 from 3.71% for the same three month period of the previous year. This increase in net interest income was partially offset by an increase in the average balance and average cost of interest-bearing liabilities between the year-over-year second quarter periods.  

 

The $26,000, or 2.5%, decrease in noninterest income in the quarter ended June 30, 2018, as compared to the same quarterly period in 2017, was primarily the result of a net decrease of $157,000 in the net gains on the sales and redemptions of investment securities from a gain of $135,000 for the three months ended June 30, 2017 to a net loss of $22,000 for the same quarter in 2018.  The net gains on investment securities during the quarter ended June 30, 2017 were primarily the result of $94,000 in net gains recorded on short-term interest rate hedging activities in that period.  There were no hedging activities of this type in the three months ended June 30, 2018.  During the three months ended June 30, 2018, Company-initiated sales and issuer-initiated redemptions of investment securities in the amount of $11.4 million, generated a net loss of $22,000, or 0.19%.  The investment securities sales were part of the Company’s portfolio optimization and liquidity management strategies. It is the intention of management to reinvest the proceeds of these investment securities transactions into potentially higher yielding interest-earning assets in future periods.

Excluding the effects of the quarter over quarter reduction in gains on the sale of investment securities, all other noninterest income categories increased in the aggregate by $131,000, or 14.3% to $1.0 million in the quarter ended June 30, 2018 as compared with $915,000 in the same quarter of 2017.  This $131,000 quarter over quarter increase in noninterest income, excluding the effects of gains on the sales and redemptions of investment securities, was due primarily to increases of $46,000 in earnings and gains on bank owned life insurance, $34,000 net gains on sales of loans and foreclosed real estate, and $28,000 in other charges, commissions and fees.The $26,000 decrease in noninterest income in the quarter ended June 30, 2018, as compared to the same quarterly period in 2017, was primarily the result of a decrease of $157,000 in gains on the sales and redemptions of investment securities.  Absent the effects of the quarter over quarter reduction in gains on the sale of investment securities, all other noninterest income categories increased by $131,000, or 14.3% to $1.0 million in the quarter ended June 30, 2018 as compared with $915,000 in the same quarter of 2017.  

The $1.1 million increase in noninterest expense in the quarter ended June 30, 2018, as compared to the same quarterly period in 2017, was due primarily to an increase of $610,000, or 21.6%, in salaries and employee benefits expense that reflected an increase in staffing levels intended to meet increased loan demand and to better serve customers and potential customers as the Bank’s operations continue to expand primarily into Onondaga County, New York.  In addition, professional and other services increased $186,000, advertising expenses increased $113,000, data processing increased $60,000, and FDIC assessments increased $54,000.  All other noninterest expense categories increased $93,000, or 7.1%, in aggregate during the quarter ended June 30, 2018, as compared to the same three month period in 2017.

The $126,000 decrease in the provision for loan losses in the quarter ended June 30, 2018, as compared with the same quarter of 2017, was primarily due to improvements in the majority of credit quality metrics throughout the loan portfolio.  The ratio of delinquent loans to total loans improved to 1.29% at June 30, 2018 as compared to 2.12% at December 31, 2017 as a result of a decrease in total delinquent loans to $7.8 million at June 30, 2018 as compared to $12.3 million at June 30, 2017.  Partially offsetting the effects of these improvements in credit quality metrics was the increase in the estimable and probable loan losses inherent in the loan portfolio due to increases of $68.4 million, or 12.7%, in average loan balances in the second quarter of 2018 as compared with the same quarter of 2017.

In comparing the year-over-year second quarter periods, the return on average assets decreased three basis points to 0.43% due to the combined effects of the increase in net income (the numerator in the ratio) and the increase in average assets (the denominator in the ratio).  Average assets increased due to increases in average loans, and average taxable and tax-

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exempt investment securities of $68.4 million and $8.1 million, respectively, in the second quarter of 2018 as compared to the same quarter of 2017.  Average interest-bearing deposits increased $56.4 million in the second quarter of 2018, as compared with the same quarter in 2017, due to increased brokered and consumer deposits, and increased commercial deposits resulting in part from new loan account relationships, particularly in Onondaga County. These increases in average deposits were partially offset by decreases in municipal deposits that are considered to be seasonal in nature.

The Company had net income of $1.9 million for the six months ended June 30, 2018 compared to net income of $1.7 million for the six months ended June 30, 2017.  The $229,000 increase in net income available to common shareholders was due primarily to a $2.8 million increase in interest and dividend income, and a $135,000 decrease in income tax expense, partially offset by an increase of $1.6 million in noninterest expense, a $989,000 increase in interest expense, an increase of $98,000 in provision for loan losses, and a $68,000 decrease in noninterest income.  

Net interest income before the provision for loan losses increased $1.8 million, or 16.1%, to $12.9 million for the six months ended June 30, 2018 as compared to the same six month period in the previous year.  The increase was a result of the increase in average balances on loans and taxable investment securities and an increase in the average yield earned on those balances, partially offset by an increase in the average balance and average cost of interest-bearing liabilities between the year-over-year six month periods.

 

The $68,000, or 3.4% decrease in noninterest income in the six months ended June 30, 2018, as compared to the same six month period in 2017, was primarily the result of a net decrease of $335,000 in the net gains on the sales and redemptions of investment securities from a gain of $206,000 for the six months ended June 30, 2017 to a net loss of $129,000 for the same six month period in 2018.  The net gains on investment securities during the six months ended June 30, 2017 were primarily the result of $250,000 in net gains recorded on short-term interest rate hedging activities in that period. There were no hedging activities of this type in the six months ended June 30, 2018.  During the six months ended June 30, 2018, Company-initiated sales and issuer-initiated redemptions of investment securities in the amount of $29.2 million, generated a net loss of $129,000, or 0.44%.  The investment securities sales were part of the Company’s portfolio optimization and liquidity management strategies. It is the intention of management to reinvest the proceeds of these investment securities transactions into potentially higher yielding interest-earning assets in future periods.

 

Excluding the effects of the period over period reduction in gains on the sale of investment securities, all other noninterest income categories increased in the aggregate by $267,000, or 15.0% to $2.0 million in the six months ended June 30, 2018 as compared with $1.8 million in the same six month period of 2017.  This $267,000 period over period increase in noninterest income, excluding the effects of gains on the sales and redemptions of investment securities, was due primarily to increases of $84,000 in other charges, commissions and fees, $61,000 net gains on sales of loans and foreclosed real estate, and $48,000 in earnings and gains on bank owned life insurance.

 

The $1.6 million increase in noninterest expense was due primarily to an increase of $844,000, or 14.9%, in salary and employee benefits expense that reflected in part an increase in staffing levels intended to meet increased loan demand and to better serve customers and potential customers as the Bank’s operations continue to expand into Onondaga County.  In addition, professional and other services expense increased $326,000, advertising expense increased $128,000, FDIC assessments increased $118,000 and data processing expense increased $112,000.  All other noninterest expense categories increased $74,000, or 2.9%, in aggregate for the six month period ended June 30, 2018, as compared to the same six month period in 2017.

For the three months ended June 30, 2018, we recorded $297,000 in provision for loan losses as compared to $423,000 in the same prior year three month period.  This $126,000 decrease in the provision for loan losses was due principally to favorable changes to both the quantitative and environmental factors assigned to the Bank’s loan portfolio in aggregate, partially offset by $68.4 million, or 12.7%, increase in average loan balances in the first three months of 2018 as compared with the same three month period of 2017 and the resultant increase in the estimable and probable loan losses inherent in the loan portfolio.

For the first six months of 2018, we recorded $910,000 in provision for loan losses as compared to $812,000 in the same prior year six month period.  This $98,000 increase in the provision for loan losses was due principally to the $77.5 million, or 14.8%, increase in average loan balances in the first six months of 2018 as compared with the same six month period of 2017 and the resultant increase in the estimable and probable loan losses inherent in the loan portfolio, partially

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offset by favorable changes to both the quantitative and environmental factors assigned to the Bank’s loan portfolio in aggregate.

Return on average assets increased one basis point to 0.44% between the year-over-year six month periods as the net income increases in the six month period ended June 30, 2018 (the numerator of the ratio) increased by a slightly higher percentage than did total average assets (the denominator of the ratio) during the period.

Net Interest Income

Net interest income is the Company's primary source of operating income for payment of operating expenses and providing for loan losses.  It is the amount by which interest earned on loans, interest-earning deposits, and investment securities, exceeds the interest paid on deposits and other interest-bearing liabilities.  Changes in net interest income and net interest margin result from the interaction between the volume and composition of interest-earning assets, interest-bearing liabilities, related yields, and associated funding costs.

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The following tables set forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated.  Interest income and resultant yield information in the tables has not been adjusted for tax equivalency.  Averages are computed on the daily average balance for each month in the period divided by the number of days in the period. Yields and amounts earned include loan fees. Nonaccrual loans have been included in interest-earning assets for purposes of these calculations.

 

 

 

For the three months ended June 30,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

Average

 

 

 

 

 

 

Yield /

 

 

Average

 

 

 

 

 

 

Yield /

 

(Dollars in thousands)

 

Balance

 

 

Interest

 

 

Cost

 

 

Balance

 

 

Interest

 

 

Cost

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

607,286

 

 

$

7,018

 

 

 

4.62

%

 

$

538,926

 

 

$

5,869

 

 

 

4.36

%

Taxable investment securities

 

 

186,147

 

 

 

1,232

 

 

 

2.65

%

 

 

182,489

 

 

 

875

 

 

 

1.92

%

Tax-exempt investment securities

 

 

33,302

 

 

 

217

 

 

 

2.61

%

 

 

28,880

 

 

 

312

 

 

 

4.32

%

Fed funds sold and interest-earning deposits

 

 

15,135

 

 

 

49

 

 

 

1.30

%

 

 

12,845

 

 

 

28

 

 

 

0.87

%

Total interest-earning assets

 

 

841,870

 

 

 

8,516

 

 

 

4.05

%

 

 

763,140

 

 

 

7,084

 

 

 

3.71

%

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

55,763

 

 

 

 

 

 

 

 

 

 

 

50,724

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(7,544

)

 

 

 

 

 

 

 

 

 

 

(6,062

)

 

 

 

 

 

 

 

 

Net unrealized losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  on available-for-sale securities

 

 

(3,876

)

 

 

 

 

 

 

 

 

 

 

(1,542

)

 

 

 

 

 

 

 

 

Total assets

 

$

886,213

 

 

 

 

 

 

 

 

 

 

$

806,260

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

64,157

 

 

$

27

 

 

 

0.17

%

 

$

63,458

 

 

$

25

 

 

 

0.16

%

Money management accounts

 

 

13,584

 

 

 

5

 

 

 

0.15

%

 

 

13,531

 

 

 

6

 

 

 

0.18

%

MMDA accounts

 

 

250,502

 

 

 

599

 

 

 

0.96

%

 

 

239,811

 

 

 

317

 

 

 

0.53

%

Savings and club accounts

 

 

85,892

 

 

 

22

 

 

 

0.10

%

 

 

85,167

 

 

 

21

 

 

 

0.10

%

Time deposits

 

 

226,358

 

 

 

913

 

 

 

1.61

%

 

 

182,099

 

 

 

526

 

 

 

1.16

%

Subordinated loans

 

 

15,071

 

 

 

210

 

 

 

5.57

%

 

 

15,036

 

 

 

197

 

 

 

5.24

%

Borrowings

 

 

65,470

 

 

 

273

 

 

 

1.67

%

 

 

59,086

 

 

 

411

 

 

 

2.78

%

Total interest-bearing liabilities

 

 

721,034

 

 

 

2,049

 

 

 

1.14

%

 

 

658,188

 

 

 

1,503

 

 

 

0.91

%

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

96,226

 

 

 

 

 

 

 

 

 

 

 

82,071

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

5,772

 

 

 

 

 

 

 

 

 

 

 

5,186

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

823,032

 

 

 

 

 

 

 

 

 

 

 

745,445

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

63,181

 

 

 

 

 

 

 

 

 

 

 

60,815

 

 

 

 

 

 

 

 

 

Total liabilities & shareholders' equity

 

$

886,213

 

 

 

 

 

 

 

 

 

 

$

806,260

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

6,467

 

 

 

 

 

 

 

 

 

 

$

5,581

 

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

 

 

 

 

2.91

%

 

 

 

 

 

 

 

 

 

 

2.80

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.07

%

 

 

 

 

 

 

 

 

 

 

2.93

%

Ratio of average interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to average interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

116.76

%

 

 

 

 

 

 

 

 

 

 

115.95

%

  

- 47 -


Table of Contents

 

 

For the six months ended June 30,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

Average

 

 

 

 

 

 

Yield /

 

 

Average

 

 

 

 

 

 

 

 

Yield /

 

(Dollars in thousands)

 

Balance

 

 

Interest

 

 

Cost

 

 

Balance

 

 

 

 

Interest

 

 

Cost

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

600,548

 

 

$

13,736

 

 

 

4.57

%

 

$

523,025

 

 

 

 

$

11,610

 

 

 

4.44

%

Taxable investment securities

 

 

193,731

 

 

 

2,428

 

 

 

2.51

%

 

 

175,236

 

 

 

 

 

1,681

 

 

 

1.92

%

Tax-exempt investment securities

 

 

35,564

 

 

 

465

 

 

 

2.62

%

 

 

30,371

 

 

 

 

 

590

 

 

 

3.89

%

Fed funds sold and interest-earning deposits

 

 

14,412

 

 

 

96

 

 

 

1.33

%

 

 

22,929

 

 

 

 

 

73

 

 

 

0.64

%

Total interest-earning assets

 

 

844,255

 

 

 

16,725

 

 

 

3.96

%

 

 

751,561

 

 

 

 

 

13,954

 

 

 

3.71

%

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

54,540

 

 

 

 

 

 

 

 

 

 

 

52,733

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(7,324

)

 

 

 

 

 

 

 

 

 

 

(6,177

)

 

 

 

 

 

 

 

 

 

 

Net unrealized (losses) gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  on available for sale securities

 

 

(3,358

)

 

 

 

 

 

 

 

 

 

 

(2,065

)

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

888,113

 

 

 

 

 

 

 

 

 

 

$

796,052

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

68,100

 

 

$

52

 

 

 

0.15

%

 

$

64,492

 

 

 

 

$

48

 

 

 

0.15

%

Money management accounts

 

 

14,246

 

 

 

11

 

 

 

0.15

%

 

 

13,992

 

 

 

 

 

14

 

 

 

0.20

%

MMDA accounts

 

 

252,798

 

 

 

1,072

 

 

 

0.85

%

 

 

227,420

 

 

 

 

 

560

 

 

 

0.49

%

Savings and club accounts

 

 

83,901

 

 

 

43

 

 

 

0.10

%

 

 

84,340

 

 

 

 

 

41

 

 

 

0.10

%

Time deposits

 

 

225,223

 

 

 

1,733

 

 

 

1.54

%

 

 

180,854

 

 

 

 

 

997

 

 

 

1.10

%

Subordinated loans

 

 

15,066

 

 

 

413

 

 

 

5.48

%

 

 

15,032

 

 

 

 

 

390

 

 

 

5.19

%

Borrowings

 

 

66,981

 

 

 

541

 

 

 

1.62

%

 

 

63,087

 

 

 

 

 

826

 

 

 

2.62

%

Total interest-bearing liabilities

 

 

726,315

 

 

 

3,865

 

 

 

1.06

%

 

 

649,217

 

 

 

 

 

2,876

 

 

 

0.89

%

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

92,803

 

 

 

 

 

 

 

 

 

 

 

81,724

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

5,960

 

 

 

 

 

 

 

 

 

 

 

5,031

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

825,078

 

 

 

 

 

 

 

 

 

 

 

735,972

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

63,035

 

 

 

 

 

 

 

 

 

 

 

60,080

 

 

 

 

 

 

 

 

 

 

 

Total liabilities & shareholders' equity

 

$

888,113

 

 

 

 

 

 

 

 

 

 

$

796,052

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

12,860

 

 

 

 

 

 

 

 

 

 

 

 

$

11,078

 

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

 

 

 

 

2.90

%

 

 

 

 

 

 

 

 

 

 

 

 

2.82

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.05

%

 

 

 

 

 

 

 

 

 

 

 

 

2.95

%

Ratio of average interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to average interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

116.24

%

 

 

 

 

 

 

 

 

 

 

 

 

115.76

%

 

As indicated in the above tables, net interest income, before provision for loan losses, increased $886,000, or 15.9%, to $6.5 million for the three months ended June 30, 2018 as compared to $5.6 million for the same prior year period.  This increase was due principally to the $78.7 million, or 10.3%, increase in the average balance of interest-earning assets, and an increase of 34 basis points on the average interest yield earned on those assets.  These positive factors on net interest income were partially offset by an increase in the average balance of interest-bearing liabilities of $62.8 million, or 9.55%, and an increase of 23 basis points on the average interest rate paid on those liabilities.   In total, net interest margin increased 14 basis points to 3.07% due largely to the increase in yields earned on average interest-earning assets, as noted above.  The following analysis should also be viewed in conjunction with the table below which reports the changes in net interest income attributable to rate and volume.

Interest and dividend income increased $1.4 million, or 20.2%, to $8.5 million for the three months ended June 30, 2018 compared to $7.1 million for the same three month period in 2017.  The increase in interest income was due principally to the increase in average interest-earning assets (primarily loans, and taxable and tax-exempt investment securities) which increased between the year-over-year second quarter periods by 10.2%.  The increase in the average balances of loans reflects the Company’s continued success in its expansion within the greater Syracuse, New York market.  Further supporting the quarter-over-quarter increase in interest income, the average yield on the loans and taxable investment portfolio improved 26 basis points to 4.62% and 73 basis points to 2.65%, respectively.  This increase in the average yield

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on loans was the result of new loan production being added to the loan portfolio at rates slightly higher than the average rates of the previously existing portfolio.  The increase in the average yield on taxable investment securities was the result of an increase in book yields on adjustable-rate securities and the purchase of new securities, often with longer durations or more credit risk exposure, at rates higher than the average yields of securities within the previously-existing portfolio whose balances continue to be reduced by amortization and maturities.  

Interest expense for the three months ended June 30, 2018 increased $546,000, or 36.3%, to $2.0 million when compared to the same prior year period.  Deposit interest expense increased $671,000, or 75.0%, to $1.6 million due to a $56.4 million increase in the average balance of interest-bearing deposits accompanied by a 37 basis point increase in the average annualized rate paid on these deposits to 0.98% for the three months ended June 30, 2018, as compared with the same three month period in 2017. This increase in average rates was primarily due to 45 and 43 basis points increases in the average rates paid on time deposits and money market deposit accounts (“MMDA”), respectively, during the three months ended June 30, 2018 as compared to the same three month period in 2017.  These increases in the average rates paid on time deposits and MMDA deposits reflected the competitive environment for such deposits within the Company’s marketplace as well as a general increase in short-term interest rates nationally. Partially offsetting the increase in interest expense on deposits in the three months ended June 30, 2018, as compared with the same three month period in 2017, was a decrease of $138,000 in interest expense on borrowed funds, primarily due to the Bank’s use of certain interest rate risk hedging strategies in the second quarter of 2017 that added $222,000 to interest expense in the second quarter of that year.  The Bank did not engage in those activities during 2018.  

For the six month period ended June 30, 2018, net interest income, before the provision for loan losses, increased $1.8 million, or 16.1%, to $12.9 million compared to $11.1 million for the six months ended June 30, 2017.  Interest and dividend income increased $2.8 million, or 19.9%, to $16.7 million for the six months ended June 30, 2018 from $14.0 million for the same six month period in 2017.  The increase in interest income was due principally to the increase in average balances of loans, and the aggregate balances of taxable and tax-exempt investment securities, which increased 14.8% and 11.5%, respectively, between the year-over-year six month periods.  The increase in the average balances of loans reflects the Company’s continued success in its expansion within the greater Syracuse market.  These increases were also positively affected by the increase in the average yield on loans and taxable investment securities of 13 basis points to 4.57% and 59 basis points to 2.51%, respectively.  This increase in the average yield on loans was the result of new loan production being added to the loan portfolio at rates slightly higher than the average rates of the previously existing portfolio.  The increase in the average yield on taxable investment securities was the result of an increase in book yields on adjustable-rate securities and the purchase of new securities, often with longer durations or more credit risk exposure, at rates higher than the average rates of securities within the previously-existing portfolio whose balances continue to be reduced by amortization, maturities and sales.    

Interest expense for the six months ended June 30, 2018 increased $989,000, or 34.4%, to $3.9 million as compared to $2.9 million for the six months ended June 30, 2017.  The increase in interest expense was due principally to the increase in average interest-bearing liabilities of $77.1 million, along with a 17 basis point increase in the average rate paid on these liabilities to 1.06%.  The increase in average rates paid on interest-bearing liabilities was due to a $1.3 million increase in deposit interest expense, partially offset by a $285,000 decrease in interest expense paid on borrowed funds. The average balances of interest-bearing deposits, which include brokered deposits, increased $73.2 million between the year-over-year six month periods.  Deposit interest expense increased 32 basis points to 0.90% for the six months ended June 30, 2018 as compared with the same six month period in 2017.  This increase was primarily due to a 44 and 36 basis point increase in the average rate paid on time deposits and MMDA deposits, respectively, during the six months ended June 30, 2018 as compared to the same time period in 2017.  The increases in rates paid on those deposits reflected the competitive environment for such deposits within the Company’s marketplace and a general increase in short-term interest rates nationally.

The $285,000 decrease in interest expense related to borrowings between the year-over-year six month periods was primarily due to a reduction of $430,000 in pretax interest expense paid that was related to the Bank’s short-term interest rate risk hedging activities in 2017.  This reduction in interest expense paid on borrowings was partially offset by an increase of $145,000 in interest expense related to non-hedge related borrowings. There were no hedging activities in the first six months of 2018.  During the six months of 2017, the Bank paid $430,000 in net interest on a $40 million U.S. Treasury security that it had received from an unrelated entity as collateral for a short term loan.  The U.S. Treasury security was sold by the Bank which placed the Bank in what is commonly referred to as a “short” position with respect to

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that security.  During the period of time that the Bank was in a short position with respect to the security, short-term interest rates generally rose and the Bank reacquired the security with a realized gain, net of tax benefits, of $346,000.  The $145,000 increase in non-hedge related borrowings interest expense was primarily due to a 36 basis point increase in the average rate paid on non-hedge related borrowings to 1.62% in the six months ended June 30, 2018 from 1.26% in the same six month period of 2017.  This increase in the average rate paid on non-hedge related borrowings was primarily due to a general year-over-year increase in short-term interest rates.  

Rate/Volume Analysis

Net interest income can also be analyzed in terms of the impact of changing interest rates on interest-earning assets and interest-bearing liabilities and changes in the volume or amount of these assets and liabilities. The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (change in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) total increase or decrease.  Changes attributable to both rate and volume have been allocated ratably.

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2018 vs. 2017

 

 

2018 vs. 2017

 

 

 

Increase/(Decrease) Due to

 

 

Increase/(Decrease) Due to

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Increase

 

 

 

 

 

 

 

 

 

 

Increase

 

(In thousands)

 

Volume

 

 

Rate

 

 

(Decrease)

 

 

Volume

 

 

Rate

 

 

(Decrease)

 

Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

775

 

 

$

374

 

 

$

1,149

 

 

$

1,764

 

 

$

362

 

 

$

2,126

 

Taxable investment securities

 

 

18

 

 

 

339

 

 

 

357

 

 

 

191

 

 

 

556

 

 

 

747

 

Tax-exempt investment securities

 

 

249

 

 

 

(344

)

 

 

(95

)

 

 

222

 

 

 

(347

)

 

 

(125

)

Interest-earning deposits

 

 

6

 

 

 

15

 

 

 

21

 

 

 

(75

)

 

 

98

 

 

 

23

 

Total interest income

 

 

1,048

 

 

 

384

 

 

 

1,432

 

 

 

2,102

 

 

 

669

 

 

 

2,771

 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

 

-

 

 

 

2

 

 

 

2

 

 

 

3

 

 

 

1

 

 

 

4

 

Money management accounts

 

 

-

 

 

 

(1

)

 

 

(1

)

 

 

1

 

 

 

(4

)

 

 

(3

)

MMDA accounts

 

 

15

 

 

 

267

 

 

 

282

 

 

 

69

 

 

 

443

 

 

 

512

 

Savings and club accounts

 

 

-

 

 

 

1

 

 

 

1

 

 

 

(1

)

 

 

3

 

 

 

2

 

Time deposits

 

 

147

 

 

 

240

 

 

 

387

 

 

 

282

 

 

 

454

 

 

 

736

 

Subordinated loans

 

 

-

 

 

 

13

 

 

 

13

 

 

 

1

 

 

 

22

 

 

 

23

 

Borrowings

 

 

250

 

 

 

(388

)

 

 

(138

)

 

 

136

 

 

 

(421

)

 

 

(285

)

Total interest expense

 

 

412

 

 

 

134

 

 

 

546

 

 

 

491

 

 

 

498

 

 

 

989

 

Net change in net interest income

 

$

636

 

 

$

250

 

 

$

886

 

 

$

1,611

 

 

$

171

 

 

$

1,782

 

 

Provision for Loan Losses

We establish a provision for loan losses, which is charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio.  In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. The provision for loan losses represents management’s estimate of the amount necessary to maintain the allowance for loan losses at an adequate level.  

Management extensively reviews recent trends in historical losses, qualitative factors and specific reserve needs on loans individually evaluated for impairment in its determination of the adequacy of the allowance for loan losses. We recorded $297,000 in provision for loan losses for the three month period ended June 30, 2018, as compared to $423,000 for the three month period ended June 30, 2017.  The $126,000 decrease in the provision for loan losses was primarily due to favorable changes to both the quantitative and environmental factors deemed to be appropriate for the Bank’s loan

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portfolio in aggregate, partially offset by the effects of an increase in the estimable and probable loan losses inherent in the loan portfolio that resulted from the $68.4 million, or 12.7%, increase in average loan balances in the second quarter of 2018, as compared with the same quarter of 2017.

For the three months ended June 30, 2018, we recorded $297,000 in provision for loan losses as compared to $423,000 in the same prior year three month period.  This $126,000 decrease in the provision for loan losses was due principally to favorable changes to both the quantitative and environmental factors assigned to the Bank’s loan portfolio in aggregate, partially offset by $68.4 million, or 12.7%, increase in average loan balances in the first three months of 2018 as compared with the same three month period of 2017 and the resultant increase in the estimable and probable loan losses inherent in the loan portfolio.

For the first six months of 2018, we recorded $910,000 in provision for loan losses as compared to $812,000 in the same prior year six month period.  This $98,000 increase in the provision for loan losses was due principally to the $77.5 million, or 14.8%, increase in average loan balances in the first six months of 2018 as compared with the same six month period of 2017 and the resultant increase in the estimable and probable loan losses inherent in the loan portfolio, partially offset by favorable changes to both the quantitative and environmental factors assigned to the Bank’s loan portfolio in aggregate.

 

The Company measures delinquency based on the amount of past due loans as a percentage of total loans.  The ratio of delinquent loans to total loans decreased to 1.29% at June 30, 2018 as compared to 2.12% at December 31, 2017.  Delinquent loans (numerator) decreased $4.5 million while total loan balances (denominator) increased $26.1 million at June 30, 2018, as compared to December 31, 2017.  The decline in past due loans was primarily driven by a decrease of $2.7 million in loans delinquent 30-59 days and $2.4 million in loans delinquent 60-89, partially offset by an increase of $551,000 in loans delinquent more than 90 days.  At June 30, 2018, there were $7.8 million in loans past due including $1.6 million in loans 30-59 days past due, $812,000 in loans 60-89 days past due and $5.4 million in loans 90 or more days past due.  At December 31, 2017, there were $12.3 million in loans past due, including $4.3 million in loans 30-59 days past due, $3.2 million in loans 60-89 days past due and $4.9 million in loans 90 or more days past due.

 

The decrease of $4.5 million in total loans past due at June 30, 2018, as compared to December 31, 2017, was primarily due to a decrease of $2.7 million in loans 30-59 days past due and a decrease of $2.4 million in loans 60-89 days past due.  The decrease in loans 30-59 days past due at June 30, 2018 as compared to December 31, 2017 was primarily due to a decrease in the commercial lines of credit that were delinquent 30-59 days.  At December 31, 2017, there were four commercial lines of credit with an outstanding balance of $1.5 million (outstanding loan balances of $600,000, $450,000, $400,000, and $32,000, respectively) that were 30-59 days past due, while at June 30, 2018, there were only two commercial lines of credit with an outstanding balance of $161,000 (outstanding loan amounts of $71,000 and $90,000, respectively) that were 30-59 days past due.   Total loans with delinquent balances 60-89 days past due decreased by $2.4 million in aggregate, primarily as a result of one commercial real estate loan with an outstanding balance of $1.7 million that was 60-89 days delinquent at December 31, 2017 and was over 90 days past due at June 30, 2018.

Noninterest Income

The Company's noninterest income is primarily comprised of fees on deposit account balances and transactions, loan servicing, commissions, including insurance agency commissions, and net gains on sales of securities, loans, and foreclosed real estate.  

- 51 -


Table of Contents

The following table sets forth certain information on noninterest income for the periods indicated:

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

Change

 

 

2018

 

 

2017

 

 

Change

 

Service charges on deposit accounts

 

$

273

 

 

$

274

 

 

$

(1

)

 

 

-0.4

%

 

$

547

 

 

$

537

 

 

$

10

 

 

 

1.9

%

Earnings and gain on bank owned life insurance

 

 

108

 

 

 

62

 

 

 

46

 

 

 

74.2

%

 

 

181

 

 

 

133

 

 

 

48

 

 

 

36.1

%

Loan servicing fees

 

 

42

 

 

 

32

 

 

 

10

 

 

 

31.3

%

 

 

83

 

 

 

68

 

 

 

15

 

 

 

22.1

%

Debit card interchange fees

 

 

148

 

 

 

147

 

 

 

1

 

 

 

0.7

%

 

 

291

 

 

 

268

 

 

 

23

 

 

 

8.6

%

Other charges, commissions and fees

 

 

449

 

 

 

421

 

 

 

28

 

 

 

6.7

%

 

 

904

 

 

 

820

 

 

 

84

 

 

 

10.2

%

Noninterest income before gains (losses)

 

 

1,020

 

 

 

936

 

 

 

84

 

 

 

9.0

%

 

 

2,006

 

 

 

1,826

 

 

 

180

 

 

 

9.9

%

Net (losses) gains on sales and redemptions of investment securities

 

 

(22

)

 

 

135

 

 

 

(157

)

 

 

-116.3

%

 

 

(129

)

 

 

206

 

 

 

(335

)

 

 

-162.6

%

Gains on equity securities

 

 

13

 

 

 

-

 

 

 

13

 

 

-

 

 

 

26

 

 

 

-

 

 

 

26

 

 

 

-

 

Net gains (losses) on sales of loans and foreclosed real estate

 

 

13

 

 

 

(21

)

 

 

34

 

 

 

-161.9

%

 

 

16

 

 

 

(45

)

 

 

61

 

 

 

-135.6

%

Total noninterest income

 

$

1,024

 

 

$

1,050

 

 

$

(26

)

 

 

-2.5

%

 

$

1,919

 

 

$

1,987

 

 

$

(68

)

 

 

-3.4

%

 

The $26,000, or 2.5%, decrease in noninterest income in the quarter ended June 30, 2018, as compared to the same quarterly period in 2017, was primarily the result of a net decrease of $157,000 in the net gains on the sales and redemptions of investment securities from a gain of $135,000 for the three months ended June 30, 2017 to a net loss of $22,000 for the same quarter in 2018.  The net gains on investment securities during the quarter ended June 30, 2017 were primarily the result of $94,000 in net gains recorded on short-term interest rate hedging activities in that period.  There were no hedging activities of this type in the three months ended June 30, 2018.  During the three months ended June 30, 2018, Company-initiated sales and issuer-initiated redemptions of investment securities in the amount of $11.4 million, generated a net loss of $22,000, or 0.19%.  The investment securities sales were part of the Company’s portfolio optimization and liquidity management strategies. It is the intention of management to reinvest the proceeds of these investment securities transactions into potentially higher yielding interest-earning assets in future periods.

 

Excluding the effects of the quarter over quarter reduction in gains on the sale of investment securities, all other noninterest income categories increased in the aggregate by $131,000, or 14.3% to $1.0 million in the quarter ended June 30, 2018 as compared with $915,000 in the same quarter of 2017.  This $131,000 quarter over quarter increase in noninterest income, excluding the effects of gains on the sales and redemptions of investment securities, was due primarily to increases of $46,000 in earnings and gains on bank owned life insurance, $34,000 net gains on sales of loans and foreclosed real estate, and $28,000 in other charges, commissions and fees.  

 

The $68,000, or 3.4% decrease in noninterest income in the six months ended June 30, 2018, as compared to the same six month period in 2017, was primarily the result of a net decrease of $335,000 in the net gains on the sales and redemptions of investment securities from a gain of $206,000 for the six months ended June 30, 2017 to a net loss of $129,000 for the same six month period in 2018. The net gains on investment securities during the six months ended June 30, 2017 were primarily the result of $250,000 in net gains recorded on short-term interest rate hedging activities in that period. There were no hedging activities of this type in the six months ended June 30, 2018.  During the six months ended June 30, 2018, Company-initiated sales and issuer-initiated redemptions of investment securities in the amount of $29.2 million, generated a net loss of $129,000, or 0.44%.  The investment securities sales were part of the Company’s portfolio optimization and liquidity management strategies. It is the intention of management to reinvest the proceeds of these investment securities transactions into potentially higher yielding interest-earning assets in future periods.

 

Excluding the effects of the period over period reduction in gains on the sale of investment securities, all other noninterest income categories increased in the aggregate by $267,000, or 15.0% to $2.0 million in the six months ended June 30, 2018 as compared with $1.8 million in the same six month period of 2017.  This $267,000 period over period increase in noninterest income, excluding the effects of gains on the sales and redemptions of investment securities, was due primarily to increases of $84,000 in other charges, commissions and fees, $61,000 net gains on sales of loans and foreclosed real estate, and $48,000 in earnings and gains on bank owned life insurance.

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Noninterest Expense

The following table sets forth certain information on noninterest expense for the periods indicated:

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

Change

 

 

2018

 

 

2017

 

 

Change

 

Salaries and employee benefits

 

$

3,429

 

 

$

2,819

 

 

$

610

 

 

 

21.6

%

 

$

6,513

 

 

$

5,669

 

 

$

844

 

 

 

14.9

%

Building occupancy

 

 

553

 

 

 

531

 

 

 

22

 

 

 

4.1

%

 

 

1,144

 

 

 

1,070

 

 

 

74

 

 

 

6.9

%

Data processing

 

 

476

 

 

 

416

 

 

 

60

 

 

 

14.4

%

 

 

955

 

 

 

843

 

 

 

112

 

 

 

13.3

%

Professional and other services

 

 

405

 

 

 

219

 

 

 

186

 

 

 

84.9

%

 

 

736

 

 

 

410

 

 

 

326

 

 

 

79.5

%

Advertising

 

 

285

 

 

 

172

 

 

 

113

 

 

 

65.7

%

 

 

476

 

 

 

348

 

 

 

128

 

 

 

36.8

%

FDIC assessments

 

 

135

 

 

 

81

 

 

 

54

 

 

 

66.7

%

 

 

255

 

 

 

137

 

 

 

118

 

 

 

86.1

%

Audits and exams

 

 

105

 

 

 

85

 

 

 

20

 

 

 

23.5

%

 

 

210

 

 

 

169

 

 

 

41

 

 

 

24.3

%

Other expenses

 

 

739

 

 

 

688

 

 

 

51

 

 

 

7.4

%

 

 

1,297

 

 

 

1,338

 

 

 

(41

)

 

 

-3.1

%

Total noninterest expenses

 

$

6,127

 

 

$

5,011

 

 

$

1,116

 

 

 

22.3

%

 

$

11,586

 

 

$

9,984

 

 

$

1,602

 

 

 

16.0

%

 

The $1.1 million, or 22.3%, increase in noninterest expense between the year-over-year second quarter periods was principally due to an increase in salaries and employee benefits expense of $610,000, or 21.6%.  All other noninterest expenses in aggregate increased $506,000, or 23.1%, for the three months ended June 30, 2018 as compared to the same three month period in 2017.  The detail of the components of the overall increase in noninterest expense is as follows:

 

The $610,000 increase in salaries and employee benefits expense in the second quarter of 2018, as compared to the same three month period in 2017, was primarily due to increases of $221,000 in salary expense, increases of $185,000 in commissions expense, increases of $109,000 in employee benefits expense, including employee payroll tax expenses, and the establishment of a $100,000 reserve, through expense recognition, for the potential acceleration of postemployment benefits related to the earlier than originally planned retirement of a senior officer.  Partially offsetting these increases was a net decrease in all other salaries and employee benefits expenses of $5,000.  Salaries expense increased primarily as the result of the addition of staff members supporting current and planned asset growth and risk management activities. Commissions expense increased primarily due to $113,000 in additional accruals in the second quarter of 2018 that related to the timing of commissions payments, primarily to the senior management team of the Agency under a revised compensation formula established at the end of 2017.  These timing factors are expected to partially reverse themselves in the remainder of 2018. The increases in employee benefits expenses for the three months ended June 30, 2018, as compared to the same three-month period in 2017, were also affected by certain timing factors and were consistent with the salary and commissions expense increases discussed above.

 

The $60,000 increase in data processing costs was primarily due to an additional $28,000 in processing fees paid by the Bank that were based on increased levels of customer activity primarily transacted through its electronic delivery channels and $22,000 of additional equipment depreciation expenses.

 

The $186,000 increase in professional and other services fees was primarily due to fees paid to an unaffiliated consulting firm during the quarter for assistance with operational and strategic planning.   

 

Advertising expense increased $113,000 primarily as the result of increases in the level of brand awareness advertising expenditures primarily focused on the Onondaga County market.

 

FDIC assessments increased $54,000 due to an increase in the Bank’s risk-weighted assessment resulting from the phase-out of a benefit the Bank received in the FDIC’s risk-weighting methodology as a result of the dissolution of Pathfinder Commercial Bank.  

 

All other noninterest expenses decreased in aggregate in the year-over-year three month periods by a total of $93,000, or 7.1%, due to a broad range of individually immaterial variances.

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The $1.6 million, or 16.0%, increase in noninterest expenses between the six month period ended June 30, 2018 and the same six month period in the prior year was principally due to an increase in salaries and employee benefits expense, data processing expense, professional and other service fees, advertising expense, FDIC assessments, and other expenses.  The detail of the components of the overall increase in noninterest expense is as follows:

 

The $844,000 increase in salaries and employee benefits expense in the first six months of 2018, as compared to the same six month period in 2017, was primarily due to $447,000 in salary expense increases, increases of $151,000 in employee benefits expense, including employee payroll tax expenses, the establishment of a $150,000 reserve, through expense recognition, for the potential acceleration of postemployment benefits related to the earlier than originally planned retirement of a senior officer, and increases of $134,000 in commissions expense, partially offset by a net decrease in all other salaries and employee benefits expenses of $38,000. Salaries expense increased as the result of the additions of staff members supporting current and planned asset growth and risk management activities. Commissions expense increased primarily due to $113,000 in additional accruals in the second quarter of 2018 that related to the timing of commissions payments, primarily to the senior management team of the Agency under a revised compensation formula established at the end of 2017.  These timing factors are expected to partially reverse themselves in the remainder of 2018.  The increases in employee benefits expenses for the six months ended June 30, 2018, as compared to the same six-month period in 2017, were consistent with the salary and commissions expense increases discussed above.

 

The $112,000 increase in data processing expenses was primarily related to increases of $42,000, $32,000 and $31,000 in third-party processing charges, equipment depreciation and equipment maintenance expenses, respectively, for the six months ended June 30, 2018, as compared with the same six month period in 2017.

 

The $326,000 increase in professional and other services fees was primarily due to fees paid to an unaffiliated consulting firm for the six months ended June 30, 2018 for assistance with operational and strategic planning.  

 

Advertising expense increased $128,000 primarily as the result of increases in the level of brand awareness advertising expenditures primarily focused on the Onondaga County market.

 

FDIC assessments increased $118,000 due to an increase in the Bank’s risk-weighted assessment resulting from the phase-out of a benefit the Bank received in the FDIC’s risk-weighting methodology as a result of the dissolution of Pathfinder Commercial Bank.  

 

All other noninterest expenses decreased in aggregate in the year-over-year six month periods by a total of $74,000, or 2.9%, due to a broad range of individually immaterial variances.

 

At June 30, 2018, the Bank serviced 220 residential mortgage loans in the aggregate amount of $31.2 million that have been sold on a non-recourse basis to FNMA.  FNMA is the only unrelated third-party that has acquired loans originated by the Bank. On an infrequent basis, loans previously sold to FNMA that subsequently default may be found to have underwriting defects that place the loans out of compliance with the representations and warranties made by the Bank.  This can occur at any time while the loan is outstanding.  In such cases, the Bank is required to repurchase the defaulted loans from FNMA.  Repurchase losses sustained by the Bank include all costs incurred by FNMA as part of the foreclosure process, including items such as delinquent property taxes and legal fees.  Management continues to monitor the underwriting standards applied to all residential mortgage loan originations and subsequent sales through its quality control processes and considers these occurrences and their related expenses to be isolated instances.

Income Tax Expense

 

Income tax expense decreased $72,000 to $166,000, with an effective tax rate of 14.3% for the quarter ended June 30, 2018 as compared to $238,000, with an effective tax rate of 21.3%, for the same three month period in 2017.  The reduction in income tax expense was primarily the result of a reduction in statutory tax rates applicable to the Company and, to a lesser extent, a reduction in net income before income taxes of $130,000. The reduction in the second quarter 2018 effective tax rate, compared to the effective tax rate in the same quarter of 2017, was primarily the result of the enactment of the Tax Act, which reduced the federal statutory corporate tax rate applicable to the Company from 34% to 21%, and favorable changes to the New York State tax code.  During both the second quarters of 2018 and 2017, the Company derived tax benefits from its investments in tax-exempt securities issued by municipalities and political subdivisions, and from its investments in bank owned life insurance.  In the second quarter of 2018, these benefits reduced the effective tax rate to 18.9%. In addition, the Company recognized tax benefits of $52,000 and $19,000 related to the

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nonqualified redemption of employee incentive stock options and the utilization of low-income housing tax credits, respectively, that further reduced the overall effective tax rate for the first half of 2018 to the reported 14.3%.  

 

During the second quarter of 2017, the sale of certain U.S. Treasury assets, positioned as part of the Company’s short-term interest rate hedge strategies, resulted in realized capital gains in the amount of $156,000. These gains enabled the partial utilization of previously reserved-for capital loss carryforwards resulting in a reduction in income tax expense of $60,000 during that quarter. Absent this capital loss carryforward utilization effect in the second quarter of 2017, the Company’s income tax expense would have been $298,000 and its effective tax rate for that quarter would have been 26.7%.

 

Income tax expense decreased $135,000 to $348,000, with an effective tax rate of 15.1% for the six months ended June 30, 2018 as compared to $483,000, with an effective tax rate of 22.6%, for the same six month period in 2017.  The reduction in the first half 2018 effective tax rate, compared to the effective tax rate in the same six month period in 2017, was primarily the result of the enactment of the Tax Act, which reduced the federal statutory corporate tax rate applicable to the Company from 34% to 21%, and favorable changes to the New York State tax code.  During both the first six months of 2018 and 2017, the Company derived effective tax rate benefits from its investments in tax-exempt securities issued by municipalities and political subdivisions, and from its investments in bank owned life insurance.  In the first six months of 2018, these benefits reduced the effective tax rate to 19.0%.  In addition, the Company recognized tax benefits of $74,000 and $19,000 related to the nonqualified redemption of employee incentive stock options and the utilization of low-income housing tax credits, respectively, reducing the overall effective tax rate for the first half of 2018 to the reported 15.1%.  

 

During the first six months of 2017, the sale of certain U.S. Treasury assets, positioned as part of the Company’s short-term interest rate hedge strategies, resulted in realized capital gains in the amount of $250,000. These gains enabled the partial utilization of previously reserved-for capital loss carryforwards resulting in a reduction in income tax expense of $96,000 during the six months ended June 30, 2018. Absent this capital loss carryforward utilization effect in the first half of 2017, the Company’s income tax expense would have been $298,000 and its effective tax rate for that six month period would have been 27.1%.

Earnings per Share

Basic and diluted earnings per share were unchanged at $0.23 and $0.22, respectively, for the second quarters of 2018 and 2017.  

Basic and diluted earnings per share were $0.47 and $0.46, respectively, for the six month period ended June 30, 2018 as compared to $0.42 and $0.41, respectively, for the same prior year period.  The increase in earnings per share between these two periods was due to the increase in net income between these two time periods.  Further information on earnings per share can be found in Note 3 of this Form 10-Q.

Changes in Financial Condition

Assets

Total assets increased $22.2 million, or 2.5%, to $903.5 million at June 30, 2018 as compared to $881.3 million at December 31, 2017.  This increase was due primarily to an increase in loans and cash and cash equivalents, partially offset by decreases in investment securities.

Total loans receivable increased $26.4 million, or 4.5%, to $607.2 million at June 30, 2018 from $580.8 million at December 31, 2017. Commercial loans and residential loans recorded increases between these two dates, with increases of $20.6 million, and $6.8 million, respectively.  These increases were partially offset by a decrease of $1.3 million in consumer loans.

Investment securities decreased $26.1 million, or 11.0%, to $211.2 million at June 30, 2018, as compared to $237.3 million at December 31, 2017, due principally to sales and maturities of securities during the first six months of 2018.  

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Cash and cash equivalents increased $14.7 million, or 67.1%, to $36.7 million at June 30, 2018, as compared to $22.0 million at December 31, 2017.  The $14.7 million increase in cash and cash equivalents was primarily due to a strategic increase in short-term liquidity in anticipation of continued high levels of demand for loan fundings in the second half of 2018.  The Bank considers its statutorily required cash reserve balances held at the Federal Reserve Bank to be restricted cash.  Total restricted cash was $4.4 million and $6.3 million at June 30, 2018 and December 31, 2017, respectively.

Liabilities

Total liabilities increased $21.5 million, or 2.6%, to $840.6 million at June 30, 2018 compared to $819.1 million at December 31, 2017.  Deposits increased $9.6 million, or 1.3%, to $733.2 million at June 30, 2018, compared to $723.6 million at December 31, 2017.  This increase was the result of an increase in brokered deposits of $10.4 million, partially offset by a decrease in deposits obtained directly from customers within the Bank’s marketplace of $792,000. The net decrease in customer deposits during the six months ended June 30, 2018 was due primarily to decreases in municipal deposits of $18.7 million, partially offset by growth in consumer and business deposit categories of $17.9 million in aggregate.  The Bank utilizes the Certificates of Deposit Account Registry Service (“CDARS”) provided by Promontory Interfinancial Network as a form of brokered deposits.  At June 30, 2018, deposits obtained through the use of this service increased $10.4 million to $69.9 million as compared to $59.5 million at December 31, 2017.  Borrowed funds balances at June 30, 2018 increased $10.2 million, or 13.8%, to $84.1 million from $73.9 million at December 31, 2017.

Shareholders’ Equity

The Company’s shareholders’ equity, exclusive of the noncontrolling interest, increased $806,000, or 1.3%, to $62.6 million at June 30, 2018 from $61.8 million at December 31, 2017. This increase was principally due to an increase of $1.5 million in retained earnings, a $459,000 increase in additional paid-in capital, resulting from activity within the Company’s stock-based compensation programs, and a $90,000 increase in ESOP shares earned. In addition, the Company adopted ASU 2017-12: Derivatives and Hedging [Topic 815]: Targeted Improvements to Accounting for Hedging Activities, effective January 1, 2018, in the second quarter of 2018.  As a result of the adoption of this guidance, the Company transferred investment securities from HTM to AFS with an amortized historical cost before transfer of $35.2 million.  This transfer resulted in the addition of $359,000 to accumulated other comprehensive income as of the effective date.  Partially offsetting these increases in shareholders’ equity was an increase of $1.3 million in accumulated other comprehensive loss. The increase in retained earnings primarily resulted from $1.9 million in net income recorded in the first six months of 2018 and a $53,000 one-time adjustment related to the cumulative effect of an unrealized gain on marketable equity securities based on the adoption of ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities in the first quarter of 2018.  Partially offsetting these increases in retained earnings was a reduction of $497,000 for cash dividends declared on our common stock.  The increase in accumulated comprehensive loss was primarily the result of the decline in the fair market value of our available-for-sale investment securities during the six months ended June 30, 2018.

Capital

Capital adequacy is evaluated primarily by the use of ratios which measure capital against total assets, as well as against total assets that are weighted based on defined risk characteristics. The Company’s goal is to maintain a strong capital position, consistent with the risk profile of its banking operations.  This strong capital position serves to support growth and expansion activities while at the same time exceeding regulatory standards.  At June 30, 2018, the Bank met the regulatory definition of a “well-capitalized” institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 8%, Tier 1 common equity exceeding 6.5%, and a total risk-based capital ratio exceeding 10%.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.  The buffer is separate from the capital ratios required under the Prompt Corrective Actions (“PCA”) standards. In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum levels of the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity.  The capital conservation buffer requirement began being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and is increasing each year until fully implemented at 2.5% on January 1, 2019. For

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Table of Contents

2018, the capital buffer is 1.875% of risk-weighted assets. At June 30, 2018, the Bank exceeded all current and projected regulatory required minimum capital ratios, including the maximum capital buffer level that will be required on January 1, 2019.

As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion.  A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes.  The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%.  A financial institution can elect to be subject to this new definition.

Pathfinder Bank’s capital amounts and ratios as of the indicated dates are presented in the following tables:

 

 

 

Actual

 

 

Minimum For

Capital Adequacy

Purposes

 

 

Minimum To Be

"Well-Capitalized"

Under Prompt

Corrective Provisions

 

 

Well-Capitalized

With Buffer, Fully

Phased In 2019

 

(Dollars in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of  June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Core Capital (to Risk-Weighted Assets)

 

$

80,812

 

 

 

13.79

%

 

$

46,892

 

 

 

8.00

%

 

$

58,616

 

 

 

10.00

%

 

$

61,546

 

 

 

10.50

%

Tier 1 Capital (to Risk-Weighted Assets)

 

$

73,482

 

 

 

12.54

%

 

$

35,169

 

 

 

6.00

%

 

$

46,892

 

 

 

8.00

%

 

$

49,823

 

 

 

8.50

%

Tier 1 Common Equity (to Risk-Weighted Assets)

 

$

73,482

 

 

 

12.54

%

 

$

26,377

 

 

 

4.50

%

 

$

38,100

 

 

 

6.50

%

 

$

41,031

 

 

 

7.00

%

Tier 1 Capital (to Assets)

 

$

73,482

 

 

 

8.35

%

 

$

35,215

 

 

 

4.00

%

 

$

44,019

 

 

 

5.00

%

 

$

44,019

 

 

 

5.00

%

As of December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Core Capital (to Risk-Weighted Assets)

 

$

78,105

 

 

 

13.97

%

 

$

44,733

 

 

 

8.00

%

 

$

55,916

 

 

 

10.00

%

 

$

58,712

 

 

 

10.50

%

Tier 1 Capital (to Risk-Weighted Assets)

 

$

71,114

 

 

 

12.72

%

 

$

33,550

 

 

 

6.00

%

 

$

44,733

 

 

 

8.00

%

 

$

47,529

 

 

 

8.50

%

Tier 1 Common Equity (to Risk-Weighted Assets)

 

$

71,114

 

 

 

12.72

%

 

$

25,162

 

 

 

4.50

%

 

$

36,345

 

 

 

6.50

%

 

$

39,141

 

 

 

7.00

%

Tier 1 Capital (to Assets)

 

$

71,114

 

 

 

8.16

%

 

$

34,863

 

 

 

4.00

%

 

$

43,579

 

 

 

5.00

%

 

$

43,579

 

 

 

5.00

%

 


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Table of Contents

Non-GAAP Financial Measures

 

Regulation G, a rule adopted by the Securities and Exchange Commission (SEC), applies to certain SEC filings, including earnings releases, made by registered companies that contain “non-GAAP financial measures.”  GAAP is generally accepted accounting principles in the United States of America.  Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure (if a comparable GAAP measure exists) and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures.  The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP.  When these exempted measures are included in public disclosures, supplemental information is not required. Financial institutions like the Company and its subsidiary bank are subject to an array of bank regulatory capital measures that are financial in nature but are not based on GAAP. The Company follows industry practice in disclosing its financial condition under these various regulatory capital measures, including period-end regulatory capital ratios for its subsidiary bank, in its periodic reports filed with the SEC. The Company provides, below, an explanation of the calculations, as supplemental information, for non-GAAP measures included in the consolidated annual financial statements.  In addition, the Company provides a reconciliation of its subsidiary bank’s disclosed regulatory capital measures, below.

 

 

June 30,

 

 

December 31,

 

 

(Dollars in thousands)

2018

 

 

2017

 

 

Regulatory Capital Ratios (Bank Only)

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

Total equity (GAAP)

$

72,721

 

 

$

71,535

 

 

Goodwill

 

(4,536

)

 

 

(4,536

)

 

Intangible assets

 

(174

)

 

 

(146

)

 

Addback: Accumulated other comprehensive income

 

5,471

 

 

 

4,261

 

 

       Total Tier 1 Capital

$

73,482

 

 

$

71,114

 

 

Allowance for loan and lease losses

 

7,330

 

 

 

6,991

 

 

Unrealized Gain on available-for-sale securities

 

-

 

 

 

-

 

 

       Total Tier 2 Capital

$

7,330

 

 

$

6,991

 

 

       Total Tier 1 plus Tier 2 Capital (numerator)

$

80,812

 

 

$

78,105

 

 

Risk-weighted assets (denominator)

 

586,155

 

 

 

559,161

 

 

      Total core capital to risk-weighted assets

 

13.79

 

%

 

13.97

 

%

 

 

 

 

 

 

 

 

 

Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

Total Tier 1 capital (numerator)

$

73,482

 

 

$

71,114

 

 

Risk-weighted assets (denominator)

 

586,155

 

 

 

559,161

 

 

      Total capital to risk-weighted assets

 

12.54

 

%

 

12.72

 

%

 

 

 

 

 

 

 

 

 

Tier 1 capital (to adjusted assets)

 

 

 

 

 

 

 

 

Total Tier 1 capital (numerator)

$

73,482

 

 

$

71,114

 

 

Total average assets

 

885,095

 

 

 

876,263

 

 

Goodwill

 

(4,536

)

 

 

(4,536

)

 

Intangible assets

 

(174

)

 

 

(146

)

 

Adjusted assets (denominator)

$

880,385

 

 

$

871,581

 

 

      Total capital to adjusted assets

 

8.35

 

%

 

8.16

 

%

 

 

 

 

 

 

 

 

 

Tier 1 Common Equity (to risk-weighted assets)

 

 

 

 

 

 

 

 

Total Tier 1 capital (numerator)

$

73,482

 

 

$

71,114

 

 

Risk-weighted assets (denominator)

 

586,155

 

 

 

559,161

 

 

      Total Tier 1 Common Equity to risk-weighted assets

 

12.54

 

%

 

12.72

 

%

 

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Table of Contents

Loan and Asset Quality and Allowance for Loan Losses

The following table represents information concerning the aggregate amount of non-performing assets at the indicated dates:

 

 

 

June 30,

 

 

December 31,

 

 

June 30,

 

(Dollars In thousands)

 

2018

 

 

2017

 

 

2017

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and commercial real estate loans

 

$

3,152

 

 

$

2,443

 

 

$

2,049

 

Consumer

 

 

203

 

 

 

363

 

 

 

388

 

Residential mortgage loans

 

 

2,090

 

 

 

2,088

 

 

 

1,956

 

Total nonaccrual loans

 

 

5,445

 

 

 

4,894

 

 

 

4,393

 

Total nonperforming loans

 

 

5,445

 

 

 

4,894

 

 

 

4,393

 

Foreclosed real estate

 

 

97

 

 

 

468

 

 

 

678

 

Total nonperforming assets

 

$

5,542

 

 

$

5,362

 

 

$

5,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing troubled debt restructurings

 

$

2,756

 

 

$

2,539

 

 

$

4,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.90

%

 

 

0.84

%

 

 

0.80

%

Nonperforming assets to total assets

 

 

0.61

%

 

 

0.61

%

 

 

0.63

%

 

Nonperforming assets include nonaccrual loans, nonaccrual troubled debt restructurings (“TDR”), and foreclosed real estate (‘‘FRE”). The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or more.  There are no loans that are past due 90 days or more and still accruing interest.  Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity.  TDRs are included in the above table within the categories of nonaccrual loans or accruing TDRs.  There were two nonaccruing TDR loans, with an aggregate carrying value of $69,000 included among the nonaccrual loans detailed in the table above at June 30, 2018. 

 

As indicated in the table above, nonperforming assets at June 30, 2018 were $5.5 million and were $180,000 higher than the $5.4 million reported at December 31, 2017, due primarily to an increase of $709,000 in nonperforming commercial and commercial real estate loans, partially offset by a decrease of $371,000 in FRE and $160,000 in nonperforming consumer loans.   

 

As indicated in the nonperforming asset table above, FRE balances decreased $371,000 to $97,000 at June 30, 2018 from $468,000 at December 31, 2017, following five sales from the portfolio and four additions to the portfolio during the six-month period ended June 30, 2018.  More information regarding foreclosed real estate can be found in Note 8 of this Form 10-Q.

Fair values for commercial FRE are initially recorded based on market value evaluations by third parties, less costs to sell (“initial cost basis”).  On a prospective basis, residential FRE assets will be initially recorded at the lower of the net amount of loan receivable or the real estate’s fair value less costs to sell.   Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to FRE are charged to the allowance for loan losses.  Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash flow analysis.  Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis for the FRE property.  

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Table of Contents

The allowance for loan losses represents management’s estimate of the probable losses inherent in the loan portfolio as of the date of the statement of condition.  The allowance for loan losses was $7.6 million and $7.1 million at June 30, 2018 and December 31, 2017, respectively.  The ratio of the allowance for loan losses to total loans increased two basis points to 1.25% at June 30, 2018 from 1.23% at December 31, 2017.  Management performs a quarterly evaluation of the allowance for loan losses based on quantitative and qualitative factors and has determined that the current level of the allowance for loan losses is adequate to absorb the losses in the loan portfolio as of June 30, 2018.

The Company considers a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan.   The measurement of impaired loans is generally based upon the fair value of the collateral, with a portion of the impaired loans measured based upon the present value of future cash flows discounted at the historical effective interest rate.  A specific reserve is established for an impaired loan if its carrying value exceeds its estimated fair value.  The estimated fair values of the majority of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.  For loans secured by real estate, estimated fair values are determined primarily through third-party appraisals or broker price opinions.  When a loan is determined to be impaired, the Bank will reevaluate the collateral which secures the loan. For real estate, the Company will obtain a new appraisal or broker’s opinion whichever is considered to provide the most accurate value in the event of sale. An evaluation of equipment held as collateral will be obtained from a firm able to provide such an evaluation. Collateral will be inspected not less than annually for all impaired loans and will be reevaluated not less than every two years. Appraised values and broker opinion values are discounted due to the market’s perception of a reduced price of Bank-owned property and the Bank’s desire to sell the property more quickly to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value.  The discounts also include estimated costs to sell the property.

At June 30, 2018 and December 31, 2017, the Company had $7.8 million and $9.2 million in loans, respectively, which were deemed to be impaired, having established specific reserves of $1.2 million and $1.1 million, respectively, on these loans.  The decrease in impaired loans between these two dates was primarily driven by decreases of $970,000 and $348,000 in impaired commercial real estate and other commercial loans, respectively. The $68,000 increase in specific reserves for impaired loans at June 30, 2018, as compared to December 31, 2017 was primarily due to a $276,000 increase in specific reserves for commercial real estate loans, partially offset by a $208,000 decrease in reserves for all other loans in aggregate.

 

Management has identified potential credit problems which may result in the borrowers not being able to comply with the current loan repayment terms and which may result in those loans being included in future impaired loan reporting.  Potential problem loans totaled $3.8 million as of June 30, 2018, a decrease of $138,000, or 3.5%, as compared to $3.9 million at December 31, 2017.  These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered impaired.  

Appraisals are obtained at the time a real estate secured loan is originated.   For commercial real estate held as collateral, the property is inspected every two years.  

In the normal course of business, the Bank has infrequently sold residential mortgage loans and participation interests in commercial loans. As is typical in the industry, the Bank makes certain representations and warranties to the buyer.  The Bank maintains a quality control program for closed loans and considers the risks and uncertainties associated with potential repurchase requirements to be minimal.  

Liquidity

Liquidity management involves the Company’s ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth, meet deposit withdrawals, maintain reserve requirements, and otherwise operate the Company on an ongoing basis.  The Company's primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans and maturities of investment securities and other short-term investments, and earnings and funds provided from operations.  While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.  The Company manages the pricing of deposits to maintain a desired deposit composition and balance.  In addition, the Company invests excess funds in short-term interest-earning and other assets, which provide liquidity to meet lending requirements.  

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Table of Contents

The Company's liquidity has been enhanced by its ability to borrow from the Federal Home Loan Bank of New York (“FHLBNY”), whose competitive advance programs and lines of credit provide the Company with a safe, reliable, and convenient source of funds.  A significant decrease in deposits in the future could result in the Company having to seek other sources of funds for liquidity purposes.  Such sources could include, but are not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment securities, the sale of securitized loans, or the sale of whole loans.  Such actions could result in higher interest expense and/or losses on the sale of securities or loans.  

Through the first six months of 2018, as indicated in the consolidated statement of cash flows, the Company reported net cash flows from operating activities of $5.1 million and net cash outflows of $9.7 million related to investing activities. The net cash outflows from investing activities primarily was due to a net $27.0 million increase in loan balances, partially offset by a $17.3 million decrease in all other investing activities in aggregate.  The Company reported net cash flows from financing activities of $19.4 million generated principally by increased balances of long-term borrowings of $14.2 million and brokered deposits of $10.4 million, partially offset by an aggregate decrease in net cash of $5.2 million from all other financing sources, including dividends paid to common shareholders of $502,000.

In June 2018, the Company renewed for the period ended June 12, 2019, a $12.0 million portion of an expiring $26.0 million Irrevocable Stand-By Letter of Credit (“LOC”), first established in June 2016, with the FHLBNY as an alternative means of collateralizing certain public funds deposits.  A LOC is a conditional commitment issued by the FHLBNY to guarantee the performance of the Bank with respect to large public funds deposits. These deposits are placed with the Bank by entities, such as municipalities and other political subdivisions within the Bank’s market area, and typically exceed the statutory FDIC deposit insurance limits for individual accounts. As a matter of statute, these depositors require that collateral be directly deposited by the Bank with an independent safekeeping agent, or in certain cases, that LOCs be issued by a third party that is acceptable to the depositor.  The Bank finds that, with certain depositor relationships, this method of collateralization for the benefit of the municipal depositors is more economically efficient than posting specific securities with a safekeeping agent. The Bank committed a portion of its mortgage loan portfolio as pledged collateral to the FHLBNY for the LOC.  Loans encumbered as collateral for letters of credit reduce the Bank’s available liquidity position in that available borrowing capacity with the FHLBNY is decreased substantially on a dollar-for-dollar basis.    

The Company has a number of existing credit facilities available to it. At June 30, 2018, total credit available to the Company under the existing lines of credit was approximately $194.4 million at FHLBNY, the Federal Reserve Bank, and two other correspondent banks. As of June 30, 2018, the Company had $96.1 million of the available lines of credit utilized, including encumbrances supporting outstanding letters of credit, described above, on its existing lines of credit with $98.3 million available.

 

The Asset Liability Management Committee of the Company is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity.  As of June 30, 2018, management reported to the Board of Directors that the Company is in compliance with its liquidity policy guidelines.

 

Off-Balance Sheet Arrangements

 

The Company is also a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  At June 30, 2018, the Company had $108.8 million in outstanding commitments to extend credit and standby letters of credit. 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

 

A smaller reporting company is not required to provide the information relating to this item.

 

 

Item 4 – Controls and Procedures

 

Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure

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Table of Contents

controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the Company’s internal control over financial reporting.

 

 

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Table of Contents

PART II – OTHER INFORMATION

 

Item 1 – Legal Proceedings

 

At June 30, 2018, the Company is not currently a named party in a legal proceeding, the outcome of which would have a material and adverse effect on the financial condition or results of operations of the Company.

 

Item 1A – Risk Factors

 

A smaller reporting company is not required to provide the information relating to this item.

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

 

Period

 

Total Number of Shares Purchased (1)

 

 

Average Price Paid

Per Share

 

 

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs

 

 

Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs

 

April 1, 2018 through April 30, 2018

 

 

-

 

 

$

-

 

 

 

-

 

 

 

74,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 1, 2018 through May 31, 2018

 

 

-

 

 

$

-

 

 

 

-

 

 

 

74,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 1, 2018 through June 30, 2018

 

 

-

 

 

$

-

 

 

 

-

 

 

 

74,292

 

 

(1) On August 29, 2016, our Board of Directors authorized the repurchase of up to 217,692 shares of our common stock, or 5% of the Company’s shares outstanding as of that date.

 

Item 3 – Defaults Upon Senior Securities

 

None

 

Item 4 – Mine Safety Disclosures

 

Not applicable

 

Item 5 – Other Information

 

None

 

Item 6 – Exhibits

 

Exhibit No.

Description

 

 

31.1

Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer

31.2

Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer

32

Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer

101

Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements tagged as blocks of text.

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

PATHFINDER BANCORP, INC.

(registrant)

 

August 10, 2018

/s/ Thomas W. Schneider

 

 

Thomas W. Schneider

 

 

President and Chief Executive Officer

 

 

 

 

August 10, 2018

/s/ James A. Dowd

 

 

James A. Dowd

 

 

Executive Vice President, Chief Operating Officer and Chief Financial Officer

 

 

 

 

 

- 64 -