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Pathfinder Bancorp, Inc. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

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

EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

PBHC

The NASDAQ Stock Market LLC

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 Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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

 

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 8, 2019, there were 4,707,657 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

 

8

 

Notes to Consolidated Financial Statements

 

10

 

 

 

 

Item 2.

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

 

46

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

67

 

 

 

 

Item 4.

Controls and Procedures

 

67

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

69

Item 1A.

Risk Factors

 

69

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

69

Item 3.

Defaults upon Senior Securities

 

69

Item 4.

Mine Safety Disclosures

 

69

Item 5.

Other information

 

69

Item 6.

Exhibits

 

69

 

 

 

 

SIGNATURES

 

70

 

 


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)

 

2019

 

 

2018

 

ASSETS:

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

38,739

 

 

$

9,610

 

Interest-earning deposits (including restricted balances of $0 and $3,993, respectively)

 

 

11,603

 

 

 

16,706

 

Total cash and cash equivalents

 

 

50,342

 

 

 

26,316

 

Available-for-sale securities, at fair value

 

 

117,530

 

 

 

177,664

 

Held-to-maturity securities, at amortized cost (fair value of $96,959 and $53,769, respectively)

 

 

95,324

 

 

 

53,908

 

Marketable equity securities, at fair value

 

 

510

 

 

 

453

 

Federal Home Loan Bank stock, at cost

 

 

4,443

 

 

 

5,937

 

Loans

 

 

692,823

 

 

 

620,270

 

Less: Allowance for loan losses

 

 

7,825

 

 

 

7,306

 

Loans receivable, net

 

 

684,998

 

 

 

612,964

 

Premises and equipment, net

 

 

22,247

 

 

 

20,623

 

Operating lease right-of-use assets

 

 

2,458

 

 

 

-

 

Accrued interest receivable

 

 

3,339

 

 

 

3,068

 

Foreclosed real estate

 

 

591

 

 

 

1,173

 

Intangible assets, net

 

 

157

 

 

 

165

 

Goodwill

 

 

4,536

 

 

 

4,536

 

Bank owned life insurance

 

 

17,163

 

 

 

16,941

 

Other assets

 

 

9,218

 

 

 

9,367

 

Total assets

 

$

1,012,856

 

 

$

933,115

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Interest-bearing

 

$

713,475

 

 

$

623,936

 

Noninterest-bearing

 

 

95,162

 

 

 

103,124

 

Total deposits

 

 

808,637

 

 

 

727,060

 

Short-term borrowings

 

 

29,000

 

 

 

39,000

 

Long-term borrowings

 

 

60,434

 

 

 

79,534

 

Subordinated loans

 

 

15,111

 

 

 

15,094

 

Accrued interest payable

 

 

446

 

 

 

304

 

Operating lease liabilities

 

 

2,711

 

 

 

-

 

Other liabilities

 

 

8,673

 

 

 

7,664

 

Total liabilities

 

 

925,012

 

 

 

868,656

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share; no liquidation preference; 10,000,000 and 0 shares

    authorized, respectively; 1,155,283 and 0 shares issued and outstanding, respectively

 

 

12

 

 

 

-

 

Common stock, par value $0.01; 25,000,000 authorized shares; 4,707,657 and 4,362,328

   shares issued and outstanding, respectively

 

 

47

 

 

 

44

 

Additional paid in capital

 

 

49,125

 

 

 

29,139

 

Retained earnings

 

 

42,389

 

 

 

42,114

 

Accumulated other comprehensive loss

 

 

(3,024

)

 

 

(6,042

)

Unearned ESOP

 

 

(944

)

 

 

(1,034

)

Total Pathfinder Bancorp, Inc. shareholders' equity

 

 

87,605

 

 

 

64,221

 

Noncontrolling interest

 

 

239

 

 

 

238

 

Total equity

 

 

87,844

 

 

 

64,459

 

Total liabilities and shareholders' equity

 

$

1,012,856

 

 

$

933,115

 

 

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 months ended

 

 

For the six months ended

 

(In thousands, except per share data)

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

8,222

 

 

$

7,018

 

 

$

15,797

 

 

$

13,736

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,655

 

 

 

1,171

 

 

 

3,454

 

 

 

2,299

 

Tax-exempt

 

 

51

 

 

 

217

 

 

 

159

 

 

 

465

 

Dividends

 

 

74

 

 

 

61

 

 

 

151

 

 

 

129

 

Federal funds sold and interest earning deposits

 

 

106

 

 

 

49

 

 

 

216

 

 

 

96

 

Total interest and dividend income

 

 

10,108

 

 

 

8,516

 

 

 

19,777

 

 

 

16,725

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

2,740

 

 

 

1,566

 

 

 

5,085

 

 

 

2,911

 

Interest on short-term borrowings

 

 

58

 

 

 

70

 

 

 

225

 

 

 

163

 

Interest on long-term borrowings

 

 

387

 

 

 

203

 

 

 

780

 

 

 

378

 

Interest on subordinated loans

 

 

217

 

 

 

210

 

 

 

434

 

 

 

413

 

Total interest expense

 

 

3,402

 

 

 

2,049

 

 

 

6,524

 

 

 

3,865

 

Net interest income

 

 

6,706

 

 

 

6,467

 

 

 

13,253

 

 

 

12,860

 

Provision for loan losses

 

 

610

 

 

 

297

 

 

 

754

 

 

 

910

 

Net interest income after provision for loan losses

 

 

6,096

 

 

 

6,170

 

 

 

12,499

 

 

 

11,950

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

348

 

 

 

273

 

 

 

630

 

 

 

547

 

Earnings and gain on bank owned life insurance

 

 

101

 

 

 

108

 

 

 

222

 

 

 

181

 

Loan servicing fees

 

 

60

 

 

 

42

 

 

 

87

 

 

 

83

 

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

 

 

32

 

 

 

(22

)

 

 

111

 

 

 

(129

)

Gains on marketable equity securities

 

 

16

 

 

 

13

 

 

 

57

 

 

 

26

 

Net gains on sales of loans and foreclosed real estate

 

 

13

 

 

 

13

 

 

 

5

 

 

 

16

 

Debit card interchange fees

 

 

187

 

 

 

148

 

 

 

331

 

 

 

291

 

Insurance agency revenue

 

 

218

 

 

 

236

 

 

 

461

 

 

 

465

 

Other charges, commissions & fees

 

 

244

 

 

 

213

 

 

 

408

 

 

 

439

 

Total noninterest income

 

 

1,219

 

 

 

1,024

 

 

 

2,312

 

 

 

1,919

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,454

 

 

 

3,211

 

 

 

7,104

 

 

 

6,190

 

Building occupancy

 

 

632

 

 

 

503

 

 

 

1,287

 

 

 

1,088

 

Data processing

 

 

587

 

 

 

453

 

 

 

1,162

 

 

 

912

 

Professional and other services

 

 

380

 

 

 

405

 

 

 

716

 

 

 

736

 

Advertising

 

 

242

 

 

 

281

 

 

 

481

 

 

 

468

 

FDIC assessments

 

 

130

 

 

 

135

 

 

 

241

 

 

 

255

 

Audits and exams

 

 

100

 

 

 

105

 

 

 

200

 

 

 

210

 

Insurance agency expense

 

 

229

 

 

 

325

 

 

 

428

 

 

 

489

 

Community service activities

 

 

144

 

 

 

141

 

 

 

282

 

 

 

228

 

Foreclosed real estate expenses

 

 

59

 

 

 

48

 

 

 

296

 

 

 

74

 

Other expenses

 

 

582

 

 

 

520

 

 

 

1,053

 

 

 

936

 

Total noninterest expense

 

 

6,539

 

 

 

6,127

 

 

 

13,250

 

 

 

11,586

 

Income before income taxes

 

 

776

 

 

 

1,067

 

 

 

1,561

 

 

 

2,283

 

Provision for income taxes

 

 

175

 

 

 

166

 

 

 

426

 

 

 

348

 

Net income attributable to noncontrolling interest and

   Pathfinder Bancorp, Inc.

 

 

601

 

 

 

901

 

 

 

1,135

 

 

 

1,935

 

Net (loss) income attributable to noncontrolling interest

 

 

(6

)

 

 

(44

)

 

 

14

 

 

 

(14

)

Net income attributable to Pathfinder Bancorp Inc.

 

$

607

 

 

$

945

 

 

$

1,121

 

 

$

1,949

 

Convertible preferred stock dividends

 

 

69

 

 

 

-

 

 

 

69

 

 

 

-

 

Warrant dividend

 

 

8

 

 

 

-

 

 

 

8

 

 

 

-

 

Undistributed earnings allocated to participating securities

 

 

38

 

 

 

-

 

 

 

41

 

 

 

-

 

Net Income available to common shareholders

 

$

492

 

 

$

945

 

 

$

1,003

 

 

$

1,949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.11

 

 

$

0.23

 

 

$

0.23

 

 

$

0.47

 

Earnings per common share - diluted

 

$

0.11

 

 

$

0.22

 

 

$

0.23

 

 

$

0.46

 

Dividends per common share

 

$

0.06

 

 

$

0.06

 

 

$

0.12

 

 

$

0.12

 

 

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, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

Net Income

 

$

601

 

 

$

901

 

 

$

1,135

 

 

$

1,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement Plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement plan net losses recognized in plan expenses

 

 

84

 

 

 

43

 

 

 

168

 

 

 

86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

1,759

 

 

 

(1,156

)

 

 

3,748

 

 

 

(2,502

)

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

 

 

(32

)

 

 

22

 

 

 

(111

)

 

 

129

 

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

 

 

1,727

 

 

 

(1,134

)

 

 

3,637

 

 

 

(2,373

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

   maturity(1)

 

 

9

 

 

 

470

 

 

 

15

 

 

 

163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), before tax

 

 

1,820

 

 

 

(621

)

 

 

3,820

 

 

 

(2,124

)

Tax effect

 

 

(382

)

 

 

162

 

 

 

(802

)

 

 

555

 

Other comprehensive income (loss), net of tax

 

 

1,438

 

 

 

(459

)

 

 

3,018

 

 

 

(1,569

)

Comprehensive income

 

$

2,039

 

 

$

442

 

 

$

4,153

 

 

$

366

 

Comprehensive (loss) income, attributable to noncontrolling interest

 

$

(6

)

 

$

(44

)

 

$

14

 

 

$

(14

)

Comprehensive income attributable to Pathfinder Bancorp, Inc.

 

$

2,045

 

 

$

486

 

 

$

4,139

 

 

$

380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement plan net losses recognized in plan expenses

 

$

(18

)

 

$

(11

)

 

$

(37

)

 

$

(22

)

Unrealized holding gains (losses) arising during the period

 

 

(369

)

 

 

302

 

 

 

(785

)

 

 

654

 

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

 

 

7

 

 

 

(6

)

 

 

23

 

 

 

(34

)

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

   maturity(1)

 

 

(2

)

 

 

(123

)

 

 

(3

)

 

 

(43

)

Income tax effect related to other comprehensive income (loss)

 

$

(382

)

 

$

162

 

 

$

(802

)

 

$

555

 

 

(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

Three months ended June 30, 2019 and June 30, 2018

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other Com-

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Preferred

 

 

Common

 

 

Paid in

 

 

Retained

 

 

prehensive

 

 

Unearned

 

 

controlling

 

 

 

 

 

(In thousands, except share and per share data)

 

Stock

 

 

Stock

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

ESOP

 

 

Interest

 

 

Total

 

Balance, March 31, 2019

 

$

-

 

 

$

44

 

 

$

29,454

 

 

$

42,133

 

 

$

(4,462

)

 

$

(989

)

 

$

258

 

 

$

66,438

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

607

 

 

 

-

 

 

 

-

 

 

 

(6

)

 

 

601

 

Other comprehensive income, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,438

 

 

 

-

 

 

 

-

 

 

 

1,438

 

Proceeds of common stock private placement,

   net of expenses (1)

 

 

-

 

 

 

3

 

 

 

3,823

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,826

 

Proceeds of preferred stock private placement,

   net of expenses (1)

 

 

12

 

 

 

-

 

 

 

15,358

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

15,370

 

Effect of warrant issued from private placement (1)

 

 

-

 

 

 

-

 

 

 

373

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

373

 

ESOP shares earned (6,110 shares)

 

 

-

 

 

 

-

 

 

 

44

 

 

 

-

 

 

 

-

 

 

 

45

 

 

 

-

 

 

 

89

 

Restricted stock units (13,436 shares)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock based compensation

 

 

-

 

 

 

-

 

 

 

73

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

73

 

Common stock dividends declared ($0.06 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(274

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(274

)

Preferred stock dividends declared ($0.06 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(69

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(69

)

Warrant dividends declared ($0.06 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8

)

Distributions from affiliates

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13

)

 

 

(13

)

Balance, June 30, 2019

 

$

12

 

 

$

47

 

 

$

49,125

 

 

$

42,389

 

 

$

(3,024

)

 

$

(944

)

 

$

239

 

 

$

87,844

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2018

 

$

-

 

 

$

43

 

 

$

28,384

 

 

$

39,829

 

 

$

(5,012

)

 

$

(1,169

)

 

$

363

 

 

$

62,438

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

945

 

 

 

-

 

 

 

-

 

 

 

(44

)

 

 

901

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(459

)

 

 

-

 

 

 

-

 

 

 

(459

)

ESOP shares earned (6,110 shares)

 

 

-

 

 

 

-

 

 

 

52

 

 

 

-

 

 

 

-

 

 

 

45

 

 

 

-

 

 

 

97

 

Restricted stock units (14,490 shares)

 

 

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock based compensation

 

 

-

 

 

 

-

 

 

 

81

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

81

 

Stock options exercised

 

 

-

 

 

 

-

 

 

 

120

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

120

 

Cumulative effect of affiliate capital allocation

 

 

-

 

 

 

-

 

 

 

(8

)

 

 

15

 

 

 

-

 

 

 

-

 

 

 

(7

)

 

 

-

 

Common stock dividends declared ($0.06 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(249

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(249

)

Distributions from affiliates

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(60

)

 

 

(60

)

Balance, June 30, 2018

 

$

-

 

 

$

43

 

 

$

28,629

 

 

$

40,540

 

 

$

(5,471

)

 

$

(1,124

)

 

$

252

 

 

$

62,869

 

 

(1)

On May 8, 2019, the Company entered into a Securities Purchase Agreement with an institutional investor, in which it sold: (i) 37,700 shares of the Company’s common stock, (ii) 1,155,283 shares of a new series of preferred stock, Series B convertible perpetual preferred stock; and (iii) a warrant to purchase 125,000 shares of common stock in a private placement transaction.  The Company also entered into Subscription Agreements with certain directors and executive officers of the Company as well as other accredited investors. Pursuant to the Subscription Agreements, the investors purchased an aggregate of 269,277 shares of common stock.

 

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

- 6 -


Table of Contents

Pathfinder Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

Six months ended June 30, 2019 and June 30, 2018

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other Com-

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

Preferred

 

 

Common

 

 

Paid in

 

 

Retained

 

 

prehensive

 

 

Unearned

 

 

controlling

 

 

 

 

 

(In thousands, except share and per share data)

 

Stock

 

 

Stock

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

ESOP

 

 

Interest

 

 

Total

 

Balance, January 1, 2019

 

$

-

 

 

$

44

 

 

$

29,139

 

 

$

42,114

 

 

$

(6,042

)

 

$

(1,034

)

 

$

238

 

 

$

64,459

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,121

 

 

 

-

 

 

 

-

 

 

 

14

 

 

 

1,135

 

Other comprehensive income, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,018

 

 

 

-

 

 

 

-

 

 

 

3,018

 

Proceeds of common stock private placement,

   net of expenses (1)

 

 

-

 

 

 

3

 

 

 

3,823

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,826

 

Proceeds of preferred stock private placement,

   net of expenses (1)

 

 

12

 

 

 

-

 

 

 

15,358

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

15,370

 

Effect of warrant issued from private placement (1)

 

 

-

 

 

 

-

 

 

 

373

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

373

 

ESOP shares earned (12,221 shares)

 

 

-

 

 

 

-

 

 

 

86

 

 

 

-

 

 

 

-

 

 

 

90

 

 

 

-

 

 

 

176

 

Restricted stock units (13,436 shares)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock based compensation

 

 

-

 

 

 

-

 

 

 

146

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

146

 

Stock options exercised

 

 

-

 

 

 

-

 

 

 

200

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

200

 

Cumulative effect of change in measurement of

   operating leases (2)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(239

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(239

)

Common stock dividends declared ($0.12 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(530

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(530

)

Preferred stock dividends declared ($0.06 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(69

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(69

)

Warrant dividends declared ($0.06 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8

)

Distributions from affiliates

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13

)

 

 

(13

)

Balance, June 30, 2019

 

$

12

 

 

$

47

 

 

$

49,125

 

 

$

42,389

 

 

$

(3,024

)

 

$

(944

)

 

$

239

 

 

$

87,844

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

 

$

-

 

 

$

43

 

 

$

28,170

 

 

$

39,020

 

 

$

(4,208

)

 

$

(1,214

)

 

$

333

 

 

$

62,144

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

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 (3)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

53

 

 

 

(53

)

 

 

-

 

 

 

-

 

 

 

-

 

Cumulative effect of change in investment securities

   transfer (4)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

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

 

 

(1)

On May 8, 2019, the Company entered into a Securities Purchase Agreement with an institutional investor, in which it sold: (i) 37,700 shares of the Company’s common stock, (ii) 1,155,283 shares of a new series of preferred stock, Series B convertible perpetual preferred stock; and (iii) a warrant to purchase 125,000 shares of common stock in a private placement transaction.  The Company also entered into Subscription Agreements with certain directors and executive officers of the Company as well as other accredited investors. Pursuant to the Subscription Agreements, the investors purchased an aggregate of 269,277 shares of common stock.

(2)

Cumulative effect of the adoption of ASU 2016-02, Leases (Topic 842), based on the difference in the right-of-use asset and lease liability as of January 1, 2019.

(3)

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.

(4)

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.

- 7 -


Table of Contents

Pathfinder Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the six months ended June 30,

 

(In thousands)

 

2019

 

 

2018

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income attributable to Pathfinder Bancorp, Inc.

 

$

1,121

 

 

$

1,949

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

754

 

 

 

910

 

Amortization of operating leases

 

 

15

 

 

 

-

 

Proceeds from sales of loans

 

 

48

 

 

 

-

 

Originations of loans held-for-sale

 

 

(47

)

 

 

-

 

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

 

 

 

 

 

 

 

 

Real estate acquired through foreclosure

 

 

-

 

 

 

(16

)

Loans

 

 

(5

)

 

 

-

 

Available-for-sale investment securities

 

 

(111

)

 

 

131

 

Held-to-maturity investment securities

 

 

-

 

 

 

(2

)

Premises and equipment

 

 

-

 

 

 

(8

)

Marketable equity securities

 

 

(57

)

 

 

(26

)

Depreciation

 

 

744

 

 

 

578

 

Amortization of mortgage servicing rights

 

 

2

 

 

 

22

 

Amortization of deferred loan costs

 

 

128

 

 

 

150

 

Amortization of deferred financing from subordinated debt

 

 

17

 

 

 

17

 

Earnings and gain on bank owned life insurance

 

 

(222

)

 

 

(181

)

Net amortization of premiums and discounts on investment securities

 

 

618

 

 

 

994

 

Amortization of intangible assets

 

 

8

 

 

 

9

 

Stock based compensation and ESOP expense

 

 

322

 

 

 

353

 

Net change in accrued interest receivable

 

 

(271

)

 

 

322

 

Pension plan contribution

 

 

-

 

 

 

(825

)

Net change in other assets and liabilities

 

 

14

 

 

 

674

 

Net cash flows from operating activities

 

 

3,078

 

 

 

5,051

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchase of investment securities available-for-sale

 

 

(12,280

)

 

 

(34,427

)

Purchase of investment securities held-to-maturity

 

 

(46,970

)

 

 

-

 

Purchase of Federal Home Loan Bank stock

 

 

(2,605

)

 

 

(4,660

)

Proceeds from redemption of Federal Home Loan Bank stock

 

 

4,099

 

 

 

4,127

 

Proceeds from maturities and principal reductions of investment securities

   available-for-sale

 

 

12,044

 

 

 

24,941

 

Proceeds from maturities and principal reductions of investment securities

   held-to-maturity

 

 

5,035

 

 

 

4,688

 

Proceeds from sales, redemptions and calls of:

 

 

 

 

 

 

 

 

Available-for-sale investment securities

 

 

63,486

 

 

 

27,125

 

Held-to-maturity investment securities

 

 

548

 

 

 

967

 

Real estate acquired through foreclosure

 

 

1,085

 

 

 

496

 

Premise and equipment

 

 

-

 

 

 

14

 

Purchase of bank owned life insurance

 

 

-

 

 

 

(5,000

)

Proceeds from bank owned life insurance

 

 

-

 

 

 

228

 

Net change in loans

 

 

(73,419

)

 

 

(27,044

)

Purchase of premises and equipment

 

 

(2,368

)

 

 

(1,159

)

Net cash flows from investing activities

 

 

(51,345

)

 

 

(9,704

)

- 8 -


Table of Contents

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

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

deposit accounts, MMDA accounts and escrow deposits

 

 

(14,292

)

 

 

(2,634

)

Net change in time deposits

 

 

61,781

 

 

 

1,842

 

Net change in brokered deposits

 

 

34,088

 

 

 

10,358

 

Net change in short-term borrowings

 

 

(10,000

)

 

 

(4,000

)

Payments on long-term borrowings

 

 

(19,100

)

 

 

-

 

Proceeds from long-term borrowings

 

 

-

 

 

 

14,215

 

Proceeds from exercise of stock options

 

 

200

 

 

 

204

 

Cash dividends paid to common shareholders

 

 

(526

)

 

 

(502

)

Net proceeds from common stock private placement

 

 

4,199

 

 

 

-

 

Net proceeds from preferred stock private placement

 

 

15,370

 

 

 

-

 

Proceeds from finance lease transaction

 

 

572

 

 

 

-

 

Change in noncontrolling interest, net

 

 

1

 

 

 

(81

)

Net cash flows from financing activities

 

 

72,293

 

 

 

19,402

 

Change in cash and cash equivalents

 

 

24,026

 

 

 

14,749

 

Cash and cash equivalents at beginning of period

 

 

26,316

 

 

 

21,991

 

Cash and cash equivalents at end of period

 

$

50,342

 

 

$

36,740

 

CASH PAID DURING THE PERIOD FOR:

 

 

 

 

 

 

 

 

Interest

 

$

6,382

 

 

$

3,793

 

Income taxes

 

 

-

 

 

 

645

 

NON-CASH INVESTING ACTIVITY

 

 

 

 

 

 

 

 

Real estate acquired in exchange for loans

 

 

503

 

 

 

109

 

RESTRICTED CASH

 

 

 

 

 

 

 

 

Federal Reserve Bank Reserve Requirements included in interest earning deposits

 

 

-

 

 

 

4,365

 

 

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


- 9 -


Table of Contents

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 2018 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, 2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019 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 the accounting standards that are not currently effective, but could have an impact on the Company's consolidated financial statements upon adoption.

 

Standards Not Yet Adopted as of June 30, 2019

 

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

- 10 -


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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). On July 17, the FASB made a tentative decision to change the CECL effective date for all non-SEC filing companies and SEC filers considered small reporting companies (SRCs), such as the Company.  Under this tentative decision, SRCs will have until January 1, 2023 to implement this Update. This decision is still subject to potential modification, following a designated comment period, and final promulgation. It is considered likely, however, that the mandatory implementation date for this Update will be extended to the newly-proposed date.

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 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:  Transition Relief for the Implementation of ASU-2016-13 (ASU 2019-5: Financial Instruments—Credit Losses [Topic 326]: Targeted Transition Relief)

 

Description: The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments—Credit Losses— Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326.  The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement—Overall, and 825-10.

 

General guidance for the use of the fair value option is contained in Subtopic 825-10. The irrevocable election of the fair value option must be applied on an instrument-by-instrument basis for eligible instruments, whose characteristics are within the scope of Subtopic 326-20.  Upon adoption of Topic 326, for items measured at fair value in accordance with paragraph 326-10-65-1(i), the difference between the carrying amount and the fair value shall be recorded by means of a cumulative-effect adjustment to the opening retained earnings balance as of the beginning of the first reporting period that an entity has adopted ASU 2016-13. Those differences may include, but are not limited to: (1) unamortized deferred costs, fees, premiums, and discounts (2) valuation allowances (for example, allowance for loan losses), or (3) accrued interest.

 

Required Date of Implementation:  See comments above related to ASU 2016-13.

 

Effect on Consolidated Financial Statements:  See comments above related to ASU 2016-13.

_____

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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: Fair Value Measurement (ASU 2018-13: Fair Value Measurement [Topic 820]: Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement

Description:  The FASB is issuing the amendments in this ASU as part of the disclosure framework project. The disclosure framework project’s objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP that is most important to users of each entity’s financial statements. The amendments in this ASU modify the disclosure requirements for entities such as the Company on fair value measurements in Topic 820, Fair Value Measurement.

 

The following disclosure requirements were removed from Topic 820:

 

1.

The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy

 

2.

The policy for timing of transfers between levels

 

3.

The valuation processes for Level 3 fair value measurements

 

The following disclosure requirements were modified in Topic 820:

 

1.

For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.

 

2.

The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.

 

The following disclosure requirements were added to Topic 820:

 

1.

The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period

 

2.

The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

 


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Required Date of Implementation:  The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date.

 

Effect on Consolidated Financial Statements:  The Company does not expect the new guidance will have a material impact to its consolidated statements of condition or income.

____

 

Standard:  Compensation (ASU 2018-14: Compensation - Retirement Benefits - Defined Benefit Plans - General [Subtopic 715 – 20]: Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans)

Description:  The FASB is issuing the amendments in this ASU as part of the disclosure framework project. The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

 

The following disclosure requirements are removed from Subtopic 715-20:

 

1.

The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.

 

2.

The amount and timing of plan assets expected to be returned to the employer.

 

3.

Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan.

 

4.

The effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.

 

The following disclosure requirements are added to Subtopic 715-20:

 

1.

The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates.

 

2.

An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.


The amendments in this ASU also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed:

 

1.

The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets.

 

2.

The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.

 

Required Date of Implementation:  The amendments in this ASU are effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities.

 

Effect on Consolidated Financial Statements:  The Company does not expect the new guidance will have a material impact to its consolidated statements of condition or income.

____

 


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Standard: Leases (ASU 2019-1: Leases [Topic 842] Codification Improvements)

 

Description:  On February 25, 2016, the FASB issued Accounting Standards ASU No. 2016- 02, Leases [Topic 842], to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing essential information about leasing transactions. ASU 2019-1 addresses three Issues: (1) Determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; (2) Presentation on the statement of cash flows for sales-type and direct financing leases; and (3) Transition disclosures related to Topic 250, Accounting Changes and Error Corrections.  

 

The amendments in this ASU address Issue 1, described above, and reinstate the exception in Topic 842 for lessors that are not manufacturers or dealers (generally financial institutions and captive finance companies).  Specifically, those lessors will use their cost, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset. However, if significant time lapses between the acquisition of the underlying asset and lease commencement, those lessors will be required to apply the definition of fair value (exit price) in Topic 820.

 

Topic 840 does not provide guidance on how cash received from leases by lessors from sales-type and direct financing leases should be presented in the cash flow statement.  The amendments in this ASU address Issue 2, described above, as to the concerns of lessors within the scope of Topic 942 about where “principal payments received under leases” should be presented. Specifically, lessors that are depository and lending institutions within the scope of Topic 942 will present all “principal payments received under leases” within investing activities in the Statement of Cash Flows.

 

Required Date of Implementation:  The amendments in this ASU amend Topic 842. The effective date of those amendments for public business entities, such as the Company, is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.

 

Effect on Consolidated Financial Statements:  The Company does not expect that the new guidance will have a material impact to its consolidated statements of condition or income.

____

Standard: Various Codification Improvements (ASU 2019-4: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments)

 

Description:  Since 2016, the FASB has issued the following Updates related to financial instruments:

 

1.

Accounting Standards Update No. 2016-01, Financial Instruments— Overall [Subtopic 825-10]: Recognition and Measurement of Financial Assets and Financial Liabilities;

 

2.

Accounting Standards Update No. 2016-13, Financial Instruments— Credit Losses [Topic 326]: Measurement of Credit Losses on Financial Instruments; and

 

3.

Accounting Standards Update No. 2017-12, Derivatives and Hedging [Topic 815]: Targeted Improvements to Accounting for Hedging Activities.

 

The FASB has an ongoing project on its agenda for improving the Codification or correcting its unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or to create a significant administrative cost for most entities. The amendments in this ASU are similar to those items and are summarized below.

 

For Codification Improvements specific to ASU 2016-01, the following topics were covered within ASU 2019-04:

 

 

Scope Clarifications

 

Held-to-Maturity Debt Securities Fair Value Disclosures

 

Applicability of Topic 820 to the Measurement Alternative

 

Remeasurement of Equity Securities at Historical Exchange Rates

 

The amendments to Topic 326 and other Topics in this Update include items related to the amendments in Update 2016-13 discussed at the June 2018 and November 2018 Credit Losses Transition Resource Group (“TRG”) meetings. The

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amendments clarify or address stakeholders’ specific issues about certain aspects of the amendments in Update 2016-13 on a number of different topics, including the following:  

 

 

Accrued Interest

 

Transfers between Classifications or Categories for Loans and Debt Securities

 

Recoveries

 

Consideration of Prepayments in Determining the Effective Interest Rate

 

Consideration of Estimated Costs to Sell When Foreclosure Is Probable

 

 

Vintage Disclosures— Line-of-Credit Arrangements Converted to Term Loans

 

 

Contractual Extensions and Renewals

 

 

The ASU also covered a number of issues that related to hedge accounting (ASU-2017-12) including:

 

 

Partial-Term Fair Value Hedges of Interest Rate Risk

 

 

Amortization of Fair Value Hedge Basis Adjustments

 

 

Disclosure of Fair Value Hedge Basis Adjustments

 

 

Consideration of the Hedged Contractually Specified Interest Rate under the Hypothetical Derivative Method

 

 

Scoping for Not-for-Profit Entities

 

 

Hedge Accounting Provisions Applicable to Certain Private Companies and Not-for- Profit Entities

 

 

Application of a First- Payments-Received Cash Flow Hedging Technique to Overall Cash Flows on a Group of Variable Interest Payments

 

 

Transition Guidance

 

 

Required Dates of Implementation:  This ASU 2019-04 has various implementation dates dependent on a number of factors as it pertains to the above items.  The Company has adopted ASU 2016-01.

 

Effect on Consolidated Financial Statements:  The Company does not expect that the new guidance will have a material impact to its consolidated statements of condition or income.

 

 


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Note 3:   Earnings per Common Share

 

The Company entered into a Securities Purchase Agreement with Castle Creek Capital Partners VII, L.P. on May 8, 2019.  As a result of that agreement, the Company has common stock, Series B convertible perpetual preferred stock and a warrant that are all eligible to participate in dividends equal to the common stock dividends on a per share basis. Securities that participate in dividends, such as the Company’s preferred stock and warrant, are considered “participating securities.”  The Company calculates net income available to common shareholders using the two-class method required for capital structures that include participating securities.    

 

In applying the two-class method for the three and six months ended June 30, 2019, basic net income per share was calculated by dividing net income (less any dividends on participating securities) by the weighted average number of shares of common stock and participating securities outstanding for the period. Diluted earnings per share may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is calculated by applying either the two-class method or the Treasury Stock method to the assumed exercise or vesting of potentially dilutive common shares.  The method yielding the more dilutive result is ultimately reported for the applicable period. Potentially dilutive common stock equivalents primarily consist of employee stock options and restricted stock units. 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.

 

Basic earnings per share for the three and six months ended June 30, 2018 were 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.  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.

 

Anti-dilutive shares are common stock equivalents with average exercise prices in excess of the weighted average market price for the period presented.  Anti-dilutive stock options, not included in the computation below, were -0- for the three and six months ended June 30, 2019 and were -0- for the three and six months ended June 30, 2018.

 

 

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)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income attributable to Pathfinder Bancorp, Inc.

 

$

607

 

 

$

945

 

 

$

1,121

 

 

$

1,949

 

Convertible preferred stock dividends

 

 

69

 

 

 

-

 

 

 

69

 

 

 

-

 

Warrant dividends

 

 

8

 

 

 

-

 

 

 

8

 

 

 

-

 

Undistributed earnings allocated to participating securities

 

 

38

 

 

 

-

 

 

 

41

 

 

 

-

 

Net income available to common shareholders

 

$

492

 

 

$

945

 

 

$

1,003

 

 

$

1,949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

4,443

 

 

 

4,157

 

 

 

4,344

 

 

 

4,138

 

Effect of assumed exercise of stock options and

   unvested restricted stock units

 

 

-

 

 

 

99

 

 

 

-

 

 

 

108

 

Diluted weighted average common shares outstanding

 

 

4,443

 

 

 

4,256

 

 

 

4,344

 

 

 

4,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.11

 

 

$

0.23

 

 

$

0.23

 

 

$

0.47

 

Diluted earnings per common share

 

$

0.11

 

 

$

0.22

 

 

$

0.23

 

 

$

0.46

 

 

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Note 4:   Investment Securities

 

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

 

 

 

June 30, 2019

 

 

 

 

 

 

 

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

 

$

12,124

 

 

$

-

 

 

$

(41

)

 

$

12,083

 

State and political subdivisions

 

 

4,929

 

 

 

2

 

 

 

(3

)

 

 

4,928

 

Corporate

 

 

15,282

 

 

 

309

 

 

 

(49

)

 

 

15,542

 

Asset backed securities

 

 

16,985

 

 

 

176

 

 

 

(24

)

 

 

17,137

 

Residential mortgage-backed - US agency

 

 

18,819

 

 

 

46

 

 

 

(74

)

 

 

18,791

 

Collateralized mortgage obligations - US agency

 

 

34,607

 

 

 

40

 

 

 

(665

)

 

 

33,982

 

Collateralized mortgage obligations - Private label

 

 

14,774

 

 

 

128

 

 

 

(40

)

 

 

14,862

 

Total

 

 

117,520

 

 

 

701

 

 

 

(896

)

 

 

117,325

 

Equity investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock - financial services industry

 

 

205

 

 

 

-

 

 

 

-

 

 

 

205

 

Total

 

 

205

 

 

 

-

 

 

 

-

 

 

 

205

 

Total available-for-sale

 

$

117,725

 

 

$

701

 

 

$

(896

)

 

$

117,530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

2,993

 

 

$

-

 

 

$

(4

)

 

$

2,989

 

State and political subdivisions

 

 

6,615

 

 

 

85

 

 

 

-

 

 

 

6,700

 

Corporate

 

 

20,194

 

 

 

420

 

 

 

(40

)

 

 

20,574

 

Asset backed securities

 

 

10,653

 

 

 

165

 

 

 

-

 

 

 

10,818

 

Residential mortgage-backed - US agency

 

 

17,135

 

 

 

577

 

 

 

-

 

 

 

17,712

 

Collateralized mortgage obligations - US agency

 

 

17,804

 

 

 

424

 

 

 

-

 

 

 

18,228

 

Collateralized mortgage obligations - Private label

 

 

19,930

 

 

 

57

 

 

 

(49

)

 

 

19,938

 

Total held-to-maturity

 

$

95,324

 

 

$

1,728

 

 

$

(93

)

 

$

96,959

 

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December 31, 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

 

$

17,171

 

 

$

18

 

 

$

(158

)

 

$

17,031

 

State and political subdivisions

 

 

23,661

 

 

 

6

 

 

 

(602

)

 

 

23,065

 

Corporate

 

 

17,389

 

 

 

220

 

 

 

(409

)

 

 

17,200

 

Asset backed securities

 

 

18,243

 

 

 

13

 

 

 

(137

)

 

 

18,119

 

Residential mortgage-backed - US agency

 

 

32,409

 

 

 

34

 

 

 

(777

)

 

 

31,666

 

Collateralized mortgage obligations - US agency

 

 

48,101

 

 

 

31

 

 

 

(1,691

)

 

 

46,441

 

Collateralized mortgage obligations - Private label

 

 

24,317

 

 

 

17

 

 

 

(398

)

 

 

23,936

 

Total

 

 

181,291

 

 

 

339

 

 

 

(4,172

)

 

 

177,458

 

Equity investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock - financial services industry

 

 

206

 

 

 

-

 

 

 

-

 

 

 

206

 

Total

 

 

206

 

 

 

-

 

 

 

-

 

 

 

206

 

Total available-for-sale

 

$

181,497

 

 

$

339

 

 

$

(4,172

)

 

$

177,664

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

3,987

 

 

$

-

 

 

$

(35

)

 

$

3,952

 

State and political subdivisions

 

 

5,089

 

 

 

22

 

 

 

(84

)

 

 

5,027

 

Corporate

 

 

9,924

 

 

 

4

 

 

 

(182

)

 

 

9,746

 

Asset backed securities

 

 

1,509

 

 

 

-

 

 

 

(13

)

 

 

1,496

 

Residential mortgage-backed - US agency

 

 

11,601

 

 

 

124

 

 

 

(47

)

 

 

11,678

 

Collateralized mortgage obligations - US agency

 

 

13,972

 

 

 

93

 

 

 

(13

)

 

 

14,052

 

Collateralized mortgage obligations - Private label

 

 

7,826

 

 

 

17

 

 

 

(25

)

 

 

7,818

 

Total held-to-maturity

 

$

53,908

 

 

$

260

 

 

$

(399

)

 

$

53,769

 

 

The amortized cost and estimated fair value of debt investments at June 30, 2019 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

 

$

8,355

 

 

$

8,345

 

 

$

3,100

 

 

$

3,105

 

Due after one year through five years

 

 

12,044

 

 

 

12,302

 

 

 

16,337

 

 

 

16,594

 

Due after five years through ten years

 

 

21,490

 

 

 

21,566

 

 

 

13,163

 

 

 

13,461

 

Due after ten years

 

 

7,431

 

 

 

7,477

 

 

 

7,855

 

 

 

7,921

 

Sub-total

 

 

49,320

 

 

 

49,690

 

 

 

40,455

 

 

 

41,081

 

Residential mortgage-backed - US agency

 

 

18,819

 

 

 

18,791

 

 

 

17,135

 

 

 

17,712

 

Collateralized mortgage obligations - US agency

 

 

34,607

 

 

 

33,982

 

 

 

17,804

 

 

 

18,228

 

Collateralized mortgage obligations - Private label

 

 

14,774

 

 

 

14,862

 

 

 

19,930

 

 

 

19,938

 

Totals

 

$

117,520

 

 

$

117,325

 

 

$

95,324

 

 

$

96,959

 

 

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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, 2019

 

 

 

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

 

 

2

 

 

$

(32

)

 

$

7,039

 

 

 

1

 

 

$

(9

)

 

$

5,024

 

 

 

3

 

 

$

(41

)

 

$

12,063

 

State and political subdivisions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

(3

)

 

 

3,001

 

 

 

1

 

 

 

(3

)

 

 

3,001

 

Corporate

 

 

1

 

 

 

(1

)

 

 

758

 

 

 

5

 

 

 

(48

)

 

 

4,000

 

 

 

6

 

 

 

(49

)

 

 

4,758

 

Asset backed securities

 

 

1

 

 

 

(1

)

 

 

1,267

 

 

 

2

 

 

 

(23

)

 

 

3,134

 

 

 

3

 

 

 

(24

)

 

 

4,401

 

Residential mortgage-backed - US agency

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9

 

 

 

(74

)

 

 

9,684

 

 

 

9

 

 

 

(74

)

 

 

9,684

 

Collateralized mortgage obligations - US agency

 

 

2

 

 

 

(1

)

 

 

1,257

 

 

 

22

 

 

 

(664

)

 

 

26,306

 

 

 

24

 

 

 

(665

)

 

 

27,563

 

Collateralized mortgage obligations - Private label

 

 

2

 

 

 

(5

)

 

 

3,505

 

 

 

4

 

 

 

(35

)

 

 

3,605

 

 

 

6

 

 

 

(40

)

 

 

7,110

 

Totals

 

 

8

 

 

$

(40

)

 

$

13,826

 

 

 

44

 

 

$

(856

)

 

$

54,754

 

 

 

52

 

 

$

(896

)

 

$

68,580

 

Held-to-Maturity Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSE's

 

 

-

 

 

$

-

 

 

$

-

 

 

 

2

 

 

$

(4

)

 

$

1,996

 

 

 

2

 

 

$

(4

)

 

$

1,996

 

State and political subdivisions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

101

 

 

 

1

 

 

 

-

 

 

 

101

 

Corporate

 

 

1

 

 

 

(1

)

 

 

1,011

 

 

 

2

 

 

 

(39

)

 

 

2,849

 

 

 

3

 

 

 

(40

)

 

 

3,860

 

Residential mortgage-backed - US agency

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

241

 

 

 

1

 

 

 

-

 

 

 

241

 

Collateralized mortgage obligations - US agency

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Collateralized mortgage obligations - Private label

 

 

2

 

 

 

(44

)

 

 

4,001

 

 

 

2

 

 

 

(5

)

 

 

1,466

 

 

 

4

 

 

 

(49

)

 

 

5,467

 

Totals

 

 

3

 

 

$

(45

)

 

$

5,012

 

 

 

8

 

 

$

(48

)

 

$

6,653

 

 

 

11

 

 

$

(93

)

 

$

11,665

 

 

 

 

December 31, 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

 

 

1

 

 

$

(22

)

 

$

977

 

 

 

2

 

 

$

(136

)

 

$

12,017

 

 

 

3

 

 

$

(158

)

 

$

12,994

 

State and political subdivisions

 

 

5

 

 

 

(76

)

 

 

5,213

 

 

 

26

 

 

 

(526

)

 

 

14,206

 

 

 

31

 

 

 

(602

)

 

 

19,419

 

Corporate

 

 

10

 

 

 

(137

)

 

 

8,266

 

 

 

4

 

 

 

(272

)

 

 

3,374

 

 

 

14

 

 

 

(409

)

 

 

11,640

 

Asset backed securities

 

 

7

 

 

 

(91

)

 

 

10,470

 

 

 

2

 

 

 

(46

)

 

 

3,059

 

 

 

9

 

 

 

(137

)

 

 

13,529

 

Residential mortgage-backed - US agency

 

 

6

 

 

 

(83

)

 

 

3,519

 

 

 

21

 

 

 

(694

)

 

 

24,154

 

 

 

27

 

 

 

(777

)

 

 

27,673

 

Collateralized mortgage obligations - US agency

 

 

3

 

 

 

(98

)

 

 

2,792

 

 

 

28

 

 

 

(1,593

)

 

 

35,765

 

 

 

31

 

 

 

(1,691

)

 

 

38,557

 

Collateralized mortgage obligations - Private label

 

 

7

 

 

 

(275

)

 

 

14,011

 

 

 

5

 

 

 

(123

)

 

 

5,907

 

 

 

12

 

 

 

(398

)

 

 

19,918

 

Totals

 

 

39

 

 

$

(782

)

 

$

45,248

 

 

 

88

 

 

$

(3,390

)

 

$

98,482

 

 

 

127

 

 

$

(4,172

)

 

$

143,730

 

Held-to-Maturity Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSE's

 

 

1

 

 

$

(8

)

 

$

982

 

 

 

3

 

 

$

(27

)

 

$

2,970

 

 

 

4

 

 

$

(35

)

 

$

3,952

 

State and political subdivisions

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6

 

 

 

(84

)

 

 

2,310

 

 

 

6

 

 

 

(84

)

 

 

2,310

 

Corporate

 

 

4

 

 

 

(41

)

 

 

3,214

 

 

 

2

 

 

 

(141

)

 

 

2,507

 

 

 

6

 

 

 

(182

)

 

 

5,721

 

Asset backed securities

 

 

1

 

 

 

(13

)

 

 

1,496

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

(13

)

 

 

1,496

 

Residential mortgage-backed - US agency

 

 

3

 

 

 

(8

)

 

 

1,447

 

 

 

2

 

 

 

(39

)

 

 

1,769

 

 

 

5

 

 

 

(47

)

 

 

3,216

 

Collateralized mortgage obligations - US agency

 

 

4

 

 

 

(13

)

 

 

3,972

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

(13

)

 

 

3,972

 

Collateralized mortgage obligations - Private label

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

(25

)

 

 

1,874

 

 

 

2

 

 

 

(25

)

 

 

1,874

 

Totals

 

 

13

 

 

$

(83

)

 

$

11,111

 

 

 

15

 

 

$

(316

)

 

$

11,430

 

 

 

28

 

 

$

(399

)

 

$

22,541

 

 

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

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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 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, 2019 represents OTTI.  At June 30, 2019, 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.

 

One state and political subdivision security, categorized as available-for-sale, with an amortized historical cost of $3.0 million and an aggregate market value of $3.0 million (unrealized aggregate loss of $3,000, or 0.10%).  This security was unrated at issuance by any NRSRO but is supported with substantial credit enhancements believed to be equivalent to those that would be typical of an NRSRO credit rating that is well above the level required to be considered minimum investment grade and, therefore, no credit-related OTTI is deemed to be present.

 

Five corporate securities, categorized as available-for-sale, with an aggregate amortized historical cost of $4.0 million and an aggregate market value of $4.0 million (unrealized loss of $48,000, or 1.20%).  These securities each maintain credit ratings established by one or more NRSRO above the minimum level required to be considered investment grade and, therefore, no credit-related OTTI is deemed to be present.

 

Two privately-issued asset-backed securities, categorized as available-for-sale, with an aggregate amortized historical cost of $3.1 million and an aggregate market value of $3.1 million (unrealized loss of $23,000, or 0.73%).  These securities each maintain credit ratings established by one or more NRSRO above the minimum level required to be considered as investment grade and therefore, no credit-related OTTI is deemed to be present.

 

Two privately-issued collateralized mortgage obligation securities, categorized as available-for-sale, with an aggregate amortized historical cost of $1.3 million and an aggregate market value of $1.3 million (unrealized loss of $9,000, or 0.70%).  These securities each maintain credit ratings established by one or more NRSRO above the minimum level required to be considered investment grade and, therefore, no credit-related OTTI is deemed to be present.

 

Two privately-issued collateralized mortgage obligation securities, categorized as available-for-sale, with an aggregate amortized historical cost of $2.3 million and an aggregate market value of $2.3 million (unrealized loss of $26,000, or 1.10%).  These securities were not rated at the time of their issuance by any NRSRO but each security remains significantly collateralized through subordination. Therefore, no credit-related OTTI is deemed to be present.    

 

 

One state and political subdivision security, categorized as held-to-maturity, with an aggregate amortized historical cost of $100,000 and an aggregate market value of $100,000 (unrealized aggregate loss of $1,000, or 0.02%).  This security was issued by an entity local to the Company and whose financial condition is well known to the Company’s management. No credit-related OTTI is deemed to be present.

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Table of Contents

 

 

Two corporate securities, categorized as held-to-maturity, with an aggregate amortized historical cost of $2.9 million and an aggregate market value of $2.8 million (unrealized aggregate loss of $39,000, or 1.36%).  These securities maintain credit ratings established by one or more NRSRO above the minimum level required to be considered investment grade and, therefore, no credit-related OTTI is deemed to be present.

 

One privately-issued collateralized mortgage obligation security, categorized as held-to-maturity, with an amortized historical cost of $633,000 and a market value of $632,000 (unrealized loss of $1,000, or 0.09%).  The security was not rated at its issuance by any NRSRO but remains significantly collateralized through subordination and, therefore, no credit-related OTTI is deemed to be present.

 

One privately-issued collateralized mortgage obligation security, categorized as held-to-maturity, with an amortized historical cost of $839,000 and an aggregate market value of $834,000 (unrealized loss of $4,000, or 0.53%).  This security maintains a credit rating established by one or more NRSRO above the level considered to be minimum investment grade and therefore, no credit-related OTTI is deemed to be present.

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 investment securities that were impaired at June 30, 2019 or December 31, 2018.

 

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)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Realized gains on investments

 

$

179

 

 

$

133

 

 

$

401

 

 

$

160

 

Realized losses on investments

 

 

(147

)

 

 

(155

)

 

 

(290

)

 

 

(289

)

 

 

$

32

 

 

$

(22

)

 

$

111

 

 

$

(129

)

 

As of June 30, 2019 and December 31, 2018, securities with a fair value of $87.9 million and $69.8 million, respectively, were pledged to collateralize certain municipal deposit relationships.  As of the same dates, securities with a fair value of $24.9 million and $19.5 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.

 

 


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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’ 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)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Service cost

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Interest cost

 

 

123

 

 

 

118

 

 

 

5

 

 

 

6

 

 

 

247

 

 

 

236

 

 

 

11

 

 

 

11

 

Expected return on plan assets

 

 

(233

)

 

 

(259

)

 

 

-

 

 

 

-

 

 

 

(467

)

 

 

(518

)

 

 

-

 

 

 

-

 

Amortization of prior service credits

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

(2

)

 

 

(2

)

Amortization of net losses

 

 

82

 

 

 

41

 

 

 

3

 

 

 

3

 

 

 

164

 

 

 

82

 

 

 

6

 

 

 

6

 

Net periodic benefit plan (benefit) cost

 

$

(28

)

 

$

(100

)

 

$

7

 

 

$

8

 

 

$

(56

)

 

$

(200

)

 

$

15

 

 

$

15

 

 

The Company will evaluate the need for further contributions to the defined benefit pension plan during 2019.  The prepaid pension asset is recorded in other assets on the statement of condition as of June 30, 2019 and December 31, 2018.

 

Note 6:   Loans

 

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

 

 

 

June 30,

 

 

December 31,

 

(In thousands)

 

2019

 

 

2018

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

$

239,422

 

 

$

232,523

 

Construction

 

 

3,966

 

 

 

7,121

 

Total residential mortgage loans

 

 

243,388

 

 

 

239,644

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

Real estate

 

 

225,794

 

 

 

212,314

 

Lines of credit

 

 

56,569

 

 

 

44,235

 

Other commercial and industrial

 

 

79,590

 

 

 

63,359

 

Tax exempt loans

 

 

8,803

 

 

 

9,320

 

Total commercial loans

 

 

370,756

 

 

 

329,228

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

26,214

 

 

 

26,109

 

Other consumer

 

 

52,508

 

 

 

25,424

 

Total consumer loans

 

 

78,722

 

 

 

51,533

 

 

 

 

 

 

 

 

 

 

Total loans

 

 

692,866

 

 

 

620,405

 

Net deferred loan fees

 

 

(43

)

 

 

(135

)

Less allowance for loan losses

 

 

(7,825

)

 

 

(7,306

)

Loans receivable, net

 

$

684,998

 

 

$

612,964

 

- 22 -


Table of Contents

 

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, $10.2 million, and $24.6 million of loans originated by an unrelated financial institution, located outside of the Bank’s market area, in January 2017, April 2017, and March 2019, respectively.   The acquired loan pools represented a 90% participating interest in a total of 2,283 loans secured by liens on automobiles with maturities ranging primarily from two to six years. These loans will be serviced through their respective maturities by the originating financial institution.  At June 30, 2019 and December 31, 2018, there were 1,817 loans outstanding with a remaining outstanding carrying value of $32.8 million and 909 loans outstanding with a remaining outstanding carrying value of $13.3 million, respectively.  Since the acquisition of these loan pools, a total of 23 loans had cumulative net charge-offs totaling $165,000 with $45,000 in net charge-offs for the six months ended June 30, 2019.

 

The Bank acquired a $5.0 million pool of consumer loans and a $5.0 million pool of commercial and industrial loans, originated by an unrelated financial institution, located outside of the Bank’s market area in June 2019.   The acquired loan pools represent a 100% interest in a total of 86 unsecured consumer loans and a total of 35 commercial and industrial loans.  These loans have maturities ranging primarily from four to ten years.  No charge-offs have occurred since the acquisition of these loan pools.

 

As of June 30, 2019 and December 31, 2018, residential mortgage loans with a carrying value of $136.6 million and $154.9 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 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2019 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.  

 

- 23 -


Table of Contents

The following table illustrates the portfolio segments and classes for the Company’s loan portfolio:

 

 

Portfolio Segment

Class

 

 

Residential Mortgage Loans

1-4 family first-lien residential mortgages

 

Construction

 

 

Commercial Loans

Real estate

 

Lines of credit

 

Other commercial and industrial

 

Tax exempt loans

 

 

Consumer Loans

Home equity and junior liens

 

Other consumer

 

The following tables present the classes of the loan portfolio, not including net deferred loan costs, summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of the dates indicated:

 

 

 

As of June 30, 2019

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Pass

 

 

Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

$

235,879

 

 

$

986

 

 

$

1,318

 

 

$

1,239

 

 

$

239,422

 

Construction

 

 

3,966

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,966

 

Total residential mortgage loans

 

 

239,845

 

 

 

986

 

 

 

1,318

 

 

 

1,239

 

 

 

243,388

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

214,631

 

 

 

7,994

 

 

 

2,864

 

 

 

305

 

 

 

225,794

 

Lines of credit

 

 

54,813

 

 

 

1,349

 

 

 

407

 

 

 

-

 

 

 

56,569

 

Other commercial and industrial

 

 

74,655

 

 

 

3,815

 

 

 

1,065

 

 

 

55

 

 

 

79,590

 

Tax exempt loans

 

 

8,803

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,803

 

Total commercial loans

 

 

352,902

 

 

 

13,158

 

 

 

4,336

 

 

 

360

 

 

 

370,756

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

25,557

 

 

 

111

 

 

 

434

 

 

 

112

 

 

 

26,214

 

Other consumer

 

 

52,217

 

 

 

142

 

 

 

149

 

 

 

-

 

 

 

52,508

 

Total consumer loans

 

 

77,774

 

 

 

253

 

 

 

583

 

 

 

112

 

 

 

78,722

 

Total loans

 

$

670,521

 

 

$

14,397

 

 

$

6,237

 

 

$

1,711

 

 

$

692,866

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Pass

 

 

Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

$

228,563

 

 

$

999

 

 

$

1,190

 

 

$

1,771

 

 

$

232,523

 

Construction

 

 

7,121

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,121

 

Total residential mortgage loans

 

 

235,684

 

 

 

999

 

 

 

1,190

 

 

 

1,771

 

 

 

239,644

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

201,997

 

 

 

8,299

 

 

 

1,947

 

 

 

71

 

 

 

212,314

 

Lines of credit

 

 

42,489

 

 

 

1,491

 

 

 

233

 

 

 

22

 

 

 

44,235

 

Other commercial and industrial

 

 

59,344

 

 

 

3,268

 

 

 

612

 

 

 

135

 

 

 

63,359

 

Tax exempt loans

 

 

9,320

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,320

 

Total commercial loans

 

 

313,150

 

 

 

13,058

 

 

 

2,792

 

 

 

228

 

 

 

329,228

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

25,706

 

 

 

144

 

 

 

173

 

 

 

86

 

 

 

26,109

 

Other consumer

 

 

25,294

 

 

 

95

 

 

 

35

 

 

 

-

 

 

 

25,424

 

Total consumer loans

 

 

51,000

 

 

 

239

 

 

 

208

 

 

 

86

 

 

 

51,533

 

Total loans

 

$

599,834

 

 

$

14,296

 

 

$

4,190

 

 

$

2,085

 

 

$

620,405

 

 

- 24 -


Table of Contents

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.

- 25 -


Table of Contents

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, 2019 and December 31, 2018, are detailed in the following tables:

 

 

 

As of  June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 Days

 

 

60-89 Days

 

 

90 Days

 

 

Total

 

 

 

 

 

 

Total Loans

 

(In thousands)

 

Past Due

 

 

Past Due

 

 

and Over

 

 

Past Due

 

 

Current

 

 

Receivable

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

$

904

 

 

$

274

 

 

$

918

 

 

$

2,096

 

 

$

237,326

 

 

$

239,422

 

Construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,966

 

 

 

3,966

 

Total residential mortgage loans

 

 

904

 

 

 

274

 

 

 

918

 

 

 

2,096

 

 

 

241,292

 

 

 

243,388

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

3,148

 

 

 

484

 

 

 

2,050

 

 

 

5,682

 

 

 

220,112

 

 

 

225,794

 

Lines of credit

 

 

2,761

 

 

 

555

 

 

 

23

 

 

 

3,339

 

 

 

53,230

 

 

 

56,569

 

Other commercial and industrial

 

 

3,926

 

 

 

914

 

 

 

307

 

 

 

5,147

 

 

 

74,443

 

 

 

79,590

 

Tax exempt loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,803

 

 

 

8,803

 

Total commercial loans

 

 

9,835

 

 

 

1,953

 

 

 

2,380

 

 

 

14,168

 

 

 

356,588

 

 

 

370,756

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

76

 

 

 

26

 

 

 

237

 

 

 

339

 

 

 

25,875

 

 

 

26,214

 

Other consumer

 

 

237

 

 

 

34

 

 

 

130

 

 

 

401

 

 

 

52,107

 

 

 

52,508

 

Total consumer loans

 

 

313

 

 

 

60

 

 

 

367

 

 

 

740

 

 

 

77,982

 

 

 

78,722

 

Total loans

 

$

11,052

 

 

$

2,287

 

 

$

3,665

 

 

$

17,004

 

 

$

675,862

 

 

$

692,866

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of  December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 Days

 

 

60-89 Days

 

 

90 Days

 

 

Total

 

 

 

 

 

 

Total Loans

 

(In thousands)

 

Past Due

 

 

Past Due

 

 

and Over

 

 

Past Due

 

 

Current

 

 

Receivable

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

$

1,507

 

 

$

505

 

 

$

1,176

 

 

$

3,188

 

 

$

229,335

 

 

$

232,523

 

Construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,121

 

 

 

7,121

 

Total residential mortgage loans

 

 

1,507

 

 

 

505

 

 

 

1,176

 

 

 

3,188

 

 

 

236,456

 

 

 

239,644

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

4,261

 

 

 

364

 

 

 

323

 

 

 

4,948

 

 

 

207,366

 

 

 

212,314

 

Lines of credit

 

 

1,033

 

 

 

111

 

 

 

22

 

 

 

1,166

 

 

 

43,069

 

 

 

44,235

 

Other commercial and industrial

 

 

814

 

 

 

44

 

 

 

387

 

 

 

1,245

 

 

 

62,114

 

 

 

63,359

 

Tax exempt loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,320

 

 

 

9,320

 

Total commercial loans

 

 

6,108

 

 

 

519

 

 

 

732

 

 

 

7,359

 

 

 

321,869

 

 

 

329,228

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

247

 

 

 

6

 

 

 

35

 

 

 

288

 

 

 

25,821

 

 

 

26,109

 

Other consumer

 

 

226

 

 

 

65

 

 

 

107

 

 

 

398

 

 

 

25,026

 

 

 

25,424

 

Total consumer loans

 

 

473

 

 

 

71

 

 

 

142

 

 

 

686

 

 

 

50,847

 

 

 

51,533

 

Total loans

 

$

8,088

 

 

$

1,095

 

 

$

2,050

 

 

$

11,233

 

 

$

609,172

 

 

$

620,405

 

 

- 26 -


Table of Contents

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

 

 

 

June 30,

 

 

December 31,

 

(In thousands)

 

2019

 

 

2018

 

Residential mortgage loans:

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

$

918

 

 

$

1,176

 

 

 

 

918

 

 

 

1,176

 

Commercial loans:

 

 

 

 

 

 

 

 

Real estate

 

 

2,135

 

 

 

415

 

Lines of credit

 

 

28

 

 

 

28

 

Other commercial and industrial

 

 

307

 

 

 

387

 

 

 

 

2,470

 

 

 

830

 

Consumer loans:

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

237

 

 

 

35

 

Other consumer

 

 

130

 

 

 

107

 

 

 

 

367

 

 

 

142

 

Total nonaccrual loans

 

$

3,755

 

 

$

2,148

 

 

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 table below details one loan that was modified as a TDR for the three months ended June 30, 2019.

 

 

For the three months ended June 30, 2019

 

(In thousands)

Number of loans

 

Pre-modification outstanding recorded investment

 

 

Post-modification outstanding recorded investment

 

 

Additional provision for loan losses

 

Residential real estate loans

1

$

 

205

 

$

 

250

 

$

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The TDR evaluated for impairment for the three months ended June 30, 2019 has been classified as a TDR due to economic concessions granted, which consisted of additional funds advanced without associated increases in collateral and an extended maturity date that will result in a delay in payment from the original contractual maturity.  

 

The table below details one loan that was modified as a TDR for the six months ended June 30, 2019.

 

 

For the six months ended June 30, 2019

 

(In thousands)

Number of loans

 

Pre-modification outstanding recorded investment

 

 

Post-modification outstanding recorded investment

 

 

Additional provision for loan losses

 

Residential real estate loans

1

 

$

205

 

 

$

250

 

 

$

-

 

 

The TDR evaluated for impairment for the six months ended June 30, 2019 has been classified as a TDR due to economic concessions granted, which consisted of additional funds advanced without associated increases in collateral and an extended maturity date that will result in a delay in payment from the original contractual maturity.  

 

 

- 27 -


Table of Contents

The Company had no loans that were modified as TDRs for the three months ended June 30, 2018.

 

The table below details one loan that was 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 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 were modified as TDRs during the twelve months prior to June 30, 2019, which had subsequently defaulted during the six months ended June 30, 2019.

 

The Company had no loans that were modified as TDRs during the twelve months prior to June 30, 2018, which had subsequently defaulted during the six months ended June 30, 2018.

 

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.

 

- 28 -


Table of Contents

Impaired Loans

 

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

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

 

 

 

 

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

 

$

1,033

 

 

$

1,033

 

 

$

-

 

 

$

1,221

 

 

$

1,226

 

 

$

-

 

Commercial real estate

 

 

3,103

 

 

 

3,168

 

 

 

-

 

 

 

2,387

 

 

 

2,448

 

 

 

-

 

Commercial lines of credit

 

 

165

 

 

 

165

 

 

 

-

 

 

 

228

 

 

 

228

 

 

 

-

 

Other commercial and industrial

 

 

602

 

 

 

610

 

 

 

-

 

 

 

451

 

 

 

452

 

 

 

-

 

Home equity and junior liens

 

 

79

 

 

 

79

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Other consumer

 

 

57

 

 

 

57

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

 

600

 

 

 

600

 

 

 

104

 

 

 

606

 

 

 

606

 

 

 

108

 

Commercial real estate

 

 

1,358

 

 

 

1,358

 

 

 

108

 

 

 

486

 

 

 

486

 

 

 

100

 

Commercial lines of credit

 

 

205

 

 

 

205

 

 

 

204

 

 

 

28

 

 

 

28

 

 

 

28

 

Other commercial and industrial

 

 

544

 

 

 

544

 

 

 

287

 

 

 

373

 

 

 

373

 

 

 

255

 

Home equity and junior liens

 

 

168

 

 

 

168

 

 

 

136

 

 

 

207

 

 

 

207

 

 

 

140

 

Other consumer

 

 

40

 

 

 

40

 

 

 

6

 

 

 

-

 

 

 

-

 

 

 

-

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

 

1,633

 

 

 

1,633

 

 

 

104

 

 

 

1,827

 

 

 

1,832

 

 

 

108

 

Commercial real estate

 

 

4,461

 

 

 

4,526

 

 

 

108

 

 

 

2,873

 

 

 

2,934

 

 

 

100

 

Commercial lines of credit

 

 

370

 

 

 

370

 

 

 

204

 

 

 

256

 

 

 

256

 

 

 

28

 

Other commercial and industrial

 

 

1,146

 

 

 

1,154

 

 

 

287

 

 

 

824

 

 

 

825

 

 

 

255

 

Home equity and junior liens

 

 

247

 

 

 

247

 

 

 

136

 

 

 

207

 

 

 

207

 

 

 

140

 

Other consumer

 

 

97

 

 

 

97

 

 

 

6

 

 

 

-

 

 

 

-

 

 

 

-

 

Totals

 

$

7,954

 

 

$

8,027

 

 

$

845

 

 

$

5,987

 

 

$

6,054

 

 

$

631

 

 

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)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

1-4 family first-lien residential mortgages

 

$

1,528

 

 

$

1,846

 

 

$

1,627

 

 

$

1,850

 

Commercial real estate

 

 

3,662

 

 

 

4,971

 

 

 

3,399

 

 

 

5,147

 

Commercial lines of credit

 

 

344

 

 

 

376

 

 

 

314

 

 

 

433

 

Other commercial and industrial

 

 

1,100

 

 

 

1,050

 

 

 

1,008

 

 

 

1,049

 

Home equity and junior liens

 

 

227

 

 

 

208

 

 

 

220

 

 

 

235

 

Other consumer

 

 

99

 

 

 

-

 

 

 

66

 

 

 

-

 

Total

 

$

6,960

 

 

$

8,451

 

 

$

6,634

 

 

$

8,714

 

 

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)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

1-4 family first-lien residential mortgages

 

$

23

 

 

$

14

 

 

$

35

 

 

$

32

 

Commercial real estate

 

 

57

 

 

 

18

 

 

 

85

 

 

 

66

 

Commercial lines of credit

 

 

14

 

 

 

10

 

 

 

18

 

 

 

21

 

Other commercial and industrial

 

 

24

 

 

 

13

 

 

 

38

 

 

 

19

 

Home equity and junior liens

 

 

3

 

 

 

3

 

 

 

6

 

 

 

6

 

Other consumer

 

 

3

 

 

 

-

 

 

 

3

 

 

 

-

 

Total

 

$

124

 

 

$

58

 

 

$

185

 

 

$

144

 

 

- 29 -


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, 2019

 

 

 

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

 

$

722

 

 

$

-

 

 

$

3,370

 

 

$

802

 

 

$

1,560

 

Charge-offs

 

 

(11

)

 

 

-

 

 

 

-

 

 

 

(24

)

 

 

(1

)

Recoveries

 

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Provisions

 

 

12

 

 

 

-

 

 

 

82

 

 

 

367

 

 

 

143

 

Ending balance

 

$

724

 

 

$

-

 

 

$

3,452

 

 

$

1,145

 

 

$

1,702

 

Ending balance: related to loans

   individually evaluated for impairment

 

 

104

 

 

 

-

 

 

 

108

 

 

 

204

 

 

 

287

 

Ending balance: related to loans

   collectively evaluated for impairment

 

$

620

 

 

$

-

 

 

$

3,344

 

 

$

941

 

 

$

1,415

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

239,422

 

 

$

3,966

 

 

$

225,794

 

 

$

56,569

 

 

$

79,590

 

Ending balance: individually

   evaluated for impairment

 

 

1,633

 

 

 

-

 

 

 

4,461

 

 

 

370

 

 

 

1,146

 

Ending balance: collectively

   evaluated for impairment

 

$

237,789

 

 

$

3,966

 

 

$

221,333

 

 

$

56,199

 

 

$

78,444

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

and junior liens

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1

 

 

$

430

 

 

$

399

 

 

$

-

 

 

$

7,284

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

(40

)

 

 

-

 

 

 

(76

)

Recoveries

 

 

-

 

 

 

-

 

 

 

6

 

 

 

-

 

 

 

7

 

Provisions (credits)

 

 

-

 

 

 

(44

)

 

 

50

 

 

 

-

 

 

 

610

 

Ending balance

 

$

1

 

 

$

386

 

 

$

415

 

 

$

-

 

 

$

7,825

 

Ending balance: related to loans

   individually evaluated for impairment

 

 

-

 

 

 

136

 

 

 

6

 

 

 

-

 

 

 

845

 

Ending balance: related to loans

   collectively evaluated for impairment

 

$

1

 

 

$

250

 

 

$

409

 

 

$

-

 

 

$

6,980

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

8,803

 

 

$

26,214

 

 

$

52,508

 

 

 

 

 

 

$

692,866

 

Ending balance: individually

   evaluated for impairment

 

 

-

 

 

 

247

 

 

 

97

 

 

 

 

 

 

 

7,954

 

Ending balance: collectively

   evaluated for impairment

 

$

8,803

 

 

$

25,967

 

 

$

52,411

 

 

 

 

 

 

$

684,912

 

 


- 30 -


Table of Contents

 

 

For the six months ended June 30, 2019

 

 

 

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

 

$

766

 

 

$

-

 

 

$

3,578

 

 

$

730

 

 

$

1,285

 

Charge-offs

 

 

(11

)

 

 

-

 

 

 

-

 

 

 

(131

)

 

 

(2

)

Recoveries

 

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Provisions (credits)

 

 

(32

)

 

 

-

 

 

 

(126

)

 

 

546

 

 

 

419

 

Ending balance

 

$

724

 

 

$

-

 

 

$

3,452

 

 

$

1,145

 

 

$

1,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

and junior liens

 

 

consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

1

 

 

$

409

 

 

$

385

 

 

$

152

 

 

$

7,306

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

(107

)

 

 

-

 

 

 

(251

)

Recoveries

 

 

-

 

 

 

-

 

 

 

15

 

 

 

-

 

 

 

16

 

Provisions (credits)

 

 

-

 

 

 

(23

)

 

 

122

 

 

 

(152

)

 

 

754

 

Ending balance

 

$

1

 

 

$

386

 

 

$

415

 

 

$

-

 

 

$

7,825

 

- 31 -


Table of Contents

 

 

 

 

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

 

 

- 32 -


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

 

 

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.

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

 

 

 

June 30, 2019

 

 

 

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

 

$

104

 

 

$

-

 

 

$

108

 

 

$

204

 

 

$

287

 

Historical loss rate

 

 

64

 

 

 

-

 

 

 

89

 

 

 

35

 

 

 

28

 

Qualitative factors

 

 

556

 

 

 

-

 

 

 

3,255

 

 

 

906

 

 

 

1,387

 

Total

 

$

724

 

 

$

-

 

 

$

3,452

 

 

$

1,145

 

 

$

1,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

and junior liens

 

 

consumer

 

 

Unallocated

 

 

Total

 

Specifically reserved

 

$

-

 

 

$

136

 

 

$

6

 

 

$

-

 

 

$

845

 

Historical loss rate

 

 

-

 

 

 

1

 

 

 

144

 

 

 

-

 

 

 

361

 

Qualitative factors

 

 

1

 

 

 

249

 

 

 

265

 

 

 

-

 

 

 

6,619

 

Total

 

$

1

 

 

$

386

 

 

$

415

 

 

$

-

 

 

$

7,825

 

- 33 -


Table of Contents

 

 

 

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

 

 

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,

2019

 

 

Number of properties

 

 

December 31,

2018

 

Foreclosed residential real estate

 

 

2

 

 

$

84

 

 

 

2

 

 

$

73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2019 and December 31, 2018, the Company reported $525,000 and $951,000, respectively, in residential real estate loans in the process of foreclosure.

 

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 $2.2 million of standby letters of credit as of June 30, 2019.  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.

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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.

The Company holds two corporate investment securities with an aggregate amortized historical cost of $4.8 million and an aggregate fair market value of $5.0 million as of June 30, 2019. These securities have valuations that are determined using published net asset values (NAV) derived by analyses of the securities’ underlying assets. These securities are comprised primarily of broadly-diversified real estate and adjustable-rate senior secured business loans and are traded in secondary markets on an infrequent basis. While these securities are redeemable at least annually through tender offers made by their respective issuers, the liquidation value of the securities may be below their stated NAVs and also subject to restrictions as to the amount of securities that can be redeemed at any single scheduled redemption. The Company anticipates that these securities will be redeemed by their respective issuers on indeterminate future dates as a consequence of the ultimate liquidation strategies employed by the management of these investments.

Interest rate swap derivative:  The fair value of the interest rate swap derivative is calculated based on a discounted cash flow model. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date.  The curve utilized for discounting and projecting is built by obtaining publicly available third party market quotes for various swap maturity terms.

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 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

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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, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

Available-for-Sale Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

-

 

 

$

12,083

 

 

$

-

 

 

$

12,083

 

State and political subdivisions

 

 

-

 

 

 

4,928

 

 

 

-

 

 

 

4,928

 

Corporate

 

 

-

 

 

 

10,502

 

 

 

-

 

 

 

10,502

 

Asset backed securities

 

 

-

 

 

 

17,137

 

 

 

-

 

 

 

17,137

 

Residential mortgage-backed - US agency

 

 

-

 

 

 

18,791

 

 

 

-

 

 

 

18,791

 

Collateralized mortgage obligations - US agency

 

 

-

 

 

 

33,982

 

 

 

-

 

 

 

33,982

 

Collateralized mortgage obligations - Private label

 

 

-

 

 

 

14,862

 

 

 

-

 

 

 

14,862

 

Total

 

 

 

 

 

 

112,285

 

 

 

 

 

 

 

112,285

 

Corporate measured at NAV

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,040

 

Total available-for-sale securities

 

$

-

 

 

$

112,285

 

 

$

-

 

 

$

117,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

$

-

 

 

$

510

 

 

$

-

 

 

$

510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap derivative

 

$

-

 

 

$

(110

)

 

$

-

 

 

$

(110

)

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

Available-for-Sale Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

-

 

 

$

17,031

 

 

$

-

 

 

$

17,031

 

State and political subdivisions

 

 

-

 

 

 

23,065

 

 

 

-

 

 

 

23,065

 

Corporate

 

 

-

 

 

 

12,141

 

 

 

-

 

 

 

12,141

 

Asset backed securities

 

 

-

 

 

 

18,119

 

 

 

-

 

 

 

18,119

 

Residential mortgage-backed - US agency

 

 

-

 

 

 

31,666

 

 

 

-

 

 

 

31,666

 

Collateralized mortgage obligations - US agency

 

 

-

 

 

 

46,441

 

 

 

-

 

 

 

46,441

 

Collateralized mortgage obligations - Private label

 

 

-

 

 

 

23,936

 

 

 

-

 

 

 

23,936

 

Total

 

 

 

 

 

 

172,399

 

 

 

 

 

 

 

172,399

 

Corporate measured at NAV

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,059

 

Total available-for-sale securities

 

$

-

 

 

$

172,399

 

 

$

-

 

 

$

177,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities

 

$

-

 

 

$

453

 

 

$

-

 

 

$

453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pathfinder Bank had the following assets measured at fair value on a nonrecurring basis as of June 30, 2019 and December 31, 2018: 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

Impaired loans

 

$

-

 

 

$

-

 

 

$

3,136

 

 

$

3,136

 

Foreclosed real estate

 

$

-

 

 

$

-

 

 

$

84

 

 

$

84

 

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December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

Impaired loans

 

$

-

 

 

$

-

 

 

$

1,098

 

 

$

1,098

 

Foreclosed real estate

 

$

-

 

 

$

-

 

 

$

1,173

 

 

$

1,173

 

 

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, 2019

 

 

 

Impaired loans

Appraisal of collateral

Appraisal Adjustments

5% - 30% (10%)

 

(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, 2018

 

 

 

Impaired loans

Appraisal of collateral

Appraisal Adjustments

5% - 15% (6%)

 

(Sales Approach)

Costs to Sell

5% - 13% (11%)

 

Discounted Cash Flow

 

 

 

 

 

 

Foreclosed real estate

Appraisal of collateral

Appraisal Adjustments

15% - 15% (15%)

 

(Sales Approach)

Costs to Sell

6% - 8% (7%)

 

There have been no transfers of assets into or out of any fair value measurement during the three and six months ended June 30, 2019.

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

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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.

The Company holds two corporate investment securities with an aggregate amortized historical cost of $4.8 million and an aggregate fair market value of $5.0 million as of June 30, 2019. These securities have valuations that are determined using published NAV derived by analyses of the securities’ underlying assets. These securities are comprised primarily of broadly-diversified real estate and adjustable-rate senior secured business loans and are traded in secondary markets on an infrequent basis. While these securities are redeemable at least annually through tender offers made by their respective issuers, the liquidation value of the securities may be below their stated NAVs and also subject to restrictions as to the amount of securities that can be redeemed at any single scheduled redemption. The Company anticipates that these securities will be redeemed by their respective issuers on indeterminate future dates as a consequence of the ultimate liquidation strategies employed by the management of these investments.

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.

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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.

Interest rate swap derivative – The fair value of the interest rate swap derivative is obtained from a third party pricing agent and is calculated based on a discounted cash flow model. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date.  The curve utilized for discounting and projecting is built by obtaining publicly available third party market quotes for various swap maturity terms, and therefore is classified within Level 2 of the fair value hierarchy.

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, 2019

 

 

December 31, 2018

 

 

 

Fair Value

 

Carrying

 

 

Estimated

 

 

Carrying

 

 

Estimated

 

(In thousands)

 

Hierarchy

 

Amounts

 

 

Fair Values

 

 

Amounts

 

 

Fair Values

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

1

 

$

50,342

 

 

$

50,342

 

 

$

26,316

 

 

$

26,316

 

Investment securities - available-for-sale

 

2

 

 

112,285

 

 

 

112,285

 

 

 

172,399

 

 

 

172,399

 

Investment securities - available-for-sale

 

NAV

 

 

5,040

 

 

 

5,040

 

 

 

5,059

 

 

 

5,059

 

Investment securities - marketable equity

 

2

 

 

510

 

 

 

510

 

 

 

453

 

 

 

453

 

Investment securities - held-to-maturity

 

2

 

 

95,324

 

 

 

96,959

 

 

 

53,908

 

 

 

53,769

 

Federal Home Loan Bank stock

 

2

 

 

4,443

 

 

 

4,443

 

 

 

5,937

 

 

 

5,937

 

Net loans

 

3

 

 

684,998

 

 

 

681,739

 

 

 

612,964

 

 

 

601,789

 

Accrued interest receivable

 

1

 

 

3,339

 

 

 

3,339

 

 

 

3,068

 

 

 

3,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand Deposits, Savings, NOW and MMDA

 

1

 

$

436,047

 

 

$

436,047

 

 

$

450,267

 

 

$

450,267

 

Time Deposits

 

2

 

 

372,590

 

 

 

373,694

 

 

 

276,793

 

 

 

275,727

 

Borrowings

 

2

 

 

89,434

 

 

 

89,924

 

 

 

118,534

 

 

 

118,379

 

Subordinated loans

 

2

 

 

15,111

 

 

 

14,855

 

 

 

15,094

 

 

 

14,485

 

Accrued interest payable

 

1

 

 

446

 

 

 

446

 

 

 

304

 

 

 

304

 

Interest rate swap derivative

 

2

 

 

110

 

 

 

110

 

 

 

-

 

 

 

-

 

 

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Note 11:   Interest Rate Derivatives

 

The Company is exposed to certain risks from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through the management of its core business activities.  As part of the Company’s overall risk management processes, the Company manages its economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of certain balance sheet assets and liabilities. In the normal course of business, the Company also uses derivative financial instruments as an additional risk management tool.  Financial derivatives are recorded at fair value as other assets.  

 

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. There are two primary types of interest rate derivatives that may be employed by the Company:

 

 

Fair Value Hedge - As a result of interest rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate in fair value. When effectively hedged, this appreciation or depreciation will generally be offset by fluctuations in the fair value of derivative instruments that are linked to the hedged assets and liabilities. This strategy is referred to as a fair value hedge. 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.

 

 

Cash Flow Hedge - Cash flows related to floating rate assets and liabilities will fluctuate with changes in the underlying rate index.  When effectively hedged, the increases or decreases in cash flows related to the floating-rate asset or liability will generally be offset by changes in cash flows of the derivative instrumnets designated as a hedge.  This strategy is referred to as a cash flow hedge. 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. 

 

Among the array of interest rate derivative transactions potentially available to the Company are interest rate swaps.  The Company uses interest rate swaps as part of its interest rate risk management strategy.  Interest rate swaps, designated as fair value hedges, involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments over the life of the agreements without the exchange of the underlying notional amount.  The gain or loss on the derivative as well as the offsetting gain of loss on the hedged item attributable to the hedged risk are recognized in earnings.  The Company entered into a pay-fixed/receive variable interest rate swap with a notional amount of $9.2 million in April 2019, which was designated as a fair value hedge associated with specific pools within the Company’s fixed-rate consumer loan portfolio.

 

As of June 30, 2019, the following amounts were recorded on the balance sheet related to the cumulative basis adjustments for fair value hedges:

 

(In thousands)

 

Carrying Amount of the Hedged Assets at

June 30, 2019

 

 

Cumulative Amount of Fair Value Hedging Adjustment Included in The Carrying Amount of the Hedged Assets at June 30, 2019

 

 

 

 

 

 

 

 

 

 

Line item on the balance sheet in which the hedged item is included:

 

 

 

 

 

 

 

 

Loans receivable (1)

 

$

22,663

 

 

$

88

 

 

(1)

These amounts include the amortized cost basis of the closed portfolio used to designate the hedging relationship in which the hedged item is the remaining amortized cost of the last layer expected to be remaining at the end of the hedging relationship.  At June 30, 2019, the amortized cost of the basis of the closed portfolio used in the hedging relationship was $22.7 million, the cumulative basis adjustment associated with the hedging relationship was $88,000, and the amount of the designated hedged item was $9.2 million.

 

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At June 30, 2019, the fair value of the derivative resulted in a net liability position of $110,000 under the agreement, recorded by the Company in other liabilities. The Company had no derivative agreements in place at December 31, 2018.

   

The Company manages its potential credit exposure on interest rate swap transactions by entering into a bilateral credit support agreements with each counterparty.  These agreements require collateralization of credit exposures beyond specified minimum threshold amounts.  The Company’s agreement with its interest rate swap counterparty contains a provision whereby if either party defaults on any of its indebtedness, then that party could also be declared in default on its derivative obligations. The agreement with the Company’s derivative counterparty also includes certain other provisions that if not met, could result in the Company or the counterparty being declared in default.  If either the Company or the counterparty were to be declared in default, the other party to the agreement can terminate the derivative position and require settlement of all obligations as specifically outlined within the terms of the agreement.  

 

 

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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, 2019

 

(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

 

$

(3,087

)

 

$

(1,322

)

 

$

(53

)

 

$

(4,462

)

Other comprehensive income before reclassifications

 

 

-

 

 

 

1,390

 

 

 

7

 

 

 

1,397

 

Amounts reclassified from AOCI

 

 

66

 

 

 

(25

)

 

 

-

 

 

 

41

 

Ending balance

 

$

(3,021

)

 

$

43

 

 

$

(46

)

 

$

(3,024

)

 

 

 

 

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 six months ended June 30, 2019

 

(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

 

$

(3,152

)

 

$

(2,832

)

 

$

(58

)

 

$

(6,042

)

Other comprehensive income before reclassifications

 

 

-

 

 

 

2,963

 

 

 

12

 

 

 

2,975

 

Amounts reclassified from AOCI

 

 

131

 

 

 

(88

)

 

 

-

 

 

 

43

 

Ending balance

 

$

(3,021

)

 

$

43

 

 

$

(46

)

 

$

(3,024

)

 

 

 

 

For the six months ended June 30, 2018

 

(In thousands)

 

Retirement

Plans

 

 

Unrealized Gains and

Losses on Available-

for-Sale Securities

 

 

Securities

reclassified from

AFS to HTM

 

 

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.

 

 

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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 AOCI (1)

 

 

 

(Unaudited)

 

 

 

 

(Unaudited)

 

(In thousands)

 

For the three months ended

 

 

 

 

For the six months ended

 

Details about AOCI (1) components

 

June 30, 2019

 

 

June 30, 2018

 

 

Affected Line Item in the Statement of Income

 

June 30, 2019

 

 

June 30, 2018

 

Retirement plan items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement plan net losses

   recognized in plan expenses (2)

 

$

(84

)

 

$

(43

)

 

Salaries and employee benefits

 

$

(168

)

 

$

(86

)

Tax effect

 

 

18

 

 

 

11

 

 

Provision for income taxes

 

 

37

 

 

 

22

 

 

 

$

(66

)

 

$

(32

)

 

Net Income

 

$

(131

)

 

$

(64

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gain (loss) on sale of securities

 

$

32

 

 

$

(22

)

 

Net gains (losses) on sales and redemptions of

   investment securities

 

$

111

 

 

$

(129

)

Tax effect

 

 

(7

)

 

 

6

 

 

Provision for income taxes

 

 

(23

)

 

 

34

 

 

 

$

25

 

 

$

(16

)

 

Net Income

 

$

88

 

 

$

(95

)

 

(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 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)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Service fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insufficient funds fees

 

$

272

 

 

$

200

 

 

$

480

 

 

$

400

 

Deposit related fees

 

 

53

 

 

 

48

 

 

 

105

 

 

 

99

 

ATM fees

 

 

23

 

 

 

25

 

 

 

45

 

 

 

48

 

    Total service fees

 

 

348

 

 

 

273

 

 

 

630

 

 

 

547

 

Fee Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance commissions

 

 

216

 

 

 

234

 

 

 

451

 

 

 

460

 

Investment services revenue

 

 

97

 

 

 

83

 

 

 

145

 

 

 

149

 

ATM fees surcharge

 

 

59

 

 

 

61

 

 

 

105

 

 

 

106

 

Banking house rents collected

 

 

33

 

 

 

36

 

 

 

68

 

 

 

66

 

    Total fee income

 

 

405

 

 

 

414

 

 

 

769

 

 

 

781

 

Card income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debit card interchange fees

 

 

187

 

 

 

148

 

 

 

331

 

 

 

291

 

Merchant card fees

 

 

22

 

 

 

20

 

 

 

38

 

 

 

33

 

    Total card income

 

 

209

 

 

 

168

 

 

 

369

 

 

 

324

 

Mortgage fee income and realized gain on sale of loans

  and foreclosed real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing fees

 

 

60

 

 

 

42

 

 

 

87

 

 

 

83

 

Net gains on sales of loans and foreclosed real estate

 

 

13

 

 

 

13

 

 

 

5

 

 

 

16

 

Total mortgage fee income and realized gain on sale of

   loans and foreclosed real estate

 

 

73

 

 

 

55

 

 

 

92

 

 

 

99

 

Total

 

 

1,035

 

 

 

910

 

 

 

1,860

 

 

 

1,751

 

Earnings and gain on bank owned life insurance

 

 

101

 

 

 

108

 

 

 

222

 

 

 

181

 

Net gains (losses) on sales and redemptions of investment

   securities

 

 

32

 

 

 

(22

)

 

 

111

 

 

 

(129

)

Gains on equity securities

 

 

16

 

 

 

13

 

 

 

57

 

 

 

26

 

Other miscellaneous income

 

 

35

 

 

 

15

 

 

 

62

 

 

 

90

 

Total noninterest income

 

$

1,219

 

 

$

1,024

 

 

$

2,312

 

 

$

1,919

 

 

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 at 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.

 

Fee income – Revenue is earned through commissions on insurance and securities sales, ATM surcharge fees, and banking house rents collected.  The Company earns investment advisory fee income by providing investment management services to customers under investment management contracts.  As the direction of investment management accounts is provided over time, the performance obligation to investment management 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

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and commercial mortgage loans, sales of one-to-four family residential mortgage loans, sales of government guarantees portions of SBA loans, and sales of foreclosed real estate, and is earned as the transaction occurs.

 

Note 14: Leases

 

The Company has operating and finance leases for certain banking offices and land under noncancelable agreements.  Our leases have remaining lease terms that vary from less than one year up to 31 years, some of which include options to extend the leases for various renewal periods.  All options to renew are included in the current lease term when we believe it is reasonably certain that the renewal options will be exercised.

 

The Company elected to adopt the transition relief under Topic 842, Leases, using the modified retrospective transition method.  The periods presented prior to January 1, 2019 continue to be in accordance with ASC 840.

 

The components of the lease expense are as follows:

 

 

 

For the three months

 

 

For the six months

 

 

 

ended June 30,

 

 

ended June 30,

 

(In thousands)

 

2019

 

 

2019

 

Operating lease cost

 

$

60

 

 

$

119

 

Finance lease cost

 

$

12

 

 

$

12

 

 

 

 

For the three months

 

 

For the six months

 

 

 

ended June 30,

 

 

ended June 30,

 

(In thousands)

 

2019

 

 

2019

 

Cash paid for amount included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

     Operating cash flows from operating leases

 

$

56

 

 

$

104

 

     Operating cash flows from finance leases

 

$

12

 

 

$

12

 

     Financing cash flows from finance leases

 

$

11

 

 

$

11

 

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

June 30,

 

 

 

(In thousands, except lease term and discount rate)

 

2019

 

 

 

Operating Leases:

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

2,458

 

 

 

Operating lease liabilities

 

$

2,711

 

 

 

 

 

 

 

 

 

 

Finance Leases:

 

 

 

 

 

 

Financial Liability

 

$

574

 

 

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term:

 

 

 

 

 

 

Operating Leases

 

19.85 years

 

 

 

   Finance Leases

 

29.83 years

 

 

 

 

 

 

 

 

 

 

Weighted Average Discount Rate:

 

 

 

 

 

 

Operating Leases

 

 

3.71

%

 

 

   Finance Leases

 

 

13.75

%

 

 

 

 


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Maturities of lease liabilities were as follows:

 

Years Ending June 30,

 

 

 

 

(In thousands)

 

 

 

 

2020

 

$

116

 

2021

 

 

109

 

2022

 

 

93

 

2023

 

 

104

 

2024

 

 

114

 

Thereafter

 

 

2,749

 

Total minimum lease payments

 

$

3,285

 

 

The Company owns certain properties that it leases to unaffiliated third parties at market rates.  Lease rental income was $34,000 and $36,000 for the three months ended June 30, 2019 and 2018, respectively.  Lease rental income was $68,000 and $66,000 for the six months ended June 30, 2019 and 2018, respectively.  All lease agreements, in which the Company is the lessor, are accounted for as operating leases.  The Company has no unamortized initial direct costs related to the establishment of these lease agreements at January 1, 2019.

 

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, 2019, the Company and subsidiaries had total consolidated assets of $1.0 billion, total consolidated liabilities of $925.0 million and shareholders' equity of $87.6 million plus noncontrolling interest of $239,000, which represents the 49% of FitzGibbons not owned by the Company.

The following discussion reviews the Company's financial condition at June 30, 2019 and the results of operations for the three and six month periods ended June 30, 2019 and 2018. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any other period.

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 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2019 (“the consolidated annual financial statements”) as of December 31, 2018 and 2017 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

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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;

 

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.

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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:

 

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.  In the quarter ended March 31, 2019, the Company established, through a charge to earnings, a valuation allowance in the amount of $136,000 in order to reserve against deferred tax assets related to New York State income taxes.  Effective in January 2018, the Company adopted a modification methodology, made available following changes to the New York State tax code, effecting how the Company’s state income tax liability is computed.  Under this adopted methodology it is unlikely that the Company will pay income taxes to New York in future periods and it is therefore probable that the Company’s deferred tax assets related to New York State income taxes are unlikely to further reduce the Company’s state income tax rate in the future.  Accordingly, a valuation allowance against the value of those deferred tax assets was established to reduce the net deferred tax asset related to New York income taxes to $-0- at June 30, 2018.  At June 30, 2019, the Company had a valuation allowance of $61,000 established against the future projected benefits of deferred tax assets related to New York State income tax obligations. There were no valuation allowances against deferred tax assets at December 31, 2018.  The Company’s effective tax rate typically differs from the 21% federal statutory tax rate due primarily to tax-exempt income from specific types of investment securities and loans, bank owned life insurance, and, to a much lesser degree, the utilization of low income housing tax credits. These factors, which typically lower the effective tax rate for the Company, were offset by the establishment of the valuation allowance described above resulting in an effective tax rate of 27.8% for the six months ended June 30, 2019.  

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

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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 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.

Management performs an annual evaluation of our goodwill for possible impairment at each of our reporting units. Based on the results of the December 31, 2018 evaluation, management has determined that the carrying value of goodwill was not impaired as of that date. The evaluation approach is described in Note 10 of the consolidated annual financial statements. Further information on the estimation of fair values can be found in Note 22 to the consolidated annual financial statements.

Recent Events

On May 8, 2019, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Castle Creek Capital Partners VII, L.P. (“Castle Creek”), pursuant to which the Company sold: (i) 37,700 shares of the Company’s common stock, par value $0.01 per share, at a purchase price of $14.25 per share (the “Common Stock”); (ii) 1,155,283 shares of a new series of preferred stock, Series B convertible perpetual preferred stock, par value $0.01 per share, at a purchase price of $14.25 per share (the “Series B Preferred Stock”); and (iii) a warrant, with an approximate fair value of $373,000, to purchase 125,000 shares of Common Stock at an exercise price equal to $14.25 per share (the “Warrant”), in a private placement transaction (the “Private Placement”) for gross proceeds of approximately $17.0 million. The Securities Purchase Agreement contains representations, warranties, and covenants of the Company and Castle Creek.

The Company also entered into subscription agreements dated as of May 8, 2019 (the “Subscription Agreements”) with certain directors and executive officers of the Company as well as other accredited investors. Pursuant to the Subscription

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Agreements, the investors purchased an aggregate of 269,277 shares of Common Stock at $14.25 per share for gross proceeds of approximately $3.8 million, before payment of placement fees and related costs and expenses. The Subscription Agreements contain representations, warranties, and covenants of the purchasers and the Company that are customary in private placement transactions.  

In total, therefore, the Company issued 306,977 shares of Common Stock, 1,155,283 shares of Series B Preferred Stock and the Warrant at the conclusion of the Private Placement.  The transaction raised $20.8 million in gross proceeds and the final net cash received from the Private Placement, after all issuance expenses, including placement fees and all other issuance/due diligence costs of $927,000 and $342,000, respectively, was $19.6 million.  The fair value of the Warrant at the time of issuance was $373,000. The Company intends to use the net cash received from the Private Placement to strengthen the Company’s current balance sheet, improve the regulatory capital of the Bank, support organic growth opportunities and for general corporate purposes.

On May 8, 2019, the Company filed Articles Supplementary with the Maryland Department of Assessments and Taxation to issue 1,155,283 shares of Series B Preferred Stock to Castle Creek. Each share of the Series B Preferred Stock will be convertible on a one-for-one basis into either (i) Common Stock under certain circumstances or (ii) non-voting common stock, par value $0.01 per share (which will also be convertible into Common Stock), subject to approval of the creation of such class of non-voting common stock by the Company’s stockholders.  

Pursuant to Nasdaq rules, Castle Creek may not convert the Series B Preferred Stock or, in the future, the non-voting common stock into Common Stock, or exercise the Warrant if doing so would cause Castle Creek when combined with the purchases of certain directors and executive officers of the Company as well as other accredited investors in the Private Placement to own more than 19.99% of the Common Stock outstanding immediately prior to the execution of the Securities Purchase Agreement (the “Exchange Cap”). The Company must request stockholder approval to eliminate the Exchange Cap no later than at the 2021 annual meeting of Company shareholders. In addition, Castle Creek will need the approval or non-objection of the Board of Governors of the Federal Reserve System and the New York State Department of Financial Services if it seeks to increase its ownership of shares of Common Stock in excess of 9.9% of the outstanding shares of Common Stock.

Holders of the Series B Preferred Stock will be entitled to receive dividends if declared by the Company’s board of directors, in the same per share amount as paid on the Common Stock. No dividends would be payable on the Common Stock unless a dividend identical to that paid on the Common Stock is payable at the same time on the Series B Preferred Stock.  The Series B Preferred Stock will rank, as to payments of dividends and distribution of assets upon dissolution, liquidation or winding up of the Company, pari passu with the Common Stock pro rata. Holders of Series B Preferred Stock will have no voting rights except as may be required by law. The Series B Preferred Stock will not be redeemable by either the Company or by the holder.  

As discussed above, pursuant to the Securities Purchase Agreement, on May 8, 2019, the Company issued a Warrant to Castle Creek to purchase 125,000 shares of Common Stock at an exercise price equal to $14.25 per share. At the same time, the Company entered into a Warrant Agreement with Castle Creek, to, among other things, authorize and establish the terms of the Warrant. The Warrant is exercisable at any time after May 8, 2019, and from time to time, in whole or in part, until May 8, 2026. However, the exercise of such Warrant remains subject to certain contractual provisions, the Exchange Cap, and regulatory approval if Castle Creek’s ownership of Common Stock would exceed 9.9%.  At June 30, 2019, Castle Creek owned 9.9% of the Company’s common stock.  The Warrant will receive dividends equal to the amount paid on the Company’s common stock.  The dividend payment shall be calculated on (1) the unexercised portion of the 125,000 notional shares encompassed within the terms of the Warrant, less (2) any exercised portion of the 125,000 shares, times (3) the amount of the quarterly dividend paid to common shareholders.  Dividend payments, if declared on the Company’s common stock, will be made on the Warrant until its expiration date.  The fair value of the Warrant at the time of its issuance to Castle Creek was $373,000.

Pursuant to the terms of the Securities Purchase Agreement, Castle Creek will be entitled to have one representative appointed to the Company’s board of directors for so long as Castle Creek, together with its respective affiliates, owns, in the aggregate, 4.9% or more of all of the outstanding shares of the Company’s Common Stock.  If Castle Creek, together with its respective affiliates, owns, in the aggregate, 4.9% or more of all of the outstanding shares of the Company’s Common Stock and does not have a board representative appointed to the Company’s board of directors, the Company will

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invite a person designated by Castle Creek to attend meetings of the Company’s Board of Directors as an observer.  At June 30, 2019, Castle Creek elected to have an observer present at substantially all meetings of the Company’s Board of Directors.

On June 21, 2019, the Company announced that the Board of Directors declared a quarterly cash dividend of $0.06 per common and $0.06 per preferred share and a dividend equal to $8,000 related to the issued Warrant.  The dividends are payable on August 9, 2019 to shareholders of record on July 19, 2019.

Overview and Results of Operations

The following represents the significant highlights of the Company’s operating results between the second quarter of 2019 and the second quarter of 2018.

 

Net income decreased $338,000, or 35.8%, to $607,000.

 

Basic and diluted earnings per share were both $0.11 per share and decreased $0.12 per share and $0.11 per share, respectively.

 

Return on average assets decreased 18 basis points to 0.25% as the decrease in income outpaced the increase in average assets.

 

Net interest income, after provision for loan losses, decreased $74,000, or 1.2%, to $6.1 million.  Excluding the provision, net interest income increased $239,000, or 3.7%, to $6.7 million. This increase in earnings was primarily due to the increase in average balances of interest earning assets, accompanied by an increase in the average yield earned on interest-earning assets.  

 

Net interest margin decreased by 17 basis points to 2.90%, primarily as a result of a $142.4 million increase in the average balance of time deposits, coupled with an 87 basis point increase in the average rate paid on time deposits.

 

The effective income tax rate increased 7.9% to 22.2% for the three months ended June 30, 2019 as compared to 14.3% for the same three month period in 2018.  The increase was primarily related to the tax benefit recognized related to the cashless exercise of incentive stock options in the prior year quarter.  

The following represents significant highlights of the Company’s operating results between the first six months of 2019 and the first six months of 2018.

Net income decreased $828,000, or 42.5%, to $1.1 million.

 

Basic and diluted earnings per share were both $0.23 per share and decreased $0.24 per share and $0.23 per share, respectively.

 

Return on average assets decreased 21 basis points to 0.23% as the decrease in income outpaced the increase in average assets.

 

Net interest income, after provision for loan losses, increased by $549,000, or 4.6%, to $12.5 million.  This increase in earnings was primarily due to the increase in average balances of interest earning assets, accompanied by an increase in the average yield earned on interest-earning assets.

 

Net interest margin decreased by 14 basis points to 2.91%, primarily as a result of a $120.3 million increase in the average balance of time deposits, coupled with an 86 basis point increase in the average rate paid on time deposits.  

 

The effective income tax rate increased 12.7% to 27.8% for the six months ended June 30, 2019 as compared to 15.1% for the same six month period in 2018.  This increase was primarily related to the nonrecurring establishment, through a charge to earnings, of a $136,000 valuation allowance to reserve against deferred tax assets related to New York State income taxes.

The following reflects the significant changes in financial condition between the periods of December 31, 2018 and June 30, 2019.  In addition, the following reflects significant changes in asset quality metrics between June 30, 2018 and June 30, 2019.

 

Total assets increased $79.7 million, or 8.6% to $1.0 billion at June 30, 2019, as compared to December 31, 2018, primarily due to increases in loans and cash and cash equivalents partially offset by a decrease in investment

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securities.  These increases were funded largely by 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. 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.  The annualized net loan charge-offs to average loans ratio was 0.07% for the second quarter of 2019, compared to 0.14% for the second quarter of 2018, and 0.22% for the fourth quarter of 2018.  Nonperforming loans to total loans decreased 36 basis points to 0.54% at June 30, 2019, compared to 0.90% at June 30, 2018. Nonperforming loans to total loans increased 19 basis points to 0.54% at June 30, 2019, compared to 0.35% at December 31, 2018. Correspondingly, the ratio of the allowance for loan losses to nonperforming loans for second quarter 2019 was 208.39%, as compared to 139.7% at June 30, 2018, and 340.13% at December 31, 2018.

The Company had net income of $607,000 for the three months ended June 30, 2019 compared to net income of $945,000 for the three months ended June 30, 2018.  The $338,000 decrease in net income was due primarily to a $1.4 million increase in interest expense, a $412,000 increase in noninterest expense, and a $313,000 increase in the provision for loan losses. These fluctuations were partially offset by a $1.6 million increase in interest and dividend income and a $195,000 increase in noninterest income.  

Net interest income before the provision for loan losses increased $239,000, or 3.7%, to $6.7 million for the three months ended June 30, 2019 as compared to $6.5 million for the same three month period in 2018.  The increase was primarily the result of the increase in average interest-earning asset balances due to increases in average loans and average taxable investment securities.  The positive effects of increased average interest-earning assets for the three months ended June 30, 2019, as compared to the same three month period in 2018, were also enhanced by an increase in the average yield of interest-earning assets of 31 basis points to 4.36% for the three months ended June 30, 2019 from 4.05% 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 $195,000, or 19.0%, increase in noninterest income in the quarter ended June 30, 2019, as compared to the same quarterly period in 2018, was primarily the result of a $75,000 increase on service charges on deposit accounts. Further contributing to the increase in noninterest income was a net increase of $54,000 in the net gains on the sales and redemptions of investment securities from a loss of $22,000 for the three months ended June 30, 2018 to a net gain of $32,000 for the same quarter in 2019.  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. All other noninterest income categories increased by $66,000, or 8.5% in the quarter ended June 30, 2019 as compared to the prior year quarter.

 

The $412,000 increase in noninterest expense in the quarter ended June 30, 2019, as compared to the same quarterly period in 2018, was due primarily to an increase of $243,000, or 7.6%, 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, data processing costs and building occupancy costs increased $134,000 and $129,000, respectively. The increases in these operating costs were partially due to expenses related to our new banking location in Onondaga County.  All other noninterest expense categories decreased $94,000, or 4.8%, in aggregate during the quarter ended June 30, 2019, as compared to the same three month period in 2018.

 

In comparing the year-over-year second quarter periods, the return on average assets decreased 18 basis points to 0.25% due to the combined effects of the decrease 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 investment securities of $59.1 million and $42.4 million, respectively, in the second quarter of 2019 as compared to the same quarter of 2018.  Average interest-bearing deposits increased $71.6 million in the second quarter of 2019, as compared with the same quarter in 2018.  The increase in deposits was the result of organic growth within our existing marketplace coupled with targeted promotions for our time deposit products.

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The Company had net income of $1.1 million for the six months ended June 30, 2019 compared to net income of $1.9 million for the six months ended June 30, 2018.  The $828,000 decrease in net income was due primarily to a $2.7 million increase in interest expense, a $1.7 million increase in noninterest expense, and a $78,000 increase in income tax expense. These fluctuations were partially offset by an increase of $3.1 million in interest and dividend income, a $393,000 increase in noninterest income, and a $156,000 decrease in the provision for loan losses.

Net interest income before the provision for loan losses increased $393,000, or 3.1%, to $13.3 million for the six months ended June 30, 2019 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 $393,000, or 20.5%, increase in noninterest income in the six months ended June 30, 2019, as compared to the same six month period in 2018, was primarily the result of a net increase of $240,000 in the net gains on the sales and redemptions of investment securities from a loss of $129,000 for the six months ended June 30, 2018 to a net gain of $111,000 for the same six month period in 2019. 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. Also contributing to the increase in noninterest income was service charges on deposit accounts, earnings and gain on bank owned life insurance, and gains on marketable equity securities, which increased $83,000, $41,000, and $31,000, respectively.  All other noninterest income categories decreased by $2,000, or .2%, in the six months ended June 30, 2019 as compared to the prior year period.

 

The $1.7 million increase in noninterest expense was due primarily to an increase of $914,000, or 14.8%, in salary and employee benefits expense that reflected, in part, approximately $197,000 in one-time employee severance payments and $144,000 in reduced accrued earnings from the Company’s defined benefit pension plan (due primarily to market value declines in the Company’s pension assets at December 31, 2018).  The remainder of the year-over-year increase in salary and benefits expense of $573,000 was primarily due to increases 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, data processing costs, foreclosed real estate expenses, and building occupancy costs increased $250,000, $222,000, and $199,000, respectively. The increase in data processing and building occupancy costs were partially due to expenses related to our new banking location in Onondaga County.  Foreclosed real estate expenses increased due to expenses related to the final disposition of a single foreclosed commercial property. All other noninterest expense categories increased $79,000, or 2.4%, in aggregate for the six month period ended June 30, 2019, as compared to the same six month period in 2018.

 

For the three months ended June 30, 2019, we recorded $610,000 in provision for loan losses as compared to $297,000 in the same prior year three month period.  This $313,000 increase in the provision for loan losses was reflective of continued significant growth in the Bank’s commercial lending portfolio and the addition of one commercial loan relationship that required a specific reserve of $176,000. Average loan balances increased $59.1 million, or 9.7%, in the second quarter of 2019 as compared with the same quarter of 2018.  

 

For the first six months of 2019, we recorded $754,000 in provision for loan losses as compared to $910,000 in the same prior year six month period.  This $156,000 decrease in the provision for loan losses was reflective of changes to both quantitative and environmental factors deemed appropriate for the Bank’s loan portfolio, as well as stable asset quality metrics, partially offset by an increase in the provision for loan losses recorded due to the increase in the loan portfolio’s aggregate size.  Further, at December 31, 2018, the Bank had $152,000 in unallocated reserves to absorb future potential losses reducing the provision necessary for the first half of 2019.  There were no unallocated reserves at March 31, 2019 or June 30, 2019.

Return on average assets decreased 21 basis points to 0.23% between the year-over-year six month periods as the change in net income in the six month period ended June 30, 2019 (the numerator of the ratio) decreased by a slightly higher percentage than the rate at which average assets (the denominator of the ratio) grew during the period.

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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.

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,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

Average

 

 

 

 

 

 

Yield /

 

 

Average

 

 

 

 

 

 

Yield /

 

(Dollars in thousands)

 

Balance

 

 

Interest

 

 

Cost

 

 

Balance

 

 

Interest

 

 

Cost

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

666,428

 

 

$

8,222

 

 

 

4.93

%

 

$

607,286

 

 

$

7,018

 

 

 

4.62

%

Taxable investment securities

 

 

228,506

 

 

 

1,729

 

 

 

3.03

%

 

 

186,147

 

 

 

1,232

 

 

 

2.65

%

Tax-exempt investment securities

 

 

9,383

 

 

 

51

 

 

 

2.17

%

 

 

33,302

 

 

 

217

 

 

 

2.61

%

Fed funds sold and interest-earning deposits

 

 

22,222

 

 

 

106

 

 

 

1.91

%

 

 

15,135

 

 

 

49

 

 

 

1.30

%

Total interest-earning assets

 

 

926,539

 

 

 

10,108

 

 

 

4.36

%

 

 

841,870

 

 

 

8,516

 

 

 

4.05

%

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

67,935

 

 

 

 

 

 

 

 

 

 

 

55,763

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(7,372

)

 

 

 

 

 

 

 

 

 

 

(7,544

)

 

 

 

 

 

 

 

 

Net unrealized losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  on available-for-sale securities

 

 

(1,685

)

 

 

 

 

 

 

 

 

 

 

(3,876

)

 

 

 

 

 

 

 

 

Total assets

 

$

985,417

 

 

 

 

 

 

 

 

 

 

$

886,213

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

67,380

 

 

$

28

 

 

 

0.17

%

 

$

64,157

 

 

$

27

 

 

 

0.17

%

Money management accounts

 

 

13,415

 

 

 

5

 

 

 

0.15

%

 

 

13,584

 

 

 

5

 

 

 

0.15

%

MMDA accounts

 

 

177,284

 

 

 

395

 

 

 

0.89

%

 

 

250,502

 

 

 

599

 

 

 

0.96

%

Savings and club accounts

 

 

85,283

 

 

 

25

 

 

 

0.12

%

 

 

85,892

 

 

 

22

 

 

 

0.10

%

Time deposits

 

 

368,708

 

 

 

2,287

 

 

 

2.48

%

 

 

226,358

 

 

 

913

 

 

 

1.61

%

Subordinated loans

 

 

15,102

 

 

 

217

 

 

 

5.75

%

 

 

15,071

 

 

 

210

 

 

 

5.57

%

Borrowings

 

 

71,701

 

 

 

445

 

 

 

2.48

%

 

 

65,470

 

 

 

273

 

 

 

1.67

%

Total interest-bearing liabilities

 

 

798,873

 

 

 

3,402

 

 

 

1.70

%

 

 

721,034

 

 

 

2,049

 

 

 

1.14

%

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

101,675

 

 

 

 

 

 

 

 

 

 

 

96,226

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

10,395

 

 

 

 

 

 

 

 

 

 

 

5,772

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

910,943

 

 

 

 

 

 

 

 

 

 

 

823,032

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

74,474

 

 

 

 

 

 

 

 

 

 

 

63,181

 

 

 

 

 

 

 

 

 

Total liabilities & shareholders' equity

 

$

985,417

 

 

 

 

 

 

 

 

 

 

$

886,213

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

6,706

 

 

 

 

 

 

 

 

 

 

$

6,467

 

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

 

 

 

 

2.66

%

 

 

 

 

 

 

 

 

 

 

2.91

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

2.90

%

 

 

 

 

 

 

 

 

 

 

3.07

%

Ratio of average interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to average interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

115.98

%

 

 

 

 

 

 

 

 

 

 

116.76

%

  

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Table of Contents

 

 

For the six months ended June 30,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

Average

 

 

 

 

 

 

Yield /

 

 

Average

 

 

 

 

 

 

Yield /

 

(Dollars in thousands)

 

Balance

 

 

Interest

 

 

Cost

 

 

Balance

 

 

Interest

 

 

Cost

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

650,169

 

 

$

15,797

 

 

 

4.86

%

 

$

600,548

 

 

$

13,736

 

 

 

4.57

%

Taxable investment securities

 

 

226,586

 

 

 

3,605

 

 

 

3.18

%

 

 

193,731

 

 

 

2,428

 

 

 

2.51

%

Tax-exempt investment securities

 

 

13,903

 

 

 

159

 

 

 

2.29

%

 

 

35,564

 

 

 

465

 

 

 

2.62

%

Fed funds sold and interest-earning deposits

 

 

21,390

 

 

 

216

 

 

 

2.02

%

 

 

14,412

 

 

 

96

 

 

 

1.33

%

Total interest-earning assets

 

 

912,048

 

 

 

19,777

 

 

 

4.34

%

 

 

844,255

 

 

 

16,725

 

 

 

3.96

%

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

66,878

 

 

 

 

 

 

 

 

 

 

 

54,540

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(7,324

)

 

 

 

 

 

 

 

 

 

 

(7,324

)

 

 

 

 

 

 

 

 

Net unrealized (losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  on available for sale securities

 

 

(2,468

)

 

 

 

 

 

 

 

 

 

 

(3,358

)

 

 

 

 

 

 

 

 

Total assets

 

$

969,134

 

 

 

 

 

 

 

 

 

 

$

888,113

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

68,819

 

 

$

56

 

 

 

0.16

%

 

$

68,100

 

 

$

52

 

 

 

0.15

%

Money management accounts

 

 

13,820

 

 

 

10

 

 

 

0.14

%

 

 

14,246

 

 

 

11

 

 

 

0.15

%

MMDA accounts

 

 

180,907

 

 

 

829

 

 

 

0.92

%

 

 

252,798

 

 

 

1,072

 

 

 

0.85

%

Savings and club accounts

 

 

84,792

 

 

 

50

 

 

 

0.12

%

 

 

83,901

 

 

 

43

 

 

 

0.10

%

Time deposits

 

 

345,486

 

 

 

4,140

 

 

 

2.40

%

 

 

225,223

 

 

 

1,733

 

 

 

1.54

%

Subordinated loans

 

 

15,097

 

 

 

434

 

 

 

5.75

%

 

 

15,066

 

 

 

413

 

 

 

5.48

%

Borrowings

 

 

79,200

 

 

 

1,005

 

 

 

2.54

%

 

 

66,981

 

 

 

541

 

 

 

1.62

%

Total interest-bearing liabilities

 

 

788,121

 

 

 

6,524

 

 

 

1.66

%

 

 

726,315

 

 

 

3,865

 

 

 

1.06

%

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

101,480

 

 

 

 

 

 

 

 

 

 

 

92,803

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

9,383

 

 

 

 

 

 

 

 

 

 

 

5,960

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

898,984

 

 

 

 

 

 

 

 

 

 

 

825,078

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

70,150

 

 

 

 

 

 

 

 

 

 

 

63,035

 

 

 

 

 

 

 

 

 

Total liabilities & shareholders' equity

 

$

969,134

 

 

 

 

 

 

 

 

 

 

$

888,113

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

13,253

 

 

 

 

 

 

 

 

 

 

$

12,860

 

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

 

 

 

 

2.68

%

 

 

 

 

 

 

 

 

 

 

2.90

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

2.91

%

 

 

 

 

 

 

 

 

 

 

3.05

%

Ratio of average interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to average interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

115.72

%

 

 

 

 

 

 

 

 

 

 

116.24

%

 

As indicated in the above tables, net interest income, before provision for loan losses, increased $239,000, or 3.7%, to $6.7 million for the three months ended June 30, 2019 as compared to $6.5 million for the same prior year period.  This increase was due principally to the $84.7 million, or 10.1%, increase in the average balance of interest-earning assets, and an increase of 31 basis points on the average 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 $77.8 million, or 10.8%, and an increase of 56 basis points on the average interest rate paid on those liabilities.   In total, net interest margin decreased 17 basis points to 2.90% due largely to the increase in rates paid on average interest-bearing liabilities, 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 $1.6 million, or 18.7%, to $10.1 million for the three months ended June 30, 2019 compared to $8.5 million for the same three month period in 2018.  The increase in interest income was due principally to the increase in average interest-earning assets (primarily loans and taxable investment securities), which increased between the year-over-year second quarter periods by 12.8%.  The increase in the average balances of loans reflected 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 31 basis points to 4.93% and 38 basis points to 3.03%, respectively.  This increase in the average yield on loans was the result of new loan

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production being added to the loan portfolio at rates slightly higher than the average yields 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, 2019 increased $1.4 million, or 66.0%, to $3.4 million when compared to the same prior year period.  Deposit interest expense increased $1.2 million, or 75.0%, to $2.7 million due to a $71.6 million increase in the average balance of interest-bearing deposits accompanied by a 56 basis point increase in the average annualized rate paid on these deposits to 1.54% for the three months ended June 30, 2019, as compared with the same three month period in 2018. This increase in average rates was primarily due to an 87 basis point increase in the average rates paid on time deposits, during the three months ended June 30, 2019 as compared to the same three month period in 2018.  The increases in the average rates paid on time 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. Further contributing to the increase in interest expense was a $172,000 increase in borrowings expense, which increased due to general increases in short-term interest rates nationally along with a $6.2 million increase in the average balance of borrowings.  

For the six month period ended June 30, 2019, net interest income, before the provision for loan losses, increased $393,000, or 3.1%, to $13.3 million compared to $12.9 million for the six months ended June 30, 2018.  Interest and dividend income increased $3.1 million, or 18.3%, to $19.8 million for the six months ended June 30, 2019 from $16.7 million for the same six month period in 2018.  The increase in interest income was due principally to the increase in average balances of loan and taxable investment securities, which increased 8.3% and 17.0%, respectively, between the year-over-year six month periods.  The increase in the average balances of loans reflected 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 29 basis points to 4.86% and 67 basis points to 3.18%, 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. Further contributing to the increase in interest expense was a $464,000 increase in borrowings expense, which increased due to general increases in short-term interest rates nationally along with a $12.2 million increase in the average balance of borrowings.    

Interest expense for the six months ended June 30, 2019 increased $2.7 million, or 68.8%, to $6.5 million as compared to $3.9 million for the six months ended June 30, 2018.  The increase in interest expense was due principally to the increase in average interest-bearing liabilities of $61.8 million, along with a 60 basis point increase in the average rate paid on these liabilities to 1.66%.  The increase in average rates paid on interest-bearing liabilities was due to a $2.2 million increase in deposit interest expense and a $464,000 increase in interest expense paid on borrowed funds. The average balances of interest-bearing deposits, which include brokered deposits, increased $49.6 million between the year-over-year six month periods.  Deposit interest expense increased 57 basis points to 1.47% for the six months ended June 30, 2019 as compared with the same six month period in 2018.  This increase was primarily due to an 86 basis point increase in the average rate paid on time deposits, during the six months ended June 30, 2019 as compared to the same time period in 2018.  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.


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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,

 

 

 

2019 vs. 2018

 

 

2019 vs. 2018

 

 

 

Increase/(Decrease) Due to

 

 

Increase/(Decrease) Due to

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Increase

 

 

 

 

 

 

 

 

 

 

Increase

 

(In thousands)

 

Volume

 

 

Rate

 

 

(Decrease)

 

 

Volume

 

 

Rate

 

 

(Decrease)

 

Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

711

 

 

$

493

 

 

$

1,204

 

 

$

1,175

 

 

$

886

 

 

$

2,061

 

Taxable investment securities

 

 

305

 

 

 

192

 

 

 

497

 

 

 

455

 

 

 

722

 

 

 

1,177

 

Tax-exempt investment securities

 

 

(135

)

 

 

(31

)

 

 

(166

)

 

 

(254

)

 

 

(52

)

 

 

(306

)

Interest-earning deposits

 

 

28

 

 

 

29

 

 

 

57

 

 

 

58

 

 

 

62

 

 

 

120

 

Total interest income

 

 

909

 

 

 

683

 

 

 

1,592

 

 

 

1,434

 

 

 

1,618

 

 

 

3,052

 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

 

3

 

 

 

(2

)

 

 

1

 

 

 

1

 

 

 

3

 

 

 

4

 

Money management accounts

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

(1

)

MMDA accounts

 

 

(165

)

 

 

(39

)

 

 

(204

)

 

 

(459

)

 

 

216

 

 

 

(243

)

Savings and club accounts

 

 

(1

)

 

 

4

 

 

 

3

 

 

 

-

 

 

 

7

 

 

 

7

 

Time deposits

 

 

741

 

 

 

633

 

 

 

1,374

 

 

 

1,178

 

 

 

1,229

 

 

 

2,407

 

Subordinated loans

 

 

-

 

 

 

7

 

 

 

7

 

 

 

1

 

 

 

20

 

 

 

21

 

Borrowings

 

 

28

 

 

 

144

 

 

 

172

 

 

 

112

 

 

 

352

 

 

 

464

 

Total interest expense

 

 

606

 

 

 

747

 

 

 

1,353

 

 

 

833

 

 

 

1,826

 

 

 

2,659

 

Net change in net interest income

 

$

303

 

 

$

(64

)

 

$

239

 

 

$

601

 

 

$

(208

)

 

$

393

 

 

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 $610,000 in provision for loan losses for the three month period ended June 30, 2019, as compared to $297,000 for the three month period ended June 30, 2018.  The $313,000 increase in the provision for loan losses was reflective of continued significant growth in the Bank’s commercial lending portfolio and the addition of one commercial loan relationship that required a specific reserve of $176,000. Average loan balances increased $59.1 million, or 9.7%, in the second quarter of 2019 as compared with the same quarter of 2018.  

For the first six months of 2019, we recorded $754,000 in provision for loan losses as compared to $910,000 in the same prior year six month period.  This $156,000 decrease in the provision for loan losses was reflective of changes to both quantitative and environmental factors deemed appropriate for the Bank’s loan portfolio, as well as stable asset quality metrics, partially offset by an increase in the provision for loan losses recorded due to the increase in the loan portfolio’s

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aggregate size.  Further, at December 31, 2018, the Bank had $152,000 in unallocated reserves to absorb future potential losses reducing the provision necessary for the first quarter of 2019.  There were no unallocated reserves at March 31, 2019 or June 30, 2019.

 

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 increased to 2.45% at June 30, 2019 as compared to 1.81% at December 31, 2018.  Delinquent loans (numerator) increased $5.8 million while total loan balances (denominator) increased $72.5 million at June 30, 2019, as compared to December 31, 2018.  The increase in past due loans was primarily driven by an increase of $3.0 million in loans delinquent 30-59 days, an increase of $1.6 million in loans delinquent more than 90 days, and a $1.2 million increase in loans delinquent 60-89 days.  The increase in loans 30-59 days past due at June 30, 2019 as compared to December 31, 2018 was primarily due to the addition of one other commercial and industrial loan totaling $2.5 million.  The increase in loans delinquent 90 days or more at June 30, 2019 as compared to December 31, 2018 was primarily due to the addition of six commercial real estate loans totaling $1.8 million. The increase in loans 60-89 days past due at June 30, 2019 as compared to December 31, 2018 was primarily due to the addition of three other commercial and industrial loans totaling $880,000 and the addition of one commercial line of credit totaling $550,000.

 

At June 30, 2019, there were $17.0 million in loans past due including $11.1 million in loans 30-59 days past due, $2.3 million in loans 60-89 days past due and $3.6 million in loans 90 or more days past due.  At December 31, 2018, there were $11.2 million in loans past due, including $8.1 million in loans 30-59 days past due, $1.1 million in loans 60-89 days past due and $2.0 million in loans 90 or more days past due.  

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.  

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)

 

2019

 

 

2018

 

 

Change

 

 

2019

 

 

2018

 

 

Change

 

Service charges on deposit accounts

 

$

348

 

 

$

273

 

 

$

75

 

 

 

27.5

%

 

$

630

 

 

$

547

 

 

$

83

 

 

 

15.2

%

Earnings and gain on bank owned life insurance

 

 

101

 

 

 

108

 

 

 

(7

)

 

 

-6.5

%

 

 

222

 

 

 

181

 

 

 

41

 

 

 

22.7

%

Loan servicing fees

 

 

60

 

 

 

42

 

 

 

18

 

 

 

42.9

%

 

 

87

 

 

 

83

 

 

 

4

 

 

 

4.8

%

Debit card interchange fees

 

 

187

 

 

 

148

 

 

 

39

 

 

 

26.4

%

 

 

331

 

 

 

291

 

 

 

40

 

 

 

13.7

%

Insurance agency revenue

 

 

218

 

 

 

236

 

 

 

(18

)

 

 

-7.6

%

 

 

461

 

 

 

465

 

 

 

(4

)

 

 

-0.9

%

Other charges, commissions and fees

 

 

244

 

 

 

213

 

 

 

31

 

 

 

14.6

%

 

 

408

 

 

 

439

 

 

 

(31

)

 

 

-7.1

%

Noninterest income before gains (losses)

 

 

1,158

 

 

 

1,020

 

 

 

138

 

 

 

13.5

%

 

 

2,139

 

 

 

2,006

 

 

 

133

 

 

 

6.6

%

Net gains (losses) on sales and redemptions of

   investment securities

 

 

32

 

 

 

(22

)

 

 

54

 

 

 

245.5

%

 

 

111

 

 

 

(129

)

 

 

240

 

 

 

186.0

%

Gains on marketable equity securities

 

 

16

 

 

 

13

 

 

 

3

 

 

 

23.1

%

 

 

57

 

 

 

26

 

 

 

31

 

 

 

119.2

%

Net gains on sales of loans and foreclosed

   real estate

 

 

13

 

 

 

13

 

 

 

-

 

 

 

0.0

%

 

 

5

 

 

 

16

 

 

 

(11

)

 

 

-68.8

%

Total noninterest income

 

$

1,219

 

 

$

1,024

 

 

$

195

 

 

 

19.0

%

 

$

2,312

 

 

$

1,919

 

 

$

393

 

 

 

20.5

%

 

The $195,000, or 19.0%, increase in noninterest income in the quarter ended June 30, 2019, as compared to the same quarterly period in 2018, was partially due to the net increase of $54,000 in the net gains on the sales and redemptions of investment securities from a loss of $22,000 for the three months ended June 30, 2018 to a net gain of $32,000 for the same quarter in 2019.  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 increase in gains on the sale of investment securities, all other noninterest income categories increased in the aggregate by $141,000, or 13.5% to $1.2 million in the quarter ended June 30, 2019 as compared with $1.0 million in the same quarter of 2018.  This $141,000 quarter over quarter increase in noninterest income,

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excluding the effects of gains on the sales and redemptions of investment securities, was due primarily to increases of $75,000 in service charges on deposit accounts, $39,000 in debit card interchange fees, $31,000 in other charges, commissions and fees, and $18,000 in loan servicing fees.  These increases were offset by an $18,000 decrease in insurance agency revenue.  

 

The $393,000, or 20.5%, increase in noninterest income in the six months ended June 30, 2019, as compared to the same six month period in 2018, was primarily the result of a net increase of $240,000 in the net gains on the sales and redemptions of investment securities from a loss of $129,000 for the six months ended June 30, 2018 to a net gain of $111,000 for the same six month period in 2019. 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 increase in gains on the sale of investment securities, all other noninterest income categories increased in the aggregate by $153,000, or 7.5%, to $2.2 million in the six months ended June 30, 2019 as compared with $2.0 million in the same six month period of 2018.  This $153,000 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 $83,000 in service charges on deposit accounts, a $41,000 increase in earnings and gains on bank owned life insurance, a $40,000 increase in debit card interchanges fees, and a $31,000 increase in gains on marketable equity securities. These increases were offset by decreases of $31,000 in other charges, commissions and fees and $11,000 in net gains on sale of loans and foreclosed real estate.

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)

 

2019

 

 

2018

 

 

Change

 

 

2019

 

 

2018

 

 

Change

 

Salaries and employee benefits

 

$

3,454

 

 

$

3,211

 

 

$

243

 

 

 

7.6

%

 

$

7,104

 

 

$

6,190

 

 

$

914

 

 

 

14.8

%

Building occupancy

 

 

632

 

 

 

503

 

 

 

129

 

 

 

25.6

%

 

 

1,287

 

 

 

1,088

 

 

 

199

 

 

 

18.3

%

Data processing

 

 

587

 

 

 

453

 

 

 

134

 

 

 

29.6

%

 

 

1,162

 

 

 

912

 

 

 

250

 

 

 

27.4

%

Professional and other services

 

 

380

 

 

 

405

 

 

 

(25

)

 

 

-6.2

%

 

 

716

 

 

 

736

 

 

 

(20

)

 

 

-2.7

%

Advertising

 

 

242

 

 

 

281

 

 

 

(39

)

 

 

-13.9

%

 

 

481

 

 

 

468

 

 

 

13

 

 

 

2.8

%

FDIC assessments

 

 

130

 

 

 

135

 

 

 

(5

)

 

 

-3.7

%

 

 

241

 

 

 

255

 

 

 

(14

)

 

 

-5.5

%

Audits and exams

 

 

100

 

 

 

105

 

 

 

(5

)

 

 

-4.8

%

 

 

200

 

 

 

210

 

 

 

(10

)

 

 

-4.8

%

Insurance agency expense

 

 

229

 

 

 

325

 

 

 

(96

)

 

 

-29.5

%

 

 

428

 

 

 

489

 

 

 

(61

)

 

 

-12.5

%

Community service activities

 

 

144

 

 

 

141

 

 

 

3

 

 

 

2.1

%

 

 

282

 

 

 

228

 

 

 

54

 

 

 

23.7

%

Foreclosed real estate expenses

 

 

59

 

 

 

48

 

 

 

11

 

 

 

22.9

%

 

 

296

 

 

 

74

 

 

 

222

 

 

 

300.0

%

Other expenses

 

 

582

 

 

 

520

 

 

 

62

 

 

 

11.9

%

 

 

1,053

 

 

 

936

 

 

 

117

 

 

 

12.5

%

Total noninterest expenses

 

$

6,539

 

 

$

6,127

 

 

$

412

 

 

 

6.7

%

 

$

13,250

 

 

$

11,586

 

 

$

1,664

 

 

 

14.4

%

 

The $412,000, or 6.7%, 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 $243,000, or 7.6%.  All other noninterest expenses in aggregate increased $169,000, or 5.8%, for the three months ended June 30, 2019 as compared to the same three month period in 2018.  The detail of the components of the overall increase in noninterest expense is as follows:

 

The $243,000 increase in salaries and employee benefits expense in the second quarter of 2019, as compared to the same three month period in 2018, was primarily due to increases of $343,000 in salary expense and increases of $197,000 in employee benefits expense, including employee payroll tax expenses. Offsetting these increases was a $315,000 decrease in commission expenses. Commission expense decreased primarily due to 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.  Salaries expense increased primarily as the result of additional staff members supporting current and planned asset growth and risk management activities as well as increased customer service and other operating costs reflecting the ramp-up period

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for our two new banking locations in Oneida and Onondaga counties. The year-over-year increases in employee benefit expenses were consistent with the salary increases discussed above.

 

The $134,000 increase in data processing costs was primarily due to $62,000 in additional depreciation related to recently completed projects and $27,000 in processing fees paid by the Bank that were based on increased levels of customer activity primarily transacted through its electronic delivery channels.  

 

The increase in building and occupancy expenses was primarily due to $23,000 in additional depreciation expense related to recently completed building modernization and refurbishment projects, a $21,000 increase in property taxes, a $17,000 increase in utilities and communications, and a $12,000 increase in building and machine maintenance.  These increases are consistent with branch and operational growth.  

 

All other noninterest expenses decreased in aggregate in the year-over-year three month periods by a total of $94,000, or 4.8%, due to a broad range of individually immaterial variances.

The $1.7 million, or 14.4%, increase in noninterest expenses between the six month period ended June 30, 2019 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, foreclosed real estate expense, building occupancy expense, and other expenses.  The detail of the components of the overall increase in noninterest expense is as follows:

 

The $914,000 increase in salaries and employee benefits expense in the first six months of 2019, as compared to the same six month period in 2018, was primarily due to increases of $764,000 in salary expense and increases of $437,000 in employee benefits expense, including employee payroll tax expenses. Offsetting these increases was a $281,000 decrease in commission expenses. Commission expense decreased primarily due to additional accruals in the prior year 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.  Salaries expense increased primarily as the result of additional staff members supporting current and planned asset growth and risk management activities as well as increased customer service and other operating costs reflecting the ramp-up period for our two new banking locations in Oneida and Onondaga counties. The year-over-year increases in employee benefit expenses were consistent with the salary increases discussed above.

 

The $250,000 increase in data processing costs was primarily due to $128,000 in additional depreciation related to recently completed projects and $70,000 in processing fees paid by the Bank that were based on increased levels of customer activity primarily transacted through its electronic delivery channels.  

 

Foreclosed real estate expenses increased $222,000 as a result of property taxes paid on a foreclosed property. This foreclosed property was sold in February 2019 and is no longer in foreclosed real estate at June 30, 2019.

 

The increase in building occupancy costs was primarily due to $40,000 in additional depreciation expense related to recently completed building modernization and refurbishment projects, a $42,000 increase in utilities and communications, and a $27,000 increase in building and machine maintenance.  These increases are consistent with branch and operational growth.  

 

All other noninterest expenses increased in aggregate in the year-over-year six month periods by a total of $79,000, or 2.4%, due to a broad range of individually immaterial variances.

 

At June 30, 2019, the Bank serviced 197 residential mortgage loans in the aggregate amount of $11.3 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.


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Income Tax Expense

 

Income tax expense increased $9,000 to $175,000, with an effective tax rate of 22.2%, for the quarter ended June 30, 2019, as compared to $166,000, with an effective tax rate of 14.3%, for the same three month period in 2018.  The increase in income tax expense in the current quarter, as compared to the same quarter in 2018, was primarily due to the recognition of tax benefits of $52,000 in the second quarter of 2018 that resulted from the cashless exercise of incentive stock options by certain executives of the Company.  Excluding the tax benefit effects of the stock option exercises, income tax expense for the second quarter of 2018 would have been $218,000, with an effective rate of 18.8%. There were no tax benefits derived from the exercise of these options in the second quarter of 2019.  

 

Income tax expense increased $78,000 to $426,000, with an effective tax rate of 27.8% for the six months ended June 30, 2019 as compared to $348,000, with an effective tax rate of 15.1%, for the same six month period in 2018. In the first quarter of 2019, the Company established, through a charge to earnings, a valuation allowance in the amount of $136,000, increasing the Company’s effective tax rate by 8.9%, in order to establish a reserve against deferred tax assets related to New York State income taxes. Effective in January 2018, the Company adopted a modification methodology, made available following changes to the New York State tax code, effecting how the Company’s state income tax liability is computed. Under this adopted methodology, it is unlikely that the Company will pay income taxes to New York in future periods and it is therefore probable that the Company’s deferred tax assets related to New York State income taxes are unlikely to further reduce the Company’s State tax rate in the future. Accordingly, a valuation allowance against the recorded value of those deferred tax assets was established in order to reduce the net deferred tax asset related to New York income taxes to $-0- at June 30, 2019. There were no valuation allowances against deferred tax assets at December 31, 2018.

 

The Company’s effective tax rate differs from the statutory federal tax rate of 21% due primarily to tax-exempt income from specific types of investment securities and loans, bank owned life insurance, and, to a much lesser degree, the utilization of low income housing credits. In addition, the tax effects of certain incentive stock option activity may also reduce the Company’s effective tax rate on a sporadic basis. During the six months ended June 30, 2019 these effects reduced the Company’s effective tax rate by 1.8%. Excluding the nonrecurring charge related to the deferred tax asset valuation allowance, income tax expense in the first half of 2019 would have been $58,000 less than the prior period, and the effective tax rate would have been 18.9%. The reduction in income tax expense and the effective tax rate in the first half of 2019, as compared to the previous period, was primarily attributable to the year-over-year six month quarter reduction in pre-tax net income.

Earnings per Share

Basic and diluted earnings per share were $0.11 per share for the second quarter of 2019, as compared to $0.23 per basic and diluted share for the same quarter of 2018.

Basic and diluted earnings per share were $0.23 for the six month period ended June 30, 2019, as compared to $0.47 and $0.46, respectively, for the same prior year period.  The decrease in earnings per share between these two periods was due to the decrease 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 $79.7 million, or 8.6%, to $1.0 billion at June 30, 2019 as compared to $933.1 million at December 31, 2018.  This increase was due primarily to increases in loans and cash and cash equivalents, partially offset by a decrease in investment securities.

Total loans receivable increased $72.0 million, or 11.8%, to $685.0 million at June 30, 2019 from $613.0 million at December 31, 2018. Commercial loans, consumer loans, and residential loans recorded increases between these two dates, with increases of $41.5 million, $27.2 million, and $3.7 million, respectively.

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Investment securities decreased $18.7 million, or 8.0%, to $213.4 million at June 30, 2019, as compared to $232.0 million at December 31, 2018, due principally to sales and maturities of securities during the first six months of 2019.  

Cash and cash equivalents increased $24.0 million, or 91.3%, to $50.3 million at June 30, 2019, as compared to $26.3 million at December 31, 2018.  The $24.0 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 2019.  The Bank considers its statutorily required cash reserve balances held at the Federal Reserve Bank to be restricted cash.  Total restricted cash was -$0- and $4.0 million at June 30, 2019 and December 31, 2018, respectively.

Liabilities

Total liabilities increased $56.4 million, or 6.5%, to $925.0 million at June 30, 2019 compared to $868.7 million at December 31, 2018.  Deposits increased $81.6 million, or 11.2%, to $808.6 million at June 30, 2019, compared to $727.1 million at December 31, 2018.  This increase was the result of an increase in deposits obtained directly from customers within the Bank’s marketplace of $59.1 million, primarily due to increases in time deposits. This increase was further enhanced by the seasonally-normal strong deposit inflows related to the Bank’s municipal depositor relationships, which increased $16.6 million. The increase in these customer deposits during the six months ended June 30, 2019 was partially offset by a decrease in business deposits of $27.3 million. In March 2019, the Bank took on additional brokered time deposits through an unrelated financial institution in the amount of $24.0 million. The Bank utilizes the Certificates of Deposit Account Registry Service (“CDARS”) provided by Promontory Interfinancial Network and other deposits acquired through unaffiliated financial institutions as forms of brokered deposits. At June 30, 2019 deposits obtained through the use of this service increased $9.6 million to $51.0 million as compared to $41.4 million at December 31, 2018. Borrowed funds balances from the FHLB-NY decreased $29.1 million, or 24.5%, to $89.4 million at June 30, 2019 from $118.5 million at December 31, 2018.

Shareholders’ Equity

The Company’s shareholders’ equity, exclusive of the noncontrolling interest, increased $23.4 million, or 36.4%, to $87.6 million at June 30, 2019 from $64.2 million at December 31, 2018. This increase was principally due to the $20.0 million increase in additional paid in capital, a $3.0 million increase in comprehensive income, a $275,000 increase in retained earnings, and a $90,000 increase in ESOP shares earned. Additional paid in capital increased as a result of the proceeds received from the Private Placement of common and preferred shares that took place in May 2019. Comprehensive income increased primarily as the result of the appreciation in the fair market value of our available-for-sale investment securities during the six months ended June 30, 2019.  The slight increase in retained earnings resulted from $1.1 million in net income recorded in the first six months of 2019.  Partially offsetting the increase in retained earnings was a $239,000 one-time adjustment related to the cumulative effect of the capitalization of the operating lease right-of-use-assets based on the adoption of ASU 2016-02 - Leases (Topic 842).  In addition, retained earnings was further reduced by $530,000 for cash dividends declared on our common stock, $69,000 for cash dividends declared on our preferred stock, and $8,000 for cash dividends declared on our issued warrant.  

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, 2019, 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.  

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The capital conservation buffer requirement is now fully implemented at 2.5% of risk-weighted assets as of January 1, 2019.  At June 30, 2019, the Bank exceeded all regulatory required minimum capital ratios, including the capital buffer requirements.

On May 24, 2018, The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”) was enacted, which repeals or modifies certain provisions of the Dodd-Frank Act and eases regulations on all but the largest banks. The EGRRCPA’s provisions include, among other things: (i) exempting banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) not requiring appraisals for certain transactions valued at less than $400,000 in rural areas; (iii) exempting banks that originate fewer than 500 open-end and 500 closed-end mortgages from HMDA’s expanded data disclosures; (iv) clarifying that, subject to various conditions, reciprocal deposits of another depository institution obtained using a deposit broker through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations; (v) raising eligibility for the 18-month exam cycle from $1 billion to banks with $3 billion in assets; and (vi) simplifying capital calculations by requiring regulators to establish for institutions under $10 billion in assets a community bank leverage ratio (tangible equity to average consolidated assets) at a percentage not less than 8% and not greater than 10% that such institutions may elect to replace the general applicable risk-based capital requirements for determining well-capitalized status. The federal banking agencies have proposed that the community bank leverage ratio be set at 9.0%.  However, until the federal banking regulators finalize the proposed rule, the current capital rules remain in effect.  In addition, the law required the Federal Reserve Board to raise the asset threshold under its Small Bank Holding Company Policy Statement from $1 billion to $3 billion for bank or savings and loan holding companies that are exempt from consolidated capital requirements, provided that such companies meet certain other conditions such as not engaging in significant nonbanking activities.

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

 

 

Minimum For

Capital Adequacy with Buffer

 

(Dollars in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of  June 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Core Capital (to Risk-Weighted Assets)

 

$

85,002

 

 

 

12.30

%

 

$

55,293

 

 

 

8.00

%

 

$

69,117

 

 

 

10.00

%

 

$

72,573

 

 

 

10.50

%

Tier 1 Capital (to Risk-Weighted Assets)

 

$

77,177

 

 

 

11.17

%

 

$

41,470

 

 

 

6.00

%

 

$

55,293

 

 

 

8.00

%

 

$

58,749

 

 

 

8.50

%

Tier 1 Common Equity (to Risk-Weighted Assets)

 

$

77,177

 

 

 

11.17

%

 

$

31,103

 

 

 

4.50

%

 

$

44,926

 

 

 

6.50

%

 

$

48,382

 

 

 

7.00

%

Tier 1 Capital (to Assets)

 

$

77,177

 

 

 

7.90

%

 

$

39,074

 

 

 

4.00

%

 

$

48,842

 

 

 

5.00

%

 

$

48,842

 

 

 

5.00

%

As of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Core Capital (to Risk-Weighted Assets)

 

$

83,177

 

 

 

13.69

%

 

$

48,593

 

 

 

8.00

%

 

$

60,741

 

 

 

10.00

%

 

$

63,778

 

 

 

10.50

%

Tier 1 Capital (to Risk-Weighted Assets)

 

$

75,871

 

 

 

12.49

%

 

$

36,445

 

 

 

6.00

%

 

$

48,593

 

 

 

8.00

%

 

$

51,630

 

 

 

8.50

%

Tier 1 Common Equity (to Risk-Weighted Assets)

 

$

75,871

 

 

 

12.49

%

 

$

27,334

 

 

 

4.50

%

 

$

39,482

 

 

 

6.50

%

 

$

42,519

 

 

 

7.00

%

Tier 1 Capital (to Assets)

 

$

75,871

 

 

 

8.31

%

 

$

36,522

 

 

 

4.00

%

 

$

45,652

 

 

 

5.00

%

 

$

45,652

 

 

 

5.00

%

 


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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)

2019

 

 

2018

 

 

Regulatory Capital Ratios (Bank Only)

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

Total equity (GAAP)

$

84,894

 

 

$

86,614

 

 

Goodwill

 

(4,536

)

 

 

(4,536

)

 

Intangible assets

 

(157

)

 

 

(165

)

 

Addback: Accumulated other comprehensive income

 

(3,024

)

 

 

(6,042

)

 

       Total Tier 1 Capital

$

77,177

 

 

$

75,871

 

 

Allowance for loan and lease losses

 

7,825

 

 

 

7,306

 

 

       Total Tier 2 Capital

$

7,825

 

 

$

7,306

 

 

       Total Tier 1 plus Tier 2 Capital (numerator)

$

85,002

 

 

$

83,177

 

 

Risk-weighted assets (denominator)

 

691,168

 

 

 

607,414

 

 

      Total core capital to risk-weighted assets

 

12.30

 

%

 

13.69

 

%

 

 

 

 

 

 

 

 

 

Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

Total Tier 1 capital (numerator)

$

77,177

 

 

$

75,871

 

 

Risk-weighted assets (denominator)

 

691,168

 

 

 

607,414

 

 

      Total capital to risk-weighted assets

 

11.17

 

%

 

12.49

 

%

 

 

 

 

 

 

 

 

 

Tier 1 capital (to adjusted assets)

 

 

 

 

 

 

 

 

Total Tier 1 capital (numerator)

$

77,177

 

 

$

75,871

 

 

Total average assets

 

981,540

 

 

 

917,740

 

 

Goodwill

 

(4,536

)

 

 

(4,536

)

 

Intangible assets

 

(157

)

 

 

(165

)

 

Adjusted assets (denominator)

$

976,847

 

 

$

913,039

 

 

      Total capital to adjusted assets

 

7.90

 

%

 

8.31

 

%

 

 

 

 

 

 

 

 

 

Tier 1 Common Equity (to risk-weighted assets)

 

 

 

 

 

 

 

 

Total Tier 1 capital (numerator)

$

77,177

 

 

$

75,871

 

 

Risk-weighted assets (denominator)

 

691,168

 

 

 

607,414

 

 

      Total Tier 1 Common Equity to risk-weighted assets

 

11.17

 

%

 

12.49

 

%

 

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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)

 

2019

 

 

2018

 

 

2018

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and commercial real estate loans

 

$

2,470

 

 

$

830

 

 

$

3,152

 

Consumer

 

 

367

 

 

 

142

 

 

 

203

 

Residential mortgage loans

 

 

918

 

 

 

1,176

 

 

 

2,090

 

Total nonaccrual loans

 

 

3,755

 

 

 

2,148

 

 

 

5,445

 

Total nonperforming loans

 

 

3,755

 

 

 

2,148

 

 

 

5,445

 

Foreclosed real estate

 

 

591

 

 

 

1,173

 

 

 

97

 

Total nonperforming assets

 

$

4,346

 

 

$

3,321

 

 

$

5,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing troubled debt restructurings

 

$

2,860

 

 

$

2,574

 

 

$

2,756

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

0.54

%

 

 

0.35

%

 

 

0.90

%

Nonperforming assets to total assets

 

 

0.43

%

 

 

0.36

%

 

 

0.61

%

 

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 was one nonaccruing TDR loan, with an aggregate carrying value of $74,000 included among the nonaccrual loans detailed in the table above at June 30, 2019. 

 

As indicated in the table above, nonperforming assets at June 30, 2019 were $4.3 million and were $1.0 million higher than the $3.3 million reported at December 31, 2018, due primarily to an increase of $1.6 million in nonperforming commercial and commercial real estate loans and a $225,000 increase in nonperforming consumer loans, partially offset by a decrease of $582,000 in FRE and $258,000 in nonperforming residential real estate loans.   

 

As indicated in the nonperforming asset table above, FRE balances decreased $582,000 to $591,000 at June 30, 2019 from $1.2 million at December 31, 2018, following three sales from the portfolio and three additions to the portfolio during the six-month period ended June 30, 2019.  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.  

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 $7.8 million and $7.3 million at June 30, 2019 and December 31, 2018, respectively.  The ratio of the allowance for loan losses to total loans decreased five basis points to 1.13% at June 30, 2019 from 1.18% at December 31, 2018.  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, 2019.

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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, 2019 and December 31, 2018, the Company had $8.0 million and $6.0 million in loans, respectively, which were deemed to be impaired, having established specific reserves of $845,000 and $631,000, respectively, on these loans.  The increase in impaired loans between these two dates was primarily driven by increases of $1.6 million, $322,000, and $114,000, in impaired commercial real estate, other commercial and industrial loans, and commercial lines of credit.   The $214,000 increase in specific reserves for impaired loans at June 30, 2019, as compared to December 31, 2018 was primarily due to a $176,000 increase in specific reserves for commercial real estate loans and a $32,000 increase in specific reserves for commercial lines of credit.  

 

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 $14.4 million as of June 30, 2019, a decrease of $193,000, or 1.3%, as compared to $14.6 million at December 31, 2018.  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.  

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

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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 2019, as indicated in the consolidated statement of cash flows, the Company reported net cash flows from operating activities of $3.1 million and net cash outflows of $51.3 million related to investing activities.  The net cash outflows from investing activities primarily was due to a net $73.4 million increase in loan balances, partially offset by a $22.1 million decrease in all other investing activities in aggregate.  The Company reported net cash flows from financing activities of $72.3 million generated principally by net proceeds from the Private Placement offering totaling $19.6 million, increased deposit balances of $47.5 million, and increased brokered deposits balances of $34.1 million, partially offset by an aggregate decrease in net cash of $29.4 million from all other financing sources, including dividends paid to common shareholders of $526,000.

In June 2019, the Company cancelled a $12.0 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, 2019, total credit available to the Company under the existing lines of credit was approximately $176.5 million at FHLBNY, the Federal Reserve Bank, and two other correspondent banks. As of June 30, 2019, the Company had $89.4 million of the available lines of credit utilized, including encumbrances supporting outstanding letters of credit, described above, on its existing lines of credit with $87.1 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, 2019, 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, 2019, the Company had $140.4 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 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

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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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PART II – OTHER INFORMATION

 

Item 1 – Legal Proceedings

 

At June 30, 2019, 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, 2019 through April 30, 2019

 

 

-

 

 

$

-

 

 

 

-

 

 

 

74,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 1, 2019 through May 31, 2019

 

 

-

 

 

$

-

 

 

 

-

 

 

 

74,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 1, 2019 through June 30, 2019

 

 

-

 

 

$

-

 

 

 

-

 

 

 

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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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 9, 2019

/s/ Thomas W. Schneider

 

 

Thomas W. Schneider

 

 

President and Chief Executive Officer

 

 

 

 

August 9, 2019

/s/ Walter F. Rusnak

 

 

Walter F. Rusnak

 

 

Senior Vice President, Chief Financial Officer

 

 

 

 

 

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