Companies: 10,793     total market cap: A$194.761 T
$USD๐Ÿ‡บ๐Ÿ‡ธโ‚ฌEUR๐Ÿ‡ช๐Ÿ‡บโ‚นINR๐Ÿ‡ฎ๐Ÿ‡ณยฃGBP๐Ÿ‡ฌ๐Ÿ‡ง$CAD๐Ÿ‡จ๐Ÿ‡ฆ$NZD๐Ÿ‡ณ๐Ÿ‡ฟ$HKD๐Ÿ‡ญ๐Ÿ‡ฐ$SGD๐Ÿ‡ธ๐Ÿ‡ฌ
Pathfinder Bancorp
PBHC
#9528
Rank
A$0.11 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
A$18.78
Share price
1.21%
Change (1 day)
-29.25%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Pathfinder Bancorp
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2023 Q3

Pathfinder Bancorp - 10-Q quarterly report FY2023 Q3


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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 September 30, 2023

 

OR

☐

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

EXCHANGE ACT OF 1934

For the transition period from _______ to _______

img235442949_0.jpg 

 

(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 November 8, 2023, there were 4,719,288 shares outstanding of the registrant’s Voting common stock and 1,380,283 shares outstanding of the registrant’s Series A Non-Voting 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 (Loss)

 

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

 

69

 

 

 

 

Item 4.

Controls and Procedures

 

69

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

70

Item 1A.

Risk Factor

 

70

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

70

Item 3.

Defaults upon Senior Securities

 

70

Item 4.

Mine Safety Disclosures

 

70

Item 5.

Other information

 

70

Item 6.

Exhibits

 

70

 

 

 

 

SIGNATURES

 

71

 

 

 

PART I - FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements
 

Pathfinder Bancorp, Inc.

Consolidated Statements of Condition

(Unaudited)

 

 

September 30,

 

 

December 31,

 

(In thousands, except share and per share data)

 

2023

 

 

2022

 

ASSETS:

 

 

 

 

 

 

Cash and due from banks

 

$

12,822

 

 

$

13,939

 

Interest-earning deposits

 

 

11,652

 

 

 

21,343

 

Total cash and cash equivalents

 

 

24,474

 

 

 

35,282

 

Available-for-sale securities, at fair value

 

 

206,848

 

 

 

191,726

 

Held-to-maturity securities, at amortized cost (fair value of $170,575 and $181,491, respectively)

 

 

185,589

 

 

 

194,402

 

Marketable equity securities, at fair value

 

 

3,013

 

 

 

1,862

 

Federal Home Loan Bank stock, at cost

 

 

5,824

 

 

 

5,982

 

Loans

 

 

896,123

 

 

 

897,735

 

Loans held-for-sale

 

 

-

 

 

 

19

 

Less: Allowance for credit losses

 

 

15,767

 

 

 

15,319

 

Loans receivable, net

 

 

880,356

 

 

 

882,435

 

Premises and equipment, net

 

 

18,491

 

 

 

17,872

 

Assets held-for-sale

 

 

3,042

 

 

 

3,042

 

Operating lease right-of-use assets

 

 

1,559

 

 

 

2,098

 

Finance lease right-of-use assets

 

 

4,108

 

 

 

4,213

 

Accrued interest receivable

 

 

6,594

 

 

 

6,168

 

Foreclosed real estate

 

 

189

 

 

 

221

 

Intangible assets, net

 

 

88

 

 

 

101

 

Goodwill

 

 

4,536

 

 

 

4,536

 

Bank owned life insurance

 

 

24,479

 

 

 

24,012

 

Other assets

 

 

31,459

 

 

 

25,969

 

Total assets

 

$

1,400,649

 

 

$

1,399,921

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Interest-bearing

 

$

953,143

 

 

$

941,719

 

Noninterest-bearing

 

 

174,710

 

 

 

183,711

 

Total deposits

 

 

1,127,853

 

 

 

1,125,430

 

Short-term borrowings

 

 

56,698

 

 

 

60,333

 

Long-term borrowings

 

 

53,915

 

 

 

55,664

 

Subordinated debt

 

 

29,867

 

 

 

29,733

 

Accrued interest payable

 

 

1,731

 

 

 

975

 

Operating lease liabilities

 

 

1,739

 

 

 

2,417

 

Finance lease liabilities

 

 

4,391

 

 

 

4,422

 

Other liabilities

 

 

10,013

 

 

 

9,365

 

Total liabilities

 

 

1,286,207

 

 

 

1,288,339

 

Shareholders' equity:

 

 

 

 

 

 

Voting common stock, par value $0.01; 25,000,000 authorized shares; 4,713,353 and 4,651,829 shares
   issued and outstanding, respectively

 

 

47

 

 

 

47

 

Non-Voting common stock, par value $0.01; 1,505,283 authorized shares; 1,380,283 shares
   issued and outstanding, respectively

 

 

14

 

 

 

14

 

Additional paid in capital

 

 

52,963

 

 

 

52,101

 

Retained earnings

 

 

74,282

 

 

 

71,322

 

Accumulated other comprehensive loss

 

 

(13,356

)

 

 

(12,172

)

Unearned ESOP

 

 

(180

)

 

 

(315

)

Total Pathfinder Bancorp, Inc. shareholders' equity

 

 

113,770

 

 

 

110,997

 

Noncontrolling interest

 

 

672

 

 

 

585

 

Total equity

 

 

114,442

 

 

 

111,582

 

Total liabilities and shareholders' equity

 

$

1,400,649

 

 

$

1,399,921

 

 

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

- 3 -

 

Pathfinder Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

 

For the three months ended

 

 

For the nine months ended

 

(In thousands, except per share data)

 

September 30, 2023

 

 

September 30, 2022

 

 

September 30, 2023

 

 

September 30, 2022

 

Interest and dividend income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

12,470

 

 

$

9,895

 

 

$

34,919

 

 

$

27,561

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

4,488

 

 

 

3,052

 

 

 

12,408

 

 

 

7,695

 

Tax-exempt

 

 

507

 

 

 

351

 

 

 

1,441

 

 

 

612

 

Dividends

 

 

140

 

 

 

56

 

 

 

341

 

 

 

155

 

Federal funds sold and interest earning deposits

 

 

66

 

 

 

29

 

 

 

226

 

 

 

48

 

Total interest and dividend income

 

 

17,671

 

 

 

13,383

 

 

 

49,335

 

 

 

36,071

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

6,223

 

 

 

1,907

 

 

 

15,885

 

 

 

4,006

 

Interest on short-term borrowings

 

 

674

 

 

 

123

 

 

 

1,624

 

 

 

152

 

Interest on long-term borrowings

 

 

222

 

 

 

131

 

 

 

619

 

 

 

405

 

Interest on subordinated debt

 

 

492

 

 

 

442

 

 

 

1,447

 

 

 

1,284

 

Total interest expense

 

 

7,611

 

 

 

2,603

 

 

 

19,575

 

 

 

5,847

 

Net interest income

 

 

10,060

 

 

 

10,780

 

 

 

29,760

 

 

 

30,224

 

Provision for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

798

 

 

 

710

 

 

 

2,675

 

 

 

871

 

Held-to-maturity securities

 

 

5

 

 

 

-

 

 

 

(24

)

 

 

-

 

Unfunded commitments

 

 

30

 

 

 

-

 

 

 

14

 

 

 

-

 

Total provision for credit losses

 

 

833

 

 

 

710

 

 

 

2,665

 

 

 

871

 

Net interest income after provision for credit losses

 

 

9,227

 

 

 

10,070

 

 

 

27,095

 

 

 

29,353

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

343

 

 

 

334

 

 

 

913

 

 

 

876

 

Earnings and gain on bank owned life insurance

 

 

165

 

 

 

156

 

 

 

466

 

 

 

441

 

Loan servicing fees

 

 

99

 

 

 

74

 

 

 

238

 

 

 

260

 

(Losses) gains on sales and redemptions of investment securities

 

 

(13

)

 

 

(198

)

 

 

60

 

 

 

(168

)

Net (losses) gains on marketable equity securities

 

 

(39

)

 

 

-

 

 

 

(208

)

 

 

39

 

Gains on sales of loans and foreclosed real estate

 

 

41

 

 

 

47

 

 

 

183

 

 

 

122

 

Debit card interchange fees

 

 

22

 

 

 

180

 

 

 

455

 

 

 

639

 

Insurance agency revenue

 

 

310

 

 

 

258

 

 

 

1,001

 

 

 

849

 

Other charges, commissions & fees

 

 

265

 

 

 

310

 

 

 

764

 

 

 

1,002

 

Total noninterest income

 

 

1,193

 

 

 

1,161

 

 

 

3,872

 

 

 

4,060

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,154

 

 

 

4,196

 

 

 

12,243

 

 

 

12,030

 

Building and occupancy

 

 

868

 

 

 

835

 

 

 

2,699

 

 

 

2,491

 

Data processing

 

 

483

 

 

 

485

 

 

 

1,519

 

 

 

1,552

 

Professional and other services

 

 

492

 

 

 

267

 

 

 

1,531

 

 

 

1,112

 

Advertising

 

 

144

 

 

 

199

 

 

 

516

 

 

 

621

 

FDIC assessments

 

 

222

 

 

 

162

 

 

 

663

 

 

 

606

 

Audits and exams

 

 

159

 

 

 

141

 

 

 

476

 

 

 

424

 

Insurance agency expense

 

 

273

 

 

 

229

 

 

 

817

 

 

 

687

 

Community service activities

 

 

55

 

 

 

58

 

 

 

151

 

 

 

193

 

Foreclosed real estate expenses

 

 

44

 

 

 

17

 

 

 

76

 

 

 

57

 

Other expenses

 

 

759

 

 

 

678

 

 

 

1,660

 

 

 

1,892

 

Total noninterest expense

 

 

7,653

 

 

 

7,267

 

 

 

22,351

 

 

 

21,665

 

Income before income taxes

 

 

2,767

 

 

 

3,964

 

 

 

8,616

 

 

 

11,748

 

Provision for income taxes

 

 

573

 

 

 

772

 

 

 

1,772

 

 

 

2,273

 

Net income attributable to noncontrolling interest and
   Pathfinder Bancorp, Inc.

 

 

2,194

 

 

 

3,192

 

 

 

6,844

 

 

 

9,475

 

Net income attributable to noncontrolling interest

 

 

18

 

 

 

12

 

 

 

87

 

 

 

73

 

Net income attributable to Pathfinder Bancorp Inc.

 

$

2,176

 

 

$

3,180

 

 

$

6,757

 

 

$

9,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Voting Earnings per common share - basic and diluted

 

$

0.35

 

 

$

0.52

 

 

$

1.10

 

 

$

1.55

 

Series A Non-Voting Earnings per common share- basic and diluted

 

$

0.35

 

 

$

0.52

 

 

$

1.10

 

 

$

1.55

 

Dividends per common share (Voting and Series A Non-Voting)

 

$

0.09

 

 

$

0.09

 

 

$

0.27

 

 

$

0.27

 

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

Pathfinder Bancorp, Inc.

- 4 -

 

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

 

For the three months ended

 

 

For the nine months ended

 

(In thousands)

 

September 30, 2023

 

 

September 30, 2022

 

 

September 30, 2023

 

 

September 30, 2022

 

Net Income

 

$

2,194

 

 

$

3,192

 

 

$

6,844

 

 

$

9,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

Retirement Plans:

 

 

 

 

 

 

 

 

 

 

 

 

Retirement plan net gains recognized in plan expenses

 

 

56

 

 

 

1

 

 

 

167

 

 

 

2

 

Net unrealized gain on retirement plans

 

 

56

 

 

 

1

 

 

 

167

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) arising during the period

 

 

(3,016

)

 

 

(4,588

)

 

 

(4,093

)

 

 

(16,542

)

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

 

 

(1

)

 

 

186

 

 

 

1,932

 

 

 

160

 

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

 

 

(3,017

)

 

 

(4,402

)

 

 

(2,161

)

 

 

(16,382

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives and hedging activities:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

 

273

 

 

 

116

 

 

 

391

 

 

 

1,087

 

Net unrealized gains on derivatives and hedging activities

 

 

273

 

 

 

116

 

 

 

391

 

 

 

1,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss), before tax

 

 

(2,688

)

 

 

(4,285

)

 

 

(1,603

)

 

 

(15,293

)

Tax effect

 

 

702

 

 

 

1,119

 

 

 

419

 

 

 

3,996

 

Other comprehensive (loss), net of tax

 

 

(1,986

)

 

 

(3,166

)

 

 

(1,184

)

 

 

(11,297

)

Comprehensive income (loss)

 

$

208

 

 

$

26

 

 

$

5,660

 

 

$

(1,822

)

Comprehensive income, attributable to noncontrolling interest

 

$

18

 

 

$

12

 

 

$

87

 

 

$

73

 

Comprehensive income (loss) attributable to Pathfinder Bancorp, Inc.

 

$

190

 

 

$

14

 

 

$

5,573

 

 

$

(1,895

)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Retirement plan net losses recognized in plan expenses

 

$

(15

)

 

$

-

 

 

$

(44

)

 

$

(1

)

Unrealized holding gains on available-for-sale securities arising during the period

 

 

788

 

 

 

1,199

 

 

 

1,070

 

 

 

4,324

 

Reclassification adjustment for net (gains) included in net income

 

 

-

 

 

 

(50

)

 

 

(506

)

 

 

(43

)

Unrealized (gains) on derivatives and hedging arising during the period

 

 

(71

)

 

 

(30

)

 

 

(101

)

 

 

(284

)

Income tax effect related to other comprehensive income

 

$

702

 

 

$

1,119

 

 

$

419

 

 

$

3,996

 

 

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

- 5 -

 

Pathfinder Bancorp, Inc.

 

Consolidated Statements of Changes in Shareholders' Equity

 

Three months ended September 30, 2023 and September 30, 2022

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except share and per share data)

 

Common Stock

 

 

Non-Voting Common Stock

 

 

Additional Paid in Capital

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Loss

 

 

Unearned ESOP

 

 

Non-controlling Interest

 

 

Total

 

Balance, June 30, 2023

 

$

47

 

 

$

14

 

 

$

52,645

 

 

$

72,664

 

 

$

(11,370

)

 

$

(225

)

 

$

654

 

 

$

114,429

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,176

 

 

 

-

 

 

 

-

 

 

 

18

 

 

 

2,194

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,986

)

 

 

-

 

 

 

-

 

 

 

(1,986

)

ESOP shares earned (6,111 shares)

 

 

-

 

 

 

-

 

 

 

40

 

 

 

-

 

 

 

-

 

 

 

45

 

 

 

-

 

 

 

85

 

Stock based compensation

 

 

-

 

 

 

-

 

 

 

23

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23

 

Stock options exercised

 

 

-

 

 

 

-

 

 

 

255

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

255

 

Common stock dividends declared ($0.09 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(422

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(422

)

Non-Voting common stock dividends declared ($0.09 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(124

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(124

)

Warrant dividends declared ($0.09 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(12

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(12

)

Balance, September 30, 2023

 

$

47

 

 

$

14

 

 

$

52,963

 

 

$

74,282

 

 

$

(13,356

)

 

$

(180

)

 

$

672

 

 

$

114,442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2022

 

$

46

 

 

$

14

 

 

$

51,388

 

 

$

66,077

 

 

$

(9,399

)

 

$

(405

)

 

$

407

 

 

$

108,128

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,180

 

 

 

-

 

 

 

-

 

 

 

12

 

 

 

3,192

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,166

)

 

 

-

 

 

 

-

 

 

 

(3,166

)

ESOP shares earned (6,111 shares)

 

 

-

 

 

 

-

 

 

 

77

 

 

 

-

 

 

 

-

 

 

 

45

 

 

 

-

 

 

 

122

 

Stock based compensation

 

 

-

 

 

 

-

 

 

 

45

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

45

 

Stock options exercised

 

 

-

 

 

 

-

 

 

 

17

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17

 

Common stock dividends declared ($0.09 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(411

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(411

)

Non-Voting common stock dividends declared ($0.09 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(125

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(125

)

Warrant dividends declared ($0.09 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11

)

Cumulative effect of affiliate capital allocation

 

 

-

 

 

 

-

 

 

 

76

 

 

 

(147

)

 

 

-

 

 

 

-

 

 

 

71

 

 

 

-

 

Distributions from affiliates

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

4

 

Balance, September 30, 2022

 

$

46

 

 

$

14

 

 

$

51,603

 

 

$

68,563

 

 

$

(12,565

)

 

$

(360

)

 

$

494

 

 

$

107,795

 

 

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

 

- 6 -

 

Pathfinder Bancorp, Inc.

 

Consolidated Statements of Changes in Shareholders' Equity

 

Nine months ended September 30, 2023 and September 30, 2022

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except share and per share data)

 

Common Stock

 

 

Non-Voting Common Stock

 

 

Additional Paid in Capital

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Loss

 

 

Unearned ESOP

 

 

Non-controlling Interest

 

 

Total

 

Balance, January 1, 2023

 

$

47

 

 

$

14

 

 

$

52,101

 

 

$

71,322

 

 

$

(12,172

)

 

$

(315

)

 

$

585

 

 

$

111,582

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,757

 

 

 

-

 

 

 

-

 

 

 

87

 

 

 

6,844

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,184

)

 

 

-

 

 

 

-

 

 

 

(1,184

)

ESOP shares earned (18,332 shares)

 

 

-

 

 

 

-

 

 

 

153

 

 

 

-

 

 

 

-

 

 

 

135

 

 

 

-

 

 

 

288

 

Stock based compensation

 

 

-

 

 

 

-

 

 

 

86

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

86

 

Stock options exercised

 

 

-

 

 

 

-

 

 

 

623

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

623

 

Common stock dividends declared ($0.27 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,256

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,256

)

Non-Voting common stock dividends declared ($0.27 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(373

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(373

)

Warrant dividends declared ($0.27 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(34

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(34

)

Adoption of ASU 2016-13 Current Expected Credit Losses

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,134

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,134

)

Balance, September 30, 2023

 

$

47

 

 

$

14

 

 

$

52,963

 

 

$

74,282

 

 

$

(13,356

)

 

$

(180

)

 

$

672

 

 

$

114,442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2022

 

$

46

 

 

$

14

 

 

$

51,044

 

 

$

60,946

 

 

$

(1,268

)

 

$

(495

)

 

$

346

 

 

$

110,633

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,402

 

 

 

-

 

 

 

-

 

 

 

73

 

 

 

9,475

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(11,297

)

 

 

-

 

 

 

-

 

 

 

(11,297

)

ESOP shares earned (18,332 shares)

 

 

-

 

 

 

-

 

 

 

217

 

 

 

-

 

 

 

-

 

 

 

135

 

 

 

-

 

 

 

352

 

Stock based compensation

 

 

-

 

 

 

-

 

 

 

135

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

135

 

Stock options exercised

 

 

-

 

 

 

-

 

 

 

131

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

131

 

Common stock dividends declared ($0.27 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,231

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,231

)

Non-Voting common stock dividends declared ($0.27 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(373

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(373

)

Warrant dividends declared ($0.27 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(34

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(34

)

Cumulative effect of affiliate capital allocation

 

 

-

 

 

 

-

 

 

 

76

 

 

 

(147

)

 

 

-

 

 

 

-

 

 

 

71

 

 

 

-

 

Distributions from affiliates

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

4

 

Balance, September 30, 2022

 

$

46

 

 

$

14

 

 

$

51,603

 

 

$

68,563

 

 

$

(12,565

)

 

$

(360

)

 

$

494

 

 

$

107,795

 

 

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

- 7 -

 

Pathfinder Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the nine months ended September 30,

 

(In thousands)

 

2023

 

 

2022

 

OPERATING ACTIVITIES

 

 

 

 

 

 

Net income attributable to Pathfinder Bancorp, Inc.

 

$

6,757

 

 

$

9,402

 

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

 

 

 

 

 

 

Provision for credit losses

 

 

2,665

 

 

 

871

 

Proceeds from sales of loans

 

 

4,244

 

 

 

6,789

 

Originations of loans held-for-sale

 

 

(4,013

)

 

 

(6,429

)

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

 

 

 

 

 

 

Real estate acquired through foreclosure

 

 

29

 

 

 

-

 

Loans

 

 

(212

)

 

 

(122

)

Available-for-sale investment securities

 

 

(79

)

 

 

160

 

Held-to-maturity investment securities

 

 

19

 

 

 

8

 

Marketable securities

 

 

208

 

 

 

(39

)

Depreciation

 

 

1,051

 

 

 

1,108

 

Amortization of mortgage servicing rights

 

 

(35

)

 

 

(1

)

Amortization of deferred loan fees and costs

 

 

(183

)

 

 

389

 

Amortization of operating leases

 

 

(65

)

 

 

11

 

Amortization of deferred financing from subordinated debt

 

 

134

 

 

 

126

 

Earnings on bank owned life insurance

 

 

(466

)

 

 

(441

)

Net amortization of premiums and discounts on investment securities

 

 

1,633

 

 

 

1,475

 

Amortization of intangible assets

 

 

13

 

 

 

13

 

Stock based compensation and ESOP expense

 

 

374

 

 

 

487

 

Net change in accrued interest receivable

 

 

(426

)

 

 

(652

)

Net change in other assets and liabilities

 

 

(4,645

)

 

 

(1,003

)

Net cash flows from operating activities

 

 

7,003

 

 

 

12,152

 

INVESTING ACTIVITIES

 

 

 

 

Purchase of investment securities available-for-sale

 

 

(49,256

)

 

 

(51,411

)

Purchase of investment securities held-to-maturity

 

 

(12,787

)

 

 

(60,253

)

Purchase of Federal Home Loan Bank stock

 

 

(13,415

)

 

 

(9,769

)

Proceeds from redemption of Federal Home Loan Bank stock

 

 

13,573

 

 

 

10,243

 

Purchase of marketable securities

 

 

(1,359

)

 

 

(1,215

)

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

 

 

12,921

 

 

 

16,449

 

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

 

 

20,878

 

 

 

23,322

 

Proceeds from sales, redemptions and calls of:

 

 

 

 

 

 

Available-for-sale investment securities

 

 

17,396

 

 

 

8,358

 

Held-to-maturity investment securities

 

 

278

 

 

 

2,196

 

Real estate acquired through foreclosure

 

 

288

 

 

 

-

 

Marketable securities

 

 

-

 

 

 

714

 

Net change in loans

 

 

(736

)

 

 

(54,562

)

Purchase of premises and equipment

 

 

(1,670

)

 

 

(1,430

)

Net cash outflows (inflows) from investing activities

 

 

(13,889

)

 

 

(117,358

)

 

- 8 -

 

FINANCING ACTIVITIES

 

 

 

 

 

 

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

 

 

(67,468

)

 

 

848

 

Net change in time deposits

 

 

74,902

 

 

 

(20,707

)

Net change in brokered deposits

 

 

(5,011

)

 

 

145,096

 

Net change in short-term borrowings

 

 

(3,635

)

 

 

(1,000

)

Payments on long-term borrowings

 

 

(6,525

)

 

 

(12,227

)

Proceeds from long-term borrowings

 

 

4,776

 

 

 

1,750

 

Proceeds from exercise of stock options

 

 

623

 

 

 

131

 

Cash dividends paid to common voting shareholders

 

 

(1,264

)

 

 

(1,152

)

Cash dividends paid to common non-voting shareholders

 

 

(373

)

 

 

(345

)

Cash dividends paid on warrants

 

 

(34

)

 

 

(31

)

Change in noncontrolling interest, net

 

 

87

 

 

 

148

 

Net cash (outflows) inflows from financing activities

 

 

(3,922

)

 

 

112,511

 

Change in cash and cash equivalents

 

 

(10,808

)

 

 

7,305

 

Cash and cash equivalents at beginning of period

 

 

35,282

 

 

 

37,149

 

Cash and cash equivalents at end of period

 

$

24,474

 

 

$

44,454

 

CASH PAID DURING THE PERIOD FOR:

 

 

 

 

 

 

Interest

 

$

18,819

 

 

$

1,452

 

Income taxes

 

 

2,500

 

 

 

2,518

 

NON-CASH INVESTING ACTIVITY

 

 

 

 

 

 

Real estate acquired in exchange for loans

 

 

333

 

 

 

252

 

RESTRICTED CASH

 

 

 

 

 

 

Collateral deposits for hedge position included in cash and due from banks

 

 

-

 

 

 

1,600

 

 

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

 

- 9 -

 

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 2022 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 nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2023 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.

 

 

- 10 -

 

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 table 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 September 30, 2023

Standard

 

Description

 

Required Date
of Implementation

Effect on Consolidated Financial Statements

Reference Rate Reform (ASU 2020-04: Facilitation of the Effects of Reference Rate Reform on Financial Reporting [Topic 848]: Deferral of the Sunset Date of Topic 848)

 

The amendments provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments (1) apply to contract modifications that replace a reference rate affected by reference rate reform, (2) provide exceptions to existing guidance related to changes to the critical terms of a hedging relationship due to reference rate reform (3) provide optional expedients for fair value hedging relationships, cash flow hedging relationships, and net investment hedging relationships, and (4) provide a onetime election to sell, transfer, or both sell and transfer debt securities classified as held-to-maturity that reference a rate affected by reference rate reform and that are classified as held-to-maturity before January 1, 2020. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. ASU 2021-01 clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

 

Upon issuance, January 7, 2021, through December 31, 2024, as amended by ASU 2022-06.

The adoption of this ASU is not expected to have a material impact to the Company's consolidated statements of condition or income.

 

 

- 11 -

 

Note 3: Earnings per Common Share

 

Following shareholder approval received on June 4, 2021, the Company converted 1,380,283 shares of its Series B Convertible Perpetual Preferred Stock ("Convertible Perpetual Preferred Stock") to an equal number of shares of its newly-created Series A Non-Voting Common Stock. The conversion, which was effective on June 28, 2021, represented 100% of the Company's Convertible Perpetual Preferred Stock outstanding at the time of the conversion and retired the Convertible Perpetual Preferred Stock in perpetuity.

The Company has voting common stock, non-voting common stock and a warrant that are all eligible to participate in dividends equal to the voting common stock dividends on a per share basis. Securities that participate in dividends, such as the Company’s non-voting common stock and warrant, are considered “participating securities”. The Company calculates net income available to voting common shareholders using the two-class method required for capital structures that include participating securities.

 

In applying the two-class method, 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 voting 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.

 

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 nine months ended September 30, 2023, and -0- for the three and nine months ended September 30, 2022, respectively.

 

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

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands, except share and per share data)

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net income attributable to Pathfinder Bancorp, Inc.

 

$

2,176

 

 

$

3,180

 

 

$

6,757

 

 

$

9,402

 

Series A Non-Voting Common Stock dividends

 

 

124

 

 

 

125

 

 

 

373

 

 

 

373

 

Warrant dividends

 

 

12

 

 

 

11

 

 

 

34

 

 

 

34

 

Undistributed earnings allocated to participating securities

 

 

395

 

 

 

653

 

 

 

1,248

 

 

 

1,930

 

Net income available to common shareholders-Voting

 

$

1,645

 

 

$

2,391

 

 

$

5,102

 

 

$

7,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Pathfinder Bancorp, Inc.

 

$

2,176

 

 

$

3,180

 

 

$

6,757

 

 

$

9,402

 

Voting Common Stock dividends

 

 

422

 

 

 

411

 

 

 

1,256

 

 

 

1,231

 

Warrant dividends

 

 

12

 

 

 

11

 

 

 

34

 

 

 

34

 

Undistributed earnings allocated to participating securities

 

 

1,257

 

 

 

2,034

 

 

 

3,950

 

 

 

5,994

 

Net income available to common shareholders-Series A Non-Voting

 

$

485

 

 

$

724

 

 

$

1,517

 

 

$

2,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding-Voting

 

 

4,671

 

 

 

4,564

 

 

 

4,640

 

 

 

4,550

 

Basic and diluted weighted average common shares outstanding-Series A Non-Voting

 

 

1,380

 

 

 

1,380

 

 

 

1,380

 

 

 

1,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per common share-Voting

 

$

0.35

 

 

$

0.52

 

 

$

1.10

 

 

$

1.55

 

Basic and diluted earnings per common share-Series A Non-Voting

 

$

0.35

 

 

$

0.52

 

 

$

1.10

 

 

$

1.55

 

 

- 12 -

 

Note 4: Investment Securities

 

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

 

 

 

September 30, 2023

 

 

 

 

 

 

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

 

$

42,034

 

 

$

295

 

 

$

(4,183

)

 

$

38,146

 

State and political subdivisions

 

 

33,157

 

 

 

-

 

 

 

(4,014

)

 

 

29,143

 

Corporate

 

 

11,519

 

 

 

389

 

 

 

(501

)

 

 

11,407

 

Asset backed securities

 

 

17,751

 

 

 

-

 

 

 

(377

)

 

 

17,374

 

Residential mortgage-backed - US agency

 

 

21,826

 

 

 

-

 

 

 

(1,474

)

 

 

20,352

 

Collateralized mortgage obligations - US agency

 

 

13,534

 

 

 

-

 

 

 

(1,343

)

 

 

12,191

 

Collateralized mortgage obligations - Private label

 

 

82,692

 

 

 

105

 

 

 

(4,768

)

 

 

78,029

 

Total

 

 

222,513

 

 

 

789

 

 

 

(16,660

)

 

 

206,642

 

Equity investment securities:

 

 

 

 

 

 

 

 

Common stock - financial services industry

 

 

206

 

 

 

-

 

 

 

-

 

 

 

206

 

Total

 

 

206

 

 

 

-

 

 

 

-

 

 

 

206

 

Total available-for-sale

 

$

222,719

 

 

$

789

 

 

$

(16,660

)

 

$

206,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

3,770

 

 

$

-

 

 

$

(415

)

 

$

3,355

 

State and political subdivisions

 

 

15,698

 

 

 

-

 

 

 

(2,562

)

 

 

13,136

 

Corporate

 

 

45,436

 

 

 

22

 

 

 

(4,004

)

 

 

41,454

 

Asset backed securities

 

 

17,609

 

 

 

-

 

 

 

(1,277

)

 

 

16,332

 

Residential mortgage-backed - US agency

 

 

7,206

 

 

 

-

 

 

 

(893

)

 

 

6,313

 

Collateralized mortgage obligations - US agency

 

 

13,339

 

 

 

-

 

 

 

(1,691

)

 

 

11,648

 

Collateralized mortgage obligations - Private label

 

 

82,957

 

 

 

31

 

 

 

(4,651

)

 

 

78,337

 

Total

 

 

186,015

 

 

 

53

 

 

 

(15,493

)

 

 

170,575

 

Less: Allowance for credit losses

 

 

426

 

 

 

-

 

 

 

-

 

 

 

-

 

Total held-to-maturity

 

$

185,589

 

 

$

53

 

 

$

(15,493

)

 

$

170,575

 

 

- 13 -

 

 

 

December 31, 2022

 

 

 

 

 

 

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

 

$

32,533

 

 

$

37

 

 

$

(3,206

)

 

$

29,364

 

State and political subdivisions

 

 

48,002

 

 

 

384

 

 

 

(3,001

)

 

 

45,385

 

Corporate

 

 

11,803

 

 

 

676

 

 

 

(650

)

 

 

11,829

 

Asset backed securities

 

 

16,059

 

 

 

-

 

 

 

(659

)

 

 

15,400

 

Residential mortgage-backed - US agency

 

 

17,982

 

 

 

-

 

 

 

(1,582

)

 

 

16,400

 

Collateralized mortgage obligations - US agency

 

 

13,070

 

 

 

-

 

 

 

(1,362

)

 

 

11,708

 

Collateralized mortgage obligations - Private label

 

 

65,781

 

 

 

8

 

 

 

(4,355

)

 

 

61,434

 

Total

 

 

205,230

 

 

 

1,105

 

 

 

(14,815

)

 

 

191,520

 

Equity investment securities:

 

 

 

 

 

 

 

 

Common stock - financial services industry

 

 

206

 

 

 

-

 

 

 

-

 

 

 

206

 

Total

 

 

206

 

 

 

-

 

 

 

-

 

 

 

206

 

Total available-for-sale

 

$

205,436

 

 

$

1,105

 

 

$

(14,815

)

 

$

191,726

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

3,852

 

 

$

-

 

 

$

(280

)

 

$

3,572

 

State and political subdivisions

 

 

15,211

 

 

 

-

 

 

 

(2,340

)

 

 

12,871

 

Corporate

 

 

45,086

 

 

 

2

 

 

 

(2,586

)

 

 

42,502

 

Asset backed securities

 

 

19,158

 

 

 

-

 

 

 

(1,291

)

 

 

17,867

 

Residential mortgage-backed - US agency

 

 

7,489

 

 

 

-

 

 

 

(739

)

 

 

6,750

 

Collateralized mortgage obligations - US agency

 

 

15,109

 

 

 

-

 

 

 

(1,251

)

 

 

13,858

 

Collateralized mortgage obligations - Private label

 

 

88,497

 

 

 

4

 

 

 

(4,430

)

 

 

84,071

 

Total held-to-maturity

 

$

194,402

 

 

$

6

 

 

$

(12,917

)

 

$

181,491

 

 

The amortized cost and estimated fair value of debt investments at September 30, 2023 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

 

$

8,603

 

 

$

8,953

 

 

$

1,136

 

 

$

1,129

 

Due after one year through five years

 

 

11,254

 

 

 

10,604

 

 

 

19,536

 

 

 

18,879

 

Due after five years through ten years

 

 

36,174

 

 

 

32,090

 

 

 

43,469

 

 

 

38,405

 

Due after ten years

 

 

48,430

 

 

 

44,423

 

 

 

18,372

 

 

 

15,864

 

Sub-total

 

 

104,461

 

 

 

96,070

 

 

82,513

 

 

 

74,277

 

Residential mortgage-backed - US agency

 

 

21,826

 

 

 

20,352

 

 

 

7,206

 

 

 

6,313

 

Collateralized mortgage obligations - US agency

 

 

13,534

 

 

 

12,191

 

 

 

13,339

 

 

11,648

 

Collateralized mortgage obligations - Private label

 

 

82,692

 

 

78,029

 

 

 

82,957

 

 

 

78,337

 

Totals

 

$

222,513

 

 

$

206,642

 

$

186,015

 

 

$

170,575

 

 

- 14 -

 

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:

 

 

 

September 30, 2023

 

 

 

Less than Twelve Months

 

 

Twelve Months or More

 

 

Total

 

 

 

Number of

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

Individual

 

 

Unrealized

 

 

Fair

 

 

Individual

 

 

Unrealized

 

 

Fair

 

 

Individual

 

 

Unrealized

 

 

Fair

 

(In thousands)

 

Securities

 

 

Losses

 

 

Value

 

 

Securities

 

 

Losses

 

 

Value

 

 

Securities

 

 

Losses

 

 

Value

 

Available-for-Sale Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

 

3

 

 

$

(42

)

 

$

5,963

 

 

 

3

 

 

$

(4,141

)

 

$

24,819

 

 

 

6

 

 

$

(4,183

)

 

$

30,782

 

State and political subdivisions

 

 

1

 

 

 

(25

)

 

 

1,387

 

 

 

24

 

 

 

(3,989

)

 

 

27,756

 

 

 

25

 

 

 

(4,014

)

 

 

29,143

 

Corporate

 

 

2

 

 

 

(1

)

 

 

1,500

 

 

 

5

 

 

 

(500

)

 

 

4,221

 

 

 

7

 

 

 

(501

)

 

 

5,721

 

Asset backed securities

 

 

1

 

 

 

(14

)

 

 

954

 

 

 

10

 

 

 

(363

)

 

 

14,404

 

 

 

11

 

 

 

(377

)

 

 

15,358

 

Residential mortgage-backed - US agency

 

 

1

 

 

 

(1

)

 

 

5,372

 

 

 

15

 

 

 

(1,473

)

 

 

14,981

 

 

 

16

 

 

 

(1,474

)

 

 

20,353

 

Collateralized mortgage obligations - US agency

 

 

2

 

 

 

(59

)

 

 

3,920

 

 

 

11

 

 

 

(1,284

)

 

 

8,271

 

 

 

13

 

 

 

(1,343

)

 

 

12,191

 

Collateralized mortgage obligations - Private label

 

 

12

 

 

 

(293

)

 

 

23,505

 

 

 

32

 

 

 

(4,475

)

 

 

46,483

 

 

 

44

 

 

 

(4,768

)

 

 

69,988

 

Totals

 

 

22

 

 

$

(435

)

 

$

42,601

 

 

 

100

 

 

$

(16,225

)

 

$

140,935

 

 

 

122

 

 

$

(16,660

)

 

$

183,536

 

Held-to-Maturity Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

 

-

 

 

$

-

 

 

$

-

 

 

 

2

 

 

$

(415

)

 

$

3,355

 

 

 

2

 

 

$

(415

)

 

$

3,355

 

State and political subdivisions

 

 

5

 

 

 

(41

)

 

 

1,052

 

 

 

14

 

 

 

(2,521

)

 

 

12,083

 

 

 

19

 

 

 

(2,562

)

 

 

13,135

 

Corporate

 

 

2

 

 

 

(142

)

 

 

858

 

 

 

38

 

 

 

(3,862

)

 

 

32,397

 

 

 

40

 

 

 

(4,004

)

 

 

33,255

 

Asset backed securities

 

 

2

 

 

 

(11

)

 

 

2,938

 

 

 

8

 

 

 

(1,266

)

 

 

11,163

 

 

 

10

 

 

 

(1,277

)

 

 

14,101

 

Residential mortgage-backed - US agency

 

 

3

 

 

 

(3

)

 

 

1,452

 

 

 

9

 

 

 

(890

)

 

 

4,861

 

 

 

12

 

 

 

(893

)

 

 

6,313

 

Collateralized mortgage obligations - US agency

 

 

-

 

 

 

-

 

 

 

-

 

 

 

10

 

 

 

(1,691

)

 

 

11,648

 

 

 

10

 

 

 

(1,691

)

 

 

11,648

 

Collateralized mortgage obligations - Private label

 

 

10

 

 

 

(417

)

 

 

13,068

 

 

 

42

 

 

 

(4,234

)

 

 

58,610

 

 

 

52

 

 

 

(4,651

)

 

 

71,678

 

Totals

 

 

22

 

 

$

(614

)

 

$

19,368

 

 

 

123

 

 

$

(14,879

)

 

$

134,117

 

 

 

145

 

 

$

(15,493

)

 

$

153,485

 

 

 

 

December 31, 2022

 

 

 

Less than Twelve Months

 

 

Twelve Months or More

 

 

Total

 

 

 

Number of

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

 

 

Individual

 

 

Unrealized

 

 

Fair

 

 

Individual

 

 

Unrealized

 

 

Fair

 

 

Individual

 

 

Unrealized

 

 

Fair

 

(In thousands)

 

Securities

 

 

Losses

 

 

Value

 

 

Securities

 

 

Losses

 

 

Value

 

 

Securities

 

 

Losses

 

 

Value

 

Available-for-Sale Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

 

-

 

 

$

-

 

 

$

-

 

 

 

3

 

 

$

(3,206

)

 

$

26,167

 

 

 

3

 

 

$

(3,206

)

 

$

26,167

 

State and political subdivisions

 

 

10

 

 

 

(830

)

 

 

12,601

 

 

 

17

 

 

 

(2,171

)

 

 

20,128

 

 

 

27

 

 

 

(3,001

)

 

 

32,729

 

Corporate

 

 

7

 

 

 

(269

)

 

 

5,720

 

 

 

2

 

 

 

(381

)

 

 

1,319

 

 

 

9

 

 

 

(650

)

 

 

7,039

 

Asset backed securities

 

 

5

 

 

 

(148

)

 

 

5,473

 

 

 

5

 

 

 

(511

)

 

 

9,926

 

 

 

10

 

 

 

(659

)

 

 

15,399

 

Residential mortgage-backed - US agency

 

 

10

 

 

 

(131

)

 

 

2,747

 

 

 

5

 

 

 

(1,451

)

 

 

13,653

 

 

 

15

 

 

 

(1,582

)

 

 

16,400

 

Collateralized mortgage obligations - US agency

 

 

6

 

 

 

(238

)

 

 

4,009

 

 

 

6

 

 

 

(1,124

)

 

 

7,700

 

 

 

12

 

 

 

(1,362

)

 

 

11,709

 

Collateralized mortgage obligations - Private label

 

 

15

 

 

 

(1,684

)

 

 

20,429

 

 

 

19

 

 

 

(2,671

)

 

 

33,707

 

 

 

34

 

 

 

(4,355

)

 

 

54,136

 

Totals

 

 

53

 

 

$

(3,300

)

 

$

50,979

 

 

 

57

 

 

$

(11,515

)

 

$

112,600

 

 

 

110

 

 

$

(14,815

)

 

$

163,579

 

Held-to-Maturity Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSE's

 

 

2

 

 

$

(280

)

 

$

3,573

 

 

 

-

 

 

 

-

 

 

$

-

 

 

 

2

 

 

$

(280

)

 

$

3,573

 

State and political subdivisions

 

 

7

 

 

 

(871

)

 

 

7,277

 

 

 

7

 

 

 

(1,469

)

 

 

5,077

 

 

 

14

 

 

 

(2,340

)

 

 

12,354

 

Corporate

 

 

31

 

 

 

(1,786

)

 

 

29,213

 

 

 

9

 

 

 

(800

)

 

 

6,803

 

 

 

40

 

 

 

(2,586

)

 

 

36,016

 

Asset backed securities

 

 

6

 

 

 

(625

)

 

 

9,742

 

 

 

3

 

 

 

(666

)

 

 

3,674

 

 

 

9

 

 

 

(1,291

)

 

 

13,416

 

Residential mortgage-backed - US agency

 

 

10

 

 

 

(736

)

 

 

6,577

 

 

 

1

 

 

 

(3

)

 

 

107

 

 

 

11

 

 

 

(739

)

 

 

6,684

 

Collateralized mortgage obligations - US agency

 

 

10

 

 

 

(1,236

)

 

 

12,965

 

 

 

1

 

 

 

(15

)

 

 

892

 

 

 

11

 

 

 

(1,251

)

 

 

13,857

 

Collateralized mortgage obligations - Private label

 

 

38

 

 

 

(2,719

)

 

 

58,061

 

 

 

8

 

 

 

(1,711

)

 

 

12,532

 

 

 

46

 

 

 

(4,430

)

 

 

70,593

 

Totals

 

 

104

 

 

$

(8,253

)

 

$

127,408

 

 

 

29

 

 

$

(4,664

)

 

$

29,085

 

 

 

133

 

 

$

(12,917

)

 

$

156,493

 

 

Excluding the effects of changes in the characteristics of individual debt securities that potentially give rise to credit losses, 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” or "shape" of the interest rate yield curve),

- 15 -

 

(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 an asset-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 fair value at the measurement date. Conversely, the lower the discount rate, the higher the resultant security fair value at the measurement date. In addition, the cumulative amount and timing of undiscounted cash flows of debt securities may also be affected by changes in interest rates. For any given level of movement in the general market and economic environmental factors described above, the magnitude of any particular debt security’s price changes will also depend heavily upon security-specific factors such as (1) the 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).

When the fair value of any individual security categorized as available-for-sale ("AFS") or held-to-maturity ("HTM") is less than its amortized cost basis, an assessment is made as to whether or not a charge to current earnings for credit loss is required. In assessing potential credit losses, management also makes a quantitative determination of potential credit loss for all HTM securities even if the risk of credit loss is considered remote and uses a best estimate threshold for securities categorized as AFS. The Company considers numerous factors when determining whether a potential credit loss exists. The principal factors considered are (1) the financial condition of the issue and (guarantor, if any) any adverse conditions specifically related to the security, industry or geographic area, (2) failure of the issuer of the security to make scheduled interest or principal payments, (3) any changes to the rating of the security by a nationally recognized statistical rating organization (“NRSRO”), and (4) the presence of contractual credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

 

The Company carries all of its AFS investments at fair value with any unrealized gains or losses reported, net of income tax effects, 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, if any, 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 portfolio (both AFS and HTM) for credit 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 insufficient to recover the entire amortized cost basis.

 

The portion of the investment securities portfolio, categorized as AFS, with an aggregate amortized historical cost of $222.7 million, had an aggregate fair value that was less than its aggregate amortized historical cost by $16.7 million, or -7.5%, at September 30, 2023. The AFS securities portfolio, with an aggregate amortized historical cost of $205.4 million, had an aggregate fair value that was less than its aggregate amortized historical cost by $14.8 million, or -7.2%, at December 31, 2022. The resultant $1.9 million total decline in the fair value of the AFS investment portfolio's aggregate fair value relative to its aggregate amortized historical cost, in the nine months ended September 30, 2023, was primarily due to changes in the interest rate environment (the general interest rate level and the relationships between shorter-term and longer-term interest rates, known as the 'yield curve') that occurred in that period. These changes in aggregate fair value relative to aggregate amortized historical cost that occurred in the nine months ended September 30, 2023 did not represent any changes in credit loss estimations within the portfolio. Management evaluated the individual securities within the AFS securities portfolio and determined that there was no material credit loss in that portfolio at the adoption date of the CECL methodology on January 1, 2023 or at the reporting date of September 30, 2023. Accordingly, no transition adjustment related to the adoption of ASU 2016-13 was recorded on January 1, 2023 and no impairment charges related to this portfolio were taken in the three and nine months ended September 30, 2023.

 

The portion of the investment securities portfolio, categorized as HTM, with an aggregate amortized historical cost of $185.6 million, had an aggregate fair value that was less than its aggregate amortized historical cost by $15.5 million, or -8.3%, at September 30, 2023. The portion of the investment securities portfolio, categorized as HTM, with an aggregate amortized historical cost of $194.4 million, had an aggregate fair value that was less than its aggregate amortized historical cost by $12.9 million, or -6.6%, at December 31, 2022. The resultant $2.6 million reduction in the aggregate fair value of the HTM investment portfolio, relative to its aggregate amortized historical cost, during the nine months ended September 30, 2023, was primarily due to changes in the interest rate environment (the general interest rate level and the relationships

- 16 -

 

between shorter-term and longer-term interest rates, known as the 'yield curve') that occurred in that period. These changes in aggregate fair value relative to aggregate amortized historical cost that occurred in the nine months ended September 30, 2023 did not represent any changes in credit loss estimations within the portfolio. 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.

 

As a result of the Company's adoption of ASU 2016-13, the Company established a reserve against the recorded aggregate value of the HTM investment securities portfolio in the amount of $450,000 at January 1, 2023. The reserve was determined using a discounted probability of default ("PD") - loss given default ("LGD") model consistent with the methodologies used to calculate the Company's allowance for credit losses ("ACL"). This calculation, applied in the third quarter of 2023, resulted in a $5,000 increase to the allowance for credit losses to $426,000 at September 30, 2023, reflected as an increase to the total periodic provision for credit losses recorded in the third quarter of 2023, related to the portion of the investment securities portfolio categorized as HTM.

 

The following table depicts a rollforward of the allowance for credit losses on investment securities classified as held-to-maturity for the three months ended September 30, 2023:

 

(In thousands)

Government Issued and Government Sponsored Enterprise Securities

 

Mortgage and Asset-backed Securities

 

Securities Issued By State and Political Subdivisions

 

Corporate Securities

 

Total

 

Balance, June 30, 2023

$

-

 

$

22

 

$

2

 

$

397

 

$

421

 

Provision for credit losses

 

-

 

 

-

 

 

-

 

 

5

 

 

5

 

Allowance on purchased financial assets with credit deterioration

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Charge-offs of securities

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Recoveries

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Balance, September 30, 2023

$

-

 

$

22

 

$

2

 

$

402

 

$

426

 

 

The following table depicts a rollforward of the allowance for credit losses on investment securities classified as held-to-maturity for the nine months ended September 30, 2023:

 

(In thousands)

Government Issued and Government Sponsored Enterprise Securities

 

Mortgage and Asset-backed Securities

 

Securities Issued By State and Political Subdivisions

 

Corporate Securities

 

Total

 

Balance, December 31, 2022

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

Adjustment for the adoption of ASU 2016-13

 

-

 

 

40

 

 

1

 

 

409

 

 

450

 

Provision for credit losses

 

-

 

 

(18

)

 

1

 

 

(7

)

 

(24

)

Allowance on purchased financial assets with credit deterioration

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Charge-offs of securities

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Recoveries

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Balance, September 30, 2023

$

-

 

$

22

 

$

2

 

$

402

 

$

426

 

 

The Company monitors the credit quality of the debt securities categorized as HTM primarily through the use of NRSRO credit ratings. These assessments are made on a quarterly basis. The following table summarizes the amortized cost of debt securities categorized as HTM at September 30, 2023, aggregated by credit quality indicators:

 

- 17 -

 

(In thousands)

 

 

AAA or equivalent

$

43,298

 

AA or equivalent, including securities issued by the United States Government or Government Sponsored Enterprises

 

48,032

 

A or equivalent

$

22,312

 

BBB or equivalent

 

15,546

 

BB or equivalent

$

983

 

Unrated

 

55,844

 

Total

$

186,015

 

 

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

 

 

 

For the three months

For the nine months

 

 

 

ended September 30,

ended September 30,

 

(In thousands)

 

2023

 

 

2022

 

 

 

2023

 

 

2022

 

Realized gains on investments

 

$

-

 

 

$

-

 

 

 

$

2,021

 

 

$

37

 

Realized losses on investments

 

 

(13

)

 

 

(198

)

 

 

 

(1,961

)

 

 

(205

)

Total

 

$

(13

)

$

(198

)

 

 

$

60

 

 

$

(168

)

 

As of September 30, 2023 and December 31, 2022, securities with a fair value of $90.3 million and $99.8 million, respectively, were pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of $64.0 million and $38.1 million, respectively, were pledged against certain 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 investment securities.

 

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 September 30,

 

 

For the nine months ended September 30,

 

(In thousands)

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Service cost

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Interest cost

 

 

140

 

 

 

116

 

 

 

3

 

 

 

3

 

 

 

421

 

 

 

348

 

 

 

6

 

 

 

9

 

Expected return on plan assets

 

 

(241

)

 

 

(267

)

 

 

 

 

 

-

 

 

 

(724

)

 

 

(801

)

 

 

 

 

 

-

 

Amortization of prior service credits

 

 

 

 

 

-

 

 

 

(1

)

 

 

(1

)

 

 

 

 

 

-

 

 

 

(3

)

 

 

(4

)

Amortization of net losses

 

 

57

 

 

 

-

 

 

 

(1

)

 

 

2

 

 

 

172

 

 

 

-

 

 

 

(3

)

 

 

5

 

Net periodic benefit plan (benefit) cost

 

$

(44

)

 

$

(151

)

 

$

1

 

 

$

4

 

 

$

(131

)

 

$

(453

)

 

$

-

 

 

$

10

 

 

The Company will evaluate the need for further contributions to the defined benefit pension plan during 2023. The prepaid pension asset is recorded in other assets on the consolidated statements of condition as of September 30, 2023 and December 31, 2022.

- 18 -

 

 

Note 6: Loans

 

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

 

 

September 30,

 

 

December 31,

 

(In thousands)

 

2023

 

 

2022

 

Residential mortgage loans:

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

$

252,956

 

 

$

257,656

 

Construction

 

 

2,090

 

 

 

5,085

 

Loans held-for-sale

 

 

-

 

 

 

19

 

Total residential mortgage loans

 

 

255,046

 

 

 

262,760

 

Commercial loans:

 

 

 

 

 

 

Real estate

 

 

362,822

 

 

 

345,330

 

Lines of credit

 

 

73,497

 

 

 

82,050

 

Other commercial and industrial

 

 

85,506

 

 

 

77,273

 

Paycheck Protection Program loans

 

 

169

 

 

 

203

 

Tax exempt loans

 

 

3,451

 

 

 

4,280

 

Total commercial loans

 

 

525,445

 

 

 

509,136

 

Consumer loans:

 

 

 

 

 

 

Home equity and junior liens

 

 

34,666

 

 

 

34,007

 

Other consumer

 

 

81,319

 

 

 

92,851

 

Total consumer loans

 

 

115,985

 

 

 

126,858

 

Total loans

 

 

896,476

 

 

 

898,754

 

Net deferred loan fees

 

 

(353

)

 

 

(1,000

)

Less allowance for credit losses

 

 

15,767

 

 

 

15,319

 

Loans receivable, net

 

$

880,356

 

 

$

882,435

 

 

Although the Bank may sometimes 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.

 

- 19 -

 

 

From time to time, the Bank acquires diversified pools of loans, originated by unrelated third parties, as part of the Company’s overall balance sheet management strategies. These acquisitions took place with nine separate transactions, that occurred between 2017 and 2019, with an additional six transactions occurring in 2021. The following tables detail the purchased loan pool positions held by the Bank at September 30, 2023 and December 31, 2022 (the month/year of the earliest acquisition date is depicted in parentheses):

 

(In thousands, except number of loans)

 

September 30, 2023

 

 

 

Original Balance

 

 

Current Balance

 

 

Unamortized Premium/ (Discount)

 

 

Number of Loans

 

 

Maturity Range

 

Cumulative net charge-offs

 

Commercial and industrial loans (6/2019)

 

$

6,800

 

 

$

1,800

 

 

$

-

 

 

 

20

 

 

2-6 years

 

$

-

 

Home equity lines of credit (8/2019)

 

 

21,900

 

 

 

4,900

 

 

 

137

 

 

 

128

 

 

1-26 years

 

 

-

 

Unsecured consumer loan pool 2 (11/2019)

 

 

26,600

 

 

 

700

 

 

 

3

 

 

 

181

 

 

0-3 years

 

 

-

 

Residential real estate loans (12/2019)

 

 

4,300

 

 

 

3,700

 

 

 

231

 

 

 

48

 

 

17-22 years

 

 

-

 

Unsecured consumer loan pool 1 (12/2019)

 

 

5,400

 

 

 

1,200

 

 

 

-

 

 

 

46

 

 

1-4 years

 

 

-

 

Unsecured consumer installment loans pool 3 (12/2019)

 

 

10,300

 

 

 

500

 

 

 

22

 

 

 

186

 

 

0-9 years

 

 

69

 

Secured consumer installment loans pool 4 (12/2020)

 

 

14,500

 

 

 

10,700

 

 

 

(1,302

)

 

 

502

 

 

22-23 years

 

 

-

 

Unsecured consumer loans pool 5 (1/2021)

 

 

24,400

 

 

 

16,100

 

 

 

(437

)

 

 

661

 

 

7-22 years

 

 

-

 

Revolving commercial line of credit 1 (3/2021)

 

 

11,600

 

 

 

12,300

 

 

 

5

 

 

 

1

 

 

0-1 year

 

 

-

 

Secured consumer installment loans (11/2021)

 

 

21,300

 

 

 

18,500

 

 

 

(3,009

)

 

 

826

 

 

17-24 years

 

 

-

 

Revolving commercial line of credit 2 (11/2021)

 

 

10,500

 

 

 

4,300

 

 

 

4

 

 

 

1

 

 

0-1 year

 

 

-

 

Unsecured consumer loans pool 6 (11/2021)

 

 

22,200

 

 

 

18,800

 

 

 

(2,235

)

 

 

526

 

 

7-24 years

 

 

-

 

Total

 

$

179,800

 

 

$

93,500

 

 

$

(6,581

)

 

 

3,126

 

 

 

 

$

69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except number of loans)

 

December 31, 2022

 

 

 

Original Balance

 

 

Current Balance

 

 

Unamortized Premium/ (Discount)

 

 

Number of Loans

 

 

Maturity Range

 

Cumulative net charge-offs

 

Automobile loans (1/2017) paid in full at 6/30/23

 

$

50,400

 

 

$

4,200

 

 

$

128

 

 

 

537

 

 

0-4 years

 

$

247

 

Commercial and industrial loans (6/2019)

 

 

6,800

 

 

 

2,100

 

 

 

-

 

 

 

22

 

 

3-7 years

 

 

-

 

Home equity lines of credit (8/2019)

 

 

21,900

 

 

 

6,000

 

 

 

189

 

 

 

143

 

 

1-27 years

 

 

-

 

Unsecured consumer loan pool 2 (11/2019)

 

 

26,600

 

 

 

1,500

 

 

 

11

 

 

 

320

 

 

0-2 years

 

 

-

 

Residential real estate loans (12/2019)

 

 

4,300

 

 

 

3,900

 

 

 

240

 

 

 

49

 

 

16-22 years

 

 

-

 

Unsecured consumer loan pool 1 (12/2019)

 

 

5,400

 

 

 

1,600

 

 

 

-

 

 

 

50

 

 

1-4 years

 

 

-

 

Unsecured consumer installment loans pool 3 (12/2019)

 

 

10,300

 

 

 

1,000

 

 

 

38

 

 

 

354

 

 

0-9 years

 

 

63

 

Secured consumer installment loans pool 4 (12/2020)

 

 

14,500

 

 

 

11,300

 

 

 

(1,484

)

 

 

518

 

 

23-24 years

 

 

-

 

Unsecured consumer loans pool 5 (1/2021)

 

 

24,400

 

 

 

17,300

 

 

 

(485

)

 

 

678

 

 

8-24 years

 

 

-

 

Revolving commercial line of credit 1 (3/2021)

 

 

11,600

 

 

 

11,400

 

 

 

14

 

 

 

1

 

 

0-1 year

 

 

-

 

Secured consumer installment loans (11/2021)

 

 

21,300

 

 

 

19,700

 

 

 

(3,237

)

 

 

850

 

 

18-25 years

 

 

-

 

Revolving commercial line of credit 2 (11/2021)

 

 

10,500

 

 

 

15,000

 

 

 

23

 

 

 

1

 

 

0-1 year

 

 

-

 

Unsecured consumer loans pool 6 (11/2021)

 

 

22,200

 

 

 

20,200

 

 

 

(2,441

)

 

 

540

 

 

8-24 years

 

 

-

 

Total

 

$

230,200

 

 

$

115,200

 

 

$

(7,004

)

 

 

4,063

 

 

 

 

$

310

 

At September 30, 2023 the ACL related to these pools was $2.1 million. As of September 30, 2023 and December 31, 2022, residential mortgage loans with a carrying value of $114.4 million and $110.3 million, respectively, have been pledged by the Company to the Federal Home Loan Bank of New York (“FHLBNY”) under a blanket collateral agreement to secure the Company’s line of credit and term borrowings.

 

- 20 -

 

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 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2023 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 an occasional 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 credit 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 credit losses. Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class.

 

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

 

 

Portfolio Segment

Class

 

 

Residential Mortgage Loans

1-4 family first-lien residential mortgages

 

Construction

 

 

Commercial Loans

Real estate

 

Lines of credit

 

Other commercial and industrial

 

Tax exempt loans

 

 

Consumer Loans

Home equity and junior liens

 

Other consumer

 

 

- 21 -

 

The following tables present the classes of the loan portfolio, 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving

 

 

 

 

 

 

Term Loans By Origination Year

 

 

Revolving

 

 

loans converted

 

 

 

 

(In thousands)

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Loans

 

 

to term loans

 

 

Total

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

39,528

 

 

$

68,969

 

 

$

60,100

 

 

$

29,609

 

 

$

51,743

 

 

$

87,664

 

 

$

-

 

 

$

-

 

 

$

337,613

 

Special Mention

 

 

-

 

 

 

14,022

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

823

 

 

 

-

 

 

 

-

 

 

 

14,845

 

Substandard

 

 

769

 

 

 

500

 

 

 

2,342

 

 

 

739

 

 

 

396

 

 

 

5,458

 

 

 

-

 

 

 

-

 

 

 

10,204

 

Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

160

 

 

 

-

 

 

 

-

 

 

 

160

 

Total Commercial Real Estate

 

 

40,297

 

 

 

83,491

 

 

 

62,442

 

 

 

30,348

 

 

 

52,139

 

 

 

94,105

 

 

 

-

 

 

 

-

 

 

 

362,822

 

Commercial Lines of Credit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

63,301

 

 

 

7,238

 

 

 

70,539

 

Special Mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

647

 

 

 

167

 

 

 

814

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

743

 

 

 

1,384

 

 

 

2,127

 

Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17

 

 

 

17

 

Total Commercial Lines of Credit

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

64,691

 

 

 

8,806

 

 

 

73,497

 

Other Commercial and Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

18,879

 

 

 

18,819

 

 

 

6,914

 

 

 

5,943

 

 

 

8,437

 

 

 

12,793

 

 

 

4,020

 

 

 

-

 

 

 

75,805

 

Special Mention

 

 

2,480

 

 

 

2

 

 

 

249

 

 

 

76

 

 

 

-

 

 

 

34

 

 

 

-

 

 

 

-

 

 

 

2,841

 

Substandard

 

 

1,435

 

 

 

1,171

 

 

 

941

 

 

 

757

 

 

 

213

 

 

 

2,343

 

 

 

-

 

 

 

-

 

 

 

6,860

 

Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total Other Commercial and Industrial

 

 

22,794

 

 

 

19,992

 

 

 

8,104

 

 

 

6,776

 

 

 

8,650

 

 

 

15,170

 

 

 

4,020

 

 

 

-

 

 

 

85,506

 

Paycheck Protection Program Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Pass

 

 

-

 

 

 

-

 

 

 

-

 

 

 

169

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

169

 

      Special Mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

      Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

      Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total Paycheck Protection Program Loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

169

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

169

 

Tax Exempt Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Pass

 

 

-

 

 

 

-

 

 

 

32

 

 

 

196

 

 

 

6

 

 

 

3,217

 

 

 

-

 

 

 

-

 

 

 

3,451

 

      Special Mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

      Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

      Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total Tax Exempt Loans

 

 

-

 

 

 

-

 

 

 

32

 

 

 

196

 

 

 

6

 

 

 

3,217

 

 

 

-

 

 

 

-

 

 

 

3,451

 

 

 

 

 

- 22 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving

 

 

 

 

 

 

Term Loans By Origination Year

 

 

Revolving

 

 

loans converted

 

 

 

 

(In thousands)

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Loans

 

 

to term loans

 

 

Total

 

1-4 family first-lien residential mortgages:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

6,873

 

 

$

32,585

 

 

$

52,220

 

 

$

40,478

 

 

$

18,902

 

 

$

97,486

 

 

$

-

 

 

$

-

 

 

$

248,544

 

Special Mention

 

 

-

 

 

 

-

 

 

 

1,471

 

 

 

46

 

 

 

61

 

 

 

314

 

 

 

-

 

 

 

-

 

 

 

1,892

 

Substandard

 

 

-

 

 

 

-

 

 

 

139

 

 

 

447

 

 

 

222

 

 

 

1,085

 

 

 

-

 

 

 

-

 

 

 

1,893

 

Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

154

 

 

 

-

 

 

 

473

 

 

 

-

 

 

 

-

 

 

 

627

 

Total 1-4 family first-lien residential mortgages

 

 

6,873

 

 

 

32,585

 

 

 

53,830

 

 

 

41,125

 

 

 

19,185

 

 

 

99,358

 

 

 

-

 

 

 

-

 

 

 

252,956

 

Construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

2,090

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,090

 

Special Mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total Construction

 

 

2,090

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,090

 

Home Equity and Junior Liens:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

8,256

 

 

 

2,122

 

 

 

1,502

 

 

 

802

 

 

 

610

 

 

 

2,241

 

 

 

17,693

 

 

 

685

 

 

 

33,911

 

Special Mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

20

 

 

 

9

 

 

 

29

 

Substandard

 

 

-

 

 

 

-

 

 

 

67

 

 

 

-

 

 

 

-

 

 

 

29

 

 

 

630

 

 

 

-

 

 

 

726

 

Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total Home Equity and Junior Liens

 

 

8,256

 

 

 

2,122

 

 

 

1,569

 

 

 

802

 

 

 

610

 

 

 

2,270

 

 

 

18,343

 

 

 

694

 

 

 

34,666

 

Other Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

 

69,076

 

 

 

4,291

 

 

 

3,226

 

 

 

1,455

 

 

 

1,735

 

 

 

1,454

 

 

 

-

 

 

 

-

 

 

 

81,237

 

Special Mention

 

 

-

 

 

 

14

 

 

 

18

 

 

 

6

 

 

 

3

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

42

 

Substandard

 

 

-

 

 

 

5

 

 

 

8

 

 

 

16

 

 

 

4

 

 

 

7

 

 

 

-

 

 

 

-

 

 

 

40

 

Doubtful

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total Other Consumer

 

 

69,076

 

 

 

4,310

 

 

 

3,252

 

 

 

1,477

 

 

 

1,742

 

 

 

1,462

 

 

 

-

 

 

 

-

 

 

 

81,319

 

Net Deferred Loan Fees

 

 

(237

)

 

 

32

 

 

 

98

 

 

 

63

 

 

 

(58

)

 

 

(251

)

 

 

-

 

 

 

-

 

 

 

(353

)

Total loans

 

$

149,149

 

 

$

142,532

 

 

$

129,327

 

 

$

80,956

 

 

$

82,274

 

 

$

215,331

 

 

$

87,054

 

 

$

9,500

 

 

$

896,123

 

 

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.

 

Nonaccrual and Past Due Loans

 

Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date. Loans are placed on nonaccrual when the contractual payment of principal and interest has become 90 days past due or when management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing.

 

 

- 23 -

 

An aging analysis of past due loans, not including net deferred loan costs, segregated by portfolio segment and class of loans, as of September 30, 2023 and December 31, 2022, are detailed in the following tables:

 

 

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1,262

 

 

$

1,846

 

 

$

1,610

 

 

$

4,718

 

 

$

248,238

 

 

$

252,956

 

Construction

 

 

-

 

 

 

-

 

 

 

-

 

 

$

-

 

 

 

2,090

 

 

 

2,090

 

Loans held-for-sale

 

 

-

 

 

 

-

 

 

 

-

 

 

$

-

 

 

 

-

 

 

 

-

 

Total residential mortgage loans

 

 

1,262

 

 

 

1,846

 

 

 

1,610

 

 

 

4,718

 

 

 

250,328

 

 

 

255,046

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

4,090

 

 

 

1,457

 

 

 

6,280

 

 

 

11,827

 

 

 

350,995

 

 

 

362,822

 

Lines of credit

 

 

1,759

 

 

 

10

 

 

 

1,513

 

 

 

3,282

 

 

 

70,215

 

 

 

73,497

 

Other commercial and industrial

 

 

571

 

 

 

541

 

 

 

3,710

 

 

 

4,822

 

 

 

80,684

 

 

 

85,506

 

Paycheck Protection Program loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

169

 

 

 

169

 

Tax exempt loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,451

 

 

 

3,451

 

Total commercial loans

 

 

6,420

 

 

 

2,008

 

 

 

11,503

 

 

 

19,931

 

 

 

505,514

 

 

 

525,445

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

73

 

 

 

69

 

 

 

237

 

 

 

379

 

 

 

34,287

 

 

 

34,666

 

Other consumer

 

 

683

 

 

 

322

 

 

 

2,629

 

 

 

3,634

 

 

 

77,685

 

 

 

81,319

 

Total consumer loans

 

 

756

 

 

 

391

 

 

 

2,866

 

 

 

4,013

 

 

 

111,972

 

 

 

115,985

 

Total loans

 

$

8,438

 

 

$

4,245

 

 

$

15,979

 

 

$

28,662

 

 

$

867,814

 

 

$

896,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1,627

 

 

$

620

 

 

$

932

 

 

$

3,179

 

 

$

254,477

 

 

$

257,656

 

Construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,085

 

 

 

5,085

 

Loans held-for-sale

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

19

 

 

 

19

 

Total residential mortgage loans

 

 

1,627

 

 

 

620

 

 

 

932

 

 

 

3,179

 

 

 

259,581

 

 

 

262,760

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

 

4,974

 

 

 

854

 

 

 

3,499

 

 

 

9,327

 

 

 

336,003

 

 

 

345,330

 

Lines of credit

 

 

1,280

 

 

 

1,584

 

 

 

298

 

 

 

3,162

 

 

 

78,888

 

 

 

82,050

 

Other commercial and industrial

 

 

4,721

 

 

 

999

 

 

 

1,738

 

 

 

7,458

 

 

 

69,815

 

 

 

77,273

 

Paycheck Protection Program loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

203

 

 

 

203

 

Tax exempt loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,280

 

 

 

4,280

 

Total commercial loans

 

 

10,975

 

 

 

3,437

 

 

 

5,535

 

 

 

19,947

 

 

 

489,189

 

 

 

509,136

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity and junior liens

 

 

23

 

 

 

17

 

 

 

279

 

 

 

319

 

 

 

33,688

 

 

 

34,007

 

Other consumer

 

 

391

 

 

 

239

 

 

 

1,904

 

 

 

2,534

 

 

 

90,317

 

 

 

92,851

 

Total consumer loans

 

 

414

 

 

 

256

 

 

 

2,183

 

 

 

2,853

 

 

 

124,005

 

 

 

126,858

 

Total loans

 

$

13,016

 

 

$

4,313

 

 

$

8,650

 

 

$

25,979

 

 

$

872,775

 

 

$

898,754

 

 

- 24 -

 

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

 

 

 

September 30,

 

 

December 31,

 

(In thousands)

 

2023

 

 

2022

 

Residential mortgage loans:

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

$

1,659

 

 

$

1,112

 

 

 

 

1,659

 

 

 

1,112

 

Commercial loans:

 

 

 

 

 

 

Real estate

 

 

6,404

 

 

 

3,504

 

Lines of credit

 

 

1,529

 

 

 

332

 

Other commercial and industrial

 

 

3,710

 

 

 

1,884

 

 

 

 

11,643

 

 

 

5,720

 

Consumer loans:

 

 

 

 

 

 

Home equity and junior liens

 

 

237

 

 

 

279

 

Other consumer

 

 

2,634

 

 

 

1,904

 

Total consumer loans

 

 

2,871

 

 

 

2,183

 

Total nonaccrual loans

 

$

16,173

 

 

$

9,015

 

 

At September 30, 2023, the Bank's 133 nonperforming loans represented 1.8% of total loans, with an aggregate outstanding balance of $16.2 million, as compared to 126 loans with an aggregate outstanding balance of $9.0 million at December 31, 2022. This increase in nonaccrual balances of $7.1 million was primarily the result of the downgrade of two significant commercial real estate and commercial loan relationships. At September 30, 2023, the number of nonaccrual loans related to these two relationships was 19 loans, with an aggregate outstanding balance of $11.5 million, as compared to five loans with an aggregate outstanding balance of $1.7 million at December 31, 2022. Management is closely monitoring all nonaccrual loans and has incorporated its current estimate of the ultimate collectability of these loans into the reported allowance for credit losses at September 30, 2023.

 

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 credit losses, an associated increase to the allowance for credit losses or as a charge-off to the allowance for credit losses in the current period.

 

- 25 -

 

Impaired Loans

 

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

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

 

 

 

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

 

$

757

 

 

$

757

 

 

$

-

 

 

$

1,048

 

 

$

1,048

 

 

$

-

 

Commercial real estate

 

 

6,580

 

 

 

6,580

 

 

 

-

 

 

 

5,283

 

 

 

5,386

 

 

 

-

 

Commercial lines of credit

 

 

500

 

 

 

500

 

 

 

-

 

 

 

2,218

 

 

 

2,218

 

 

 

-

 

Other commercial and industrial

 

 

3,087

 

 

 

3,087

 

 

 

-

 

 

 

2,780

 

 

 

2,829

 

 

 

-

 

Home equity and junior liens

 

 

82

 

 

 

82

 

 

 

-

 

 

 

182

 

 

 

182

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

 

925

 

 

 

925

 

 

 

126

 

 

 

450

 

 

 

450

 

 

 

91

 

Commercial real estate

 

 

4,944

 

 

 

4,944

 

 

 

598

 

 

 

2,625

 

 

 

2,625

 

 

 

346

 

Commercial lines of credit

 

 

1,552

 

 

 

1,566

 

 

 

1,092

 

 

 

3,059

 

 

 

3,066

 

 

 

2,957

 

Other commercial and industrial

 

 

3,672

 

 

 

3,672

 

 

 

1,564

 

 

 

1,998

 

 

 

1,998

 

 

 

1,285

 

Home equity and junior liens

 

 

630

 

 

 

630

 

 

 

147

 

 

 

536

 

 

 

536

 

 

 

114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family first-lien residential mortgages

 

 

1,682

 

 

 

1,682

 

 

 

126

 

 

 

1,498

 

 

 

1,498

 

 

 

91

 

Commercial real estate

 

 

11,524

 

 

 

11,524

 

 

 

598

 

 

 

7,908

 

 

 

8,011

 

 

 

346

 

Commercial lines of credit

 

 

2,052

 

 

 

2,066

 

 

 

1,092

 

 

 

5,277

 

 

 

5,284

 

 

 

2,957

 

Other commercial and industrial

 

 

6,759

 

 

 

6,759

 

 

 

1,564

 

 

 

4,778

 

 

 

4,827

 

 

 

1,285

 

Home equity and junior liens

 

 

712

 

 

 

712

 

 

 

147

 

 

 

718

 

 

 

718

 

 

 

114

 

Totals

 

$

22,729

 

 

$

22,743

 

 

$

3,527

 

 

$

20,179

 

 

$

20,338

 

 

$

4,793

 

 

 

 

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

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

(In thousands)

 

2023

 

 

2022

 

2023

 

 

2022

 

1-4 family first-lien residential mortgages

 

$

1,678

 

 

$

1,133

 

$

1,586

 

 

$

1,165

 

Commercial real estate

 

 

10,559

 

 

 

7,124

 

 

9,875

 

 

 

7,130

 

Commercial lines of credit

 

 

2,644

 

 

 

2,089

 

 

3,265

 

 

 

1,120

 

Other commercial and industrial

 

 

7,722

 

 

 

3,302

 

 

7,119

 

 

 

2,750

 

Home equity and junior liens

 

 

666

 

 

 

627

 

 

691

 

 

 

629

 

Total

 

$

23,269

 

 

$

14,275

 

$

22,536

 

 

$

12,794

 

 

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

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,

 

September 30,

 

(In thousands)

 

2023

 

 

2022

 

2023

 

 

2022

 

1-4 family first-lien residential mortgages

 

$

17

 

 

$

12

 

$

58

 

 

$

41

 

Commercial real estate

 

 

95

 

 

 

78

 

 

231

 

 

 

227

 

Commercial lines of credit

 

 

75

 

 

 

45

 

 

107

 

 

 

90

 

Other commercial and industrial

 

 

88

 

 

 

48

 

 

145

 

 

 

184

 

Home equity and junior liens

 

 

15

 

 

 

16

 

 

42

 

 

 

19

 

Total

 

$

290

 

 

$

199

 

$

583

 

 

$

561

 

 

- 26 -

 

 

Note 7: Allowance for Credit Losses

 

Management extensively reviews recent trends in historical losses, qualitative factors, including concentrations of loans to related borrowers and concentrations of loans by collateral type, and specific reserve requirements on loans individually evaluated in its determination of the adequacy of the credit losses. We recorded $833,000 in provision for credit losses for the three month period ended September 30, 2023, as compared to $710,000 for the three month period ended September 30, 2022. For the first nine months of 2023, we recorded $2.7 million in provision for credit losses compared to $871,000 in the first nine months of the prior year.

 

The increase in provision for credit losses in in the three and nine months ended September 30, 2023, as compared to the same three and nine month periods in 2022, primarily reflected the recording of additional reserves related to two large loan relationships. The two loan relationships consisted of 19 loans, with aggregate outstanding balances of $11.5 million.

 

At December 31, 2022 the Company calculated its Allowance for Loan losses utilizing the Incurred Loss Model ("ILM") methodology, as required under generally accepted accounting principles ("GAAP") on that date. On January 1, 2023, the Company adopted the Current Expected Credit Loss ("CECL") model methodology in accordance with GAAP requirements that became effective on that date. At December 31, 2022 the Company had a total allowance for loan and lease losses ("ALLL") of $15.3 million, of which $4.8 million was related to specifically-identified loans and $10.5 million was related to loans analyzed collectively on an aggregate pool basis. On January 1, 2023 the Company recorded a one-time CECL transition adjustment (recorded as an adjustment, net of taxes, to retained earnings) of $1.9 million that reversed the $10.5 million in the December 31, 2022 ALLL, that was related to pooled loans, evaluated collectively in the aggregate, as previously calculated under the phased-out ILM methodology, and replaced it with the ACL, as calculated under CECL, in the amount of $12.4 million. The $12.4 million CECL ACL at January 1, 2023 was composed of $8.4 million in reserves calculated using quantitative methodologies based on historical loss experience and $4.0 million based on qualitative factors, as determined by management. The $4.8 million in ALLL related to specifically-identified loans at December 31, 2022 was not affected by the transition to the CECL methodology at January 1, 2023.

 

The transition to CECL on January 1, 2023 also required that new reserves be created in the amounts of $450,000 and $552,000, related to held-to-maturity investments and unfunded commitments, respectively. Including the $1.9 million CECL transition adjustment related to loans, described above, the total CECL transition adjustment related to loans, securities classified as held-to-maturity and unfunded commitments was $2.9 million on January 1, 2023. This amount was recorded to retained earnings on that date and was not included in net income in 2023.

 

The total provision for credit losses ("PCL") for the three and nine months ended September 30, 2023 was $871,000 and $2.7 million, respectively, of which $798,000 and $2.7 million related to the Company's loan portfolio for the three and nine months ended September 30, 2023, respectively. The ACL related to loans was therefore $15.8 million at September 30, 2023, composed of $7.1 million related to specifically-identified loans, $4.8 million in reserves calculated using quantitative methodologies based on historical loss experience and $3.9 million based on qualitative factors, as determined by management. In addition, during the third quarter of 2023, the Company recorded modest PCL increases of $5,000 and $30,000 for reserves related to securities classified as held-to-maturity and unfunded commitments, respectively.

 

The following table summarizes all activity related to the ACL from December 31, 2022 to September 30, 2023 and to the recorded PCL for the three and nine months ended September 30, 2023:

 

- 27 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACL - loans

ILM 12/31/2022

 

CECL transition adjustment 1/1/2023

 

CECL ACL at 1/1/2023

 

Q1 2023 Charge-offs

 

Q1 2023 Recoveries

 

Q1 2023 PCL

 

CECL ACL at 3/31/2023

 

Q2 2023 Charge-offs

 

Q2 2023 Recoveries

 

Q2 2023 PCL

 

CECL ACL at 6/30/2023

 

Q3 2023 Charge-offs

 

Q3 2023 Recoveries

 

Q3 2023 PCL

 

CECL ACL at 9/30/2023

 

Specifically-identified loans

$

4,793

 

$

-

 

$

4,793

 

$

-

 

$

-

 

$

834

 

$

5,627

 

$

263

 

$

-

 

$

1,004

 

$

6,368

 

$

-

 

$

-

 

$

692

 

$

7,060

 

Pooled loans under ILM

 

10,526

 

 

(10,526

)

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

Pooled loans under CECL - Quantitative

 

 

 

8,444

 

 

8,444

 

 

100

 

 

92

 

 

255

 

 

8,691

 

 

109

 

 

116

 

 

(106

)

 

8,592

 

 

3,874

 

 

45

 

 

17

 

 

4,780

 

Pooled loans under CECL - Qualitative

 

 

 

3,965

 

 

3,965

 

 

19

 

 

 

 

(397

)

 

3,549

 

 

-

 

 

-

 

 

287

 

 

3,836

 

 

-

 

 

-

 

 

89

 

 

3,925

 

  Total ACL related to loans

$

15,319

 

$

1,883

 

$

17,202

 

$

119

 

$

92

 

$

692

 

$

17,867

 

$

372

 

$

116

 

$

1,185

 

$

18,796

 

$

3,874

 

$

45

 

$

798

 

$

15,765

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACL - related to held-to-maturity investments (1)

 

-

 

 

450

 

 

450

 

 

-

 

 

-

 

 

-

 

 

450

 

 

-

 

 

-

 

 

(29

)

 

421

 

 

-

 

 

-

 

 

5

 

 

426

 

ACL - related to unfunded commitments (2)

 

-

 

 

552

 

 

552

 

 

-

 

 

-

 

 

-

 

 

552

 

 

-

 

 

-

 

 

(16

)

 

536

 

 

-

 

 

-

 

 

30

 

 

566

 

 

 

$

2,885

 

 

 

 

 

 

 

$

692

 

 

 

 

 

 

 

$

1,140

 

 

 

 

 

 

 

$

833

 

 

 

 

(1) - Reported on the Statements of Financial Condition as an adjustment to held-to-maturity investment securities

(2) - Reported on the Statements of Financial Condition as an adjustment to other liabilities

 

 

- 28 -

 

Summarized in the tables below are changes in the allowance for credit losses for loans for the indicated periods and information pertaining to the allocation of the balances of the credit 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 September 30, 2023

 

 

 

1-4 family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

first-lien

 

 

Residential

 

 

 

 

 

 

 

 

 

Other

 

 

Paycheck

 

 

 

residential

 

 

construction

 

 

Commercial

 

 

 

Commercial

 

 

commercial

 

 

Protection

 

(In thousands)

 

mortgage

 

 

mortgage

 

 

real estate

 

 

 

lines of credit

 

 

and industrial

 

 

Program

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

2,036

 

 

$

634

 

 

$

5,431

 

 

 

$

2,620

 

 

$

5,192

 

 

$

-

 

Charge-offs

 

 

(60

)

 

 

-

 

 

 

-

 

 

 

 

(1,230

)

 

 

(2,499

)

 

 

-

 

Recoveries

 

 

-

 

 

 

-

 

 

 

24

 

 

 

 

-

 

 

 

5

 

 

 

-

 

Provisions (credits)

 

 

31

 

 

 

238

 

 

 

(401

)

 

 

 

483

 

 

 

343

 

 

 

-

 

Ending balance

 

$

2,007

 

 

$

872

 

 

$

5,054

 

 

 

$

1,873

 

 

$

3,041

 

 

$

-

 

Ending balance: related to loans
   individually evaluated for impairment

 

$

126

 

 

$

-

 

 

$

598

 

 

 

$

1,093

 

 

$

1,564

 

 

$

-

 

Ending balance: related to loans
   collectively evaluated for impairment

 

$

1,881

 

 

$

872

 

 

$

4,456

 

 

 

$

780

 

 

$

1,477

 

 

$

-

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

252,956

 

 

$

2,090

 

 

$

362,822

 

 

 

$

73,497

 

 

$

85,506

 

 

$

169

 

Ending balance: individually
   evaluated for impairment

 

$

1,681

 

 

$

-

 

 

$

11,525

 

 

 

$

2,052

 

 

$

6,759

 

 

$

-

 

Ending balance: collectively
   evaluated for impairment

 

$

251,275

 

 

$

2,090

 

 

$

351,297

 

 

 

$

71,445

 

 

$

78,747

 

 

$

169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

and junior liens

 

 

Consumer

 

 

 

Total

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

15

 

 

$

682

 

 

$

2,186

 

 

 

$

18,796

 

 

 

 

 

 

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

(84

)

 

 

 

(3,873

)

 

 

 

 

 

 

Recoveries

 

 

-

 

 

 

-

 

 

 

17

 

 

 

 

46

 

 

 

 

 

 

 

Provisions (credits)

 

 

(2

)

 

 

40

 

 

 

66

 

 

-

 

 

798

 

 

 

 

 

 

 

Ending balance

 

$

13

 

 

$

722

 

 

$

2,185

 

 

 

 

15,767

 

 

 

 

 

 

 

Ending balance: related to loans
   individually evaluated for impairment

 

$

-

 

 

$

147

 

 

$

-

 

 

 

$

3,528

 

 

 

 

 

 

 

Ending balance: related to loans
   collectively evaluated for impairment

 

$

13

 

 

$

575

 

 

$

2,185

 

 

 

$

12,239

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

3,451

 

 

$

34,666

 

 

$

81,319

 

 

 

$

896,476

 

 

 

 

 

 

 

Ending balance: individually
   evaluated for impairment

 

$

-

 

 

$

712

 

 

$

-

 

 

 

$

22,729

 

 

 

 

 

 

 

Ending balance: collectively
   evaluated for impairment

 

$

3,451

 

 

$

33,954

 

 

$

81,319

 

 

 

$

873,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 29 -

 

 

 

 

 

For the nine months ended September 30, 2023

 

 

 

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 credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

714

 

 

$

-

 

 

$

5,881

 

 

$

3,990

 

 

$

2,944

 

Adoption of New Accounting Standard

 

 

1,396

 

 

 

969

 

 

 

(1,744

)

 

 

95

 

 

 

10

 

Charge-offs

 

 

(60

)

 

 

-

 

 

 

-

 

 

 

(1,230

)

 

 

(2,798

)

Recoveries

 

 

-

 

 

 

-

 

 

 

24

 

 

 

1

 

 

 

132

 

Provisions (credits)

 

 

(43

)

 

 

(97

)

 

 

893

 

 

 

(983

)

 

 

2,753

 

Ending balance

 

$

2,007

 

 

$

872

 

 

$

5,054

 

 

$

1,873

 

 

$

3,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

Home equity and junior liens

 

 

Other consumer

 

 

Total

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

3

 

 

$

741

 

 

$

1,046

 

 

 

15,319

 

 

 

 

Adoption of New Accounting Standard

 

 

14

 

 

 

(97

)

 

 

1,243

 

 

 

1,886

 

 

 

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

(277

)

 

 

(4,365

)

 

 

 

Recoveries

 

 

-

 

 

 

-

 

 

 

95

 

 

 

252

 

 

 

 

Provisions (credits)

 

 

(4

)

 

 

78

 

 

 

78

 

 

 

2,675

 

 

 

 

Ending balance

 

$

13

 

 

$

722

 

 

$

2,185

 

 

$

15,767

 

 

 

 

 

- 30 -

 

 

 

 

For the three months ended September 30, 2022

 

 

 

1-4 family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

first-lien

 

 

Residential

 

 

 

 

 

 

 

 

Other

 

 

Paycheck

 

 

 

residential

 

 

construction

 

 

Commercial

 

 

Commercial

 

 

commercial

 

 

Protection

 

(In thousands)

 

mortgage

 

 

mortgage

 

 

real estate

 

 

lines of credit

 

 

and industrial

 

 

Program

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

897

 

 

$

-

 

 

$

5,522

 

 

$

1,157

 

 

$

2,616

 

 

$

-

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(134

)

 

 

-

 

Recoveries

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Provisions (credits)

 

 

(85

)

 

 

-

 

 

 

234

 

 

 

2,212

 

 

 

(205

)

 

 

-

 

Ending balance

 

$

812

 

 

$

-

 

 

$

5,756

 

 

$

3,369

 

 

$

2,277

 

 

$

-

 

Ending balance: related to loans
   individually evaluated for impairment

 

$

92

 

 

$

-

 

 

$

339

 

 

$

2,184

 

 

$

687

 

 

$

-

 

Ending balance: related to loans
   collectively evaluated for impairment

 

$

720

 

 

$

-

 

 

$

5,417

 

 

$

1,185

 

 

$

1,590

 

 

$

-

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

245,428

 

 

$

14,623

 

 

$

337,392

 

 

$

80,717

 

 

$

74,641

 

 

$

693

 

Ending balance: individually
   evaluated for impairment

 

$

1,125

 

 

$

-

 

 

$

7,291

 

 

$

4,033

 

 

$

4,647

 

 

$

-

 

Ending balance: collectively
   evaluated for impairment

 

$

244,303

 

 

$

14,623

 

 

$

330,101

 

 

$

76,684

 

 

$

69,994

 

 

$

693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

and junior liens

 

 

Consumer

 

 

Unallocated

 

 

Total

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

4

 

 

$

750

 

 

$

1,543

 

 

$

589

 

 

$

13,078

 

 

 

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

(42

)

 

 

-

 

 

 

(176

)

 

 

 

Recoveries

 

 

-

 

 

 

-

 

 

 

20

 

 

 

-

 

 

 

20

 

 

 

 

Provisions (credits)

 

 

(1

)

 

 

(321

)

 

 

(578

)

 

 

(546

)

 

 

710

 

 

 

 

Ending balance

 

$

3

 

 

$

429

 

 

$

943

 

 

$

43

 

 

$

13,632

 

 

 

 

Ending balance: related to loans
   individually evaluated for impairment

 

$

-

 

 

$

114

 

 

$

-

 

 

$

-

 

 

$

3,416

 

 

 

 

Ending balance: related to loans
   collectively evaluated for impairment

 

$

3

 

 

$

316

 

 

$

943

 

 

$

43

 

 

$

10,216

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

4,344

 

 

$

33,746

 

 

$

95,331

 

 

$

275

 

 

$

887,190

 

 

 

 

Ending balance: individually
   evaluated for impairment

 

$

-

 

 

$

625

 

 

$

-

 

 

$

-

 

 

$

17,721

 

 

 

 

Ending balance: collectively
   evaluated for impairment

 

$

4,344

 

 

$

33,121

 

 

$

95,331

 

 

$

275

 

 

$

869,469

 

 

 

 

 

- 31 -

 

 

 

 

For the nine months ended September 30, 2022

 

 

 

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 credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

872

 

 

$

-

 

 

$

5,308

 

 

$

935

 

 

$

2,762

 

Charge-offs

 

 

(29

)

 

 

-

 

 

 

(23

)

 

 

(38

)

 

 

(334

)

Recoveries

 

 

-

 

 

 

-

 

 

 

250

 

 

 

-

 

 

 

46

 

Provisions (credits)

 

 

(31

)

 

 

-

 

 

 

221

 

 

 

2,472

 

 

 

(197

)

Ending balance

 

$

812

 

 

$

-

 

 

$

5,756

 

 

$

3,369

 

 

$

2,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

Home equity and junior liens

 

 

Other consumer

 

 

Unallocated

 

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

3

 

 

$

774

 

 

$

1,297

 

 

$

984

 

 

$

12,935

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

(122

)

 

 

-

 

 

 

(546

)

Recoveries

 

 

-

 

 

 

-

 

 

 

76

 

 

 

-

 

 

 

372

 

Provisions (credits)

 

 

-

 

 

 

(345

)

 

 

(308

)

 

 

(941

)

 

 

871

 

Ending balance

 

$

3

 

 

$

429

 

 

$

943

 

 

$

43

 

 

$

13,632

 

 

The Company’s methodology for determining its allowance for credit losses includes an analysis of qualitative factors that are added to the historical loss rates in arriving at the total allowance for credit losses needed for this general pool of loans. The qualitative factors include, but are not limited to, the following:

•
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 credit losses analysis and calculation.

- 32 -

 

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

 

 

 

September 30, 2023

 

 

 

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

 

$

126

 

 

$

-

 

 

$

598

 

 

$

1,093

 

 

$

1,564

 

Historical loss rate

 

 

1,540

 

 

 

650

 

 

 

2,662

 

 

 

198

 

 

 

1,012

 

Qualitative factors

 

 

341

 

 

 

222

 

 

 

1,794

 

 

 

582

 

 

 

465

 

Total

 

$

2,007

 

 

$

872

 

 

$

5,054

 

 

$

1,873

 

 

$

3,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

Other

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

and junior liens

 

 

consumer

 

 

Total

 

 

 

 

Specifically reserved

 

$

-

 

 

$

456

 

 

$

1,818

 

 

$

5,655

 

 

 

 

Historical loss rate

 

 

4

 

 

 

192

 

 

 

323

 

 

 

6,581

 

 

 

 

Qualitative factors

 

 

9

 

 

 

74

 

 

 

44

 

 

 

3,531

 

 

 

 

Total

 

$

13

 

 

$

722

 

 

$

2,185

 

 

$

15,767

 

 

 

 

 

 

 

December 31, 2022

 

 

 

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

 

$

91

 

 

$

-

 

 

$

346

 

 

$

2,957

 

 

$

1,285

 

Historical loss rate

 

 

5

 

 

 

-

 

 

 

(32

)

 

 

-

 

 

 

97

 

Qualitative factors

 

 

618

 

 

 

-

 

 

 

5,567

 

 

 

1,033

 

 

 

1,562

 

Total

 

$

714

 

 

$

-

 

 

$

5,881

 

 

$

3,990

 

 

$

2,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

Other

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

and junior liens

 

 

consumer

 

 

Unallocated

 

 

Total

 

Specifically reserved

 

$

-

 

 

$

114

 

 

$

-

 

 

$

-

 

 

$

4,793

 

Historical loss rate

 

 

-

 

 

 

321

 

 

 

708

 

 

 

-

 

 

 

1,099

 

Qualitative factors

 

 

3

 

 

 

306

 

 

 

338

 

 

 

-

 

 

 

9,427

 

Other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

3

 

 

$

741

 

 

$

1,046

 

 

$

-

 

 

$

15,319

 

 

Note 8: Foreclosed Real Estate

 

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

 

(In thousands)

 

Number of
properties

 

 

September 30,
2023

 

 

Number of properties

 

 

December 31,
2022

 

Foreclosed real estate

 

 

5

 

 

$

189

 

 

 

2

 

 

$

221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2023 and December 31, 2022, the Company reported $1.3 million and $542,000, respectively, in real estate loans in the process of foreclosure.

 

 

- 33 -

 

Note 9: Guarantees

 

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Generally, all letters of credit, when issued have expiration dates within one year. The credit risks involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had $1.8 million of standby letters of credit as of September 30, 2023. 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. No provision for credit losses have been made for these commitments. The fair value of standby letters of credit was not significant to the Company’s consolidated financial statements.

 

Note 10: Fair Value Measurements

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

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

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

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

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

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

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

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

The Company holds two corporate investment securities with an amortized historical cost of $4.1 million and an aggregate fair market value of $4.4 million as of September 30, 2023. These securities have an aggregate valuation that is determined using published net asset values (NAV) derived by an analysis of the securities’ underlying assets. These securities are comprised primarily of broadly-diversified real estate holdings and are traded in secondary markets on an infrequent basis. While these securities are redeemable at least annually through tender offers made by respective issuers, the liquidation value of these securities may be below stated NAVs and also subject to restrictions as to the amount that can be redeemed at any single scheduled redemption. The Company anticipates that these securities will be redeemed by respective issuers

- 34 -

 

on indeterminate future dates as a consequence of the ultimate liquidation strategies employed by the managers of these portfolios.

The Company held two private equity security investments, acquired in 2022, with an aggregate value of $3.0 million at September 30, 2023, valued utilizing the unit of account (NAV) which includes; financial metrics for the company, specific operating key performance indicators, and market-related inputs.

Interest rate derivatives: The fair value of the interest rate derivatives, characterized as either fair value or cash flow hedges, are calculated based on a discounted cash flow model. All future floating rate cash flows are projected and both floating rate and fixed rate cash flows are discounted to the valuation date. The benchmark interest rate curve utilized for projecting cash flows and applying appropriate discount rates 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 credit losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.

- 35 -

 

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:

 

 

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

Available-for-Sale Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

-

 

 

$

38,146

 

 

$

-

 

 

$

38,146

 

State and political subdivisions

 

 

-

 

 

 

29,143

 

 

 

-

 

 

 

29,143

 

Corporate

 

 

-

 

 

 

6,961

 

 

 

-

 

 

 

6,961

 

Asset backed securities

 

 

-

 

 

 

17,374

 

 

 

-

 

 

 

17,374

 

Residential mortgage-backed - US agency

 

 

-

 

 

 

20,352

 

 

 

-

 

 

 

20,352

 

Collateralized mortgage obligations - US agency

 

 

-

 

 

 

12,191

 

 

 

-

 

 

 

12,191

 

Collateralized mortgage obligations - Private label

 

 

-

 

 

 

78,029

 

 

 

-

 

 

 

78,029

 

Total

 

 

 

 

 

202,196

 

 

 

 

 

 

202,196

 

Equity investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock - financial services industry

 

 

206

 

 

 

-

 

 

 

-

 

 

 

206

 

Other Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate measured at NAV

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,446

 

Total available-for-sale securities

 

$

206

 

 

$

202,196

 

 

$

-

 

 

$

206,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities measured at NAV

 

$

-

 

 

$

-

 

 

$

-

 

 

$

3,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap derivative fair value hedges (unrealized gain carried as receivable from derivative counterparties)

 

$

-

 

 

$

12,516

 

 

$

-

 

 

$

12,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap derivative cash flow hedges (unrealized loss carried as payable to derivative counterparties)

 

$

-

 

 

$

909

 

 

$

-

 

 

$

909

 

- 36 -

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

Available-for-Sale Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

Debt investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury, agencies and GSEs

 

$

-

 

 

$

29,364

 

 

$

-

 

 

$

29,364

 

State and political subdivisions

 

 

-

 

 

 

45,385

 

 

 

-

 

 

 

45,385

 

Corporate

 

 

-

 

 

 

7,066

 

 

 

-

 

 

 

7,066

 

Asset backed securities

 

 

-

 

 

 

15,400

 

 

 

-

 

 

 

15,400

 

Residential mortgage-backed - US agency

 

 

-

 

 

 

16,400

 

 

 

-

 

 

 

16,400

 

Collateralized mortgage obligations - US agency

 

 

-

 

 

 

11,708

 

 

 

-

 

 

 

11,708

 

Collateralized mortgage obligations - Private label

 

 

-

 

 

 

61,434

 

 

 

-

 

 

 

61,434

 

Total

 

 

-

 

 

 

186,757

 

 

 

-

 

 

 

186,757

 

Equity investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock - financial services industry

 

 

206

 

 

 

-

 

 

 

-

 

 

 

206

 

Other Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate measured at NAV

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,763

 

Total available-for-sale securities

 

$

206

 

 

$

186,757

 

 

$

-

 

 

$

191,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable equity securities measured at NAV

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap derivative fair value hedges (unrealized gain carried as receivable from derivative counterparties)

 

$

-

 

 

$

9,717

 

 

$

-

 

 

$

9,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap derivative cash flow hedges (unrealized gain carried as receivable from derivative counterparties)

 

$

-

 

 

$

519

 

 

$

-

 

 

$

519

 

 

 

Pathfinder Bank had the following assets measured at fair value on a nonrecurring basis as of September 30, 2023 and December 31, 2022:

 

 

 

 

 

 

September 30, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

Impaired loans

 

$

-

 

 

$

-

 

 

$

7,225

 

 

$

7,225

 

Foreclosed real estate

 

$

-

 

 

$

-

 

 

$

189

 

 

$

189

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fair

 

(In thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

Impaired loans

 

$

-

 

 

$

-

 

 

$

2,328

 

 

$

2,328

 

Foreclosed real estate

 

$

-

 

 

$

-

 

 

$

221

 

 

$

221

 

 

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 September 30, 2023

 

 

 

Impaired loans

Appraisal of collateral

Discounted Cash Flow

12% - 50% (18%)

Foreclosed real estate

Appraisal of collateral

Costs to Sell

21% - 24% (22%)

 

 

- 37 -

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

Valuation

Unobservable

Range

 

Techniques

Input

(Weighted Avg.)

At December 31, 2022

 

 

 

Impaired loans

Appraisal of collateral

Discounted Cash Flow

5% - 35% (17%)

 

(Sales Approach)

Costs to Sell

7% - 14% (12%)

Foreclosed real estate

Appraisal of collateral

Appraisal Adjustments

15% - 15% (15%)

(Sales Approach)

Costs to Sell

6% - 9% (8%)

 

There have been no transfers of assets into or out of any fair value measurement level during the three or nine months ended September 30, 2023.

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

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

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

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

Under 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.

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.

- 38 -

 

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

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

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

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

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

 

 

 

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

Fair Value

 

Carrying

 

Estimated

 

 

Carrying

 

Estimated

 

(In thousands)

 

Hierarchy

 

Amounts

 

Fair Values

 

 

Amounts

 

Fair Values

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

1

 

$

24,474

 

$

24,474

 

 

$

35,282

 

$

35,282

 

Investment securities - available-for-sale

 

2

 

 

202,196

 

 

202,196

 

 

 

186,757

 

 

186,757

 

Investment securities - available-for-sale

 

NAV

 

 

4,446

 

 

4,446

 

 

 

4,763

 

 

4,763

 

Investment securities - marketable equity

 

NAV

 

 

3,013

 

 

3,013

 

 

 

1,862

 

 

1,862

 

Investment securities - held-to-maturity

 

2

 

 

185,589

 

 

170,575

 

 

 

194,402

 

 

181,491

 

Federal Home Loan Bank stock

 

2

 

 

5,824

 

 

5,824

 

 

 

5,982

 

 

5,982

 

Net loans

 

3

 

 

880,356

 

 

827,228

 

 

 

882,435

 

 

844,892

 

Accrued interest receivable

 

1

 

 

6,594

 

 

6,594

 

 

 

6,168

 

 

6,168

 

Interest rate swap derivative cash flow hedge receivable

 

2

 

 

909

 

 

909

 

 

 

519

 

 

519

 

Interest rate derivative fair value hedges receivable - AFS investments

 

2

 

 

6,709

 

 

6,709

 

 

 

8,240

 

 

8,240

 

Interest rate derivative fair value hedges receivable - loans

 

2

 

 

5,807

 

 

5,807

 

 

 

1,477

 

 

1,477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Demand Deposits, Savings, NOW and MMDA

 

1

 

$

632,262

 

$

632,262

 

 

$

699,624

 

$

699,624

 

Time Deposits

 

2

 

 

495,591

 

 

494,392

 

 

 

425,806

 

 

393,676

 

Borrowings

 

2

 

 

110,613

 

 

108,300

 

 

 

115,997

 

 

112,877

 

Subordinated debt

 

2

 

 

29,867

 

 

27,660

 

 

 

29,733

 

 

27,378

 

Accrued interest payable

 

1

 

 

1,731

 

 

1,731

 

 

 

975

 

 

975

 

 

Note 11: Interest Rate Derivatives

 

The Company is exposed to certain risks from both its business operations and changes in economic conditions. As part of managing interest rate risk, the Company enters into standardized interest rate derivative contracts (designated as hedging agreements) to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate hedging agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate hedging agreements are entered into with counterparties that meet the Company's established credit standards and the agreements contain master netting, collateral and/or settlement provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting,

- 39 -

 

collateral or settlement provisions, the Company believes that the credit risk inherent in these contracts was not material at September 30, 2023. Interest rate hedging agreements are recorded at fair value as other assets or liabilities. The Company had no material derivative contracts not designated as hedging agreements at September 30, 2023 or December 31, 2022.

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 changes 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. In a fair value hedge, the fair value of the derivative (the interest rate hedging agreement) and changes in the fair value of the hedged item are recorded in the Company’s consolidated balance sheet with the corresponding gain or loss recognized in current earnings. The difference between changes in the fair value of the interest rate hedging agreements and the hedged items represents hedge ineffectiveness and is recorded as an adjustment to the interest income or interest expense of the respective hedged item.

Cash flows related to floating rate assets and liabilities will fluctuate with changes in underlying rate indices. 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 instruments designated as a hedge. This strategy is referred to as a cash flow hedge. In a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the derivative’s gain or loss on cash flow hedges is accounted for similar to that associated with fair value hedges.

Among the array of interest rate hedging contracts, potentially available to the Company, are interest rate swap and interest rate cap (or floor) contracts. The Company uses interest rate swaps, cap or floor contracts as part of its interest rate risk management strategy. Interest rate swaps 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. An interest rate cap is a type of interest rate derivative in which the buyer receives payments at the end of each contractual period in which the index interest rate exceeds the contractually agreed upon strike price rate. The purchaser of a cap contract will continue to benefit from any rise in interest rates above the strike price. Similarly, an interest rate floor is a derivative contract in which the buyer receives payments at the end of each period in which the interest rate is below the agreed strike price. The purchaser of a floor contract will continue to benefit from any decrease in interest rates below the strike price.

 

 

- 40 -

 

The Company records various hedges in the consolidated statements of condition at fair value. The Company’s accounting treatment for these derivative instruments is based on the instruments hedge designation determined at the inception of each derivative instrument's contractual term. The following tables show the Company’s outstanding fair value hedges at September 30, 2023 and December 31, 2022:

 

(In thousands)

 

Carrying Amount of the Hedged Assets at
September 30, 2023

 

 

Cumulative Amount of Fair Value Hedging Gains Included in the Carrying Amount of the Hedged Assets at September 30, 2023

 

 

Carrying Amount of the Hedged Assets at
December 31, 2022

 

 

Cumulative Amount of Fair Value Hedging Gains Included in The Carrying Amount of the Hedged Assets at December 31, 2022

 

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

 

 

 

 

 

 

 

Available-for-sale securities (1)

 

$

53,940

 

 

$

6,709

 

 

$

68,741

 

 

$

8,240

 

Loans receivable (2)

 

$

124,322

 

 

$

5,807

 

 

$

37,196

 

 

$

1,477

 

 

(1)
These amounts represent the amortized cost basis of specifically-identified municipal and Government Sponsored Enterprise ("GSE") debt securities designated as the underlying assets for the hedging relationship. The notional amount of the designated hedged item was $53.9 million and $68.7 million at September 30, 2023 and December 31, 2022, respectively. The fair value of the derivative resulted in a net asset position of $6.7 million and $8.2 million recorded by the Company in other assets at September 30, 2023 and December 31, 2022, respectively.

 

(2)
These amounts include the amortized cost of a specific purchased consumer loan pool and a portion of the Bank's originated residential mortgage loan portfolio designated as the underlying assets for the hedging relationships in which the hedged item is the underlying asset's amortized cost (last layer) projected to be remaining at the end of the contractual term of the hedge instrument. The fair value hedge related to the residential mortgage pool had a notional value of $100 million when it was instituted on April 7, 2023 and had a notional value of $94.3 million at September 30, 2023. The amount of the designated hedged assets were $124.3 million and $37.2 million as of September 30, 2023 and December 31, 2022, respectively. At September 30, 2023, the fair value of the derivatives resulted in a net asset position of $5.8 million recorded by the Company in other assets.

 

The hedging contracts noted above, accounted for as fair value hedges, increased the yield on investment securities and loans by 0.27% and 0.23%, respectively, in the nine months ended September 30, 2023. The hedging contracts noted above, accounted for as fair value hedges, increased the yield on investment securities and loans by 0.01% and 0.01%, respectively, in the nine months ended September 30, 2022.

 

The following tables summarize the net effects of the Company's fair value and cash flow hedges for the nine months ended September 30, 2023 and September 30, 2022, respectively:

 

 

 

 

 

 

 

 

 

 

Fair Value Hedges

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2023

 

Hedge Category

Average Notional Balance

 

Period Ending Notional Balance

 

Net Cash Received (Paid) Recorded In Net Income

 

Fair Value Receivable (Payable) at Quarter End

 

Investments

$

53,756

 

$

52,120

 

$

1,513

 

$

6,709

 

 Loans

 

83,701

 

 

110,149

 

 

1,540

 

 

5,807

 

    Total

$

137,457

 

$

162,269

 

$

3,053

 

$

12,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2022

 

Hedge Category

Average Notional Balance

 

Ending Notional Balance

 

Net Cash Received (Paid) Recorded In Net Income

 

Fair Value Receivable (Payable) at Quarter End

 

Investments

$

61,659

 

$

66,845

 

$

69

 

$

8,707

 

Loans

 

20,700

 

 

20,700

 

 

62

 

 

1,103

 

    Total

$

82,359

 

$

87,545

 

$

131

 

$

9,810

 

 

- 41 -

 

Cash Flow Hedges

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2023

 

Hedge Category

Average Notional Balance

 

Ending Notional Balance

 

Net Cash Received (Paid) Recorded In Net Income

 

Fair Value Receivable (Payable) at Period End

 

Borrowed Funds

$

47,778

 

$

40,000

 

$

748

 

$

909

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2022

 

Hedge Category

Average Notional Balance

 

Ending Notional Balance

 

Net Cash Received (Paid) Recorded In Net Income

 

Fair Value Receivable (Payable) at Period End

 

Borrowed Funds

$

53,333

 

$

40,000

 

$

(94

)

$

699

 

 

 

The following table shows the pre-tax gains and losses of the Company’s derivatives designated as cash flow hedges in OCI at September 30, 2023 and December 31, 2022:

 

 (In thousands)

 

 

 

September 30, 2023

 

 

December 31, 2022

 

Cash flow hedges:

 

 

 

 

 

 

Fair market value adjustment interest rate swap

 

$

909

 

 

$

519

 

  Total gain in comprehensive income

 

$

909

 

 

$

519

 

 

The hedging contracts noted above, accounted for as cash flow hedges, decreased the interest expense associated with MMDA accounts by 0.41% in the nine months ended September 30, 2023 and increased the interest expense associated with MMDA accounts by 0.05% in the nine months ended September 30, 2022.

 

The amounts of hedge ineffectiveness, recognized at September 30, 2023 and December 31, 2022 for cash flow hedges were not material to the Company’s consolidated results of operations. A portion of, or the entire amount included in accumulated other comprehensive loss would be reclassified into current earnings should a portion of, or the entire hedge, no longer be considered effective. Management believes that the hedges will remain fully effective during the remaining term of the respective hedging contracts. The changes in the fair values of the interest rate hedging agreements primarily result from the effects of changing index interest rates and the reduction of the time each quarter between the measurement date and the contractual maturity date of the hedging instrument.

 

The Company manages its potential credit exposure on interest rate swap transactions by entering into bilateral credit support agreements with each contractual counterparty. These agreements require collateralization of credit exposures beyond specified minimum threshold amounts.

Note 12: Accumulated Other Comprehensive (Loss) Income

 

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

 

 

 

For the three months ended September 30, 2023

 

(In thousands)

 

Net Unrealized Loss on Retirement Plans

 

 

Unrealized Loss on Available-for-Sale Securities

 

 

Unrealized Gain on Derivatives and Hedging Activities

 

 

Unrealized Gain on Securities Transferred to Held-to-Maturity

 

 

Total

 

Beginning balance

 

$

(2,345

)

 

$

(9,495

)

 

$

470

 

 

$

-

 

 

$

(11,370

)

Other comprehensive (loss) income before reclassifications

 

 

-

 

 

 

(2,228

)

 

 

202

 

 

 

-

 

 

 

(2,026

)

Amounts reclassified from AOCI

 

 

41

 

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

40

 

Ending balance

 

$

(2,304

)

 

$

(11,724

)

 

$

672

 

 

$

-

 

 

$

(13,356

)

 

- 42 -

 

 

 

For the three months ended September 30, 2022

 

(In thousands)

 

Net Unrealized Loss on Retirement Plans

 

 

Unrealized Loss on Available-for-Sale Securities

 

 

Unrealized Gain on Derivatives and Hedging Activities

 

 

Unrealized Gain on Securities Transferred to Held-to-Maturity

 

 

Total

 

Beginning balance

 

$

(1,411

)

 

$

(8,421

)

 

$

431

 

 

$

2

 

 

$

(9,399

)

Other comprehensive (loss) income before reclassifications

 

 

-

 

 

 

(3,389

)

 

 

86

 

 

 

-

 

 

 

(3,303

)

Amounts reclassified from AOCI

 

 

1

 

 

 

136

 

 

 

-

 

 

 

-

 

 

 

137

 

Ending balance

 

$

(1,410

)

 

$

(11,674

)

 

$

517

 

 

$

2

 

 

$

(12,565

)

 

 

 

For the nine months ended September 30, 2023

 

(In thousands)

 

Net Unrealized Loss on Retirement Plans

 

 

Unrealized Loss on Available-for-Sale Securities

 

 

Unrealized Gain on Derivatives and Hedging Activities

 

 

Unrealized Gain on Securities Transferred to Held-to-Maturity

 

 

Total

 

Beginning balance

 

$

(2,427

)

 

$

(10,127

)

 

$

382

 

 

$

-

 

 

$

(12,172

)

Other comprehensive (loss) income before reclassifications

 

 

-

 

 

 

(3,023

)

 

 

290

 

 

 

-

 

 

 

(2,733

)

Amounts reclassified from AOCI

 

 

123

 

 

 

1,426

 

 

 

-

 

 

 

-

 

 

 

1,549

 

Ending balance

 

$

(2,304

)

 

$

(11,724

)

 

$

672

 

 

$

-

 

 

$

(13,356

)

 

 

 

For the nine months ended September 30, 2022

 

(In thousands)

 

Net Unrealized Loss on Retirement Plans

 

 

Unrealized Loss on Available-for-Sale Securities

 

 

Unrealized Gain on Derivatives and Hedging Activities

 

 

Unrealized Gain on Securities Transferred to Held-to-Maturity

 

 

Total

 

Beginning balance

 

$

(1,412

)

 

$

428

 

 

$

(286

)

 

$

2

 

 

$

(1,268

)

Other comprehensive (loss) income before reclassifications

 

 

-

 

 

 

(12,220

)

 

 

803

 

 

 

-

 

 

 

(11,417

)

Amounts reclassified from AOCI

 

 

2

 

 

 

118

 

 

 

-

 

 

 

-

 

 

 

120

 

Ending balance

 

$

(1,410

)

 

$

(11,674

)

 

$

517

 

 

$

2

 

 

$

(12,565

)

 

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 nine months ended

 

Details about AOCI (1) components

 

Affected Line Item in the Statement of Income

 

September 30, 2023

 

September 30, 2022

 

 

September 30, 2023

 

September 30, 2022

 

Retirement plan items

 

 

 

 

 

 

 

 

 

 

 

 

 

 Retirement plan net losses
   recognized in plan expenses  (2)

 

 Salaries and employee benefits

 

$

(56

)

 

$

(1

)

 

$

(167

)

$

(2

)

Tax effect

 

 Provision for income taxes

 

 

15

 

 

 

-

 

 

 

44

 

 

1

 

 

 

 Net (losses)

 

$

(41

)

 

$

(1

)

 

$

(123

)

$

(1

)

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gain (loss) on sale of securities

 

 Net gains on sales and redemptions
   of investment securities

 

$

1

 

 

$

(186

)

 

$

(1,932

)

$

(160

)

Tax effect

 

 Provision for income taxes

 

 

-

 

 

 

50

 

 

 

506

 

 

43

 

 

 

 Net income (losses)

 

$

1

 

 

$

(136

)

 

$

(1,426

)

$

(117

)

 

(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.

 

- 43 -

 

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 ended

 

 

For the nine months ended

 

(In thousands)

 

September 30, 2023

 

 

September 30, 2022

 

 

September 30, 2023

 

 

September 30, 2022

 

Service charges on deposit accounts

 

 

 

 

 

 

 

 

 

 

 

Insufficient funds fees

 

$

181

 

 

$

154

 

 

$

488

 

 

$

406

 

Deposit related fees

 

 

112

 

 

 

120

 

 

 

321

 

 

 

332

 

ATM fees

 

 

50

 

 

 

60

 

 

 

104

 

 

 

138

 

    Total service charges on deposit accounts

 

 

343

 

 

 

334

 

 

 

913

 

 

 

876

 

Fee Income

 

 

 

 

 

 

 

 

 

 

 

 

Insurance agency revenue

 

 

310

 

 

 

258

 

 

 

1,001

 

 

 

849

 

Investment services revenue

 

 

128

 

 

 

140

 

 

 

360

 

 

 

365

 

ATM fees surcharge

 

 

61

 

 

 

66

 

 

 

168

 

 

 

172

 

Banking house rents collected

 

 

54

 

 

 

70

 

 

 

150

 

 

 

172

 

    Total fee income

 

 

553

 

 

 

534

 

 

 

1,679

 

 

 

1,558

 

Card income

 

 

 

 

 

 

 

 

 

 

 

 

Debit card interchange fees

 

 

22

 

 

 

180

 

 

 

455

 

 

 

639

 

Merchant card fees

 

 

19

 

 

 

21

 

 

 

46

 

 

 

54

 

    Total card income

 

 

41

 

 

 

201

 

 

 

501

 

 

 

693

 

Mortgage fee income and realized gain on sale of loans
  and foreclosed real estate

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing fees

 

 

99

 

 

 

74

 

 

 

238

 

 

 

260

 

Net gains on sales of loans and foreclosed real estate

 

 

41

 

 

 

47

 

 

 

183

 

 

 

122

 

Total mortgage fee income and realized gain on sale of
   loans and foreclosed real estate

 

 

140

 

 

 

121

 

 

 

421

 

 

 

382

 

Total

 

 

1,077

 

 

 

1,190

 

 

 

3,514

 

 

 

3,509

 

Earnings and gain on bank owned life insurance

 

 

165

 

 

 

156

 

 

 

466

 

 

 

441

 

Net (losses) gains on sale and redemption of investment
   securities

 

 

(13

)

 

 

(198

)

 

 

60

 

 

 

(168

)

(Losses) gains on marketable equity securities

 

 

(39

)

 

 

-

 

 

 

(208

)

 

 

39

 

Other miscellaneous income

 

 

3

 

 

 

13

 

 

 

40

 

 

 

239

 

Total noninterest income

 

$

1,193

 

 

$

1,161

 

 

$

3,872

 

 

$

4,060

 

 

The following is a discussion of key revenues within the scope of ASC 606 guidance:

•
Service charges on deposit accounts – 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 and commercial mortgage loans, sales of one-to-four family residential mortgage loans, sales of government

- 44 -

 

guarantees portions of Small Business Administration loans (“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 2 years up to 29 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 components of lease expense are as follows:

 

 

 

For the three months ended

 

 

For the nine months ended

 

(In thousands)

 

September 30, 2023

 

 

September 30, 2022

 

 

September 30, 2023

 

 

September 30, 2022

 

Operating lease cost

 

$

53

 

 

$

57

 

 

$

170

 

 

$

170

 

Finance lease cost

 

 

56

 

 

 

21

 

 

 

167

 

 

 

62

 

 

Supplemental cash flow information related to leases was as follows:

 

 

 

For the three months ended

 

 

For the nine months ended

 

(In thousands)

 

September 30, 2023

 

 

September 30, 2022

 

 

September 30, 2023

 

 

September 30, 2022

 

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

 

 

 

 

 

 

 

     Operating cash flows from operating leases

 

$

48

 

 

$

53

 

 

$

156

 

 

$

158

 

     Operating cash flows from finance leases

 

 

56

 

 

 

21

 

 

 

167

 

 

 

62

 

     Financing cash flows from finance leases

 

 

31

 

 

 

19

 

 

 

93

 

 

 

55

 

 

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

 

 

 

 

 

(In thousands, except lease term and discount rate)

 

September 30, 2023

 

 

December 31, 2022

 

Operating Leases:

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

1,559

 

 

$

2,098

 

Operating lease liabilities

 

 

1,739

 

 

 

2,417

 

 

 

 

 

 

 

 

Finance Leases:

 

 

 

 

 

 

Finance lease right-of-use assets

 

$

4,108

 

 

$

4,213

 

Finance lease liability

 

 

4,391

 

 

 

4,422

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term:

 

 

 

 

 

 

Operating Leases

 

17.28 years

 

 

18.28 years

 

Finance Leases

 

27.60 years

 

 

28.35 years

 

 

 

 

 

 

 

 

Weighted Average Discount Rate:

 

 

 

 

 

 

Operating Leases

 

 

3.88

%

 

 

3.85

%

Finance Leases

 

 

9.40

%

 

 

9.41

%

 

- 45 -

 

Maturities of lease liabilities are as follows:

 

Twelve Months Ending September 30,

 

 

 

(In thousands)

 

 

 

2024

 

$

33

 

2025

 

 

164

 

2026

 

 

166

 

2027

 

 

168

 

2028

 

 

178

 

Thereafter

 

 

5,421

 

Total minimum lease payments

 

$

6,130

 

 

The Company owns certain properties that it leases to unaffiliated third parties at market rates. Lease rental income was $53,000 and $70,000 for the three months ended September 30, 2023 and 2022, respectively. Lease rental income was $149,000 and $172,000 for the nine months ended September 30, 2023 and 2022, respectively. The lease agreements in which the Company is the lessor are a mix of operating and finance leases.

 

Note 15: Related Party Transactions:

In the ordinary course of business, the Company has granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”). None of the related party loans were classified as nonaccrual, past due, restructured, or potential problem loans at September 30, 2023 or December 31, 2022.

The following represents the activity associated with loans to related parties during the nine months ended September 30, 2023 and the year ended December 31, 2022:

 

 

 

September 30,

 

 

December 31,

 

(In thousands)

 

 

2023

 

 

 

2022

 

Balance at the beginning of the year

 

$

32,531

 

 

$

22,427

 

Originations and related party additions

 

 

3,010

 

 

 

15,278

 

Principal payments and related party removals

 

 

(2,558

)

 

 

(5,174

)

Balance at the end of the period

 

$

32,983

 

 

$

32,531

 

 

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 (“FitzGibbons” or “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 a noncontrolling interest within the consolidated financial statements. At September 30, 2023, the Company and subsidiaries had total consolidated assets of $1.40 billion, total consolidated liabilities of $1.29 billion and shareholders' equity of $113.8 million, plus noncontrolling interest of $672,000, which represents the 49% of FitzGibbons not owned by the Company.

The following discussion reviews the Company's financial condition at September 30, 2023 and the results of operations for the three and nine month periods ended September 30, 2023 and 2022. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any other period.

- 46 -

 

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 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2023 (“the consolidated annual financial statements”) as of December 31, 2022 and 2021 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

 

Certain statements contained herein are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions, or future or conditional verbs, such as “will,” “would,” “should,” “could,” or “may.” These forward-looking statements are based on current beliefs and expectations of the Company’s and the Bank’s management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s and the Bank’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ materially from those set forth in the forward-looking statements as a result of numerous factors. Factors that could cause such differences to exist include, but are not limited to: risks related to the real estate and economic environment, particularly in the market areas in which the Company and the Bank operate; fiscal and monetary policies of the U.S. Government; inflation; changes in government regulations affecting financial institutions, including regulatory compliance costs and capital requirements; fluctuations in the adequacy of the allowance for credit losses; decreases in deposit levels necessitating increased borrowing to fund loans and investments; the effects of the COVID-19 pandemic; operational risks including, but not limited to, cybersecurity, fraud and natural disasters; the risk that the Company may not be successful in the implementation of its business strategy; changes in prevailing interest rates; credit risk management; asset-liability management; recent events involving the failure of financial institutions and the impact on the Company's business and the market price of its common stock; any future increase in FDIC insurance assessments or special assessments; and other risks described in the Company’s filings with the Securities and Exchange Commission, which are available at the SEC’s website, www.sec.gov.

The Company and the Bank caution prospective investors not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation to revise or update any forward-looking statements contained in this quarterly report on Form 10-Q to reflect future events or developments.

 

Application of Critical Accounting Estimates

The Company's consolidated quarterly 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 quarterly 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 quarterly

- 47 -

 

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 credit losses, deferred income taxes, pension obligations, the evaluation of investment securities for credit losses, 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.

In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard’s stated main goal is to improve financial reporting by requiring earlier recognition of credit losses on financing receivables (such as loans) and other financial assets in scope. The ASU requires entities to measure credit losses on most financial assets carried at amortized costs and certain other instruments using an expected credit loss model. Banks in the United States above $5.0 billion in assets generally adopted this new way of measuring loan losses called the “Current Expected Credit Loss” (“CECL”) model in 2020, with smaller public and private banks, such as Pathfinder, required to convert to this method in fiscal years beginning after December 15, 2022. The Company computed its Allowance for Loan Losses at December 31, 2022 using a methodology called the "Incurred Loss Model" ("ILM"), which remained applicable GAAP at that date. ILM (previous GAAP) assumes that all loans will be repaid until evidence to the contrary (known as a loss or trigger event) is identified. Only at that point is the impaired loan (or portfolio of loans) written down to a lower value. CECL requires that an estimate of loss for the entire life cycle of each asset with credit loss exposure be recorded at the funding date of that asset as a component of the reported Allowance for Credit Losses ("ACL").

The ACL represents management's estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for credit 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 environmental factors, all of which may be susceptible to significant change. The Company establishes a specific allowance for all commercial loans in excess of the total related credit threshold of $100,000 and single borrower residential mortgage loans in excess of the total related credit threshold of $300,000 identified as being impaired which are on nonaccrual and have been risk rated under the Company’s risk rating system as substandard, doubtful, or loss. In addition, an accruing substandard loan could be identified as being impaired.

 

Loan 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. The measurement of impaired loans is generally based upon the present value of future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral, less costs to sell. At September 30, 2023, the Bank’s position in impaired loans consisted of 73 loans totaling $22.8 million. Of these loans, 17 loans, totaling $1.7 million, were valued using the present value of future cash flows method; and 56 loans, totaling $21.1 million, were valued based on a collateral analysis. For all other loans, the Company uses the general allocation methodology that establishes an allowance to estimate the probable incurred loss for each risk-rating category.

 

In estimating the ACL on loans, management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from management’s estimate. At September 30, 2023, the Bank held $521.8 million in commercial real estate and commercial & industrial loans (collectively, commercial loans) representing 58.2% of the Bank’s entire loan portfolio. The Bank allocated $10.0 million to the ACL for these loans, including $2.9 million derived from the use of qualitative factors in the calculation. Given the concentration of ACL allocation to the total commercial loan portfolio and the significant judgments made by management in deriving the qualitative loss factors, management considers the impact that changes in judgments could have on the ACL. The ACL could increase (or decrease) by approximately $712,000, assuming a 25% negative (or positive) change within the group of qualitative factors used to determine the ACL for commercial loans. The sensitivity and related range of impacts for various judgments on the ACL is a hypothetical analysis and is used to determine management’s judgments or assumptions of qualitative loss factors that were utilized at September 30, 2023 in the final recorded estimation of the ACL on loans recognized on the Statements of Financial Condition.

 

- 48 -

 

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.

The Company’s effective tax rate typically differs from the 21% federal statutory tax rate due primarily to New York State income taxes, partially offset by 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. In addition, the tax effects of certain incentive stock option activity may reduce the Company’s effective tax rate on a sporadic basis.

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

When the fair value of a security categorized as available-for-sale ("AFS") or held-to-maturity ("HTM") is less than its amortized cost basis, an assessment is made as to whether or not credit loss is present. Management makes a quantitative determination of potential credit loss for all HTM securities even if the risk of credit loss is considered remote and uses a best estimate threshold for securities categorized as AFS. The Company considers numerous factors when determining whether a potential credit loss exists. The principal factors considered are (1) the financial condition of the issue and (guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (2) failure of the issuer of the security to make scheduled interest or principal payments, (3) any changes to the rating of the security by a nationally recognized statistical rating organization (“NRSRO”), and (4) the presence of contractual credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

The Company carries all of its AFS 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 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 portfolio, for both AFS and HTM securities for credit 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 insufficient to recover the entire amortized cost basis.

The estimation of fair value is significant to several of our assets; including AFS and marketable equity investment securities, intangible assets, foreclosed real estate, and the value of loan collateral when valuing 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 AFS 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 AFS securities 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

- 49 -

 

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, 2022 evaluation, management has determined that the carrying value of goodwill was not impaired as of that date. Management will continuously evaluate all relevant economic and operational factors potentially affecting the Bank or the fair value of its assets, including goodwill. Should the pandemic or recent banking crisis, or the future economic consequences thereof, require a significant and sustained change in the operations of the Bank, re-evaluations of the Bank’s goodwill valuation will be conducted on a more frequent basis.

 

Recent Events

On September 30, 2023, the Company announced that its Board of Directors declared a cash dividend of $0.09 per share on the Company's voting common and non-voting common stock, and a cash dividend of $0.09 per notional share for the issued warrant relating to the fiscal quarter ended September 30, 2023. The dividends were payable to all shareholders of record on October 20, 2023 and were paid on November 10, 2023.

Overview and Results of Operations

The following represents the significant highlights of the Company’s operating results between the third quarter of 2023 and the third quarter of 2022.

 

•
Net income attributable to Pathfinder Bancorp, Inc. decreased $1.0 million or 31.6% to $2.2 million.
•
Basic and diluted earnings per voting common share were both $0.35 per share and decreased $0.17 per share from $0.52 per share.
•
Return on average assets decreased 30 basis points to 0.63% due to a decrease in income and increase in average asset balances.
•
Net interest income, after provision for credit losses, decreased $843,000, or 8.4% to $9.2 million. Excluding the provision, net interest income decreased $720,000, or 6.7%, to $10.1 million. The decrease in net interest income, before provision for credit losses, was primarily due to an increase in the average balance of interest-bearing liabilities of $28.9 million, combined with a 183 basis points increase in the average rates paid on interest-bearing liabilities. These increases in interest expense were partially offset by the increase in the average balance of interest-earning assets of $14.4 million, coupled with an increase in the average yield earned on those assets of 126 basis points, from 4.13% for the three months ended September 30, 2022 to 5.39% for the three months ended September 30, 2023.
•
The increase in the provision for credit losses of $123,000 was primarily due to management's decision to downgrade certain commercial real estate and commercial loans within two large credit relationships.
•
The net interest margin for the third quarter of 2023 was 3.07%, a 25 basis points decrease compared to 3.32% for the same quarter in 2022. This reflects a 183 basis points increase in the average cost paid on interest-bearing liabilities, offset by a 126 basis points increase in the average yield earned on interest-earning assets.
•
The effective income tax rate increased 1.2% to 20.7% for the three months ended September 30, 2023 as compared to 19.5% for the same three month period in 2022. The increase in the tax rate in the third quarter of 2023, as compared to the same quarter in 2022, was primarily related to fluctuations in permanent tax differences.

The following represents the significant highlights of the Company’s operating results between the first nine months of 2023 and the first nine months of 2022.

 

•
Net income decreased $2.6 million, or 28.1%, to $6.8 million.
•
Basic and diluted earnings per voting common share were both $1.10 per share and decreased $0.45 per share from $1.55 per share
•
Return on average assets decreased 29 basis points to 0.65% due to a decrease in income and increase in average asset balances.
•
Net interest income, after provision for credit losses, decreased by $2.3 million, or 7.7%, to $27.1 million. Excluding the provision, net interest income decreased by $464,000, or 1.5%, to $29.8 million. The decrease in

- 50 -

 

net interest income, before provision for credit losses, was primarily due to the increase in total interest expense, partially offset by an increase in interest income.
•
Net interest margin decreased by 16 basis points to 3.02%, primarily as the result of a 165 basis points increase in the average cost of interest-bearing liabilities, offset by a 121 basis points increase in the average yield on interest-earning assets.
•
The effective income tax rate increased 1.3% to 20.6% for the nine months ended September 30, 2023 as compared to 19.3% for the same nine month period in 2022. The increase in the tax rate for the nine months ended September 30, 2023, as compared to the same period in 2022, was primarily related to fluctuations in permanent tax differences and the reversal of a deferred tax asset valuation allowance, during the nine months ended September 30, 2022.

The following reflects the significant changes in financial condition between September 30, 2023 and December 31, 2022. In addition, the following reflects significant changes in asset quality metrics between September 30, 2023 and September 30, 2022.

 

•
Total assets increased $728,000, or 0.05% to $1.40 billion at September 30, 2023 as compared to December 31, 2022, primarily driven by higher investment securities balances.
•
Asset quality metrics, as measured by net loan charge-offs, increased in comparison to the year prior reporting periods. The annualized net loan charge-offs to average loans ratio was 0.61% for the third quarter of 2023, compared to 0.03% for the third quarter of 2022, and 0.04% for the fourth quarter of 2022.
•
Nonperforming loans to total loans were 1.8% at September 30, 2023, compared to 1.2% at September 30, 2022 and 1.0% at December 31, 2022. Correspondingly, the ratio of the allowance for credit losses to nonperforming loans was 97.5% at September 30, 2023, as compared to 128.3% at September 30, 2022, and 169.9% at December 31, 2022.

 

The Company had net income of $2.2 million for the three months ended September 30, 2023 compared to net income of $3.2 million for the three months ended September 30, 2022. The $1.0 million decrease in net income was due primarily to a $5.0 million increase in total interest expense, a $123,000 increase in provision for credit losses, and a $386,000 increase in noninterest expense. These year-over-year changes were partially offset by a $4.3 million increase in interest and dividend income, a $199,000 decrease in provision for income taxes, and a $32,000 increase in total noninterest income.

 

Net interest income before the provision for credit losses decreased $720,000, or 6.7%, to $10.1 million for the three months ended September 30, 2023, as compared to $10.8 million for the same three month period in 2022. The decrease in net interest income was due to a 183 basis points increase in the average cost of total interest-bearing liabilities in the third quarter of 2023, as compared to the same quarter in 2022, combined with a $28.9 million increase in the average balance of total interest-bearing liabilities. The increase in the average rates paid on interest-bearing liabilities in the third quarter of 2023, as compared to the same quarter in 2022, reflects the generally increased rates of interest for all financial instruments that has occurred in 2023 due to the rising interest rate environment and increased competition for deposits.

 

These decreases in net interest income were partially offset by the result of increases in the average yields of loans and taxable and tax-exempt investment securities portfolios, combined with the increase in the average balance of the loan portfolio of $15.8 million. These increases resulted in a 126 basis points increase to 5.39% in total average interest-earning asset yield for the three months ended September 30, 2023 as compared to 4.13% for the same three month period of the previous year. The increase in the average yield received on interest-earning assets in the third quarter of 2023, as compared to the same quarter in 2022, reflects generally increased rates of interest for newly funded loans and investment securities, as compared to the average yields within these portfolios, as well as increases in coupon rates for certain adjustable-rate loans and securities in the rising interest rate environment that has occurred in 2022 and 2023. To some degree, these increases in the average yield on loans during 2023, were partially offset by reduced fee recognition related to PPP loans. PPP fee recognition revenues were nominal in the third quarter of 2023, as compared to $144,000 in the third quarter of the previous year.

 

The Company's noninterest income for the third quarter of 2023 amounted to $1.2 million, reflecting an increase of $32,000, compared to the same quarter of 2022. This modest increase was primarily attributable to a $185,000 increase in gains

- 51 -

 

(losses) on sales and redemptions of investment securities, a $52,000 increase in insurance agency revenue, and a $25,000 increase in loan servicing fees. These increases were largely offset by a $158,000 decrease in debit card interchange fees.

The decline in debit card income was due in part to the recognition of increased customer card rewards program redemption rates among the Bank’s active debit card users. During the third quarter of 2023, the Bank recognized a $73,000 nonrecurring reduction of debit card interchange income to increase its estimate of currently unused rewards that are likely to be redeemed by customers in future periods. This adjustment was made after a re-evaluation of recent customer reward program redemption patterns. Absent this one-time adjustment related to the rewards program, debit card interchange income would have declined by $85,000, or 47.2% for the three months ended September 30, 2023, compared to the same three month period in 2022. The $85,000 quarterly decline in debit card interchange income, not due to the one-time rewards program revenue adjustment, discussed above, was primarily due to changes in the number of debit card processor reporting cycles in the nine months ended September 30, 2023, as compared to the same nine month period in 2022, adjusted on a year-to-date basis in the third quarter of 2023. Debit card interchange income was also reduced by modest declines in consumer transactional deposit accounts and reduced consumer utilization of the Bank’s debit card offerings.

 

Total noninterest expense for the third quarter of 2023 was $7.7 million, an increase of $386,000, or 5.3%, compared to the same three month period in 2022. The increase was primarily a result of an increase of $225,000 in professional and other service expense, primarily the result of a $154,000 increase in third-party software service costs, related in part to the Company's continuing efforts to increase process automation, and a $61,000 increase in non-recurring consulting fees.

 

Management extensively reviews recent trends in changes in the size and composition of the loan portfolio, historical loss experience, qualitative factors, and specific reserve requirements on loans individually evaluated, in its determination of the adequacy of the allowance for credit losses. For the three months ended September 30, 2023, $833,000 was recorded in provision for credit losses as compared to $710,000 in the same prior year three month period. The primary driver of the increased provision expense in the third quarter of 2023, was management's decision to downgrade certain commercial real estate loans and commercial loans within two borrower relationships. These relationships are under active resolution management by the Company. Additionally, the provision in the quarter ended September 30, 2023 was reflective of the qualitative factors used in determining the adequacy of the allowance for credit losses and changes in the levels of delinquent and nonaccrual loans. The third quarter provision for credit losses reflects an addition to reserves considering loan growth and asset quality metrics. The credit-sensitive portfolios continue to be carefully monitored, and the Bank will consistently apply its loan classification and reserve building methodologies to the analysis of these portfolios.

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, requiring financial institutions, such as the Bank, to adopt the Current Expected Credit Loss (“CECL”) methodology according to a specified implementation timeline. In order to meet this requirement, the Bank adopted the CECL methodology for calculating its Allowance for Credit Losses (“ACL”) on January 1, 2023. The amended guidance replaces the previously-required Allowance for Loan and Lease Losses (“ALLL”) calculated under what was known as the Incurred Loss Model. The ACL represents a valuation account that is deducted from the amortized cost basis of includable financial assets to present their net carrying value at the amount expected to be collected over the entire life of those assets. The income statement now reflects the measurement of credit losses for newly recognized financial assets as well as expected increases, or decreases, of expected credit losses that have taken place during the reporting period. When determining the ACL, expected credit losses over the expected term of the financial asset will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amount. In addition, the amended guidance requires credit losses relating to assets such as held-to-maturity debt securities and open contractual funding commitments to be recorded through the ACL. Because the CECL methodology requires that reserves be established within the ACL for a broad range of financial assets, including all loans, through the entirety of their expected lives and also considers new items, such as open funding commitments, the initial ACL upon adoption would, in most cases, be expected to be greater than the ALLL that it replaced.

 

The transition to CECL also required that new reserves be created in the amounts of $450,000 and $552,000, related to held-to-maturity investments and unfunded commitments, respectively. Including the $1.9 million CECL transition adjustment related to loans, described above, the total CECL transition adjustment was $2.9 million on January 1, 2023, which was charged to retained earnings on that date.

- 52 -

 

 

The total PCL for the three and nine months ended September 30, 2023 was $833,000 and $2.7 million, respectively, of which $798,000 and $2.7 million related to the Company's loan portfolio for the three and nine months ended September 30, 2023, respectively. The ACL related to loans was therefore $15.8 million at September 30, 2023. In addition, during the third quarter of 2023, the Company recorded modest PCL charges of $5,000 and $30,000 for reserves related to held-to-maturity securities and unfunded commitments, respectively.

In comparing the year-over-year third quarter periods, the Company’s return on average assets decreased 30 basis points to 0.63% due to the combined effects of the decrease in net income (the numerator in the ratio), and an increase in average assets (the denominator in the ratio). Average assets increased mostly due to an increase of $15.8 million in the balances of average loans in the third quarter of 2023, as compared to the same quarter of 2022.

 

The Company had net income of $6.8 million for the nine months ended September 30, 2023 compared to net income of $9.4 million for the nine months ended September 30, 2022. The $2.7 million decrease in net income was due primarily to a $13.7 million increase in total interest expense, a $1.8 million increase in the provision for credit losses, a $686,000 increase in total noninterest expense, and a $188,000 decrease in total noninterest income. These decreases were partially offset by a $13.3 million increase in interest and dividend income, and a $501,000 decrease in provision for income tax.

 

Net interest income before the provision for credit losses decreased $464,000 to $29.8 million for the nine months ended September 30, 2023, as compared to $30.2 million for the same nine month period in 2022. Interest expense increased $13.7 million to $19.6 million for the nine months ended September 30, 2023 as compared to the prior year period. The average interest rate paid on interest-bearing liabilities increased by 165 basis points for the nine months ended September 30, 2023 as compared to the prior year period, and average interest-bearing liabilities increased by $60.7 million, or 6.0%. Offsetting the increase in interest expense was an increase in average loans for the first nine months of 2023 which grew by $37.7 million, or 4.4%, due to increased loan originations over the prior year period, while the average interest yield earned on average loans increased by 91 basis points, resulting in an increase of $7.4 million in interest income on loans for the nine months ended September 30, 2023 as compared to the prior year period. Income from investment securities increased $5.7 million to $14.2 million for the nine months ended September 30, 2023, as compared to the same prior year period.

 

Noninterest income decreased $188,000 for the nine months ended September 30, 2023, when compared to the same nine month period in 2022. This decrease was primarily due to a $247,000 loss on marketable equity securities, and a $184,000 decrease in debit card interchange fees, partially offset by a $60,000 gain on sales and redemption of investment securities in the current nine months as compared to a $168,000 loss in the prior nine month period, and a $152,000 increase in insurance agency revenue. The decline in debit card income was due in part to the recognition of increased customer card rewards program redemption rates among the Bank’s active debit card users. During the third quarter of 2023, the Bank recognized a $73,000 nonrecurring reduction of debit card interchange income to increase its estimate of currently unused rewards that are likely to be redeemed by customers in future periods. This adjustment was made after a re-evaluation of recent customer reward program redemption patterns. Absent this one-time adjustment related to the rewards program, debit card interchange income would have declined $111,000, or 17.4%, for the nine months ended September 30, 2023 compared to the same nine month period in 2022.

 

Total noninterest expense for the first nine month period of 2023 was $22.4 million, an increase of $686,000, or 3.2%, compared with $21.7 million for the prior year period. The increase was primarily a result of an increase in professional and other services of $419,000, higher salaries and employee benefits expense of $213,000, and an increase in building and occupancy of $208,000.

 

The increase in professional and other services of $419,000 in the first nine months of 2023, as compared to the same period in 2022, was primarily the result of a $282,000 increase in third-party software service costs, related in part to the Company's continuing efforts to increase process automation, a $113,000 increase in non-recurring legal fees, and a $50,000 increase in non-recurring consulting fees. The increase of $213,000 in salaries for the nine months ended September 30, 2023, as compared to the same prior nine month period, was primarily due to increases in individual salaries, enacted early in 2023, as well as modest additions to staff headcount. The Company increased its salary structure where deemed appropriate in order to effectively respond to inflationary and competitive pressures within our marketplace to recruit and retain talent.

- 53 -

 

The increase in building and occupancy of $208,000 for the nine months ended September 30, 2023, when compared to the same prior year period, was primarily due to the addition of the Bank's eleventh full-service branch in November 2022.

 

For the first nine months of 2023, the Bank recorded $2.7 million in provision for credit losses as compared to $871,000 in the same prior year nine month period. The provision was reflective of (1) the qualitative factors used in determining the adequacy of the allowance for credit losses, (2) the size of the loan portfolio, and (3) delinquent and nonaccrual loans. The increase in the provision for credit losses in the first nine months of 2023, as compared to the same period in 2022, was primarily related to the downgrade of two commercial real estate and commercial loan relationships, as compared to the same period in the previous year. The credit sensitive portfolios continue to be carefully monitored. Please refer to the asset quality section below for a further discussion of asset quality as it relates to the allowance for credit losses.

 

Return on average assets decreased 29 basis points to 0.65% between the year-over-year nine month periods as there was a decrease in net income in the nine month period ended September 30, 2023 (the numerator of the ratio) while the rate of average assets (the denominator of the ratio) grew during the period. Average assets increased due to increases in loans of $37.7 million and investment securities of $16.6 million in the nine month period ended September 30, 2023 as compared to the same period of 2022.

Net Interest Income

Net interest income is the Company's primary source of operating income for payment of operating expenses and providing for credit 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.

- 54 -

 

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 have 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 PPP loan fees income of $3,000 and $688,000 for the nine month periods ended September 30, 2023 and September 30, 2022, respectively. The decrease in loan fees for the year over year periods was primarily due to the decrease in PPP loan fee income. Nonaccrual loans have been included in interest-earning assets for purposes of these calculations.

 

 

 

(Unaudited)

 

 

 

For the three months ended September 30,

 

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

Average

 

 Unaudited

 

Average

 

 

 

 

 

Yield /

 

 

Average

 

 

 

 

 

Yield /

 

(In thousands)

 

Balance

 

 

Interest

 

 

Cost

 

 

Balance

 

 

Interest

 

 

Cost

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

895,900

 

 

$

12,470

 

 

 

5.57

%

 

$

880,097

 

 

$

9,895

 

 

 

4.50

%

Taxable investment securities

 

 

376,455

 

 

 

4,628

 

 

 

4.92

%

 

 

363,877

 

 

 

3,108

 

 

 

3.42

%

Tax-exempt investment securities

 

 

27,831

 

 

 

507

 

 

 

7.29

%

 

 

42,855

 

 

 

351

 

 

 

3.28

%

Fed funds sold and interest-earning deposits

 

 

11,395

 

 

 

66

 

 

 

2.32

%

 

 

10,383

 

 

 

29

 

 

 

1.12

%

Total interest-earning assets

 

 

1,311,581

 

 

 

17,671

 

 

 

5.39

%

 

 

1,297,212

 

 

 

13,383

 

 

 

4.13

%

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

102,738

 

 

 

 

 

 

 

 

 

90,482

 

 

 

 

 

 

 

Allowance for credit losses

 

 

(19,028

)

 

 

 

 

 

 

 

 

(13,050

)

 

 

 

 

 

 

Net unrealized losses
   on available-for-sale securities

 

 

(13,275

)

 

 

 

 

 

 

 

 

(10,983

)

 

 

 

 

 

 

Total assets

 

$

1,382,016

 

 

 

 

 

 

 

 

$

1,363,661

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

90,992

 

 

$

124

 

 

 

0.55

%

 

$

101,907

 

 

$

85

 

 

 

0.33

%

Money management accounts

 

 

14,503

 

 

 

4

 

 

 

0.11

%

 

 

16,097

 

 

 

4

 

 

 

0.10

%

MMDA accounts

 

 

218,601

 

 

 

1,642

 

 

 

3.00

%

 

 

244,884

 

 

 

427

 

 

 

0.70

%

Savings and club accounts

 

 

121,710

 

 

 

68

 

 

 

0.22

%

 

 

140,425

 

 

 

52

 

 

 

0.15

%

Time deposits

 

 

493,907

 

 

 

4,385

 

 

 

3.55

%

 

 

440,227

 

 

 

1,339

 

 

 

1.22

%

Subordinated debt

 

 

29,837

 

 

 

492

 

 

 

6.60

%

 

 

29,655

 

 

 

442

 

 

 

5.96

%

Borrowings

 

 

110,780

 

 

 

896

 

 

 

3.24

%

 

 

78,232

 

 

 

254

 

 

 

1.30

%

Total interest-bearing liabilities

 

 

1,080,330

 

 

 

7,611

 

 

 

2.82

%

 

 

1,051,427

 

 

 

2,603

 

 

 

0.99

%

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

169,825

 

 

 

 

 

 

 

 

 

189,317

 

 

 

 

 

 

 

Other liabilities

 

 

15,768

 

 

 

 

 

 

 

 

 

12,248

 

 

 

 

 

 

 

Total liabilities

 

 

1,265,923

 

 

 

 

 

 

 

 

 

1,252,992

 

 

 

 

 

 

 

Shareholders' equity

 

 

116,093

 

 

 

 

 

 

 

 

 

110,669

 

 

 

 

 

 

 

Total liabilities & shareholders' equity

 

$

1,382,016

 

 

 

 

 

 

 

 

$

1,363,661

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

10,060

 

 

 

 

 

 

 

 

$

10,780

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

 

 

2.57

%

 

 

 

 

 

 

 

 

3.14

%

Net interest margin

 

 

 

 

 

 

 

 

3.07

%

 

 

 

 

 

 

 

 

3.32

%

Ratio of average interest-earning assets
   to average interest-bearing liabilities

 

 

 

 

 

 

 

 

121.41

%

 

 

 

 

 

 

 

 

123.38

%

 

- 55 -

 

 

 

For the nine months ended September 30,

 

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

Average

 

 Unaudited

 

Average

 

 

 

 

 

Yield /

 

 

Average

 

 

 

 

 

Yield /

 

(In thousands)

 

Balance

 

 

Interest

 

 

Cost

 

 

Balance

 

 

Interest

 

 

Cost

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

900,917

 

 

$

34,919

 

 

 

5.17

%

 

$

863,191

 

 

$

27,561

 

 

 

4.26

%

Taxable investment securities

 

 

371,615

 

 

 

12,749

 

 

 

4.57

%

 

 

348,499

 

 

 

7,850

 

 

 

3.00

%

Tax-exempt investment securities

 

 

31,077

 

 

 

1,441

 

 

 

6.18

%

 

 

37,593

 

 

 

612

 

 

 

2.17

%

Fed funds sold and interest-earning deposits

 

 

11,750

 

 

 

226

 

 

 

2.56

%

 

 

19,950

 

 

 

48

 

 

 

0.32

%

Total interest-earning assets

 

 

1,315,359

 

 

 

49,335

 

 

 

5.00

%

 

 

1,269,233

 

 

 

36,071

 

 

 

3.79

%

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

99,431

 

 

 

 

 

 

 

 

 

85,652

 

 

 

 

 

 

 

Allowance for credit losses

 

 

(18,043

)

 

 

 

 

 

 

 

 

(13,040

)

 

 

 

 

 

 

Net unrealized losses
   on available-for-sale securities

 

 

(12,919

)

 

 

 

 

 

 

 

 

(7,230

)

 

 

 

 

 

 

Total assets

 

$

1,383,828

 

 

 

 

 

 

 

 

$

1,334,615

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

94,116

 

 

$

315

 

 

 

0.45

%

 

$

104,874

 

 

$

234

 

 

 

0.30

%

Money management accounts

 

 

14,651

 

 

 

12

 

 

 

0.11

%

 

 

16,212

 

 

 

12

 

 

 

0.10

%

MMDA accounts

 

 

241,550

 

 

 

4,539

 

 

 

2.51

%

 

 

255,933

 

 

 

985

 

 

 

0.51

%

Savings and club accounts

 

 

127,490

 

 

 

199

 

 

 

0.21

%

 

 

139,798

 

 

 

150

 

 

 

0.14

%

Time deposits

 

 

472,614

 

 

 

10,820

 

 

 

3.05

%

 

 

401,297

 

 

 

2,625

 

 

 

0.87

%

Subordinated debt

 

 

29,793

 

 

 

1,447

 

 

 

6.48

%

 

 

29,617

 

 

 

1,284

 

 

 

5.78

%

Borrowings

 

 

99,029

 

 

 

2,243

 

 

 

3.02

%

 

 

70,833

 

 

 

557

 

 

 

1.05

%

Total interest-bearing liabilities

 

 

1,079,243

 

 

 

19,575

 

 

 

2.42

%

 

 

1,018,564

 

 

 

5,847

 

 

 

0.77

%

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

174,143

 

 

 

 

 

 

 

 

 

194,220

 

 

 

 

 

 

 

Other liabilities

 

 

16,100

 

 

 

 

 

 

 

 

 

11,808

 

 

 

 

 

 

 

Total liabilities

 

 

1,269,486

 

 

 

 

 

 

 

 

 

1,224,592

 

 

 

 

 

 

 

Shareholders' equity

 

 

114,342

 

 

 

 

 

 

 

 

 

110,023

 

 

 

 

 

 

 

Total liabilities & shareholders' equity

 

$

1,383,828

 

 

 

 

 

 

 

 

$

1,334,615

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

29,760

 

 

 

 

 

 

 

 

$

30,224

 

 

 

 

Net interest rate spread

 

 

 

 

 

 

 

 

2.58

%

 

 

 

 

 

 

 

 

3.02

%

Net interest margin

 

 

 

 

 

 

 

 

3.02

%

 

 

 

 

 

 

 

 

3.18

%

Ratio of average interest-earning assets
   to average interest-bearing liabilities

 

 

 

 

 

 

 

 

121.88

%

 

 

 

 

 

 

 

 

124.61

%

 

In the third quarter of 2023, net interest income, before provision for credit losses, for the Company decreased by $720,000 or 6.7%, to $10.1 million compared to $10.8 million for the same quarter in 2022. This decrease was due principally to a 183 basis points increase on the average cost of interest-bearing liabilities, partially offset by an increase of 126 basis points in the average yield of interest-earning assets. Net interest income was positively impacted by an increase in the average balance of interest-earning assets of $14.4 million, or 1.1%. The positive effect of this increase on the average balance of interest-earning assets was offset by an increase of $28.9 million, or 2.8%, in average interest-bearing liabilities. In total, net interest margin decreased 25 basis points to 3.07% for the three months ended September 30, 2023 as compared to the same prior year period.

 

Interest and dividend income increased by $4.3 million, or 32.0%, to $17.7 million for the three months ended September 30, 2023 compared to $13.4 million for the same three month period in 2022. The increase in interest and dividend income between comparable quarters was a result of a $2.6 million increase in loan interest income, and a $1.6 million increase in interest income derived from investment securities. The positive effect on interest income was the result of a 107 basis points increase in the average loan yield, accompanied by a $15.8 million increase in the average outstanding balance of loans and a 168 basis points increase in the average yield on investment securities, accompanied by a $2.4 million increase in the average outstanding balance of investment securities. The increase in the average yield received on interest-earning assets in the third quarter of 2023, as compared to the same quarter in 2022, reflects generally increased rates of interest for newly funded loans and investment securities, as compared to the average yields within these portfolios, as well as increases in coupon rates for certain adjustable-rate loans and securities in the rising interest rate environment that has occurred in 2022 and 2023. These increases in the average yield on loans during 2023 were partially offset by reduced fee recognition related to PPP loans. PPP fee recognition revenues were $1,000 for the three months ended September 30, 2023, as compared to $144,000 for the same three month period of the previous year.

- 56 -

 

 

Interest expense for the three months ended September 30, 2023 increased by $5.0 million to $7.6 million when compared to the same prior year period due primarily to an increase in interest expense on time deposits and the Company's short-term and long-term borrowings. Interest expense increased due to a 183 basis points increase in the average rates paid on interest-bearing liabilities between the two periods, accompanied by an increase in the average outstanding balance of those liabilities of $28.9 million. The increase in the quarterly interest expense was primarily a result of the increase in cost of deposits resulting from the rapidly rising interest rate environment and increased competition. The deposit mix included a $53.7 million increase in average time deposit balances, an increase of $32.5 million in the Company's average borrowings, partially offset by a decrease of $3.8 million in the average balance of all other types of interest-bearing deposits.

 

In the nine month period ended September 30, 2023, net interest income before provision for credit losses slightly decreased by $464,000, or 1.5%, to $29.8 million compared to the same nine month period in 2022. This downtrend was primarily attributable to the increase in interest expense of $19.6 million, marking a 235% increase from the corresponding period in 2022. These increases were the result of general increases in short-term rates that have occurred in persistent upward increments since the first quarter of 2022.

 

The Company's interest and dividend income increased to $49.3 million, a 36.8%, or $13.3 million increase from $36.0 million during the same nine months in 2022. The average yield of interest earning assets increased 121 basis points primarily due to the rising interest rate environment. The change in interest and dividend income for the first nine months of 2023 was mainly from an increase in interest generated from loans totaling $34.9 million, up $7.4 million from $27.5 million in the same nine months of 2022. In addition to the increase in interest generated from loans in the nine month period ended September 30, 2023, there was a $5.7 million increase in interest earned on investment securities totaling $14.2 million, up from $8.5 million during the same period in 2022. The average balance of all interest-earning assets for the nine month period ended September 30, 2023 was $1.32 billion, an increase of $46.1 million from $1.27 billion, primarily due to loan growth, in the same nine month period in 2022.

 

The increase in interest and dividend income was offset by an increase of $13.7 million in interest expense on the Company's interest-bearing liabilities reaching $19.6 million in the nine month period ended September 30, 2023, up from $5.9 million in the same period in 2022. There was an increase in the average balance of the Company's interest-bearing liabilities in the first nine months of 2023 totaling $1.08 billion, up $60.7 million from the same nine month period in 2022. This upward change in interest-bearing liabilities was primarily due to an increase of $71.3 million in average time deposits and a $1.7 million increase in expense on the Company's average borrowings in the first nine months of 2023 compared to the same nine months in 2022. The increase in average time deposits for the nine month period ended September 30, 2023 compared to the same nine months in 2022 was partially offset by the decrease of all other average interest-bearing deposits of $39.0 million in the first nine months of 2023. The 165 basis points increase in the Company's average cost of interest-bearing liabilities for the nine month period ended September 30, 2023 exemplified the effect rising interest rates have on this competitive deposit market.

 

The resultant net interest margin for the first nine months of 2023 was 3.02%, a 16 basis points decrease compared to a net interest margin of 3.18% in the first nine months of 2022.

 

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

- 57 -

 

or decrease. Changes attributable to both rate and volume have been allocated ratably. Tax-exempt securities have not been adjusted for tax equivalency.

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2023 vs. 2022

 

 

2023 vs. 2022

 

 

 

Increase/(Decrease) Due to

 

 

Increase/(Decrease) Due to

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Total

 

 Unaudited

 

 

 

 

 

 

 

Increase

 

 

 

 

 

 

 

 

Increase

 

(In thousands)

 

Volume

 

 

Rate

 

 

(Decrease)

 

 

Volume

 

 

Rate

 

 

(Decrease)

 

Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

181

 

 

$

2,394

 

 

$

2,575

 

 

$

1,248

 

 

$

6,110

 

 

$

7,358

 

Taxable investment securities

 

 

111

 

 

 

1,409

 

 

 

1,520

 

 

 

551

 

 

 

4,348

 

 

 

4,899

 

Tax-exempt investment securities

 

 

(731

)

 

 

887

 

 

 

156

 

 

 

(188

)

 

 

1,017

 

 

 

829

 

Interest-earning deposits

 

 

3

 

 

 

34

 

 

 

37

 

 

 

(40

)

 

 

218

 

 

 

178

 

Total interest income

 

 

(436

)

 

 

4,724

 

 

 

4,288

 

 

 

1,571

 

 

 

11,693

 

 

 

13,264

 

Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

 

(57

)

 

 

96

 

 

 

39

 

 

 

(39

)

 

 

120

 

 

 

81

 

Money management accounts

 

 

(2

)

 

 

2

 

 

 

-

 

 

 

(2

)

 

 

2

 

 

 

-

 

MMDA accounts

 

 

(317

)

 

 

1,532

 

 

 

1,215

 

 

 

(95

)

 

 

3,649

 

 

 

3,554

 

Savings and club accounts

 

 

(41

)

 

 

57

 

 

 

16

 

 

 

(22

)

 

 

71

 

 

 

49

 

Time deposits

 

 

182

 

 

 

2,864

 

 

 

3,046

 

 

 

544

 

 

 

7,651

 

 

 

8,195

 

Subordinated debt

 

 

3

 

 

 

47

 

 

 

50

 

 

 

8

 

 

 

155

 

 

 

163

 

Borrowings

 

 

140

 

 

 

502

 

 

 

642

 

 

 

295

 

 

 

1,391

 

 

 

1,686

 

Total interest expense

 

 

(92

)

 

 

5,100

 

 

 

5,008

 

 

 

689

 

 

 

13,039

 

 

 

13,728

 

Net change in net interest income

 

$

(344

)

 

$

(376

)

 

$

(720

)

 

$

882

 

 

$

(1,346

)

 

$

(464

)

 

- 58 -

 

Provision for Credit Losses

We establish a provision for credit losses, which is charged to operations, at a level management believes is appropriate to absorb expected credit losses in the loan portfolio. In evaluating the level of the allowance for credit 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 credit losses represents management’s estimate of the amount necessary to maintain the allowance for credit losses at an adequate level.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, requiring financial institutions, such as the Bank, to adopt the Current Expected Credit Loss (“CECL”) methodology according to a specified implementation timeline. In order to meet this requirement, the Bank adopted the CECL methodology for calculating its Allowance for Credit Losses (“ACL”) on January 1, 2023. The amended guidance replaces the previously-required Allowance for Loan and Lease Losses (“ALLL”) calculated under what was known as the Incurred Loss Model. The ACL represents a valuation account that is deducted from the amortized cost basis of includable financial assets to present their net carrying value at the amount expected to be collected over the entire life of those assets. The income statement now reflects the measurement of credit losses for newly recognized financial assets as well as expected increases, or decreases, of expected credit losses that have taken place during the reporting period. When determining the ACL, expected credit losses over the expected term of the financial asset will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amount. In addition, the amended guidance requires credit losses relating to assets such as held-to-maturity debt securities and open contractual funding commitments to be recorded through the ACL. Because the CECL methodology requires that reserves be established within the ACL for a broad range of financial assets, including all loans, through the entirety of their expected lives and also considers new items, such as open funding commitments, the initial ACL upon adoption would, in most cases, be expected to be greater than the ALLL that it replaced.

The Company recorded $833,000 in provision for credit losses for the three month period ended September 30, 2023, as compared to $710,000 for the three month period ended September 30, 2022. The provisioning in the third quarter of 2023 and 2022 reflects management’s determination of the appropriate level of additions to reserves, the composition of the loan portfolio, changes in quantifiable econometric data statistically correlated to historical charge-off rates, subjective qualitative assessments of changes in a broad array of factors including changes to underwriting criteria, loan staffing and local market conditions. The $88,000 increase in provision for credit losses in the third quarter of 2023, as compared to the same period in 2022, primarily reflected management's decision to downgrade certain loans within two specifically-identified commercial real estate and commercial loan credit relationships with an aggregate outstanding balance of $11.5 million. The Bank's credit sensitive portfolios continue to be carefully monitored, and the Bank will consistently apply its loan classification and reserve building methodologies to the analysis of these portfolios. Please refer to the asset quality section below for a further discussion of asset quality as it relates to the allowance for credit losses.

 

There was an increase in the provision for credit losses in the first nine months of 2023 to $2.7 million, an increase of $1.8 million from the same nine months in 2022, which was $871,000. The Bank has two large credit relationships that are experiencing deterioration and are the primary impact of this provision, mitigating potential risk. The Lending Department, along with highly experienced specialists, are carefully managing these commercial relationships to the best possible outcome. We are currently working with the borrowers associated with these credit relationships on individual loan repayment plans and the liquidation of loan collateral, where appropriate.

 

The transition to CECL also required that new reserves be created in the amounts of $450,000 and $552,000, related to held-to-maturity investments and unfunded commitments, respectively. Including the $1.9 million CECL transition adjustment related to loans, described above, the total CECL transition adjustment was $2.9 million on January 1, 2023, which was charged to retained earnings on that date.

 

The total PCL for the three and nine months ended September 30, 2023 was $833,000 and $710,000, respectively, of which $798,000 and $710,000 related to the Company's loan portfolio for the three and nine months ended September 30, 2023,

- 59 -

 

respectively. The ACL related to loans was therefore $15.8 million at September 30, 2023. In addition, during the third quarter of 2023, the Company recorded modest PCL charges of $5,000 and $30,000 for reserves related to held-to-maturity securities and unfunded commitments, respectively.

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 3.2% at September 30, 2023 as compared to 2.9% at December 31, 2022. Delinquent loans (numerator) increased $2.7 million while total loan balances (denominator) decreased $2.3 million at September 30, 2023, as compared to December 31, 2022. The increase in past due loans was driven by a $7.3 million increase in loans delinquent 90 days and over past due at September 30, 2023, offset by a decrease of $4.6 million in loans delinquent 30-59 days, and a decrease of $68,000 in loans delinquent 60-89 days, offset by a as compared to December 31, 2022. The increase of $2.7 million primarily consisted of increases in commercial real estate, commercial lines of credit and commercial loans.

 

At September 30, 2023, there were $28.7 million in loans past due including $8.5 million in loans 30-59 days past due, $4.1 million in loans 60-89 days past due and $16.1 million in loans 90 or more days past due. At December 31, 2022, there were $26.0 million in loans past due including $13.0 million in loans 30-59 days past due, $4.3 million in loans 60-89 days past due and $8.7 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:

Unaudited

 

For the three months ended

 

 

For the nine months ended

 

(In thousands)

 

September 30, 2023

 

 

September 30, 2022

 

 

Change

 

 

September 30, 2023

 

 

September 30, 2022

 

 

Change

 

Service charges on deposit accounts

 

$

343

 

 

$

334

 

 

$

9

 

 

 

2.7

%

 

$

913

 

 

$

876

 

 

$

37

 

 

 

4.2

%

Earnings and gain on bank owned life insurance

 

 

165

 

 

 

156

 

 

 

9

 

 

 

5.8

%

 

 

466

 

 

 

441

 

 

 

25

 

 

 

5.7

%

Loan servicing fees

 

 

99

 

 

 

74

 

 

 

25

 

 

 

33.8

%

 

 

238

 

 

 

260

 

 

 

(22

)

 

 

-8.5

%

Debit card interchange fees

 

 

22

 

 

 

180

 

 

 

(158

)

 

 

-87.8

%

 

 

455

 

 

 

639

 

 

 

(184

)

 

 

-28.8

%

Insurance agency revenue

 

 

310

 

 

 

258

 

 

 

52

 

 

 

20.2

%

 

 

1,001

 

 

 

849

 

 

 

152

 

 

 

17.9

%

Other charges, commissions and fees

 

 

265

 

 

 

310

 

 

 

(45

)

 

 

-14.5

%

 

 

764

 

 

 

1,002

 

 

 

(238

)

 

 

-23.8

%

Noninterest income before gains

 

 

1,204

 

 

 

1,312

 

 

 

(108

)

 

 

-8.2

%

 

 

3,837

 

 

 

4,067

 

 

 

(230

)

 

 

-5.7

%

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

 

 

28

 

 

 

(151

)

 

 

179

 

 

 

-118.5

%

 

 

243

 

 

 

(46

)

 

 

289

 

 

 

-628.3

%

(Losses) gains on marketable equity securities

 

 

(39

)

 

 

-

 

 

 

(39

)

 

 

0.0

%

 

 

(208

)

 

 

39

 

 

 

(247

)

 

 

-633.3

%

Total noninterest income

 

$

1,193

 

 

$

1,161

 

 

$

32

 

 

 

2.8

%

 

$

3,872

 

 

$

4,060

 

 

$

(188

)

 

 

-4.6

%

 

Third quarter noninterest income was $1.2 million, an increase of $32,000, or 2.8% compared to the same three month period in 2022. For the nine months ended September 30, 2023, noninterest income was $3.9 million, a decrease of $188,000, or 4.6%, compared to the same nine month period in 2022.

 

This modest increase for the third quarter of 2023 as compared to the prior year period was primarily attributable to a $185,000 increase in gains (losses) on sales and redemptions of investment securities, a $52,000 increase in insurance agency revenue, and a $25,000 increase in loan servicing fees. These increases were largely offset by a $158,000 decrease in debit card interchange fees. Noninterest income decreased $188,000 for the nine months ended September 30, 2023, when compared to the same nine month period in 2022. This decrease was primarily due to a $247,000 loss on marketable equity securities, and a $184,000 decrease in debit card interchange fees, partially offset by a $60,000 gain on sales and redemption of investment securities in the current nine months as compared to a $168,000 loss in the prior nine month period, and a $152,000 increase in insurance agency revenue.

- 60 -

 

The decline in debit card income was due in part to the recognition of increased customer card rewards program redemption rates among the Bank’s active debit card users. During the third quarter of 2023, the Bank recognized a $73,000 nonrecurring reduction of debit card interchange income to increase its estimate of currently unused rewards that are likely to be redeemed by customers in future periods. This adjustment was made after a re-evaluation of recent customer reward program redemption patterns. Absent this one-time adjustment related to the rewards program, debit card interchange income would have declined by $85,000, or 47.2%, and $111,000, or 17.4%, for the three and nine months ended September 30, 2023, respectively, compared to the same three and nine month periods in 2022. The $85,000 quarterly decline in debit card interchange income, not due to the one-time rewards program revenue adjustment, discussed above, was primarily due to changes in the number of debit card processor reporting cycles in the nine months ended September 30, 2023, as compared to the same nine month period in 2022, adjusted on a year-to-date basis in the third quarter of 2023. Debit card interchange income was also reduced by modest declines in consumer transactional deposit accounts and reduced consumer utilization of the Bank’s debit card offerings.

Noninterest Expense

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

Unaudited

 

For the three months ended

 

 

For the nine months ended

 

(In thousands)

 

September 30, 2023

 

 

September 30, 2022

 

 

Change

 

 

September 30, 2023

 

 

September 30, 2022

 

 

Change

 

Salaries and employee benefits

 

$

4,154

 

 

$

4,196

 

 

$

(42

)

 

 

-1.0

%

 

$

12,243

 

 

$

12,030

 

 

$

213

 

 

 

1.8

%

Building and occupancy

 

 

868

 

 

 

835

 

 

 

33

 

 

 

4.0

%

 

 

2,699

 

 

 

2,491

 

 

 

208

 

 

 

8.4

%

Data processing

 

 

483

 

 

 

485

 

 

 

(2

)

 

 

-0.4

%

 

 

1,519

 

 

 

1,552

 

 

 

(33

)

 

 

-2.1

%

Professional and other services

 

 

492

 

 

 

267

 

 

 

225

 

 

 

84.3

%

 

 

1,531

 

 

 

1,112

 

 

 

419

 

 

 

37.7

%

Advertising

 

 

144

 

 

 

199

 

 

 

(55

)

 

 

-27.6

%

 

 

516

 

 

 

621

 

 

 

(105

)

 

 

-16.9

%

FDIC assessments

 

 

222

 

 

 

162

 

 

 

60

 

 

 

37.0

%

 

 

663

 

 

 

606

 

 

 

57

 

 

 

9.4

%

Audits and exams

 

 

159

 

 

 

141

 

 

 

18

 

 

 

12.8

%

 

 

476

 

 

 

424

 

 

 

52

 

 

 

12.3

%

Insurance agency expense

 

 

273

 

 

 

229

 

 

 

44

 

 

 

19.2

%

 

 

817

 

 

 

687

 

 

 

130

 

 

 

18.9

%

Community service activities

 

 

55

 

 

 

58

 

 

 

(3

)

 

 

-5.2

%

 

 

151

 

 

 

193

 

 

 

(42

)

 

 

-21.8

%

Foreclosed real estate expenses

 

 

44

 

 

 

17

 

 

 

27

 

 

 

158.8

%

 

 

76

 

 

 

57

 

 

 

19

 

 

 

33.3

%

Other expenses

 

 

759

 

 

 

678

 

 

 

81

 

 

 

11.9

%

 

 

1,660

 

 

 

1,892

 

 

 

(232

)

 

 

-12.3

%

Total noninterest expenses

 

$

7,653

 

 

$

7,267

 

 

$

386

 

 

 

5.3

%

 

$

22,351

 

 

$

21,665

 

 

$

686

 

 

 

3.2

%

 

Total noninterest expense for the third quarter of 2023 was $7.7 million, an increase of $386,000, or 5.3%, compared to the same three month period in 2022. This increase in noninterest expenses was attributable to several factors, including the persistent inflation rate. Additionally, our strategic opening of the Bank's eleventh full-service branch in November 2022, contributed to this quarterly year-over-year increase.

The primary driver of this year-over-year quarterly increase in noninterest expenses was an increase of $225,000 or 84.3%, in professional and other services expense. Absent that increase, noninterest expenses increased $161,000, or 2.3%, in the quarter ended September 30, 2023, as compared to the same quarter in 2022. The increase in professional and other services expense was primarily the result of a $154,000 increase in third-party software service costs, related in part to the Company's continuing efforts to increase process automation, and a $61,000 increase in non-recurring consulting fees.

In the nine months ended September 30, 2023, the Company reported noninterest expenses totaling $22.4 million, which marked an increase of $686,000, or 3.2%, in comparison to the same period in 2022. The primary driver of this year-over-year nine month increase in noninterest expenses was an increase of $419,000 or 37.7%, in professional and other services expense. Absent that increase, noninterest expenses increased $267,000, or 1.3%, in the nine months ended September 30, 2023, as compared to the same nine month period in 2022. This increase in professional and other services expense in the nine months ended September 30, 2023, as compared to the same nine month period in 2022, was primarily the result of a $282,000 increase in third-party software service costs, related in part to the Company's continuing efforts to increase process automation, a $113,000 increase in non-recurring legal fees, and a $50,000 increase in non-recurring consulting fees.

The moderate increase in noninterest expenses in the first nine months of 2023, when contrasted with the corresponding period in 2022, underscores the Company's robust expense management strategies. These practices have proven effective,

- 61 -

 

even in the face of a fluctuating economic landscape marked by inflationary pressures, particularly within the labor market. Our unwavering commitment to striking a balance between competitive employee compensation and prudent expense management has enabled us to navigate the challenges of rising labor costs. Our strategic financial approach prioritizes both sustained profitability and investment in our workforce, thereby enhancing customer service and strengthening our position in the market.

There were also noteworthy changes in building and occupancy costs for the three and nine month periods ended September 30, 2023. During the third quarter of 2023, these costs increased by $33,000, representing a 4.0% rise, reaching a total of $868,000. Over the first nine months of 2023, we observed a more substantial increase of $208,000, or 8.4%, to $2.7 million. These increases were primarily driven by expenses related to the opening of our newest full-service branch and secondarily related to increases in general maintenance and other costs associated with operating facilities due to general inflationary factors.

 

Income Tax Expense

 

Income tax expense decreased $199,000 to $573,000, with an effective tax rate of 20.7%, for the quarter ended September 30, 2023, as compared to $772,000 with an effective tax rate of 19.5% for the same three month period in 2022. The decrease in income tax expense for the quarter ended September 30, 2023, as compared to the same quarter in 2022, was primarily driven by a decrease of $1.2 million in income before taxes. The effective income tax rate increased 1.2% to 20.7% for the three months ended September 30, 2023 as compared to 19.5% for the same three month period in 2022. The increase in the tax rate in the third quarter of 2023, as compared to the same quarter in 2022, was primarily related to fluctuations in permanent tax differences.

 

Income tax expense decreased $501,000 to $1.8 million, with an effective tax rate of 20.6%, for the nine months ended September 30, 2023, as compared to $2.3 million with an effective tax rate of 19.3%, for the same nine month period in 2022. The decrease in income tax expense for the nine months ended September 30, 2023, as compared to the same nine month period in 2022, was primarily driven by the year-over-year decrease in income before taxes. The effective income tax rate increased 1.3% to 20.6% for the nine months ended September 30, 2023 as compared to 19.3% for the same nine month period in 2022. The increase in the tax rate for the nine months ended September 30, 2023, as compared to the same period in 2022, was primarily related to fluctuations in permanent tax differences and the reversal of a deferred tax asset valuation allowance during the nine months ended September 30, 2022.

 

The Company’s tax liability is a function of the 21% statutory federal tax rate, the level of pretax income, the varying effects of New York State income taxes, and is partially reduced by 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. In addition, the tax effects of certain incentive stock option activity may reduce the Company’s effective tax rate on a sporadic basis.

 

Earnings per Share

Basic and diluted earnings per Voting and Series A Non-Voting share were $0.35 per share for the third quarter of 2023, as compared to $0.52 per basic and diluted Voting and Series A Non-Voting share for the same quarter of 2022. Basic and diluted earnings per Voting and Series A Non-Voting share were $1.10 for the nine month period ended September 30, 2023, as compared to $1.55 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 slightly increased $728,000, or 0.05%, to $1.40 billion at September 30, 2023 as compared to December 31, 2022. This increase was due primarily to increases in investment securities.

- 62 -

 

Loans totaled $896.1 million at September 30, 2023, a decrease of $1.6 million, or 0.18%, compared to $897.7 million at December 31, 2022. This was primarily due to decreases of $10.9 million in total consumer loans, and $7.7 million in total residential mortgage loans, offset by increases of $16.3 million in commercial loans. Investment securities, including investment in FHLB-NY stock, increased $7.3 million, or 1.9%, to $401.3 million at September 30, 2023, as compared to $394.0 million at December 31, 2022. This was due to an increase of $15.1 million in available-for-sale securities, and an increase of $1.2 million in marketable equity securities. The increase was offset by a decrease of $8.8 million in held-to-maturity securities, and a decrease of $158,000 in FHLB-NY stock

 

Liabilities

 

Total liabilities decreased $2.1 million, or 0.17%, to $1.29 billion at September 30, 2023 as compared to December 31, 2022. This decrease was due primarily to a decrease in borrowed funds balances from the FHLB-NY of $5.4 million, or 4.6%, to $110.6 million at September 30, 2023, from $116.0 million at December 31, 2022.

 

These decreases were slightly offset by a $2.4 million, or 0.22% increase in total deposits to $1.13 billion at September 30, 2023, as compared to December 31, 2022. This includes an increase of $11.4 million, or 1.2%, in interest-bearing deposits, offset by a decrease of $9.0 million, or 4.9%, in noninterest-bearing deposits.

 

Shareholders’ Equity

Shareholders' equity increased by $2.8 million, or 2.5%, from $111.0 million at December 31, 2022, to $113.8 million on September 30, 2023. This increase was primarily due to the Company’s recorded net income of $6.8 million, partially reduced by declared dividends to shareholders of $1.7 million.

Additionally, on January 1, 2023, the Company adopted the CECL methodology for computing its ACL and related provision for credit losses. This adoption resulted in the recognition of a one-time transitional adjustment that reduced the Company’s retained earnings by $2.1 million on that date. In total therefore, retained earnings increased by $3.0 million in the nine months ended September 30, 2023. Shareholders' equity was also affected due to an increase in accumulated other comprehensive loss of $1.2 million, offset primarily by an increase in all other components of shareholders' equity totaling $997,000.

 

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 September 30, 2023, 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. At September 30, 2023, the Bank exceeded all regulatory required minimum capital ratios, including the capital buffer requirements.

- 63 -

 

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

 

Actual

 

 

Minimum For
Capital Adequacy
Purposes

 

 

Minimum To Be
"Well-Capitalized"
Under Prompt
Corrective Provisions

 

 

Minimum For
Capital Adequacy
with Buffer

 

(In thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of September 30, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Core Capital (to Risk-Weighted Assets)

 

$

153,004

 

 

 

14.76

%

 

$

82,916

 

 

 

8.00

%

 

$

103,645

 

 

 

10.00

%

 

$

108,828

 

 

 

10.50

%

Tier 1 Capital (to Risk-Weighted Assets)

 

$

140,002

 

 

 

13.51

%

 

$

62,187

 

 

 

6.00

%

 

$

82,916

 

 

 

8.00

%

 

$

88,099

 

 

 

8.50

%

Tier 1 Common Equity (to Risk-Weighted Assets)

 

$

140,002

 

 

 

13.51

%

 

$

46,640

 

 

 

4.50

%

 

$

67,370

 

 

 

6.50

%

 

$

72,552

 

 

 

7.00

%

Tier 1 Capital (to Assets)

 

$

140,002

 

 

 

10.11

%

 

$

55,379

 

 

 

4.00

%

 

$

69,224

 

 

 

5.00

%

 

$

69,224

 

 

 

5.00

%

As of December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Core Capital (to Risk-Weighted Assets)

 

$

145,760

 

 

 

15.14

%

 

$

77,029

 

 

 

8.00

%

 

$

96,286

 

 

 

10.00

%

 

$

101,100

 

 

 

10.50

%

Tier 1 Capital (to Risk-Weighted Assets)

 

$

133,683

 

 

 

13.88

%

 

$

57,772

 

 

 

6.00

%

 

$

77,029

 

 

 

8.00

%

 

$

81,843

 

 

 

8.50

%

Tier 1 Common Equity (to Risk-Weighted Assets)

 

$

133,683

 

 

 

13.88

%

 

$

43,329

 

 

 

4.50

%

 

$

62,586

 

 

 

6.50

%

 

$

67,400

 

 

 

7.00

%

Tier 1 Capital (to Assets)

 

$

133,683

 

 

 

9.67

%

 

$

55,314

 

 

 

4.00

%

 

$

69,142

 

 

 

5.00

%

 

$

69,142

 

 

 

5.00

%

 

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.

 

- 64 -

 

 

September 30,

 

 

December 31,

 

 

(In thousands)

2023

 

 

2022

 

 

Regulatory Capital Ratios (Bank only)

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 Total equity (GAAP)

$

131,270

 

 

$

126,148

 

 

 Goodwill

 

(4,536

)

 

 

(4,536

)

 

 Intangible assets

 

(88

)

 

 

(101

)

 

 Addback: Accumulated other comprehensive income

 

13,356

 

 

 

12,172

 

 

       Total Tier 1 Capital

$

140,002

 

 

$

133,683

 

 

  Allowance for credit losses (subject to regulatory limits)

 

13,002

 

 

 

12,076

 

 

       Total Tier 2 Capital

$

13,002

 

 

$

12,076

 

 

       Total Tier 1 plus Tier 2 Capital (numerator)

$

153,004

 

 

$

145,759

 

 

 Risk-weighted assets (denominator)

 

1,036,454

 

 

 

962,861

 

 

      Total core capital to risk-weighted assets

 

14.76

 

%

 

15.14

 

%

 

 

 

 

 

 

 

 Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 Total Tier 1 capital (numerator)

$

140,002

 

 

$

133,683

 

 

 Risk-weighted assets (denominator)

 

1,036,454

 

 

 

962,861

 

 

      Total capital to risk-weighted assets

 

13.51

 

%

 

13.88

 

%

 

 

 

 

 

 

 

 Tier 1 capital (to adjusted assets)

 

 

 

 

 

 

 Total Tier 1 capital (numerator)

$

140,002

 

 

$

133,683

 

 

 Total average assets

 

1,389,099

 

 

 

1,387,480

 

 

 Goodwill

 

(4,536

)

 

 

(4,536

)

 

 Intangible assets

 

(88

)

 

 

(101

)

 

 Adjusted assets (denominator)

$

1,384,475

 

 

$

1,382,843

 

 

      Total capital to adjusted assets

 

10.11

 

%

 

9.67

 

%

 

 

 

 

 

 

 

 Tier 1 Common Equity (to risk-weighted assets)

 

 

 

 

 

 

 Total Tier 1 capital (numerator)

$

140,002

 

 

$

133,683

 

 

 Risk-weighted assets (denominator)

 

1,036,454

 

 

 

962,861

 

 

      Total Tier 1 Common Equity to risk-weighted assets

 

13.51

 

%

 

13.88

 

%

 

Loan and Asset Quality and Allowance for Credit Losses

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

 

 

September 30,

 

 

December 31,

 

 

September 30,

 

(In thousands)

 

2023

 

 

2022

 

 

2022

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

 

Commercial and commercial real estate loans

 

$

11,643

 

 

$

5,720

 

 

$

8,201

 

Consumer

 

 

2,871

 

 

 

2,183

 

 

 

1,576

 

Residential mortgage loans

 

 

1,659

 

 

 

1,112

 

 

 

848

 

Total nonaccrual loans

 

 

16,173

 

 

 

9,015

 

 

 

10,625

 

Total nonperforming loans

 

 

16,173

 

 

 

9,015

 

 

 

10,625

 

Foreclosed real estate

 

 

189

 

 

 

221

 

 

 

221

 

Total nonperforming assets

 

$

16,362

 

 

$

9,236

 

 

$

10,846

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans

 

 

1.80

%

 

 

1.00

%

 

 

1.22

%

Nonperforming assets to total assets

 

 

1.17

%

 

 

0.66

%

 

 

0.78

%

 

Nonperforming assets include nonaccrual loans, including nonaccrual loans classified as troubled debt restructurings (“TDRs”) prior to January 1, 2023, 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 at September 30, 2023, December 31, 2022 and September 30, 2022.

 

As indicated in the table above, nonperforming assets at September 30, 2023 were $16.4 million, and were $7.1 million higher than the $9.2 million reported at December 31, 2022 and $5.5 million higher than the reported $10.8 million at

- 65 -

 

September 30, 2022. The increase in the nonperforming loan portfolio on September 30, 2023, as compared to December 31, 2022, was primarily the result of the placement of $11.5 million into nonaccrual status of certain loans within two large commercial real estate loan and commercial loan relationships. These relationships are under active resolution management at September 30, 2023.

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 credit 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 credit losses on loans 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 credit losses was $15.8 million and $15.3 million at September 30, 2023 and December 31, 2022, respectively. The ratio of the allowance for credit losses to total loans was 1.8% as of September 30, 2023, as compared to 1.7% at December 31, 2022 and 1.6% at September 30, 2022. Management performs a quarterly evaluation of the allowance for credit losses based on quantitative and qualitative factors and has determined that the current level of the allowance for credit losses is adequate to absorb the losses in the loan portfolio as of September 30, 2023.

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 September 30, 2023 and December 31, 2022, the Company had $22.7 million and $20.2 million in loans, respectively, which were deemed to be impaired, having established specific reserves of $3.5 million and $4.8 million, respectively, on these loans. The $2.5 million increase in impaired loans between these two dates was primarily the result of the placement into nonaccrual status of loans within two large commercial loan and commercial real estate borrower relationships.

 

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 $43.1 million at September 30, 2023, an increase of $4.5 million, or 11.7%, as compared to $38.6 million at December 31, 2022. 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 sells residential mortgage loans and has infrequently sold participation interests in commercial loans. As is typical in the industry, the Bank makes certain representations and warranties to the buyers of these loans or loan participations. The Bank maintains a quality control program for closed loans and considers the risks and uncertainties associated with potential repurchase requirements to be minimal.

- 66 -

 

The future performance of the Company’s loan portfolios with respect to credit losses will be highly dependent upon the course and duration, both nationally and within the Company’s market area, of the concentrations in the Company’s loan portfolio. Concentrations of loans within a portfolio that are made to a single borrower, to a related group of borrowers, or to a limited number of industries, are generally considered to be additional risk factors in estimating future credit losses. Therefore, the Company monitors all of its credit relationships to ensure that the total loan amounts extended to one borrower, or to a related group of borrowers, does not exceed the maximum permissible levels defined by applicable regulation or the Company’s generally more restrictive internal policy limits.

 

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 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 nine months of 2023, as indicated in the consolidated statement of cash flows, the Company reported net cash flow from operating activities of $7.0 million and net cash inflow of $13.9 million related to investing activities. The net cash flow from investing activities was generated principally by a $11.5 million increase in net investment activity, a $736,000 increase in net loan activity and an increase of $1.7 million in all other investing activities in aggregate. The Company reported net cash outflows from financing activities of $3.9 million, primarily due to a $4.8 million decrease in net borrowings, a $2.4 million increase in deposits, and an aggregate decrease of $1.5 million in net cash from all other financing sources, including dividends paid to common voting and non-voting shareholders and warrants of $1.7 million.

The Bank’s management monitors liquidity on a continuous basis through a broad range of internal programs and considers effective liquidity management to be one of its primary objectives. At September 30, 2023 the Bank had deposits of $1.13 billion, of which $307.8 million were nominally uninsured, as they were above the insurance limits established by the Federal Deposit Insurance Corporation (“FDIC”) on that date. Of the $307.8 million in nominally uninsured deposits at September 30, 2023, $62.1 million were insured through a long-standing reciprocal deposit program managed by a third-party entity. In addition, $80.3 million in municipal deposits are fully protected against principal loss by a collateral program whereby the Bank places high-quality securities with an independent custodian as collateral. Therefore, the Bank had $165.4 million in deposits, representing 15.0% of all deposits, that were considered to be uninsured at September 30, 2023.

The Company has a number of existing credit facilities available to it. At September 30, 2023, total credit available under the existing lines of credit was approximately $189.3 million at FHLBNY, the Federal Reserve Bank, and two other correspondent banks. At September 30, 2023, the Company had $110.6 million of the available lines of credit utilized on its existing lines of credit with the remainder of $78.7 million available.

In an effort to increase depositor confidence across the United States' banking system, the Federal Reserve Board, pursuant to section 13(3) of the Federal Reserve Act, authorized all 12 Reserve Banks to establish the Bank Term Funding Program ("BTFP") to make available additional funding to eligible depository institutions, such as the Bank, in order to help assure those institutions have the ability to meet the liquidity needs of all their depositors. The Bank is fully qualified for the BTFP at September 30, 2023 and the BTFP is an additional potential source of liquidity for the Bank until the date of the Program's termination. The BTFP may be accessed by the Bank if management determines that there is a potential or realized

- 67 -

 

short-term liquidity requirement for which this facility should be used to support the Bank's operations. Management could also electively choose to use the facility in certain other circumstances to create other financial or operational benefits at the time that the BTFP line is accessed.

 

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 September 30, 2023, 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 September 30, 2023, the Company had $203.3 million in outstanding commitments to extend credit and standby letters of credit.

 

The Company's exposure to credit loss in the event of nonperformance related to off-balance sheet arrangements is proportional to the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless such commitments are unconditionally cancelable, through the provision for credit losses expense. The allowance for credit losses on off-balance sheet credit exposures as of September 30, 2023 was $576,000 and is included in other liabilities on the Company's consolidated Statements of Condition.

 

 

- 68 -

 

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 our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) (the Company’s principal executive officer and principal financial officer), management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2023. The term “disclosure controls and procedures,” under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures as of September 30, 2023, our CEO and CFO concluded that our disclosure controls and procedures were effective as of that date.

 

As disclosed elsewhere within this document, during the first quarter of 2023 the Company adopted ASU 2016-13 and consequently, the CECL model for accounting for credit losses related to financial assets. The adoption of the model and the ongoing calculations under CECL involve significant complexity and management has engaged expert independent third parties to complete significant portions of the transition to CECL and to manage the ongoing processes involved in CECL calculations, documentation and reporting. In many cases, our disclosure controls and procedures have been modified significantly to accommodate the requirements of the CECL model and those controls require increased reliance on the services and expertise provided by the engaged independent parties. Management believes that these new disclosure controls are currently effective, and will be effective in the future, with respect to the calculation of the Company's allowance for credit losses. Other than the adoption of the CECL model, there were no changes made in our internal controls during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

- 69 -

 

PART II – OTHER INFORMATION

 

 

At September 30, 2023, 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, and Issuer Purchases of Equity Securities

 

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

 

July 1, 2023 through July 31, 2023

 

 

-

 

 

$

-

 

 

 

-

 

 

 

74,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

August 1, 2023 through August 31, 2023

 

 

-

 

 

$

-

 

 

 

-

 

 

 

74,292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 1, 2023 through September 30, 2023

 

 

-

 

 

$

-

 

 

 

-

 

 

 

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 Inline Extensible Business Reporting Language (iXBRL): (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.

104

Cover Page Interactive Data File (embedded within the Inline XBRL document).

 

- 70 -

 

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)

 

November 14, 2023

/s/ James A. Dowd

 

 

James A. Dowd

 

 

President and Chief Executive Officer

 

 

 

 

November 14, 2023

 /s/ Walter F. Rusnak

 

 

Walter F. Rusnak

 

 

Senior Vice President, Chief Financial Officer

 

 

 

- 71 -

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