Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the transition period from _______ to _______
(Exact Name of Company as Specified in its Charter)
Maryland
(State of Other Jurisdiction of Incorporation)
001-36695
(Commission File No.)
38-3941859
(I.R.S. Employer Identification No.)
214 West First Street, Oswego, NY 13126
(Address of Principal Executive Office) (Zip Code)
(315) 343-0057
(Issuer's Telephone Number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
PBHC
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
As of August 13, 2021, there were 4,562,301 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.
PATHFINDER BANCORP, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1.
Consolidated Financial Statements (Unaudited)
3
Consolidated Statements of Condition
Consolidated Statements of Income
4
Consolidated Statements of Comprehensive Income
5
Consolidated Statements of Changes in Shareholders' Equity
6
Consolidated Statements of Cash Flows
8
Notes to Consolidated Financial Statements
10
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)
56
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
84
Item 4.
Controls and Procedures
PART II - OTHER INFORMATION
Legal Proceedings
86
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities
Mine Safety Disclosures
Item 5.
Other information
Item 6.
Exhibits
SIGNATURES
87
Item 1 – Consolidated Financial Statements
Pathfinder Bancorp, Inc.
(Unaudited)
June 30,
December 31,
(In thousands, except share and per share data)
2021
2020
ASSETS:
Cash and due from banks (including restricted balances of $1,600 and $1,600, respectively)
$
13,006
14,906
Interest-earning deposits (including restricted balances of $0 and $0, respectively)
28,148
28,558
Total cash and cash equivalents
41,154
43,464
Available-for-sale securities, at fair value
157,559
128,261
Held-to-maturity securities, at amortized cost (fair value of $165,997 and $174,935, respectively)
162,432
171,224
Marketable equity securities, at fair value
2,133
1,850
Federal Home Loan Bank stock, at cost
4,487
4,390
Loans
834,239
823,969
Loans held-for-sale
713
1,526
Less: Allowance for loan losses
14,603
12,777
Loans receivable, net
820,349
812,718
Premises and equipment, net
22,195
22,264
Operating lease right-of-use assets
2,172
2,240
Accrued interest receivable
4,539
4,549
Intangible assets, net
125
133
Goodwill
4,536
Bank owned life insurance
23,117
17,864
Other assets
14,893
13,950
Total assets
1,259,691
1,227,443
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing
848,010
833,850
Noninterest-bearing
183,660
162,057
Total deposits
1,031,670
995,907
Short-term borrowings
2,000
4,020
Long-term borrowings
81,734
78,030
Subordinated loans
29,482
39,400
Accrued interest payable
145
193
Operating lease liabilities
2,467
2,525
Other liabilities
8,661
9,646
Total liabilities
1,156,159
1,129,721
Shareholders' equity:
Preferred stock, par value $0.01 per share; no liquidation preference; 10,000,000 shares
authorized; 0 and 1,380,283 shares issued and outstanding, respectively
-
14
Voting common stock, par value $0.01; 25,000,000 authorized shares; 4,562,301 and 4,531,383 shares
issued and outstanding, respectively
45
Non-Voting common stock, par value $0.01; 1,505,283 authorized shares; 1,380,283 and 0 shares
Additional paid in capital
50,451
50,024
Retained earnings
54,545
50,284
Accumulated other comprehensive loss
(1,235
)
(2,236
Unearned ESOP
(585
(675
Total Pathfinder Bancorp, Inc. shareholders' equity
103,235
97,456
Noncontrolling interest
297
266
Total equity
103,532
97,722
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
- 3 -
For the three months ended
For the six months ended
(In thousands, except per share data)
June 30, 2021
June 30, 2020
Interest and dividend income:
Loans, including fees
9,784
8,832
18,631
18,074
Debt securities:
Taxable
2,152
1,549
4,128
3,241
Tax-exempt
42
52
71
59
Dividends
64
174
134
Federal funds sold and interest earning deposits
1
17
49
Total interest and dividend income
12,066
10,514
23,008
21,557
Interest expense:
Interest on deposits
1,144
2,204
2,671
4,760
Interest on short-term borrowings
39
96
Interest on long-term borrowings
296
439
591
884
Interest on subordinated loans
408
192
965
398
Total interest expense
1,851
2,874
4,233
6,138
Net interest income
10,215
7,640
18,775
15,419
Provision for loan losses
929
1,146
1,957
2,213
Net interest income after provision for loan losses
9,286
6,494
16,818
13,206
Noninterest income:
Service charges on deposit accounts
357
303
689
659
Earnings and gain on bank owned life insurance
129
106
254
222
Loan servicing fees
11
79
101
128
Net gains on sales and redemptions of investment securities
51
1,023
1,049
Gains (losses) on marketable equity securities
(722
283
(916
Net gains on sales of loans and foreclosed real estate
97
159
769
Net gains on sale of premises and equipment
201
Debit card interchange fees
241
205
462
368
Insurance agency revenue
234
185
514
522
Other charges, commissions & fees
323
255
565
478
Total noninterest income
1,434
1,531
3,279
Noninterest expense:
Salaries and employee benefits
3,501
2,972
6,842
6,219
Building and occupancy
870
707
1,663
1,461
Data processing
654
552
1,330
1,152
Professional and other services
451
301
868
617
Advertising
259
261
505
437
FDIC assessments
232
150
430
339
Audits and exams
177
379
250
Insurance agency expense
194
212
400
404
Community service activities
34
12
122
119
Foreclosed real estate expenses
16
22
35
Other expenses
457
461
920
970
Total noninterest expense
6,845
5,758
13,481
12,003
Income before income taxes
3,875
2,267
6,616
4,482
Provision for income taxes
851
1,400
894
Net income attributable to noncontrolling interest and
3,024
1,828
5,216
3,588
Net income (loss) attributable to noncontrolling interest
15
(13
53
57
Net income attributable to Pathfinder Bancorp Inc.
3,009
1,841
5,163
3,531
Voting Earnings per common share - basic
0.50
0.31
0.87
0.60
Voting Earnings per common share - diluted
Series A Non-Voting Earnings per common share- basic
0.51
Series A Non-Voting Earnings per common share - diluted
Dividends per common share (Voting and Series A Non-Voting)
0.07
0.06
0.14
0.12
- 4 -
(In thousands)
Net Income
Other Comprehensive Income (Loss)
Retirement Plans:
Retirement plan net losses recognized in plan expenses
26
117
Unrealized holding gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period
597
4,393
963
760
Reclassification adjustment for net gains included in net
income
(873
(899
Net unrealized gains (losses) on available-for-sale securities
3,520
(139
Derivatives and hedging activities:
93
(184
327
(1,528
Net unrealized gains (losses) on derivatives and hedging activities
Accretion of net unrealized loss on securities transferred to held-to-
maturity(1)
13
19
Other comprehensive income (loss), before tax
722
3,405
1,356
(1,531
Tax effect
(189
(715
(355
321
Other comprehensive income (loss) , net of tax
533
2,690
1,001
(1,210
Comprehensive income
3,557
4,518
6,217
2,378
Comprehensive income (loss), attributable to noncontrolling interest
Comprehensive income attributable to Pathfinder Bancorp, Inc.
3,542
4,531
6,164
2,321
Tax Effect Allocated to Each Component of Other Comprehensive
Income (Loss)
(7
(12
(15
(24
Unrealized holding gains (losses) on available-for-sale securities
arising during the period
(156
(923
(251
(160
183
189
Unrealized gains (losses) on derivatives and hedging arising during
the period
(85
(2
(4
(5
Income tax effect related to other comprehensive income (loss)
(1)
The accretion of the unrealized holding losses in accumulated other comprehensive loss at the date of transfer at September 30, 2013 partially offsets the amortization of the difference between the par value and the fair value of the investment securities at the date of transfer, and is an adjustment of yield.
- 5 -
Consolidated Statements of Changes in Shareholders’ Equity
Three months ended June 30, 2021 and June 30, 2020
Preferred Stock
Common Stock
Non-Voting Common Stock
Additional Paid in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Non-controlling Interest
Total
Balance, March 31, 2021
50,258
52,020
(1,768
(630
304
100,243
Net income
Conversion of Preferred stock to Non-Voting common stock
(14
Other comprehensive income, net of tax
ESOP shares earned (6,110 shares)
47
92
Restricted stock units (13,436 shares issued)
Stock based compensation
55
Stock options exercised
58
Common stock dividends declared ($0.07 per share)
(314
Non-Voting common stock dividends declared ($0.07 per share)
(97
Warrant dividends declared ($0.07 per share)
(8
Capital transfer from affiliates
Cumulative effect of affiliate capital allocation
33
(65
32
Distributions from affiliates
(54
Balance, June 30, 2021
Balance, March 31, 2020
49,659
46,174
(7,077
(809
305
88,311
44
Restricted stock units (13,437 shares issued)
73
Common stock dividends declared ($0.06 per share)
(279
Preferred stock dividends declared ($0.06 per share)
(69
Warrant dividends declared ($0.06 per share)
Balance, June 30, 2020
48
49,747
47,660
(4,387
(765
292
92,607
- 6 -
Six months ended June 30, 2021 and June 30, 2020
Balance, January 1, 2021
ESOP shares earned (12,221 shares)
90
Restricted stock units vested (13,436 shares issued)
148
162
Common stock dividends declared ($0.14 per share)
(626
Preferred stock dividends declared ($0.07 per share)
Warrant dividends declared ($0.14 per share)
(17
Balance, January 1, 2020
49,362
44,839
(2,971
(855
235
90,669
Reevaluation of deferred tax asset valuation allowance (1)
(206
Other comprehensive loss, net of tax
142
139
195
Common stock dividends declared ($0.12 per share)
(557
Preferred stock dividends declared ($0.12 per share)
(138
Warrant dividends declared ($0.12 per share)
In the first quarter of 2020, consistent with policy, management reviewed all facts and circumstances related to its deferred taxes and determined that based on the expected filings of future New York State tax returns, the valuation allowance created in 2019 was no longer needed. Therefore management elected to eliminate its New York State net deferred tax asset valuation allowance during the quarter ended March 31, 2020.
- 7 -
For the six months ended June 30,
OPERATING ACTIVITIES
Net income attributable to Pathfinder Bancorp, Inc.
Adjustments to reconcile net income to net cash flows from operating activities:
Amortization of operating leases
Proceeds from sales of loans
4,634
40,498
Originations of loans held-for-sale
(3,662
(3,790
Realized losses (gains) on sales, redemptions and calls of:
Real estate acquired through foreclosure
(159
(773
Available-for-sale investment securities
(1,014
Held-to-maturity investment securities
(51
(35
Premises and equipment
(201
Marketable equity securities
(283
916
Depreciation
909
824
Amortization of mortgage servicing rights
(298
Amortization of deferred loan costs
983
137
Amortization of deferred financing from subordinated debt
82
Earnings on bank owned life insurance
(254
(222
Net amortization of premiums and discounts on investment securities
1,310
637
Amortization of intangible assets
Stock based compensation and ESOP expense
322
281
Net change in accrued interest receivable
(1,261
Payment of executive deferred compensation and SERP contracts, expensed in prior periods
(571
Net change in other assets and liabilities
(1,617
(1,363
Net cash flows from operating activities
8,585
40,321
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale
(72,642
(79,052
Purchase of investment securities held-to-maturity
(23,248
(39,552
Purchase of Federal Home Loan Bank stock
(3,562
(1,176
Proceeds from redemption of Federal Home Loan Bank stock
3,465
1,919
Proceeds from maturities and principal reductions of investment securities
available-for-sale
42,083
47,457
held-to-maturity
30,753
19,523
Proceeds from sales, redemptions and calls of:
500
24,768
1,112
1,589
116
Purchase of bank owned life insurance
(5,000
Net change in loans
(10,571
(61,017
Purchase of premises and equipment
(870
(436
Proceeds from sale of premises and equipment
231
Net cash flows from investing activities
(37,749
(85,861
- 8 -
FINANCING ACTIVITIES
Net change in demand deposits, NOW accounts, savings accounts, money management
deposit accounts, MMDA accounts and escrow deposits
65,864
100,069
Net change in time deposits
(3,188
(39,454
Net change in brokered deposits
(26,913
28,085
Net change in short-term borrowings
(2,020
(14,980
Payments on long-term borrowings
(3,391
(18,060
Proceeds from long-term borrowings
7,095
15,312
Payments on sub-debt borrowings
(10,000
Proceeds from exercise of stock options
Cash dividends paid to common shareholders
(589
(567
Cash dividends paid to preferred shareholders
(180
Cash dividends paid on warrants
Change in noncontrolling interest, net
31
Net cash flows from financing activities
26,854
70,503
Change in cash and cash equivalents
(2,310
24,963
Cash and cash equivalents at beginning of period
20,160
Cash and cash equivalents at end of period
45,123
CASH PAID DURING THE PERIOD FOR:
Interest
4,282
6,259
Income taxes
755
550
NON-CASH INVESTING ACTIVITY
Real estate acquired in exchange for loans
RESTRICTED CASH
Collateral deposits for hedge position included in cash and due from banks
1,600
- 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 2020 consolidated financial statements may have been reclassified to conform to the current period presentation. These reclassifications had no effect on net income or comprehensive income as previously reported. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2021 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 consolidated financial statements; accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions, and judgments. Certain accounting policies inherently have a greater reliance on the use of estimates, assumptions, and judgments, and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices or are provided by unaffiliated third-party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management.
Although the Company owns, through its subsidiary Pathfinder Risk Management Company, Inc., 51% of the membership interest in FitzGibbons Agency, LLC (“Agency”), the Company is required to consolidate 100% of the Agency within the consolidated financial statements. The 49% of which the Company does not own is accounted for separately as noncontrolling interests within the consolidated financial statements.
Note 2: New Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) and, to a lesser extent, other authoritative rulemaking bodies promulgate generally accepted accounting principles (“GAAP”) to regulate the standards of accounting in the United States. From time to time, the FASB issues new GAAP standards, known as Accounting Standards Updates (“ASUs”) some of which, upon adoption, may have the potential to change the way in which the Company recognizes or reports within its consolidated financial statements. The following 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.
- 10 -
Standards Adopted as of June 30, 2021
Standard
Description
Required Date
of Implementation
Effect on Consolidated Financial Statements
Compensation (ASU 2018-14: Compensation - Retirement Benefits - Defined Benefit Plans - General [Subtopic 715 – 20]: Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans)
The FASB is issuing the amendments in this ASU as part of the disclosure framework project. The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.
The following disclosure requirements are removed from Subtopic 715-20:
1. The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.
2. The amount and timing of plan assets expected to be returned to the employer.
3. Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan.
4. The effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.
The following disclosure requirements are added to Subtopic 715-20:
1. The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates.
2. An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.
The amendments in this ASU also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed:
1. The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets.
2. The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.
The amendments in this ASU are effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities.
The adoption of this ASU had no material impact to the Company's consolidated statements of condition or income.
Investments (ASU 2020-01- Equity Securities [Topic 321], Investments—Equity Method and Joint Ventures [Topic 323], and Derivatives and Hedging [Topic 815]—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815)
The amendments in this Update clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments clarify that for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options.
- 11 -
Income Taxes (ASU 2019-12- Simplifying the Accounting for Income Taxes)
The FASB Board is issuing this Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative).
The amendments in this Update simplify the accounting for income taxes by removing the following exceptions, among others not considered to be applicable to the Company:
1. Exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income)
2. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
The amendments in this Update also simplify the accounting for income taxes by doing the following:
1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax.
2. Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.
3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority.
4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
5. Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.
The amendments in this ASU are effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption of the amendments is permitted, including adoption in any interim period for (1) public business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period.
Reference Rate Reform (ASU 2020-04- Facilitation of the Effects of Reference Rate Reform on Financial Reporting)
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.
The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022.
- 12 -
Standards Not Yet Adopted as of June 30, 2021
Measurement of Credit Losses on Financial Instruments (ASU 2016-13: Financial Instruments—Credit Losses [Topic 326]: Measurement of Credit Losses on Financial Instruments)
The amended guidance replaces the current incurred loss model for determining the allowance for credit losses. The guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses will represent a valuation account that is deducted from the amortized cost basis of the financial assets to present their net carrying value at the amount expected to be collected. The income statement will reflect the measurement of credit losses for newly recognized financial assets as well as expected increases or decreases of expected credit losses that have taken place during the period. When determining the allowance, expected credit losses over the contractual term of the financial asset(s) (taking into account prepayments) will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amended guidance also requires recording an allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. The initial allowance for these assets will be added to the purchase price at acquisition rather than being reported as an expense. Subsequent changes in the allowance will be recorded through the income statement as an expense adjustment. In addition, the amended guidance requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. The calculation of credit losses for available-for-sale securities will be similar to how it is determined under existing guidance.
January 1, 2023 (early adoption was permitted as of January 1, 2019)
The Company is assessing the new guidance to determine what modifications to existing credit estimation processes may be required. The new guidance is complex and management is still evaluating the preliminary output from models that have been developed during this evaluative phase. In addition, future levels of allowances will also reflect new requirements to include estimated credit losses on investment securities classified as held-to-maturity, if any. The Company has formed an Implementation Committee, whose membership includes representatives of senior management, to develop plans that will encompass: (1) internal methodology changes (2) data collection and management activities, (3) internal communication requirements, and (4) estimation of the projected impact of this guidance. It has been generally assumed that the conversion from the incurred loss model, required under current GAAP, to the current expected credit loss (CECL) methodology (as required upon implementation of this Update) will, more likely than not, result in increases to the allowances for credit losses at many financial institutions. However, the amount of any change in the allowance for credit losses resulting from the new guidance will ultimately be impacted by the provisions of this guidance as well as by the loan and debt security portfolios composition and asset quality at the adoption date, and economic conditions and forecasts at the time of adoption. The amendments in this Update should be applied on a modified retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in Update 2016-13. The cumulative impact of the economic effects of the COVID-19 pandemic on the changes to the allowance for loan losses, that will be required upon the implementation of the CECL methodology, cannot be estimated at this time.
- 13 -
Transition Relief for the Implementation of ASU-2016-13 (ASU 2019-5: Financial Instruments—Credit Losses [Topic 326]: Targeted Transition Relief)
The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement—Overall, and 825-10. General guidance for the use of the fair value option is contained in Subtopic 825-10. The irrevocable election of the fair value option must be applied on an instrument-by-instrument basis for eligible instruments, whose characteristics are within the scope of Subtopic 326-20. Upon adoption of Topic 326, for items measured at fair value in accordance with paragraph 326-10-65-1(i), the difference between the carrying amount and the fair value shall be recorded by means of a cumulative-effect adjustment to the opening retained earnings balance as of the beginning of the first reporting period that an entity has adopted ASU 2016-13. Those differences may include, but are not limited to: (1) unamortized deferred costs, fees, premiums, and discounts (2) valuation allowances (for example, allowance for loan losses), or (3) accrued interest.
See comments above related to ASU 2016-13.
- 14 -
Financial Instruments—Credit Losses (ASU 2019-11- Codification Improvements to Topic 326)
On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost basis. That model replaces the probable, incurred loss model for those assets. Through the amendments in that Update, the Board added Topic 326, Financial Instruments—Credit Losses, and made several consequential amendments to the Codification. The Board has an ongoing project on its agenda for improving the Codification or correcting its unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities. The amendments in this Update are similar to those items. However, the Board decided to issue a separate Update for improvements to the amendments in Update 2016-13 to increase stakeholder awareness of those amendments and to expedite the improvement process. The amendments include items brought to the Board's attention by stakeholders. The amendments in this Update clarify or address stakeholders' specific issues about certain aspects of the amendments in Update 2016-13 as described below:
1. Expected Recoveries for Purchased Financial Assets with Credit Deterioration (PCDs): The amendments clarify that the allowance for credit losses for PCD assets should include in the allowance for credit losses expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. In addition, the amendments clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cash flows after acquisition.
2. Transition Relief for Troubled Debt Restructurings (TDRs): The amendments provide transition relief by permitting entities an accounting policy election to adjust the effective interest rate on existing TDRs using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring.
3. Disclosures Related to Accrued Interest Receivables: The amendments extend the disclosure relief for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis. 4. Financial Assets Secured by Collateral Maintenance Provisions: The amendments clarify that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. The amendments clarify that an entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero. 5. Conforming Amendment to Subtopic 805-20: The amendment to Subtopic 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest, clarifies the guidance by removing the cross-reference to Subtopic 310-30 in paragraph 805-20-50-1 and replacing it with a cross-reference to the guidance on PCD assets in Subtopic 326-20.
January 1, 2023 (early adoption was permitted as of January 1, 2019). The effective dates and transition requirements for the amendments are the same as the effective dates and transition requirements in Update 2016-13.
The Company is assessing the new guidance to determine what modifications to existing credit estimation processes may be required. The new guidance is complex and management is still evaluating the preliminary output from models that have been developed during this evaluative phase. In addition, future levels of allowances will also reflect new requirements to include estimated credit losses on investment securities classified as held-to-maturity, if any. The Company has formed an Implementation Committee, whose membership includes representatives of senior management, to develop plans that will encompass: (1) internal methodology changes (2) data collection and management activities, (3) internal communication requirements, and (4) estimation of the projected impact of this guidance. It has been generally assumed that the conversion from the incurred loss model, required under current GAAP, to the CECL methodology will, more likely than not, result in increases to the allowances for credit losses at many financial institutions. However, the amount of any change in the allowance for credit losses resulting from the new guidance will ultimately be impacted by the provisions of this guidance as well as by the loan and debt security portfolios composition and asset quality at the adoption date, and economic conditions and forecasts at the time of adoption. The amendments in this Update should be applied on a modified retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in Update 2016-13.
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Earnings Per Share, Debt Modifications and Extinguishments, Stock Compensation, and Derivatives and Hedging- Contacts in Entity's own Equity (ASU 2011-04)
The amendments in this Update affect all entities that issue freestanding written call options that are classified in equity. Specifically, the amendments affect those entities when a freestanding equity-classified written call option is modified or exchanged and remains equity classified after the modification or exchange. The amendments that relate to the recognition and measurement of EPS for certain modifications or exchanges of freestanding equity-classified written call options affect entities that present EPS in accordance with the guidance in Topic 260, Earnings Per Share. The amendments in this Update do not apply to modifications or exchanges of financial instruments that are within the scope of another Topic. That is, accounting for those instruments continues to be subject to the requirements in other Topics. The amendments in this Update do not affect a holder‘s accounting for freestanding call options.
The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt the amendments in this Update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period.
The adoption of this ASU is expected to have no material impact to the Company's consolidated statements of condition or income as the Company does not have any freestanding equities with a written call option.
Leases- Topic 842 (ASU 2021-05)
The amendments in this Update affect lessors with lease contracts that (1) have variable lease payments that do not depend on a reference index or a rate and (2) would have resulted in the recognition of a selling loss at lease commencement if classified as sales-type or direct financing. The amendment requires that a lessor determine whether a lease should be classified as a sales-type lease or a direct financing lease at lease commencement on the basis of specified classification criteria (see paragraphs 842-10-25-2 through 25-3). Under ASC 842, a lessor is not permitted to estimate most variable payments and must exclude variable payments that are not estimated and do not depend on a reference index or a rate from the lease receivable. Subsequently, those excluded variable payments are recognized entirely as lease income when the changes in facts and circumstances on which those variable payments are based occur. Consequently, the net investment in the lease for a sales-type lease or a direct financing lease with variable payments of a certain magnitude that do not depend on a reference index or a rate may be less than the carrying amount of the underlying asset derecognized at lease commencement. As a result, the lessor recognizes a selling loss at lease commencement (hereinafter referred to as a day-one loss) even if the lessor expects the arrangement to be profitable overall. The amendments in this Update address stakeholders' concerns by amending the lease classification requirements for lessors to align them with practice under ASC 840. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: (1) The lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in paragraphs 842-10-25-2 through 25-3 and (2) The lessor would have otherwise recognized a day-one loss. When a lease is classified as operating, the lessor does not recognize a net investment in the lease, does not derecognize the underlying asset, and, therefore, does not recognize a selling profit or loss. The leased asset continues to be subject to the measurement and impairment requirements under other applicable GAAP before and after the lease transaction.
The amendments in this Update amend Topic 842, which has different effective dates for public business entities and most entities other than public business entities. The amendments are effective for fiscal years beginning after December 15, 2021, for all entities, and interim periods within those fiscal years for public business entities and interim periods within fiscal years beginning after December 15, 2022, for all other entities.
The adoption of this ASU is currently not expected to have a material impact to the Company's consolidated statements of condition or income.
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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 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 six months ended June 30, 2021 and were 256,145 and $128,073 for the three and six months ended June 30, 2020, respectively.
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The following table sets forth the calculation of basic and diluted earnings per share.
Three months ended
Six months ended
Convertible preferred stock dividends
83
69
180
138
Series A Non-Voting Common Stock dividends
Warrant dividends
9
7
Undistributed earnings allocated to participating securities
653
1,093
612
Net income available to common shareholders- Voting
2,250
1,443
3,859
2,766
Voting Common Stock dividends
314
626
2,504
4,254
Net income available to common shareholders- Series A Non-Voting
100
Basic weighted average common shares outstanding- Voting
4,464
4,639
4,453
4,623
Basic weighted average common shares outstanding- Series A Non-Voting
197
99
Diluted weighted average common shares outstanding- Voting
Diluted weighted average common shares outstanding- Series A Non-Voting
Basic earnings per common share- Voting
Basic earnings per common share- Series A Non-Voting
Diluted earnings per common share- Voting
Diluted earnings per common share- Series A Non-Voting
Supplemental information:
December 31, 2020
Voting Common Stock shares outstanding at period end
4,562
4,754
Series A Non-Voting Common Stock shares outstanding at period end
1,380
Series B Convertible Preferred Stock shares outstanding at period end
1,155
Total shares of all classes of stock outstanding at period end
5,942
5,911
5,909
- 18 -
Note 4: Investment Securities
The amortized cost and estimated fair value of investment securities are summarized as follows:
Gross
Estimated
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
18,261
18
(25
18,254
State and political subdivisions
22,548
1,203
23,751
Corporate
12,830
486
(41
13,275
Asset backed securities
14,279
30
14,294
Residential mortgage-backed - US agency
22,765
406
23,171
Collateralized mortgage obligations - US agency
27,311
105
(427
26,989
Collateralized mortgage obligations - Private label
37,263
401
(45
37,619
155,257
2,649
(553
157,353
Equity investment securities:
Common stock - financial services industry
206
Total available-for-sale
155,463
Held-to-Maturity Portfolio
16,912
489
(149
17,252
44,673
1,406
(50
46,029
13,959
186
(92
14,053
10,714
11,122
13,312
580
13,888
62,862
902
(111
63,653
Total held-to-maturity
3,971
(406
165,997
- 19 -
6,428
6,416
23,235
538
(20
23,753
12,393
275
12,668
8,572
8,607
24,856
355
25,211
26,776
149
(461
26,464
24,662
384
(110
24,936
126,922
1,752
(619
128,055
127,128
1,000
2
1,002
16,482
527
(58
16,951
36,441
1,101
37,535
18,414
217
(176
18,455
11,807
475
12,282
24,482
850
(1
25,331
62,598
(121
63,379
4,074
(363
174,935
The amortized cost and estimated fair value of debt investments at June 30, 2021 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
Fair Value
Due in one year or less
14,841
15,147
Due after one year through five years
4,669
4,787
14,553
15,231
Due after five years through ten years
14,946
14,969
39,601
40,605
Due after ten years
33,462
34,671
21,390
21,498
Sub-total
67,918
69,574
75,544
77,334
Totals
- 20 -
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:
Less than Twelve Months
Twelve Months or More
Number of
Individual
(Dollars in thousands)
Securities
(3
1,975
(22
4,957
6,932
3,000
(11
2,062
5,062
(151
8,713
(276
6,957
15,670
(40
4,676
953
5,629
(239
19,077
14,929
34,006
5,315
7,311
2,104
1,293
4,000
532
4,532
(313
17,919
(93
2,636
20,555
US Treasury, agencies and GSE's
4,954
2,521
2,487
80
2,567
6,974
(416
5,683
12,657
(78
8,071
(32
2,574
10,645
(145
20,053
(474
13,291
33,344
7,063
3,775
(36
4,209
(140
4,683
8,892
1,496
(115
6,442
(6
780
7,222
(217
22,985
(146
5,463
20
28,448
- 21 -
Excluding the effects of changes in the characteristics of individual debt securities that potentially give rise to other-than-temporary impairment (“OTTI”), as described below, the fair market value of a debt security as of a particular measurement date is highly dependent upon prevailing market and economic environmental factors at the measurement date relative to the prevailing market and economic environmental factors present at the time the debt security was acquired. The most significant market and environmental factors include, but are not limited to (1) the general level of interest rates, (2) the relationship between shorter-term interest rates and longer-term interest rates (referred to as the “slope” of the interest rate yield curve), (3) general bond market liquidity, (4) the recent and expected near-term volume of new issuances of similar debt securities, and (5) changes in the market values of individual loan collateral underlying mortgage-backed debt securities. Changes in interest rates affect the fair market values of debt securities by influencing the discount rate applied to the securities’ future expected cash flows. The higher the discount rate, the lower the resultant security price. Conversely, the lower the discount rate, the higher the resultant security price. In addition, the cumulative amount and timing of undiscounted cash flows of debt securities may be also affected by changes in interest rates. For any given level of movement in the general market and economic environmental factors described above, the magnitude of any particular debt security’s price changes will also depend heavily upon security-specific factors such as (1) the duration of the security, (2) imbedded optionality contractually granted to the issuer of the security with respect to principal prepayments, and (3) changes in the level of market premiums demanded by investors for securities with imbedded credit risk (where applicable).
The Company conducts a formal review of investment securities on a quarterly basis for the presence of OTTI. The Company assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the statement of condition date. Under these circumstances, OTTI is considered to have occurred (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not anticipated to be sufficient to recover the entire amortized cost basis. The guidance requires that credit-related OTTI is recognized in earnings while non-credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”). Non-credit-related OTTI is based on other factors, including illiquidity and changes in the general interest rate environment. Presentation of OTTI is made in the consolidated statement of income on a gross basis, including both the portion recognized in earnings as well as the portion recorded in OCI. The gross OTTI would then be offset by the amount of non-credit-related OTTI, showing the net as the impact on earnings.
Management does not believe any individual unrealized loss in securities within the portfolio as of June 30, 2021 represents OTTI. At June 30, 2021, the Bank had the following securities, in a loss position for 12 months or more relative to their amortized historical cost, which were deemed to have no credit impairment, thus, the disclosed unrealized losses relate directly to changes in interest rates subsequent to the acquisition of the individual securities. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.
Of the total of ten securities in an unrealized loss position for 12 months or more at June 30, 2021, four securities, representing 67.9% of the unamortized cost of the total securities in an unrealized loss position for 12 months or more, are issued by United States agencies or Government Sponsored Enterprises (GSEs) and consist of mortgage-backed securities, collateralized mortgage obligations and direct agency financings. These positions in U.S. government agency and GSEs are deemed to have no credit impairment, thus, the disclosed unrealized losses relate primarily to changes in prepayment assumptions related to significantly lower general interest rates resulting from the economic effects of the pandemic.
In addition to these four securities, the Company held the following six non-government or GSE-issued/backed securities that were in an unrealized loss position for 12 or more months at June 30, 2021:
•
One privately-issued asset-backed security, categorized as available-for-sale, and collateralized by rail car leases, with an aggregate amortized historical cost of $2.0 million (unrealized loss of $11,000, or 0.6%). This security maintains a credit rating established by one or more NRSRO above the minimum level required to be considered as investment grade. Therefore, no credit-related OTTI is deemed to be present.
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One privately-issued asset-backed security, categorized as available-for-sale, and collateralized by consumer installment loans with an aggregate amortized historical cost of $78,000 (unrealized loss of less than $1,000). This security was not rated at the time of its issuance by any NRSRO but remains significantly collateralized through subordination and other credit enhancements. Therefore, no credit-related OTTI is deemed to be present.
One privately-issued collateralized mortgage obligation security, collateralized by commercial mortgage loans and categorized as available-for-sale, with an aggregate amortized historical cost of $958,000 and an aggregate market value of $953,000 (unrealized aggregate loss of $5,000 or -0.5%). This security was not rated at the time of its issuance by any NRSRO but remains significantly collateralized through subordination and other credit enhancements. Therefore, no credit-related OTTI is deemed to be present.
One privately-issued asset-backed security, collateralized by small business installment loans, and categorized as held-to-maturity, with an aggregate amortized historical cost of $486,000 and a market value of $479,000 (unrealized loss of $7,000 or -1.4%). This security maintains a credit rating established by one or more NRSRO above the minimum level required to be considered as investment grade. Therefore, no credit-related OTTI is deemed to be present.
One privately-issued asset-backed security, collateralized by private-issue student loans and categorized as held-to-maturity, with an aggregate amortized historical cost of $1.7 million and an aggregate market value of $1.6 million (unrealized loss of $85,000 or -5.0%). This security was unrated at issuance but remains sufficiently collateralized through subordination. Therefore, no credit-related OTTI is deemed to be present.
One privately-issued collateralized mortgage obligation security, collateralized by residential mortgage loans and categorized as held-to-maturity, with an aggregate amortized historical cost of $532,000 and a market value of $531,000 (unrealized loss of less than $1,000). This security maintains a credit rating established by one or more NRSRO above the minimum level required to be considered as investment grade. Therefore, no credit-related OTTI is deemed to be present.
All other securities with market values less than their amortized historical costs for twelve or more months are issued by United States agencies or government sponsored enterprises and consist of mortgage-backed securities, collateralized mortgage obligations and direct agency financings. These positions in US government agency and government-sponsored enterprises are deemed to have no credit impairment, thus, the disclosed unrealized losses relate directly to changes in interest rates subsequent to the acquisition of the individual securities. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.
In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the length of time the equity security’s fair value has been below the carrying amount. The Company had no equity investment securities that were impaired at June 30, 2021 or December 31, 2020.
Gross realized gains (losses) on sales and redemptions of securities for the indicated periods are detailed below:
For the three months
For the six months
ended June 30,
Realized gains on investments
917
950
Realized losses on investments
(9
(16
908
934
As of June 30, 2021 and December 31, 2020, securities with a fair value of $109.5 million and $96.4 million, respectively, were pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of $11.9 million and $13.2 million, respectively, were pledged against certain borrowing arrangements.
- 23 -
Management has reviewed its loan and mortgage-backed securities portfolios and determined that, to the best of its knowledge, only minimal exposure exists to sub-prime or other high-risk residential mortgages. With limited exceptions in the Company’s investment portfolio involving the most senior tranches of securitized bonds, the Company is not in the practice of investing in, or originating, these types of investments or loans.
- 24 -
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
For the three months ended June 30,
Service cost
Interest cost
111
221
233
Expected return on plan assets
(287
(274
(573
(547
Amortization of prior service credits
Amortization of net losses
25
50
114
Net periodic benefit plan (benefit) cost
(100
(302
(200
The Company will evaluate the need for further contributions to the defined benefit pension plan during 2021. The prepaid pension asset is recorded in other assets on the statement of condition as of June 30, 2021 and December 31, 2020.
- 25 -
Note 6: Loans
Major classifications of loans at the indicated dates are as follows:
Residential mortgage loans:
1-4 family first-lien residential mortgages
226,896
227,185
Construction
8,133
6,681
Total residential mortgage loans
235,742
235,392
Commercial loans:
Real estate
291,678
286,271
Lines of credit
60,097
49,103
Other commercial and industrial
74,416
78,629
Paycheck Protection Program loans
53,611
60,643
Tax exempt loans
6,554
7,166
Total commercial loans
486,356
481,812
Consumer loans:
Home equity and junior liens
34,649
38,624
Other consumer
80,269
70,905
Total consumer loans
114,918
109,529
Total loans
837,016
826,733
Net deferred loan fees
(2,064
(1,238
Less allowance for loan losses
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.
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 occurred in ten separate transactions commencing in 2019 and continuing through 2021, including two separate transactions during the six months ended June 30, 2021.
- 26 -
The following table sets forth certain information related to these loan transactions:
(In thousands, except number of loans)
Purchased residential real estate loans
Original Balance
4,300
Current Balance
4,200
Unamortized Premium (Discount)
265
273
Percent Owned
%
Number of Loans
Maturity range
17-24 years
17-25 years
Cumulative net charge-offs
Purchased other commercial and industrial loans
6,800
4,800
5,500
37
4-8 years
5-9 years
Purchased home equity lines of credit:
21,900
10,900
13,900
274
309
226
3-28 years
3-29 years
Purchased automobile loans:
50,400
12,500
17,000
602
1,041
1,257
0-5 years
0-6 years
230
Purchased unsecured consumer loan pool 1:
5,400
3,600
70
76
3-5 years
3-6 years
- 27 -
Purchased unsecured consumer loan pool 2:
26,600
10,400
15,400
63
1,878
2,246
1-3 years
2-4 years
Purchased unsecured consumer loan pool 3:
10,300
2,127
2,958
Purchased secured consumer loan pool 1:
14,500
13,800
(1,943
(2,124
68
599
619
25 years
Purchased secured consumer loan pool 2:
24,400
21,700
(633
0
797
10-24 years
Purchased commercial line of credit:
11,600
4,100
3 years
- 28 -
As of June 30, 2021 and December 31, 2020, residential mortgage loans with a carrying value of $120.4 million and $115.6 million, respectively, have been pledged by the Company to the Federal Home Loan Bank of New York (“FHLBNY”) under a blanket collateral agreement to secure the Company’s line of credit and term borrowings.
Loan Origination / Risk Management
The Company’s lending policies and procedures are presented in Note 5 to the audited consolidated financial statements included in the 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2021 and have not changed.
To develop and document a systematic methodology for determining the allowance for loan losses, the Company has divided the loan portfolio into three portfolio segments, each with different risk characteristics but with similar methodologies for assessing risk. Each portfolio segment is broken down into loan classes where appropriate. Loan classes contain unique measurement attributes, risk characteristics, and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses. Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class.
The following table illustrates the portfolio segments and classes for the Company’s loan portfolio:
Portfolio Segment
Class
Residential Mortgage Loans
Commercial Loans
Consumer Loans
- 29 -
The following tables present the classes of the loan portfolio, not including net deferred loan costs, summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of the dates indicated:
As of June 30, 2021
Special
Pass
Mention
Substandard
Doubtful
222,785
661
2,724
726
231,631
267,369
13,523
10,198
588
51,881
4,981
3,107
62,711
3,860
6,810
1,035
442,126
22,364
20,115
1,751
33,632
108
647
262
79,876
220
113,508
867
349
787,265
23,219
23,706
2,826
As of December 31, 2020
222,386
1,151
3,196
452
230,593
267,736
9,541
8,615
40,733
5,132
3,154
65,441
4,770
8,153
441,719
19,443
19,922
728
37,926
54
411
70,502
104
218
81
108,428
158
629
780,740
20,752
23,747
1,494
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 placed on nonaccrual when the contractual payment of principal and interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing.
Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date.
- 30 -
An age analysis of past due loans, not including net deferred loan costs, segregated by portfolio segment and class of loans, as of June 30, 2021 and December 31, 2020, are detailed in the following tables:
30-59 Days
60-89 Days
90 Days
Total Loans
Past Due
and Over
Current
Receivable
771
871
1,847
225,049
233,895
3,331
390
3,160
6,881
284,797
572
1,654
172
2,398
57,699
2,749
3,008
7,014
67,402
6,652
5,052
4,589
16,293
470,063
156
291
447
34,202
535
419
1,189
79,080
691
710
1,636
113,282
8,114
5,492
6,170
19,776
817,240
1,250
570
1,098
2,918
224,267
232,474
480
913
2,511
3,904
282,367
734
1,870
2,798
46,305
441
1,717
1,691
3,849
74,780
170
60,473
1,825
4,500
4,396
10,721
471,091
248
78
473
799
37,825
443
252
187
882
70,023
330
660
1,681
107,848
3,766
6,154
15,320
811,413
- 31 -
Nonaccrual loans, segregated by class of loan, were as follows:
2,881
2,608
4,829
11,286
6,802
6,498
11,803
17,978
839
471
747
Total nonaccrual loans
15,994
21,333
The following table summarizes nonaccrual loans by category and status at June 30, 2021:
Loan Type
Collateral Type
Loan Balance
Average Loan Balance
Weighted LTV at Origination/ Modification
Status
Secured residential mortgage:
Real Estate
88
Under active resolution management by the Bank.
Secured commercial real estate:
Private Museum
1,385
The Bank is working on a modification with the borrower. The borrower has substantial deposits with the Bank.
Recreational
1,234
The loan is currently classified as a Troubled Debt Restructuring (TDR). Next payment is due August 1, 2021.
All Others
2,210
Commercial lines of credit
43
N/A
Commercial and industrial:
4,485
41
The Bank modified the loan and the next payment is due August 1, 2021. Repayment is expected from operations, pledges and collateral value.
2,317
211
Consumer loans
- 32 -
The Company is required to disclose certain activities related to Troubled Debt Restructurings (“TDR”) in accordance with accounting guidance. Certain loans have been modified in a TDR where economic concessions have been granted to a borrower who is experiencing, or expected to experience, financial difficulties. These economic concessions could include a reduction in the loan interest rate, extension of payment terms, reduction of principal amortization, or other actions that it would not otherwise consider for a new loan with similar risk characteristics.
The Company is required to disclose new TDRs for each reporting period for which an income statement is being presented. The pre-modification outstanding recorded investment is the principal loan balance less the provision for loan losses before the loan was modified as a TDR. The post-modification outstanding recorded investment is the principal balance less the provision for loan losses after the loan was modified as a TDR. Additional provision for loan losses is the change in the allowance for loan losses between the pre-modification outstanding recorded investment and post-modification outstanding recorded investment.
The Company had no loans that were modified as TDRs for the three months ended June 30, 2021.
The table below details loans that had been modified as TDRs for the six months ended June 30, 2021.
For the three months ended June 30, 2021
Number of loans
Pre-modification outstanding recorded investment
Post-modification outstanding recorded investment
Additional provision for loan losses
Commercial loans
961
967
Residential real estate loans
389
200
504
219
The loans evaluated for impairment for the six months ended June 30, 2021 have been classified as TDRs due to economic concessions granted, which consisted of a reduction in the stated interest rate, a significant delay in the timing of the payment or an extended maturity date that will result in a significant delay in payment from the original terms.
The Company had no loans that were modified as TDRs for the three months ended June 30, 2020.
The Company had no loans that were modified as TDRs for the six months ended June 30, 2020.
The Company is required to disclose loans that have been modified as TDRs within the previous 12 months in which there was payment default after the restructuring. The Company defines payment default as any loans 90 days past due on contractual payments.
The Company had no loans that were modified as TDRs during the twelve months prior to June 30, 2021, which had subsequently defaulted during the six months ended June 30, 2021.
The Company had no loans that were modified as TDRs during the twelve months prior to June 30, 2020, which had subsequently defaulted during the six months ended June 30, 2020.
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, impairment is recognized as a component of the provision for loan losses, by an associated increase to the allowance for loan losses or as a charge-off to the allowance for loan losses in the current period.
- 33 -
Impaired Loans
The following table summarizes impaired loan information by portfolio class at the indicated dates:
Unpaid
Recorded
Principal
Related
Investment
Balance
Allowance
With no related allowance recorded:
1,006
665
Commercial real estate
4,841
4,929
11,053
11,136
4,881
5,114
72
75
With an allowance recorded:
493
1,182
2,105
1,729
904
925
2,385
1,852
1,864
1,278
506
223
Total:
1,499
6,946
7,034
12,782
12,865
1,004
7,266
6,978
6,996
578
17,372
17,460
3,281
22,830
22,931
2,781
The following table presents the average recorded investment in impaired loans for the periods indicated:
1,503
1,601
1,618
1,604
10,234
4,544
11,083
4,511
982
181
6,990
972
6,986
959
458
89
20,373
7,604
21,192
7,563
- 34 -
The following table presents the cash basis interest income recognized on impaired loans for the periods indicated:
27
38
109
74
130
65
249
Note 7: Allowance for Loan 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 needs on loans individually evaluated for impairment in its determination of the adequacy of the allowance for loan losses. We recorded $929,000 in provision for loan losses for the three month period ended June 30, 2021, as compared to $1.1 million for the three month period ended June 30, 2020. For the first six months of 2021, we recorded $2.0 million in provision for loan losses as compared to $2.2 million in the same prior year six month period. The provisioning in 2021 and 2020 reflects management’s determination of prudent additions to reserves considering loan mix changes, concentrations of loans in certain business sectors, factors related to loan quality metrics, and continued COVID-19 related economic uncertainty. The credit-sensitive portfolios continue to be carefully monitored, and the Bank will consistently apply its proven conservative loan classification and reserve building methodologies to the analysis of these portfolios.
.
- 35 -
Summarized in the tables below are changes in the allowance for loan losses for the indicated periods and information pertaining to the allocation of the allowance for loan losses, balances of the allowance for loan losses, loans receivable based in 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.
1-4 family
first-lien
Residential
Other
Paycheck
residential
construction
Commercial
commercial
Protection
mortgage
real estate
lines of credit
and industrial
Program
Allowance for loan losses:
Beginning Balance
975
5,721
1,916
3,016
Charge-offs
Recoveries
62
Provisions
(80
405
(168
432
Ending balance
875
6,120
1,810
3,448
Ending balance: related to loans
individually evaluated for impairment
collectively evaluated for impairment
795
5,898
906
1,596
Loans receivables:
Ending balance: individually
evaluated for impairment
Ending balance: collectively
225,397
284,732
59,093
67,150
Home equity
Tax exempt
and junior liens
Consumer
Unallocated
827
1,237
13,693
(76
(102
21
294
805
582
11,322
34,071
80,190
819,644
- 36 -
For the six months ended June 30, 2021
931
4,776
1,670
2,992
1,350
77
556
consumer
739
1,123
545
(119
(245
66
- 37 -
For the three months ended June 30, 2020
731
4,243
1,218
1,758
(99
(48
124
317
756
4,258
1,208
2,066
153
98
563
603
4,194
1,110
212,741
3,678
260,824
53,509
83,167
73,774
1,598
4,661
178
1,062
211,143
256,163
53,331
82,105
611
846
198
9,606
(52
(208
367
644
1,055
10,553
1,020
502
9,533
7,644
42,587
69,915
807,839
85
7,803
42,368
69,830
800,036
- 38 -
For the six months ended June 30, 2020
4,010
1,195
1,645
(125
Provisions (credits)
300
553
413
272
8,669
(28
(185
(395
29
793
293
The Company’s methodology for determining its allowance for loan losses includes an analysis of qualitative factors that are added to the historical loss rates in arriving at the total allowance for loan losses needed for this general pool of loans. The qualitative factors include:
Changes in national and local economic trends;
The rate of growth in the portfolio;
Trends of delinquencies and nonaccrual balances;
Changes in loan policy; and
Changes in lending management experience and related staffing.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. These qualitative factors, applied to each product class, make the evaluation inherently subjective, as it requires material estimates that may be susceptible to significant revision as more information becomes available. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan losses analysis and calculation.
- 39 -
The allocation of the allowance for loan losses summarized on the basis of the Company’s calculation methodology was as follows:
Specifically reserved
Historical loss rate
Qualitative factors
5,897
873
1,558
325
992
1,474
257
258
9,554
152
61
4,095
958
1,442
1,399
7,569
Note 8: Foreclosed Real Estate
The Company is required to disclose the carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession of the property at each reporting period. The Company had no foreclosed residential real estate at June 30, 2021 and December 31, 2020. At June 30, 2021 and December 31, 2020, the Company reported $891,000 and $182,000, respectively, in residential real estate loans in the process of foreclosure.
- 40 -
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 are essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had $2.6 million of standby letters of credit as of June 30, 2021. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The fair value of standby letters of credit was not significant to the Company’s consolidated financial statements.
Note 10: Fair Value Measurements
Accounting guidance related to fair value measurements and disclosures specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs, minimize the use of unobservable inputs, to the extent possible, and considers counterparty credit risk in its assessment of fair value.
The Company used the following methods and significant assumptions to estimate fair value:
Investment securities: The fair values of available-for-sale and marketable equity securities are obtained from an independent third party and are based on quoted prices on nationally recognized securities exchanges, where available (Level 1). If quoted prices are not available, fair values are measured by utilizing matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management made no adjustment to the fair value quotes that were received from the independent third party pricing service. Level 3 securities are assets whose fair value cannot be determined by using observable measures, such as market prices or pricing models. Level 3 assets are typically very illiquid, and fair values can only be calculated using estimates or risk-adjusted value ranges. Management applies known factors, such as currently applicable discount rates, to the valuation of those investments in order to determine fair value at the reporting date.
The Company holds one corporate investment security, categorized based on its net asset value (NAV), with an amortized historical cost of $2.6 million and a fair market value of $2.8 million as of June 30, 2021. This security has a valuation that is determined using published net asset values (NAV) derived by analyses of the security’s underlying assets. This security is comprised primarily of broadly-diversified real estate properties whose fair values are determined by appraisals and other discounted cash flow evaluation methods on an infrequent basis. While this security is redeemable at least annually through tender offers made by its respective issuer, the liquidation value of the security may be below its stated NAVs and also subject to restrictions as to the amount of securities that can be redeemed at any single scheduled redemption. The Company anticipates that this security will be redeemed by its respective issuers on indeterminate future dates as a consequence of the ultimate liquidation strategies employed by the management of this investment. The Company holds two equity security
- 41 -
investments, with an aggregate value of $2.1 million at June 30, 2021, valued utilizing readily available market pricing (Level 1) observed from active trading on major national stock exchanges.
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 loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.
Foreclosed real estate: Fair values for foreclosed real estate are initially recorded based on market value evaluations by third parties, less costs to sell (“initial cost basis”). Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to foreclosed real estate are charged to the allowance for loan losses. Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash flow analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as, changes in absorption rates and market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition. Either change could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level 3 within the fair value hierarchy.
- 42 -
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:
Total Fair
Level 1
Level 2
Level 3
10,450
154,528
Corporate measured at NAV
2,825
Total available-for-sale securities
Interest rate swap derivative fair value hedges
878
Interest rate swap derivative cash flow hedges
(981
9,943
125,330
2,725
Interest rate swap derivative fair value hedge
136
(1,308
Pathfinder Bank had the following assets measured at fair value on a nonrecurring basis as of June 30, 2021 and December 31, 2020:
Impaired loans
2,560
- 43 -
14,701
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value at the indicated dates.
Quantitative Information about Level 3 Fair Value Measurements
Valuation
Unobservable
Range
Techniques
Input
(Weighted Avg.)
At June 30, 2021
Appraisal of collateral
Appraisal Adjustments
5% - 25% (16%)
(Sales Approach)
Costs to Sell
7% - 14% (5%)
Discounted Cash Flow
At December 31, 2020
5% - 25% (18%)
7% - 13% (12%)
There have been no transfers of assets into or out of any fair value measurement level during the three or six months ended June 30, 2021.
Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated statement of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
The Company has various processes and controls in place to ensure that fair value is reasonably estimated. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process.
While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.
FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the financial assets and liabilities were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation
- 44 -
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.
Accrued interest receivable and payable – The carrying amount of these assets approximates their fair value and are classified as Level 1.
Deposits – The fair values disclosed for demand deposits (e.g., interest-bearing and noninterest-bearing checking, passbook savings and certain types of money management accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) and are classified within Level 1 of the fair value hierarchy. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates of deposits to a schedule of aggregated expected monthly maturities on time deposits. Measurements of the fair value of time deposits are classified within Level 2 of the fair value hierarchy.
Borrowings – Fixed/variable term “bullet” structures are valued using a replacement cost of funds approach. These borrowings are discounted to the FHLBNY advance curve. Option structured borrowings’ fair values are determined by the FHLB for borrowings that include a call or conversion option. If market pricing is not available from this source, current market indications from the FHLBNY are obtained and the borrowings are discounted to the FHLBNY advance curve less an appropriate spread to adjust for the option. These measurements are classified as Level 2 within the fair value hierarchy.
Subordinated loans – The Company secures quotes from its pricing service based on a discounted cash flow methodology or utilizes observations of recent highly-similar transactions which result in a Level 2 classification.
- 45 -
The carrying amounts and fair values of the Company’s financial instruments as of the indicated dates are presented in the following table:
Carrying
Hierarchy
Amounts
Fair Values
Financial assets:
Cash and cash equivalents
Investment securities - available-for-sale
NAV
Investment securities - marketable equity
Investment securities - held-to-maturity
Federal Home Loan Bank stock
Net loans
824,686
816,626
191
Financial liabilities:
Demand Deposits, Savings, NOW and MMDA
668,156
598,683
Time Deposits
363,514
364,192
397,224
398,863
Borrowings
83,734
84,710
82,050
84,065
31,184
39,416
981
1,308
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 generally entered into with counterparties that meet 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, collateral or settlement provisions, the Company believes that the credit risk inherent in these contracts was not material at June 30, 2021. Interest rate hedging agreements are recorded at fair value as other assets or liabilities. The Company had no derivative contracts not designated as hedging agreements at June 30, 2021 or December 31, 2020.
As a result of interest rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate in fair value. When effectively hedged, this appreciation or depreciation will generally be offset by fluctuations in the fair value of derivative instruments that are linked to the hedged assets and liabilities. This strategy is referred to as a fair value hedge. 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 the underlying rate index. When effectively hedged, the increases or decreases in cash flows related to the floating-rate asset or liability will generally be offset by changes in cash flows of the derivative 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.
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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 rise in interest rates above the strike price.
The Company records various hedges in the Consolidated Statement 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 June 30, 2021 and December 31, 2021:
Carrying Amount of the Hedged Assets at
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets at June 30, 2021
Cumulative Amount of Fair Value Hedging Adjustment Included in The Carrying Amount of the Hedged Assets at December 31, 2020
Line item on the balance sheet in which the hedged item is included:
Loans receivable (1)
12,944
Available-for-sale securities (2)
16,369
(831
17,055
(191
Loans receivable (3)
21,690
(47
These amounts include the amortized historical cost basis of a specific loan pool designated as the underlying asset for the hedging relationship 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 hedging instrument. The hedging instrument matured in April of 2021 and is no longer a component of the Company's Consolidated Statement of Condition at June 30, 2021. The amount of the designated hedged item was $9.2 million and the fair value of the hedging instrument resulted in a net liability position of $55,000, recorded by the Company in other liabilities at December 31, 2020. The Company’s participation in the fair value hedge had an immaterial effect on recorded interest income for the three and six months ended June 30, 2021 and 2020.
(2)
These amounts represent the amortized cost basis of specifically identified municipal securities designated as the underlying assets for the hedging relationship. The notional amount of the designated hedged item was $16.3 million at both June 30, 2021 and December 31, 2020. At June 30, 2021, the fair value of the derivative resulted in a net asset position of $831,000, recorded by the Company in other assets. At December 31, 2020, the fair value of the derivative resulted in a net asset position of $191,000 recorded by the Company in other assets. The Company's participation in the fair value hedge had an immaterial effect on recorded interest income for the three and six months ended June 30, 2021 and 2020.
(3)
These amounts include the amortized cost of a specific loan pool designated as the underlying asset for the hedging relationship 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 hedging instrument. The amount of the designated hedged item was $12.2 million at June 30, 2021. The Company did not have this derivative agreement in place at December 31, 2020. At June 30, 2021, the fair value of the derivative resulted in a net asset position of $47,000, recorded by the Company in other assets. The Company’s participation in the fair value hedge had an immaterial effect on recorded interest income for the three and six months ended June 30, 2021 and 2020.
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The following table shows the pre-tax losses of the Company’s derivatives designated as cash flow hedges in other comprehensive income at June 30, 2021 and December 31, 2021:
Cash flow hedges:
Total unamortized premium
204
Fair market value adjustment interest rate cap
(166
(197
Total unamortized cap
Fair market value adjustment interest rate swap
(815
(1,111
Total loss in comprehensive income
The amounts of hedge ineffectiveness, recognized during the three and six months ended June 30, 2021 and 2020 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.
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. At June 30, 2021, the Company posted cash, held in an interest-bearing refundable escrow arrangement, in the amount of $1.6 million in order to satisfy collateral requirements associated with its hedging contracts.
Note 12: Accumulated Other Comprehensive Income (Loss)
Changes in the components of accumulated other comprehensive income (loss) (“AOCI”), net of tax, for the periods indicated are summarized in the tables below.
Retirement
Plans
Unrealized Gains
and Losses on
Available-for-
Sale Securities
Losses on
Derivatives
and Hedging
Activities
Unrealized Loss
on Securities
Transferred to
Beginning balance
(2,074
1,108
(793
Other comprehensive income before reclassifications
Amounts reclassified from AOCI
(2,055
(724
- 48 -
(2,859
(3,121
(1,062
3,470
3,333
(690
(643
(2,812
(341
(1,207
(27
(2,093
837
(966
712
242
(2,717
(216
(38
(188
600
(593
(710
(617
(1) In the first quarter of 2020, consistent with policy, management reviewed all facts and circumstances related to its deferred taxes and determined that based on the expected filings of future New York State tax returns, the valuation allowance created in 2019 was no longer needed. Therefore, management elected to eliminate its New York State net deferred tax asset valuation allowance during the quarter ended March 31, 2020.
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The following table presents the amounts reclassified out of each component of AOCI for the indicated period:
Amount Reclassified
from AOCI (1)
Details about AOCI (1) components
Affected Line Item in the Statement of Income
Retirement plan items
Retirement plan net losses
recognized in plan expenses (2)
(26
(59
(53
(117
24
(19
Available-for-sale securities
Realized gain on sale of securities
Net gains on sales and redemptions
of investment securities
899
(183
690
Amounts in parentheses indicates debits in net income.
These items are included in net periodic pension cost.
See Note 5 for additional information.
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Note 13: Noninterest Income
The Company has included the following table regarding the Company’s noninterest income for the periods presented.
Service fees
Insufficient funds fees
208
423
Deposit related fees
ATM fees
Total service fees
Fee Income
Insurance commissions
184
511
519
Investment services revenue
163
246
ATM fees surcharge
110
Banking house rents collected
Total fee income
516
392
919
Card income
Merchant card fees
Total card income
256
399
Mortgage fee income and realized gain on sale of loans
and foreclosed real estate
Total mortgage fee income and realized gain on sale of
loans and foreclosed real estate
176
260
897
1,179
1,091
2,434
Net gains on sales and redemptions of investment
securities
Gains/(losses) on marketable equity securities
Other miscellaneous income
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The following is a discussion of key revenues within the scope of the new revenue guidance:
Service fees – Revenue is earned through insufficient funds fees, customer initiated activities or passage of time for deposit related fees, and ATM service fees. Transaction-based fees are recognized at the time the transaction is executed, which is the same time the Company’s performance obligation is satisfied. Account maintenance fees are earned over the course of the month as the monthly maintenance performance obligation to the customer is satisfied.
Fee income – Revenue is earned through commissions on insurance and securities sales, ATM surcharge fees, and banking house rents collected. The Company earns investment advisory fee income by providing investment management services to customers under investment management contracts. As the direction of investment management accounts is provided over time, the performance obligation to investment management customers is satisfied over time, and therefore, revenue is recognized over time.
Card income – Card income consists of interchange fees from consumer debit card networks and other related services. Interchange rates are set by the card networks. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur.
Mortgage fee income and realized gain on sale of loans and foreclosed real estate – Revenue from mortgage fee income and realized gain on sale of loans and foreclosed real estate is earned through the origination of residential and commercial mortgage loans, sales of one-to-four family residential mortgage loans, sales of government guarantees portions of Small Business Administration (“SBA”) loans, and sales of foreclosed real estate, and is earned as the transaction occurs.
Note 14: Leases
The Company has operating and finance leases for certain banking offices and land under noncancelable agreements. Our leases have remaining lease terms that vary from less than two 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 the lease expense are as follows:
Operating lease cost
60
113
121
Finance lease cost
40
Cash paid for amount included in the measurement of lease liabilities:
Operating cash flows from operating leases
103
Operating cash flows from finance leases
Financing cash flows from finance leases
36
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Supplemental balance sheet information related to leases was as follows:
(In thousands, except lease term and discount rate)
Operating Leases:
Finance Leases:
Financial Liability
592
587
Weighted Average Remaining Lease Term:
Operating Leases
18.79 years
19.08 years
Finance Leases
27.92 years
28.42 years
Weighted Average Discount Rate:
3.72
3.73
13.75
Maturities of lease liabilities were as follows:
Twelve Months Ending June 30,
2022
95
2023
2024
2025
2026
Thereafter
2,494
Total minimum lease payments
3,059
The Company owns certain properties that it leases to unaffiliated third parties at market rates. Lease rental income was $62,000 and $71,000 for the three months ended June 30, 2021 and 2020, respectively. Lease rental income was $125,000 and $142,000 for the six months ended June 30, 2021 and 2020, respectively. All lease agreements, in which the Company is the lessor, are accounted for as operating leases.
Note 15: COVID-19
The World Health Organization (the “WHO) declared COVID-19 a global pandemic on March 11, 2020. In the United States, by the end of March 2020, the rapid spread of the COVID-19 virus invoked various Federal and New York State authorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included severe restrictions on international and domestic travel, limitations on public gatherings, implementation of social distancing and sanitization protocols, school closings, orders to shelter in place and mandates to close all non-essential businesses to the public. To varying degrees, these very substantial mandated curtailments of social and economic activity had been progressively relaxed in the United States during the first and second quarters of 2021. This relaxation of the social and economic restrictions followed the increasingly wide-spread availability of vaccines that were first made available to the most vulnerable population segments in late 2020. These vaccines are generally considered to be effective in reducing the severity of the infection, if contracted, and in slowing the rate of spread of the coronavirus.
As a result of the initial and continuing outbreak, and governmental responses thereto, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. During the most restrictive periods during the pandemic, the Company had many of its employees working remotely and significantly reduced physical customer contact with employees and other customers until the second quarter of 2021, when New York State relaxed the majority of its safety mandates. On
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June 30, 2021, the Bank’s offices and branches were fully accessible to the public. We will take further actions, focused on safety, as may be required in the future by government authorities or that we determine to be in the best interests of our employees, customers and business partners.
Concerns about the spread of the disease and its anticipated negative impact on economic activity severely disrupted both domestic and international financial markets, prompting the world’s central banks to inject significant amounts of monetary stimulus into their respective economies. In the United States, the Federal Reserve System’s Federal Open Market Committee swiftly cut the target Federal Funds rate to a range of 0% to 0.25%, where it remains as of the date of this filing. The reductions in the Fed funds target rate included a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. In addition, the Federal Reserve initiated various market support programs to ease the stress on financial markets. This significant reduction in short-term interest rates has reduced, and will continue to reduce, the Bank’s cost of funds and interest earning-asset yields, as long as these central bank monetary policies remain in effect. The long-term effects of the current interest rate environment, resulting from government and central bank responses to the pandemic, on the Bank’s net interest margin cannot be predicted with certainty at this time. However, it is likely that a prolonged period of the current monetary policy will result in the reduction of the Company’s net interest margin in future periods, primarily as a result of declines in interest earning-asset yields over time.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on March 27, 2020, provided financial assistance in various forms to both businesses and consumers, including the establishment and funding of the Paycheck Protection Program (“PPP”). In addition, the CARES Act also created many directives affecting the operations of financial services providers, such as the Company, including a forbearance program for federally-backed mortgage loans and protections for borrowers from negative credit reporting due to loan accommodations related to the national emergency. The banking regulatory agencies likewise issued guidance encouraging financial institutions to work prudently with borrowers who were, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. The Company has worked to assist its business and consumer customers affected by COVID-19. While the CARES Act is widely-considered to have been beneficial to the economic recovery and supportive of the Company’s business activities, the long-term effect of this legislation on the operations of the Company cannot be determined with certainty at this time.
On December 27, 2020, following passage by the United States Congress, President Donald J. Trump signed into law the Consolidated Appropriations Act, 2021 which included the Coronavirus Response and Relief Supplemental Appropriations Act (“CRRSAA”). The intent of this legislation was to provide another round of Economic Impact Payments to eligible individuals and families, renew the PPP to support small businesses and their employees, ensure needed access to unemployment benefits for Americans who had lost their jobs due to COVID-19, and provide additional funding for schools, vaccine distribution, and other important sectors of the economy. While CRRSSA is widely considered to have been beneficial to the economic recovery and supportive of the Company’s business activities, the long-term effect of this legislation on the operations of the Company cannot be determined with certainty at this time.
On March 11, 2021, President Joseph R. Biden signed into law the American Rescue Plan Act of 2021. The intent of this legislation was to provide additional new funding for rural hospitals and health care providers for COVID-19 relief, to increase federal subsidies for COBRA coverage, and make changes to the Medicare wage index. The legislation also included provisions to bolster the nation’s COVID-19 health care response with additional resources for vaccines, treatment, personal protective equipment (PPE), testing, contact tracing and workforce development. In addition, non-health care specific provisions provide financial support for families and small businesses, and both extended and expanded support for housing, child care, food and the education system. While The American Rescue Plan Act of 2021 is expected to benefit the economic recovery and be supportive of the Company’s business activities, the effect of this legislation on the operations of the Company cannot be determined with certainty at this time.
As of the date of this filing, a new variant of the coronavirus, generally referred to as the “Delta” variant, has emerged in the United States and remains a significant concern in some regions and potentially, throughout the country. This variant is believed to be significantly more contagious than earlier variants of the coronavirus. Certain previously-relaxed social distancing and safety protocols have been reinstated in some areas of the country and it is possible that such protocols will be reinstated broadly in the future. The economic effects of these varying protocol reinstatement actions on the Company’s operations cannot be determined with certainty at this time.
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During the most restrictive periods of the pandemic, the Bank granted loan payment deferrals to the substantial majority of commercial and consumer customers who had made requests for such accommodations. These deferrals were granted following individual discussions with each borrower and were generally for periods of 90 or 180 days at the outset. Following discussions with certain borrowers, additional loan payment deferral periods of up to 90 days were granted following the expiration of the initial 90- to 180-day deferral periods. Typically, scheduled interest payments placed into deferred status have been added to future scheduled payments and are expected to be collected in total at the original maturity date of the loan. As of June 30, 2021, the Bank had no loans on active pandemic-related deferral.
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)
General
The Company is a Maryland corporation headquartered in Oswego, New York. The Company is 100% owned by public shareholders. The primary business of the Company is its investment in Pathfinder Bank (the "Bank"), a New York State chartered commercial bank, which is 100% owned by the Company. The Bank has two wholly owned operating subsidiaries, Pathfinder Risk Management Company, Inc. (“PRMC”) and Whispering Oaks Development Corp. All significant inter-company accounts and activity have been eliminated in consolidation. Although the Company owns, through its subsidiary PRMC, 51% of the membership interest in FitzGibbons Agency, LLC (“Agency”), the Company is required to consolidate 100% of FitzGibbons within the consolidated financial statements. The 49% of which the Company does not own is accounted for separately as noncontrolling interests within the consolidated financial statements. At June 30, 2021, the Company and subsidiaries had total consolidated assets of $1.3 billion, total consolidated liabilities of $1.2 billion and shareholders' equity of $103.2 million plus noncontrolling interest of $297,000, which represents the 49% of FitzGibbons not owned by the Company.
The following discussion reviews the Company's financial condition at June 30, 2021 and the results of operations for the three and six month periods ended June 30, 2021 and 2020. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any other period.
The following material under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is written with the presumption that the users of the interim financial statements have read, or have access to, the Company's latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2021 (“the consolidated annual financial statements”) as of December 31, 2020 and 2019 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. This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:
Credit quality and the effect of credit quality on the adequacy of our allowance for loan losses;
Deterioration in financial markets that may result in impairment charges relating to our securities portfolio;
Competition in our primary market areas;
Changes in interest rates and national or regional economic conditions;
Changes in monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;
Significant government regulations, legislation and potential changes thereto;
A reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;
Increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;
Cyberattacks, computer viruses and other technological threats that may breach the security of our websites or other systems;
Technological changes that may be more difficult or expensive than expected;
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Limitations on our ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations; and
Other risks described herein and in the other reports and statements we file with the SEC.
In addition to the risk factors enumerated above, the continuing economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations. The COVID-19 pandemic caused significant economic dislocation in the United States as many state and local governments ordered non-essential businesses to close and residents to shelter in place. While certain restrictions have started to ease, particularly with the recent widespread availability of novel vaccines, the pace at which the economic recovery unfolds and the sustainability of that recovery cannot be predicted with certainty at this time.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following additional risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
Demand for our products and services may decline, making it difficult to grow assets and income;
If the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
Collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
Our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
As the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;
A material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;
Our cyber security risks are increased as the result of an increase in the number of employees working remotely;
We rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and
Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.
Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
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COVID-19 Response
The World Health Organization (the “WHO) declared COVID-19 a global pandemic on March 11, 2020. In the United States, by the end of March 2020, the rapid spread of the COVID-19 virus invoked various Federal and New York State authorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included severe restrictions on international and domestic travel, limitations on public gatherings, implementation of social distancing and sanitization protocols, school closings, orders to shelter in place and mandates to close all non-essential businesses to the public. To varying degrees these very substantial mandated curtailments of social and economic activity had been progressively relaxed in the United States during the first and second quarters of 2021. This relaxation of the social and economic restrictions followed the increasingly wide-spread availability of vaccines that were first made available to the most vulnerable population segments in late 2020. These vaccines are generally considered to be effective in reducing the severity of the infection, if contracted, and in slowing the rate of spread of the coronavirus. However, the percentage of unvaccinated people in the United States, and the potential for future mutations of the coronavirus, remain significant long-term public health and economic concerns.
As a result of the initial and continuing outbreak, and governmental responses thereto, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. During the most restrictive periods during the pandemic, the Company had many of its employees working remotely and significantly reduced physical customer contact with employees and other customers until the second quarter of 2021, when New York State relaxed the majority of its safety mandates. At June 30, 2021, the Bank’s offices and branches were fully accessible to the public. We will take further actions, focused on safety, as may be required in the future by government authorities or that we determine to be in the best interests of our employees, customers and business partners.
Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted both domestic and international financial markets prompting the world’s central banks to inject significant amounts of monetary stimulus into their respective economies. In the United States, the Federal Reserve System’s Federal Open Market Committee, swiftly cut the target Federal Funds rate to a range of 0% to 0.25%, where it remains as of the date of this filing. The reductions in the Fed funds target rate included a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. In addition, the Federal Reserve initiated various market support programs to ease the stress on financial markets. This significant reduction in short-term interest rates has reduced, and will continue to reduce, the Bank’s cost of funds and interest earning-asset yields, as long as these central bank monetary policies remain in effect. The long-term effects of the current interest rate environment, resulting from government and central bank responses to the pandemic, on the Bank’s net interest margin cannot be predicted with certainty at this time. However, it is likely that a prolonged period of the current monetary policy will result in the reduction of the Company’s net interest margin in future periods, primarily as a result of declines in interest earning-asset yields over time.
On December 27, 2020, following passage by the United States Congress, President Donald J. Trump signed into law the Consolidated Appropriations Act, 2021 which included the Coronavirus Response and Relief Supplemental Appropriations Act (“CRRSAA”). The intent of this legislation was to provide another round of Economic Impact Payments to eligible individuals and families, renew the PPP to support small businesses and their employees, ensure needed access to unemployment benefits for Americans who had lost their jobs due to COVID-19, and provide additional funding for schools, vaccine distribution, and other important sectors of the economy. While CRRSSA is widely-considered to have been
- 58 -
beneficial to the economic recovery and supportive of the Company’s business activities, the long-term effect of this legislation on the operations of the Company cannot be determined with certainty at this time.
On March 11, 2021, President Joseph R. Biden, signed into law the American Rescue Plan Act of 2021. The intent of this legislation was to provide additional new funding for rural hospitals and health care providers for COVID-19 relief, to increase federal subsidies for COBRA coverage, and make changes to the Medicare wage index. The legislation also included provisions to bolster the nation’s COVID-19 health care response with additional resources for vaccines, treatment, personal protective equipment (PPE), testing, contact tracing and workforce development. In addition, non-health care specific provisions provide financial support for families and small businesses, and both extended and expanded support for housing, child care, food and the education system. While The American Rescue Plan Act of 2021 is expected to benefit the economic recovery and be supportive of the Company’s business activities, the effect of this legislation on the operations of the Company cannot be determined with certainty at this time.
Paycheck Protection Program
The Bank participated in all rounds of the PPP funded by the U.S. Treasury Department and administered by the U.S. SBA pursuant to the CARES Act and subsequent legislation. PPP loans have an interest rate of 1.0% and a two-year or five-year loan term to maturity. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and the loan proceeds are used for qualifying expenses. Information related to the Company’s PPP loans are included in the following tables:
For the six months ended,
Number of PPP loans originated in the period
674
Funded balance of PPP loans originated in the period
1,882
75,040
36,369
Number of PPP loans forgiven in the period
143
Average balance of PPP loans in the period
68,927
48,029
69,410
24,015
Balance of PPP loans forgiven in the period
23,985
42,566
Deferred PPP fee income recognized in the period
735
289
1,147
Unearned PPP deferred fee income at end of period
1,720
2,236
Number
Total PPP loans originated since inception
1,177
111,721
Total PPP loans forgiven since inception
479
58,110
Total PPP loans remaining at June 30, 2021
698
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Application of Critical Accounting Policies
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 financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the allowance for loan losses, deferred income taxes, pension obligations, the evaluation of investment securities for other than temporary impairment, the estimation of fair values for accounting and disclosure purposes, and the evaluation of goodwill for impairment to be the accounting areas that require the most subjective and complex judgments. These areas could be the most subject to revision as new information becomes available.
The allowance for loan losses represents management's estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment on the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.
Our Allowance for Loan and Lease Losses policy establishes criteria for selecting loans to be measured for impairment based on the following:
Residential and Consumer Loans:
All loans rated substandard or worse, on nonaccrual, and above our total related credit (“TRC”) threshold balance of $300,000.
All Troubled Debt Restructured Loans
Commercial Lines and Loans, Commercial Real Estate and Tax-exempt loans:
All loans rated substandard or worse, on nonaccrual, and above our TRC threshold balance of $100,000.
Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses as compared to the loan carrying value. For all other loans and leases, the Company uses the general allocation methodology that establishes an allowance to estimate the probable incurred loss for each risk-rating category.
Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is recognized for the future tax consequences. This is attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating
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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.
Effective in January 2018, the Company adopted a modification methodology that was at the time newly made available under the New York State tax code, affecting how the Company’s state income tax liability is computed. Under this adopted methodology, management determined in the first quarter of 2019, it was unlikely that the Company would pay material income taxes to New York State in future periods under then-existing income tax laws in the State, and therefore in the quarter ended March 31, 2019, the Company established, through a charge to earnings, a valuation allowance in the amount of $136,000 in order to reserve against deferred tax assets related to New York State income taxes. This valuation allowance against the value of those deferred tax assets was established to reduce the net deferred tax asset related to New York State income taxes to $0. Management is continuously monitoring its future tax consequences to determine if the Company’s deferred taxes are properly stated. In the first quarter of 2020, consistent with policy, management reviewed all facts and circumstances related to its deferred taxes and determined that based on the expected filings of future New York State tax returns, the valuation allowance created in 2019 was no longer needed. Therefore management elected to eliminate its New York State net deferred tax asset valuation allowance during the quarter ended March 31, 2020.
On April 7, 2021, the New York State Legislature approved comprehensive tax legislation as part of the State’s 2022 Fiscal Year budget. The legislation includes increased taxes on businesses and high-income individuals among other tax law revisions. Other provisions include amendments to the real estate transfer tax.
The legislation increases the corporate franchise tax rate to 7.25% from 6.5% for tax years beginning on or after January 1, 2021 and before January 1, 2024 for taxpayers with a business income base greater than $5.0 million. In addition, the previously scheduled phase-out of the capital base tax has been delayed. The rate of the capital base was to have been reduced to 0% starting in 2021. The legislation imposes the tax at the rate of 0.1875% for tax years beginning on or after January 1, 2021 and before January 1, 2024, with the 0% rate to take effect in 2024. Management is evaluating the projected impact on the Company’s financial condition and results of operations and believes that these provisions may increase the Company’s income tax expense in the future. However, these potential increases in New York State income taxes are not expected to be material to the future results of the Company’s operations.
The Company’s effective tax rate typically differs from the 21% federal statutory tax rate due primarily to tax-exempt income from specific types of investment securities and loans, bank owned life insurance, and, to a much lesser degree, the utilization of low income housing tax credits, as well as the effects of transitional adjustments related to state income taxes and certain taxes payable to states other than New York. The effective tax rate was 21.5% for the six month period ended June 30, 2021.
We maintain a noncontributory defined benefit pension plan covering most employees. The plan provides defined benefits based on years of service and final average salary. On May 14, 2012, we informed our employees of our decision to freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan. Pension and post-retirement benefit plan liabilities and expenses are based upon actuarial assumptions of future events; including fair value of plan assets, interest rates, and the length of time the Company will have to provide those benefits. The assumptions used by management are discussed in Note 14 to the consolidated annual financial statements.
The Company carries all of its available-for-sale investments at fair value with any unrealized gains or losses reported, net of tax, as an adjustment to shareholders' equity and included in accumulated other comprehensive income (loss), except for the credit-related portion of debt securities impairment losses and other-than-temporary impairment (“OTTI”) of equity securities which are charged to earnings. The Company's ability to fully realize the value of its investments in various securities, including corporate debt securities, is dependent on the underlying creditworthiness of the issuing organization. In evaluating the debt securities (both available-for-sale and held-to-maturity) portfolio for other-than-temporary impairment losses, management considers (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) if the present value of expected cash flows is
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not sufficient to recover the entire amortized cost basis. When the fair value of a held-to-maturity or available-for-sale security is less than its amortized cost basis, an assessment is made as to whether OTTI is present. The Company considers numerous factors when determining whether a potential OTTI exists and the period over which the debt security is expected to recover. The principal factors considered are (1) the length of time and the extent to which the fair value has been less than the amortized cost basis, (2) the financial condition of the issue and (guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (3) failure of the issuer of the security to make scheduled interest or principal payments, (4) any changes to the rating of the security by a nationally recognized statistical rating organization (“NRSRO”), and (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.
The estimation of fair value is significant to several of our assets; including available-for-sale 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 available-for-sale securities may be influenced by a number of factors; including market interest rates, prepayment speeds, discount rates, and the shape of yield curves.
Fair values for securities available-for-sale are obtained from unaffiliated third party pricing services. Where available, fair values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management made no adjustments to the fair value quotes that were provided by the pricing sources. Fair values for marketable equity securities are based on quoted prices on a nationally recognized securities exchange for similar benchmark securities. The fair values of foreclosed real estate and the underlying collateral value of impaired loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to reflect changes in market conditions.
Management performs an annual evaluation of our goodwill for possible impairment at each of our reporting units. Based on the results of the December 31, 2020 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 current pandemic, 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. The evaluation approach is described in Note 10 of the consolidated annual financial statements. Further information on the estimation of fair values can be found in Note 22 to the consolidated annual financial statements.
Recent Events
Following shareholder approval obtained on June 4, 2021, the Company converted 1,380,283, or 100%, of its previously-outstanding shares of Series B Convertible Perpetual Preferred Stock to an equal number of newly-created Series A Non-Voting Common Stock. Neither the previously-issued Series B Convertible Perpetual Preferred Stock, nor the newly-issued Series A Non-Voting Common Stock had, or will have, dividend or liquidation preference over the Company’s existing Voting Common Stock. Holders of the new Series A Non-Voting Common Stock will be entitled to receive dividends, if and when declared by the Company’s Board of Directors, in the same per share amount as paid on the Company’s Voting Common Stock.
On June 28, 2021, the Company announced that the Board of Directors declared a quarterly cash dividend of $0.07 per voting common and non-voting common share and a cash dividend of $0.07 per notional share for the issued warrant. The dividends are payable on August 13, 2021 to shareholders of record on July 16, 2021.
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Overview and Results of Operations
The following represents the significant highlights of the Company’s operating results between the second quarter of 2021 and the second quarter of 2020.
Net income increased $1.2 million, or 65.4%, to $3.0 million.
Basic and diluted earnings per voting common share were both $0.50 per share and increased $0.19 per share.
Return on average assets increased 32 basis points to 0.95% as the increase in income outpaced the increase in average assets.
Net interest income, after provision for loan losses, increased $2.8 million, or 43.0%, to $9.3 million. Excluding the provision, net interest income increased $2.6 million, or 33.7%, to $10.2 million. The increase in net interest income after provision for loan losses was primarily due to a decrease in total interest expense, combined with an increase in the average balances of interest-earning assets.
Net interest margin increased by 67 basis points to 3.42% and reflects both a 25 basis point increase in the average yield for interest-earning assets, and a 49 basis point decline in the average cost for interest-bearing liabilities.
The effective income tax rate increased 3.0% to 22.1% for the three months ended June 30, 2021 as compared to 19.1% for the same three month period in 2020. The increase in the tax rate in the second quarter of 2021, as compared to the same quarter in 2020, was primarily related to increases in accruals for New York State related taxes and the timing of certain potential deductions related to New York State taxable income.
The following represents significant highlights of the Company’s operating results between the first six months of 2021 and the first six months of 2020.
•Net income increased $1.6 million, or 45.4%, to $5.2 million.
Basic and diluted earnings per voting common share were both $0.87 per share and increased $0.27 per share.
Return on average assets increased 19 basis points to 0.81% as the increase in income outpaced the increase in average assets.
Net interest income, after provision for loan losses, increased by $3.6 million, or 27.4%, to $16.8 million. This increase in net interest income after provision for loan losses was primarily due to the decrease in total interest expense, combined with an increase in the average balances of interest-earning assets.
Net interest margin increased by 25 basis points to 3.13%, primarily the result of a 50 basis point decline in the average cost for interest-bearing liabilities, partially offset by a 19 basis point decrease in the average yield for interest-earning assets.
The effective income tax rate increased 1.0% to 21.5% for the six months ended June 30, 2021 as compared to 20.5% for the same six month period in 2020. The increase in the tax rate in the first six months of 2021, as compared to the same period in 2020, was primarily related to increases in accruals for New York State related taxes and the timing of certain potential deductions related to New York State taxable income.
The following reflects the significant changes in financial condition between December 31, 2020 and June 30, 2021. In addition, the following reflects significant changes in asset quality metrics between June 30, 2020 and June 30, 2021.
Total assets increased $32.2 million, or 2.6% to $1.3 billion at June 30, 2021, as compared to December 31, 2020, primarily due to increases in loans and investment securities. These increases were funded largely by increases in deposits, including brokered deposits, as well as the cash flow from maturities and principal reductions of investment securities.
The Bank’s asset quality metrics, as measured by net loan charge-offs to average loans, remained stable for second quarter 2021. Net loan charge-offs to average loans were 0.03% for the second quarter 2021, compared with 0.08% for the second quarter of 2020 and 0.05% for the quarter ended March 31, 2021.
Nonperforming loans to total loans were 1.92% at June 30, 2021, a decrease of 66 basis points compared to 2.58% at December 31, 2020. The decrease in nonperforming loans at June 30, 2021, as compared to December 31, 2020 was primarily the result of one commercial real estate loan, with an outstanding balance of $7.4 million, being returned to accruing status as of June 30, 2021 following six months of timely principal and interest payments. Management is monitoring all nonaccrual loans closely and has incorporated our current estimate of the ultimate collectability of these loans into the reported allowance for loan losses at June 30, 2021.
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The Company had net income of $3.0 million for the three months ended June 30, 2021 compared to net income of $1.8 million for the three months ended June 30, 2020. The $1.2 million increase in net income was due primarily to a $1.6 million increase in interest and dividend income, a $1.0 million decrease in interest expense and a $217,000 decrease in provision for loan losses. These increases were partially offset by a $1.1 million increase in noninterest expense and a $412,000 increase in income tax expense.
Net interest income before the provision for loan losses increased $2.6 million, or 33.7%, to $10.2 million for the three months ended June 30, 2021 as compared to $7.6 million for the same three month period in 2020. The increase was primarily the result of an increase in average interest-earning asset balances as well as increases in the average yields of both loan and investment securities portfolios. These increases resulted in a 25 basis point increase to 4.03% in interest-earning asset yields for the three months ended June 30, 2021 as compared to 3.78% for the same three month period of the previous year. Net interest income was further enhanced by a 49 basis point decrease in the average cost of interest-bearing liabilities in the second quarter of 2021, as compared to the same quarter in 2020, partially offset by a $47.7 million increase in the average balance of interest-bearing liabilities.
The $97,000, or 6.3%, decrease in noninterest income in the quarter ended June 30, 2021, as compared to the same quarterly period in 2020, was primarily the result of a decrease of $972,000 in net gains on sales and redemptions of investment securities partially offset by a $771,000 increase in net gains on equity securities. Further contributing to the decrease in noninterest income was a net decrease of $58,000 in net gains on sales of loans and foreclosed real estate for the current period, as compared to the same three-month period in 2020. All other noninterest income categories increased by $104,000, or 6.8%, in the three months ended June 30, 2021, as compared to the same period in the prior year, primarily driven by increases in other charges, commissions and fees and services charges on deposit accounts, which increased $68,000 and $54,000, respectively.
The $1.1 million increase in noninterest expense in the quarter ended June 30, 2021, as compared to the same quarterly period in 2020, was due primarily as a result of an increase in salaries and employee benefits expense, building and occupancy costs, professional and other services, data processing costs, the FDIC assessment, and audits and exams costs of $529,000, $163,000, $150,000, $102,000, $82,000, and $52,000, respectively. The increase in salaries and employee benefit expense was primarily due to a $401,000 increase in net salaries expense and a $144,000 increase in commissions’ expense. The increase in net salaries expense was partially the result of increased PPP loan originations in 2020 and the deferral of employee-related expenses related to those originations. All other employee-related expenses declined an aggregate $18,000 in the second quarter of 2021, as compared to the same quarterly period in 2020. Building and occupancy costs increased as a result of an increase in maintenance costs and depreciation expense of $122,000 and $27,000, respectively. These increases are consistent with the Company’s recent refurbishments of certain branch and administrative locations and the relative timing of certain maintenance activities. Professional and other services costs increased due to increased use of third party services. Data processing costs increased due to increases in internet banking costs and processing costs. These increases are consistent with the Company’s customer and operational growth. The increases in audits and exams expense are primarily related to the Bank’s first year of increased internal controls testing under FDICIA requirements for institutions with assets greater than $1 billion and additional expenses for the Company as a result of the COVID-19 pandemic.
Management extensively reviews recent trends in changes in the size and composition of the loan portfolio, historical loss experience, qualitative factors, and specific reserve needs on loans individually evaluated for impairment, in its determination of the adequacy of the allowance for loan losses. For the three months ended June 30, 2021, we recorded $929,000 in provision for loan losses as compared to $1.1 million in the same prior year three month period. The provision is reflective of (1) the qualitative factors used in determining the adequacy of the allowance for loan losses, (2) the size of the loan portfolio, and (3) delinquent and nonaccrual loans. The second quarter provision for loan losses reflects a prudent 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 proven conservative loan classification and reserve building methodologies to the analysis of these portfolios.
In comparing the year-over-year second quarter periods, the Company’s return on average assets increased 32 basis points to 0.95% due to the combined effects of the increase in net income (the numerator in the ratio) and the increase in average assets (the denominator in the ratio). Average assets increased due to increases in average investment securities and average
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loans of $74.6 million and $60.1 million, respectively, in the second quarter of 2021 as compared to the same quarter of 2020. Average interest-bearing deposits increased $29.5 million in the second quarter of 2021, as compared with the same quarter in 2020. The increase in deposits was due to growth in retail and commercial relationship deposits as a result of the Bank’s participation in the PPP lending program. Average time deposits decreased $45.9 million as compared with the same quarter in 2020.
The Company had net income of $5.2 million for the six months ended June 30, 2021 compared to net income of $3.6 million for the six months ended June 30, 2020. The $1.6 million increase in net income was due primarily to a $3.4 million increase in net interest income and a $256,000 decrease in provision for loan losses. These fluctuations were partially offset by an increase of $1.5 million in noninterest expense and a $506,000 increase in income tax expense.
Net interest income before the provision for loan losses increased $3.4 million to $18.8 million for the six months ended June 30, 2021, as compared to $15.4 million for the same six month period in 2020. The increase was due principally to a $1.5 million, or 6.7%, increase in interest and dividend income that was a result of growth in average interest-earning assets of $130.0 million compared to the prior year six month period. Average loans for the first six months of 2021 increased by $74.3 million, or 9.5%, over the prior year period, while the average interest yield earned on average loans decreased by 27 basis points. In addition, interest expense decreased $1.9 million to $4.2 million for the six months ended June 30, 2021 as compared to the prior year period. The average interest rate paid on interest-bearing liabilities decreased by 50 basis points for the six months ended June 30, 2021 as compared to the prior year period; however, average interest-bearing liabilities increased by $75.7 million, or 8.5%.
Noninterest income remained consistent for the six months ended June 30, 2021, when compared to the same six month period in 2020. Net gains on marketable equity securities increased $1.2 million and was offset by a decrease in net gains on the sales and redemptions of investment securities of $998,000. Net gains on the sale of loans and foreclosed real estate also decreased $610,000 when compared to the same period in 2020. Debit card interchange fees, other charges, commission and fees, earnings on bank owned life insurance and service charges on deposit accounts increased $94,000, $87,000, $32,000 and $30,000, respectively. The net increase in these categories of noninterest income were in part due to the Company’s increased strategic focus on improving recurring noninterest income.
Total noninterest expense for the six month period of 2021 was $13.5 million, an increase of $1.5 million, or 12.3%, compared with $12.0 million for the prior year period. The increase was primarily a result of higher salaries and benefit expense, professional and other services, building and occupancy, data processing expenses, and audits and exams expense of $623,000, $251,000, $202,000, $178,000, and $129,000, respectively. The increase in net salaries expense was partially the result of increased PPP loan originations in 2020 and the deferral of employee-related expenses related to those originations. The increases in professional and other services fees, and audits and exams expense were primarily related to the Bank’s first year of increased internal controls testing under FDICIA requirements for institutions with assets greater than $1 billion and additional expenses for the Company as a result of the COVID-19 pandemic. Building and occupancy costs increased as a result of an increase in maintenance costs and depreciation expense of $168,000 and $51,000, respectively. These increases are consistent with the Company’s recent refurbishments of certain branch and administrative locations and the relative timing of certain maintenance activities. Data processing costs increased due to increases in internet banking costs and processing costs. These increases are consistent with the Company’s customer and operational growth.
For the first six months of 2021, we recorded $2.0 million in provision for loan losses as compared to $2.2 million in the same prior year six month period. The provision is reflective of (1) the qualitative factors used in determining the adequacy of the allowance for loan losses, (2) the size of the loan portfolio, and (3) delinquent and nonaccrual loans. The credit sensitive portfolios continue to be carefully monitored, and the Bank will consistently apply its proven conservative 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 loan losses.
Return on average assets increased 19 basis points to 0.81% between the year-over-year six month periods as the increase in net income in the six month period ended June 30, 2021 (the numerator of the ratio) increased by a higher percentage than the rate at which average assets (the denominator of the ratio) grew during the period. Average assets increased due to increases in average loans and investment securities of $74.3 million and $73.0 million, respectively, in the six months
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period ended June 30, 2021 as compared to the same period of 2020. Average interest-bearing liabilities increased $75.7 million in the six month ended June 30 2021, as compared with the same period in 2020. The increase in deposits was due to growth in retail and commercial relationship deposits as a result of the Bank’s participation in the PPP lending program. Average time deposits decreased $25.0 million as compared with the same period in 2020.
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Net Interest Income
Net interest income is the Company's primary source of operating income for payment of operating expenses and providing for loan losses. It is the amount by which interest earned on loans, interest-earning deposits, and investment securities, exceeds the interest paid on deposits and other interest-bearing liabilities. Changes in net interest income and net interest margin result from the interaction between the volume and composition of interest-earning assets, interest-bearing liabilities, related yields, and associated funding costs.
The following tables set forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated. Interest income and resultant yield information in the tables has not been adjusted for tax equivalency. Averages are computed on the daily average balance for each month in the period divided by the number of days in the period. Yields and amounts earned include loan fees. Nonaccrual loans have been included in interest-earning assets for purposes of these calculations.
Average
Yield /
Interest-earning assets:
856,380
4.57
796,267
4.44
Taxable investment securities
303,858
2,239
2.95
230,943
1,613
2.79
Tax-exempt investment securities
11,226
1.50
9,552
2.18
Fed funds sold and interest-earning deposits
24,948
0.02
76,203
0.09
Total interest-earning assets
1,196,412
4.03
1,112,965
3.78
Noninterest-earning assets:
80,159
73,721
Allowance for loan losses
(14,016
(10,076
Net unrealized gains
on available-for-sale securities
1,872
(1,804
1,264,427
1,174,806
Interest-bearing liabilities:
NOW accounts
92,412
0.32
80,712
0.17
Money management accounts
15,988
0.10
15,826
MMDA accounts
238,791
0.40
202,136
0.70
Savings and club accounts
121,584
0.13
94,684
Time deposits
372,807
785
0.84
418,722
1,788
1.71
32,643
5.00
15,139
5.07
88,109
299
1.36
87,415
2.19
Total interest-bearing liabilities
962,334
0.77
914,634
1.26
Noninterest-bearing liabilities:
Demand deposits
187,877
156,001
11,598
12,828
1,161,809
1,083,463
Shareholders' equity
102,618
91,343
Total liabilities & shareholders' equity
Net interest rate spread
3.26
2.52
Net interest margin
3.42
2.75
Ratio of average interest-earning assets
to average interest-bearing liabilities
124.32
121.68
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852,972
4.37
778,709
4.64
306,278
4,302
2.81
239,297
3,375
2.82
11,495
1.24
5,458
2.16
28,660
0.03
45,943
0.21
1,199,405
3.84
1,069,407
81,248
75,263
(13,539
(9,390
Net unrealized losses
on available for sale securities
1,595
(843
1,268,709
1,134,437
93,598
0.28
78,247
15,794
15,005
237,050
496
0.42
198,298
0.76
116,479
90,901
0.11
385,918
1,965
1.02
410,967
3,882
1.89
36,009
5.36
15,135
5.26
86,598
1.38
87,217
980
2.25
971,446
895,770
1.37
184,180
134,179
11,769
12,446
1,167,395
1,042,395
101,314
92,042
2.97
2.66
3.13
2.88
123.47
119.38
As indicated in the above tables, net interest income, before provision for loan losses, increased $2.6 million, or 33.7%, to $10.2 million for the three months ended June 30, 2021 as compared to $7.6 million for the same prior year period. This increase was due principally to the $83.4 million, or 7.5%, increase in the average balance of interest-earning assets, combined with an increase of 25 basis points on the average yield earned on those assets. These positive factors on net interest income were partially offset by an increase in the average balance of interest-bearing liabilities of $47.7 million, or 5.2%, but with a decrease of 49 basis points on the average interest rate paid on those liabilities. In total, net interest margin increased 67 basis points to 3.42% due largely to the increase in average yields earned on average interest-earning assets, and an 87 and 83 basis point decrease in the average rate paid on time deposits and borrowings, respectively. The following analysis should also be viewed in conjunction with the table below which reports the changes in net interest income attributable to rate and volume.
Interest and dividend income increased $1.6 million, or 14.8%, to $12.1 million for the three months ended June 30, 2021 compared to $10.5 million for the same three month period in 2020. The increase in interest income was due principally to the increase in average interest-earning assets (primarily taxable investment securities, tax exempt investment securities and loans). The increase in interest income on taxable investment securities was due principally to the increase in the average balance of those securities, which increased 31.6% in the year-over-year second quarter periods. The average balance of loans increased by $60.1 million, while the average yield earned on those loans increased by 13 basis points. The increase
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in the average balance of loans reflected purchased loan growth. The increase in the average yield earned on loans was due to the recognition of deferred PPP fee income recognized in the period due to the increased levels of forgiveness in the three month ended June 30, 2021. Please refer to the PPP tables above for the full impact of PPP loans on average loan yields.
Interest expense for the three months ended June 30, 2021 decreased $1.0 million or 35.6%, to $1.9 million when compared to the same prior year period. Deposit interest expense decreased $1.1 million, or 48.1%, to $1.1 million due primarily to a 54 basis point decrease in the annualized rate paid on deposits to 0.54% for the three months ended June 30, 2021, as compared to 1.09% for the three months ended June 30, 2020. This was partially offset by a $29.5 million increase in the average balance of interest-bearing deposits during the same time periods. This decrease in the average cost of deposits was primarily due to an 87 basis point decrease in the average rate paid on time deposits during the three months ended June 30, 2021 as compared to the same three month period in 2020 due to the general decline in market interest rates during the second quarter of 2021.
For the six month period ended June 30, 2021, net interest income, before the provision for loan losses, increased $3.4 million, or 21.8%, to $18.8 million compared to $15.4 million for the six months ended June 30, 2020. Interest and dividend income increased $1.5 million, or 6.7%, to $23.0 million for the six months ended June 30, 2021 from $21.6 million for the same six month period in 2020. The increase in interest income was due principally to the increase in average balances of loans and taxable investment securities. The increase in the average balance of loans reflected continued success in its expansion within the greater Syracuse, New York market and purchased loan growth. The increase in the average balance of securities reflected increased purchases in 2021 compared to 2020. These increases were offset by a reduction of the average balance of federal funds sold and interest-earning deposits, which decreased 37.6% in the year over-year six month periods. The decrease in the average balance of federal funds sold and interest-earning deposits in 2021 was primarily the result of the effects of the COVID-19 pandemic. The Bank substantially increased its on-hand liquidity in 2020 to support the potential needs of the customers and the communities it serves during the six month period ended June 30, 2020. This level of liquidity was not considered necessary in 2021.
Interest expense for the six months ended June 30, 2021 decreased $1.9 million, or 31.0%, to $4.2 million as compared to $6.1 million for the six months ended June 30, 2020. The decrease in interest expense was due principally to a 50 basis point decrease in the average rate paid on interest-bearing liabilities to 0.87%, partially offset by a $75.7 million increase in the average balance of these liabilities. The decrease in interest expense was due to a $2.1 million decrease in deposit interest expense and a $383,000 decrease in borrowings expense. These decreases were partially offset by a $567,000 increase in subordinated loan expense due to the increase in the average balance of those subordinated loans period over period. The average balance of interest-bearing deposits, which include brokered deposits, increased $55.4 million between the year-over-year six month periods. The average rate paid on interest-bearing deposits decreased 57 basis points to 0.63% for the six months ended June 30, 2021 as compared with the same six month period in 2020. This decrease was primarily due to an 87 basis point decrease in the average rate paid on time deposits, during the six months ended June 30, 2021 as compared to the same time period in 2020. The decrease in the average rates paid on those deposits reflected the general decline in market interest rates during the first half of 2021.
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Rate/Volume Analysis
Net interest income can also be analyzed in terms of the impact of changing interest rates on interest-earning assets and interest-bearing liabilities and changes in the volume or amount of these assets and liabilities. The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (change in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) total increase or decrease. Changes attributable to both rate and volume have been allocated ratably. Please refer to the PPP table in the previous section for information on PPP loans and the impact on loan income for the three and six months ended June 30, 2021 and 2020.
Three months ended June 30,
Six months ended June 30,
2021 vs. 2020
Increase/(Decrease) Due to
Increase
Volume
Rate
(Decrease)
Interest Income:
2,285
(2,270
5,110
(2,840
2,270
(417
450
524
(964
(440
(23
(31
(30
(61
Interest-earning deposits
(457
(235
Total interest income
3,217
(2,789
428
5,825
(4,291
1,534
Interest Expense:
(394
(278
(530
(610
1,436
(2,725
(1,289
341
365
(64
(268
(123
554
(1,046
(492
1,761
(3,499
(1,738
Net change in net interest income
2,663
(1,743
4,064
(792
3,272
Provision for Loan Losses
We establish a provision for loan losses, which is charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. The provision for loan losses represents management’s estimate of the amount necessary to maintain the allowance for loan losses at an adequate level.
Management extensively reviews recent trends in historical losses, qualitative factors and specific reserve needs on loans individually evaluated for impairment in its determination of the adequacy of the allowance for loan losses. We recorded $929,000 in provision for loan losses for the three month period ended June 30, 2021, as compared to $1.1 million for the three month period ended June 30, 2020. For the first six months of 2021, we recorded $2.0 million in provision for loan losses as compared to $2.2 million in the same prior year six month period. The provisioning in 2021 and 2020 reflects management’s determination of prudent additions to reserves considering loan mix changes, concentrations of loans in certain business sectors, factors related to loan quality metrics, and continued COVID-19 related economic uncertainty. The credit-sensitive portfolios continue to be carefully monitored, and the Bank will consistently apply its proven conservative loan classification and reserve building methodologies to the analysis of these portfolios.
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The Company measures delinquency based on the amount of past due loans as a percentage of total loans. The ratio of delinquent loans to total loans increased to 2.36% at June 30, 2021 as compared to 1.85% at December 31, 2020. Delinquent loans (numerator) increased $4.5 million while total loan balances (denominator) increased $5.8 million at June 30, 2021, as compared to December 31, 2020. The increase in past due loans was primarily driven by an increase of $4.3 million loans delinquent 30-59 days, of which $3.4 million relate to a single commercial borrower.
At June 30, 2021, there were $19.8 million in loans past due including $8.1 million in loans 30-59 days past due, $5.5 million in loans 60-89 days past due and $6.2 million in loans 90 or more days past due. At December 31, 2020, there were $15.3 million in loans past due including $3.8 million in loans 30-59 days past due, $5.4 million in loans 60-89 days past due and $6.1 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:
Change
17.8
4.6
23
21.7
14.4
(68
-86.1
-21.1
17.6
94
25.5
26.5
-1.5
Other charges, commissions and fees
26.7
18.2
Noninterest income before gains (losses)
1,295
1,133
14.3
2,585
2,377
8.8
Net gains on sales and redemptions of
investment securities
(972
-95.0
(998
-95.1
106.8
1,199
-130.9
Net gains on sales of loans and foreclosed
-59.8
-79.3
Gains on sale of premises and equipment
>100%
-6.3
0.0
The $97,000, or 6.3%, decrease in noninterest income in the quarter ended June 30, 2021, as compared to the same quarterly period in 2020, was primarily the result of a $201,000 decrease in income from the combined investment related activities of (1) net gains on sales and redemptions of investment securities and (2) net losses on equity securities. During the second quarter of 2021, net gains on sales and redemptions of investment securities decreased $972,000, as compared to the previous year period, and this decrease was partially offset by a $771,000 increase in gains on equity securities, compared to the second quarter of 2020. Further contributing to the decrease in noninterest income was a net decrease of $58,000 in net gains on sales of loans and foreclosed real estate for the current period.
Excluding the effects of the quarter over quarter fluctuations discussed above, all other noninterest income categories increased by $162,000, or 14.3%, in the three months ended June 30, 2021, as compared to the same prior year period. Noninterest income was significantly muted in the second quarter of 2020 by reduced customer transactional activity levels and the Bank’s increased levels of fee waivers and other forbearances in response to the local economic effects of the COVID-19 pandemic.
Noninterest income remained consistent for the six months ended June 30, 2021, when compared to the same six month period in 2020. Net gains on marketable equity securities increased $1.2 million and was partially offset by a decrease in net gains on the sales and redemptions of investment securities of $998,000. Net gains on the sale of loans and foreclosed real estate also decreased $610,000 when compared to the same period in 2020. Debit card interchange fees, other charges,
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commission and fees, earnings on bank owned life insurance and services charges on deposit accounts increased $94,000, $87,000, $32,000 and $30,000, respectively. The net increase in these categories of noninterest income were in part due to the Company’s increased strategic focus on improving recurring noninterest income.
Noninterest Expense
The following table sets forth certain information on noninterest expense for the periods indicated:
529
623
10.0
23.1
202
13.8
102
18.5
15.5
49.8
251
40.7
-0.8
15.6
54.7
91
26.8
41.6
51.6
(18
-8.5
-1.0
183.3
2.5
220.0
-37.1
-0.9
-5.2
Total noninterest expenses
1,087
18.9
1,478
12.3
The $1.1 million, or 18.9%, increase in noninterest expense between the year-over-year second quarter periods was primarily a result of higher salaries and employee benefit expense, building and occupancy costs, professional and other services, and data processing expenses. The detail of the components of the overall increase in noninterest expense is as follows:
The increase in salaries and employee benefits expense was primarily due to a $401,000 increase in net salaries and employee benefits expense and a $144,000 increase in commissions’ expense. The year-over-year increase in salaries and employee benefit expense was partially attributable to factors related to PPP loan originations, as discussed below.
The $163,000, $150,000, and $102,000 increases in building occupancy expenses, professional and other services, and data processing expenses, respectively, are consistent with the Company’s customer and operational growth and with the additional factors discussed below.
All other noninterest expenses increased in aggregate in the year-over-year three-month periods by a total of $143,000, or 2.5%.
The increase in salaries and employee benefit expense was primarily due to a $401,000 increase in net salaries and benefits expense and a $144,000 increase in commissions’ expense. The $401,000 increase in net salaries and benefits expense in the three months ended June 30, 2021, as compared to the same three month period in 2020, was partially the result of reduced PPP loan origination-related salary expense deferrals in the amount of $416,000 in 2021, as compared to the previous year, as PPP loan origination volume declined from $75.0 million in the second quarter of 2020 to $1.9 million in the second quarter 2021. Commissions’ expense increased primarily due to the full resumption of accruals related to employee and officer incentive programs in the second quarter of 2021. These accruals were substantially reduced in the second quarter of 2020 in response to the uncertainties presented by the pandemic. All other employee-related expenses declined in aggregate by $18,000 in the second quarter of 2021, as compared to the same quarterly period in 2020. Building and occupancy costs increased primarily as a result of an increase in maintenance costs and depreciation expense of $122,000 and $27,000, respectively. These increases are consistent with the Company’s recent refurbishments of certain branch and administrative locations and the relative timing of certain maintenance activities. Professional and other services costs increased due to increased use of third party services. Data processing costs increased due to increases in internet banking costs and processing costs. These increases are consistent with the Company’s customer growth and operational growth, and the increased functionality now being offered to business customers and increased utilization of the Company’s electronic product and service channels.
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The $1.5 million, or 12.3%, increase in noninterest expenses between the six month period ended June 30, 2021 and the same six month period in the prior year was principally due to an increase in salaries and employee benefits expense, professional and other services, building and occupancy costs, data processing expenses, and audits and exams expense. The detail of the components of the overall increase in noninterest expense is as follows:
The $623,000 increase in salaries and employee benefits expense in the first six months of 2021, as compared to the same six month period in 2020, was primarily the result of an increase in net salaries expense and commissions expense of $410,000 and $237,000, respectively. The $410,000 increase in net salaries and benefits expense in the six months ended June 30, 2021, as compared to the same six month period in 2020, was partially the result of reduced PPP loan origination-related salary expense deferrals in the amount of $132,000 in 2021, as compared to the previous year, as PPP loan origination volume declined from $75.0 million in the first half of 2020 to $36.4 million in the first half of 2021. Commissions’ expense increased primarily due to the resumption of accruals related to employee and officer incentive programs in the first half of 2021. These accruals were substantially reduced in the first half of 2020 in response to the uncertainties presented by the pandemic. All other employee-related expenses decreased in aggregate by $25,000 in the first half of 2021, as compared to the same six month period in 2020.
The $251,000 increase in professional and other services and the $129,000 increase in audits and exams expense was primarily related to the Bank’s first year of increased internal controls testing under FDICIA requirements for institutions with assets greater than $1 billion and additional expenses incurred by the Company as a result of the COVID-19 pandemic.
Building and occupancy costs increased primarily as a result of an increase in maintenance costs and depreciation expense of $168,000 and $51,000, respectively. These increases are consistent with the Company’s recent refurbishments of certain branch and administrative locations and the relative timing of certain maintenance activities.
Data processing costs increased due to increases in internet banking costs and processing costs. These increases are consistent with the Company’s customer growth and operational growth, and the costs of increased functionality now being offered to business customers as well as generally increased utilization of the Company’s electronic product and service delivery channels.
All other noninterest expenses increased in aggregate in the year-over-year six month periods by a total of $95,000, or 0.8%, due to a broad range of individually immaterial variances.
At June 30, 2021, the Bank serviced 518 residential mortgage loans in the aggregate amount of $54.3 million that have been sold on a non-recourse basis to FNMA. FNMA is the only unrelated third-party that has acquired loans originated by the Bank. On an infrequent basis, loans previously sold to FNMA that subsequently default may be found to have underwriting defects that place the loans out of compliance with the representations and warranties made by the Bank. This can occur at any time while the loan is outstanding. In such cases, the Bank is required to repurchase the defaulted loans from FNMA. Repurchase losses sustained by the Bank include all costs incurred by FNMA as part of the foreclosure process, including items such as delinquent property taxes and legal fees. No such claims against the Bank were made by FNMA in the three or six month periods ended in either June 30, 2021 or June 30, 2020. Management continues to monitor the underwriting standards applied to all residential mortgage loan originations and subsequent sales through its quality control processes and considers these occurrences and their related expenses to be isolated instances.
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During the most restrictive periods following the inception of the Covid-19 pandemic, which began in March 2020, the Company experienced material declines in substantially all forms of noninterest expenses. These reductions in noninterest expenses were the result of the curtailment or elimination of a significant portion of non-critically-essential business and business development activities during that time. These activities were reduced or eliminated for the duration of the substantial restrictions imposed by governmental officials and as a consequence of the internal safety and social distancing protocols initiated by the Company and/or its customers. These effects were most pronounced in the second and third quarters of 2020 and extended, to lessening degrees, at least through the end of the first quarter of 2021. Accordingly, as the Company progressively returned to less restricted operations, noninterest expenses progressively returned to the levels considered by its management to be prudent for the effective long-term management of the Company. Management has elected to provide a supplemental comparison between 2021 noninterest expenses and the same three and six month periods in 2019, which were the most recent three and six month periods not affected by the pandemic. The following table details the components of noninterest expense for the three and six months ended June 30, 2021 and 2019:
June 30, 2019
3,454
1.4
7,104
(262
-3.7
632
238
37.7
1,287
376
29.2
67
11.4
1,162
168
14.5
380
18.7
716
21.2
7.0
481
5.0
78.5
78.4
77.0
179
89.5
229
-15.3
-6.5
144
-76.4
282
-56.7
(43
-72.9
-92.6
-21.5
1,053
(133
-12.6
6,539
306
4.7
13,250
1.7
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Income Tax Expense
Income tax expense increased $412,000 to $851,000, with an effective tax rate of 19.2%, for the quarter ended June 30, 2021, as compared to $439,000, with an effective tax rate of 19.2%, for the same three month period in 2020. Income tax expense increased $506,000 to $1.4 million, with an effective tax rate of 21.5% for the six months ended June 30, 2021 as compared to $894,000, with an effective tax rate of 20.5%, for the same six month period in 2020. The increase in income tax expense in the current quarter and year to date, as compared to the same quarter and period in 2020, was primarily attributable to the year-over-year second quarter and six month increase in pre-tax net income.
The Company’s effective tax rate typically differs from the 21% federal statutory tax rate due primarily to tax-exempt income from specific types of investment securities and loans, bank owned life insurance, and, to a much lesser degree, the utilization of low income housing tax credits, as well as the effects of transitional adjustments related to state income taxes and certain taxes payable to states other than New York. In addition, the tax effects of certain incentive stock option activity may also reduce the Company’s effective tax rate on a sporadic basis.
Earnings per Share
Basic and diluted earnings per voting common share were $0.50 per share for the second quarter of 2021, as compared to $0.31 per basic and diluted share for the same quarter of 2020.
Basic and diluted earnings per voting common share were $0.87 for the six month period ended June 30, 2021, as compared to $0.60 for the same prior year period. The increase in earnings per share between these two periods was due to the increase in net income between these two time periods. Further information on earnings per share can be found in Note 3 of this Form 10-Q.
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Changes in Financial Condition
Assets
Total assets increased $32.2 million, or 2.6%, to $1.3 billion at June 30, 2021 as compared to $1.2 billion at December 31, 2020. This increase was due primarily to increases in loans and investment securities.
Total net loans receivable increased $7.6 million, or 0.9%, to $820.3 million at June 30, 2021 from $812.7 million at December 31, 2020. The increase was primarily the result of an increase of $5.4 million in consumer loans and a $4.5 million increase in commercial loans.
Cash and cash equivalents decreased $2.3 million, or 5.3%, to $41.2 million at June 30, 2021, as compared to $43.5 million at December 31, 2020. Total restricted cash was $1.6 million at both June 30, 2021 and December 31, 2020.
Investment securities increased $20.8 million, or 6.9%, to $322.1 million at June 30, 2021, as compared to $301.3 million at December 31, 2020, due principally to purchases of securities during the first six months of 2021.
Liabilities
Total liabilities increased $26.4 million, or 2.3%, to $1.2 billion at June 30, 2021 compared to $1.1 billion at December 31, 2020. Deposits increased $35.8 million, or 3.6%, to $1.0 billion at June 30, 2021, compared to $995.9 million at December 31, 2020. Noninterest-bearing deposits totaled $183.7 million at June 30, 2021, an increase of $21.6 million, or 13.3%, from the 2020 year end, and an increase of $23.5 million, or 14.7%, compared to June 30, 2020. The increase in noninterest-bearing deposits was primarily a result of the Bank’s participation in the PPP, as well as ongoing growth in business banking relationships. Interest-bearing deposits totaled $848.0 million at June 30, 2021, an increase of $14.2 million, or 1.7%, for the 2020 year end. Interest-bearing deposit growth was a result of municipal deposit inflows related to seasonal tax collections, as well as increases in retail and commercial deposits. Borrowed funds balances from the FHLB-NY increased $1.7 million, or 2.1%, to $83.7 million at June 30, 2021 from $82.1 million at December 31, 2020. Subordinated loans were $29.5 million at June 30, 2021, a 25.2% decrease from $39.4 million as of the 2020 year end. The Company exercised its option to redeem $10.0 million of the loans that were outstanding at June 30, 2021 on April 1, 2021. This redemption of outstanding debt prospectively reduces interest expense after April 1, 2021 by $625,000 annually.
Shareholders’ Equity
The Company’s shareholders’ equity, exclusive of the noncontrolling interest, increased $5.8 million, or 5.9%, to $103.2 million at June 30, 2021, from $97.5 million at December 31, 2020. This increase was principally due to a $4.3 million increase in retained earnings, a $427,000 increase in additional paid in capital, a $90,000 increase in ESOP shares earned and a $1.0 million increase in comprehensive income. Comprehensive income increased primarily as the result of increases in the unrealized gain on the available-for sale investment portfolio during the six month period. The increase in retained earnings resulted from $5.2 million in net income recorded in the first six months of 2021. Partially offsetting this increase in retained earnings were $626,000 for cash dividends declared on our common stock, $97,000 for cash dividends declared on our Non-Voting common stock, $97,000 for cash dividends declared on our preferred stock, $17,000 for cash dividends declared on our issued warrant, and $65,000 in cumulative effect of our affiliate capital allocation.
Non-Voting Common Stock Issued
During the second quarter of 2021, the Company converted 1,380,283, or 100%, of its previously-outstanding shares of Series B Convertible Perpetual Preferred Stock to an equal number of newly-created Series A Non-Voting Common Stock. Neither the previously-issued Series B Perpetual Preferred Stock, nor the newly-issued Series A Non-Voting Common Stock had, or will have, dividend or liquidation preference over the Company’s existing Voting Common Stock. Holders of the new Series A Non-Voting Common Stock will be entitled to receive dividends, if and when declared by the Company’s Board of Directors, in the same per share amount as paid on the Company’s Voting Common Stock.
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Capital
Capital adequacy is evaluated primarily by the use of ratios which measure capital against total assets, as well as against total assets that are weighted based on defined risk characteristics. The Company’s goal is to maintain a strong capital position, consistent with the risk profile of its banking operations. This strong capital position serves to support growth and expansion activities while at the same time exceeding regulatory standards. At June 30, 2021, the Bank met the regulatory definition of a “well-capitalized” institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 8%, Tier 1 common equity exceeding 6.5%, and a total risk-based capital ratio exceeding 10%.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The buffer is separate from the capital ratios required under the Prompt Corrective Actions (“PCA”) standards. In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum levels of the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. The capital conservation buffer requirement is now fully implemented at 2.5% of risk-weighted assets. At June 30, 2021, the Bank exceeded all regulatory required minimum capital ratios, including the capital buffer requirements.
As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies developed a “Community Bank Leverage Ratio” (the ratio of a bank's tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution's risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies have set the Community Bank Leverage Ratio at 9%. Pursuant to the CARES Act, the federal banking agencies in April 2020 issued interim final rules to set the Community Bank Leverage Ratio at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the Community Bank Leverage Ratio increased to 8.5% for the calendar year. Community banks will have until January 1, 2022, before the Community Bank Leverage Ratio requirement will return to 9%. A financial institution can elect to be subject to this new definition. The Bank did not elect to become subject to the Community Bank Leverage Ratio.
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
with Buffer
Amount
Ratio
As of June 30, 2021:
Total Core Capital (to Risk-Weighted Assets)
120,708
14.82
65,174
8.00
81,468
10.00
85,541
10.50
Tier 1 Capital (to Risk-Weighted Assets)
110,470
13.56
48,881
6.00
69,247
8.50
Tier 1 Common Equity (to Risk-Weighted Assets)
36,660
4.50
52,954
6.50
57,027
7.00
Tier 1 Capital (to Assets)
8.83
50,046
4.00
62,557
115,289
13.13
70,270
87,838
92,230
104,287
11.87
52,703
74,662
39,527
57,095
61,487
8.63
48,314
60,392
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Non-GAAP Financial Measures
Regulation G, a rule adopted by the Securities and Exchange Commission (SEC), applies to certain SEC filings, including earnings releases, made by registered companies that contain “non-GAAP financial measures.” GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure (if a comparable GAAP measure exists) and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. Financial institutions like the Company and its subsidiary bank are subject to an array of bank regulatory capital measures that are financial in nature but are not based on GAAP. The Company follows industry practice in disclosing its financial condition under these various regulatory capital measures, including period-end regulatory capital ratios for its subsidiary bank, in its periodic reports filed with the SEC. The Company provides, below, an explanation of the calculations, as supplemental information, for non-GAAP measures included in the consolidated annual financial statements. In addition, the Company provides a reconciliation of its subsidiary bank’s disclosed regulatory capital measures, below.
Regulatory Capital Ratios (Bank Only)
Total capital (to risk-weighted assets)
Total equity (GAAP)
113,896
106,720
(4,536
Intangible assets
Addback: Accumulated other comprehensive income
1,235
Total Tier 1 Capital
Allowance for loan and lease losses
10,238
11,002
Total Tier 2 Capital
Total Tier 1 plus Tier 2 Capital (numerator)
Risk-weighted assets (denominator)
814,675
878,380
Total core capital to risk-weighted assets
Tier 1 capital (to risk-weighted assets)
Total Tier 1 capital (numerator)
Total capital to risk-weighted assets
Tier 1 capital (to adjusted assets)
Total average assets
1,255,806
1,212,512
Adjusted assets (denominator)
1,251,145
1,207,843
Total capital to adjusted assets
Tier 1 Common Equity (to risk-weighted assets)
Total Tier 1 Common Equity to risk-weighted assets
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Loan and Asset Quality and Allowance for Loan Losses
The following table represents information concerning the aggregate amount of non-performing assets at the indicated dates:
(Dollars In thousands)
Nonaccrual loans:
Commercial and commercial real estate loans
6,807
540
Residential mortgage loans
1,038
8,385
Total nonperforming loans
Foreclosed real estate
Total nonperforming assets
8,411
Accruing troubled debt restructurings
3,554
2,020
Nonperforming loans to total loans
1.92
2.58
1.04
Nonperforming assets to total assets
1.27
1.74
0.72
Nonperforming assets include nonaccrual loans, nonaccrual troubled debt restructurings (“TDR”), and foreclosed real estate (‘‘FRE”). The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or more. There are no loans that are past due 90 days or more and still accruing interest. Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the categories of nonaccrual loans or accruing TDRs. There was one nonaccruing TDR loan, with an aggregate carrying value of $74,000 included among the nonaccrual loans detailed in the table above at June 30, 2021.
Pursuant to the CARES Act and as extended by the Consolidated Appropriations Act, 2021, financial institutions have the option to temporarily suspend certain requirements under U.S. generally accepted accounting principles related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. This provision allows a financial institution the option to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Bank elected to adopt these provisions of the CARES Act.
As indicated in the table above, nonperforming assets at June 30, 2021 were $16.0 million and were $5.3 million lower than the $21.3 million reported at December 31, 2020, which was due to a $6.2 million decrease in commercial real estate nonaccrual loans. This was primarily the result of one commercial real estate loan totaling $7.4 million being removed from nonaccrual as of June 30, 2021 due to the resumption of timely principal and interest payments for six consecutive months. This decrease was partially offset by an increase of $563,000 in nonperforming consumer loans and a $273,000 increase in nonperforming residential mortgage loans.
Fair values for commercial FRE are initially recorded based on market value evaluations by third parties, less costs to sell (“initial cost basis”). On a prospective basis, residential FRE assets will be initially recorded at the lower of the net amount of loan receivable or the real estate’s fair value less costs to sell. Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to FRE are charged to the allowance for loan losses. Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash flow analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis for the FRE property.
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The allowance for loan losses represents management’s estimate of the probable losses inherent in the loan portfolio as of the date of the statement of condition. The allowance for loan losses was $14.6 million and $12.8 million at June 30, 2021 and December 31, 2020, respectively. The ratio of the allowance for loan losses to total loans increased 20 basis points to 1.75% at June 30, 2021 from 1.55% at December 31, 2020. Management performs a quarterly evaluation of the allowance for loan losses based on quantitative and qualitative factors and has determined that the current level of the allowance for loan losses is adequate to absorb the losses in the loan portfolio as of June 30, 2021.
The Company considers a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan. The measurement of impaired loans is generally based upon the fair value of the collateral, with a portion of the impaired loans measured based upon the present value of future cash flows discounted at the historical effective interest rate. A specific reserve is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the majority of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral. For loans secured by real estate, estimated fair values are determined primarily through third-party appraisals or broker price opinions. When a loan is determined to be impaired, the Bank will reevaluate the collateral which secures the loan. For real estate, the Company will obtain a new appraisal or broker’s opinion whichever is considered to provide the most accurate value in the event of sale. An evaluation of equipment held as collateral will be obtained from a firm able to provide such an evaluation. Collateral will be inspected not less than annually for all impaired loans and will be reevaluated not less than every two years. Appraised values and broker opinion values are discounted due to the market’s perception of a reduced price of Bank-owned property and the Bank’s desire to sell the property more quickly to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
At June 30, 2021 and December 31, 2020, the Company had $17.3 million and $22.8 million in loans, respectively, which were deemed to be impaired, having established specific reserves of $3.3 million and $2.8 million, respectively, on these loans. The decrease in impaired loans between these two dates was primarily driven by decreases of $5.8 million and $348,000, in impaired commercial real estate loans and residential real estate loans, respectively. The $500,000 increase in specific reserves for impaired loans at June 30, 2021 as compared to December 31, 2020 was primarily due to a $574,000 increase in specific reserves for other commercial and industrial loans.
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 $32.4 million as of June 30, 2021, an increase of $9.2 million, or 39.8%, as compared to $23.2 million at December 31, 2020. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered impaired.
Appraisals are obtained at the time a real estate secured loan is originated. For commercial real estate held as collateral, the property is inspected every two years.
In the normal course of business, the Bank has infrequently sold residential mortgage loans and participation interests in commercial loans. As is typical in the industry, the Bank makes certain representations and warranties to the buyer. The Bank maintains a quality control program for closed loans and considers the risks and uncertainties associated with potential repurchase requirements to be minimal.
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 public health and economic factors related to the pandemic, as well as 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.
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Loans to a single borrower, or to a related group of borrowers, are referred to as related credits. Total related credits encompass all related or affiliated borrower loan balances, including available unused lines of credit, for both personal and business loans. At June 30, 2021, the Company had 30 total related credit relationships, comprised of 273 individual loans, with outstanding balances in excess of $5.0 million. These total related credits ranged from $5.0 million to $15.0 million at June 30, 2021 with aggregate balances of $258.2 million. Of the $258.2 million in total related credits, $238.4 million was secured by various collateral assets, primarily commercial real estate, $9.5 million was unsecured, and $10.3 million were PPP loans.
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In addition, the future credit-related performance of a loan portfolio generally depends upon the types of loans within the portfolio, concentrations by type of loan and the quality of the collateral securing the loans. The following table details the Company's loan portfolio by collateral type within major categories as of June 30, 2021:
of Loans
Loan
Minimum/
Maximum
Allowance for Loan Losses
Percent
of
112
1,529
Commercial Real Estate:
Mixed Use
50,280
898
11,341
Multi-Family Residential
44,043
746
6,269
924
Hotels and Motels
35,595
3,560
11,500
Office
33,921
547
4,799
Retail
23,614
46
513
5,092
495
1-4 Family Residential
19,639
1,207
412
Automobile Dealership
16,815
6,691
353
Skilled Nursing Facility
11,555
5,778
3,800
7,755
Recreation/ Golf Course/
Marina
752
3,150
237
Warehouse
9,836
757
2,664
Manufacturing/Industrial
7,592
1,402
Restaurant
6,131
1,231
Automobile Repair
6,098
210
737
Hospitals
4,671
425
2,288
Not-For-Profit & Community Service Real Estate
3,639
1,213
3,105
Land
3,421
1,140
All Other
590
Total Commercial Real Estate Loans
518
Commercial and Industrial:
Secured Term Loans
57,901
369
157
2,263
Unsecured Term Loans
16,515
2,244
646
Secured Lines of Credit
50,885
263
6,787
1,989
Unsecured Lines of Credit
9,212
4,052
360
Total Commercial and
Industrial Loans
134,513
888
151
5,258
Tax Exempt Loans
328
2,248
Paycheck Protection Loans
2,628
Consumer:
Home Equity Lines of Credit
957
Vehicle
22,645
1,543
348
Consumer Secured
38,484
1,466
Consumer Unsecured
17,003
4,377
2,137
598
Total Consumer Loans
8,941
2,055
Unallocated allowance for
loan losses
834,952
13,169
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Including the potential effects of the COVID-19 outbreak on the Company’s loan portfolios, the ongoing and dynamic nature of the pandemic and the resultant, potentially severe and long-lasting, economic dislocations, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
Liquidity
Liquidity management involves the Company’s ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth, meet deposit withdrawals, maintain reserve requirements, and otherwise operate the Company on an ongoing basis. The Company's primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans and maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company manages the pricing of deposits to maintain a desired deposit composition and balance. In addition, the Company invests excess funds in short-term interest-earning and other assets, which provide liquidity to meet lending requirements.
The Company's liquidity has been enhanced by its ability to borrow from the Federal Home Loan Bank of New York (“FHLBNY”), whose competitive advance programs and lines of credit provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in deposits in the future could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could include, but are not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment securities, the sale of securitized
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loans, or the sale of whole loans. Such actions could result in higher interest expense and/or losses on the sale of securities or loans.
Through the first six months of 2021, as indicated in the consolidated statement of cash flows, the Company reported net cash flows from operating activities of $8.6 million and net cash outflows of $37.7 million related to investing activities. The net cash outflows from investing activities primarily was due to a net $20.8 million increase in all other investing activities in aggregate combined with a $9.5 million increase in loan balances. The Company reported net cash flows from financing activities of $26.9 million generated principally by increased deposit balances of $62.7 million, offset by decreased brokered deposits balances of $26.9 million and net cash outflow of $8.3 million from all other financing sources and dividends paid to common shareholders of $590,000.
The Company has a number of existing credit facilities available to it. At June 30, 2021, total credit available to the Company under the existing lines of credit was approximately $147.4 million at FHLBNY, the Federal Reserve Bank, and two other correspondent banks. As of June 30, 2021, the Company had $83.7 million of the available lines of credit utilized on its existing lines of credit with $63.7 million available.
The Asset Liability Management Committee of the Company is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity. As of June 30, 2021, management reported to the Board of Directors that the Company is in compliance with its liquidity policy guidelines.
Off-Balance Sheet Arrangements
The Company is also a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. At June 30, 2021, the Company had $196.4 million in outstanding commitments to extend credit and standby letters of credit.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company is not required to provide the information relating to this item.
Item 4 – Controls and Procedures
Disclosure 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 June 30, 2021. 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 June 30, 2021, our CEO and CFO concluded that, solely as a result of the material weaknesses in internal control over financial reporting described below, which continued to exist as of June 30, 2021, our disclosure controls and procedures were not effective as of June 30, 2021.
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Previously Disclosed Material Weakness
The Company disclosed in Item 8 – Financial Statements and Supplementary Data in its Annual Report on Form 10-K for the year ended December 31, 2020 two areas that, under applicable SEC accounting rules, each constituted a “material weakness.” The first material weakness identified ineffectiveness in the controls related to Related Party (as defined in applicable regulations) transactions that included procedural and documentary deficiencies related to underwriting risk ratings and the completeness of borrower reviews. The second identified area of material weakness related to loan authorization, disbursement and file maintenance controls. As a result of the material weaknesses described above, management has concluded that, as of June 30, 2021, our internal control over financial reporting was not effective.
Management’s Financial Reporting Remediation Initiatives
In order to remediate the material weakness related to transactions with Related Parties, management has commenced to initiate enhanced training programs and revise internal operating procedures designed to identify, summarize and monitor all such transactions and relationships.
In order to remediate the material weakness related to loan authorization, disbursement and file maintenance controls, management has commenced the redesign of specific processes and controls associated with each of the loan operations and will increase staffing levels where appropriate, improve training, increase the use of certain automated productivity tools, and install enhanced process oversight and functional controls to ensure that these internal controls are effective.
Management is committed to maintaining a strong internal control environment and believes these remediation efforts will result in an improvement in existing controls. Management anticipates that the new controls, as implemented and when tested for a sufficient period of time, will remediate the material weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address control deficiencies or modify certain activities of the remediation measures described above.
Changes in Internal Control over Financial Reporting
There were no changes made in our internal controls during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
At June 30, 2021, 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
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
Period
Total Number of Shares Purchased (1)
Average Price Paid
Per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
April 1, 2021 through April 30, 2021
74,292
May 1, 2021 through May 31, 2021
June 1, 2021 through June 30, 2021
(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
Item 6 – Exhibits
Exhibit No.
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
Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer
Interactive data files pursuant to Rule 405 of Regulation S-T formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements tagged as blocks of text.
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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.
(registrant)
August 16, 2021
/s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
/s/ Walter F. Rusnak
Walter F. Rusnak
Senior Vice President, Chief Financial Officer
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