PBHC 10-Q Quarter ended March 31, 2020

☒

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

EXCHANGE ACT OF 1934

☐

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

EXCHANGE ACT OF 1934

Maryland

(State of Other Jurisdiction of Incorporation)

001-36695

(Commission File No.)

38-3941859

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

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

YES ☒ NO ☐

YES ☒ NO ☐

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒

Emerging growth company ☐

PART I - FINANCIAL INFORMATION

PAGE NO.

Item 1.

Consolidated Financial Statements (Unaudited)

3

Consolidated Statements of Condition

3

Consolidated Statements of Income

4

Consolidated Statements of Comprehensive Income

5

Consolidated Statements of Changes in Shareholders' Equity

6

Consolidated Statements of Cash Flows

7

Notes to Consolidated Financial Statements

9

Item 2.

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

50

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

70

Item 4.

Controls and Procedures

70

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

71

Item 1A.

Risk Factors

71

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

71

Item 3.

Defaults upon Senior Securities

71

Item 4.

Mine Safety Disclosures

71

Item 5.

Other information

71

Item 6.

Exhibits

71

SIGNATURES

72

March 31,

December 31,

(In thousands, except share and per share data)

2020

2019

ASSETS:

Cash and due from banks

$

48,671

$

8,284

Interest-earning deposits (including restricted balances of $1,300 and $0, respectively)

8,908

11,876

Total cash and cash equivalents

57,579

20,160

Available-for-sale securities, at fair value

121,458

111,134

Held-to-maturity securities, at amortized cost (fair value of $117,088 and $124,148, respectively)

120,549

122,988

Marketable equity securities, at fair value

340

534

Federal Home Loan Bank stock, at cost

4,758

4,834

Loans

750,372

745,516

Loans held-for-sale ⁽¹⁾

150

35,935

Less: Allowance for loan losses

9,606

8,669

Loans receivable, net

740,916

772,782

Premises and equipment, net

22,304

22,699

Operating lease right-of-use assets

2,349

2,386

Accrued interest receivable

3,700

3,712

Foreclosed real estate

58

88

Intangible assets, net

145

149

Goodwill

4,536

4,536

Bank owned life insurance

17,519

17,403

Other assets

11,432

10,402

Total assets

$

1,107,643

$

1,093,807

LIABILITIES AND SHAREHOLDERS' EQUITY:

Deposits:

Interest-bearing

$

786,316

$

774,392

Noninterest-bearing

113,544

107,501

Total deposits

899,860

881,893

Short-term borrowings

8,138

25,138

Long-term borrowings

83,299

67,987

Subordinated loans

15,136

15,128

Accrued interest payable

407

396

Operating lease liabilities

2,618

2,650

Other liabilities

9,874

9,946

Total liabilities

1,019,332

1,003,138

Shareholders' equity:

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

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

12

12

Common stock, par value $0.01; 25,000,000 authorized shares; 4,740,446 and 4,709,238

shares issued and outstanding, respectively

47

47

Additional paid in capital

49,659

49,362

Retained earnings

46,174

44,839

Accumulated other comprehensive loss

(7,077

)

(2,971

)

Unearned ESOP

(809

)

(855

)

Total Pathfinder Bancorp, Inc. shareholders' equity

88,006

90,434

Noncontrolling interest

305

235

Total equity

88,311

90,669

Total liabilities and shareholders' equity

$

1,107,643

$

1,093,807

(1)

Based on ASC 948, Mortgage Banking, loans shall be classified as held-for-sale once a decision has been made to sell the loans and shall be transferred to the held-for-sale category at lower of cost or fair value.  At March 31, 2020, the loans under contract to be sold had a principal balance of $151,000 and net deferred fees of $76.  These loans were transferred at their fair value of $150,000 as of March 31, 2020 as the fair value of these loans was less than the amortized cost. During the three months ended March 31, 2020, the loss recorded on the write-down of the loan held-for-sale was immaterial.   At December 31, 2019, the loans under contract to be sold had a principal balance of $35.8 million and net deferred fees of $146,000.  These loans were transferred at their amortized cost of $35.9 million as of December 31, 2019, as the fair value of these loans was greater than the amortized cost.

For the three months ended,

(In thousands, except per share data)

March 31, 2020

March 31, 2019

Interest and dividend income:

Loans, including fees

$

9,242

$

7,575

Debt securities:

Taxable

1,692

1,799

Tax-exempt

7

108

Dividends

70

77

Federal funds sold and interest earning deposits

32

110

Total interest and dividend income

11,043

9,669

Interest expense:

Interest on deposits

2,556

2,345

Interest on short-term borrowings

57

167

Interest on long-term borrowings

445

393

Interest on subordinated loans

206

217

Total interest expense

3,264

3,122

Net interest income

7,779

6,547

Provision for loan losses

1,067

144

Net interest income after provision for loan losses

6,712

6,403

Noninterest income:

Service charges on deposit accounts

356

282

Earnings and gain on bank owned life insurance

116

121

Loan servicing fees

49

27

Net gains on sales and redemptions of investment securities

26

79

(Losses) gains on marketable equity securities

(194

)

41

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

672

(8

)

Debit card interchange fees

163

144

Insurance agency revenue

337

243

Other charges, commissions & fees

223

164

Total noninterest income

1,748

1,093

Noninterest expense:

Salaries and employee benefits

3,247

3,650

Building and occupancy

754

655

Data processing

600

574

Professional and other services

316

336

Advertising

176

239

FDIC assessments

189

111

Audits and exams

125

100

Insurance agency expense

192

199

Community service activities

107

138

Foreclosed real estate expenses

30

237

Other expenses

509

472

Total noninterest expense

6,245

6,711

Income before income taxes

2,215

785

Provision for income taxes

455

251

Net income attributable to noncontrolling interest and

Pathfinder Bancorp, Inc.

1,760

534

Net income attributable to noncontrolling interest

70

20

Net income attributable to Pathfinder Bancorp Inc.

$

1,690

$

514

Convertible preferred stock dividends

69

-

Warrant dividends

8

-

Undistributed earnings allocated to participating securities

290

-

Net income available to common shareholders

$

1,323

$

514

Earnings per common share - basic

$

0.29

$

0.12

Earnings per common share - diluted

$

0.29

$

0.12

Dividends per common share

$

0.06

$

0.06

For the three months ended

(In thousands)

March 31, 2020

March 31, 2019

Net Income

$

1,760

$

534

Other Comprehensive (Loss) Income

Retirement Plans:

Retirement plan net losses recognized in plan expenses

58

84

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

Unrealized holding (losses) gains arising during the period

(3,633

)

1,988

Reclassification adjustment for net gains included in net

income

(26

)

(79

)

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

(3,659

)

1,909

Derivatives and hedging activities:

Unrealized holding losses arising during the period

(1,344

)

-

Net unrealized losses on derivatives and hedging activities

(1,344

)

-

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

maturity ⁽¹⁾

8

6

Other comprehensive (loss) income, before tax

(4,937

)

1,999

Tax effect

1,037

(419

)

Other comprehensive (loss) income, net of tax

(3,900

)

1,580

Comprehensive (loss) income

$

(2,140

)

$

2,114

Comprehensive income, attributable to noncontrolling interest

$

70

$

20

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

$

(2,210

)

$

2,094

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

Income

Retirement plan net losses recognized in plan expenses

$

(12

)

$

(19

)

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

period

764

(416

)

Reclassification adjustment for net gains included in net

income

5

17

Unrealized losses on derivatives and hedging arising during the

period

282

-

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

maturity ⁽¹⁾

(2

)

(1

)

Income tax effect related to other comprehensive (loss) income

$

1,037

$

(419

)

(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.

Accumulated

Additional

Other Com-

Non-

Preferred

Common

Paid in

Retained

prehensive

Unearned

controlling

(In thousands, except share and per share data)

Stock

Stock

Capital

Earnings

Loss

ESOP

Interest

Total

Balance, January 1, 2020

$

12

$

47

$

49,362

$

44,839

$

(2,971

)

$

(855

)

$

235

$

90,669

Net income

-

-

-

1,690

-

-

70

1,760

Reevaluation of deferred tax asset valuation allowance ⁽¹⁾

-

-

-

-

(206

)

-

-

(206

)

Other comprehensive loss, net of tax

-

-

-

-

(3,900

)

-

-

(3,900

)

ESOP shares earned (6,111 shares)

-

-

37

-

-

46

-

83

Stock based compensation

-

-

66

-

-

-

-

66

Stock options exercised

-

-

194

-

-

-

-

194

Common stock dividends declared ($0.06 per share)

-

-

-

(278

)

-

-

-

(278

)

Preferred stock dividends declared ($0.06 per share)

-

-

-

(69

)

-

-

-

(69

)

Warrant dividends declared ($0.06 per share)

-

-

-

(8

)

-

-

-

(8

)

Balance, March 31, 2020

$

12

$

47

$

49,659

$

46,174

$

(7,077

)

$

(809

)

$

305

$

88,311

Balance, January 1, 2019

$

-

$

44

$

29,139

$

42,114

$

(6,042

)

$

(1,034

)

$

238

$

64,459

Net income

-

-

-

514

-

-

20

534

Other comprehensive income, net of tax

-

-

-

-

1,580

-

-

1,580

ESOP shares earned (6,111 shares)

-

-

42

-

-

45

-

87

Stock based compensation

-

-

73

-

-

-

-

73

Stock options exercised

-

-

200

-

-

-

-

200

Cumulative effect of change in measurement of

operating leases ⁽²⁾

-

-

-

(239

)

-

-

-

(239

)

Common stock dividends declared ($0.06 per share)

-

-

-

(256

)

-

-

-

(256

)

Balance, March 31, 2019

$

-

$

44

$

29,454

$

42,133

$

(4,462

)

$

(989

)

$

258

$

66,438

(1)

Management determined that the Company, under the current New York State (“NYS”) tax code, was highly unlikely to incur a material NYS tax liability in the foreseeable future. As a result, certain net current and deferred tax assets, related to GAAP vs. tax timing differences under previous NYS tax law were no longer going to provide any future tax benefit. The substantial majority of these net deferred tax assets were offset by a related valuation allowance established in prior periods. Therefore, the Company eliminated its remaining NYS net deferred tax asset balances and the related valuation allowance on January 1, 2020.  The effect of these eliminations required an adjustment to other comprehensive income balances and had no effect on 2020 reported earnings.

(2)

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

For the three months ended March 31,

(In thousands)

2020

2019

OPERATING ACTIVITIES

Net income attributable to Pathfinder Bancorp, Inc.

$

1,690

$

514

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

Provision for loan losses

1,067

144

Amortization of operating leases

5

11

Proceeds from sales of loans

36,614

-

Originations of loans held-for-sale

(150

)

-

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

Real estate acquired through foreclosure

7

8

Loans

(679

)

-

Available-for-sale investment securities

-

(86

)

Held-to-maturity investment securities

(26

)

7

Marketable equity securities

194

(41

)

Depreciation

414

360

Amortization of mortgage servicing rights

(279

)

3

Amortization of deferred loan costs

75

66

Amortization of deferred financing from subordinated debt

8

8

Earnings and gain on bank owned life insurance

(116

)

(121

)

Net amortization of premiums and discounts on investment securities

268

228

Amortization of intangible assets

4

4

Stock based compensation and ESOP expense

149

160

Net change in accrued interest receivable

12

(296

)

Net change in other assets and liabilities

(1,262

)

(2,532

)

Net cash flows from operating activities

37,995

(1,563

)

INVESTING ACTIVITIES

Purchase of investment securities available-for-sale

(38,422

)

(5,081

)

Purchase of investment securities held-to-maturity

(7,492

)

(26,835

)

Purchase of Federal Home Loan Bank stock

(1,121

)

(1,346

)

Proceeds from redemption of Federal Home Loan Bank stock

1,197

3,195

Proceeds from maturities and principal reductions of investment securities

available-for-sale

24,244

6,879

Proceeds from maturities and principal reductions of investment securities

held-to-maturity

8,824

1,906

Proceeds from sales, redemptions and calls of:

Available-for-sale investment securities

-

22,277

Held-to-maturity investment securities

1,068

30

Real estate acquired through foreclosure

81

1,020

Net change in loans

(5,119

)

(38,031

)

Purchase of premises and equipment

(19

)

(1,276

)

Net cash flows from investing activities

(16,759

)

(37,262

)

FINANCING ACTIVITIES

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

deposit accounts, MMDA accounts and escrow deposits

35,546

960

Net change in time deposits

2,137

43,477

Net change in brokered deposits

(19,716

)

34,031

Net change in short-term borrowings

(17,000

)

(26,000

)

Payments on long-term borrowings

-

(15,100

)

Proceeds from long-term borrowings

15,312

-

Proceeds from exercise of stock options

194

200

Cash dividends paid to common shareholders

(283

)

(263

)

Cash dividends paid to preferred shareholders

(69

)

-

Cash dividends paid on warrants

(8

)

-

Change in noncontrolling interest, net

70

20

Net cash flows from financing activities

16,183

37,325

Change in cash and cash equivalents

37,419

(1,500

)

Cash and cash equivalents at beginning of period

20,160

26,316

Cash and cash equivalents at end of period

$

57,579

$

24,816

CASH PAID DURING THE PERIOD FOR:

Interest

$

3,253

$

2,955

Income taxes

200

-

NON-CASH INVESTING ACTIVITY

Real estate acquired in exchange for loans

58

479

RESTRICTED CASH

Federal Reserve Bank Reserve Requirements included in interest earning deposits

-

4,632

Collateral deposits for hedge position included in interest earning deposits

1,300

-

1.

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

2.

The policy for timing of transfers between levels.

3.

The valuation processes for Level 3 fair value measurements.

1.

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

2.

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

1.

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

2.

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

1.

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

2.

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

3.

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

•

Scope Clarifications

•

Held-to-Maturity Debt Securities Fair Value Disclosures

•

Applicability of Topic 820 to the Measurement Alternative

•

Remeasurement of Equity Securities at Historical Exchange Rates

•

Accrued Interest

•

Transfers between Classifications or Categories for Loans and Debt Securities

•

Recoveries

•

Consideration of Prepayments in Determining the Effective Interest Rate

•

Consideration of Estimated Costs to Sell When Foreclosure Is Probable

•

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

•

Contractual Extensions and Renewals

•

Partial-Term Fair Value Hedges of Interest Rate Risk

•

Amortization of Fair Value Hedge Basis Adjustments

•

Disclosure of Fair Value Hedge Basis Adjustments

•

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

•

Scoping for Not-for-Profit Entities

•

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

•

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

•

Transition Guidance

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.

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.

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.

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 requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment

3.

Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary

4.

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.

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.

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 electio n 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 Amendme nt to Subtopic 805-20 : The amendment to Subtopic 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest , clarifies the guidance by rem oving 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.

Three months ended

March 31,

(In thousands, except per share data)

2020

2019

Net income attributable to Pathfinder Bancorp, Inc.

$

1,690

$

514

Convertible preferred stock dividends

69

-

Warrant dividends

8

-

Undistributed earnings allocated to participating securities

290

-

Net income available to common shareholders