PATHFINDER BANCORP, INC. General
The Company is aMaryland corporation headquartered inOswego, New York . The Company is 100% owned by public shareholders. The primary business of the Company is its investment inPathfinder Bank (the "Bank"), aNew 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") andWhispering 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 inFitzGibbons Agency, LLC ("Fitzgibbons" or "Agency"), the Company is required to consolidate 100% of FitzGibbons within the consolidated financial statements. The 49% of which the Company does not own, is accounted for separately as a noncontrolling interest within the consolidated financial statements. AtSeptember 30, 2022 , the Company and subsidiaries had total consolidated assets of$1.4 billion , total consolidated liabilities of$1.29 billion and shareholders' equity of$107.3 million , plus noncontrolling interest of$494,000 , which represents the 49% of FitzGibbons not owned by the Company. The following discussion reviews the Company's financial condition atSeptember 30, 2022 and the results of operations for the three and nine month periods endedSeptember 30, 2022 and 2021. Operating results for the three and nine months endedSeptember 30, 2022 are not necessarily indicative of the results that may be expected for the year endingDecember 31, 2022 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 2021 Annual Report on Form 10-K filed with theSecurities and Exchange Commission onMarch 25, 2022 ("the consolidated annual financial statements") as ofDecember 31, 2021 and 2020 and for the two years then ended. Therefore, only material changes in financial condition and results of operations are discussed in the remainder of Item 2.
Statement Regarding Forward-Looking Statements
Certain statements contained herein are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions, or future or conditional verbs, such as "will," "would," "should," "could," or "may." These forward-looking statements are based on current beliefs and expectations of the Company's and the Bank's management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's and the Bank's control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Actual results may differ materially from those set forth in the forward-looking statements as a result of numerous factors. Factors that could cause such differences to exist include, but are not limited to: risks related to the real estate and economic environment, particularly in the market areas in which the Company and the Bank operate; fiscal and monetary policies of theU.S. Government ; inflation; changes in government regulations affecting financial institutions, including regulatory compliance costs and capital requirements; fluctuations in the adequacy of the allowance for loan losses; decreases in deposit levels necessitating increased borrowing to fund loans - 47 - -------------------------------------------------------------------------------- and investments; the effects of the COVID-19 pandemic; operational risks including, but not limited to, cybersecurity, fraud and natural disasters; the risk that the Company may not be successful in the implementation of its business strategy; changes in prevailing interest rates; credit risk management; asset-liability management; and other risks described in the Company's filings with theSecurities and Exchange Commission , which are available at theSEC's website, www.sec.gov. The Company and the Bank caution prospective investors not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation to revise or update any forward-looking statements contained in this quarterly report on Form 10-Q to reflect future events or developments.
COVID-19 Response and the Paycheck Protection Program
TheWorld Health Organization (the "WHO") declared COVID-19 a global pandemic onMarch 11, 2020 . Inthe United States , by the end ofMarch 2020 , the rapid spread of the COVID-19 virus invoked various Federal andNew York State authorities to make emergency declarations and issue executive orders to limit the spread of the disease. The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), signed into law onMarch 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 service 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. There were no remaining pandemic-related borrower forbearances of any type remaining in effect atSeptember 30, 2022 . AtSeptember 30, 2022 , the Company's operations and business activities, including its relationships with its customers, most particularly loan customers, were being conducted in a manner that was substantially identical to the way in which the Company conducted its activities and relationships prior to the COVID-19 pandemic.
Paycheck Protection Program
The Bank participated in all rounds of the PPP funded by theU.S. Treasury Department and administered by theU.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. The PPP ended inMay 2021 . Information related to the Company's PPP loans are included in the following tables: Unaudited For the three months ended For the nine months ended (In thousands, except number of September 30, September 30, September 30, September 30, loans) 2022 2021 2022 2021 Number of PPP loans originated in the period - - - 478 Funded balance of PPP loans originated in the period $ - $ - $ -$ 36,369 Number of PPP loans forgiven in the period 54 287 243 636 Balance of PPP loans forgiven in the period$ 4,184 $ 26,621 $ 12,601 $ 68,726 Deferred PPP fee income recognized in the period $ 144 $ 595 $ 691$ 1,742 (In thousands) September 30, 2022 September 30, 2021 Unearned PPP deferred fee income at end of period $ 28 $ 1,124 (In thousands, except number of loans) Number Balance
Total PPP loans originated since inception 1,177
1,164 $ 111,028 Total PPP loans remaining at
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Application of Critical Accounting Estimates
The Company's consolidated quarterly financial statements are prepared in accordance with accounting principles generally accepted inthe 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 status, and above our total
related credit ("TRC") threshold balance of
•
All Troubled Debt Restructured Loans.
Commercial Lines and Loans,
•
All loans rated substandard or worse, on nonaccrual status, and above our TRC
threshold balance of
•
All Troubled Debt Restructured Loans.
Impairment is measured by determining the present value of expected future cash
flows or, for collateral-dependent loans, the fair value of the collateral
adjusted for market conditions and selling expenses as compared to the loan
carrying value. For all other loans and leases, the Company uses the general
allocation methodology that establishes an allowance to estimate the probable
incurred loss for each risk-rating category.
Deferred income tax assets and liabilities are determined using the liability
method. Under this method, the net deferred tax asset or liability is recognized
for the future tax consequences. This is attributable to the differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases as well as net operating
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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.
The Company's effective tax rate typically differs from the 21% federal
statutory tax rate due primarily to New York State income taxes, partially
offset by tax-exempt income from specific types of investment securities and
loans, bank owned life insurance, and to a much lesser degree, the utilization
of low income housing tax credits. Other variances from the federal statutory
federal tax rate are due to the effects of transitional adjustments related to
state income taxes. In addition, the tax effects of certain incentive stock
option activity may reduce the Company's effective tax rate on a sporadic basis.
We maintain a noncontributory defined benefit pension plan covering most
employees. The plan provides defined benefits based on years of service and
final average salary. On May 14, 2012 , we informed our employees of our decision
to freeze participation and benefit accruals under the plan, primarily to reduce
some of the volatility in earnings that can accompany the maintenance of a
defined benefit plan. Pension and post-retirement benefit plan liabilities and
expenses are based upon actuarial assumptions of future events; including fair
value of plan assets, interest rates, and the length of time the Company will
have to provide those benefits. The assumptions used by management are discussed
in Note 14 to the consolidated annual financial statements.
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 insufficient 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.
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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, 2021
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.
Recent Events
OnSeptember 23, 2022 , the Company announced that its Board of Directors declared a cash dividend of$0.09 per share on the Company's voting common and non-voting common stock, and a cash dividend of$0.09 per notional share for the issued warrant relating to the fiscal quarter endedSeptember 30, 2022 . The dividends are payable to all shareholders of record onOctober 14, 2022 and were paid onNovember 10, 2022 .
Overview and Results of Operations
The following represents the significant highlights of the Company's operating results between the third quarter of 2022 and the third quarter of 2021.
•
Net income attributable toPathfinder Bancorp, Inc. decreased$185,000 or 5.50% to$3.2 million . • Basic and diluted earnings per voting common share were both$0.52 per share and decreased$0.04 per share from$0.56 per share. • Return on average assets decreased 14 basis points to 0.93% as the increase in average asset balance outpaced the increase in income. • Net interest income, after provision for loan losses, increased$383,000 , or 4.0% to$10.1 million . Excluding the provision, net interest income increased$989,000 , or 10.1%, to$10.8 million . The increase in net interest income, before provision for loan losses, was primarily due to the increase in the average balance of interest-earning assets of$114.2 million , coupled with an increase in the average yield earned on these assets of 10 basis points. These increases in interest income were partially offset by a 21 basis points increase in the average rates paid on interest-bearing liabilities. • The increase in the provision for loan losses of$606,000 was primarily due to management's decision to downgrade certain loans within a single large credit relationship. • The net interest margin for the third quarter of 2022 was 3.32%, a one basis point increase compared to 3.31% for the same quarter in 2021. • The effective income tax rate decreased 1.1% to 19.6% for the three months endedSeptember 30, 2022 as compared to 22.1% for the same three month period in 2021. The decrease in the tax rate in the third quarter of 2022, as compared to the same quarter in 2021, was primarily related to an increase in tax exempt income derived from increased average balances invested in securities issued by state and political subdivisions.
The following represents significant highlights of the Company's operating results between the first nine months of 2022 and the first nine months of 2021.
•
Net income attributable toPathfinder Bancorp, Inc. increased$874,000 , or 10.2%, to$9.4 million . • Basic and diluted earnings per voting common share were both$1.55 per share and increased$0.12 per share. • Return on average assets increased four basis points to 0.94% as the increase in net income outpaced the increase in average assets. • Net interest income, after provision for loan losses, increased by$2.8 million , or 10.8%, to$29.4 million . This increase in net interest income after provision for loan losses was primarily due to a$1.1 million decrease in the provision for loan losses, combined with an increase of$70.1 million in the average balances of interest-earning assets and a seven basis points decrease in the average rates paid on interest-bearing liabilities. • Net interest margin decreased by one basis point to 3.18%, primarily as the result of a 7 basis points decline in the average cost for interest-bearing liabilities, offset by an 8 basis points decrease in the average yield for interest-earning assets. - 51 - --------------------------------------------------------------------------------
•
The effective income tax rate decreased 2.6% to 19.4% for the nine months endedSeptember 30, 2022 as compared to 22.0% for the same nine month period in 2021. The decrease in the tax rate in the first nine months of 2022 was primarily related to an increase in interest on tax exempt securities along with decreases inNew York State taxes. The following reflects the significant changes in financial condition betweenDecember 31, 2021 andSeptember 30, 2022 . In addition, the following reflects significant changes in asset quality metrics betweenSeptember 30, 2022 andSeptember 30, 2021 . • Total assets increased$111.8 million , or 8.7% to$1.40 billion atSeptember 30, 2022 , as compared toDecember 31, 2021 , primarily driven by higher investment securities balances and loan balances. • Asset quality metrics, as measured by net loan charge-offs, remained stable, in comparison to recent reporting periods. The annualized net loan charge-offs to average loans ratio was 0.03% for the third quarter of 2022, compared to 0.12% for the third quarter of 2021, and 0.12% for the fourth quarter of 2021. • Nonperforming loans to total loans increased nine basis points to 1.20% atSeptember 30, 2022 , compared to 1.11% atSeptember 30, 2021 . Nonperforming loans to total loans increased 20 basis points to 1.20% atSeptember 30, 2022 compared to 1.00% atDecember 31, 2021 . Correspondingly, the ratio of the allowance for loan losses to nonperforming loans was 128.3% atSeptember 30, 2022 , as compared to 160.1% atSeptember 30, 2021 , and 156.0% atDecember 31, 2021 . The Company had net income of$3.2 million for the three months endedSeptember 30, 2022 compared to net income of$3.4 million for the three months endedSeptember 30, 2021 . The$213,000 decrease in net income was due primarily to a$762,000 increase in total interest expense, a$606,000 increase in provision for loan losses expense, a$444,000 increase in total noninterest expenses and a$385,000 decrease in total noninterest income. These were partially offset by a$1.8 million increase in total interest and dividend income and a$233,000 decrease in provision for income taxes. Net interest income before the provision for loan losses increased$989,000 , or 10.1%, to$10.8 million for the three months endedSeptember 30, 2022 as compared to$9.8 million for the same three month period in 2021. The increase was primarily the result of increases in the average yields of both taxable and tax-exempt investment securities portfolios, combined with increases in the average balances of the loan portfolio of$57.6 million and$74.3 million in the investment portfolios. These increases resulted in a 20 basis points increase to 4.13% in total interest-earning asset yields for the three months endedSeptember 30, 2022 as compared to 3.93% for the same three month period of the previous year. The increase in the average yields received on interest-earning assets in the third quarter of 2022, as compared to the same quarter in 2021, reflects generally increased rates of interest for newly funded loans and investments securities, as compared to the average yields within these portfolios, as well as increases in coupon rates for certain adjustable-rate loans and securities in the rising interest environment that has occurred in 2022. These increases in the average yield on loans during 2022, were partially offset by reduced fee recognition related to PPP loans. These increases in net interest income were partially offset by a 21 basis points increase in the average cost of total interest-bearing liabilities in the third quarter of 2022, as compared to the same quarter in 2021, combined with a$105.3 million increase in the average balance of total interest-bearing liabilities. The increase in the average rates paid on interest-earning liabilities in the third quarter of 2022, as compared to the same quarter in 2021, reflects the generally increased rates of interest for all financial instruments that has occurred in 2022. The$385,000 , or 24.9%, decrease in noninterest income in the quarter endedSeptember 30, 2022 , as compared to the same quarterly period in 2021, was primarily the result of a decrease of$203,000 in net gains on sales of investment securities, an$89,000 decrease in gains on marketable equity securities, a$59,000 decrease in service charges on deposits accounts, a$56,000 decrease in debit card interchange fees and a$45,000 decrease in insurance agency revenue. All other noninterest income categories netted to an$8,000 decrease in the three months endedSeptember 30, 2022 , as compared to the same period in the prior year. These decreases were partially offset by a$75,000 increase in other charges, commissions and fees. Total noninterest expense for the third quarter of 2022 was$7.3 million , an increase of$444,000 , or 6.5%, compared to$6.8 million for the same three month period in 2021. The increase was primarily a result of higher salaries and employee benefits expense of$572,000 , or 15.8%. Other expenses and building and occupancy expenses increased$174,000 and$111,000 , respectively. Partially offsetting these increases was a$201,000 , or 29.3%, reduction in data processing expenses, primarily the result of a reduction in ATM processing fees related to third-party vendor refunds obtained through contract - 52 - -------------------------------------------------------------------------------- renegotiation activities. All other noninterest expense categories netted to a$212,000 decrease in the three months endedSeptember 30, 2022 , as compared to the same quarter in 2021. 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 endedSeptember 30, 2022 , we recorded$710,000 in provision for loan losses as compared to$104,000 in the same prior year three month period. The primary driver of the increased provision expense in the third quarter of 2022, as compared to the same quarter in 2021, was management's decision to downgrade certain commercial real estate loans and commercial loans within a single borrower relationship totaling$7.2 million in related credits. This relationship is under active resolution management by the Company. Additionally, the provision in the quarter endedSeptember 30, 2022 is reflective of (1) the qualitative factors used in determining the adequacy of the allowance for loan losses, (2) the increase in the size of the loan portfolio, and (3) changes in the levels of delinquent and nonaccrual loans. The third quarter provision for loan losses reflects an addition to reserves considering loan growth and asset quality metrics. The credit-sensitive portfolios continue to be carefully monitored, and the Bank will consistently apply its loan classification and reserve building methodologies to the analysis of these portfolios. In comparing the year-over-year third quarter periods, the Company's return on average assets decreased 14 basis points to 0.93% due to the combined effects of the decrease in net income (the numerator in the ratio), offset by the increase in average assets (the denominator in the ratio). Average assets increased due to increases in average investment securities and average loans of$74.3 million and$57.6 million , respectively, in the third quarter of 2022 as compared to the same quarter of 2021. Average interest-bearing deposits increased$105.8 million in the third quarter of 2022, as compared with the same quarter in 2021. The increase in deposits was primarily due to municipal deposit inflows and outflows due to seasonal timing of tax collections, an increase in brokered deposits and continued growth in business banking relationships. Average MMDA accounts increased$3.5 million as compared with the same quarter in 2021. The Company had net income of$9.5 million for the nine months endedSeptember 30, 2022 compared to net income of$8.6 million for the nine months endedSeptember 30, 2021 . The$854,000 increase in net income was due primarily to a$1.4 million increase in interest and dividend income, a$1.2 million decrease in the provision for loan losses, a$227,000 decrease in interest expense and a$132,000 decrease in provision for income taxes. Partially offsetting the increase in net income was a$1.4 million increase in noninterest expense and a$765,000 decrease in noninterest income. Net interest income before the provision for loan losses increased$1.7 million to$30.2 million for the nine months endedSeptember 30, 2022 , as compared to$28.6 million for the same nine month period in 2021. Interest expense decreased$227,000 to$5.8 million for the nine months endedSeptember 30, 2022 as compared to the prior year period. The average interest rate paid on interest-bearing liabilities decreased by seven basis points for the nine months endedSeptember 30, 2022 as compared to the prior year period; however, average interest-bearing liabilities increased by$55.6 million , or 5.8%. Average loans for the first nine months of 2022 increased by$20.3 million , or 2.4%, over the prior year period, while the average interest yield earned on average loans decreased by 18 basis points, resulting in a decrease of$535,000 in interest income on loans for the nine months endedSeptember 30, 2022 as compared to the prior year period due to the loss of PPP income. Income from investment securities increased$1.9 million , or 22.0% to$8.5 million for the nine months endedSeptember 30, 2022 . Noninterest income decreased$765,000 for the nine months endedSeptember 30, 2022 , when compared to the same nine month period in 2021. Net gains on sales and redemptions of investment securities decreased$224,000 when compared to the same period in 2021. Net gains on marketable equity securities decreased$333,000 and there were no gains on sale of premises and equipment when compared to the$201,000 gain in the same period in 2021. Service charges on deposit accounts, gains on sales of foreclosed real estate and debit card interchange fees also decreased$206,000 ,$104,000 , and$59,000 , respectively, when compared to the same period in 2021. The$206,000 decrease in service charges on deposit accounts in the nine months endedSeptember 30, 2022 , as compared to the same nine month period in 2021, was primarily due to reductions in the Bank's service fee schedules, enacted inJanuary 2022 , based on the competitive environment within our marketplace. Other charges, commission and fees, loan servicing fees, insurance agency revenue, and earnings on bank owned life insurance increased$202,000 ,$105,000 ,$32,000 and$23,000 , respectively. The net increase in these categories - 53 - --------------------------------------------------------------------------------
of noninterest income during the nine months ended
Total noninterest expense for the first nine month period of 2022 was$21.7 million , an increase of$1.4 million , or 6.7%, compared with$20.3 million for the prior year period. The increase was primarily a result of higher salaries and employee benefits expense of$1.6 million , or 14.9%, and was primarily comprised of a$664,000 , or 8.7%, increase in salaries, a$380,000 reduction in the deferral of employee related expenses, a$173,000 increase in employee benefits and a$349,000 net increase in all other salaries and employee benefit expenses. The$443,000 increase in salaries was primarily due to increases in individual salaries, enacted early in 2022 and continuing through the year, as well as modest additions to staff headcount. The Company increased its salary structure where deemed appropriate in order to effectively respond to inflationary and competitive pressures within our marketplace to recruit and retain talent. The$380,000 reduction in deferred salaries was primarily due to reduced levels of PPP loan originations in 2022 as compared to the previous year. The Company originated$36.4 million in PPP loans in the first nine months of 2021 and$-0 - in 2022. The$139,000 increase in employee benefit expenses was consistent with increased staffing levels and salaries for 2022. For the first nine months of 2022, we recorded$871,000 in provision for loan losses as compared to$2.1 million in the same prior year nine month period. Notwithstanding the downgrading of a single credit relationship totaling$7.2 million in the third quarter of 2022, discussed above, the reduction in year-to-date provision expense 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 decrease in the provision for loan losses through the third quarter of 2022, as compared to the same period in 2021, was primarily related to the improvement in the qualitative factors used by the Company to determine the provision in 2022, as compared to the same period in the previous year. The improvement in these qualitative factors was due to observed improvements in economic conditions during the second half of 2021 and the first half of 2022 that followed the easing of the most restrictive phases of the COVID-19 pandemic that had existed in 2020 and the first half of 2021. The credit sensitive portfolios continue to be carefully monitored. Please refer to the asset quality section below for a further discussion of asset quality as it relates to the allowance for loan losses. Return on average assets increased four basis points to 0.94% between the year-over-year nine month periods as the increase in net income in the nine month period endedSeptember 30, 2022 (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 investment securities and the loan portfolio of$63.4 and$20.3 million , respectively, in the nine month period endedSeptember 30, 2022 as compared to the same period of 2021. Average interest-bearing liabilities increased$55.6 million in the nine months endedSeptember 30 2022 , as compared with the same period in 2021. The increase in deposits was primarily the result of municipal deposit inflows and outflows due to seasonal timing of tax collections, an increase in brokered deposits and continued growth in business banking relationships. Average time deposits increased$24.5 million in the nine months endedSeptember 30, 2022 , as compared with the same period in 2021.
Net Interest Income
Net interest income is the Company's primary source of operating income for
payment of operating expenses and providing for loan losses. It is the amount by
which interest earned on loans, interest-earning deposits, and investment
securities, exceeds the interest paid on deposits and other interest-bearing
liabilities. Changes in net interest income and net interest margin result from
the interaction between the volume and composition of interest-earning assets,
interest-bearing liabilities, related yields, and associated funding costs.
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The following tables set forth information concerning average interest-earning
assets and interest-bearing liabilities and the average yields and rates thereon
for the periods indicated. Interest income and resultant yield information in
the tables has not been adjusted for tax equivalency. Averages are computed on
the daily average balance for each month in the period divided by the number of
days in the period. Yields and amounts earned include loan fees of $389,000 and
$1.4 million for the nine month periods ended September 30, 2022 and September
30, 2021 , respectively. The decrease in loan fees for the year over year nine
month period is primarily due to the decrease in PPP loan fee income. Nonaccrual
loans have been included in interest-earning assets for purposes of these
calculations.
(Unaudited)
For the three months ended September 30,
2022 2021
Average Average
Unaudited Average Yield / Average Yield /
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
Interest-earning assets:
Loans $ 880,097 $ 9,895 4.50 % $ 822,547 $ 9,465 4.60 %
Taxable investment
securities 363,877 3,108 3.42 % 317,612 2,136 2.69 %
Tax-exempt investment
securities 42,855 351 3.28 % 14,863 28 0.75 %
Fed funds sold and
interest-earning deposits 10,383 29 1.12 % 27,984 3 0.04 %
Total interest-earning
assets 1,297,212 13,383 4.13 % 1,183,006 11,632 3.93 %
Noninterest-earning
assets:
Other assets 90,482 83,028
Allowance for loan losses (13,050 ) (14,794 )
Net unrealized (losses)
gains
on available-for-sale
securities (10,983 ) 2,209
Total assets $ 1,363,661 $ 1,253,449
Interest-bearing
liabilities:
NOW accounts $ 101,907 $ 85 0.33 % $ 94,654 $ 81 0.34 %
Money management accounts 16,097 4 0.10 % 16,583 5 0.12 %
MMDA accounts 244,884 427 0.70 % 241,374 241 0.40 %
Savings and club accounts 140,425 52 0.15 % 126,511 42 0.13 %
Time deposits 440,227 1,339 1.22 % 358,634 785 0.88 %
Subordinated debt 29,655 442 5.96 % 29,496 411 5.57 %
Borrowings 78,232 254 1.30 % 78,892 276 1.40 %
Total interest-bearing
liabilities 1,051,427 2,603 0.99 % 946,144 1,841 0.78 %
Noninterest-bearing
liabilities:
Demand deposits 189,317 189,951
Other liabilities 12,248 11,441
Total liabilities 1,252,992 1,147,536
Shareholders' equity 110,669 105,913
Total liabilities &
shareholders' equity $ 1,363,661 $ 1,253,449
Net interest income $ 10,780 $ 9,791
Net interest rate spread 3.14 % 3.15 %
Net interest margin 3.32 % 3.31 %
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities 123.38 % 125.03 %
- 55 ---------------------------------------------------------------------------------
For the nine months ended September 30,
2022 2021
Average Average
Unaudited Average Yield / Average Yield /
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
Interest-earning assets:
Loans $ 863,191 $ 27,561 4.26 % $ 842,850 $ 28,096 4.44 %
Taxable investment
securities 348,499 7,850 3.00 % 310,098 6,438 2.77 %
Tax-exempt investment
securities 37,593 612 2.17 % 12,631 99 1.05 %
Fed funds sold and
interest-earning deposits 19,950 48 0.32 % 28,433 7 0.03 %
Total interest-earning
assets 1,269,233 36,071 3.79 % 1,194,012 34,640 3.87 %
Noninterest-earning assets:
Other assets 85,652 81,779
Allowance for loan losses (13,040 ) (13,962 ) Net unrealized (losses) gains on available-for-sale securities (7,230 ) 1,802 Total assets$ 1,334,615 $ 1,263,631 Interest-bearing liabilities: NOW accounts$ 104,874 $ 234 0.30 %$ 94,018 $ 212 0.30 % Money management accounts 16,212 12 0.10 % 16,059 13 0.11 % MMDA accounts 255,933 985 0.51 % 238,507 737 0.41 % Savings and club accounts 139,798 150 0.14 % 119,859 115 0.13 % Time deposits 401,297 2,625 0.87 % 376,724 2,748 0.97 % Subordinated debt 29,617 1,284 5.78 % 33,814 1,376 5.43 % Borrowings 70,833 557 1.05 % 84,001 873 1.39 % Total interest-bearing liabilities 1,018,564 5,847 0.77 % 962,982 6,074 0.84 % Noninterest-bearing liabilities: Demand deposits 194,220 186,125 Other liabilities 11,808 11,660 Total liabilities 1,224,592 1,160,767 Shareholders' equity 110,023 102,864 Total liabilities & shareholders' equity$ 1,334,615 $ 1,263,631 Net interest income$ 30,224 $ 28,566 Net interest rate spread 3.02 % 3.03 % Net interest margin 3.18 % 3.19 % Ratio of average interest-earning assets to average interest-bearing liabilities 124.61 % 123.99 % As indicated in the above table, net interest income, before provision for loan losses, increased$989,000 or 10.1%, to$10.8 million for the three months endedSeptember 30, 2022 as compared to$9.8 million for the same prior year period. This increase was due principally to a 20 basis points increase in the average yield of interest-earning assets, offset by an increase of 21 basis points on the average cost of interest-bearing liabilities. Net interest income was positively impacted by an increase in the average balance of interest-earning assets of$114.2 million , or 9.7%. The positive effect of this increase in the average balance of interest-earning assets was offset by an increase of$105.3 million in interest-bearing liabilities. In total, net interest margin increased one basis point to 3.32% for the three months endedSeptember 30, 2022 as compared to the same prior year period. 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$1.8 million , or 15.1%, to$13.4 million for the three months endedSeptember 30, 2022 compared to$11.6 million for the same three month period in 2021. This quarter-over-quarter increase was due to an increase in the average yield earned on interest-earning assets of 20 basis points and was primarily driven by an 80 basis points increase in the average yield earned on investment securities, primarily, tax-exempt securities. This increase in 2022 on the yields received from investment securities was the result of the combined effects of increasing coupons received on previously-held adjustable-rate securities and relatively higher rates of interest received on newly-purchased securities as a result of rising interest rates. These increased yields on investments securities were offset slightly by a decrease of 10 basis - 56 - --------------------------------------------------------------------------------
points in the average yield earned on loans in the quarter ended
Compared to the third quarter of 2021, average loan yields decreased 10 basis points during the three months endedSeptember 30, 2022 , primarily due to a$451,000 reduction in deferred Paycheck Protection Program (PPP) fee income recognized in the quarter endedSeptember 30, 2022 as compared to the same quarter in 2021. Absent the effects of PPP revenue recognition, loan yields in aggregate would have increased 12 basis points from 4.31% in the three months endedSeptember 30, 2021 to 4.43% for the same three month period in 2022. Interest expense for the three months endedSeptember 30, 2022 increased$762,000 , or 41.4%, to$2.6 million when compared to the same prior year period. The average cost of interest-bearing liabilities increased 21 basis points between the two periods due primarily to an increase in the average cost of time deposits and MMDA accounts, combined with an increase of$105.8 million in the average balance of interest bearing deposits. Interest expense on borrowings increased$9,000 , or 1.3%, to$696,000 due primarily to a 39 basis points increase in the average rate paid on subordinated debt for the three months endedSeptember 30, 2022 as compared to the prior year period. This increase was offset by a$660,000 decrease in the average balance of borrowings, combined with a 10 basis points decrease as long term, higher rate borrowings matured during the period and were replaced with lower-cost overnight borrowings. Net interest income for the nine months endedSeptember 30, 2022 was$30.2 million , compared to$28.6 million for the nine months endedSeptember 30, 2021 . The primary driver of the increase in net interest income was a$1.4 million or 4.1%, increase in interest and dividend income to$36.1 million for the nine months endedSeptember 30, 2022 compared to$34.6 million for the nine months endedSeptember 30, 2021 . Interest income on investment securities increased$1.9 million to$8.5 million for the nine months endedSeptember 30, 2022 as compared to$6.5 million for the same prior year period. Loan income decreased$535,000 , or 1.9%, for the nine months endedSeptember 30, 2022 when compared to the same prior year period. The average yield earned on interest earning assets decreased eight basis points as compared to the same nine month period in 2021. This increase in net interest income was also due to a seven basis points decrease in the average cost of interest-bearing liabilities. The average balance of interest-earning assets increased$75.2 million for the nine months endedSeptember 30, 2022 to$1.3 billion from$1.2 billion for the same prior year period while the average balance of interest-bearing liabilities increased$55.6 million for the nine months endedSeptember 30, 2022 as compared to same prior year period. The net interest margin percentage decreased from 3.19% for the nine months endedSeptember 30, 2021 to 3.18% for the nine months endedSeptember 30, 2022 . Interest and dividend income increased$1.4 million , or 4.1%, to$36.1 million for the nine months endedSeptember 30, 2022 compared to$34.7 million for the same nine month period in 2021 primarily as a result of a $$63.4 million increase in the average balance of investments in the nine months endedSeptember 30, 2022 , as compared to the same nine month period in 2021. Additionally, there was a 22 basis points increase in investment yields in the nine months endedSeptember 30, 2022 , as compared to the same nine month period in 2021. The increase in 2022 in the yields received from investment securities was the result of the combined effects of increasing coupons received on previously-held adjustable-rate securities and relatively higher rates of interest received on newly-purchased securities as a result of rising interest rates. The 18 basis points decline in average loan yields during the nine months endedSeptember 30, 2022 , as compared to the same nine month period in 2021, was due to a variety of factors, most notably a$1.1 million reduction in deferred PPP fee income recognized in the first nine months of 2022 as compared to the same nine month period in the previous year. Absent the effects of PPP revenue recognition, loan yields in aggregate would have decreased one basis point from 4.16% in the nine months endedSeptember 30, 2021 to 4.15% for the same nine month period in 2022. Interest expense for the nine months endedSeptember 30, 2022 decreased$227,000 , or 3.7%, to$5.8 million as compared to$6.1 million for the nine months endedSeptember 30, 2021 . The decrease in interest expense was due principally to a seven basis points decrease in the average rate paid on interest-bearing liabilities, partially offset by a$55.6 million increase in the average balance of these liabilities. Interest expense on time deposits decreased$123,000 , while interest expense on MMDA accounts increased$248,000 , or 33.6%. The average balance of interest-bearing deposits, which include brokered deposits, increased$72.9 million between the year-over-year nine month periods. The average rate paid on interest-bearing deposits decreased two basis points for the nine months endedSeptember 30, 2022 , as compared to the same nine month period in 2021. This decrease was primarily due to a 10 basis points decrease in the average rate paid on time deposits, during the nine months endedSeptember 30, 2022 as compared to the same time period in 2021. The decrease - 57 - -------------------------------------------------------------------------------- in the average rates paid on those deposits reflected the general decline in market interest rates that occurred in last nine months of 2021 when many of the Bank's deposit liabilities were originated or acquired through brokers. Therefore, average deposit rates were lower in the nine months endedSeptember 30, 2022 than they were in the same nine month period of 2021 due to time lag in the repricing of those deposits in 2022, despite the fact that general market rates of interest have increased significantly in the first nine months of 2022. The Bank's management continues to monitor internal deposit activity and competitive market rates for deposits in an effort to effectively manage future deposit levels and the cost of deposits in the current interest rate environment. Interest expense on borrowings decreased$316,000 , or 34 basis points, as higher rate advances matured and were replaced with lower-cost overnight borrowings, combined with a$13.1 million decrease in the average balance of borrowings. Interest expense on subordinated debt decreased$92,000 , combined with a$4.2 million decrease in the average balance of the debt. This reduction in subordinated debt expense was offset by the increase in the average rate paid on the debt to 5.78% as compared to 5.43% in the prior year period.
Rate/Volume Analysis
Net interest income can also be analyzed in terms of the impact of changing interest rates on interest-earning assets and interest-bearing liabilities and changes in the volume or amount of these assets and liabilities. The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (change in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) total increase or decrease. Changes attributable to both rate and volume have been allocated ratably. Tax-exempt securities have not been adjusted for tax equivalency. Please refer to the PPP table in the previous section for information on PPP loans and the impact on loan income for the three and nine months endedSeptember 30, 2022 and 2021. Three months ended September 30, Nine months ended September 30, 2022 vs. 2021 2022 vs. 2021 Increase/(Decrease) Due to Increase/(Decrease) Due to Total Total Unaudited Increase Increase (In thousands) Volume Rate (Decrease) Volume Rate (Decrease) Interest Income: Loans$ 1,607 $ (1,177 ) $ 430 $ 941 $ (1,476 ) $ (535 ) Taxable investment securities 341 631 972 840 572 1,412 Tax-exempt investment securities 116 207 323 333 180 513 Interest-earning deposits (13 ) 39 26 (4 ) 45 41 Total interest income 2,051 (300 ) 1,751 2,110 (679 ) 1,431 Interest Expense: NOW accounts 13 (9 ) 4 25 (3 ) 22 MMDA accounts 4 182 186 56 192 248 Savings and club accounts 4 6 10 22 13 35 Time deposits 207 347 554 241 (364 ) (123 ) Subordinated debt 2 29 31 (216 ) 124 (92 ) Borrowings (2 ) (20 ) (22 ) (123 ) (193 ) (316 ) Total interest expense 228 534 762 5 (232 ) (227 )
Net change in net interest income
989$ 2,105 $ (447 ) $ 1,658 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. - 58 - -------------------------------------------------------------------------------- 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. The Company recorded$710,000 in provision for loan losses for the three month period endedSeptember 30, 2022 , as compared to$104,000 for the three month period endedSeptember 30, 2021 . We recorded$871,000 in provision for loan losses for the nine month period endedSeptember 30, 2022 , as compared to$2.1 million for the nine month period endedSeptember 30, 2021 . The provisioning for the three and nine months endedSeptember 30, 2022 and 2021 reflects management's determination of additions to reserves considering loan mix changes, concentrations of loans in certain business sectors, factors related to loan quality metrics, and COVID-19 related economic impact. The increase in provision for loan losses in the third quarter of 2022, as compared to the same three month period in 2021, primarily reflected required reserves related to year-over-year loan growth and management's decision to downgrade certain loans within a specifically-identified commercial real estate and commercial loan credit relationship with an aggregate total related outstanding balance of$7.2 million . The$1.2 million decrease in provision for loan losses in the nine months endedSeptember 20, 2022 , as compared to the same nine month period in 2021, primarily reflected continued improvements in overall borrower credit profiles as pandemic-related economic restrictions were eased. Certain credit sensitive portfolios continue to be carefully monitored, and the Bank will consistently apply its loan classification and reserve building methodologies to the analysis of these portfolios. Please refer to the asset quality section below for a further discussion of asset quality as it relates to the allowance for loan losses. 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 2.42% atSeptember 30, 2022 as compared to 2.14% atDecember 31, 2021 . Delinquent loans (numerator) decreased$3.6 million while total loan balances (denominator) increased$53.5 million atSeptember 30, 2022 , as compared toDecember 31, 2021 . The increase in past due loans was driven by an increase of$649,000 in loans delinquent 30-59 days, an increase of$690,000 in loans delinquent 60-89 days, and a$2.2 million increase in loans delinquent 90 days and over past due atSeptember 30, 2022 as compared toDecember 31, 2021 . AtSeptember 30, 2022 , there were$21.4 million in loans past due including$5.9 million in loans 30-59 days past due,$5.3 million in loans 60-89 days past due and$10.2 million in loans 90 or more days past due. AtDecember 31, 2021 , there were$17.9 million in loans past due including$5.2 million in loans 30-59 days past due,$4.6 million in loans 60-89 days past due and$8.0 million in loans 90 or more days past due. Noninterest Income
The Company's noninterest income is primarily comprised of fees on deposit account balances and transactions, loan servicing, commissions, including insurance agency commissions, and net gains on sales of securities, loans, and foreclosed real estate.
The following table sets forth certain information on noninterest income for the
periods indicated:
Unaudited For the three months ended For the nine months ended
September September September September
(Dollars in thousands) 30, 2022 30, 2021 Change 30, 2022 30, 2021 Change
Service charges on deposit
accounts $ 334 $ 393 $ (59 ) -15.0 % $ 876 $ 1,082 $ (206 ) -19.0 %
Earnings and gain on bank
owned life insurance 156 164 (8 ) -4.9 % 441 418 23 5.5 %
Loan servicing fees 74 54 20 37.0 % 260 155 105 67.7 %
Debit card interchange fees 180 236 (56 ) -23.7 % 639 698 (59 ) -8.5 %
Insurance agency revenue 258 303 (45 ) -14.9 % 849 817 32 3.9 %
Other charges, commissions
and fees 310 235 75 31.9 % 1,002 800 202 25.3 %
Noninterest income before
(losses) gains 1,312 1,385 (73 ) -5.3 % 4,067 3,970 97 2.4 %
Net (losses) gains on sales
of securities, fixed assets,
loans and foreclosed
real estate (151 ) 72 (223 ) -309.7 % (46 ) 483 (529 ) -109.5 %
Gains on marketable equity
securities - 89 (89 ) -100.0 % 39 372 (333 ) 89.5 %
Total noninterest income $ 1,161 $ 1,546 $ (385 ) -24.9 % $ 4,060 $ 4,825 $ (765 ) -15.9 %
- 59 --------------------------------------------------------------------------------- Third quarter 2022 noninterest income was$1.2 million , a decrease of$385,000 , or 24.9%, compared to$1.5 million for the same three month period in 2021. The decrease in noninterest income, as compared to the same quarter of the previous year was due to (1) a loss on sales and redemptions of investment securities in the current quarter, compared to a net gain in the third quarter of 2021, (2) no activity with sales of marketable equity securities in the current quarter compared to the net gain on marketable equity securities recorded in the third quarter of 2021, and (3) a decrease in service charges for overdraft, ATM fees and insufficient funds on deposit accounts for the current quarter compared to the third quarter of 2021. Noninterest income was$4.1 million for the nine months endedSeptember 30, 2022 , a decrease of$765,000 , or 15.9%, compared to$4.8 million for the same nine month period in 2021. The decrease in noninterest income, as compared to the nine month period of the previous year was primarily due to the net loss on sales and redemptions of investment securities, a decline in the gains on marketable securities and a reduction in services charges on deposit accounts.
Noninterest Expense
The following table sets forth certain information on noninterest expense for
the periods indicated:
Unaudited For the three months ended For the nine months ended
September September September September
(Dollars in thousands) 30, 2022 30, 2021 Change 30, 2022 30, 2021 Change
Salaries and employee benefits
15.8 %
835 724 111 15.3 % 2,491 2,387 104 4.4 %
Data processing 485 686 (201 ) -29.3 % 1,552 2,016 (464 ) -23.0 %
Professional and other services 267 385 (118 ) -30.6 % 1,112 1,253 (141 ) -11.3 %
Advertising 199 191 8 4.2 % 621 696 (75 ) -10.8 %
FDIC assessments 162 222 (60 ) -27.0 % 606 652 (46 ) -7.1 %
Audits and exams 141 193 (52 ) -26.9 % 424 572 (148 ) -25.9 %
Insurance agency expense 229 227 2 0.9 % 687 627 60 9.6 %
Community service activities 58 59 (1 ) -1.7 % 193 181 12 6.6 %
Foreclosed real estate expenses 17 8 9 112.5 % 57 30 27 90.0 %
Other expenses 678 504 174 34.5 % 1,892 1,424 468 32.9 %
Total noninterest expenses
6.5 %
Total noninterest expense for the third quarter of 2022 was$7.3 million , an increase of$444,000 , or 6.5%, compared to$6.8 million for the third quarter of 2021. The increase was primarily a result of higher salaries and employee benefits expense of$572,000 , or 15.8%, and a net decrease of$128,000 , or 4.0%, in all other expense categories. The$572,000 increase in salaries and benefits expense for the three months endedSeptember 30, 2022 was primarily due to increases in individual staff salaries and commissions and other compensation expenses paid related to increased levels of insurance and investment services activities. Additionally, salaries and benefits expenses increased due to additions to staff headcount concentrated primarily in the loan servicing areas and within the Bank's branch system. Staffing increases in the Bank's branch system were made in anticipation of the imminent opening of the Bank's eleventh branch. During 2022, the Company increased its salary structure where it was deemed appropriate in order to effectively respond to inflationary and competitive pressures within our marketplace to recruit and retain talent. Total noninterest expense for the nine month period of 2022 was$21.7 million , an increase of$1.4 million , or 6.7%, compared with$20.3 million for the prior year period. The increase was primarily a result of higher salaries and employee benefits expense of$1.6 million , or 14.9%, that was primarily comprised of a$1.0 million , or 10.7%, increase in salaries, a$379,000 reduction in the level of deferred employee-related expenses related to loan origination volume declines following the cessation of the PPP, a$136,000 increase in employee benefits and a$85,000 net increase in all other salaries and employee benefit expenses. The$1.0 million increase in salaries expense for the nine months endedSeptember 30, 2022 was primarily due to increases in individual salaries, enacted early in 2022 and continuing through the year, as well as additions to staff headcount primarily in the loan servicing areas and within the Bank's branch system, as discussed above. Additionally, under generally accepted accounting principles (GAAP), certain direct costs related to loan originations are deferred and recorded as an adjustment to yield over the life of the loan. The$379,000 reduction in the total deferred employee related expenses in the nine months endedSeptember 30, 2022 , as compared to the same nine month period in 2021, was primarily due to the termination of the PPP loan program in 2021, which returned loan origination volume to normalized levels. The$136,000 increase in employee - 60 - -------------------------------------------------------------------------------- benefit expenses is consistent with increased staffing levels and additionally reflects increases in per-employee benefit costs, including health insurance premiums. AtSeptember 30, 2022 , the Bank serviced 511 residential mortgage loans in the aggregate amount of$52.5 million that have been sold on a non-recourse basis toFNMA .FNMA is the only unrelated third-party that has acquired loans originated by the Bank. On an infrequent basis, loans previously sold toFNMA 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 fromFNMA . Repurchase losses sustained by the Bank include all costs incurred byFNMA as part of the foreclosure process, including items such as delinquent property taxes and legal fees. No such claims against the Bank were made byFNMA in the three or nine month periods ended in eitherSeptember 30, 2022 orSeptember 30, 2021 . Management continues to monitor the underwriting standards applied to all residential mortgage loan originations and subsequent sales through its quality control processes and considers these occurrences and their related expenses to be isolated instances. Income Tax Expense Income tax expense decreased$233,000 to$772,000 , with an effective tax rate of 19.6%, for the quarter endedSeptember 30, 2022 , as compared to$1.0 million with an effective tax rate of 23.2% for the same three month period in 2021. The reduction in income tax expense for the quarter endedSeptember 30, 2022 , as compared to the same quarter in 2021, was primarily driven by the aforementioned decrease in the effective tax rate, combined with a decrease of$446,000 in recorded net income. The effective income tax rate decreased 3.6% to 19.6% for the three months endedSeptember 30, 2022 as compared to 23.2% for the same three month period in 2021. The decrease in the tax rate in the third quarter of 2022, as compared to the same quarter in 2021, was primarily related to an increase in tax exempt income derived from increased average balances of investment securities issued by state and political subdivisions. Income tax expense decreased$132,000 to$2.3 million , with an effective tax rate of 19.4%, for the nine months endedSeptember 30, 2022 , as compared to$2.4 million with an effective tax rate of 22.0%, for the same nine month period in 2021. The decrease in income tax expense and effective income tax rate for the nine months endedSeptember 30, 2022 , as compared to the same nine month period in 2021, was primarily driven by the increase in tax exempt interest on securities. The Company's tax liability is a function of the 21% statutory federal tax rate, the level of pretax income, the varying effects ofNew York State income taxes, and is partially reduced by tax-exempt income from specific types of investment securities and loans, bank owned life insurance, and, to a much lesser degree, the utilization of low income housing tax credits. Other variances from the federal statutory federal tax rate are due to the effects of transitional adjustments related to state income taxes. In addition, the tax effects of certain incentive stock option activity may reduce the Company's effective tax rate on a sporadic basis. Earnings per Share Basic and diluted earnings per Voting share were$0.52 per share for the third quarter of 2022, as compared to$0.56 per basic and diluted Voting share for the same quarter of 2021. Basic and diluted earnings per Series A Non-Voting share were$0.52 per share for the third quarter of 2022, as compared to$0.56 per basic and diluted Series A Non-Voting share for the same quarter of 2021. Basic and diluted earnings per Voting share were$1.55 per share for the nine month period endedSeptember 30, 2022 , as compared to$1.43 for the same period year period. Basic and diluted earnings per Series A Non-Voting share were$1.55 for the nine month period endedSeptember 30, 2022 , as compared to$1.43 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. - 61 - --------------------------------------------------------------------------------
Changes in Financial Condition
Assets
Total assets increased$111.8 million , or 8.7%, to$1.40 billion atSeptember 30, 2022 as compared to$1.29 billion atDecember 31, 2021 . This increase was due primarily to increases in loans and investment securities. Loans totaled$886.2 million atSeptember 30, 2022 , an increase of$53.7 million compared to$832.5 million atDecember 31, 2021 , primarily due to increases of$48.9 million in commercial real estate loans,$4.3 million in commercial business loans and$13.1 million in residential real estate loans. These increases were offset by a$12.8 million decrease in total consumer loans. Investment securities, including investment in FHLB-NY stock, increased$36.0 million , or 10.1%, to$392.4 million atSeptember 30, 2022 , as compared to$356.4 million atDecember 31, 2021 , due principally to purchases of securities during the first nine months of 2022, that were partially offset by sales and redemptions of securities totaling$50.3 million and unrealized losses of$15.8 million in the portion of the investment portfolio characterized as available-for-sale as a result of the increase in market interest rates through the third quarter of 2022. Liabilities Total liabilities increased$114.6 million , or 9.8%, to$1.29 billion atSeptember 30, 2022 , compared to$1.17 billion atDecember 31, 2021 . Deposits increased$125.2 million , or 11.9%, to$1.18 billion atSeptember 30, 2022 , compared to$1.06 billion atDecember 31, 2021 . Interest-bearing deposits, primarily time deposits acquired through various broker channels, were the primary driver of growth between the comparable dates and totaled$993.4 million atSeptember 30, 2022 , an increase of$130.0 million , or 15.1% from the 2021 year end. Borrowed funds balances from the FHLB-NY decreased$11.5 million , or 14.9%, to$65.6 million atSeptember 30, 2022 from$77.1 million atDecember 31, 2021 as the Bank primarily used net incoming deposit cash flows to repay borrowings at their scheduled maturity dates.
Shareholders' Equity
Total shareholders' equity was$107.3 million atSeptember 30, 2022 , a decrease of$3.0 million , as compared to$110.3 million atDecember 31, 2021 . The$3.0 million decline in shareholders' equity was primarily due to an increase of$11.3 million in accumulated other comprehensive loss, due to unrealized temporary losses on investment securities categorized as available-for-sale, and$740,000 in declared dividend distributions, partially offset by an increase in retained earnings for the nine months endedSeptember 30, 2022 of$7.6 million , or 12.5%. The$11.3 million tax-effected increase in accumulated other comprehensive loss fromDecember 31, 2021 toSeptember 30, 2022 , was primarily due to the decline in the fair value of the Company's available-for-sale investment securities portfolio during that period. The available-for-sale investment securities portfolio, with an aggregate amortized historical cost of$191.5 million , had an aggregate fair value that was less than its aggregate amortized historical cost by$15.8 million , or 8.25%, atSeptember 30, 2022 . The available-for-sale investment securities portfolio, with an aggregate amortized historical cost of$190.6 million , had an aggregate fair value that exceeded its aggregate amortized historical cost by$579,000 , or 0.30%, atDecember 31, 2021 . The resultant$15.2 million total decline in the fair value of the available-for-sale investment portfolio's aggregate fair value relative to its aggregate amortized historical cost, in the nine months endedSeptember 30, 2022 , was due to the significant increase in general interest rates that occurred in that period and did not represent any other-than-temporary impairment within the portfolio atSeptember 30, 2022 .
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. AtSeptember 30, 2022 , the Bank met the - 62 - -------------------------------------------------------------------------------- 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. AtSeptember 30, 2022 , the Bank exceeded all regulatory required minimum capital ratios, including the capital buffer requirements.
Minimum To Be
Minimum For "Well-Capitalized" Minimum For
Capital Adequacy Under Prompt Capital Adequacy
Actual Purposes Corrective Provisions with Buffer
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio
As of September 30, 2022 :
Total Core Capital (to
Risk-Weighted Assets) $ 141,354 14.69 % $ 76,993 8.00 % $ 96,241 10.00 % $ 101,053 10.50 %
Tier 1 Capital (to
Risk-Weighted Assets) $ 129,304 13.44 % $ 57,744 6.00 % $ 76,993 8.00 % $ 81,805 8.50 %
Tier 1 Common Equity (to
Risk-Weighted Assets) $ 129,304 13.44 % $ 43,308 4.50 % $ 62,556 6.50 % $ 67,368 7.00 %
Tier 1 Capital (to Assets) $ 129,304 9.48 % $ 54,576 4.00 % $ 68,220 5.00 % $ 68,220 5.00 %
As of December 31, 2021
Total Core Capital (to
Risk-Weighted Assets) $ 129,166 15.19 % $ 68,013 8.00 % $ 85,016 10.00 % $ 89,266 10.50 %
Tier 1 Capital (to
Risk-Weighted Assets) $ 118,511 13.94 % $ 51,009 6.00 % $ 68,013 8.00 % $ 72,263 8.50 %
Tier 1 Common Equity (to
Risk-Weighted Assets) $ 118,511 13.94 % $ 38,257 4.50 % $ 55,260 6.50 % $ 59,511 7.00 %
Tier 1 Capital (to Assets) $ 118,511 9.52 % $ 49,804 4.00 % $ 62,255 5.00 % $ 62,255 5.00 %
Non-GAAP Financial Measures
Regulation G, a rule adopted by the Securities and Exchange Commission (SEC),
applies to certain SEC filings, including earnings releases, made by registered
companies that contain "non-GAAP financial measures." GAAP is generally accepted
accounting principles in the United States of America . Under Regulation G,
companies making public disclosures containing non-GAAP financial measures must
also disclose, along with each non-GAAP financial measure, certain additional
information, including a reconciliation of the non-GAAP financial measure to the
closest comparable GAAP financial measure (if a comparable GAAP measure exists)
and a statement of the Company's reasons for utilizing the non-GAAP financial
measure as part of its financial disclosures. The SEC has exempted from the
definition of "non-GAAP financial measures" certain commonly used financial
measures that are not based on GAAP. When these exempted measures are included
in public disclosures, supplemental information is not required. Financial
institutions like the Company and its subsidiary bank are subject to an array of
bank regulatory capital measures that are financial in nature but are not based
on GAAP. The Company follows industry practice in disclosing its financial
condition under these various regulatory capital measures, including period-end
regulatory capital ratios for its subsidiary bank, in its periodic reports filed
with the SEC . The Company provides, below, an explanation of the calculations,
as supplemental information, for non-GAAP measures included in the consolidated
annual financial statements. In addition, the Company provides a reconciliation
of its subsidiary bank's disclosed regulatory capital measures, below.
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September 30, December 31,
(Dollars in thousands) 2022 2021
Regulatory Capital Ratios (Bank only)
Total capital (to risk-weighted assets)
Total equity (GAAP) $ 121,380 $ 121,896
Goodwill (4,536 ) (4,536 )
Intangible assets (105 ) (117 )
Addback: Accumulated other comprehensive income 12,565 1,268
Total Tier 1 Capital $ 129,304
Allowance for loan and lease losses 12,050 10,655
Total Tier 2 Capital $ 12,050 $ 10,655
Total Tier 1 plus Tier 2 Capital (numerator) $ 141,354 $ 129,166
Risk-weighted assets (denominator) 962,407 850,157
Total core capital to risk-weighted assets 14.69
% 15.19 %
Tier 1 capital (to risk-weighted assets)
Total Tier 1 capital (numerator)$ 129,304
Risk-weighted assets (denominator) 962,407
850,157
Total capital to risk-weighted assets 13.44
% 13.94 %
Tier 1 capital (to adjusted assets)
Total Tier 1 capital (numerator)$ 129,304 $ 118,511 Total average assets 1,369,039 1,249,752 Goodwill (4,536 ) (4,536 ) Intangible assets (105 ) (117 ) Adjusted assets (denominator)$ 1,364,398
Total capital to adjusted assets 9.48 % 9.52 %
Tier 1 Common Equity (to risk-weighted assets)
Total Tier 1 capital (numerator)$ 129,304
Risk-weighted assets (denominator) 962,407 850,157 Total Tier 1 Common Equity to risk-weighted assets 13.44 % 13.94 %
Loan and Asset Quality and Allowance for Loan Losses
The following table represents information concerning the aggregate amount of non-accrual loans at the indicated dates:
September 30, December 31, September 30,
(Dollars In thousands) 2022 2021 2021
Nonaccrual loans:
Commercial and commercial real estate loans $ 8,201 $ 6,297 $ 5,666
Consumer 1,576 1,104 1,289
Residential mortgage loans 848 891 1,830
Total nonaccrual loans 10,625 8,292 8,785
Total nonperforming loans 10,625 8,292 8,785
Foreclosed real estate 221 - -
Total nonperforming assets $ 10,846 $ 8,292 $ 8,785
Accruing troubled debt restructurings $ 3,716
Nonperforming loans to total loans 1.22 % 1.00 % 1.11 %
Nonperforming assets to total assets 0.78 % 0.65 % 0.70 %
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
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within the categories of nonaccrual loans or accruing TDRs. There were five TDR
loans in nonaccrual status at
As indicated in the table above, nonperforming assets atSeptember 30, 2022 were$10.8 million , and were$2.5 million higher than the$8.3 million reported atDecember 31, 2021 and$2.0 million higher than the reported$8.8 million atSeptember 30, 2021 . The increase in the nonperforming loan portfolio onSeptember 30, 2022 , as compared toDecember 31, 2021 , was primarily the result of the placement of$1.8 million into nonaccrual status of certain loans within one large commercial real estate loan and commercial loan relationship with a total related outstanding amount of$7.2 million . This relationship is under active resolution management atSeptember 30, 2022 . Fair values for commercial FRE are initially recorded based on market value evaluations by third parties, less costs to sell ("initial cost basis"). On a prospective basis, residential FRE assets will be initially recorded at the lower of the net amount of loan receivable or the real estate's fair value less costs to sell. Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to FRE are charged to the allowance for loan losses. Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash flow analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis for the FRE property. The allowance for loan losses represents management's estimate of the probable losses inherent in the loan portfolio as of the date of the statement of condition. The allowance for loan losses was$13.6 million and$12.9 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. The ratio of the allowance for loan losses to total loans remained consistent at 1.54% as ofSeptember 30, 2022 when compared to 1.55% atDecember 31, 2021 . 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 ofSeptember 30, 2022 . 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. AtSeptember 30, 2022 andDecember 31, 2021 , the Company had$17.7 million and$11.4 million in loans, respectively, which were deemed to be impaired, having established specific reserves of$4.2 million and$1.9 million , respectively, on these loans. The$5.7 million increase in impaired loans between these two dates was primarily the result of the placement into nonaccrual status of a group of loans within one large commercial loan and commercial real estate borrower relationship. 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$42.6 million as ofSeptember 30, 2022 , a decrease of$1.1 million , or 2.5%, as compared to$43.7 million atDecember 31, 2021 . These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered impaired. - 65 - -------------------------------------------------------------------------------- Appraisals are obtained at the time a real estate secured loan is originated. For commercial real estate held as collateral, the property is inspected every two years. In the normal course of business, the Bank sells residential mortgage loans and has infrequently sold participation interests in commercial loans. As is typical in the industry, the Bank makes certain representations and warranties to the buyers of these loans or loan participations. The Bank maintains a quality control program for closed loans and considers the risks and uncertainties associated with potential repurchase requirements to be minimal. 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.
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 theFederal Home Loan Bank of New York ("FHLBNY"), whose competitive advance programs and lines of credit provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in deposits in the future could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could include, but are not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment securities, the sale of securitized loans, or the sale of whole loans. Such actions could result in higher interest expense and/or losses on the sale of securities or loans. Through the first nine months of 2022, as indicated in the consolidated statement of cash flows, the Company reported net cash flow from operating activities of$12.2 million and net cash outflow of$117.4 million related to investing activities. The net cash outflow from investing activities primarily was due to a$61.4 million increase in net investment activity, a$54.6 million increase in net loan activity and a$1.4 million net increase in all other investing activities in aggregate. The Company reported net cash flows from financing activities of$112.5 million generated principally by increased customer and brokered deposit balances of$145.9 million , partially offset by a$11.5 million decrease in net borrowings, a$20.7 million decrease in time deposits, and an aggregate decrease in net cash of$400,000 from all other financing sources, including dividends paid to common voting and non-voting shareholders and warrants of$1.5 million . The Company has a number of existing credit facilities available to it. AtSeptember 30, 2022 , total credit available to the Company under the existing lines of credit was approximately$141.6 million at FHLBNY, theFederal Reserve Bank , and two other correspondent banks. As ofSeptember 30, 2022 , the Company had$65.6 million of the available lines of credit utilized on its existing lines of credit with$76.0 million available.
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--------------------------------------------------------------------------------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. AtSeptember 30, 2022 , the Company had$234.5 million in outstanding commitments to extend credit and standby letters of credit.
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