UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
or
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition from to
Commission file number: 001-38827
Cortland Bancorp
(Exact name of registrant as specified in its charter)
Ohio |
|
34-1451118 |
(State or other jurisdiction of Incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
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|
|
194 West Main Street, Cortland, Ohio |
|
44410 |
(Address of principal executive offices) |
|
(Zip code) |
330- 637-8040
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common stock, No Par Value |
CLDB |
NASDAQ Capital Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
☐ |
|
Accelerated filer |
☒ |
Non-accelerated filer |
☐ |
|
Smaller reporting company |
☒ |
|
|
|
Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
TITLE OF CLASS |
|
SHARES OUTSTANDING |
Common Stock, No Par Value |
|
4,378,723 Shares November 1, 2019 |
PART I – FINANCIAL INFORMATION |
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Item 1. |
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Financial Statements |
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Cortland Bancorp and Subsidiaries: |
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Consolidated Balance Sheets (unaudited) – September 30, 2019 and December 31, 2018 |
2 |
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3 |
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4 |
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5 |
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Consolidated Statements of Cash Flows (unaudited) – Nine months ended September 30, 2019 and 2018 |
6 |
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Notes to Consolidated Financial Statements (unaudited) – September 30, 2019 |
7 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
30 |
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30 |
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31 |
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32 |
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33 |
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Item 3. |
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44 |
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Item 4. |
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44 |
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45 |
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Item 1. |
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45 |
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Item 1A. |
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45 |
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Item 2. |
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45 |
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Item 3. |
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45 |
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Item 4. |
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45 |
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Item 5. |
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45 |
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Item 6. |
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46 |
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49 |
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Amounts in thousands, except share data)
|
September 30, |
|
|
December 31, |
|
||
|
2019 |
|
|
2018 |
|
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ASSETS |
|
|
|
|
|
|
|
Cash and due from banks |
$ |
8,483 |
|
|
$ |
11,333 |
|
Interest-earning deposits |
|
12,025 |
|
|
|
8,359 |
|
Total cash and cash equivalents |
|
20,508 |
|
|
|
19,692 |
|
Investment securities available-for-sale (Note 3) |
|
136,456 |
|
|
|
136,923 |
|
Regulatory stock (Note 3) |
|
2,835 |
|
|
|
2,581 |
|
Loans held for sale |
|
4,988 |
|
|
|
1,040 |
|
Total loans (Note 4) |
|
488,435 |
|
|
|
514,392 |
|
Less allowance for loan losses (Note 4) |
|
(4,641 |
) |
|
|
(4,198 |
) |
Net loans |
|
483,794 |
|
|
|
510,194 |
|
Premises and equipment |
|
11,752 |
|
|
|
10,202 |
|
Bank-owned life insurance |
|
17,672 |
|
|
|
15,711 |
|
Other assets |
|
22,616 |
|
|
|
18,323 |
|
Total assets |
$ |
700,621 |
|
|
$ |
714,666 |
|
|
|
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LIABILITIES |
|
|
|
|
|
|
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Noninterest-bearing deposits |
$ |
138,537 |
|
|
$ |
136,886 |
|
Interest-bearing deposits |
|
448,591 |
|
|
|
467,533 |
|
Total deposits |
|
587,128 |
|
|
|
604,419 |
|
Securities sold under agreements to repurchase (Note 13) |
|
1,307 |
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|
|
2,206 |
|
Federal Home Loan Bank advances - short term |
|
— |
|
|
|
12,000 |
|
Federal Home Loan Bank advances - long term |
|
19,000 |
|
|
|
16,000 |
|
Subordinated debt (Note 7) |
|
5,155 |
|
|
|
5,155 |
|
Other liabilities |
|
13,878 |
|
|
|
9,968 |
|
Total liabilities |
|
626,468 |
|
|
|
649,748 |
|
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|
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SHAREHOLDERS’ EQUITY |
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Common stock - $5.00 stated value - authorized 20,000,000 shares; issued 4,728,267 shares in 2019 and 2018; outstanding shares, 4,378,723 in 2019 and 4,349,624 in 2018 |
|
23,641 |
|
|
|
23,641 |
|
Additional paid-in capital |
|
21,153 |
|
|
|
20,984 |
|
Retained earnings |
|
34,808 |
|
|
|
31,089 |
|
Accumulated other comprehensive income (loss) (Note 10) |
|
1,261 |
|
|
|
(3,656 |
) |
Treasury stock, at cost, 349,544 shares in 2019 and 378,643 in 2018 |
|
(6,710 |
) |
|
|
(7,140 |
) |
Total shareholders’ equity |
|
74,153 |
|
|
|
64,918 |
|
Total liabilities and shareholders’ equity |
$ |
700,621 |
|
|
$ |
714,666 |
|
See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries
2
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Amounts in thousands, except per share data)
|
THREE MONTHS ENDED SEPTEMBER 30, |
|
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NINE MONTHS ENDED SEPTEMBER 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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INTEREST AND DIVIDEND INCOME |
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Interest and fees on loans |
$ |
6,257 |
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|
$ |
6,009 |
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|
$ |
19,250 |
|
|
$ |
17,336 |
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Interest and dividends on investment securities: |
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|
|
|
|
|
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|
|
|
|
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Taxable interest |
|
382 |
|
|
|
522 |
|
|
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1,440 |
|
|
|
1,553 |
|
Nontaxable interest |
|
466 |
|
|
|
355 |
|
|
|
1,187 |
|
|
|
1,140 |
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Dividends |
|
29 |
|
|
|
35 |
|
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|
103 |
|
|
|
109 |
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Other interest income |
|
90 |
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|
|
41 |
|
|
|
235 |
|
|
|
122 |
|
Total interest and dividend income |
|
7,224 |
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|
|
6,962 |
|
|
|
22,215 |
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|
20,260 |
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INTEREST EXPENSE |
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Deposits |
|
1,238 |
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|
|
909 |
|
|
|
3,607 |
|
|
|
2,548 |
|
Securities sold under agreements to repurchase |
|
1 |
|
|
|
1 |
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4 |
|
|
|
4 |
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Federal Home Loan Bank advances - short term |
|
17 |
|
|
|
107 |
|
|
|
128 |
|
|
|
252 |
|
Federal Home Loan Bank advances - long term |
|
96 |
|
|
|
81 |
|
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|
271 |
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|
|
205 |
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Subordinated debt |
|
50 |
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|
50 |
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|
|
157 |
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|
138 |
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Total interest expense |
|
1,402 |
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|
|
1,148 |
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|
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4,167 |
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|
3,147 |
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Net interest income |
|
5,822 |
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|
5,814 |
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|
|
18,048 |
|
|
|
17,113 |
|
PROVISION FOR LOAN LOSSES |
|
180 |
|
|
|
75 |
|
|
|
535 |
|
|
|
650 |
|
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
|
5,642 |
|
|
|
5,739 |
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|
|
17,513 |
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|
|
16,463 |
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NON-INTEREST INCOME |
|
|
|
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|
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|
|
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Fees for customer services |
|
617 |
|
|
|
569 |
|
|
|
1,701 |
|
|
|
1,708 |
|
Investment securities available-for-sale losses, net |
|
— |
|
|
|
— |
|
|
|
(44 |
) |
|
|
(21 |
) |
Mortgage banking gains, net |
|
492 |
|
|
|
272 |
|
|
|
1,173 |
|
|
|
771 |
|
Earnings on bank-owned life insurance |
|
86 |
|
|
|
82 |
|
|
|
296 |
|
|
|
1,790 |
|
Other non-interest income |
|
232 |
|
|
|
225 |
|
|
|
557 |
|
|
|
489 |
|
Total non-interest income |
|
1,427 |
|
|
|
1,148 |
|
|
|
3,683 |
|
|
|
4,737 |
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NON-INTEREST EXPENSES |
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|
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|
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|
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|
|
|
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Salaries and employee benefits |
|
2,622 |
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|
|
2,592 |
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|
|
8,436 |
|
|
|
7,659 |
|
Occupancy and equipment |
|
610 |
|
|
|
536 |
|
|
|
1,765 |
|
|
|
1,683 |
|
State and local taxes |
|
130 |
|
|
|
123 |
|
|
|
389 |
|
|
|
373 |
|
FDIC insurance |
|
(8 |
) |
|
|
44 |
|
|
|
107 |
|
|
|
132 |
|
Professional fees |
|
348 |
|
|
|
254 |
|
|
|
816 |
|
|
|
652 |
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Advertising and marketing |
|
78 |
|
|
|
76 |
|
|
|
276 |
|
|
|
239 |
|
Data processing fees |
|
72 |
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|
|
56 |
|
|
|
215 |
|
|
|
183 |
|
Other operating expenses |
|
909 |
|
|
|
848 |
|
|
|
2,848 |
|
|
|
2,519 |
|
Total non-interest expenses |
|
4,761 |
|
|
|
4,529 |
|
|
|
14,852 |
|
|
|
13,440 |
|
INCOME BEFORE FEDERAL INCOME TAX EXPENSE |
|
2,308 |
|
|
|
2,358 |
|
|
|
6,344 |
|
|
|
7,760 |
|
Federal income tax expense |
|
363 |
|
|
|
386 |
|
|
|
966 |
|
|
|
949 |
|
NET INCOME |
$ |
1,945 |
|
|
$ |
1,972 |
|
|
$ |
5,378 |
|
|
$ |
6,811 |
|
EARNINGS PER SHARE BASIC AND DILUTED |
$ |
0.45 |
|
|
$ |
0.46 |
|
|
$ |
1.24 |
|
|
$ |
1.56 |
|
CASH DIVIDENDS DECLARED PER SHARE |
$ |
0.11 |
|
|
$ |
0.16 |
|
|
$ |
0.38 |
|
|
$ |
0.38 |
|
See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries
3
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Amounts in thousands)
|
THREE MONTHS ENDED SEPTEMBER 30, |
|
|
NINE MONTHS ENDED SEPTEMBER 30, |
|
||||||||||
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Net income |
$ |
1,945 |
|
|
$ |
1,972 |
|
|
$ |
5,378 |
|
|
$ |
6,811 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on available-for-sale securities |
|
1,764 |
|
|
|
(1,395 |
) |
|
|
6,154 |
|
|
|
(4,444 |
) |
Tax effect |
|
(371 |
) |
|
|
292 |
|
|
|
(1,293 |
) |
|
|
933 |
|
Reclassification adjustment for net losses realized in net income |
|
— |
|
|
|
— |
|
|
|
44 |
|
|
|
21 |
|
Tax effect |
|
— |
|
|
|
— |
|
|
|
(9 |
) |
|
|
(4 |
) |
Total securities available-for-sale |
|
1,393 |
|
|
|
(1,103 |
) |
|
|
4,896 |
|
|
|
(3,494 |
) |
Change in post-retirement obligations |
|
7 |
|
|
|
(8 |
) |
|
|
21 |
|
|
|
95 |
|
Total other comprehensive income (loss) |
|
1,400 |
|
|
|
(1,111 |
) |
|
|
4,917 |
|
|
|
(3,399 |
) |
Total comprehensive income |
$ |
3,345 |
|
|
$ |
861 |
|
|
$ |
10,295 |
|
|
$ |
3,412 |
|
See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries
4
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(Amounts in thousands, except per share data)
|
THREE MONTHS ENDED SEPTEMBER 30, |
|
|
NINE MONTHS ENDED SEPTEMBER 30, |
|
||||||||||
|
2019 |
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2018 |
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|
2019 |
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2018 |
|
||||
COMMON STOCK |
|
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Balance |
$ |
23,641 |
|
|
$ |
23,641 |
|
|
$ |
23,641 |
|
|
$ |
23,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL PAID IN CAPITAL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
21,027 |
|
|
|
20,878 |
|
|
|
20,984 |
|
|
|
20,928 |
|
Treasury shares reissued (2,770 shares) |
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
Equity compensation |
|
126 |
|
|
|
58 |
|
|
|
158 |
|
|
|
8 |
|
Ending Balance |
|
21,153 |
|
|
|
20,936 |
|
|
|
21,153 |
|
|
|
20,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
33,345 |
|
|
|
28,270 |
|
|
|
31,089 |
|
|
|
24,403 |
|
Net income |
|
1,945 |
|
|
|
1,972 |
|
|
|
5,378 |
|
|
|
6,811 |
|
Cash dividend declared, $0.11 and $0.38 and $0.16 and $0.38 per share for three and nine months ended September 30, 2019 and 2018, respectively |
|
(482 |
) |
|
|
(698 |
) |
|
|
(1,659 |
) |
|
|
(1,670 |
) |
Ending balance |
|
34,808 |
|
|
|
29,544 |
|
|
|
34,808 |
|
|
|
29,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
(139 |
) |
|
|
(4,113 |
) |
|
|
(3,656 |
) |
|
|
(1,825 |
) |
Other comprehensive income (loss) |
|
1,400 |
|
|
|
(1,111 |
) |
|
|
4,917 |
|
|
|
(3,399 |
) |
Ending balance |
|
1,261 |
|
|
|
(5,224 |
) |
|
|
1,261 |
|
|
|
(5,224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TREASURY STOCK |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
(6,710 |
) |
|
|
(6,852 |
) |
|
|
(7,140 |
) |
|
|
(5,517 |
) |
Treasury shares reissued (2,770 shares) |
|
— |
|
|
|
— |
|
|
|
49 |
|
|
|
— |
|
Treasury shares purchased (5,352 shares in 2019 and 70,181 in 2018) |
|
— |
|
|
|
— |
|
|
|
(122 |
) |
|
|
(1,493 |
) |
Equity compensation |
|
— |
|
|
|
— |
|
|
|
503 |
|
|
|
158 |
|
Ending balance |
|
(6,710 |
) |
|
|
(6,852 |
) |
|
|
(6,710 |
) |
|
|
(6,852 |
) |
TOTAL SHAREHOLDERS' EQUITY |
$ |
74,153 |
|
|
$ |
62,045 |
|
|
$ |
74,153 |
|
|
$ |
62,045 |
|
See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries
5
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
|
FOR THE NINE MONTHS ENDED SEPTEMBER 30, |
|
|||||
|
2019 |
|
|
2018 |
|
||
Net cash flow from operating activities |
$ |
4,193 |
|
|
$ |
9,696 |
|
Cash flow from investing activities |
|
|
|
|
|
|
|
Purchases of available-for-sale securities |
|
(16,478 |
) |
|
|
(13,021 |
) |
Proceeds from sale of available-for-sale securities |
|
13,622 |
|
|
|
21,418 |
|
Proceeds from call, maturity and principal payments on available-for-sale securities |
|
8,467 |
|
|
|
9,567 |
|
Purchases of regulatory stock |
|
(254 |
) |
|
|
— |
|
Net decrease in loans made to customers |
|
25,865 |
|
|
|
4,500 |
|
Purchases of bank-owned life insurance |
|
(2,068 |
) |
|
|
— |
|
Proceeds from bank-owned life insurance |
|
403 |
|
|
|
3,808 |
|
Contributions to partnership funds |
|
(1,827 |
) |
|
|
(1,472 |
) |
Purchases of premises and equipment |
|
(2,196 |
) |
|
|
(849 |
) |
Net cash flow from investing activities |
|
25,534 |
|
|
|
23,951 |
|
Cash deficit from financing activities |
|
|
|
|
|
|
|
Net decrease in deposit accounts |
|
(17,291 |
) |
|
|
(24,645 |
) |
Net change in securities sold under agreements to repurchase |
|
(899 |
) |
|
|
(678 |
) |
Net change in Federal Home Loan Bank advances - short term |
|
(12,000 |
) |
|
|
(9,000 |
) |
Repayments of Federal Home Loan Bank advances - long term |
|
(6,000 |
) |
|
|
(6,000 |
) |
Proceeds from Federal Home Loan Bank advances - long term |
|
9,000 |
|
|
|
8,000 |
|
Dividends paid |
|
(1,659 |
) |
|
|
(1,670 |
) |
Treasury shares purchased |
|
(122 |
) |
|
|
(1,493 |
) |
Treasury shares reissued |
|
60 |
|
|
|
— |
|
Net cash deficit from financing activities |
|
(28,911 |
) |
|
|
(35,486 |
) |
Net change in cash and cash equivalents |
|
816 |
|
|
|
(1,839 |
) |
Cash and cash equivalents |
|
|
|
|
|
|
|
Beginning of period |
|
19,692 |
|
|
|
19,125 |
|
End of period |
$ |
20,508 |
|
|
$ |
17,286 |
|
Supplemental disclosures: |
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
Income taxes |
$ |
— |
|
|
$ |
600 |
|
Interest |
$ |
3,914 |
|
|
$ |
3,132 |
|
Adoption of lease standard: |
|
|
|
|
|
|
|
Increase in ROU asset |
$ |
1,930 |
|
|
$ |
— |
|
Increase in lease liability |
$ |
1,944 |
|
|
$ |
— |
|
See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.) Basis of Presentation and Reclassifications:
The accompanying unaudited consolidated financial statements of Cortland Bancorp (the Company) and the Cortland Savings and Banking Company (the Bank) have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. These interim unaudited consolidated financial statements should be read in conjunction with our annual audited financial statements as of December 31, 2018, included in our Form 10-K for the year ended December 31, 2018, filed with the United States Securities and Exchange Commission. The accompanying Consolidated Balance Sheets at December 31, 2018 have been derived from the audited Consolidated Balance Sheets but do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
Certain items contained in the 2018 financial statements have been reclassified to conform to the presentation for 2019. Such reclassifications had no effect on the net results of operations or shareholders’ equity.
2.) Authoritative Accounting Guidance:
In February 2016, the FASB issued ASU (Accounting Standard Update) 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases in the balance sheet. Additionally, in July 2018,the FASB issued ASU 2018-11, Leases (Topic 842) – Targeted Improvements, which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We have elected to apply ASU 2016-02 and its related amendments as of the beginning of the period of adoption (January 1, 2019) and have not restated comparative periods. The Company elected to adopt the transition relief provisions from ASU 2018-11. Our operating leases relate primarily to office space and bank branches. As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use ("ROU") asset and an operating lease liability of $2.1 million on January 1, 2019, with no impact on our consolidated statement of income or consolidated statement of cash flows compared to the prior lease accounting model. The ROU asset and operating lease liability are recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. See Note 15 - Leases for additional information.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. This Update did not have a significant impact on the Company’s financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 850), the objective of which is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this Update make certain targeted improvements to simplify the application and disclosure of the hedge accounting guidance in current generally accepted accounting principles. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any period after issuance. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update. The amended presentation and disclosure guidance is required only prospectively. This Update did not have a significant impact on the Company’s financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), which simplified the accounting for nonemployee share-based payment transactions. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update improve the following areas of nonemployee share-based payment accounting; (a) the overall measurement objective, (b) the measurement date, (c) awards with performance conditions, (d) classification reassessment of certain equity-classified awards, (e) calculated value (nonpublic entities only), and (f) intrinsic value (nonpublic entities only). The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update did not have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). This Update addresses customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This Update is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The amendments in this Update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. On October 16, 2019, the FASB voted to defer the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November. This Update is not expected to have a significant impact on the Company’s financial statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815). The amendments in this Update permit use of the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to the interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate (LIBOR) swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
and Financial Markets Association (SIFMA) Municipal Swap Rate. For entities that have not already adopted Update 2017-12, the amendments in this Update are required to be adopted concurrently with the amendments in Update 2017-12. For public business entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities that already have adopted the amendments in Update 2017-12, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period upon issuance of this Update if an entity already has adopted Update 2017-12. This Update is not expected to have a significant impact on the Company’s financial statements.
In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which addressed issues lessors sometimes encounter. Specifically addressed in this Update were issues related to 1) determining the fair value of the underlying asset by the lessor that are not manufacturers or dealers (generally financial institutions and captive finance companies), and 2) lessors that are depository and lending institutions should classify principal and payments received under sales-type and direct financing leases within investing activities in the cash flow statement. The ASU also exempts both lessees and lessors from having to provide the interim disclosures required by ASC 250-10-50-3 in the fiscal year in which a company adopts the new leases standard. The amendments addressing the two lessor accounting issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the effective date is for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Company’s financial statements.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November. This Update is not expected to have a significant impact on the Company’s financial statements.
3.) Investment Securities:
Investments in debt securities are classified as held-to-maturity, available-for-sale or trading. Securities classified as held-to-maturity are those that management has the positive intent and ability to hold to maturity. Securities classified as available-for-sale are those that could be sold for liquidity, investment management, or similar reasons, even though management has no present intentions to do so. Securities classified as trading are those that management has bought principally for the purpose of selling in the near term. The Company currently has no securities classified as held-to-maturity or trading.
Available-for-sale securities are carried at fair value with unrealized gains and losses recorded as a separate component of shareholders’ equity, net of tax. Realized gains or losses on dispositions are based on net proceeds and the adjusted carrying amount of securities sold, using the specific identification method. Interest income includes amortization of purchase premium or discount and is amortized on the level-yield method without anticipating payments, except for U.S. Government mortgage-backed and related securities where twelve months of historical prepayments are taken into consideration.
The regulatory stock is carried at cost (its redeemable value) and the Company is required to hold such investments as a condition of membership in order to transact business with the Federal Home Loan Bank (FHLB) of Cincinnati and the Federal Reserve Bank (FRB). The stock is bought from and sold to the correspondent institutions based upon its par value. The stock cannot be traded or sold in any market and as such is classified as restricted stock, carried at cost (its redeemable value) and evaluated by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB and FRB as compared to the capital stock amount and the length of time this situation has persisted, (b) commitments by the FHLB and FRB to make payments required by law or regulation and the level of such payments in relation to the operating performance, (c) the impact of legislative and regulatory changes on the customer base of the FHLB and FRB and (d) the liquidity position of the FHLB and FRB. The Company does not consider these investments to be other-than-temporarily impaired at September 30, 2019.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Securities are evaluated periodically to determine whether a decline in value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, along with the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline in value is permanent but indicates that the prospect for a near-term recovery of value is not necessarily favorable and that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Unrealized losses on available-for-sale investments have not been recognized into income. However, once a decline in value is determined to be other-than-temporary, the credit related other-than-temporary impairment (OTTI) is recognized in earnings while the non-credit related OTTI on securities not expected to be sold is recognized in other comprehensive income (loss).
The following table is a summary of investment securities available-for-sale and regulatory stock:
|
(Amounts in thousands) |
|
|||||||||||||
September 30, 2019 |
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
||||
U.S. Government agencies and corporations |
$ |
3,348 |
|
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
3,349 |
|
Obligations of states and political subdivisions |
|
67,958 |
|
|
|
2,046 |
|
|
|
20 |
|
|
|
69,984 |
|
U.S. Government-sponsored mortgage-backed securities |
|
47,227 |
|
|
|
41 |
|
|
|
564 |
|
|
|
46,704 |
|
U.S. Government-sponsored collateralized mortgage obligations |
|
9,498 |
|
|
|
106 |
|
|
|
41 |
|
|
|
9,563 |
|
U.S. Government-guaranteed small business administration pools |
|
6,893 |
|
|
|
3 |
|
|
|
40 |
|
|
|
6,856 |
|
Total investment securities available-for-sale |
$ |
134,924 |
|
|
$ |
2,197 |
|
|
$ |
665 |
|
|
$ |
136,456 |
|
Federal Home Loan Bank (FHLB) stock |
$ |
2,609 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,609 |
|
Federal Reserve Bank (FRB) stock |
|
226 |
|
|
|
— |
|
|
|
— |
|
|
|
226 |
|
Total regulatory stock |
$ |
2,835 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,835 |
|
|
(Amounts in thousands) |
|
|||||||||||||
December 31, 2018 |
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
||||
U.S. Government agencies and corporations |
$ |
9,242 |
|
|
$ |
11 |
|
|
$ |
251 |
|
|
$ |
9,002 |
|
Obligations of states and political subdivisions |
|
53,187 |
|
|
|
26 |
|
|
|
1,555 |
|
|
|
51,658 |
|
U.S. Government-sponsored mortgage-backed securities |
|
59,070 |
|
|
|
— |
|
|
|
2,483 |
|
|
|
56,587 |
|
U.S. Government-sponsored collateralized mortgage obligations |
|
12,112 |
|
|
|
41 |
|
|
|
177 |
|
|
|
11,976 |
|
U.S. Government-guaranteed small business administration pools |
|
7,978 |
|
|
|
— |
|
|
|
278 |
|
|
|
7,700 |
|
Total investment securities available-for-sale |
$ |
141,589 |
|
|
$ |
78 |
|
|
$ |
4,744 |
|
|
$ |
136,923 |
|
Federal Home Loan Bank (FHLB) stock |
$ |
2,355 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,355 |
|
Federal Reserve Bank (FRB) stock |
|
226 |
|
|
|
— |
|
|
|
— |
|
|
|
226 |
|
Total regulatory stock |
$ |
2,581 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,581 |
|
The amortized cost and fair value of debt securities at September 30, 2019, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
(Amounts in thousands) |
|
|||||
|
Amortized Cost |
|
|
Fair Value |
|
||
Due in one year or less |
$ |
348 |
|
|
$ |
349 |
|
Due after one year through five years |
|
135 |
|
|
|
141 |
|
Due after five years through ten years |
|
5,540 |
|
|
|
5,536 |
|
Due after ten years |
|
72,176 |
|
|
|
74,163 |
|
Total |
|
78,199 |
|
|
|
80,189 |
|
U.S. Government-sponsored mortgage-backed and related securities |
|
56,725 |
|
|
|
56,267 |
|
Total investment securities available-for-sale |
$ |
134,924 |
|
|
$ |
136,456 |
|
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below sets forth the proceeds and gains or losses realized on available for sale securities sold or called for the periods presented:
|
(Amounts in thousands) |
|
|||||||||||||
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
September 30, |
|
|
September 30, |
|
||||||||||
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Proceeds on securities sold |
$ |
— |
|
|
$ |
— |
|
|
$ |
13,622 |
|
|
$ |
21,418 |
|
Gross realized gains |
|
— |
|
|
|
— |
|
|
|
82 |
|
|
|
123 |
|
Gross realized losses |
|
— |
|
|
|
— |
|
|
|
126 |
|
|
|
144 |
|
Investment securities with a carrying value of approximately $60.4 million at September 30, 2019 and $55.1 million at December 31, 2018 were pledged to secure deposits and for other purposes. The remaining securities provide an adequate level of liquidity.
The following is a summary of the fair value of available-for-sale securities with unrealized losses and an aging of those unrealized losses at September 30, 2019:
|
(Amounts in thousands) |
|
|||||||||||||||||||||
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|||||||||||||||
|
Fair Value |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
Unrealized Losses |
|
||||||
U.S. Government agencies and corporations |
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Obligations of states and political subdivisions |
|
264 |
|
|
|
1 |
|
|
|
1,336 |
|
|
|
19 |
|
|
|
1,600 |
|
|
|
20 |
|
U.S. Government-sponsored mortgage-backed securities |
|
2,604 |
|
|
|
9 |
|
|
|
39,976 |
|
|
|
555 |
|
|
|
42,580 |
|
|
|
564 |
|
U.S. Government-sponsored collateralized mortgage obligations |
|
1,356 |
|
|
|
16 |
|
|
|
4,178 |
|
|
|
25 |
|
|
|
5,534 |
|
|
|
41 |
|
U.S. Government-guaranteed small business administration pools |
|
4,143 |
|
|
|
19 |
|
|
|
1,012 |
|
|
|
21 |
|
|
|
5,155 |
|
|
|
40 |
|
Total |
$ |
8,367 |
|
|
$ |
45 |
|
|
$ |
46,502 |
|
|
$ |
620 |
|
|
$ |
54,869 |
|
|
$ |
665 |
|
The above table comprises 34 investment securities where the fair value is less than the related amortized cost.
The following is a summary of the fair value of available-for-sale securities with unrealized losses and an aging of those unrealized losses at December 31, 2018:
|
(Amounts in thousands) |
|
|||||||||||||||||||||
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|||||||||||||||
|
Fair Value |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
Unrealized Losses |
|
||||||
U.S. Government agencies and corporations |
$ |
3,280 |
|
|
$ |
6 |
|
|
$ |
2,755 |
|
|
$ |
245 |
|
|
$ |
6,035 |
|
|
$ |
251 |
|
Obligations of states and political subdivisions |
|
23,616 |
|
|
|
567 |
|
|
|
24,607 |
|
|
|
988 |
|
|
|
48,223 |
|
|
|
1,555 |
|
U.S. Government-sponsored mortgage-backed securities |
|
1,598 |
|
|
|
18 |
|
|
|
54,989 |
|
|
|
2,465 |
|
|
|
56,587 |
|
|
|
2,483 |
|
U.S. Government-sponsored collateralized mortgage obligations |
|
— |
|
|
|
— |
|
|
|
5,350 |
|
|
|
177 |
|
|
|
5,350 |
|
|
|
177 |
|
U.S. Government-guaranteed small business administration pools |
|
— |
|
|
|
— |
|
|
|
7,700 |
|
|
|
278 |
|
|
|
7,700 |
|
|
|
278 |
|
Total |
$ |
28,494 |
|
|
$ |
591 |
|
|
$ |
95,401 |
|
|
$ |
4,153 |
|
|
$ |
123,895 |
|
|
$ |
4,744 |
|
The above table comprises 121 investment securities where the fair value is less than the related amortized cost.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The unrealized losses at September 30, 2019 on the Company’s investments were caused by changes in market rates and related spreads. It is expected that the securities would not be settled at less than the amortized cost of the Company’s investment because the decline in fair value is attributable to changes in interest rates and relative spreads and not credit quality. Also, the Company does not intend to sell those investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of its amortized cost basis less any current period credit loss. The Company does not consider these investments to be other-than-temporarily impaired at September 30, 2019.
4.) Loans and Allowance for Loan Losses:
The Company, through the Bank, grants residential, consumer and commercial loans to customers located primarily in Northeastern Ohio and Western Pennsylvania.
The following represents the composition of the loan portfolio for the period ending:
|
(Amounts in thousands) |
|
|||||||||||||
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||||||||||
|
Balance |
|
|
% |
|
|
Balance |
|
|
% |
|
||||
Commercial |
$ |
77,071 |
|
|
|
15.8 |
|
|
$ |
112,440 |
|
|
|
21.9 |
|
Commercial real estate |
|
292,150 |
|
|
|
59.8 |
|
|
|
303,804 |
|
|
|
59.0 |
|
Residential real estate |
|
89,709 |
|
|
|
18.4 |
|
|
|
69,845 |
|
|
|
13.6 |
|
Consumer - home equity |
|
25,578 |
|
|
|
5.2 |
|
|
|
25,076 |
|
|
|
4.9 |
|
Consumer - other |
|
3,927 |
|
|
|
0.8 |
|
|
|
3,227 |
|
|
|
0.6 |
|
Total loans |
$ |
488,435 |
|
|
|
|
|
|
$ |
514,392 |
|
|
|
|
|
Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented loans in the portfolio by product type. Loans are segmented into the following pools: commercial loans, commercial real estate loans, residential real estate loans and consumer loans. The pools of commercial real estate loans and commercial loans are also broken down further by industry sectors when analyzing the related pools. Using the largest concentrations as the qualifier, these industry sectors include non-residential buildings; skilled nursing and nursing care; residential real estate lessors, agents and managers; hotel and motels, and trucking. The Company also sub-segments the consumer loan portfolio into the following two classes: home equity loans and other consumer loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. These historical loss percentages are calculated over multiple periods for all portfolio segments. Management evaluates these results and utilizes the most reflective period in the calculation. Certain qualitative factors are then added to the historical allocation percentage to get the adjusted factor.
These factors include, but are not limited to, the following:
Factor Considered: |
|
Risk Trend: |
Levels of and trends in charge-offs, classifications and non-accruals |
|
Decreasing |
Trends in volume and terms |
|
Stable |
Changes in lending policies and procedures |
|
Stable |
Experience, depth and ability of management, including loan review function |
|
Stable |
Economic trends, including valuation of underlying collateral |
|
Increasing |
Concentrations of credit |
|
Stable |
The following factors are analyzed and applied to loans internally graded with higher credit risk in addition to the above factors for non-classified loans:
Factor Considered: |
|
Risk Trend: |
Levels and trends in classification |
|
Stable |
Declining trends in financial performance |
|
Decreasing |
Structure and lack of performance measures |
|
Stable |
Migration between risk categories |
|
Stable |
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The provision charged to operations can be allocated to a loan classification either as a positive or negative value as a result of any material changes to: net charge-offs or recovery which influence the historical allocation percentage, qualitative risk factors or loan balances.
The following is an analysis of changes in the allowance for loan losses for the periods ended:
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands) |
|
|||||||||||||||||||||
September 30, 2019 |
Commercial |
|
|
Commercial real estate |
|
|
Residential real estate |
|
|
Consumer - home equity |
|
|
Consumer - other |
|
|
Total |
|
||||||
Balance at beginning of period |
$ |
1,717 |
|
|
$ |
2,165 |
|
|
$ |
368 |
|
|
$ |
98 |
|
|
$ |
137 |
|
|
$ |
4,485 |
|
Loan charge-offs |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(37 |
) |
|
|
(37 |
) |
Recoveries |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
12 |
|
|
|
13 |
|
Net loan recoveries (charge-offs) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
(25 |
) |
|
|
(24 |
) |
Provision charged to operations |
|
84 |
|
|
|
94 |
|
|
|
(23 |
) |
|
|
2 |
|
|
|
23 |
|
|
|
180 |
|
Balance at end of period |
$ |
1,801 |
|
|
$ |
2,259 |
|
|
$ |
345 |
|
|
$ |
101 |
|
|
$ |
135 |
|
|
$ |
4,641 |
|
|
(Amounts in thousands) |
|
|||||||||||||||||||||
September 30, 2018 |
Commercial |
|
|
Commercial real estate |
|
|
Residential real estate |
|
|
Consumer - home equity |
|
|
Consumer - other |
|
|
Total |
|
||||||
Balance at beginning of period |
$ |
1,394 |
|
|
$ |
2,457 |
|
|
$ |
80 |
|
|
$ |
66 |
|
|
$ |
98 |
|
|
$ |
4,095 |
|
Loan charge-offs |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(49 |
) |
|
|
(49 |
) |
Recoveries |
|
— |
|
|
|
16 |
|
|
|
— |
|
|
|
1 |
|
|
|
14 |
|
|
|
31 |
|
Net loan recoveries (charge-offs) |
|
— |
|
|
|
16 |
|
|
|
— |
|
|
|
1 |
|
|
|
(35 |
) |
|
|
(18 |
) |
Provision charged to operations |
|
(123 |
) |
|
|
128 |
|
|
|
25 |
|
|
|
(1 |
) |
|
|
46 |
|
|
|
75 |
|
Balance at end of period |
$ |
1,271 |
|
|
$ |
2,601 |
|
|
$ |
105 |
|
|
$ |
66 |
|
|
$ |
109 |
|
|
$ |
4,152 |
|
Nine Months Ended |
(Amounts in thousands) |
|
|||||||||||||||||||||
September 30, 2019 |
Commercial |
|
|
Commercial real estate |
|
|
Residential real estate |
|
|
Consumer - home equity |
|
|
Consumer - other |
|
|
Total |
|
||||||
Balance at beginning of period |
$ |
1,232 |
|
|
$ |
2,414 |
|
|
$ |
314 |
|
|
$ |
115 |
|
|
$ |
123 |
|
|
$ |
4,198 |
|
Loan charge-offs |
|
— |
|
|
|
— |
|
|
|
(29 |
) |
|
|
— |
|
|
|
(146 |
) |
|
|
(175 |
) |
Recoveries |
|
28 |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
53 |
|
|
|
83 |
|
Net loan recoveries (charge-offs) |
|
28 |
|
|
|
— |
|
|
|
(29 |
) |
|
|
2 |
|
|
|
(93 |
) |
|
|
(92 |
) |
Provision charged to operations |
|
541 |
|
|
|
(155 |
) |
|
|
60 |
|
|
|
(16 |
) |
|
|
105 |
|
|
|
535 |
|
Balance at end of period |
$ |
1,801 |
|
|
$ |
2,259 |
|
|
$ |
345 |
|
|
$ |
101 |
|
|
$ |
135 |
|
|
$ |
4,641 |
|
|
(Amounts in thousands) |
|
|||||||||||||||||||||
September 30, 2018 |
Commercial |
|
|
Commercial real estate |
|
|
Residential real estate |
|
|
Consumer - home equity |
|
|
Consumer - other |
|
|
Total |
|
||||||
Balance at beginning of period |
$ |
1,591 |
|
|
$ |
2,702 |
|
|
$ |
117 |
|
|
$ |
70 |
|
|
$ |
98 |
|
|
$ |
4,578 |
|
Loan charge-offs |
|
(1,163 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(126 |
) |
|
|
(1,289 |
) |
Recoveries |
|
— |
|
|
|
166 |
|
|
|
1 |
|
|
|
5 |
|
|
|
41 |
|
|
|
213 |
|
Net loan recoveries (charge-offs) |
|
(1,163 |
) |
|
|
166 |
|
|
|
1 |
|
|
|
5 |
|
|
|
(85 |
) |
|
|
(1,076 |
) |
Provision charged to operations |
|
843 |
|
|
|
(267 |
) |
|
|
(13 |
) |
|
|
(9 |
) |
|
|
96 |
|
|
|
650 |
|
Balance at end of period |
$ |
1,271 |
|
|
$ |
2,601 |
|
|
$ |
105 |
|
|
$ |
66 |
|
|
$ |
109 |
|
|
$ |
4,152 |
|
The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the consolidated balance sheet date.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following tables present a full breakdown by portfolio classification of the allowance for loan losses and the recorded investment in loans at September 30, 2019 and December 31, 2018:
|
(Amounts in thousands) |
|
|||||||||||||||||||||
September 30, 2019 |
Commercial |
|
|
Commercial real estate |
|
|
Residential real estate |
|
|
Consumer - home equity |
|
|
Consumer - other |
|
|
Total |
|
||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
579 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
579 |
|
Collectively evaluated for impairment |
|
1,222 |
|
|
|
2,259 |
|
|
|
345 |
|
|
|
101 |
|
|
|
135 |
|
|
|
4,062 |
|
Total ending allowance balance |
$ |
1,801 |
|
|
$ |
2,259 |
|
|
$ |
345 |
|
|
$ |
101 |
|
|
$ |
135 |
|
|
$ |
4,641 |
|
Loan Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
5,061 |
|
|
$ |
2,983 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
8,044 |
|
Collectively evaluated for impairment |
|
72,010 |
|
|
|
289,167 |
|
|
|
89,709 |
|
|
|
25,578 |
|
|
|
3,927 |
|
|
|
480,391 |
|
Total ending loans balance |
$ |
77,071 |
|
|
$ |
292,150 |
|
|
$ |
89,709 |
|
|
$ |
25,578 |
|
|
$ |
3,927 |
|
|
$ |
488,435 |
|
|
(Amounts in thousands) |
|
|||||||||||||||||||||
December 31, 2018 |
Commercial |
|
|
Commercial real estate |
|
|
Residential real estate |
|
|
Consumer - home equity |
|
|
Consumer - other |
|
|
Total |
|
||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Collectively evaluated for impairment |
|
1,232 |
|
|
|
2,414 |
|
|
|
314 |
|
|
|
115 |
|
|
|
123 |
|
|
|
4,198 |
|
Total ending allowance balance |
$ |
1,232 |
|
|
$ |
2,414 |
|
|
$ |
314 |
|
|
$ |
115 |
|
|
$ |
123 |
|
|
$ |
4,198 |
|
Loan Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
5,364 |
|
|
$ |
4,340 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
9,704 |
|
Collectively evaluated for impairment |
|
107,076 |
|
|
|
299,464 |
|
|
|
69,845 |
|
|
|
25,076 |
|
|
|
3,227 |
|
|
|
504,688 |
|
Total ending loans balance |
$ |
112,440 |
|
|
$ |
303,804 |
|
|
$ |
69,845 |
|
|
$ |
25,076 |
|
|
$ |
3,227 |
|
|
$ |
514,392 |
|
The decrease in commercial loan balances from year-end was due in part to 60-day or less term commercial loans for a total of $40.9 million that closed in December 2018 and were fully secured by segregated deposit accounts with the Bank. The loans matured in the first quarter of 2019. The commercial charge-off in 2018 related to loans that were restructured with no principal forgiveness with a new borrowing relationship, but with a substantial concession in interest rate. The below market rate triggered recognition of a charge-off equivalent to the difference in present value of loan payments discounted at the market rate of interest. The charged off amount of $1.1 million is recorded as a loan discount. As loan payments are made, interest is recognized at the market rate versus the negotiated rate via the amortization of the discount over the various lives of the loans. There was $625,000 in specific reserve previously allocated to these loans at December 31, 2017. The decrease in commercial real estate and the majority of the increase in residential real estate is due to reclassification of loans between these categories in 2019.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The allowance for commercial loans includes an amount for a single loan impairment, otherwise the provision decreased modestly. The decrease in the provision for commercial real estate loans is due mainly to a decrease in the concentration of credit factor. The recent segmentation of the commercial real estate loan portfolio into its five largest concentrations has resulted in lower allocations to those segments. The residential real estate, consumer-home equity and other household provisions remained fairly constant. The amount of net charge-offs also impacts the provision charged to operations for any category of loans. Charge-offs affect the historical rate applied to each category, and the amount needed to replenish the amount charged-off, which impacted home equity and consumer loans as well as commercial real estate loans.
The following tables represent credit exposures by internally assigned grades for September 30, 2019 and December 31, 2018. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.
The Company’s internally assigned grades are as follows:
|
• |
Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. Within this category, there are grades of exceptional, quality, acceptable and pass monitor. |
|
• |
Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. |
|
• |
Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. |
|
• |
Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset but with the severity which makes collection in full highly questionable and improbable, based on existing circumstances. |
|
• |
Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted. This rating does not mean that the assets have no recovery or salvage value but rather that the assets should be charged off now, even though partial or full recovery may be possible in the future. |
The following table is a summary of credit quality indicators by internally assigned grades as of September 30, 2019 and December 31, 2018:
|
(Amounts in thousands) |
|
|||||
|
Commercial |
|
|
Commercial real estate |
|
||
September 30, 2019 |
|
|
|
|
|
|
|
Pass |
$ |
58,822 |
|
|
$ |
265,054 |
|
Special Mention |
|
6,366 |
|
|
|
23,350 |
|
Substandard |
|
11,883 |
|
|
|
3,746 |
|
Doubtful |
|
— |
|
|
|
— |
|
Ending Balance |
$ |
77,071 |
|
|
$ |
292,150 |
|
|
(Amounts in thousands) |
|
|||||
|
Commercial |
|
|
Commercial real estate |
|
||
December 31, 2018 |
|
|
|
|
|
|
|
Pass |
$ |
94,316 |
|
|
$ |
271,370 |
|
Special Mention |
|
6,914 |
|
|
|
25,199 |
|
Substandard |
|
11,210 |
|
|
|
7,235 |
|
Doubtful |
|
— |
|
|
|
— |
|
Ending Balance |
$ |
112,440 |
|
|
$ |
303,804 |
|
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company evaluates the classification of consumer, home equity and residential loans primarily on a pooled basis. If the Company becomes aware that adverse or distressed conditions exist that may affect a particular loan, the loan is downgraded following the above definitions of special mention and substandard. Nonaccrual loans in these categories are evaluated for charge off or charge down, and the remaining balance has the same allowance factor as pooled loans.
The following table is a summary of consumer credit exposure as of September 30, 2019 and December 31, 2018:
|
(Amounts in thousands) |
|
|||||||||
|
Residential real estate |
|
|
Consumer - home equity |
|
|
Consumer - other |
|
|||
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
Performing |
$ |
89,154 |
|
|
$ |
25,428 |
|
|
$ |
3,925 |
|
Nonperforming |
|
555 |
|
|
|
150 |
|
|
|
2 |
|
Total |
$ |
89,709 |
|
|
$ |
25,578 |
|
|
$ |
3,927 |
|
|
(Amounts in thousands) |
|
|||||||||
|
Residential real estate |
|
|
Consumer - home equity |
|
|
Consumer - other |
|
|||
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
Performing |
$ |
69,535 |
|
|
$ |
24,956 |
|
|
$ |
3,227 |
|
Nonperforming |
|
310 |
|
|
|
120 |
|
|
|
— |
|
Total |
$ |
69,845 |
|
|
$ |
25,076 |
|
|
$ |
3,227 |
|
Loans are considered to be nonperforming when they become 90 days past due or on nonaccrual status, though the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed in non-accrual status, previously accrued but unpaid interest is deducted from interest income. Loans in foreclosure are considered nonperforming.
The following table is a summary of classes of loans on non-accrual status as of September 30, 2019 and December 31, 2018:
|
(Amounts in thousands) |
|
|||||
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||
Commercial |
$ |
1,533 |
|
|
$ |
1,291 |
|
Commercial real estate |
|
578 |
|
|
|
512 |
|
Residential real estate |
|
555 |
|
|
|
310 |
|
Consumer: |
|
|
|
|
|
|
|
Consumer - home equity |
|
150 |
|
|
|
120 |
|
Consumer - other |
|
2 |
|
|
|
— |
|
Total |
$ |
2,818 |
|
|
$ |
2,233 |
|
Nonperforming loans also include certain loans that have been modified in troubled debt restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.
There were no loans modified as TDR’s during the three and nine month periods ended September 30, 2019.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following presents, by class, information related to loans modified in a TDR during the periods ending September 30, 2018.
|
(Dollar amounts in thousands) |
|
|||||||||||||||||||||||||||||
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||||||||||||||||
|
September 30, 2018 |
|
|
September 30, 2018 |
|
||||||||||||||||||||||||||
|
Number of contracts |
|
|
Pre- modification recorded investment |
|
|
Post- modification recorded investment |
|
|
Increase in the allowance |
|
|
Number of contracts |
|
|
Pre- modification recorded investment |
|
|
Post- modification recorded investment |
|
|
Increase in the allowance |
|
||||||||
Commercial |
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
7 |
|
|
$ |
5,373 |
|
|
$ |
4,210 |
|
|
$ |
— |
|
Commercial real estate |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total restructured loans |
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
7 |
|
|
$ |
5,373 |
|
|
$ |
4,210 |
|
|
$ |
— |
|
Subsequently defaulted |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
The seven commercial loans were all to one new borrowing relationship. The loans were restructured with no principal forgiveness, but with a substantial concession in interest rate. The below market rate triggered recognition of a charge-off equivalent to the difference in present value of loan payments discounted at the market rate of interest. The charged off amount of $1.1 million is recorded as loan discount. As loan payments are made, interest will be recognized at the market rate versus the negotiated rate via the amortization of the discount over the various lives of the loans.
The following table is an aging analysis of the recorded investment of past due loans as of September 30, 2019 and December 31, 2018:
|
(Amounts in thousands) |
|
|||||||||||||||||||||||||
|
30-59 Days Past Due |
|
|
60-89 Days Past Due |
|
|
90 Days Or Greater |
|
|
Total Past Due |
|
|
Current |
|
|
Total Loans |
|
|
Recorded Investment > 90 Days and Accruing |
|
|||||||
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
$ |
— |
|
|
$ |
91 |
|
|
$ |
1,533 |
|
|
$ |
1,624 |
|
|
$ |
75,447 |
|
|
$ |
77,071 |
|
|
$ |
— |
|
Commercial real estate |
|
— |
|
|
|
— |
|
|
|
257 |
|
|
|
257 |
|
|
|
291,893 |
|
|
|
292,150 |
|
|
|
— |
|
Residential real estate |
|
14 |
|
|
|
103 |
|
|
|
540 |
|
|
|
657 |
|
|
|
89,052 |
|
|
|
89,709 |
|
|
|
— |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer - home equity |
|
15 |
|
|
|
— |
|
|
|
125 |
|
|
|
140 |
|
|
|
25,438 |
|
|
|
25,578 |
|
|
|
— |
|
Consumer - other |
|
11 |
|
|
|
— |
|
|
|
2 |
|
|
|
13 |
|
|
|
3,914 |
|
|
|
3,927 |
|
|
|
— |
|
Total |
$ |
40 |
|
|
$ |
194 |
|
|
$ |
2,457 |
|
|
$ |
2,691 |
|
|
$ |
485,744 |
|
|
$ |
488,435 |
|
|
$ |
— |
|
|
(Amounts in thousands) |
|
|||||||||||||||||||||||||
|
30-59 Days Past Due |
|
|
60-89 Days Past Due |
|
|
90 Days Or Greater |
|
|
Total Past Due |
|
|
Current |
|
|
Total Loans |
|
|
Recorded Investment > 90 Days and Accruing |
|
|||||||
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
$ |
14 |
|
|
$ |
— |
|
|
$ |
1,291 |
|
|
$ |
1,305 |
|
|
$ |
111,135 |
|
|
$ |
112,440 |
|
|
$ |
— |
|
Commercial real estate |
|
— |
|
|
|
— |
|
|
|
167 |
|
|
|
167 |
|
|
|
303,637 |
|
|
|
303,804 |
|
|
|
— |
|
Residential real estate |
|
36 |
|
|
|
182 |
|
|
|
257 |
|
|
|
475 |
|
|
|
69,370 |
|
|
|
69,845 |
|
|
|
— |
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer - home equity |
|
— |
|
|
|
141 |
|
|
|
25 |
|
|
|
166 |
|
|
|
24,910 |
|
|
|
25,076 |
|
|
|
— |
|
Consumer - other |
|
17 |
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
|
3,210 |
|
|
|
3,227 |
|
|
|
— |
|
Total |
$ |
67 |
|
|
$ |
323 |
|
|
$ |
1,740 |
|
|
$ |
2,130 |
|
|
$ |
512,262 |
|
|
$ |
514,392 |
|
|
$ |
— |
|
An impaired loan is a loan on which, based on current information and events, it is probable that a creditor will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement. However, an insignificant delay or insignificant shortfall in amount of payments on a loan does not indicate that the loan is impaired.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
When a loan is determined to be impaired, impairment should be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. However, as a practical expedient, the Company will measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.
The following are the criteria for selecting individual loans / relationships for impairment analysis. Non-homogenous loans which meet the criteria below are evaluated quarterly.
|
• |
All borrowers whose loans are classified doubtful by examiners and internal loan review |
|
• |
All loans on non-accrual status |
|
• |
Any loan in foreclosure |
|
• |
Any loan with a specific allowance |
|
• |
Any loan determined to be collateral dependent for repayment |
|
• |
Loans classified as troubled debt restructuring |
Commercial loans and commercial real estate loans evaluated for impairment are excluded from the general pool of loans in the ALLL calculation regardless if a specific reserve was determined. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.
The following table presents the recorded investment and unpaid principal balances for impaired loans, excluding homogenous loans for which impaired analyses are not necessarily performed, with the associated allowance amount, if applicable, at September 30, 2019 and December 31, 2018. Also presented are the average recorded investments in the impaired balances and interest income recognized after impairment for the three and nine months ended September 30, 2019 and 2018.
|
(Amounts in thousands) |
|
|||||||||
|
Recorded Investment |
|
|
Unpaid Principal Balance |
|
|
Related Allowance |
|
|||
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
Commercial |
$ |
4,077 |
|
|
$ |
5,023 |
|
|
$ |
— |
|
Commercial real estate |
|
2,983 |
|
|
|
2,983 |
|
|
|
— |
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
984 |
|
|
|
984 |
|
|
|
579 |
|
Commercial real estate |
|
— |
|
|
|
— |
|
|
|
— |
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
Commercial |
$ |
5,061 |
|
|
$ |
6,007 |
|
|
$ |
579 |
|
Commercial real estate |
$ |
2,983 |
|
|
$ |
2,983 |
|
|
$ |
— |
|
|
(Amounts in thousands) |
|
|||||||||
|
Recorded Investment |
|
|
Unpaid Principal Balance |
|
|
Related Allowance |
|
|||
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
Commercial |
$ |
5,364 |
|
|
$ |
6,411 |
|
|
$ |
— |
|
Commercial real estate |
|
4,340 |
|
|
|
4,340 |
|
|
|
— |
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
— |
|
|
|
— |
|
|
|
— |
|
Commercial real estate |
|
— |
|
|
|
— |
|
|
|
— |
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
Commercial |
$ |
5,364 |
|
|
$ |
6,411 |
|
|
$ |
— |
|
Commercial real estate |
$ |
4,340 |
|
|
$ |
4,340 |
|
|
$ |
— |
|
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
(Amounts in thousands) |
|
|||||||||||||
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
Average Recorded Investment |
|
|
Interest Income Recognized |
|
|
Average Recorded Investment |
|
|
Interest Income Recognized |
|
||||
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
$ |
4,074 |
|
|
$ |
39 |
|
|
$ |
4,395 |
|
|
$ |
258 |
|
Commercial real estate |
|
3,049 |
|
|
|
45 |
|
|
|
3,157 |
|
|
|
156 |
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
984 |
|
|
|
— |
|
|
|
769 |
|
|
|
— |
|
Commercial real estate |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
$ |
5,058 |
|
|
$ |
39 |
|
|
$ |
5,164 |
|
|
$ |
258 |
|
Commercial real estate |
$ |
3,049 |
|
|
$ |
45 |
|
|
$ |
3,157 |
|
|
$ |
156 |
|
|
(Amounts in thousands) |
|
|||||||||||||
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
Average Recorded Investment |
|
|
Interest Income Recognized |
|
|
Average Recorded Investment |
|
|
Interest Income Recognized |
|
||||
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
$ |
5,456 |
|
|
$ |
7 |
|
|
$ |
3,846 |
|
|
$ |
18 |
|
Commercial real estate |
|
4,481 |
|
|
|
71 |
|
|
|
4,401 |
|
|
|
283 |
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
— |
|
|
|
— |
|
|
|
1,214 |
|
|
|
46 |
|
Commercial real estate |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
$ |
5,456 |
|
|
$ |
7 |
|
|
$ |
5,060 |
|
|
$ |
64 |
|
Commercial real estate |
$ |
4,481 |
|
|
$ |
71 |
|
|
$ |
4,401 |
|
|
$ |
283 |
|
5.) Legal Proceedings:
The Company is involved in legal actions arising in the ordinary course of business. In the opinion of management, the outcomes from these matters, either individually or in the aggregate, are not expected to have any material effect on the Company.
6.) Earnings Per Share and Capital Transactions:
Earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common outstanding stock, net of any treasury shares, during the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding, net of any treasury shares, after consideration of the potential dilutive effect of common stock equivalents, based upon the treasury stock method using an average market price for the period. The common stock equivalents are comprised of restricted share awards.
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
September 30, |
|
|
September 30, |
|
||||||||||
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Net income (amounts in thousands) |
$ |
1,945 |
|
|
$ |
1,972 |
|
|
$ |
5,378 |
|
|
$ |
6,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
4,351,801 |
|
|
|
4,338,498 |
|
|
|
4,341,858 |
|
|
|
4,367,035 |
|
Net effect of dilutive common share equivalents |
|
7,894 |
|
|
|
6,344 |
|
|
|
7,279 |
|
|
|
6,163 |
|
Adjusted average shares outstanding-dilutive |
|
4,359,695 |
|
|
|
4,344,842 |
|
|
|
4,349,137 |
|
|
|
4,373,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
$ |
0.45 |
|
|
$ |
0.46 |
|
|
$ |
1.24 |
|
|
$ |
1.56 |
|
Diluted earnings per share |
$ |
0.45 |
|
|
$ |
0.46 |
|
|
$ |
1.24 |
|
|
$ |
1.56 |
|
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In July 2007, a trust formed by the Company issued $5.0 million of floating rate trust preferred securities as part of a pooled offering of such securities due December 2037. The Company owns all $155,000 of the common securities issued by the trust. The securities bear interest at the 3-month LIBOR rate plus 1.45%. The rates at September 30, 2019 and December 31, 2018 were 3.57% and 4.24%, respectively. The Company issued subordinated debentures to the trust in exchange for the proceeds of the trust preferred offering. The debentures represent the sole assets of this trust. The Company may redeem the subordinated debentures, in whole or in part, at par.
The trust is not consolidated with the Company’s financial statements. Accordingly, the Company does not report the securities issued by the trust as liabilities, but instead reports as liabilities the subordinated debentures issued by the Company and held by the trust. The subordinated debentures qualify as Tier 1 capital for regulatory purposes in determining and evaluating the Company’s capital adequacy.
8.) Commitments:
The Bank is 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, standby letters of credit and financial guarantees. Such instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the Consolidated Balance Sheets. The contract or notional amounts on those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
In the event of nonperformance by the other party, the Company’s exposure to credit loss on these financial instruments is represented by the contract or notional amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for instruments recorded on the balance sheet. The amount and nature of collateral obtained, if any, is based on management’s credit evaluation.
The following table is a summary of such contractual commitments:
|
(Amounts in thousands) |
|
|||||
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||
Commitments to extend credit: |
|
|
|
|
|
|
|
Fixed rate |
$ |
32,061 |
|
|
$ |
31,225 |
|
Variable rate |
|
75,749 |
|
|
|
74,050 |
|
Standby letters of credit |
|
3,660 |
|
|
|
3,455 |
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Generally, these financial arrangements have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. The increase in commitments is in line with the Company’s increased focus on commercial and industrial lending, and specifically lines of credit.
The Company also offers limited overdraft protection as a non-contractual courtesy which is available to businesses as well as individually/jointly owned accounts in good standing for personal or household use. The Company reserves the right to discontinue this service without prior notice.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table is a summary of overdraft protection for the periods indicated:
|
(Amounts in thousands) |
|
|||||
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||
Overdraft protection available on depositors' accounts |
$ |
8,235 |
|
|
$ |
8,708 |
|
Balance of overdrafts included in loans |
|
96 |
|
|
|
116 |
|
Average daily balance of overdrafts |
|
112 |
|
|
|
104 |
|
Average daily balance of overdrafts as a percentage of available |
|
1.36 |
% |
|
|
1.19 |
% |
Customer Derivatives - Interest Rate Swaps/Floors – The Company enters into interest rate swaps that allow our commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate into a fixed-rate. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third party are not designated as hedges under FASB ASC 815 and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. There was no effect on earnings in any periods presented. At September 30, 2019, based on the contract values, the Company had two U.S. Government-sponsored mortgage-backed securities pledged for collateral on its interest rate swaps with the third party financial institution at a fair value of $2.9 million, whereas none was required at December 31, 2018.
Summary information regarding these derivatives is presented below:
|
(Amounts in thousands) |
|
||||||||||||||||
|
Notional Amount |
|
|
|
|
|
Fair Value |
|
||||||||||
|
September 30, 2019 |
|
|
December 31, 2018 |
|
Interest Rate Paid |
|
Interest Rate Received |
|
September 30, 2019 |
|
|
December 31, 2018 |
|
||||
Customer interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in 2020 |
$ |
2,337 |
|
|
$ |
2,410 |
|
1 Mo. Libor + Margin |
|
Fixed |
|
$ |
5 |
|
|
$ |
(30 |
) |
Maturing in 2025 |
|
4,652 |
|
|
|
4,930 |
|
1 Mo. Libor + Margin |
|
Fixed |
|
|
178 |
|
|
|
(28 |
) |
Maturing in 2026 |
|
1,853 |
|
|
|
1,946 |
|
1 Mo. Libor + Margin |
|
Fixed |
|
|
40 |
|
|
|
(64 |
) |
Maturing in 2027 |
|
13,472 |
|
|
|
13,790 |
|
1 Mo. Libor + Margin |
|
Fixed |
|
|
880 |
|
|
|
(54 |
) |
Maturing in 2028 |
|
6,152 |
|
|
|
6,395 |
|
1 Mo. Libor + Margin |
|
Fixed |
|
|
673 |
|
|
|
268 |
|
Maturing in 2029 |
|
3,753 |
|
|
|
— |
|
1 Mo. Libor + Margin |
|
Fixed |
|
|
62 |
|
|
|
— |
|
Maturing in 2033 |
|
1,125 |
|
|
|
— |
|
1 Mo. Libor + Margin |
|
Fixed |
|
|
96 |
|
|
|
— |
|
Total |
$ |
33,344 |
|
|
$ |
29,471 |
|
|
|
|
|
$ |
1,934 |
|
|
$ |
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third party interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing in 2020 |
$ |
2,337 |
|
|
$ |
2,410 |
|
Fixed |
|
1 Mo. Libor + Margin |
|
$ |
(5 |
) |
|
$ |
30 |
|
Maturing in 2025 |
|
4,652 |
|
|
|
4,930 |
|
Fixed |
|
1 Mo. Libor + Margin |
|
|
(178 |
) |
|
|
28 |
|
Maturing in 2026 |
|
1,853 |
|
|
|
1,946 |
|
Fixed |
|
1 Mo. Libor + Margin |
|
|
(40 |
) |
|
|
64 |
|
Maturing in 2027 |
|
13,472 |
|
|
|
13,790 |
|
Fixed |
|
1 Mo. Libor + Margin |
|
|
(880 |
) |
|
|
54 |
|
Maturing in 2028 |
|
6,152 |
|
|
|
6,395 |
|
Fixed |
|
1 Mo. Libor + Margin |
|
|
(673 |
) |
|
|
(268 |
) |
Maturing in 2029 |
|
3,753 |
|
|
|
— |
|
Fixed |
|
1 Mo. Libor + Margin |
|
|
(62 |
) |
|
|
— |
|
Maturing in 2033 |
|
1,125 |
|
|
|
— |
|
Fixed |
|
1 Mo. Libor + Margin |
|
|
(96 |
) |
|
|
— |
|
Total |
$ |
33,344 |
|
|
$ |
29,471 |
|
|
|
|
|
$ |
(1,934 |
) |
|
$ |
(92 |
) |
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the fair values of derivative instruments in the balance sheet:
|
(Amounts in thousands) |
|
|||||||||
|
Assets |
|
|
Liabilities |
|
||||||
|
Balance Sheet Location |
|
Fair Value |
|
|
Balance Sheet Location |
|
Fair Value |
|
||
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives |
Other assets |
|
$ |
1,934 |
|
|
Other liabilities |
|
$ |
1,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives |
Other assets |
|
$ |
92 |
|
|
Other liabilities |
|
$ |
92 |
|
9.) Fair Value of Assets and Liabilities:
Measurements
The Company groups assets and liabilities recorded at fair value into three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows:
|
Level 1: |
Quoted prices are available in active markets for identical assets or liabilities as of the reported date. |
|
Level 2: |
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but which trade less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed. |
|
Level 3: |
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where inputs into the determination of fair value require significant management judgment or estimation. |
The following table presents the assets reported on the consolidated balance sheets, on a recurring basis, at their fair value as of September 30, 2019 and December 31, 2018 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
(Amounts in thousands) |
|
|||||||||||||
|
|
|
|
|
|
Fair Value Measurements at September 30, 2019 Using |
|
|||||||||
Description |
|
September 30, 2019 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and corporations |
|
$ |
3,349 |
|
|
$ |
— |
|
|
$ |
3,349 |
|
|
$ |
— |
|
Obligations of states and political subdivisions |
|
|
69,984 |
|
|
|
— |
|
|
|
69,984 |
|
|
|
— |
|
U.S. Government-sponsored mortgage-backed securities |
|
|
46,704 |
|
|
|
— |
|
|
|
46,704 |
|
|
|
— |
|
U.S. Government-sponsored collateralized mortgage obligations |
|
|
9,563 |
|
|
|
— |
|
|
|
9,563 |
|
|
|
— |
|
U.S. Government-guaranteed small business administration pools |
|
|
6,856 |
|
|
|
— |
|
|
|
6,856 |
|
|
|
— |
|
Loans held for sale |
|
|
4,988 |
|
|
|
4,988 |
|
|
|
— |
|
|
|
— |
|
Interest rate derivatives |
|
|
1,934 |
|
|
|
— |
|
|
|
1,934 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives |
|
$ |
1,934 |
|
|
$ |
— |
|
|
$ |
1,934 |
|
|
$ |
— |
|
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
(Amounts in thousands) |
|
|||||||||||||
|
|
|
|
|
|
Fair Value Measurements at December 31, 2018 Using |
|
|||||||||
Description |
|
December 31, 2018 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and corporations |
|
$ |
9,002 |
|
|
$ |
— |
|
|
$ |
9,002 |
|
|
$ |
— |
|
Obligations of states and political subdivisions |
|
|
51,658 |
|
|
|
— |
|
|
|
51,658 |
|
|
|
— |
|
U.S. Government-sponsored mortgage-backed securities |
|
|
56,587 |
|
|
|
— |
|
|
|
56,587 |
|
|
|
— |
|
U.S. Government-sponsored collateralized mortgage obligations |
|
|
11,976 |
|
|
|
— |
|
|
|
11,976 |
|
|
|
— |
|
U.S. Government-guaranteed small business administration pools |
|
|
7,700 |
|
|
|
— |
|
|
|
7,700 |
|
|
|
— |
|
Loans held for sale |
|
|
1,040 |
|
|
|
1,040 |
|
|
|
— |
|
|
|
— |
|
Interest rate derivatives |
|
|
92 |
|
|
|
— |
|
|
|
92 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives |
|
$ |
92 |
|
|
$ |
— |
|
|
$ |
92 |
|
|
$ |
— |
|
The following tables present the changes in the Level 3 fair value category for the three and nine months ended September 30, 2019 and 2018. The Company classifies financial instruments in Level 3 of the fair-value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly.
|
(Amounts in thousands) |
|
|||||||||||||
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
September 30, |
|
|
September 30, |
|
||||||||||
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
|
Trust preferred securities |
|
|
Trust preferred securities |
|
|
Trust preferred securities |
|
|
Trust preferred securities |
|
||||
Beginning balance |
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
895 |
|
Net realized/unrealized losses included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other comprehensive income (loss) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
723 |
|
Discount accretion (premium amortization) |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Sales |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,618 |
) |
Purchases, issuance, and settlements |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Ending balance |
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Losses included in net income for the period relating to assets held at period end |
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Financial Instruments
The Company discloses fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheets, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other estimation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.
Such techniques and assumptions, as they apply to individual categories of the financial instruments, are as follows:
Investment securities available-for-sale– Fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities.
Loans held for sale – Loans held for sale consist of residential mortgage loans originated for sale. Loans held for sale are recorded at fair value based on what the secondary markets have offered on best efforts commitments.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Interest rate derivatives – The fair value is based on settlement values adjusted for credit risks associated with the counter parties and the Company and observable market interest rate curves.
In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earning power of core deposit accounts, the trained work force, customer goodwill and similar items. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The carrying amounts and fair values of the Company’s financial instruments are as follows:
|
(Amounts in thousands) |
|
|||||||||||||||||
|
September 30, 2019 |
|
|||||||||||||||||
|
Carrying Amount |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
|||||
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
20,508 |
|
|
$ |
20,508 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
20,508 |
|
Investment securities available-for-sale |
|
136,456 |
|
|
|
— |
|
|
|
136,456 |
|
|
|
— |
|
|
|
136,456 |
|
Loans held for sale |
|
4,988 |
|
|
|
4,988 |
|
|
|
— |
|
|
|
— |
|
|
|
4,988 |
|
Loans |
|
483,794 |
|
|
|
— |
|
|
|
— |
|
|
|
489,799 |
|
|
|
489,799 |
|
Bank-owned life insurance |
|
17,672 |
|
|
|
17,672 |
|
|
|
— |
|
|
|
— |
|
|
|
17,672 |
|
Accrued interest receivable |
|
2,228 |
|
|
|
2,228 |
|
|
|
— |
|
|
|
— |
|
|
|
2,228 |
|
Interest rate derivatives |
|
1,934 |
|
|
|
— |
|
|
|
1,934 |
|
|
|
— |
|
|
|
1,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, savings and money market deposits |
$ |
440,104 |
|
|
$ |
440,104 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
440,104 |
|
Time deposits |
|
147,024 |
|
|
|
— |
|
|
|
— |
|
|
|
148,543 |
|
|
|
148,543 |
|
Securities sold under agreements to repurchase |
|
1,307 |
|
|
|
1,307 |
|
|
|
— |
|
|
|
— |
|
|
|
1,307 |
|
Federal Home Loan Bank advances - long term |
|
19,000 |
|
|
|
— |
|
|
|
— |
|
|
|
19,028 |
|
|
|
19,028 |
|
Subordinated debt |
|
5,155 |
|
|
|
— |
|
|
|
— |
|
|
|
4,668 |
|
|
|
4,668 |
|
Accrued interest payable |
|
624 |
|
|
|
624 |
|
|
|
— |
|
|
|
— |
|
|
|
624 |
|
Interest rate derivatives |
|
1,934 |
|
|
|
— |
|
|
|
1,934 |
|
|
|
— |
|
|
|
1,934 |
|
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
(Amounts in thousands) |
|
|||||||||||||||||
|
December 31, 2018 |
|
|||||||||||||||||
|
Carrying Amount |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Fair Value |
|
|||||
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
19,692 |
|
|
$ |
19,692 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
19,692 |
|
Investment securities available-for-sale |
|
136,923 |
|
|
|
— |
|
|
|
136,923 |
|
|
|
— |
|
|
|
136,923 |
|
Loans held for sale |
|
1,040 |
|
|
|
1,040 |
|
|
|
— |
|
|
|
— |
|
|
|
1,040 |
|
Loans |
|
510,194 |
|
|
|
— |
|
|
|
— |
|
|
|
513,103 |
|
|
|
513,103 |
|
Bank-owned life insurance |
|
15,711 |
|
|
|
15,711 |
|
|
|
— |
|
|
|
— |
|
|
|
15,711 |
|
Accrued interest receivable |
|
2,255 |
|
|
|
2,255 |
|
|
|
— |
|
|
|
— |
|
|
|
2,255 |
|
Interest rate derivatives |
|
92 |
|
|
|
— |
|
|
|
92 |
|
|
|
— |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, savings and money market deposits |
$ |
483,054 |
|
|
$ |
483,054 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
483,054 |
|
Time deposits |
|
121,365 |
|
|
|
— |
|
|
|
— |
|
|
|
122,295 |
|
|
|
122,295 |
|
Short term borrowings |
|
2,206 |
|
|
|
2,206 |
|
|
|
— |
|
|
|
— |
|
|
|
2,206 |
|
Federal Home Loan Bank advances - short term |
|
12,000 |
|
|
|
— |
|
|
|
— |
|
|
|
11,987 |
|
|
|
11,987 |
|
Federal Home Loan Bank advances - long term |
|
16,000 |
|
|
|
— |
|
|
|
— |
|
|
|
15,880 |
|
|
|
15,880 |
|
Subordinated debt |
|
5,155 |
|
|
|
— |
|
|
|
— |
|
|
|
4,620 |
|
|
|
4,620 |
|
Accrued interest payable |
|
371 |
|
|
|
371 |
|
|
|
— |
|
|
|
— |
|
|
|
371 |
|
Interest rate derivatives |
|
92 |
|
|
|
— |
|
|
|
92 |
|
|
|
— |
|
|
|
92 |
|
The following table presents quantitative information about the Level 3 significant inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at September 30, 2019. There were no such Level 3 measurements at December 31, 2018.
|
(Amounts in thousands) |
|
|
|
|
|
|
|
|
|
Fair value at September 30, 2019 |
|
|
Valuation Technique |
|
Significant Unobservable Input |
|
Range of Inputs |
|
Impaired loans |
$ |
405 |
|
|
Appraisal of Collateral |
|
Appraisal Adjustments |
|
(76)% |
|
|
|
|
|
|
|
Liquidation Expenses |
|
(10)% |
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10.) Accumulated Other Comprehensive Loss:
The following table presents the changes in accumulated other comprehensive loss by component net of tax for the three and nine months ended September 30, 2019 and 2018:
|
(Amounts in thousands) |
|
|||||||||||||||||||||||||||||
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||||||||||||||||
|
September 30, |
|
|
September 30, |
|
||||||||||||||||||||||||||
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||||||||||||||||||
|
Unrealized gains (losses) on available- for-sale securities (a) |
|
|
Change in pension and postretirement obligations (a) |
|
|
Unrealized gains (losses) on available- for-sale securities (a) |
|
|
Change in pension and postretirement obligations (a) |
|
|
Unrealized gains (losses) on available- for-sale securities (a) |
|
|
Change in pension and postretirement obligations (a) |
|
|
Unrealized gains (losses) on available- for-sale securities (a) |
|
|
Change in pension and postretirement obligations (a) |
|
||||||||
Beginning balance |
$ |
(183 |
) |
|
$ |
44 |
|
|
$ |
(4,178 |
) |
|
$ |
65 |
|
|
$ |
(3,686 |
) |
|
$ |
30 |
|
|
$ |
(1,787 |
) |
|
$ |
(38 |
) |
Other comprehensive income (loss) before reclassification |
|
1,393 |
|
|
|
7 |
|
|
|
(1,103 |
) |
|
|
(8 |
) |
|
|
4,861 |
|
|
|
21 |
|
|
|
(3,511 |
) |
|
|
95 |
|
Amount reclassified from accumulated other comprehensive income or loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
35 |
|
|
|
— |
|
|
|
17 |
|
|
|
— |
|
Total other comprehensive income (loss) |
|
1,393 |
|
|
|
7 |
|
|
|
(1,103 |
) |
|
|
(8 |
) |
|
|
4,896 |
|
|
|
21 |
|
|
|
(3,494 |
) |
|
|
95 |
|
Ending balance |
$ |
1,210 |
|
|
$ |
51 |
|
|
$ |
(5,281 |
) |
|
$ |
57 |
|
|
$ |
1,210 |
|
|
$ |
51 |
|
|
$ |
(5,281 |
) |
|
$ |
57 |
|
The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2018:
|
(Amounts in thousands) |
|
|
|
|||||||||||||
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
||||||||||
|
September 30, |
|
|
September 30, |
|
|
|
||||||||||
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
|
|
||||
|
Amount reclassified from accumulated other comprehensive income (a) |
|
|
Amount reclassified from accumulated other comprehensive loss (a) |
|
|
Amount reclassified from accumulated other comprehensive income (a) |
|
|
Amount reclassified from accumulated other comprehensive loss (a) |
|
|
Affected line item in the statement where net income is presented |
||||
Details about other comprehensive income or loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on available- for-sale securities |
$ |
— |
|
|
$ |
— |
|
|
$ |
(44 |
) |
|
$ |
(21 |
) |
|
Investment securities available-for-sale losses, net |
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
4 |
|
|
Federal income tax expense |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(35 |
) |
|
$ |
(17 |
) |
|
|
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
11.) Post-Retirement Obligations:
The Company accrues for the monthly benefit expense of post-retirement cost of insurance for split dollar life insurance coverage. The following table presents the changes in the accumulated liability:
|
(Amounts in thousands) |
|
|||||||||||||
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
September 30, |
|
|
September 30, |
|
||||||||||
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Beginning balance |
$ |
815 |
|
|
$ |
784 |
|
|
$ |
831 |
|
|
$ |
876 |
|
Expense recorded |
|
(13 |
) |
|
|
6 |
|
|
|
(15 |
) |
|
|
17 |
|
Other comprehensive loss (income) recorded |
|
(7 |
) |
|
|
8 |
|
|
|
(21 |
) |
|
|
(95 |
) |
Ending balance |
$ |
795 |
|
|
$ |
798 |
|
|
$ |
795 |
|
|
$ |
798 |
|
12.) Stock Repurchase Program:
On January 23, 2018, the Company’s Board of Directors approved a new program which allowed the Company to repurchase up to 100,000 shares, or approximately 2.3% of the 4,420,136 shares outstanding at January 23, 2018, of the Company’s outstanding common stock. On May 22, 2018 the Company’s Board of Directors approved an increase in the number of shares authorized for repurchase under the January 23, 2018 plan by 200,000 shares bringing the total to 300,000 shares authorized. Both of these programs terminated on December 31, 2018. The Company purchased 80,944 shares under this program. On December 18, 2018, the Company’s Board of Directors approved a new program which allows the Company to repurchase up to 300,000 shares, or approximately 6.9% of the 4,349,624 outstanding shares of common stock effective December 18, 2018. This program will terminate on December 31, 2019, or upon purchase of 300,000 shares if earlier or at any time without prior notice. To date, no shares have been repurchased under this program. Repurchased shares are designated as treasury shares, available for general corporate purposes, including possible use in connection with the Company’s dividend reinvestment program, employee benefit plans, acquisitions or other distributions. Based on the value of the Company’s stock on September 30, 2019, the remaining authorization to repurchase the stock for the program is approximately $6.6 million.
13.) Securities Sold Under Agreements to Repurchase:
The following table provides additional detail regarding repurchase agreements:
|
|
(Amounts in thousands) |
|
|||||
|
|
Repurchase Agreements (Sweep) |
|
|||||
|
|
Accounted for as Secured Borrowings |
|
|||||
|
|
At September 30, 2019 |
|
|
At December 31, 2018 |
|
||
|
|
Remaining Contractual Maturity of the Agreements |
|
|||||
|
|
Overnight and Continuous |
|
|
Overnight and Continuous |
|
||
Repurchase agreements: |
|
|
|
|||||
U.S. Government-sponsored mortgage-backed securities |
|
$ |
3,007 |
|
|
$ |
3,066 |
|
Total collateral carrying value |
|
$ |
3,007 |
|
|
$ |
3,066 |
|
Total repurchase agreements |
|
$ |
1,307 |
|
|
$ |
2,206 |
|
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Omnibus Equity Plan permits the award of up to 340,000 shares to the Company’s employees to promote the long-term financial success of the Company, increasing shareholder value by providing employees the opportunity to acquire an ownership interest in the Company and enabling the Company and its related entities to attract and retain the services of those upon whom the successful conduct of business depends. In the first nine months of 2019, 30,156 shares were granted to employees under the plan, compared to 12,593 shares being granted under the plan in the first nine months of 2018. The Company is expensing the grant date fair value of all share-based compensation over the requisite vesting periods on a prorated straight-line basis. In the first nine months of 2019 and 2018, compensation expense of $627,000 and $144,000, respectively, was recorded in the Consolidated Statements of Income. In the third quarters of 2019 and 2018, compensation expense of $126,000 and $58,000, respectively, was recorded in the Consolidated Statements of Income. As of September 30, 2019, there was $365,000 of total unrecognized compensation expense related to the non-vested shares granted under the Plan. Shares awarded under this plan can vest immediately and/or on the anniversary of the award date from one to three years out if the employee remains employed with Cortland Bancorp. The remaining cost is expected to be recognized over a weighted average period of 8.9 months.
Granted shares are awarded upon a combination of service and achievement of performance objectives derived from one or more of the performance criteria. The main metrics used for the periods presented were three-year earnings per share growth and three-year total shareholder return ranked versus a peer group.
The following is the activity under the Omnibus Equity Plan during the nine months ended September 30, 2019:
|
|
Shares |
|
|
Weighted Average Grant Date Fair Value |
|
||
Nonvested at January 1, 2019 |
|
|
23,591 |
|
|
$ |
19.67 |
|
Granted |
|
|
30,156 |
|
|
|
22.58 |
|
Vested |
|
|
(26,821 |
) |
|
|
20.81 |
|
Forfeited |
|
|
— |
|
|
|
— |
|
Nonvested at September 30, 2019 |
|
|
26,926 |
|
|
$ |
21.79 |
|
The Director Equity Plan permits the award of up to 113,000 shares to nonemployee directors to promote the long-term financial success of the Company, increasing shareholder value by enabling the Company and its related entities to attract and retain the services of those directors upon whom the successful conduct of business depends. There were 1,525 Board approved shares granted in the first nine months of 2019, and there were 989 Board approved shares granted under the plan in the first nine months of 2018. In the first nine months of 2019, there was $34,000 expense recorded in the Consolidated Statements of Income, and there was $22,000 expense recorded in the first nine months of 2018. There was no expense recorded in the third quarter of 2019 and 2018.
15.) Leases:
Operating leases in which we are the lessee are recorded as operating lease Right of Use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities, respectively, on our consolidated balance sheets. We do not currently have any significant finance leases in which we are the lessee. Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. We elected to adopt the transition method, which uses a modified retrospective transition approach. ROU assets and operating lease liabilities are recognized as of the date of adoption based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the date of initial application. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy and equipment expense in the consolidated statements of income and other comprehensive income. Our leases relate primarily to office space and bank branches with remaining lease terms of generally 5 to 10 years. Certain lease arrangements contain extension options which typically range from 5 to 15 years at the then fair market rental rates. As these extension options are generally considered reasonably certain of exercise, they are included in the lease term. As of September 30, 2019, operating lease ROU assets and liabilities were $2.0 million. For year ended and quarter ended September 30, 2019, we recognized $202,000 and $69,000 in operating lease cost, $186,000 and $64,000 is operating cash flows from operating leases and $16,000 and $5,000 in non-cash expense amortization of the ROU asset and the implicit interest, respectively.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes other information related to our operating leases:
|
|
September 30, 2019 |
|
|
Weighted-average remaining lease term-operating leases in years |
|
15.56 |
|
|
Weighted-average discount rate - operating leases |
|
|
3.14 |
% |
The following table presents aggregate lease maturities and obligations as of September 30, 2019:
|
|
(Amounts in thousands) |
|
|
|
|
September 30, 2019 |
|
|
2019 |
|
$ |
62 |
|
2020 |
|
|
231 |
|
2021 |
|
|
155 |
|
2022 |
|
|
155 |
|
2023 |
|
|
157 |
|
2024 and thereafter |
|
|
1,666 |
|
Total lease payments |
|
|
2,426 |
|
Less: interest |
|
|
482 |
|
Present value of lease liabilities |
|
$ |
1,944 |
|
29
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (UNAUDITED)
|
(Fully taxable equivalent basis in thousands of dollars) |
|
|||||||||||||||||||||||||||||||||
|
YEAR-TO-DATE AS OF |
|
|||||||||||||||||||||||||||||||||
|
SEPTEMBER 30, 2019 |
|
|
DECEMBER 31, 2018 |
|
|
SEPTEMBER 30, 2018 |
|
|||||||||||||||||||||||||||
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
||||||
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning deposits |
$ |
13,170 |
|
|
$ |
235 |
|
|
|
2.38 |
% |
|
$ |
8,564 |
|
|
$ |
162 |
|
|
|
1.89 |
% |
|
$ |
8,772 |
|
|
$ |
122 |
|
|
|
1.85 |
% |
Investment securities (1) (2) (3) |
|
140,688 |
|
|
|
3,000 |
|
|
|
2.85 |
% |
|
|
148,938 |
|
|
|
4,121 |
|
|
|
2.77 |
% |
|
|
149,963 |
|
|
|
3,076 |
|
|
|
2.74 |
% |
Loans (1) (2) (3) |
|
489,816 |
|
|
|
19,254 |
|
|
|
5.25 |
% |
|
|
473,527 |
|
|
|
23,830 |
|
|
|
5.03 |
% |
|
|
469,292 |
|
|
|
17,340 |
|
|
|
4.93 |
% |
Total interest-earning assets |
|
643,674 |
|
|
$ |
22,489 |
|
|
|
4.67 |
% |
|
|
631,029 |
|
|
$ |
28,113 |
|
|
|
4.46 |
% |
|
|
628,027 |
|
|
$ |
20,538 |
|
|
|
4.37 |
% |
Cash and due from banks |
|
7,490 |
|
|
|
|
|
|
|
|
|
|
|
7,277 |
|
|
|
|
|
|
|
|
|
|
|
7,250 |
|
|
|
|
|
|
|
|
|
Bank premises and equipment |
|
10,342 |
|
|
|
|
|
|
|
|
|
|
|
9,089 |
|
|
|
|
|
|
|
|
|
|
|
9,026 |
|
|
|
|
|
|
|
|
|
Other assets |
|
30,563 |
|
|
|
|
|
|
|
|
|
|
|
25,111 |
|
|
|
|
|
|
|
|
|
|
|
25,508 |
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets |
|
48,395 |
|
|
|
|
|
|
|
|
|
|
|
41,477 |
|
|
|
|
|
|
|
|
|
|
|
41,784 |
|
|
|
|
|
|
|
|
|
Total assets |
$ |
692,069 |
|
|
|
|
|
|
|
|
|
|
$ |
672,506 |
|
|
|
|
|
|
|
|
|
|
$ |
669,811 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
$ |
194,953 |
|
|
$ |
1,386 |
|
|
|
0.95 |
% |
|
$ |
197,856 |
|
|
$ |
1,378 |
|
|
|
0.70 |
% |
|
$ |
197,783 |
|
|
$ |
984 |
|
|
|
0.67 |
% |
Savings |
|
110,505 |
|
|
|
75 |
|
|
|
0.09 |
% |
|
|
112,508 |
|
|
|
97 |
|
|
|
0.09 |
% |
|
|
113,130 |
|
|
|
72 |
|
|
|
0.09 |
% |
Time |
|
140,056 |
|
|
|
2,146 |
|
|
|
2.05 |
% |
|
|
120,986 |
|
|
|
2,052 |
|
|
|
1.70 |
% |
|
|
121,186 |
|
|
|
1,492 |
|
|
|
1.65 |
% |
Total interest-bearing deposits |
|
445,514 |
|
|
|
3,607 |
|
|
|
1.08 |
% |
|
|
431,350 |
|
|
|
3,527 |
|
|
|
0.82 |
% |
|
|
432,099 |
|
|
|
2,548 |
|
|
|
0.79 |
% |
Other borrowings |
|
24,473 |
|
|
|
403 |
|
|
|
2.20 |
% |
|
|
35,866 |
|
|
|
667 |
|
|
|
1.86 |
% |
|
|
35,150 |
|
|
|
461 |
|
|
|
1.75 |
% |
Subordinated debt |
|
5,155 |
|
|
|
157 |
|
|
|
4.01 |
% |
|
|
5,155 |
|
|
|
189 |
|
|
|
3.61 |
% |
|
|
5,155 |
|
|
|
138 |
|
|
|
3.53 |
% |
Total interest-bearing liabilities |
|
475,142 |
|
|
$ |
4,167 |
|
|
|
1.17 |
% |
|
|
472,371 |
|
|
$ |
4,383 |
|
|
|
0.93 |
% |
|
|
472,404 |
|
|
$ |
3,147 |
|
|
|
0.89 |
% |
Demand deposits |
|
135,033 |
|
|
|
|
|
|
|
|
|
|
|
128,571 |
|
|
|
|
|
|
|
|
|
|
|
126,243 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
12,593 |
|
|
|
|
|
|
|
|
|
|
|
10,044 |
|
|
|
|
|
|
|
|
|
|
|
9,871 |
|
|
|
|
|
|
|
|
|
Shareholders' equity |
|
69,301 |
|
|
|
|
|
|
|
|
|
|
|
61,520 |
|
|
|
|
|
|
|
|
|
|
|
61,293 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
$ |
692,069 |
|
|
|
|
|
|
|
|
|
|
$ |
672,506 |
|
|
|
|
|
|
|
|
|
|
$ |
669,811 |
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
$ |
18,322 |
|
|
|
|
|
|
|
|
|
|
$ |
23,730 |
|
|
|
|
|
|
|
|
|
|
$ |
17,391 |
|
|
|
|
|
Net interest rate spread (4) |
|
|
|
|
|
|
|
|
|
3.50 |
% |
|
|
|
|
|
|
|
|
|
|
3.53 |
% |
|
|
|
|
|
|
|
|
|
|
3.48 |
% |
Net interest margin (5) |
|
|
|
|
|
|
|
|
|
3.80 |
% |
|
|
|
|
|
|
|
|
|
|
3.76 |
% |
|
|
|
|
|
|
|
|
|
|
3.70 |
% |
Ratio of interest-earning assets to interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
1.35 |
|
|
|
|
|
|
|
|
|
|
|
1.34 |
|
|
|
|
|
|
|
|
|
|
|
1.33 |
|
(1) |
Includes both taxable and tax-exempt loans and investment securities. |
(2) |
The amounts are presented on a fully taxable equivalent basis using the statutory rate of 21% in 2019 and 2018 and have been adjusted to reflect the effect of disallowed interest expenses related to carrying tax-exempt assets. The tax equivalent income adjustment for loans and investment securities was $4,000 and $270,000, respectively, for September 30, 2019, $7,000 and $357,000, respectively, for December 31, 2018; and $4,000 and $274,000, respectively, for September 30, 2018. |
(3) |
Average balance outstanding includes the average amount outstanding of all non-accrual investment securities and loans. Investment securities consist of average total principal adjusted for amortization of premium and accretion of discount and includes both taxable and tax-exempt securities. Loans consist of average total loans, including loans held for sale, less average unearned income. |
(4) |
Interest rate spread represents the difference between the yield on earning assets and the rate paid on interest-bearing liabilities. |
(5) |
Net interest margin is calculated by dividing net interest income by total interest-earning assets. |
30
CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (UNAUDITED)
|
(Fully taxable equivalent basis in thousands of dollars) |
|
|||||||||||||||||||||||||||||||||
|
QUARTER-TO-DATE AS OF |
|
|||||||||||||||||||||||||||||||||
|
SEPTEMBER 30, 2019 |
|
|
JUNE 30, 2019 |
|
|
SEPTEMBER 30, 2018 |
|
|||||||||||||||||||||||||||
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
||||||
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning deposits |
$ |
13,690 |
|
|
$ |
90 |
|
|
|
2.62 |
% |
|
$ |
16,920 |
|
|
$ |
87 |
|
|
|
2.04 |
% |
|
$ |
7,760 |
|
|
$ |
41 |
|
|
|
2.09 |
% |
Investment securities (1) (2) (3) |
|
139,476 |
|
|
|
981 |
|
|
|
2.84 |
% |
|
|
139,737 |
|
|
|
987 |
|
|
|
2.82 |
% |
|
|
147,852 |
|
|
|
997 |
|
|
|
2.70 |
% |
Loans (1) (2) (3) |
|
487,793 |
|
|
|
6,258 |
|
|
|
5.11 |
% |
|
|
484,648 |
|
|
|
6,411 |
|
|
|
5.30 |
% |
|
|
475,780 |
|
|
|
6,010 |
|
|
|
5.03 |
% |
Total interest-earning assets |
|
640,959 |
|
|
$ |
7,329 |
|
|
|
4.56 |
% |
|
|
641,305 |
|
|
$ |
7,485 |
|
|
|
4.67 |
% |
|
|
631,392 |
|
|
$ |
7,048 |
|
|
|
4.45 |
% |
Cash and due from banks |
|
7,607 |
|
|
|
|
|
|
|
|
|
|
|
7,570 |
|
|
|
|
|
|
|
|
|
|
|
7,128 |
|
|
|
|
|
|
|
|
|
Bank premises and equipment |
|
10,519 |
|
|
|
|
|
|
|
|
|
|
|
10,464 |
|
|
|
|
|
|
|
|
|
|
|
9,008 |
|
|
|
|
|
|
|
|
|
Other assets |
|
35,336 |
|
|
|
|
|
|
|
|
|
|
|
29,947 |
|
|
|
|
|
|
|
|
|
|
|
24,473 |
|
|
|
|
|
|
|
|
|
Total non-interest-earning assets |
|
53,462 |
|
|
|
|
|
|
|
|
|
|
|
47,981 |
|
|
|
|
|
|
|
|
|
|
|
40,609 |
|
|
|
|
|
|
|
|
|
Total assets |
$ |
694,421 |
|
|
|
|
|
|
|
|
|
|
$ |
689,286 |
|
|
|
|
|
|
|
|
|
|
$ |
672,001 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
$ |
187,623 |
|
|
$ |
457 |
|
|
|
0.97 |
% |
|
$ |
189,596 |
|
|
$ |
455 |
|
|
|
0.96 |
% |
|
$ |
193,999 |
|
|
$ |
366 |
|
|
|
0.75 |
% |
Savings |
|
110,504 |
|
|
|
26 |
|
|
|
0.09 |
% |
|
|
110,070 |
|
|
|
25 |
|
|
|
0.09 |
% |
|
|
111,536 |
|
|
|
24 |
|
|
|
0.09 |
% |
Time |
|
145,123 |
|
|
|
755 |
|
|
|
2.06 |
% |
|
|
140,719 |
|
|
|
728 |
|
|
|
2.08 |
% |
|
|
118,557 |
|
|
|
519 |
|
|
|
1.74 |
% |
Total interest-bearing deposits |
|
443,250 |
|
|
|
1,238 |
|
|
|
1.11 |
% |
|
|
440,385 |
|
|
|
1,208 |
|
|
|
1.10 |
% |
|
|
424,092 |
|
|
|
909 |
|
|
|
0.85 |
% |
Other borrowings |
|
21,536 |
|
|
|
114 |
|
|
|
2.10 |
% |
|
|
24,388 |
|
|
|
138 |
|
|
|
2.26 |
% |
|
|
38,211 |
|
|
|
189 |
|
|
|
1.96 |
% |
Subordinated debt |
|
5,155 |
|
|
|
50 |
|
|
|
3.81 |
% |
|
|
5,155 |
|
|
|
53 |
|
|
|
4.03 |
% |
|
|
5,155 |
|
|
|
50 |
|
|
|
3.79 |
% |
Total interest-bearing liabilities |
|
469,941 |
|
|
$ |
1,402 |
|
|
|
1.18 |
% |
|
|
469,928 |
|
|
$ |
1,399 |
|
|
|
1.19 |
% |
|
|
467,458 |
|
|
$ |
1,148 |
|
|
|
0.97 |
% |
Demand deposits |
|
137,721 |
|
|
|
|
|
|
|
|
|
|
|
137,552 |
|
|
|
|
|
|
|
|
|
|
|
132,509 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
14,092 |
|
|
|
|
|
|
|
|
|
|
|
12,649 |
|
|
|
|
|
|
|
|
|
|
|
9,510 |
|
|
|
|
|
|
|
|
|
Shareholders' equity |
|
72,667 |
|
|
|
|
|
|
|
|
|
|
|
69,157 |
|
|
|
|
|
|
|
|
|
|
|
62,524 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
$ |
694,421 |
|
|
|
|
|
|
|
|
|
|
$ |
689,286 |
|
|
|
|
|
|
|
|
|
|
$ |
672,001 |
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
$ |
5,927 |
|
|
|
|
|
|
|
|
|
|
$ |
6,086 |
|
|
|
|
|
|
|
|
|
|
$ |
5,900 |
|
|
|
|
|
Net interest rate spread (4) |
|
|
|
|
|
|
|
|
|
3.38 |
% |
|
|
|
|
|
|
|
|
|
|
3.48 |
% |
|
|
|
|
|
|
|
|
|
|
3.48 |
% |
Net interest margin (5) |
|
|
|
|
|
|
|
|
|
3.70 |
% |
|
|
|
|
|
|
|
|
|
|
3.80 |
% |
|
|
|
|
|
|
|
|
|
|
3.73 |
% |
Ratio of interest-earning assets to interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
1.36 |
|
|
|
|
|
|
|
|
|
|
|
1.36 |
|
|
|
|
|
|
|
|
|
|
|
1.35 |
|
(1) |
Includes both taxable and tax-exempt loans and investment securities. |
(2) |
The amounts are presented on a fully taxable equivalent basis using the statutory rate of 21% in 2019 and 2018 and have been adjusted to reflect the effect of disallowed interest expenses related to carrying tax-exempt assets. The tax equivalent income adjustment for loans and investment securities was $1,000 and $104,000, respectively, for September 30, 2019, $1,000 and $83,000, respectively, for June 30, 2019; and $1,000 and $85,000, respectively, for September 30, 2018. |
(3) |
Average balance outstanding includes the average amount outstanding of all non-accrual investment securities and loans. Investment securities consist of average total principal adjusted for amortization of premium and accretion of discount and includes both taxable and tax-exempt securities. Loans consist of average total loans, including loans held for sale, less average unearned income. |
(4) |
Interest rate spread represents the difference between the yield on earning assets and the rate paid on interest-bearing liabilities. |
(5) |
Net interest margin is calculated by dividing net interest income by total interest-earning assets. |
31
SELECTED FINANCIAL DATA FOR THE QUARTER ENDED
(In thousands of dollars, except for ratios and per share amounts)
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|||||
Unaudited |
|
2019 |
|
|
2019 |
|
|
2019 |
|
|
2018 |
|
|
2018 |
|
|||||
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
7,224 |
|
|
$ |
7,401 |
|
|
$ |
7,590 |
|
|
$ |
7,489 |
|
|
$ |
6,962 |
|
Total interest expense |
|
|
(1,402 |
) |
|
|
(1,399 |
) |
|
|
(1,366 |
) |
|
|
(1,236 |
) |
|
|
(1,148 |
) |
NET INTEREST INCOME (NII) |
|
|
5,822 |
|
|
|
6,002 |
|
|
|
6,224 |
|
|
|
6,253 |
|
|
|
5,814 |
|
Provision for loan losses |
|
|
(180 |
) |
|
|
(180 |
) |
|
|
(175 |
) |
|
|
(75 |
) |
|
|
(75 |
) |
NII after loss provision |
|
|
5,642 |
|
|
|
5,822 |
|
|
|
6,049 |
|
|
|
6,178 |
|
|
|
5,739 |
|
Investment securities losses |
|
|
— |
|
|
|
(44 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Mortgage banking gains |
|
|
492 |
|
|
|
344 |
|
|
|
337 |
|
|
|
203 |
|
|
|
272 |
|
Other income |
|
|
935 |
|
|
|
752 |
|
|
|
867 |
|
|
|
752 |
|
|
|
876 |
|
Total non-interest expense |
|
|
(4,761 |
) |
|
|
(5,339 |
) |
|
|
(4,752 |
) |
|
|
(4,643 |
) |
|
|
(4,529 |
) |
Income before tax expense |
|
|
2,308 |
|
|
|
1,535 |
|
|
|
2,501 |
|
|
|
2,490 |
|
|
|
2,358 |
|
Federal income tax expense |
|
|
363 |
|
|
|
207 |
|
|
|
396 |
|
|
|
466 |
|
|
|
386 |
|
Net income |
|
$ |
1,945 |
|
|
$ |
1,328 |
|
|
$ |
2,105 |
|
|
$ |
2,024 |
|
|
$ |
1,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER COMMON SHARE DATA (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basic and diluted |
|
$ |
0.45 |
|
|
$ |
0.30 |
|
|
$ |
0.49 |
|
|
$ |
0.47 |
|
|
$ |
0.46 |
|
Book value |
|
|
16.93 |
|
|
|
16.25 |
|
|
|
15.70 |
|
|
|
14.92 |
|
|
|
14.22 |
|
Cash dividends declared per share |
|
|
0.11 |
|
|
|
0.11 |
|
|
|
0.16 |
|
|
|
0.11 |
|
|
|
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
700,621 |
|
|
$ |
690,683 |
|
|
$ |
685,496 |
|
|
$ |
714,666 |
|
|
$ |
681,304 |
|
Investments |
|
|
139,291 |
|
|
|
139,071 |
|
|
|
138,953 |
|
|
|
139,504 |
|
|
|
140,426 |
|
Loans |
|
|
488,435 |
|
|
|
477,946 |
|
|
|
482,313 |
|
|
|
514,392 |
|
|
|
481,914 |
|
Allowance for loan losses |
|
|
4,641 |
|
|
|
4,485 |
|
|
|
4,340 |
|
|
|
4,198 |
|
|
|
4,152 |
|
Deposits |
|
|
587,128 |
|
|
|
576,914 |
|
|
|
571,576 |
|
|
|
604,419 |
|
|
|
561,206 |
|
Borrowings |
|
|
25,462 |
|
|
|
28,830 |
|
|
|
33,793 |
|
|
|
35,361 |
|
|
|
46,155 |
|
Shareholders' equity |
|
|
74,153 |
|
|
|
71,164 |
|
|
|
68,319 |
|
|
|
64,918 |
|
|
|
62,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
694,421 |
|
|
$ |
689,286 |
|
|
$ |
692,479 |
|
|
$ |
680,501 |
|
|
$ |
672,001 |
|
Investments |
|
|
139,476 |
|
|
|
139,737 |
|
|
|
142,890 |
|
|
|
145,895 |
|
|
|
147,852 |
|
Loans |
|
|
483,590 |
|
|
|
480,474 |
|
|
|
495,356 |
|
|
|
484,856 |
|
|
|
474,113 |
|
Deposits |
|
|
580,971 |
|
|
|
577,937 |
|
|
|
582,752 |
|
|
|
564,605 |
|
|
|
556,601 |
|
Borrowings |
|
|
26,691 |
|
|
|
29,543 |
|
|
|
32,718 |
|
|
|
43,142 |
|
|
|
43,366 |
|
Shareholders' equity |
|
|
72,667 |
|
|
|
69,157 |
|
|
|
66,028 |
|
|
|
62,190 |
|
|
|
62,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSET QUALITY RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
$ |
(24 |
) |
|
$ |
(35 |
) |
|
$ |
(33 |
) |
|
$ |
(29 |
) |
|
$ |
(18 |
) |
Net charge-offs as a percentage of average total loans |
|
|
(0.02 |
)% |
|
|
(0.03 |
)% |
|
|
(0.03 |
)% |
|
|
(0.02 |
)% |
|
|
(0.02 |
)% |
Loans 30 days or more beyond their contractual due date as a percent of total loans |
|
|
0.55 |
% |
|
|
0.56 |
% |
|
|
0.38 |
% |
|
|
0.41 |
% |
|
|
0.55 |
% |
Nonperforming loans |
|
$ |
9,118 |
|
|
$ |
8,992 |
|
|
$ |
8,787 |
|
|
$ |
10,140 |
|
|
$ |
10,368 |
|
Total nonperforming assets |
|
$ |
9,118 |
|
|
$ |
8,992 |
|
|
$ |
8,787 |
|
|
$ |
10,140 |
|
|
$ |
10,368 |
|
Nonperforming assets as a percentage of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
1.30 |
% |
|
|
1.30 |
% |
|
|
1.28 |
% |
|
|
1.42 |
% |
|
|
1.52 |
% |
Equity plus allowance for loan losses |
|
|
11.57 |
|
|
|
11.89 |
|
|
|
12.09 |
|
|
|
14.67 |
|
|
|
15.66 |
|
Tier I capital |
|
|
11.71 |
|
|
|
11.78 |
|
|
|
11.70 |
|
|
|
13.78 |
|
|
|
14.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity |
|
|
10.71 |
% |
|
|
7.68 |
% |
|
|
12.75 |
% |
|
|
13.02 |
% |
|
|
12.62 |
% |
Return on average assets |
|
|
1.12 |
|
|
|
0.77 |
|
|
|
1.22 |
|
|
|
1.19 |
|
|
|
1.17 |
|
Efficiency ratio |
|
|
64.74 |
|
|
|
74.34 |
|
|
|
63.69 |
|
|
|
63.66 |
|
|
|
64.26 |
|
Effective tax rate |
|
|
15.73 |
|
|
|
13.49 |
|
|
|
15.83 |
|
|
|
18.71 |
|
|
|
16.37 |
|
Net interest margin |
|
|
3.70 |
|
|
|
3.80 |
|
|
|
3.90 |
|
|
|
3.95 |
|
|
|
3.73 |
|
(1) |
Basic earnings per common share are based on weighted average shares outstanding. Diluted earnings per share is after consideration of common stock equivalent. Cash dividends per common share are based on actual dividends declared. Book value per common share is based on shares outstanding at each period end. |
32
The following is management’s discussion and analysis of the financial condition and results of operations of Cortland Bancorp (the Company). The discussion should be read in conjunction with the Consolidated Financial Statements and related notes and summary financial information included elsewhere in this quarterly report.
Note Regarding Forward-looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. In addition to historical information, certain information included in this discussion and other material filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) may contain forward-looking statements that involve risks and uncertainties. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or similar terminology identify forward-looking statements. These statements reflect management’s beliefs and assumptions, and are based on information currently available to management.
Economic circumstances, the Company’s operations and actual results could differ significantly from those discussed in any forward-looking statements. Some of the factors that could cause or contribute to such differences are changes in the economy and interest rates either nationally or in the Company’s market area, including the impact of the impairment of securities; political actions, including failure of the United States Congress to raise the federal debt ceiling or the imposition of changes in the federal budget; changes in customer preferences and consumer behavior; increased competitive pressures or changes in either the nature or composition of competitors; changes in the legal and regulatory environment; changes in factors influencing liquidity, such as expectations regarding the rate of inflation or deflation, currency exchange rates, and other factors influencing market volatility; changes in assumptions underlying the establishment of reserves for possible loan losses, reserves for repurchase of mortgage loans sold and other estimates; and risks associated with other global economic, political and financial factors.
While actual results may differ significantly from the results discussed in the forward-looking statements, the Company undertakes no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available.
Analysis of Assets, Liabilities and Shareholders’ Equity
Due to the seasonality of the loan and deposit balances in the year-end balance sheet, a comparison of September 30, 2018 is included in the analysis of assets and liabilities, in addition to the usual comparison to December 31, 2018. The following table contains the loan and deposit balances referenced in the discussions:
|
(Amounts in thousands) |
|
|||||||||
|
September 30, 2019 |
|
|
December 31, 2018 |
|
|
September 30, 2018 |
|
|||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
Commercial |
$ |
77,071 |
|
|
$ |
112,440 |
|
|
$ |
72,978 |
|
Commercial real estate |
|
292,150 |
|
|
|
303,804 |
|
|
|
310,019 |
|
Residential real estate |
|
89,709 |
|
|
|
69,845 |
|
|
|
69,870 |
|
Consumer - home equity |
|
25,578 |
|
|
|
25,076 |
|
|
|
25,654 |
|
Consumer - other |
|
3,927 |
|
|
|
3,227 |
|
|
|
3,393 |
|
Total loans |
$ |
488,435 |
|
|
$ |
514,392 |
|
|
$ |
481,914 |
|
Total earning assets |
$ |
644,739 |
|
|
$ |
663,295 |
|
|
$ |
634,514 |
|
Total assets |
$ |
700,621 |
|
|
$ |
714,666 |
|
|
$ |
681,304 |
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
$ |
138,537 |
|
|
$ |
136,886 |
|
|
$ |
133,643 |
|
Interest-bearing demand deposits |
|
301,567 |
|
|
|
346,168 |
|
|
|
306,856 |
|
Time deposits |
|
147,024 |
|
|
|
121,365 |
|
|
|
120,707 |
|
Total deposits |
$ |
587,128 |
|
|
$ |
604,419 |
|
|
$ |
561,206 |
|
Total interest-bearing liabilities |
$ |
474,053 |
|
|
$ |
502,894 |
|
|
$ |
473,718 |
|
33
Earning assets are comprised of deposits at financial institutions, including the Federal Reserve Bank, investment securities and loans. Earning assets were $644.7 million at September 30, 2019, a decrease of 2.8% from the December 31, 2018 balance of $663.3 million. The decrease from December 31, 2018 was mainly due to a decrease in loans of $26.0 million, a decrease of $467,000 in investment securities available-for-sale and an increase in interest-earning deposits of $3.7 million. Earning assets increased 1.6% from the September 30, 2018 balance of $634.5 million, which was due mainly to an increase in loans of $6.5 million and an increase in interest-earning deposits of $928,000 offset by a decrease in investment securities available-for-sale of $1.4 million. Total assets of $700.6 million at September 30, 2019 decreased by $14.0 million, or 2.0%, from the asset total of $714.7 million at December 31, 2018, and increased $19.3 million, or 2.8%, from the asset total of $681.3 million at September 30, 2018.
At September 30, 2019, the investment securities available-for-sale portfolio was $136.5 million compared to $136.9 million at December 31, 2018, a decrease of $467,000, or 0.3%. Investment securities available-for-sale represented 21.2% of earning assets at September 30, 2019, compared to 20.6% at December 31, 2018. As the Company manages its balance sheet for loan growth, asset mix, liquidity and current interest rates and interest rate forecasts, the investment portfolio is a primary source of liquidity and therefore reflects variation in balances accordingly. The investment securities available-for-sale portfolio represented 23.2% of each deposit dollar at September 30, 2019, up from year-end at 22.7%.
The investment securities available-for-sale portfolio had net unrealized gains, net of tax, of $1.2 million at September 30, 2019 and net unrealized losses, net of tax of $3.7 million at December 31, 2018. The decrease in unrealized losses is reflective of the decline in interest rates during 2019 and its effect on securities valuation.
Loans held for sale increased by $4.0 million to $5.0 million at September 30, 2019 from $1.0 million at December 31, 2018, reflecting variation of the mortgage loan processing and origination activity.
Total loans at September 30, 2019 were $488.4 million compared to $514.4 million at December 31, 2018, a 5.1% decrease, and $481.9 million at September 30, 2018, a 1.4% increase. Year-end loan balances included 60-day or less term commercial loans totaling $40.9 million that closed in December 2018 and were fully secured by segregated deposit accounts with the Bank, and matured in the first quarter of 2019. Excluding these seasonal loans at December 31, 2018, total loans actually increased $14.9 million, or 3.2% through September 30, 2019. The Company continues its objective of shifting its asset mix into in-market commercial loans with the intent of improving net interest margin. Total gross loans as a percentage of earning assets stood at 75.8% as of September 30, 2019, 77.6% as of December 31, 2018, and 76.0% as of September 30, 2018. The total loan-to-deposit ratio was 83.2% at September 30, 2019 and 85.1% at December 31, 2018 and 85.9% September 30, 2018.
The allowance for loan losses of $4.6 million, $4.2 million and $4.2 million, respectively, represented approximately 0.9% of outstanding loans at both September 30, 2019 and 2018, and 0.8% at December 31, 2018.
During the first nine months, loan charge-offs were $175,000 in 2019 compared to $1.3 million for the same period in 2018, while the recovery of previously charged-off loans amounted to $83,000 in 2019 and $213,000 in 2018. The net charge-offs represent 3 basis points of average loans for 2019 and 31 basis points for 2018. Charge-offs of specific problem loans, as well as for smaller balance homogeneous loans, are recorded periodically during the year. The number of loan accounts and the amount of charge-offs associated with account balances vary from period to period as loans are deemed uncollectible by management. In the first three months of 2018 there was a commercial charge off related to loans to one customer that were restructured with a new borrower with no principal forgiveness, but with a substantial concession in interest rate. The below market rate triggered recognition of a charge-off equivalent to the difference in present value of loan payments discounted at the market rate of interest. The charged off amount of $1.2 million was recorded as loan discount. As loan payments are made, interest is recognized at the market rate versus the negotiated rate via the amortization of the discount over the various lives of the loans. There was $625,000 in specific reserve previously allocated on these loans at December 31, 2017. Nonaccrual loans were $2.8 million at September 30, 2019, $2.2 million at December 31, 2018 and $2.3 million at September 30, 2018 or 0.6%, 0.4% and 0.5%, respectively, of total loans.
Bank-owned life insurance had a cash surrender value of $17.7 million at September 30, 2019 and $15.7 million at December 31, 2018. The increase from year end is due mainly to an insurance purchase of $2.1 million. Comprising approximately 21% of Tier 1capital plus the allowance for loan losses, management may consider additional insurance purchases not to exceed a 25% ratio.
34
Other assets increased to $22.6 million at September 30, 2019 from $18.3 million at December 31, 2018. In 2019, we recognized an operating lease right-of-use ("ROU") asset of $2.0 million as a result of implementing ASU 2016-02 "Leases” with offsetting operating lease liability of $2.0 million. Refer to footnote 15. As of September 30, 2019, a $5.9 million investment in partnership funds is included in other assets compared to $5.3 million at December 31, 2018, with an offsetting $3.4 million at September 30, 2019 and $2.9 million at December 31, 2018 in other liabilities, which is the commitment to fund these affordable housing investments. Also included in other assets is a partnership investment of $7.6 million into a privately managed pooled fund of small business administration loans at September 30, 2019 and $6.0 million at December 31, 2018. Both of these investments are intended to satisfy Community Reinvestment Act requirements.
Noninterest-bearing deposits measured $138.5 million at September 30, 2019 compared to $136.9 million at December 31, 2018 and $133.6 million at September 30, 2018. Interest-bearing deposits decreased $18.9 million to $448.6 million at September 30, 2019 from $467.5 million at December 31, 2018 and increased $21.0 million from $427.6 million at September 30, 2018. The decrease in interest-bearing deposits from year end reflects segregated money market deposit accounts with the Bank which fully collateralized $40.9 million in 60-day or less term commercial loans that closed in December 2018. The loans matured and the deposits withdrew in the first quarter of 2019. Absent the collateral deposits, interest-bearing deposits increased $22.0 million, or 5.2%, over the first nine months of 2019.
Federal Home Loan Bank advances and short-term borrowings decreased by $9.9 million to $20.3 million at September 30, 2019 from $30.2 million at December 31, 2018. Management continues to use short-term borrowings to bridge its current cash flow needs resulting in variations from period to period. Wholesale deposits, when cheaper than FHLB funds, are sometimes used in lieu of borrowings as has been the case throughout 2019. Other liabilities measured $13.9 million at September 30, 2019 and $10.0 million at December 31, 2018. Included is the operating lease liability and the commitment to fund the affordable housing investments described above.
The Company’s total shareholders’ equity measured $74.2 million at September 30, 2019 and $64.9 million on December 31, 2018. A decrease in unrealized securities losses, which are recorded in shareholders’ equity net of tax, added to the growth in capital. The Company’s capital continues to meet the requirements to be deemed well-capitalized under all regulatory measures.
Cash dividends of $0.38 per share were paid to shareholders in the first nine months of 2019, (including the special $.05), equal to cash dividends paid in the first nine months of 2018. Cash dividends of $0.11 per share were paid to shareholders in the third quarter of 2019 and $0.16 in the same quarter of 2018.
Capital Resources
The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.
The prompt corrective action regulations provide five categories, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is only adequately capitalized, regulatory approval is required to, among other things, accept, renew or roll-over brokered deposits. If a bank is undercapitalized, capital distributions and growth and expansion are limited, and plans for capital restoration are required.
The Board of Governors of the Federal Reserve Board and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2015 and were subject to a phase-in period through January 1, 2019, minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (CET1 ratio) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. Management expects that the capital ratios for the Company and the Bank under Basel III will continue to exceed the well capitalized minimum capital requirements.
35
At September 30, 2019 and December 31, 2018, actual capital levels and minimum required levels were:
|
(Dollars in thousands) |
|
|||||||||||||||||||||
|
Actual |
|
|
Minimum required for capital adequacy purposes |
|
|
To be well-capitalized under prompt corrective action regulations |
|
|||||||||||||||
September 30, 2019 |
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
||||||
CET1 capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
$ |
72,893 |
|
|
|
12.69 |
% |
|
$ |
29,446 |
|
|
|
4.5 |
% |
|
N/A |
|
|
N/A |
|
||
Bank |
|
69,505 |
|
|
|
12.16 |
% |
|
|
29,287 |
|
|
|
4.5 |
% |
|
$ |
37,144 |
|
|
|
6.5 |
% |
Tier 1 capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
77,893 |
|
|
|
13.56 |
% |
|
|
38,064 |
|
|
|
6.0 |
% |
|
N/A |
|
|
N/A |
|
||
Bank |
|
69,505 |
|
|
|
12.16 |
% |
|
|
37,858 |
|
|
|
6.0 |
% |
|
|
45,716 |
|
|
|
8.0 |
% |
Total capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
82,618 |
|
|
|
14.38 |
% |
|
|
49,556 |
|
|
|
8.0 |
% |
|
N/A |
|
|
N/A |
|
||
Bank |
|
80,230 |
|
|
|
14.04 |
% |
|
|
49,287 |
|
|
|
8.0 |
% |
|
|
57,145 |
|
|
|
10.0 |
% |
Tier 1 capital (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
77,893 |
|
|
|
11.23 |
% |
|
|
27,752 |
|
|
|
4.0 |
% |
|
N/A |
|
|
N/A |
|
||
Bank |
|
69,505 |
|
|
|
10.07 |
% |
|
|
27,613 |
|
|
|
4.0 |
% |
|
|
34,516 |
|
|
|
5.0 |
% |
|
(Dollars in thousands) |
|
|||||||||||||||||||||
|
Actual |
|
|
Minimum required for capital adequacy purposes |
|
|
To be well-capitalized under prompt corrective action regulations |
|
|||||||||||||||
December 31, 2018 |
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
||||||
CET1 capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
$ |
68,574 |
|
|
|
12.01 |
% |
|
$ |
25,700 |
|
|
|
4.5 |
% |
|
N/A |
|
|
N/A |
|
||
Bank |
|
64,928 |
|
|
|
11.44 |
% |
|
|
25,548 |
|
|
|
4.5 |
% |
|
$ |
36,903 |
|
|
|
6.5 |
% |
Tier 1 capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
73,574 |
|
|
|
12.88 |
% |
|
|
34,267 |
|
|
|
6.0 |
% |
|
N/A |
|
|
N/A |
|
||
Bank |
|
64,928 |
|
|
|
11.44 |
% |
|
|
34,064 |
|
|
|
6.0 |
% |
|
|
45,419 |
|
|
|
8.0 |
% |
Total capital (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
77,856 |
|
|
|
13.63 |
% |
|
|
45,689 |
|
|
|
8.0 |
% |
|
N/A |
|
|
N/A |
|
||
Bank |
|
75,210 |
|
|
|
13.25 |
% |
|
|
45,419 |
|
|
|
8.0 |
% |
|
|
56,774 |
|
|
|
10.0 |
% |
Tier 1 capital (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
73,574 |
|
|
|
10.72 |
% |
|
|
27,452 |
|
|
|
4.0 |
% |
|
N/A |
|
|
N/A |
|
||
Bank |
|
64,928 |
|
|
|
9.51 |
% |
|
|
27,304 |
|
|
|
4.0 |
% |
|
|
34,130 |
|
|
|
5.0 |
% |
The Company had $5.0 million of trust preferred securities at both September 30, 2019 and December 31, 2018 that qualified as Tier 1 capital. Refer to Note 7, “Subordinated Debt.”
The Bank was categorized as "well capitalized" at September 30, 2019 and December 31, 2018.
36
Certain financial information can be determined by methods other than Generally Accepted Accounting Principles (GAAP). Specifically, certain financial measures are based on core earnings rather than net income. Core earnings exclude income, expense, gains and losses that either are not reflective of ongoing operations or that are not expected to reoccur with any regularity or reoccur with a high degree of uncertainty and volatility. Such information may be useful to both investors and management and can aid them in understanding the Company’s current performance trends and financial condition. Core earnings are a supplemental tool for analysis and not a substitute for GAAP net income. Reconciliation from GAAP net income to the non-GAAP measure of core earnings can be referenced as part of management’s discussion and analysis of financial condition and results of operations.
Core earnings, which exclude certain non-recurring items, increased for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. Core earnings for the first nine months of 2019 were $5.3 million, or $1.23 per share, compared to $5.3 million, or $1.21 per share, for the first nine months of 2018. Core earnings for the third quarter of 2019 were $1.9 million, or $0.45 per share, compared to $2.0 million, or $0.46 per share, for the third quarter of 2018.
|
(Amounts in thousands, except per share amounts) |
|
|||||||||||||
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
September 30, |
|
|
September 30, |
|
||||||||||
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
GAAP earnings |
$ |
1,945 |
|
|
$ |
1,972 |
|
|
$ |
5,378 |
|
|
$ |
6,811 |
|
Gain recognized on Bank Owned Life Insurance (tax free)* |
|
— |
|
|
|
— |
|
|
|
(51 |
) |
|
|
(1,548 |
) |
Core earnings |
$ |
1,945 |
|
|
$ |
1,972 |
|
|
$ |
5,327 |
|
|
$ |
5,263 |
|
GAAP earnings per share |
$ |
0.45 |
|
|
$ |
0.46 |
|
|
$ |
1.24 |
|
|
$ |
1.56 |
|
Gain recognized on Bank Owned Life Insurance (tax free)* |
|
— |
|
|
|
— |
|
|
|
(0.01 |
) |
|
|
(0.35 |
) |
Core earnings per share |
$ |
0.45 |
|
|
$ |
0.46 |
|
|
$ |
1.23 |
|
|
$ |
1.21 |
|
* |
This is the amount of proceeds received on life insurance policies upon the death of former directors or officers that exceeded the cash value of the policies. |
Analysis of Net Interest Income
|
(Amounts in thousands) |
|
|||||||||||||
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
September 30, |
|
|
September 30, |
|
||||||||||
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Net interest income |
$ |
5,822 |
|
|
$ |
5,814 |
|
|
$ |
18,048 |
|
|
$ |
17,113 |
|
Tax equivalent income adjustment for investment securities |
|
104 |
|
|
|
85 |
|
|
|
270 |
|
|
|
274 |
|
Tax equivalent income adjustment for loans |
|
1 |
|
|
|
1 |
|
|
|
4 |
|
|
|
4 |
|
Net interest income on a fully taxable equivalent basis |
$ |
5,927 |
|
|
$ |
5,900 |
|
|
$ |
18,322 |
|
|
$ |
17,391 |
|
Interest and dividends on investment securities |
$ |
877 |
|
|
$ |
912 |
|
|
$ |
2,730 |
|
|
$ |
2,802 |
|
Tax equivalent income adjustment for investment securities |
|
104 |
|
|
|
85 |
|
|
|
270 |
|
|
|
274 |
|
Investment securities income on a fully taxable equivalent basis |
$ |
981 |
|
|
$ |
997 |
|
|
$ |
3,000 |
|
|
$ |
3,076 |
|
Interest and fees on loans |
$ |
6,257 |
|
|
$ |
6,009 |
|
|
$ |
19,250 |
|
|
$ |
17,336 |
|
Tax equivalent income adjustment for loans |
|
1 |
|
|
|
1 |
|
|
|
4 |
|
|
|
4 |
|
Loan income on a fully taxable equivalent basis |
$ |
6,258 |
|
|
$ |
6,010 |
|
|
$ |
19,254 |
|
|
$ |
17,340 |
|
Nine months ended September 30, 2019 and 2018
Net interest income, the principal source of the Company’s earnings, is the amount by which interest and fees generated by interest-earning assets, primarily loans and investment securities, exceed the interest cost of deposits and borrowed funds. On a fully taxable equivalent basis, net interest income measured $18.3 million for September 30, 2019 and $17.4 million for September 30, 2018. The resulting net interest margin was 3.80% for September 30, 2019 and 3.70% for September 30, 2018.
37
The increase in interest income, on a fully taxable equivalent basis, of $2.0 million is the product of a 2.5% year-over-year increase in average earning assets and a 30 basis point increase in yield. The increase in interest expense of $1.0 million was a product of a 28 basis point increase in rates paid and a 0.6% increase in average interest-bearing liabilities. The net result was a 5.4% increase in net interest income on a fully taxable equivalent basis, and a 10 basis point increase in the Company’s net interest margin on a growing asset base with a different mix.
On a fully taxable equivalent basis, income on investment securities decreased by $76,000, or 2.5%. The average invested balances in these securities decreased by $9.3 million, or 6.2%, from the levels of a year ago. The decrease in the average balance of investment securities was accompanied by a 11 basis point increase in the tax equivalent yield of the portfolio. The Company will continue attempting to redeploy liquidity into loans which generate greater yields than securities, thus sacrificing securities balances when beneficial.
On a fully taxable equivalent basis, income on loans increased by $1.9 million, or 11.0%, for September 30, 2019 compared to the same period in 2018. A $20.5 million increase in the average balance of the loan portfolio, or 4.4%, was accompanied by a 32 basis point increase in the portfolio’s tax equivalent yield. The four rate increases in 2018 by the Federal Open Market Committee (FOMC) aggregating to 100 basis points has now been tempered with two rate reductions in the current quarter. Coupled with strong competition for good credits, there is continued downward pressure on offering rates. The commercial loan portfolio housed the majority of the net increase in balances.
Other interest income increased by $113,000, or 92.6%, from the same period a year ago. The average balance of interest-earning deposits increased by $4.4 million, or 50.1%. The yield increased by 53 basis points from 2018 to 2019, reflecting the aggregate net increases in the federal funds rate. Management intends to remain fully invested, minimizing on-balance sheet liquidity.
Average interest-bearing demand deposits and money market accounts decreased by $2.8 million, or 1.4%, for the nine months ended September 30, 2019 compared to the same period of 2018, while average savings balances decreased by $2.6 million, or 2.3%. Total interest paid on interest-bearing demand deposits and money market accounts was $1.4 million, a $402,000 increase from last year. The cost increased 28 basis points from the nine months ended September 30, 2018 to September 30, 2019. The reduction in money market accounts occurred in the wholesale arena where the average balance declined $8 million. Promotional rates offered on money market products, along with the continuing marketing of the Kasasa suite of products, drew in core deposits, thus producing an increase in the demand balances. Total interest paid on savings accounts was $75,000, an increase of $3,000 from last year. The average rate paid on savings accounts was 0.09% for both of the nine months ended September 30, 2019 and 2018. The average balance of time deposit products increased by $18.9 million, or 15.6%, as the average rate paid increased by 40 basis points, from 1.65% to 2.05%. Interest expense increased on time deposits by $654,000 from the prior year. Time deposits also include wholesale funds, generally brokered deposits, obtained at generally higher rates than in-market accounts, but beneficial versus rates on borrowings. Wholesale time deposits comprised $8 million of the $19 million increase over 2018.
Average borrowings and subordinated debt decreased by $10.7 million while the average rate paid increased by 54 basis points. Cost of borrowings rose in tandem with the Federal funds rate, resulting in higher interest expense, despite lower borrowing levels. Management continues to utilize short-term borrowings to bridge liquidity gaps, along with wholesale deposit alternatives.
With an expectation of continued rate reductions by the FOMC, wholesale and borrowing rates will reprice lower, while deposit rates may show modest decline.
Three months ended September 30, 2019 and 2018
Net interest income, the principal source of the Company’s earnings, is the amount by which interest and fees generated by interest-earning assets, primarily loans and investment securities, exceed the interest cost of deposits and borrowed funds. On a fully taxable equivalent basis, net interest income measured $5.9 million for both quarters ended September 30, 2019 and 2018. The resulting net interest margin was 3.70% for September 30, 2019 and 3.73% for September 30, 2018.
The increase in interest income, on a fully taxable equivalent basis, of $281,000 is the product of a 1.5% year-over-year increase in average earning assets and a 11 basis point increase in yield. The increase in interest expense of $254,000 was a product of a 21 basis point increase in rates paid and a 0.5% increase in average interest-bearing liabilities. The net result was a 0.5% increase in net interest income on a fully taxable equivalent basis, and a 3 basis point decrease in the Company’s net interest margin on a growing asset base with a different mix.
38
On a fully taxable equivalent basis, income on investment securities decreased by $16,000, or 1.6%. The average invested balances in these securities decreased by $8.4 million, or 5.7%, from the levels of a year ago. The decrease in the average balance of investment securities was accompanied by a 14 basis point increase in the tax equivalent yield of the portfolio. The Company will continue attempting to redeploy liquidity into loans which generate greater yields than securities, thus sacrificing securities balances when beneficial.
On a fully taxable equivalent basis, income on loans increased by $248,000, or 4.1%, for September 30, 2019 compared to the same period in 2018. A $12.0 million increase in the average balance of the loan portfolio, or 2.5%, was accompanied by an 8 basis point increase in the portfolio’s tax equivalent yield. The four rate increases in 2018 by the Federal Open Market Committee (FOMC) aggregating to 100 basis points has now been tempered with two rate reductions in the current quarter. Coupled with strong competition for good credits, there is continued downward pressure on offering rates. The commercial loan portfolio housed the majority of the net increase in balances.
Other interest income increased by $49,000, or 119.5%, from the same period a year ago. The average balance of interest-earning deposits increased by $5.9 million, or 76.4%. The yield increased by 53 basis points from 2018 to 2019, reflecting the net increase in the federal funds rate. Management intends to remain fully invested, minimizing on-balance sheet liquidity.
Average interest-bearing demand deposits and money market accounts decreased by $6.4 million, or 3.3%, for the quarter ended September 30, 2019 compared to the same period of 2018, while average savings balances decreased by $1.0 million, or 0.9%. Total interest paid on interest-bearing demand deposits and money market accounts was $457,000, a $91,000 increase from last year. The cost increased 22 basis points from the quarter ended September 30, 2018 to September 30, 2019. The reduction in money market accounts occurred in the wholesale arena where the average balance declined $14 million. Promotional rates offered on money market products, along with the continuing marketing of the Kasasa suite of products, drew in core deposits, thus producing an increase in the demand balances. Total interest paid on savings accounts was $26,000, an increase of $2,000 from last year. The average rate paid on savings accounts was 0.09% for both of the quarters ended September 30, 2019 and 2018. The average balance of time deposit products increased by $26.6 million, or 22.4%, as the average rate paid increased by 32 basis points, from 1.74% to 2.06%. Interest expense increased on time deposits by $236,000 from the prior year. Time deposits also include wholesale funds, generally brokered deposits, obtained at generally higher rates than in-market accounts, but beneficial versus rates on borrowings. Wholesale time deposits comprised $14 million of the $26.6 million increase over 2018.
Average borrowings and subordinated debt decreased by $16.7 million while the average rate paid increased by 25 basis points. Cost of borrowings continues to rise in tandem with the Federal funds rate, resulting in higher interest expense, despite lower borrowing levels. Management continues to utilize short-term borrowings to bridge liquidity gaps, along with wholesale deposit alternatives.
Analysis of Provision for Loan Losses, Non-Interest Income, Non-Interest Expense and Federal Income Tax - Nine Months Ended September 30, 2019 and 2018
During the first nine months of both 2019 and 2018, the amount charged to operations as a provision for loan losses was adjusted to account for charge-offs against the allowance, as well as an increase in loan balances recorded in the portfolio, expected losses on specific problem loans and several qualitative factors, including factors specific to the local economy and to industries operating in the local market. The Company had allocated a portion of the allowance for a select few specific problem loans in 2019 and 2018, and has not experienced significant deterioration in any loan type, including the residential real estate portfolios or the commercial loan portfolio, and accordingly has not added any special provision for these loan types. Past due loans, potential problem loans, as well as loans on non-accrual have all been stable, helping to require a provision of $535,000 in the first nine months of 2019, which is higher than the $92,000 net charge-offs, providing allocation to a specific reserve. A provision of 650,000 was recorded in the first nine months of 2018 which is lower than the net charge-off of $1.1 million (of which previously had a specific reserve of $625,000). Provision expense levels are in recognition of loan growth and a changing composition of the loan portfolio as the Company manages its balance sheet with a commercially-oriented focus.
Total non-interest income decreased by $1.1 million, or 22.3%, for September 30, 2019 compared to September 30, 2018.
Losses on securities called and net losses on the sale of available-for-sale investment securities increased by $23,000 in the first nine months of 2019 from a year ago, reflecting a minimal level of securities transactions.
For the first nine months of 2019, fees for customer services decreased by $7,000, or 0.4%, from the same period a year ago, driven by customer transactions on deposit accounts. Mortgage banking gains increased by $402,000 in 2019 compared to 2018, reflective of the increase in margin on loan sales. Earnings on bank-owned life insurance decreased by $1.5 million, the difference being the proceeds received on a policy upon the death of a former executive exceeding the cash value of the policy by $1.6 million in 2018. Other sources of non-interest income increased by $68,000 from the same period a year ago. This latter income category is subject to fluctuation due to the non-recurring nature of some of the items.
39
Total non-interest expenses in the first nine months were $14.9 million in 2019 compared to $13.4 million in 2018, an increase of $1.4 million, or 10.5%. During the first nine months of 2019, expenditures for salaries and employee benefits increased by $777,000 or 10.1%, from the similar period a year ago. This is mainly due to an increase in equity compensation of $495,000 in connection with attaining the most profitable year in the Company’s history in 2018, and the result of opening of a new branch in the first quarter of 2019. Full time equivalent employment averaged 162 during the first nine months of 2019 and 158 during the first nine months of 2018.
Professional fees increased by $164,000. This is due in part to an increase in legal fees attributable mainly to loan collection efforts. All other expense categories increased by $471,000 or 9.2%, in the aggregate. This is due in part to the opening of a new branch in the first quarter of 2019, and expenses related to moving the Company’s stock listing to NASDAQ.
The effective tax rate for the first nine months was 15.2% in 2019 and 12.2% in 2018, resulting in income tax expense of $966,000 in 2019 and $949,000 in 2018. The effective rate is affected by the current rate of profitability and tax-free components of the revenue stream. The gains on bank-owned life insurance mentioned above were tax free and contributed to the lower effective tax rate in 2018.
The provision for income taxes differs from the amount of income tax determined applying the applicable U.S. statutory federal income tax rate (21%) to pre-tax income as a result of the following differences:
|
(Amounts in thousands) |
|
|||||||||||||
|
September 30, |
|
|||||||||||||
|
2019 |
|
|
2018 |
|
||||||||||
|
Balance |
|
|
% |
|
|
Balance |
|
|
% |
|
||||
Provision at statutory rate |
$ |
1,332 |
|
|
|
21.0 |
|
|
$ |
1,630 |
|
|
|
21.0 |
|
Add (Deduct) tax effects of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings on bank-owned life insurance-net |
|
(73 |
) |
|
|
(1.2 |
) |
|
|
(386 |
) |
|
|
(5.0 |
) |
Non-taxable interest income |
|
(253 |
) |
|
|
(4.0 |
) |
|
|
(243 |
) |
|
|
(3.1 |
) |
Low income housing tax credits |
|
(115 |
) |
|
|
(1.8 |
) |
|
|
(106 |
) |
|
|
(1.4 |
) |
Non-deductible expenses |
|
75 |
|
|
|
1.2 |
|
|
|
54 |
|
|
|
0.7 |
|
Federal income tax expense |
$ |
966 |
|
|
|
15.2 |
|
|
$ |
949 |
|
|
|
12.2 |
|
Analysis of Provision for Loan Losses, Non-Interest Income, Non-Interest Expense and Federal Income Tax - Three Months Ended September 30, 2019 and 2018
For the third quarter ended September 30, 2019, there were net charge offs of $24,000, and for the similar period of 2018 there were net charge offs of $18,000. Past due loans, potential problem loans, as well as loans on nonaccrual have all been stable requiring a provision for loan losses of $180,000 for the third quarter of 2019 and $75,000 in 2018. The increase in substandard loans is primarily due to a single credit experiencing financial difficulties, but paying as agreed and requiring no reserve allocation. Provision expense levels are in recognition of loan growth and a changing composition of the loan portfolio as the Company manages its balance sheet with a commercially-oriented focus.
Total non-interest income increased by $279,000, or 24.3%, for the quarter ending September 30, 2019 compared to the same quarter of 2018.
Mortgage banking gains increased to $492,000 in the third quarter of 2019 from $272,000 the same quarter of 2018, an increase of $220,000 or 80.9% reflective of a 60% increase in mortgage originations over the periods. Other sources of non-interest income increased by $59,000 from the same period a year ago. This latter income category is subject to fluctuation due to the non-recurring nature of some of the items.
Total non-interest expenses in the third quarter were $4.8 million in 2019 and $4.5 million in 2018, an increase of 5.1%. During the third quarter of 2019, expenditures for salaries and employee benefits increased by $30,000, or 1.2%, from the similar period a year ago. Full time equivalent employment averaged 162 during the third quarter of 2018 and 158 during the third quarter of 2018. Professional fees increased $94,000. This is due in part to an increase in legal fees attributable to loan collection efforts. FDIC insurance expense decreased by $52,000. Because the Deposit Insurance Fund (DIF) reserve ratio exceeded a threshold amount, we were given a Small Bank Assessment credit against our September quarterly premium. All other expense categories increased by $160,000, or 9.8%, in the aggregate. This latter category is subject to fluctuation due to the non-recurring nature of some of the items, and in part to the opening of a new branch in 2019.
40
The central role of the Company’s liquidity management is to (1) ensure sufficient liquid funds to meet the normal transaction requirements of its customers, (2) take advantage of market opportunities requiring flexibility and speed, and (3) provide a cushion against unforeseen liquidity needs.
Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternative funding sources. The objective of liquidity management is to ensure the Company has the ability to fund balance sheet growth and meet deposit and debt obligations in a timely and cost-effective manner. Management monitors liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts. The Company maintains strategic and contingency liquidity plans to ensure sufficient available funding to satisfy requirements for balance sheet growth, proper management of capital markets funding sources and addressing unexpected liquidity requirements.
Principal sources of liquidity available to the Company include assets considered relatively liquid, such as interest-bearing deposits in other banks, federal funds sold and, cash and due from banks, as well as cash flows from maturities and repayments of loans, investment securities and mortgage-backed securities.
Principal repayments on mortgage-backed securities, collateralized mortgage obligations and small business administration pools, along with investment securities maturing or called amounted to $8.5 million in the first nine months of 2019, which annualized represents 8.1% of the total combined portfolio, compared to $9.6 million, or 9.1%, of the portfolio a year ago. A large portion of the investment portfolio is allocated to amortizing debt in order to provide cash flows to supplement loan growth.
In order to address the concern of FDIC insurance of larger depositors, the Bank is a member of the Certificate of Deposit Account Registry Service (CDARS®) program and the Insured Cash Sweep (ICS) program. Through CDARS®, the Bank’s customers can increase their FDIC insurance by up to $50 million through reciprocal certificate of deposit accounts and likewise through ICS, they can accomplish the same through money market savings accounts. This is accomplished by the Bank entering into reciprocal depository relationships with other member banks. The individual customer’s large deposit is broken into amounts below $250,000 and placed with other banks that are members of the network. The reciprocal member bank issues certificates of deposit or money market savings accounts in amounts that ensure that the entire deposit is eligible for FDIC insurance. The Bank can also execute “one-way buy” transactions wherein deposits are taken in on a non-reciprocal basis through a weekly bidding process. At September 30, 2019, the Bank had $5.8 million of deposits in the CDARS® program, of which none was executed as one-way buy transactions and the Bank had $15.8 million of deposits in the ICS money market program, of which none was executed as one-way buy transactions. Prospectively, for regulatory purposes, reciprocal CDARS® and ICS are no longer considered a brokered deposit.
Along with its liquid assets, the Bank has other sources of liquidity available to it which help to ensure that adequate funds are available as needed. These other sources include, but are not limited to, the ability to obtain deposits through the adjustment of interest rates, the purchasing of federal funds, correspondent bank lines of credit and access to the Federal Reserve Discount Window. The Bank is also a member of the Federal Home Loan Bank of Cincinnati, which provides its largest source of liquidity. At September 30, 2019, the Bank had approximately $27.3 million available of collateral-based borrowing capacity at FHLB of Cincinnati, supplementing the $5.7 million of availability with the Federal Reserve Discount window. Additionally, the FHLB has committed a $34.4 million cash management line, of which nothing has been disbursed, subject to posting additional collateral. The Bank, by policy, has access to approximately 25% of total deposits in various forms of wholesale deposits that could be used as an additional source of liquidity. At September 30, 2019, there was $33.9 million in outstanding balances in wholesale deposits including internet-based deposits and the above-mentioned one-way buy funds, with access to an additional $112.9 million. The Company was also granted a total of $13.5 million in unsecured, discretionary Federal Funds lines of credit with correspondent banks with no funds drawn upon as of September 30, 2019. Unpledged securities of $76.0 million are also available for borrowing under repurchase agreements or as additional collateral for FHLB lines of credit or to sell to generate liquidity.
The Company has other more limited sources of liquidity. In addition to its existing liquid assets, it can raise funds in the securities market through debt or equity offerings or it can receive dividends from its bank subsidiary. Generally, the Bank may pay dividends without prior approval as long as the dividend is not more than the total of the current calendar year-to-date earnings plus any earnings from the previous two years not already paid out in dividends, as long as the Bank remains well-capitalized after the dividend payment. The amount available for dividends at September 30, 2019 is $12.8 million. Future dividend payments by the Bank to the Company are based upon future earnings. The Holding Company had cash of $206,000 at September 30, 2019 available to meet cash needs. It also held a $6.0 million note receivable, the cash flow from which approximates the debt service on the Junior Subordinated Debentures. Cash is generally used by the Holding Company to pay quarterly interest payments on the debentures, pay dividends to common shareholders, repurchase shares, and to fund operating expenses.
Cash and cash equivalents totaled $20.5 million at September 30, 2019 compared to $17.3 million at September 30, 2018 and $19.7 million at December 31, 2018, as the Company strives to be fully invested, minimizing on balance sheet liquidity.
41
The following table details the cash flow from operating activities for the nine months ended:
|
(Amounts in thousands) |
|
|||||
|
September 30, |
|
|||||
|
2019 |
|
|
2018 |
|
||
Net income |
$ |
5,378 |
|
|
$ |
6,811 |
|
Adjustments to reconcile net income to net cash flow from operating activities: |
|
|
|
|
|
|
|
Depreciation, amortization and accretion |
|
1,656 |
|
|
|
1,800 |
|
Provision for loan losses |
|
535 |
|
|
|
650 |
|
Investment securities available-for-sale losses, net |
|
44 |
|
|
|
21 |
|
Originations of mortgage banking loans held for sale |
|
(45,448 |
) |
|
|
(35,676 |
) |
Proceeds from the sale of mortgage banking loans |
|
42,673 |
|
|
|
38,150 |
|
Mortgage banking gains, net |
|
(1,173 |
) |
|
|
(771 |
) |
Earnings on bank-owned life insurance |
|
(296 |
) |
|
|
(1,790 |
) |
Equity compensation |
|
661 |
|
|
|
166 |
|
Changes in: |
|
|
|
|
|
|
|
Deferred taxes |
|
156 |
|
|
|
76 |
|
Other assets and liabilities |
|
7 |
|
|
|
259 |
|
Net cash flow from operating activities |
$ |
4,193 |
|
|
$ |
9,696 |
|
Key variations stem from: 1) Loans held for sale increased by $3.9 million in 2019 compared to a decrease of $1.7 million in 2018. 2) Earnings on bank-owned life insurance decreased by $1.5 million. This was due to a gain on proceeds from a policy of $1.5 million in 2018. 3) Equity compensation increased $495,000 commensurate with Company performance. Refer to the Consolidated Statements of Cash Flows for a summary of the sources and uses of cash for 2019 and 2018.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operation are based upon the Consolidated Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company’s consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Certain accounting policies involve significant judgments and assumptions by management which has a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Management has discussed the development and selection of these accounting estimates with the Audit Committee.
Management believes the following are critical accounting policies that require the most significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.
Accounting for the Allowance for Loan Losses
The determination of the allowance for loan losses and the resulting amount of the provision for loan losses charged to operations reflects management’s current judgment about the credit quality of the loan portfolio and takes into consideration changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio and, in the terms of loans, changes in the experience, ability and depth of lending management, changes in the volume and severity of past due, non-accrual and adversely classified or graded loans, changes in the quality of the loan review system, changes in the value of underlying collateral for collateral-dependent loans, the existence and effect of any concentrations of credit and the effect of competition, legal and regulatory requirements and other external factors. The nature of the process by which we determine the appropriate allowance for loan losses requires the exercise of considerable judgment. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of the loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. The allowance is increased by the provision for loan losses and decreased by charge-offs when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies or defaults and a higher level of non-performing assets, net charge offs, and provision for loan losses in future periods.
42
The Company’s allowance for loan losses methodology consists of three elements: specific valuation allowances based on probable losses on specific loans; valuation allowances based on historical loan loss experience for similar loans with similar characteristics and trends; and general valuation allowances based on general economic conditions and other qualitative risk factors both internal and external to the Company. These elements support the basis for determining allocations between the various loan categories and the overall adequacy of our allowance to provide for probable losses inherent in the loan portfolio.
With these methodologies, a general allowance is established for each loan type based on historical losses for each loan type in the portfolio. Additionally, management allocates a specific allowance for “Impaired Credits,” which is based on current information and events; it is probable the Company will not collect all amounts due according to the original contractual terms of the loan agreement. The level of the general allowance is established to provide coverage for management’s estimate of the credit risk in the loan portfolio by various loan segments not covered by the specific allowance. Additional information regarding allowance for credit losses can be found in the Notes to the Consolidated Financial Statements (Note 4) and elsewhere in this Management’s Discussion and Analysis.
Investment Securities and Impairment
The classification and accounting for investment securities is discussed in detail in Note 3 of the Consolidated Financial Statements. Investment securities must be classified as held-to-maturity, available-for-sale, or trading. The appropriate classification is based partially on our ability to hold the securities to maturity and largely on management’s intentions, if any, with respect to either holding or selling the securities. The classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Unrealized gains and losses on trading securities, if any, flow directly through earnings during the periods in which they arise, whereas available-for-sale securities are recorded as a separate component of shareholders’ equity (accumulated other comprehensive income or loss) and do not affect earnings until realized. The fair values of our investment securities are generally determined by reference to quoted market prices and reliable independent sources. At each reporting date, the Company assesses whether there is an “other-than-temporary” impairment to the Company’s investment securities. Such impairment must be recognized in current earnings rather than in other comprehensive income (loss).
The Company reviews investment debt securities on an ongoing basis for the presence of other-than-temporary impairment (OTTI) with formal reviews performed quarterly. OTTI losses on individual investment securities are recognized in accordance with FASB ASC topic 320, Investments – Debt and Equity Securities. The purpose of this ASC is to provide greater clarity to investors about the credit and noncredit component of an OTTI event and to communicate more effectively when an OTTI event has occurred. This ASC amends the OTTI guidance in GAAP for debt securities, improves the presentation and disclosure of OTTI on investment securities and changes the calculation of the OTTI recognized in earnings in the financial statements. This ASC does not amend existing recognition and measurement guidance related to OTTI of equity securities.
For debt securities, ASC topic 320 requires an entity to assess whether it has the intent to sell the debt security or it is more-likely-than-not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an OTTI on the security must be recognized.
In instances in which a determination is made that a credit loss (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis) exists but the entity does not intend to sell the debt security and it is not more-likely-than-not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (i.e., the amortized cost basis less any current-period credit loss), ASC topic 320 changes the presentation and amount of the OTTI recognized in the income statement.
In these instances, the impairment is separated into the amount of the total impairment related to the credit loss and the amount of the total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in other comprehensive income (loss). The total OTTI is presented in the income statement with an offset for the amount of the total OTTI that is recognized in other comprehensive income (loss). In determining the amount of impairment related to credit loss, the Company uses a third party discounted cash flow model, several inputs for which require estimation and judgment. Among these inputs are projected deferral and default rates and estimated recovery rates. Realization of events different than that projected could result in a large variance in the values of the securities.
Income Taxes
The provision for income taxes is based on income reported for financial statement purposes and differs from the amount of taxes currently payable, since certain income and expense items are reported for financial statement purposes in different periods than those for tax reporting purposes. Accrued taxes represent the net estimated amount due or to be received from taxing authorities. In estimating accrued taxes, the Company assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of the Company’s tax position.
43
The Company accounts for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The Company conducts periodic assessments of deferred tax assets, including net operating loss carryforwards, to determine if it is more-likely-than-not that they will be realized. In making these assessments, the Company considers taxable income in prior periods, projected future taxable income, potential tax planning strategies and projected future reversals of deferred tax items. These assessments involve a certain degree of subjectivity which may change significantly depending on the related circumstances.
Available Information
The Company files an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports with the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 Amended (the Exchange Act). The Company’s website is www.cortlandbank.com. The Company makes available through its website, free of charge, the reports filed with the SEC, as soon as reasonably practicable after such material is electronically filed, or furnished to, the SEC. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The public may read and copy any materials filed with the Commission at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the quantitative and qualitative information about market risk from the information provided in the Company’s Form 10-K for the year ended December 31, 2018.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. With the supervision and participation by management, including the Company’s principal executive officer and principal financial officer, the effectiveness of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) has been evaluated as of the end of the period covered by this report. Based upon that evaluation, the Company’s principal executive officer and principal financial officer have concluded that these controls and procedures were effective.
Changes in Internal Control Over Financial Reporting. Our Chief Executive Officer and Chief Financial Officer have concluded that there have been no significant changes during the period covered by this report in the Company’s internal control over financial reporting (as defined in Rules 13a-13 and 15d-15 of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
44
See Note (5) of the financial statements.
There have been no material changes in the risk factors disclosed by the Company in its Report on Form 10-K for the fiscal year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds—Not applicable
Company’s Common Stock. There were no repurchases of the Company’s common stock during the three months ended September 30, 2019.
Item 3. Defaults upon Senior Securities—Not applicable
Item 4. Mine Safety Disclosures—Not applicable
Item 5. Other Information—Not applicable
45
CORTLAND BANCORP AND SUBSIDIARIES
Item 6. Exhibits—The following exhibits are filed or incorporated by reference as part of this report:
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Incorporated by Reference |
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Exhibit No. |
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Exhibit Description |
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Form** |
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Exhibit |
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Filing Date |
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Filed |
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3.1 |
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10-K(1) |
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3.1 |
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03/16/06 |
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3.2 |
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8-K |
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3.2 |
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05/30/17 |
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4.1 |
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10-K(1) |
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4.1 |
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03/16/06 |
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8-K |
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4.1 |
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05/30/17 |
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4.2 |
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Agreement to furnish instruments and agreements defining rights of holders of long-term debt |
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✓ |
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*10.1 |
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10-K(1) |
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10.1 |
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03/16/06 |
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*10.1.1 |
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Amendment of Group Term Carve Out Plan, dated October 28, 2014 |
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8-K |
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10.1.1 |
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11/03/14 |
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10.2 |
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[Reserved] |
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10.3 |
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[Reserved] |
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*10.4 |
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10-K |
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10.4 |
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03/17/08 |
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10.5 |
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[Reserved] |
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10.6 |
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[Reserved] |
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*10.7 |
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10-K |
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10.7 |
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03/17/08 |
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*10.8 |
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10-K |
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10.8 |
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03/17/08 |
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10.9 |
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[Reserved] |
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*10.10 |
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10-K |
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10.10 |
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03/17/08 |
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*10.11 |
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10-K |
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10.11 |
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03/17/08 |
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*10.12 |
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10-K(1) |
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10.12 |
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03/16/06 |
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as amended on December 26, 2006, for Directors Cole, Hoffman, Thompson, and Woofter; |
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10-K |
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10.12 |
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03/15/07 |
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*10.13 |
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8-K |
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10.13 |
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04/22/11 |
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46
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Incorporated by Reference |
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||||||||||
Exhibit No. |
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Exhibit Description |
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Form** |
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Exhibit |
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Filing Date |
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Filed |
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8-K |
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10.14 |
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04/22/11 |
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*10.15 |
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Form of Indemnification Agreement entered into by Cortland Bancorp with each of its directors |
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10-K(1) |
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10.15 |
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03/16/06 |
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*10.16 |
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10-K |
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10.16 |
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03/29/12 |
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*10.17 |
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8-K |
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10.17 |
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12/28/18 |
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*10.18 |
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8-K |
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10.18 |
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12/12/08 |
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*10.19 |
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8-K |
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10.19 |
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12/28/18 |
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10.20 |
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[Reserved] |
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10.21 |
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[Reserved] |
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10.22 |
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[Reserved] |
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*10.23 |
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8-K |
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10.23 |
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12/28/18 |
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*10.24 |
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8-K |
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10.24 |
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12/28/18 |
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*10.25 |
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8-K |
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10.25 |
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12/28/18 |
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*10.26 |
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8-K |
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10.26 |
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12/28/18 |
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10.27 |
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[Reserved] |
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10.28 |
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[Reserved] |
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10.29 |
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[Reserved] |
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*10.30 |
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10-Q |
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10.30 |
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08/13/13 |
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*10.31.1 |
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10-K |
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10.31.1 |
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12/01/15 |
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*10.31.2 |
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8-K |
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10.31.2 |
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12/01/15 |
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*10.31.3 |
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8-K |
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10.31.3 |
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12/28/18 |
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10.32 |
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[Reserved] |
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10.33 |
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[Reserved] |
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47
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Incorporated by Reference |
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||||||||||
Exhibit No. |
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Exhibit Description |
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Form** |
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Exhibit |
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Filing Date |
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Filed |
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8-K |
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10.34 |
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12/28/18 |
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*10.35 |
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8-K |
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10.35 |
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08/03/15 |
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*10.36 |
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10-Q |
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10.36 |
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08/11/15 |
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*10.36.1 |
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Form of incentive stock option award under the 2015 Omnibus Equity Plan |
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10-Q |
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10.36.1 |
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08/11/15 |
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*10.36.2 |
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Form of nonqualified stock option award under the 2015 Omnibus Equity Plan |
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10-Q |
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10.36.2 |
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08/11/15 |
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*10.36.3 |
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Form of restricted stock award under the 2015 Omnibus Equity Plan |
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10-Q |
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10.36.3 |
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08/11/15 |
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*10.36.4 |
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Form of restricted stock award under the 2015 Omnibus Equity Plan with Immediate Vesting Provision |
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8-K |
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10.36.4 |
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04/24/19 |
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*10.37 |
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10-Q |
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10.37 |
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08/11/15 |
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*10.37.1 |
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Form of nonqualified stock option award under the 2015 Director Equity Plan |
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10-Q |
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10.37.1 |
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08/11/15 |
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*10.37.2 |
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10-Q |
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10.37.2 |
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08/11/15 |
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11 |
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See Note 6 of Financial Statements |
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31.1 |
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Certification of the Chief Executive Officer under Rule 13a-14(a) |
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✓ |
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31.2 |
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Certification of Chief Financial Officer under Rule 13a-14(a) |
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✓ |
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32 |
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✓ |
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101 |
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The following materials from Cortland Bancorp’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) the Notes to Consolidated Financial Statements tagged as blocks of text and in detail (included with this filing) |
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✓ |
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(1) |
Film number 06691632 |
* |
Management contract or compensatory plan or arrangement |
** |
SEC File No. 000-13814 through March 2019, SEC File No. 001-38827 thereafter. |
48
CORTLAND BANCORP AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CORTLAND BANCORP
(Registrant)
/s/ James M. Gasior |
|
Date: November 7, 2019 |
James M. Gasior President and Chief Executive Officer (Principal Executive Officer) |
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/s/ David J. Lucido |
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Date: November 7, 2019 |
David J. Lucido Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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49
Exhibit 31.1
CERTIFICATION
I, James M. Gasior, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cortland Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 7, 2019 |
|
/s/ James M. Gasior |
|
|
James M. Gasior |
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President and |
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|
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, David J. Lucido, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cortland Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 7, 2019 |
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/s/ David J. Lucido |
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David J. Lucido |
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Senior Vice President and |
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Chief Financial Officer |
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER PURSUANT TO TITLE 18, UNITED
STATES CODE, SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cortland Bancorp (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James M. Gasior, the President and Chief Executive Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ James M. Gasior |
Print name: James M. Gasior |
Title: President and |
Chief Executive Officer |
Date: November 7, 2019 |
In connection with the Quarterly Report of Cortland Bancorp (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David J. Lucido, the Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ David J. Lucido |
Print name: David J. Lucido |
Title: Senior Vice President and Chief |
Financial Officer |
Date: November 7, 2019 |
*This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to and is being retained by Cortland Bancorp and will be forwarded to the Securities and Exchange Commission or its staff upon request.
Exhibit 4.2
CORTLAND BANCORP
194 West Main Street
Cortland, OH 44410
November 7, 2019
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Re: Cortland Bancorp Quarterly Report on Form 10-Q for the quarter ended September 30, 2019
Ladies and Gentlemen:
Cortland Bancorp, an Ohio corporation, is today filing a Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 (the "Form 10-Q"), as executed on November 7, 2019.
Pursuant to the instructions relating to the Exhibits in Item 601(b)(4)(iii) of Regulation S-K, Cortland Bancorp hereby agrees to furnish the Commission, upon request, copies of instruments and agreements defining the rights of holders of its long-term debt and of the long-term debt of its consolidated subsidiaries, which are not being filed as exhibits to the Form 10-Q. No such instrument or agreement represents long-term debt exceeding 10% of the total assets of Cortland Bancorp and its subsidiaries on a consolidated basis.
Very truly yours,
/s/ James M. Gasior |
James M. Gasior |
President and CEO |
Loans and Allowance for Loan Losses (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Receivables [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Composition of the Loan Portfolio |
The following represents the composition of the loan portfolio for the period ending:
|
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Certain Qualitative Factors Considered in Measuring Risk Trends |
These factors include, but are not limited to, the following:
|
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Factors Analyzed and Applied to Loans Internally Graded with Higher Credit Risk |
The following factors are analyzed and applied to loans internally graded with higher credit risk in addition to the above factors for non-classified loans:
|
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Analysis of Changes in the Allowance for Loan Losses |
The following is an analysis of changes in the allowance for loan losses for the periods ended:
|
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Allowance for Loan Losses and the Recorded Investment in Loans |
The following tables present a full breakdown by portfolio classification of the allowance for loan losses and the recorded investment in loans at September 30, 2019 and December 31, 2018:
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Summary of Credit Quality Indicators by Internally Assigned Grades |
The following table is a summary of credit quality indicators by internally assigned grades as of September 30, 2019 and December 31, 2018:
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Summary of Consumer Credit Exposure |
The following table is a summary of consumer credit exposure as of September 30, 2019 and December 31, 2018:
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Summary of Classes of Loans on Non-Accrual Status |
The following table is a summary of classes of loans on non-accrual status as of September 30, 2019 and December 31, 2018:
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Information Related to Loans Modified in a TDR |
The following presents, by class, information related to loans modified in a TDR during the periods ending September 30, 2018.
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Aging Analysis of the Recorded Investment of Past Due Loans |
The following table is an aging analysis of the recorded investment of past due loans as of September 30, 2019 and December 31, 2018:
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Recorded Investment, Unpaid Principal Balances, Average Recorded Investments and Interest Recognized on Impaired Loans, Excluding Homogenous Loans for Which Impaired Analyses are Not Necessarily Performed |
The following table presents the recorded investment and unpaid principal balances for impaired loans, excluding homogenous loans for which impaired analyses are not necessarily performed, with the associated allowance amount, if applicable, at September 30, 2019 and December 31, 2018. Also presented are the average recorded investments in the impaired balances and interest income recognized after impairment for the three and nine months ended September 30, 2019 and 2018.
|
Equity Compensation |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity Compensation |
14.) Equity Compensation: The Omnibus Equity Plan permits the award of up to 340,000 shares to the Company’s employees to promote the long-term financial success of the Company, increasing shareholder value by providing employees the opportunity to acquire an ownership interest in the Company and enabling the Company and its related entities to attract and retain the services of those upon whom the successful conduct of business depends. In the first nine months of 2019, 30,156 shares were granted to employees under the plan, compared to 12,593 shares being granted under the plan in the first nine months of 2018. The Company is expensing the grant date fair value of all share-based compensation over the requisite vesting periods on a prorated straight-line basis. In the first nine months of 2019 and 2018, compensation expense of $627,000 and $144,000, respectively, was recorded in the Consolidated Statements of Income. In the third quarters of 2019 and 2018, compensation expense of $126,000 and $58,000, respectively, was recorded in the Consolidated Statements of Income. As of September 30, 2019, there was $365,000 of total unrecognized compensation expense related to the non-vested shares granted under the Plan. Shares awarded under this plan can vest immediately and/or on the anniversary of the award date from one to three years out if the employee remains employed with Cortland Bancorp. The remaining cost is expected to be recognized over a weighted average period of 8.9 months. Granted shares are awarded upon a combination of service and achievement of performance objectives derived from one or more of the performance criteria. The main metrics used for the periods presented were three-year earnings per share growth and three-year total shareholder return ranked versus a peer group. The following is the activity under the Omnibus Equity Plan during the nine months ended September 30, 2019:
The Director Equity Plan permits the award of up to 113,000 shares to nonemployee directors to promote the long-term financial success of the Company, increasing shareholder value by enabling the Company and its related entities to attract and retain the services of those directors upon whom the successful conduct of business depends. There were 1,525 Board approved shares granted in the first nine months of 2019, and there were 989 Board approved shares granted under the plan in the first nine months of 2018. In the first nine months of 2019, there was $34,000 expense recorded in the Consolidated Statements of Income, and there was $22,000 expense recorded in the first nine months of 2018. There was no expense recorded in the third quarter of 2019 and 2018.
|
Loans and Allowance for Loan Losses (Details 2) |
9 Months Ended |
---|---|
Sep. 30, 2019 | |
Factor Considered: | |
Levels and trends in classification | Stable |
Declining trends in financial performance | Decreasing |
Structure and lack of performance measures | Stable |
Migration between risk categories | Stable |
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