Notes to Consolidated Financial Statements
Note 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of operations and principles of consolidation
The consolidated financial statements include the accounts of Stewardship Financial Corporation and its wholly owned subsidiary, Atlantic Stewardship Bank (“the Bank”), together referred to as “the Corporation”. The Bank includes its wholly-owned subsidiaries, Stewardship Investment Corporation (whose primary business is to own and manage an investment portfolio), Stewardship Realty LLC (whose primary business is to own and manage property at 612 Godwin Avenue, Midland Park, New Jersey), Atlantic Stewardship Insurance Company, LLC (whose primary business is insurance) and several other subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. The Bank’s subsidiaries have an insignificant impact on the daily operations. All intercompany accounts and transactions are eliminated in the consolidated financial statements. Certain prior period amounts have been reclassified to conform with the current year presentation.
The Corporation provides financial services through the Bank’s offices in Bergen, Passaic, and Morris Counties, New Jersey. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial, residential mortgage and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow generated from the operations of businesses. There are no significant concentrations of loans to any one industry or customer. The Corporation’s lending activities are concentrated in loans secured by real estate located in northern New Jersey and, therefore, collectability of the loan portfolio is susceptible to changes in real estate market conditions in the northern New Jersey market. The Corporation has not made loans to borrowers outside the United States.
Basis of consolidated financial statements presentation
The consolidated financial statements of the Corporation have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). In preparing the financial statements, management is required to make estimates and assumptions, based on available information, that affect the amounts reported in the financial statements and the disclosures provided. The estimate of the allowance for loan losses and the valuation of deferred tax assets are particularly critical because they involve a higher degree of complexity and subjectivity and require estimates and assumptions about highly uncertain matters. Actual results may differ from those estimates and assumptions. The current economic environment has increased the degree of uncertainty inherent in these material estimates.
Cash flows
Cash and cash equivalents include cash and deposits with other financial institutions and interest-bearing deposits in other banks with original maturities under
90
days. Net cash flows are reported for customer loan and deposit transactions, and short term borrowings and securities sold under agreement to repurchase.
Securities available-for-sale and held-to-maturity
The Corporation classifies its securities as held-to-maturity or available-for-sale. Investments in debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as securities held-to-maturity and are carried at amortized cost. All other securities are classified as securities available-for-sale. Securities available-for-sale may be sold prior to maturity in response to changes in interest rates or prepayment risk, for asset/liability management purposes, or other similar factors. These securities are carried at fair value with unrealized holding gains or losses reported in a separate component of shareholders’ equity, net of the related tax effects.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments except for mortgage-backed securities where
prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
Other Equity Investments
The Corporation carried other equity investments at fair value with unrealized holding gains or losses reported through the Consolidated Statement of Income beginning January 1, 2018 with the adoption of ASU No. 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities. Prior to the adoption of ASU No. 2016-01, the unrealized holding gains or losses reported in a component of shareholders' equity, net of the related tax effects. Cash dividends are reported as income when declared.
Federal Home Loan Bank (“FHLB”) Stock
The Bank is a member of the FHLB system. Members are required to own a certain amount of FHLB stock based on their level of borrowings and other factors. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value. Cash dividends are reported as income when declared.
Loans held for sale
Loans held for sale generally represent mortgage loans originated and intended for sale in the secondary market, which are carried at the lower of cost or fair value on an aggregate basis. Mortgage loans held for sale are carried net of deferred fees, which are recognized as income at the time the loans are sold to permanent investors. Gains or losses on the sale of mortgage loans held for sale are recognized at the settlement date and are determined by the difference between the net proceeds and the carrying value. All loans are generally sold with loan servicing rights released to the buyer.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of deferred loan fees and costs and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans represents the outstanding principal balance after charge-offs and does not include accrued interest receivable as the inclusion is not significant to the reported amounts.
Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or are charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to an accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for loan losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the collectability of the full loan balance is in doubt. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. In addition, the allowance contains an unallocated reserve amount to cover inherent imprecision of the overall loss estimation process. Due to the complexity in determining the estimated amount of allowance for loan losses, these unallocated reserves reflect management's attempt to ensure that the overall allowance reflects an appropriate level of reserves.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties are considered troubled debt restructuring and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the fair value of the note, or the fair value of the collateral if the loan is collateral-dependent. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the lower of the recorded investment or fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component of the allowance is based on historical loss experience, including an appropriate loss emergence period, adjusted for qualitative factors. The historical loss experience is determined for each portfolio segment and class, and is based on the actual loss history experienced by the Corporation over the most recent five years. The Bank prepares an analysis for each portfolio segment, which examines the historical loss experience as well as the loss emergence period. The analysis is updated quarterly for the purpose of determining the assigned allocation factors which are essential components of the allowance for loan losses calculation. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio segment or class. These qualitative factors include consideration of the following: levels of and trends in charge-offs; levels of and trends in delinquencies and impaired loans; levels and trends in loan size; levels of real estate concentrations; national and local economic trends and conditions; the depth and experience of lending management and staff; and other changes in lending policies, procedures, and practices.
For purposes of determining the allowance for loan losses, loans in the portfolio are segregated by type into the following segments: commercial, commercial real estate, construction, residential real estate, consumer and other. The
Corporation also sub-divides these segments into classes based on the associated risks within those segments. Commercial loans are divided into the following two classes: secured by real estate and other. Construction loans are divided into the following two classes: commercial and residential. Consumer loans are divided into two classes: secured by real estate and other. The models and assumptions used to determine the allowance require management’s judgment. Assumptions, data and computations are appropriately reviewed and properly documented.
The risk characteristics of each of the identified portfolio segments are as follows:
Commercial
– Commercial loans are generally of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Furthermore, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Commercial Real Estate
– Commercial real estate loans are secured by multi-family and nonresidential real estate and generally have larger balances and generally are considered to involve a greater degree of risk than residential real estate loans. Commercial real estate loans depend on the global cash flow analysis of the borrower and the net operating income of the property, the borrower’s expertise, credit history and profitability, and the value of the underlying property. Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the cash flow from the property. Payments on loans secured by income producing properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. Commercial real estate is also subject to adverse market conditions that cause a decrease in market value or lease rates, obsolescence in location or function and market conditions associated with oversupply of units in a specific region.
Construction
– Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, additional funds may be required to be advanced in excess of the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, the value of the building may be insufficient to assure full repayment if liquidation is required. If foreclosure is required on a building before or at completion due to a default, there can be no assurance that all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs will be recovered.
Residential Real Estate
– Residential real estate loans are generally made on the basis of the borrower’s ability to make repayment from his or her employment income or other income, and which are secured by real property whose value tends to be more easily ascertainable. Repayment of residential real estate loans is subject to adverse employment conditions in the local economy leading to increased default rate and decreased market values from oversupply in a geographic area. In general, residential real estate loans depend on the borrower’s continuing financial stability and, therefore, are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Consumer loans
– Consumer loans secured by real estate may entail greater risk than residential mortgage loans due to a lower lien position. In addition, other consumer loans, particularly loans secured by assets that depreciate rapidly, such as motor vehicles, are subject to greater risk. In all cases, collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. Consumer loan collections depend on the borrower’s continuing financial stability and, therefore, are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Generally, when it is probable that some portion or all of a loan balance will not be collected, regardless of portfolio segment, that amount is charged-off as a loss against the allowance for loan losses. On loans secured by real estate,
the charge-offs reflect partial writedowns due to the initial valuation of market values of the underlying real estate collateral in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-40. Consumer loans are generally charged-off in full when they reach
90
–
120
days past due.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Premises and equipment
Land is stated at cost. Buildings and improvements and furniture, fixtures and equipment are stated at cost, less accumulated depreciation computed on the straight-line method over the estimated lives of each type of asset. Estimated useful lives are
three
to
forty
years for buildings and improvements and
three
to
twenty-five
years for furniture, fixtures and equipment. Leasehold improvements are stated at cost less accumulated amortization computed on the straight-line method over the shorter of the term of the lease or useful life.
Long-Term Assets
Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recovered from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Bank owned life insurance
The Corporation has purchased life insurance policies on certain key officers. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Dividend Reinvestment Plan
The Corporation offers shareholders the opportunity to participate in a dividend reinvestment plan. Plan participants may reinvest cash dividends to purchase new shares of stock at
95%
of the market value, based on the most recent trades. Cash dividends due to the plan participants are utilized to acquire shares from either, or a combination of, the issuance of authorized shares or purchases of shares in the open market through an approved broker. The Corporation reimburses the broker for the
5%
discount when the purchase of the Corporation’s stock is completed. The plan is considered to be non-compensatory.
Stock-based compensation
Stock-based compensation cost is based on the fair value of the awards at the date of grant. The fair value of restricted stock awards is based upon the average of the high and low sale price reported for the Corporation’s common stock on the date of grant. Compensation cost is recognized for restricted stock over the required service period, generally defined as the vesting period. Restricted shares may be forfeited if the vesting requirements are not met. Forfeitures are recognized when they occur.
Advertising Costs
The Corporation expenses advertising costs as incurred.
Income taxes
The Corporation records income taxes in accordance with ASC 740, Income Taxes, as amended, using the asset and liability method. Accordingly, deferred tax assets and liabilities: (i) are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns; (ii) are attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases; and (iii) are measured using enacted tax rates expected to apply in the years when those temporary differences are expected to be recovered or settled. Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period of enactment. The valuation allowance is adjusted, by a charge or credit to income tax expense, as changes in facts and circumstances warrant. Deferred tax assets and liabilities are reported as a component of other assets on the consolidated statements of financial condition.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.
Comprehensive income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income includes unrealized gains and losses on securities available-for-sale, accretion of losses related to securities transferred from available-for-sale to held to maturity, and unrealized gains or losses on cash flow hedges, net of tax, which are also recognized as separate components of equity.
Earnings per common share
Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Common stock equivalents are not included in the calculation.
Diluted earnings per share is computed similar to that of the basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potential dilutive common shares were issued.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Loss contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements.
Dividend restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Corporation or by the Corporation to its shareholders. The Corporation's ability to pay cash dividends is based, among other things, on its ability to receive cash from the Bank. Banking regulations limit the amount of dividends that may
be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's profits, combined with the retained net profits of the preceding two years. At
December 31, 2018
the Bank could have paid dividends totaling approximately
$13.8 million
. At
December 31, 2018
, this restriction did not result in any effective limitation in the manner in which the Corporation is currently operating.
Derivatives
Derivative financial instruments are recognized as assets or liabilities at fair value. The Corporation’s only free standing derivatives consist of interest rate swap agreements, which are used as part of its asset liability management strategy to help manage interest rate risk related to its deposits and Subordinated Debentures (see Note 8 to the Consolidated Financial Statements). The Corporation does not use derivatives for trading purposes.
The Corporation designated the interest rate swaps as cash flow hedges, which is a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. For a cash flow hedge, the change in the fair value on the derivative is reported in other comprehensive income (loss) and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. Net cash settlements on these interest rate swaps that qualify for hedge accounting are recorded in interest expense. Changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged items are recognized immediately in current earnings.
The Corporation formally documented the risk-management objective and the strategy for undertaking the hedge transaction at the inception of the hedging relationship. The documentation includes linking the fair value of the cash flow hedge to the deposit or Subordinated Debentures on the balance sheet. The Corporation formally assessed, both at the hedge’s inception and on an ongoing basis, whether the interest rate swaps are highly effective in offsetting changes in cash flows of the deposits and Subordinated Debentures.
When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that would be accumulated in other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings.
Fair value of financial instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Segment Reporting
The Corporation acts as an independent community financial services provider and offers traditional banking and related financial services to individual, business and government customer. Through its branches, automated teller machine networks, and internet banking services, the Corporation offers a full array of commercial and retail financial service, including time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of other financial services. Management does not separately allocate expense, including the cost of funding loan demand, between the commercial, retail, mortgage and consumer banking operation of the Corporation. Accordingly, all significant operating decisions are based upon analysis of the Bank as one segment or unit.
Subsequent Events
The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2018 for items that should potentially be recognized or disclosed in these financial statements.
Adoption of New Accounting Standards
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". The objective of this amendment is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are in the scope of other standards. The ASU is effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2017, and early adoption is permitted. Subsequently, the FASB issued the following standards related to ASU 2014-09: ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations;” ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing;” ASU 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting;” ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients;” ASU 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue Contracts with Customers;" ASU 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments;" and ASU 2017-14, "Income Statement - Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606): Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 116 and SEC Release No. 33-10403." These amendments are intended to improve and clarify the implementation guidance of ASU 2014-09 and have the same effective date as the original standard. The Corporation’s implementation efforts include the identification of revenue within the scope of the guidance, as well as the evaluation of revenue contracts and the respective performance obligations within those contracts. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Condensed Consolidated Statement of Income was not necessary. We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying this ASU that significantly affect the determination of the amount and timing of the revenue from contracts with customers. The Corporation has completed its evaluation and adopted this ASU effective January 1, 2018 using the modified retrospective approach. Adoption of ASU 2014-09 did not have a material impact on our Consolidated Financial Statements and related disclosures as our primary sources of revenues are derived from interest and dividends earned on loans, securities and other financial instruments that are not within the scope of the new standard. Our revenue recognition pattern for revenue streams within the scope of the new standard, including but not limited to service charges on deposit accounts and debit card interchange, did not change significantly from prior practice. The modified retrospective method requires application of ASU 2014-09 to uncompleted contracts at the date of adoption, however, periods prior to the date of adoption have not been retrospectively revised as the impact of the new standard on uncompleted contracts as of the date of adoption was not material. As such, a cumulative effective adjustment to opening retained earnings was not deemed necessary. Additional disclosures required have been included in Note 19 - Revenue Recognition.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This amendment supersedes the guidance to classify equity securities with readily determinable fair values into different categories, requires equity securities to be measured at fair value with changes in the fair value recognized through net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The amendment requires public business entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion. The amendment requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. The amendment requires separate presentation of financial assets and financial liabilities by measurement category and
form of financial asset on the balance sheet or in the accompanying notes to the financial statements. The amendment reduces diversity in current practice by clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. This amendment is effective for fiscal years, including interim periods, beginning after December 15, 2017. Entities should apply the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which should be applied prospectively to equity investments that exist as of the date of adoption. The Corporation's adoption of the guidance on January 1, 2018 resulted in the reclassification from accumulated other comprehensive income (loss) to retained earnings of
$163,000
, reflected in the Consolidated Statements of Changes in Shareholders' Equity. In addition, the fair value of loans has been estimated using the exit price notion as described in Note 16 to the Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Subtopic 842).” This ASU requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. Lessor accounting remains largely unchanged under the new guidance. The amendments in ASU 2016-02 are effective for fiscal years, including interim periods, beginning after December 15, 2018. Early adoption of ASU 2016-02 is permitted. Subsequently, the FASB issued the following standards related to ASU 2016-02: ASU 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments;" ASU 2018-1, "Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, "Codification Improvements to Topic 842, Leases;" and ASU 2018-11, "Leases (Topic 842): Targeted Improvements." Based on the current lease portfolio, upon adoption of the new accounting standard, the Corporation anticipates recognizing a lease liability and related right-of-use asset on the Consolidated Statements of Financial Condition. Management is continuing to evaluate the Corporation's outstanding inventory of leases and determining the effect of recognizing operating leases on the Consolidated Statements of Financial Condition. The Corporation plans to adopt the modified retrospective approach under ASU 2018-11 in the first quarter of 2019. Based on the current composition of leases, at adoption, the Corporation is expected to record an estimated
$3.3
million lease liability with a corresponding right-of-use asset on the Consolidated Statements of Financial Condition.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments by a reporting entity at each reporting date. The amendments in this ASU require financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses would represent a valuation account that would be deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement would reflect 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. The measurement of expected credit losses would be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity will be required to use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The amendments in ASU 2016-13 are effective for fiscal years, including interim periods, beginning after December 15, 2019. Early adoption of this ASU is permitted for fiscal years beginning after December 15, 2018. The Corporation is currently evaluating the potential impact of ASU 2016-13 on the Corporation's consolidated financial statements. The Corporation has formed a working group, under the direction of the Chief Financial Officer, which is currently developing an implementation plan to include assessment of processes, portfolio segmentation, model development, system requirements and the identification of data and resource needs, among other things. Also, the Corporation is currently evaluating third-party vendor solutions to assist in the application of ASU 2016-13. The adoption of ASU 2016-13 may result in an increase in the allowance for loan losses due to changing from an "incurred loss" model, which encompasses allowances for current known and inherent losses within the portfolio, to an "expected loss" model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate establishing an allowance for expected credit losses on debt securities. The Corporation has reviewed available historical data, preliminarily identified the appropriate loan pools and is in the process of reviewing loss rates. The
completion of shadow calculations are expected in 2019. The Corporation is currently unable to reasonably estimate the impact of adopting ASU 2016-13, and it is expected that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 addresses changes to reduce the presentation diversity of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. The guidance became effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The new standard should be applied retrospectively, but may be applied prospectively if retrospective application would be impracticable. The Company adopted this ASU on January 1, 2018 and the impact was not material on the financial statements.
In March 2017, the FASB issued ASU 2017-08, "Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20)." The update shortens the amortization period for premiums on purchased callable debt securities to the earliest call date. The amendment will apply only to callable debt securities with explicit, noncontingent call features that are callable at fixed prices and on preset dates, apply to all premiums on callable debt securities, regardless of how they were generated, and require companies to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date. ASU 2017-08 does not require an accounting change for securities held at a discount. The discount continues to be amortized to maturity and does not apply when the investor has already incorporated prepayments into the calculation of its effective yield under other GAAP. The amendments in ASU 2017-08 are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted, including adoption in an interim period. As the Corporation already amortizes these premiums to the call date, the adoption of this ASU will not have any impact on the Corporation's consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in ASU 2017-12 expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This ASU will be effective for interim and annual periods beginning after December 15, 2018. Early adoption of ASU 2017-12 is permitted. As of December 31, 2018, the Corporation has early adopted ASU 2017-12 with no material impact to the Corporation's consolidated financial statements.
Note 2. SECURITIES
The fair value of the available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored agencies
|
$
|
26,232
|
|
|
$
|
15
|
|
|
$
|
(498
|
)
|
|
$
|
25,749
|
|
|
Obligations of state and political subdivisions
|
3,205
|
|
|
—
|
|
|
(84
|
)
|
|
3,121
|
|
|
Mortgage-backed securities
|
63,659
|
|
|
68
|
|
|
(1,564
|
)
|
|
62,163
|
|
|
Asset-backed securities (a)
|
4,916
|
|
|
6
|
|
|
—
|
|
|
4,922
|
|
|
Corporate debt (b)
|
13,369
|
|
|
48
|
|
|
(561
|
)
|
|
12,856
|
|
|
Total
|
$
|
111,381
|
|
|
$
|
137
|
|
|
$
|
(2,707
|
)
|
|
$
|
108,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored agencies
|
$
|
21,699
|
|
|
$
|
30
|
|
|
$
|
(396
|
)
|
|
$
|
21,333
|
|
|
Obligations of state and political subdivisions
|
3,221
|
|
|
—
|
|
|
(56
|
)
|
|
3,165
|
|
|
Mortgage-backed securities
|
64,775
|
|
|
70
|
|
|
(1,011
|
)
|
|
63,834
|
|
|
Asset-backed securities (a)
|
6,672
|
|
|
30
|
|
|
(4
|
)
|
|
6,698
|
|
|
Corporate debt (b)
|
14,437
|
|
|
94
|
|
|
(302
|
)
|
|
14,229
|
|
|
Total
|
$
|
110,804
|
|
|
$
|
224
|
|
|
$
|
(1,769
|
)
|
|
$
|
109,259
|
|
(a) Collateralized by student loans.
(b) Corporate debt securities are primarily in financial institutions.
Cash proceeds realized from sales and calls of securities available-for-sale for the years ended
December 31, 2018
and
2017
were
$1,007,000
and
$500,000
, respectively. There were gross gains totaling
$6,000
and
no
gross losses realized on sales or calls during the year ended
December 31, 2018
. There were gross gains totaling
$1,000
and
no
gross losses realized on sales or calls during the year ended
December 31, 2017
.
The fair value of available-for-sale securities pledged to secure public deposits for the years ended
December 31, 2018
and
2017
was
$988,000
and
$990,000
, respectively. See also Note 7 to the Consolidated Financial Statements regarding securities pledged as collateral for Federal Home Loan Bank of New York advances.
The following is a summary of the held-to-maturity securities and related gross unrealized gains and losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
999
|
|
|
$
|
—
|
|
|
$
|
(14
|
)
|
|
$
|
985
|
|
|
U.S. government-sponsored agencies
|
35,565
|
|
|
20
|
|
|
(976
|
)
|
|
34,609
|
|
|
Obligations of state and political subdivisions
|
2,358
|
|
|
14
|
|
|
(27
|
)
|
|
2,345
|
|
|
Mortgage-backed securities
|
23,386
|
|
|
47
|
|
|
(375
|
)
|
|
23,058
|
|
|
Total
|
$
|
62,308
|
|
|
$
|
81
|
|
|
$
|
(1,392
|
)
|
|
$
|
60,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Amortized
|
|
Gross Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
999
|
|
|
$
|
—
|
|
|
$
|
(11
|
)
|
|
$
|
988
|
|
|
U.S. government-sponsored agencies
|
27,075
|
|
|
4
|
|
|
(760
|
)
|
|
26,319
|
|
|
Obligations of state and political subdivisions
|
4,057
|
|
|
21
|
|
|
(23
|
)
|
|
4,055
|
|
|
Mortgage-backed securities
|
20,311
|
|
|
76
|
|
|
(198
|
)
|
|
20,189
|
|
|
Total
|
$
|
52,442
|
|
|
$
|
101
|
|
|
$
|
(992
|
)
|
|
$
|
51,551
|
|
Cash proceeds realized from calls of securities held-to-maturity for the years ended
December 31, 2018
and
2017
were
$280,000
and
$1,320,000
, respectively. There were
no
gross gains and
no
gross losses realized from calls during the years ended
December 31, 2018
and
2017
.
The fair value of held-to-maturity securities pledged to secure public deposits for the years ended
December 31, 2018
and
2017
was
$626,000
and
$789,000
, respectively. See also Note 7 to the Consolidated Financial Statements regarding securities pledged as collateral for Federal Home Loan Bank of New York advances.
Issuers may have the right to call or prepay obligations with or without call or prepayment penalties. This might cause actual maturities to differ from the contractual maturities.
Mortgage-backed securities are a type of asset-backed security secured by a mortgage or collection of mortgages, purchased by government agencies such as the Government National Mortgage Association and government sponsored agencies such as the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation, which then issue securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool. At year-end
2018
and
2017
, the Corporation had no holdings of securities of any one issuer other than the U.S. government and its agencies in an amount greater than 10% of shareholders' equity.
The following table presents the amortized cost and fair value of the debt securities portfolio by contractual maturity. As issuers may have the right to call or prepay obligations with or without call or prepayment premiums, the actual maturities may differ from contractual maturities. Securities not due at a single maturity date, such as mortgage-backed securities and asset-backed securities, are shown separately.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
|
(In thousands)
|
|
Available-for-sale
|
|
|
|
|
|
|
Within one year
|
$
|
1,543
|
|
|
$
|
1,528
|
|
|
After one year, but within five years
|
12,918
|
|
|
12,734
|
|
|
After five years, but within ten years
|
23,978
|
|
|
23,260
|
|
|
After ten years
|
4,367
|
|
|
4,204
|
|
|
Mortgage-backed securities
|
63,659
|
|
|
62,163
|
|
|
Asset-backed securities
|
4,916
|
|
|
4,922
|
|
|
Total
|
$
|
111,381
|
|
|
$
|
108,811
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
Within one year
|
$
|
335
|
|
|
$
|
336
|
|
|
After one year, but within five years
|
18,032
|
|
|
17,738
|
|
|
After five years, but within ten years
|
20,067
|
|
|
19,404
|
|
|
After ten years
|
488
|
|
|
461
|
|
|
Mortgage-backed securities
|
23,386
|
|
|
23,058
|
|
|
Total
|
$
|
62,308
|
|
|
$
|
60,997
|
|
The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at
December 31, 2018
and
2017
, and if the unrealized loss position was continuous for the twelve months prior to
December 31, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-
sponsored agencies
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,432
|
|
|
$
|
(498
|
)
|
|
$
|
17,432
|
|
|
$
|
(498
|
)
|
|
Obligations of state and
political subdivisions
|
—
|
|
|
—
|
|
|
3,121
|
|
|
(84
|
)
|
|
3,121
|
|
|
(84
|
)
|
|
Mortgage-backed
securities
|
4,177
|
|
|
(19
|
)
|
|
47,479
|
|
|
(1,545
|
)
|
|
51,656
|
|
|
(1,564
|
)
|
|
Asset-backed securities
|
2,892
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,892
|
|
|
—
|
|
|
Corporate debt
|
—
|
|
|
—
|
|
|
8,808
|
|
|
(561
|
)
|
|
8,808
|
|
|
(561
|
)
|
|
Total temporarily
impaired securities
|
$
|
7,069
|
|
|
$
|
(19
|
)
|
|
$
|
76,840
|
|
|
$
|
(2,688
|
)
|
|
$
|
83,909
|
|
|
$
|
(2,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-
sponsored agencies
|
$
|
8,260
|
|
|
$
|
(70
|
)
|
|
$
|
11,174
|
|
|
$
|
(326
|
)
|
|
$
|
19,434
|
|
|
$
|
(396
|
)
|
|
Obligations of state and political subdivisions
|
1,384
|
|
|
(7
|
)
|
|
1,781
|
|
|
(49
|
)
|
|
3,165
|
|
|
(56
|
)
|
|
Mortgage-backed securities
|
30,575
|
|
|
(201
|
)
|
|
26,809
|
|
|
(810
|
)
|
|
57,384
|
|
|
(1,011
|
)
|
|
Asset-backed securities
|
—
|
|
|
—
|
|
|
3,013
|
|
|
(4
|
)
|
|
3,013
|
|
|
(4
|
)
|
|
Corporate debt
|
—
|
|
|
—
|
|
|
9,135
|
|
|
(302
|
)
|
|
9,135
|
|
|
(302
|
)
|
|
Total temporarily
impaired securities
|
$
|
40,219
|
|
|
$
|
(278
|
)
|
|
$
|
51,912
|
|
|
$
|
(1,491
|
)
|
|
$
|
92,131
|
|
|
$
|
(1,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
985
|
|
|
$
|
(14
|
)
|
|
$
|
985
|
|
|
$
|
(14
|
)
|
|
U.S. government-
sponsored agencies
|
2,496
|
|
|
(9
|
)
|
|
24,595
|
|
|
(967
|
)
|
|
27,091
|
|
|
(976
|
)
|
|
Obligations of state and political subdivisions
|
—
|
|
|
—
|
|
|
461
|
|
|
(27
|
)
|
|
461
|
|
|
(27
|
)
|
|
Mortgage-backed
securities
|
5,885
|
|
|
(67
|
)
|
|
11,081
|
|
|
(308
|
)
|
|
16,966
|
|
|
(375
|
)
|
|
Total temporarily
impaired securities
|
$
|
8,381
|
|
|
$
|
(76
|
)
|
|
$
|
37,122
|
|
|
$
|
(1,316
|
)
|
|
$
|
45,503
|
|
|
$
|
(1,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Less than 12 Months
|
|
12 Months or Longer
|
|
Total
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
988
|
|
|
$
|
(11
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
988
|
|
|
$
|
(11
|
)
|
|
U.S. government-
sponsored agencies
|
10,032
|
|
|
(139
|
)
|
|
15,265
|
|
|
(621
|
)
|
|
25,297
|
|
|
(760
|
)
|
|
Obligations of state and political subdivisions
|
—
|
|
|
—
|
|
|
474
|
|
|
(23
|
)
|
|
474
|
|
|
(23
|
)
|
|
Mortgage-backed
securities
|
9,531
|
|
|
(114
|
)
|
|
3,896
|
|
|
(84
|
)
|
|
13,427
|
|
|
(198
|
)
|
|
Total temporarily
impaired securities
|
$
|
20,551
|
|
|
$
|
(264
|
)
|
|
$
|
19,635
|
|
|
$
|
(728
|
)
|
|
$
|
40,186
|
|
|
$
|
(992
|
)
|
Equity securities consist solely of a Community Reinvestment Act ("CRA") mutual fund. During 2018, the Corporation adopted Accounting Standards Update No. 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities. As a result of adoption, this fund was transferred from available for sale and reclassified into other equity investments on the Consolidated Statements of Financial Condition. In addition, the Corporation recorded an cumulative effect adjustment of
$163,000
as a reclassification from accumulated other
comprehensive loss to retained earnings. All future unrealized gains and losses are recognized in the Consolidated Statements of Income.
Other-Than-Temporary-Impairment
At
December 31, 2018
, there were available-for-sale investments comprising
twenty-one
U.S. government-sponsored agency securities,
seven
obligations of state and political subdivision securities,
seventy-three
mortgage-backed securities, and
nine
corporate debt securities in a continuous loss position for twelve months or longer. At
December 31, 2018
, there were held-to-maturity investments comprising
one
U.S. treasury,
twenty-six
U.S. government-sponsored agency securities,
one
obligation of state and political subdivision security, and
twenty-seven
mortgage-backed securities in a continuous loss position for twelve months or longer. Management has assessed the securities that were in an unrealized loss position at
December 31, 2018
and
2017
and determined that any decline in fair value below amortized cost primarily relate to changes in interest rates and market spreads and was temporary.
In making this determination management considered the following factors: the period of time the securities were in an unrealized loss position; the percentage decline in comparison to the securities’ amortized cost; any adverse conditions specifically related to the security, an industry or a geographic area; the rating or changes to the rating by a credit rating agency; the financial condition of the issuer and guarantor and any recoveries or additional declines in fair value subsequent to the balance sheet date.
Management does not intend to sell securities in an unrealized loss position and it is not more likely than not that the Corporation will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity.
Note 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
At
December 31, 2018
and
2017
, respectively, the loan portfolio consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Commercial:
|
|
|
|
|
|
|
Secured by real estate
|
$
|
28,790
|
|
|
$
|
31,684
|
|
|
Other
|
64,965
|
|
|
57,372
|
|
|
Commercial real estate
|
504,522
|
|
|
493,542
|
|
|
Commercial construction
|
9,787
|
|
|
2,152
|
|
|
Residential real estate
|
82,491
|
|
|
85,760
|
|
|
Consumer:
|
|
|
|
|
|
|
Secured by real estate
|
36,120
|
|
|
32,207
|
|
|
Other
|
455
|
|
|
563
|
|
|
Government Guaranteed Loans - guaranteed portion
|
6,559
|
|
|
8,334
|
|
|
Other
|
98
|
|
|
106
|
|
|
Total gross loans
|
733,787
|
|
|
711,720
|
|
|
|
|
|
|
|
Less: Deferred loan costs, net
|
457
|
|
|
397
|
|
|
Allowance for loan losses
|
7,926
|
|
|
8,762
|
|
|
|
8,383
|
|
|
9,159
|
|
|
|
|
|
|
|
Loans, net
|
$
|
725,404
|
|
|
$
|
702,561
|
|
Included in Commercial - Other and Commercial real estate were
$170,000
and
$3,561,000
, respectively, of Small Business Administration ("SBA") loans originated during 2018. The guaranteed portion of these loans were sold during the year ended December 31, 2018.
In addition to the origination of SBA loans, prior to 2017, the Corporation purchased the guaranteed portion of several Government Guaranteed loans. These loans are listed separately in the table above. Due to the guarantee of the principal amount of these loans, no allowance for loan losses is established for these loans.
The Corporation has entered into lending transactions with directors, executive officers and principal shareholders of the Corporation and their affiliates. At
December 31, 2018
and
2017
, these loans aggregated approximately
$3,038,000
and
$3,248,000
, respectively. During the year ended
December 31, 2018
, new loans totaling
$2,126,000
were granted and repayments totaled approximately
$1,461,000
. Additionally,
one
loan relationship in the amount of
$874,000
is no longer included in the December 31, 2018 balance as the director is no longer affiliated with this borrower as they had been previously. The loans, at
December 31, 2018
and 2017, were current as to principal and interest payments.
Excluded from the above table are
$14.3 million
and
$11.4 million
of unpaid principal balances of loans serviced for others at December 31, 2018 and 2017, respectively.
Activity in the allowance for loan losses is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
Balance
beginning of
period
|
|
Provision
charged to
operations
|
|
Loans
charged-off
|
|
Recoveries
of loans
charged-off
|
|
Balance
end of
period
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
3,058
|
|
|
$
|
(468
|
)
|
|
$
|
(29
|
)
|
|
$
|
142
|
|
|
$
|
2,703
|
|
|
Commercial real estate
|
5,531
|
|
|
(1,249
|
)
|
|
—
|
|
|
665
|
|
|
4,947
|
|
|
Commercial construction
|
33
|
|
|
98
|
|
|
—
|
|
|
—
|
|
|
131
|
|
|
Residential real estate
|
68
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
65
|
|
|
Consumer
|
64
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
68
|
|
|
Other
|
1
|
|
|
1
|
|
|
(2
|
)
|
|
1
|
|
|
1
|
|
|
Unallocated
|
7
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
Balance, ending
|
$
|
8,762
|
|
|
$
|
(1,615
|
)
|
|
$
|
(31
|
)
|
|
$
|
810
|
|
|
$
|
7,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
Balance
beginning of
period
|
|
Provision
charged to
operations
|
|
Loans
charged-off
|
|
Recoveries
of loans
charged-off
|
|
Balance
end of
period
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
2,663
|
|
|
$
|
301
|
|
|
$
|
(3
|
)
|
|
$
|
97
|
|
|
$
|
3,058
|
|
|
Commercial real estate
|
4,734
|
|
|
697
|
|
|
—
|
|
|
100
|
|
|
5,531
|
|
|
Commercial construction
|
355
|
|
|
(322
|
)
|
|
—
|
|
|
—
|
|
|
33
|
|
|
Residential real estate
|
66
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
68
|
|
|
Consumer
|
75
|
|
|
(19
|
)
|
|
—
|
|
|
8
|
|
|
64
|
|
|
Other
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
1
|
|
|
1
|
|
|
Unallocated
|
12
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
7
|
|
|
Balance, ending
|
$
|
7,905
|
|
|
$
|
655
|
|
|
$
|
(4
|
)
|
|
$
|
206
|
|
|
$
|
8,762
|
|
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Commercial
|
|
Commercial
Real Estate
|
|
Commercial
Construction
|
|
Residential
Real Estate
|
|
Consumer
|
|
Government
Guaranteed
|
|
Other
Loans
|
|
Unallocated
|
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for
impairment
|
$
|
88
|
|
|
$
|
561
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
649
|
|
|
Collectively evaluated for impairment
|
2,615
|
|
|
4,386
|
|
|
131
|
|
|
65
|
|
|
68
|
|
|
—
|
|
|
1
|
|
|
11
|
|
|
7,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance balance
|
$
|
2,703
|
|
|
$
|
4,947
|
|
|
$
|
131
|
|
|
$
|
65
|
|
|
$
|
68
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
11
|
|
|
$
|
7,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
$
|
633
|
|
|
$
|
6,079
|
|
|
$
|
—
|
|
|
$
|
576
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,288
|
|
|
Loans collectively evaluated for impairment
|
93,122
|
|
|
498,443
|
|
|
9,787
|
|
|
81,915
|
|
|
36,575
|
|
|
6,559
|
|
|
98
|
|
|
—
|
|
|
726,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loan balance
|
$
|
93,755
|
|
|
$
|
504,522
|
|
|
$
|
9,787
|
|
|
$
|
82,491
|
|
|
$
|
36,575
|
|
|
$
|
6,559
|
|
|
$
|
98
|
|
|
$
|
—
|
|
|
$
|
733,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Commercial
|
|
Commercial
Real Estate
|
|
Commercial
Construction
|
|
Residential
Real Estate
|
|
Consumer
|
|
Government
Guaranteed
|
|
Other
Loans
|
|
Unallocated
|
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for
impairment
|
$
|
34
|
|
|
$
|
575
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
609
|
|
|
Collectively evaluated for impairment
|
3,024
|
|
|
4,956
|
|
|
33
|
|
|
68
|
|
|
64
|
|
|
—
|
|
|
1
|
|
|
7
|
|
|
8,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance balance
|
$
|
3,058
|
|
|
$
|
5,531
|
|
|
$
|
33
|
|
|
$
|
68
|
|
|
$
|
64
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
7
|
|
|
$
|
8,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
$
|
549
|
|
|
$
|
6,236
|
|
|
$
|
—
|
|
|
$
|
295
|
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,142
|
|
|
Loans collectively evaluated for impairment
|
88,507
|
|
|
487,306
|
|
|
2,152
|
|
|
85,465
|
|
|
32,708
|
|
|
8,334
|
|
|
106
|
|
|
—
|
|
|
704,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loan balance
|
$
|
89,056
|
|
|
$
|
493,542
|
|
|
$
|
2,152
|
|
|
$
|
85,760
|
|
|
$
|
32,770
|
|
|
$
|
8,334
|
|
|
$
|
106
|
|
|
$
|
—
|
|
|
$
|
711,720
|
|
The following table presents the recorded investment in nonaccrual loans at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Commercial:
|
|
|
|
|
|
|
Secured by real estate
|
$
|
394
|
|
|
$
|
136
|
|
|
Commercial real estate
|
574
|
|
|
701
|
|
|
Residential real estate
|
576
|
|
|
295
|
|
|
Consumer:
|
|
|
|
|
|
|
Secured by real estate
|
—
|
|
|
62
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
$
|
1,544
|
|
|
$
|
1,194
|
|
At
December 31, 2018
and
2017
there were
no
loans that were past due 90 days and still accruing.
The following table presents loans individually evaluated for impairment by class of loans at and for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At And For The Year Ended December 31, 2018
|
|
|
Unpaid
Principal
Balance
|
|
Recorded
Investment
|
|
Allowance
for Loan
Losses
Allocated
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
|
(In thousands)
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
$
|
447
|
|
|
$
|
416
|
|
|
|
|
|
$
|
455
|
|
|
$
|
11
|
|
|
Commercial real estate
|
3,329
|
|
|
3,001
|
|
|
|
|
|
3,061
|
|
|
108
|
|
|
Residential real estate
|
587
|
|
|
576
|
|
|
|
|
|
343
|
|
|
—
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
—
|
|
|
—
|
|
|
|
|
|
28
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
95
|
|
|
95
|
|
|
$
|
83
|
|
|
65
|
|
|
3
|
|
|
Other
|
122
|
|
|
122
|
|
|
5
|
|
|
125
|
|
|
9
|
|
|
Commercial real estate
|
3,078
|
|
|
3,078
|
|
|
561
|
|
|
3,095
|
|
|
161
|
|
|
Total impaired loans
|
$
|
7,658
|
|
|
$
|
7,288
|
|
|
$
|
649
|
|
|
$
|
7,172
|
|
|
$
|
292
|
|
During the year ended
December 31, 2018
, no interest income was recognized on a cash basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At And For The Year Ended December 31, 2017
|
|
|
Unpaid
Principal
Balance
|
|
Recorded
Investment
|
|
Allowance
for Loan
Losses
Allocated
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
|
|
(In thousands)
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
$
|
389
|
|
|
$
|
389
|
|
|
|
|
|
$
|
964
|
|
|
$
|
70
|
|
|
Commercial real estate
|
3,442
|
|
|
3,124
|
|
|
|
|
|
3,148
|
|
|
121
|
|
|
Residential real estate
|
295
|
|
|
295
|
|
|
|
|
|
59
|
|
|
—
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
71
|
|
|
62
|
|
|
|
|
|
70
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
33
|
|
|
32
|
|
|
$
|
27
|
|
|
45
|
|
|
—
|
|
|
Other
|
128
|
|
|
128
|
|
|
7
|
|
|
171
|
|
|
12
|
|
|
Commercial real estate
|
3,112
|
|
|
3,112
|
|
|
575
|
|
|
3,144
|
|
|
128
|
|
|
Total impaired loans
|
$
|
7,470
|
|
|
$
|
7,142
|
|
|
$
|
609
|
|
|
$
|
7,601
|
|
|
$
|
331
|
|
During the year ended
December 31, 2017
, no interest income was recognized on a cash basis.
The following table presents the aging of the recorded investment in past due loans by class of loans as of
December 31, 2018
and
2017
. Nonaccrual loans are included in the disclosure by payment status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
Greater than
90 Days
Past Due
|
|
Total Past
Due
|
|
Loans Not
Past Due
|
|
Total
|
|
|
(In thousands)
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
394
|
|
|
$
|
394
|
|
|
$
|
28,396
|
|
|
$
|
28,790
|
|
|
Other
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
64,959
|
|
|
64,965
|
|
|
Commercial real estate
|
2,155
|
|
|
—
|
|
|
509
|
|
|
2,664
|
|
|
501,858
|
|
|
504,522
|
|
|
Commercial construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,787
|
|
|
9,787
|
|
|
Residential real estate
|
112
|
|
|
42
|
|
|
308
|
|
|
462
|
|
|
82,029
|
|
|
82,491
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36,120
|
|
|
36,120
|
|
|
Other
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
454
|
|
|
455
|
|
|
Government Guaranteed Loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,559
|
|
|
6,559
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
98
|
|
|
98
|
|
|
Total
|
$
|
2,274
|
|
|
$
|
42
|
|
|
$
|
1,211
|
|
|
$
|
3,527
|
|
|
$
|
730,260
|
|
|
$
|
733,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
Greater than
90 Days
Past Due
|
|
Total Past
Due
|
|
Loans Not
Past Due
|
|
Total
|
|
|
(In thousands)
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
$
|
186
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
186
|
|
|
$
|
31,498
|
|
|
$
|
31,684
|
|
|
Other
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
57,364
|
|
|
57,372
|
|
|
Commercial real estate
|
300
|
|
|
—
|
|
|
599
|
|
|
899
|
|
|
492,643
|
|
|
493,542
|
|
|
Commercial construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,152
|
|
|
2,152
|
|
|
Residential real estate
|
314
|
|
|
—
|
|
|
—
|
|
|
314
|
|
|
85,446
|
|
|
85,760
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
—
|
|
|
—
|
|
|
28
|
|
|
28
|
|
|
32,179
|
|
|
32,207
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
563
|
|
|
563
|
|
|
Government Guaranteed Loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,334
|
|
|
8,334
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
106
|
|
|
106
|
|
|
Total
|
$
|
808
|
|
|
$
|
—
|
|
|
$
|
627
|
|
|
$
|
1,435
|
|
|
$
|
710,285
|
|
|
$
|
711,720
|
|
Troubled Debt Restructurings
In order to determine whether a borrower is experiencing financial difficulty necessitating a restructuring, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Corporation’s internal underwriting policy. A loan is considered to be in payment default once it is contractually 90 days past due.
At
December 31, 2018
and
2017
, the Corporation had
$6.3 million
and
$6.6 million
, respectively, of loans whose terms have been modified in troubled debt restructurings. Of these loans,
$5.7 million
and
$5.9 million
had demonstrated a reasonable period of performance in accordance with their new terms at
December 31, 2018
and
2017
, respectively, and are, therefore, accruing loans. The remaining troubled debt restructurings are reported as nonaccrual loans. Specific reserves of
$649,000
and
$582,000
have been recorded for the troubled debt restructurings at
December 31, 2018
and
2017
, respectively, and are included in the table above. As of December 31, 2018 and December 31, 2017, there were
no
additional funds committed to these borrowers.
The following table presents the number of loans and their recorded investment immediately prior to the modification date and immediately after the modification date by class that were modified as troubled debt restructurings during the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Number
of
Loans
|
|
Pre-
Modification
Recorded
Investment
|
|
Post-
Modification
Recorded
Investment
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
1
|
|
|
$
|
95
|
|
|
$
|
95
|
|
|
Total
|
1
|
|
|
$
|
95
|
|
|
$
|
95
|
|
During the year ended December 31, 2018, there was
one
loan modified as a troubled debt restructuring. The modification of the terms of the commercial - secured by real estate loan represented the term out of the remaining balance of a line of credit.
For the year ended December 31, 2018, the troubled debt restructuring described above resulted in an increase in the allowance for loan losses of
$83,000
. There were
no
charge-offs during the twelve months ended December 31, 2018 related to this troubled debt restructuring.
There were
no
new loans classified as troubled debt restructuring during the year ended December 31, 2017.
For the years ended
December 31, 2018
and
2017
, there was a net increase in the allowance for loan losses of
$67,000
and decrease of
$28,000
, respectively, related to troubled debt restructurings. There were
no
charge-offs in
2018
or
2017
related to these troubled debt restructurings.
There were no loans modified as TDRs within the previous 12 months from both December 31, 2018 and 2017, which had a payment default (90 days or more past due) during the years ended December 31, 2018 and 2017.
TDRs that subsequently default are considered collateral dependent impaired loans and are evaluated for impairment based on the estimated fair value of the underlying collateral less expected selling costs.
Credit Quality Indicators
The Corporation categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public
information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial, commercial real estate and commercial construction loans. This analysis is performed at the time the loan is originated and annually thereafter. The Corporation uses the following definitions for risk ratings.
Special Mention
– A Special Mention asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or the Bank’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.
Substandard
– Substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the repayment and liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful
– A Doubtful loan has all of the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable or improbable. The likelihood of loss is extremely high, but because of certain important and reasonably specific factors, an estimated loss is deferred until a more exact status can be determined.
Loss
– A loan classified Loss is considered uncollectible and of such little value that its continuance as an asset is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off a basically worthless asset even though partial recovery may be affected in the future.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of
December 31, 2018
and
2017
, and based on the most recent analysis performed at those times, the risk category of loans by class is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Pass
|
|
Special
Mention
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
Total
|
|
|
(In thousands)
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
$
|
26,879
|
|
|
$
|
1,234
|
|
|
$
|
677
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,790
|
|
|
Other
|
63,438
|
|
|
181
|
|
|
1,346
|
|
|
—
|
|
|
—
|
|
|
64,965
|
|
|
Commercial real estate
|
490,661
|
|
|
7,086
|
|
|
6,775
|
|
|
—
|
|
|
—
|
|
|
504,522
|
|
|
Commercial construction
|
9,787
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,787
|
|
|
Government Guaranteed
Loans guaranteed
portion
|
6,559
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,559
|
|
|
Total
|
$
|
597,324
|
|
|
$
|
8,501
|
|
|
$
|
8,798
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
614,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Pass
|
|
Special
Mention
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
Total
|
|
|
(In thousands)
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
$
|
29,025
|
|
|
$
|
2,153
|
|
|
$
|
506
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,684
|
|
|
Other
|
56,632
|
|
|
216
|
|
|
524
|
|
|
—
|
|
|
—
|
|
|
57,372
|
|
|
Commercial real estate
|
481,443
|
|
|
10,023
|
|
|
2,076
|
|
|
—
|
|
|
—
|
|
|
493,542
|
|
|
Commercial construction
|
2,152
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,152
|
|
|
Government Guaranteed
Loans guaranteed
portion
|
8,334
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,334
|
|
|
Total
|
$
|
577,586
|
|
|
$
|
12,392
|
|
|
$
|
3,106
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
593,084
|
|
The Corporation considers the historical and projected performance of the loan portfolio and its impact on the allowance for loan losses. For residential real estate and consumer loan segments, the Corporation evaluates credit quality primarily based on payment activity and historical loss data. The following table presents the recorded investment in residential real estate and consumer loans based on payment activity as of
December 31, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Current
|
|
30+ Days Past Due or
Nonaccrual
|
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Residential real estate
|
$
|
81,761
|
|
|
$
|
730
|
|
|
$
|
82,491
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
36,120
|
|
|
—
|
|
|
36,120
|
|
|
Other
|
454
|
|
|
1
|
|
|
455
|
|
|
Total
|
$
|
118,335
|
|
|
$
|
731
|
|
|
$
|
119,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Current
|
|
30+ Days Past Due or
Nonaccrual
|
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Residential real estate
|
$
|
85,446
|
|
|
$
|
314
|
|
|
$
|
85,760
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
Secured by real estate
|
32,179
|
|
|
28
|
|
|
32,207
|
|
|
Other
|
563
|
|
|
—
|
|
|
563
|
|
|
Total
|
$
|
118,188
|
|
|
$
|
342
|
|
|
$
|
118,530
|
|
Note 4. PREMISES AND EQUIPMENT, NET
The balance of premises and equipment consists of the following at
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
Land
|
$
|
3,240
|
|
|
$
|
3,240
|
|
|
Buildings and improvements
|
4,654
|
|
|
4,505
|
|
|
Leasehold improvements
|
1,925
|
|
|
1,923
|
|
|
Furniture, fixtures, and equipment
|
2,027
|
|
|
1,605
|
|
|
|
11,846
|
|
|
11,273
|
|
|
Less: accumulated depreciation and amortization
|
4,839
|
|
|
4,364
|
|
|
Total premises & equipment, net
|
$
|
7,007
|
|
|
$
|
6,909
|
|
Amounts charged to net occupancy expense for depreciation and amortization of banking premises and equipment amounted to
$475,000
and
$399,000
in
2018
and
2017
, respectively.
Note 5. OTHER REAL ESTATE OWNED
There was
no
other real estate owned at the years ended
December 31, 2018
and
2017
.
There was
no
activity in the allowance for losses on other real estate owned for the year ended December 31, 2018. Activity in the allowance for losses on other real estate owned for the year ended December 31, 2017 was as follows:
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
(In thousands)
|
|
|
|
|
Beginning of year
|
$
|
3
|
|
|
Additions charged to expense
|
—
|
|
|
Reductions from sales of other real estate owned
|
(3
|
)
|
|
End of year
|
$
|
—
|
|
There was
no
gain on sale of other real estate owned for the year ended
December 31, 2018
. Net gain on sale of other real estate owned totaled
$13,000
for the year ended
December 31, 2017
.
There were
no
other real estate owned expenses for the year ended
December 31, 2018
. Expenses related to other real estate owned for the year ended
December 31, 2017
include:
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
(In thousands)
|
|
|
|
|
Provision for unrealized losses
|
$
|
—
|
|
|
Operating expenses, net of rental income
|
24
|
|
|
End of year
|
$
|
24
|
|
Note 6. DEPOSITS
The following table presents deposits at December 31,
2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
Noninterest-bearing demand
|
$
|
174,717
|
|
|
$
|
172,861
|
|
|
|
|
|
|
|
Interest-bearing checking accounts
|
175,215
|
|
|
196,924
|
|
|
Money market accounts
|
149,936
|
|
|
110,256
|
|
|
Total interest-bearing demand
|
325,151
|
|
|
307,180
|
|
|
|
|
|
|
|
Statement savings and clubs
|
71,472
|
|
|
77,284
|
|
|
Business savings
|
5,273
|
|
|
5,830
|
|
|
Total savings
|
76,745
|
|
|
83,114
|
|
|
|
|
|
|
|
IRA investment and variable rate savings
|
31,876
|
|
|
33,236
|
|
|
Brokered certificates
|
37,063
|
|
|
25,944
|
|
|
Money market certificates
|
136,539
|
|
|
141,764
|
|
|
Total certificates of deposit
|
205,478
|
|
|
200,944
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
607,374
|
|
|
591,238
|
|
|
Total deposits
|
$
|
782,091
|
|
|
$
|
764,099
|
|
Certificates of deposit with balances of $250,000 or more at
December 31, 2018
and
2017
, totaled
$59,421,000
and
$42,810,000
, respectively.
The scheduled maturities of certificates of deposit were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
Balances
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
115,418
|
|
|
|
2020
|
|
45,973
|
|
|
|
2021
|
|
34,421
|
|
|
|
2022
|
|
7,132
|
|
|
|
2023
|
|
2,534
|
|
|
|
|
|
$
|
205,478
|
|
The following table presents interest expense on deposits at December 31,
2018
and
2017
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
Total interest bearing demand
|
$
|
2,147
|
|
|
$
|
709
|
|
|
Total savings
|
83
|
|
|
91
|
|
|
Total certificates of deposit
|
3,063
|
|
|
2,389
|
|
|
Total interest expense
|
$
|
5,293
|
|
|
$
|
3,189
|
|
Deposits from executive officers and directors at December 31, 2018 and 2017 were
$3,627,000
and
$3,793,000
, respectively.
Note 7. BORROWINGS
Federal Home Loan Bank of New York Advances
The following table presents Federal Home Loan Bank of New York ("FHLB-NY") advances by maturity date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Advances Maturing
|
|
Amount
|
|
Weighted
Average Rate
|
|
Amount
|
|
Weighted
Average Rate
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
45,700
|
|
|
1.99
|
%
|
|
$
|
20,760
|
|
|
1.59
|
%
|
|
After one year, but within two years
|
|
5,000
|
|
|
1.88
|
%
|
|
33,000
|
|
|
1.76
|
%
|
|
After two years, but within three years
|
|
5,000
|
|
|
1.68
|
%
|
|
5,000
|
|
|
1.88
|
%
|
|
After three years, but within four years
|
|
—
|
|
|
—
|
%
|
|
5,000
|
|
|
1.68
|
%
|
|
After four years, but within five years
|
|
10,000
|
|
|
3.25
|
%
|
|
—
|
|
|
—
|
%
|
|
Total advances maturing
|
|
$
|
65,700
|
|
|
2.15
|
%
|
|
$
|
63,760
|
|
|
1.71
|
%
|
During
2018
and
2017
, the maximum amount of FHLB-NY advances outstanding at any month end was
$65.8 million
and
$93.8 million
, respectively. The average amount of advances outstanding during the years ended
December 31, 2018
and
2017
was
$52.4 million
and
$74.4 million
, respectively.
Advances from the FHLB-NY are all fixed rate borrowings and are secured by a blanket assignment of the Corporation's unpledged, qualifying residential first mortgage loans, by select commercial real estate loans and by certain securities. The loans remain under the control of the Corporation. Securities are maintained in safekeeping with the FHLB-NY. As of
December 31, 2018
and
2017
, the advances were collateralized by
$68.2 million
and
$73.0 million
, respectively, of residential first mortgage loans under the blanket lien arrangement and by
$44.1 million
and
$49.3 million
of investment securities, respectively. Additionally, as of
December 31, 2018
, the advances were collateralized by
$37.8 million
of select commercial real estate loans pledged to the FHLB-NY. Based on the collateral, the Corporation was eligible to borrow up to a total of
$150.2 million
at
December 31, 2018
and
$122.3 million
at
December 31, 2017
.
The Corporation has the ability to borrow overnight with the FHLB-NY. As of
December 31, 2018
, overnight borrowings with the FHLB-NY were
$12.7 million
. There were
no
overnight borrowings with the FHLB-NY as of
December 31, 2017
. The overall borrowing capacity is contingent on available collateral to secure borrowings and the ability to purchase additional activity-based capital stock of the FHLB-NY.
The Corporation may also borrow from the Discount Window of the Federal Reserve Bank of New York based on the market value of collateral pledged. At
December 31, 2018
and
2017
, the Corporation’s borrowing capacity at the Discount Window was
$3.3 million
and
$4.7 million
, respectively. In addition, at both
December 31, 2018
and
2017
the Corporation had available overnight variable repricing lines of credit with other correspondent banks totaling
$38.0 million
, on an unsecured basis. There were
no
borrowings under these lines of credit at
December 31, 2018
and
2017
.
Note 8. SUBORDINATED DEBENTURES AND SUBORDINATED NOTES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
|
|
|
|
|
December 31,
|
|
Issue
|
|
Maturity
|
|
Rate
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
9/17/2003
|
|
9/17/2033
|
|
Fixed / Floating Rate Junior Subordinated Debentures
|
|
$
|
7,217
|
|
|
$
|
7,217
|
|
|
8/28/2015
|
|
8/25/2025
|
|
Fixed Rate Subordinated Notes
|
|
16,165
|
|
|
16,100
|
|
|
|
|
|
|
Total
|
|
$
|
23,382
|
|
|
$
|
23,317
|
|
In 2003, the Corporation formed Stewardship Statutory Trust I (the “Trust”), a statutory business trust, which on September 17, 2003 issued
$7.0 million
Fixed/Floating Rate Capital Securities (“Capital Securities”). The Trust used the proceeds of the Capital Securities to purchase from the Corporation,
$7,217,000
of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”) maturing September 17, 2033. The Trust is obligated to distribute all proceeds of a redemption whether voluntary or upon maturity, to holders of the Capital Securities. The Corporation’s obligation with respect to the Capital Securities and the Subordinated Debentures, when taken together, provide a full and unconditional guarantee on a subordinated basis by the Corporation of the Trust’s obligations to pay amounts when due on the Capital Securities. The Corporation is not considered the primary beneficiary of the Trust (variable interest entity); therefore, the Trust is not consolidated in the Corporation’s consolidated financial statements, but rather the Subordinated Debentures are shown as a liability. Prior to September 17, 2008, the Capital Securities and the Subordinated Debentures both had a fixed interest rate of
6.75%
. Beginning September 17, 2008, the rate floats quarterly at a rate of
three month LIBOR
plus
2.95%
. At
December 31, 2018
and
2017
, the rate on both the Capital Securities and the Subordinated Debentures was
5.74%
and
4.55%
, respectively. The Corporation has the right to defer payments of interest on the Subordinated Debentures by extending the interest payment period for up to
20
consecutive quarterly periods. The Subordinated Debentures may be included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.
On August 28, 2015, the Corporation completed a private placement of
$16.6 million
in aggregate principal amount of fixed rate subordinated notes (the “Subordinated Notes”) to certain institutional accredited investors pursuant to a Subordinated Note Purchase Agreement dated August 28, 2015 between the Corporation and such investors. The Subordinated Notes have a maturity date of August 28, 2025 and bear interest at the rate of
6.75%
per annum, payable semi-annually, in arrears, on March 1 and September 1 of each year during the time that the Subordinated Notes remain outstanding. The Subordinated Notes include a right of prepayment, without penalty, on or after August 28, 2020 and, in certain limited circumstances, before that date. The indebtedness evidenced by the Subordinated Notes, including principal and interest, is unsecured and subordinate and junior in right of the Corporation's payment to general and secured creditors and depositors of the Bank. The Subordinated Notes have been structured to qualify as Tier 2 capital for regulatory purposes. The Subordinated Notes totaled
$16.2 million
and
$16.1 million
at
December 31, 2018
and
2017
, respectively, which includes
$435,000
and
$500,000
, respectively, of remaining unamortized debt issuance costs. The debt issuance costs are being amortized over the expected life of the issue.
Note 9. REGULATORY CAPITAL REQUIREMENTS
The Corporation is subject to capital adequacy guidelines promulgated by the Board of Governors of the Federal Reserve System (“FRB Board”). The Bank is subject to somewhat comparable but different capital adequacy requirements imposed by the Federal Deposit Insurance Corporation (the “FDIC”). The federal banking agencies have adopted risk-based capital guidelines for banks and bank holding companies. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
Federal banking regulators have also adopted leverage capital guidelines to supplement the risk-based measures. Leverage capital to average total assets is determined by dividing Tier 1 Capital as defined under the risk-based capital guidelines by average total assets (non-risk adjusted).
Guidelines for Banks
In December 2010 and January 2011, the Basel Committee on Banking Supervision (the “Basel Committee”) published the final texts of reforms on capital and liquidity, which are generally referred to as “Basel III”. The Basel Committee is a committee of central banks and bank supervisors and regulators from the major industrialized countries that develops broad policy guidelines for the regulation of banks and bank holding companies. In July 2013, the FDIC and the other federal bank regulatory agencies adopted final rules (the “Basel Rules”) to implement certain provisions of Basel III and the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Basel Rules revised the leverage and risk-based capital requirements and the methods for calculating risk-weighted assets. The Basel Rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $1 billion or more and top-tier savings and loan holding companies.
Among other things, the Basel Rules (a) established a new common equity Tier 1 Capital (“CET1”) to risk-weighted assets ratio minimum of
4.5%
of risk-weighted assets, (b) raised the minimum Tier 1 Capital to risk-based assets requirement (“Tier 1 Capital Ratio) from 4% to
6%
of risk-weighted assets and (c) assigned a higher risk weight of 150% to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities. The minimum ratio of Total Capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least
6%
of the Total Capital is required to be “Tier 1 Capital”, which consists of common shareholders’ equity and certain preferred stock, less certain items and other intangible assets. The remainder, “Tier 2 Capital,” may consist of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b) excess of qualifying preferred stock, (c) hybrid capital instruments, (d) debt, (e) mandatory convertible securities and (f) qualifying subordinated debt. “Total Capital” is the sum of Tier 1 Capital and Tier 2 Capital less reciprocal holdings of other banking organizations’ capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the federal banking regulatory agencies on a case-by-case basis or as a matter of policy after formal rule-making. A small bank holding company that has the highest regulatory examination rating and is not contemplating significant growth or expansion must maintain a minimum level of Tier 1 Capital to average total consolidated assets leverage ratio of at least 3%. All other bank holding companies are expected to maintain a leverage ratio of at least 100 to 200 basis points above the stated minimum.
The Basel Rules also require unrealized gains and losses on certain available-for-sale securities to be included for purposes of calculating regulatory capital unless a one-time opt-out was exercised. Additional constraints are also imposed on the inclusion in regulatory capital of mortgage-servicing assets and deferred tax assets. The Basel Rules limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of CET1 to risk-weighted assets in addition to the amount necessary to meet a minimum risk-based capital requirement. The purpose of the capital conservation buffer is to ensure that banking organizations conserve capital when it is needed most, allowing them to weather periods of economic stress. Banking institutions with a CET1 Ratio, Tier 1 Capital Ratio or Total Capital Ratio above the minimum capital ratios but below the minimum capital ratios plus the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers based on the amount of the shortfall. The Basel Rules became effective for the Bank on January 1, 2015. The capital conservation buffer requirement of 0.625% became effective January 1, 2016 and was phased in annually through January 1, 2019, when the full capital conservation buffer requirement of 2.50% became effective. At
December 31, 2018
, the Bank's capital conservation buffer requirement was 1.875% and the actual capital conservation buffer was
5.54%
.
Bank assets are given risk-weights of 0%, 20%, 50%, 100%, and 150%. In addition, certain off-balance sheet items are given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for performing first mortgage loans fully secured by residential property which carry a 50% risk-weighting. Loan exposures past due 90 days or more or on nonaccrual are assigned a risk-weighting of at least 100%. High volatility commercial real estate ("HVCRE") loan exposures are assigned to the 150% category; provided, however,
Section 214 of the Economic Growth Act, prohibits federal banking agencies from requiring the financial institution to assign heightened risk weights to HVCRE loans unless the loan is related to real estate acquisition, development and construction (“HVCRE ADC”). Under the Basel III capital rules, HVCRE ADC loans are assigned a higher risk weight than other commercial real estate loans. Most investment securities (including, primarily, general obligation claims of states or other political subdivisions of the United States) are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury or obligations backed by the full faith and credit of the U.S. government, which have a 0% risk-weight. In converting off-balance sheet items, direct credit substitutes, including general guarantees and standby letters of credit backing nonfinancial obligations, and undrawn commitments (including commercial credit lines with an initial maturity of more than one year) have a 50% risk-weighting. Short-term undrawn commitments and commercial letters of credit with an initial maturity of under one year have a 50% risk-weighting and certain short-term unconditionally cancelable commitments are not risk-weighted.
Community Bank Leverage Ratio
The recently enacted Economic Growth Act requires federal banking agencies to develop a “community bank leverage ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under prompt corrective action rules. The federal banking agencies may consider an institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The minimum capital for the new community bank leverage ratio must be set at not less than 8% and not more than 10%. A financial institution can elect to be subject to this new definition. The Economic Growth Act requires the federal banking agencies to consult with state banking regulators and notify the applicable state banking regulator of any qualifying community bank that exceeds or no longer exceeds the Community Bank Leverage Ratio.
Guidelines for Small Bank Holding Companies
The Dodd-Frank Act required the FRB to establish for all bank and savings and loan holding companies minimum consolidated capital requirements that are as stringent as those required for the insured depository subsidiaries. The FRB has updated and amended its Small Bank Holding Company Policy Statement to extend to bank and savings and loan holding companies the applicability of the “Small Bank Holding Company” exception to its consolidated capital requirements and, as a result of the Economic Growth Act, increased the threshold for the exception from $1.0 billion in consolidated assets to $3.0 billion in consolidated assets. As a result of the revised Small Bank Holding Company Policy Statement, Basel III capital rules and reporting requirements do not apply to small bank holding companies (“SBHC”), such as the Corporation, that have total consolidated assets of less than $3 billion unless otherwise advised by the FRB. The minimum risk-based capital requirements for a SBHC to be considered adequately capitalized are 4% for Tier 1 Capital and 8% for Total Capital to risk-weighted assets.
The regulations for SBHCs classify risk-based capital into two categories: “Tier 1 Capital” which consists of common and qualifying perpetual preferred shareholders’ equity less goodwill and other intangibles and “Tier 2 Capital” which consists of (a) the allowance for loan losses of up to 1.25% of risk-weighted assets, (b) the excess of qualifying preferred stock, (c) hybrid capital instruments, (d) debt, (e) mandatory convertible securities and (f) qualifying subordinated debt. Total qualifying capital consists of Tier 1 Capital and Tier 2 Capital less reciprocal holdings of other banking organizations’ capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the FRB on a case-by-case basis or as a matter of policy after formal rule-making. However, the amount of Tier 2 Capital may not exceed the amount of Tier 1 Capital. The Corporation must maintain a minimum level of Tier 1 Capital to average total consolidated assets leverage ratio of 3%, which is the leverage ratio reserved for top-tier bank holding companies having the highest regulatory examination rating and not contemplating significant growth or expansion.
Bank holding company assets are given risk-weights of 0%, 20%, 50%, and 100%. In addition, certain off-balance sheet items are given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Required for Capital
Adequacy Purposes
|
|
To Be Well Capitalized
Under Prompt Corrective
Action Regulations
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in thousands)
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
$
|
89,086
|
|
|
9.33
|
%
|
|
$
|
38,213
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
99,761
|
|
|
10.49
|
%
|
|
38,032
|
|
|
4.00
|
%
|
|
$
|
47,540
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
99,761
|
|
|
12.54
|
%
|
|
35,798
|
|
|
4.50
|
%
|
|
51,708
|
|
|
6.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
89,086
|
|
|
11.33
|
%
|
|
31,461
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
99,761
|
|
|
12.54
|
%
|
|
47,731
|
|
|
6.00
|
%
|
|
63,641
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
113,178
|
|
|
14.39
|
%
|
|
62,922
|
|
|
8.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
107,687
|
|
|
13.54
|
%
|
|
63,641
|
|
|
8.00
|
%
|
|
79,551
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Leverage ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
$
|
81,886
|
|
|
8.88
|
%
|
|
$
|
36,867
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
92,824
|
|
|
10.12
|
%
|
|
36,698
|
|
|
4.00
|
%
|
|
$
|
45,872
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-based capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
92,824
|
|
|
12.24
|
%
|
|
34,113
|
|
|
4.50
|
%
|
|
49,274
|
|
|
6.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
81,886
|
|
|
10.96
|
%
|
|
29,889
|
|
|
4.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
92,824
|
|
|
12.24
|
%
|
|
45,484
|
|
|
6.00
|
%
|
|
60,645
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
106,748
|
|
|
14.29
|
%
|
|
59,777
|
|
|
8.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Bank
|
101,586
|
|
|
13.40
|
%
|
|
60,645
|
|
|
8.00
|
%
|
|
75,807
|
|
|
10.00
|
%
|
As presented above, at
December 31, 2018
and
2017
, the Bank’s regulatory capital ratios exceeded the established minimum capital requirements.
The Subordinated Notes have been structured to qualify as Tier 2 capital for regulatory purposes.
Note 10. BENEFIT PLANS
The Corporation has a 401(k) plan which covers all eligible employees. Participants may elect to contribute a percentage, up to
100%
, of their salaries, not to exceed the applicable limitations as per the Internal Revenue Code. The Corporation's matching contribution is determined on an annual basis. For the year ended ended
December 31, 2018
and
2017
, the Corporation matched
50%
of the participant’s first
7%
contribution. Total 401(k) expense for the years ended
December 31, 2018
and
2017
amounted to approximately $
213,000
and
$173,000
, respectively.
The Corporation offers an Employee Stock Purchase Plan which allows all eligible employees to authorize a specific payroll deduction from his or her base compensation for the purchase of the Corporation’s Common Stock. Total stock purchases amounted to
2,863
and
2,724
shares during
2018
and
2017
, respectively. At
December 31, 2018
, the Corporation had
165,706
shares reserved for issuance under this plan.
During 2017, the Corporation introduced a Supplemental Executive Retirement Plan (“SERP”) for the President / Chief Executive Officer of the Corporation. In 2018 this plan was expanded to include the Executive Vice President / Chief Financial Officer and the Executive Vice President / Chief Lending Officer. The SERP provides a supplemental retirement income benefit upon the attainment of age 66 or separation of service. SERP benefits are payable in equal monthly installments for
180
months. Benefits are also payable upon death. The estimated present value of future benefits is accrued over the period from the effective date of the agreement until the expected retirement date. The Corporation recorded SERP expense of
$444,000
and
$258,000
for the years ended
December 31, 2018
and
2017
, respectively. The benefits accrued under the SERP included in Accrued Expenses and Other Liabilities totaled
$702,000
and
$258,000
at
December 31, 2018
and
2017
, respectively, and are unfunded.