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Section 1: 10-Q (10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549


FORM 10-Q

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

PIONEER BANCORP, INC.

(Exact Name of Company as Specified in its Charter)

 

Maryland

333-230208

83-4274253

(State of Other Jurisdiction of Incorporation)

(Commission File No.)

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

 

652 Albany Shaker Road, Albany, New York 12211

(Address of Principal Executive Office) (Zip Code)

(518) 730‑3999

(Issuer’s Telephone Number including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

Title of each class

 

Trading
Symbol(s)

 

Name of each exchange on which registered

Not Applicable

 

Not Applicable

 

Not Applicable

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ☐         NO   ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES ☒        NO   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).  YES ☐      NO   ☒

As of June 20, 2019, there were no shares issued and outstanding of the registrant’s common stock.

 

 

 

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PIONEER BANCORP, INC.

INDEX

 

 

PART I - FINANCIAL INFORMATION 

1

Item 1 – Consolidated Financial Statements-unaudited 

1

Consolidated Statements of Condition 

1

Consolidated Statements of Income 

2

Consolidated Statements of Comprehensive Income 

3

Consolidated Statements of Changes in Net Worth 

4

Consolidated Statements of Cash Flows 

5

Notes to Unaudited Consolidated Financial Statements 

6

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 

32

Item 3 – Quantitative and Qualitative Disclosures About Market Risk 

48

Item 4 – Controls and Procedures 

48

PART II – OTHER INFORMATION 

49

Item 1 – Legal Proceedings 

49

Item 1A – Risk Factors 

49

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 

49

Item 3 – Defaults Upon Senior Securities 

48

Item 4 – Mine Safety Disclosures 

49

Item 5 – Other Information 

49

Item 6 – Exhibits 

49

 

 

 

Table of Contents

EXPLANATORY NOTE

Pioneer Bancorp, Inc. (the “Company”) has been formed to serve as the mid-tier stock holding company for Pioneer Bank upon the completion of the mutual holding company reorganization of Pioneer Savings Bank  (the “Bank”).  As of March 31, 2019, the reorganization had not been completed.  As of March 31, 2019, the Company had no assets or liabilities and had not conducted any business activities other than organizational activities.  Accordingly, the unaudited consolidated financial statements and the other financial information contained in this quarterly report on Form 10‑Q relate solely to the Bank and its subsidiaries.

The unaudited consolidated financial statements and other financial information contained in this quarterly report on Form 10‑Q should be read in conjunction with the audited consolidated financial statements of the Bank as of and for the years ended June 30, 2018 and 2017 contained in the Company’s  final prospectus dated May 14, 2019 (the “Prospectus”) as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on May 24, 2019.

 

 

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PART I - FINANCIAL INFORMATION

Item 1 – Consolidated Financial Statements

PIONEER SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

    

March 31, 

    

June 30, 

 

 

2019

 

2018

 

 

 

 

 

 

 

Assets

 

 

  

 

 

  

Cash and due from banks

 

$

38,342

 

$

23,187

Federal funds sold

 

 

4,437

 

 

8,869

Interest-bearing deposits with banks

 

 

114,007

 

 

88,224

Cash and cash equivalents

 

 

156,786

 

 

120,280

 

 

 

 

 

 

 

Securities available for sale, at fair value

 

 

94,163

 

 

88,063

Securities held to maturity (fair value of $4,139 at March 31, 2019; and $5,326 at June 30, 2018)

 

 

4,123

 

 

5,297

Federal Home Loan Bank of New York stock

 

 

883

 

 

883

Net loans receivable

 

 

1,040,647

 

 

985,902

Accrued interest receivable

 

 

4,276

 

 

3,854

Premises and equipment, net

 

 

41,835

 

 

42,902

Bank-owned life insurance

 

 

17,810

 

 

17,715

Goodwill

 

 

7,292

 

 

7,292

Other intangible assets, net

 

 

2,618

 

 

2,874

Other assets

 

 

15,109

 

 

9,066

Total assets

 

$

1,385,542

 

$

1,284,128

 

 

 

 

 

 

 

Liabilities and Net Worth

 

 

  

 

 

  

Liabilities:

 

 

  

 

 

  

Deposits:

 

 

  

 

 

  

Non-interest bearing deposits

 

$

380,151

 

$

345,048

Interest bearing deposits

 

 

863,690

 

 

805,214

Total deposits

 

 

1,243,841

 

 

1,150,262

Mortgagors’ escrow deposits

 

 

3,481

 

 

5,382

Other liabilities

 

 

6,457

 

 

10,421

Total liabilities

 

 

1,253,779

 

 

1,166,065

 

 

 

 

 

 

 

Net worth:

 

 

  

 

 

  

Surplus

 

 

10,658

 

 

10,658

Undivided profits

 

 

130,416

 

 

116,394

Accumulated other comprehensive loss

 

 

(9,311)

 

 

(8,989)

Total net worth

 

 

131,763

 

 

118,063

Total liabilities and net worth

 

$

1,385,542

 

$

1,284,128

 

 

See accompanying notes to unaudited consolidated financial statements.

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PIONEER SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

March 31, 

 

March 31, 

 

    

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income:

 

 

  

 

 

  

 

 

  

 

 

  

Loans

 

$

12,438

 

$

11,046

 

$

36,899

 

$

32,197

Securities

 

 

649

 

 

352

 

 

1,918

 

 

926

Interest-bearing deposits with banks and other

 

 

512

 

 

445

 

 

1,115

 

 

1,003

Total interest and dividend income

 

 

13,599

 

 

11,843

 

 

39,932

 

 

34,126

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

  

 

 

  

 

 

  

 

 

  

Deposits

 

 

1,095

 

 

793

 

 

3,042

 

 

2,273

Borrowings and other

 

 

44

 

 

 1

 

 

151

 

 

 2

Total interest expense

 

 

1,139

 

 

794

 

 

3,193

 

 

2,275

Net interest income

 

 

12,460

 

 

11,049

 

 

36,739

 

 

31,851

Provision for loan losses

 

 

570

 

 

450

 

 

1,780

 

 

1,400

Net interest income after provision for loan losses

 

 

11,890

 

 

10,599

 

 

34,959

 

 

30,451

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

  

 

 

  

 

 

  

 

 

  

Bank fees and service charges

 

 

2,232

 

 

1,516

 

 

5,969

 

 

4,845

Insurance and wealth management services

 

 

1,568

 

 

1,474

 

 

4,850

 

 

3,860

Net gain on securities transactions

 

 

 —

 

 

10

 

 

 —

 

 

135

Net loss on disposal of assets

 

 

(27)

 

 

 —

 

 

(575)

 

 

(87)

Bank-owned life insurance

 

 

30

 

 

23

 

 

95

 

 

95

Other

 

 

169

 

 

67

 

 

203

 

 

225

Total noninterest income

 

 

3,972

 

 

3,090

 

 

10,542

 

 

9,073

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

  

 

 

  

 

 

  

 

 

  

Salaries and employee benefits

 

 

5,741

 

 

5,559

 

 

16,731

 

 

16,097

Net occupancy and equipment

 

 

1,522

 

 

1,369

 

 

4,456

 

 

4,154

Data processing

 

 

734

 

 

652

 

 

2,182

 

 

2,240

Advertising and marketing

 

 

282

 

 

222

 

 

720

 

 

524

FDIC insurance premiums

 

 

196

 

 

206

 

 

551

 

 

609

Other

 

 

1,171

 

 

1,215

 

 

3,513

 

 

3,526

Total noninterest expense

 

 

9,646

 

 

9,223

 

 

28,153

 

 

27,150

Income before income taxes

 

 

6,216

 

 

4,466

 

 

17,348

 

 

12,374

Income tax expense

 

 

1,437

 

 

1,050

 

 

3,326

 

 

5,013

Net income

 

$

4,779

 

$

3,416

 

$

14,022

 

$

7,361

 

 

See accompanying notes to unaudited consolidated financial statements.

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PIONEER SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

March 31, 

 

March 31, 

 

    

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,779

 

$

3,416

 

$

14,022

 

$

7,361

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

  

 

 

  

 

 

  

 

 

  

Unrealized gains/losses on securities:

 

 

  

 

 

  

 

 

  

 

 

  

Unrealized holding gains (losses) arising during the period

 

 

799

 

 

(24)

 

 

(436)

 

 

186

Reclassification adjustment for gains included in net income

 

 

 —

 

 

(10)

 

 

 —

 

 

(135)

 

 

 

799

 

 

(34)

 

 

(436)

 

 

51

Tax effect

 

 

209

 

 

(9)

 

 

(114)

 

 

32

 

 

 

590

 

 

(25)

 

 

(322)

 

 

19

Defined benefit plan:

 

 

  

 

 

  

 

 

  

 

 

  

Change in funded status of defined benefit plans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Reclassification adjustment for amortization of net prior service cost

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Reclassification adjustment for amortization of net actuarial loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Tax effect

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Total other comprehensive income (loss)

 

 

590

 

 

(25)

 

 

(322)

 

 

19

Comprehensive income

 

$

5,369

 

$

3,391

 

$

13,700

 

$

7,380

 

 

See accompanying notes to unaudited consolidated financial statements.

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PIONEER SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET WORTH (unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

 

 

Undivided

 

Comprehensive

 

Net

 

    

 

Surplus

    

Profits

    

Loss

    

Worth

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2017

 

$

10,658

 

$

103,022

 

$

(9,668)

 

$

104,012

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

7,361

 

 

 —

 

 

7,361

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

19

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification of certain tax effects related to the Tax Cuts and Jobs Act (1)

 

 

 —

 

 

1,873

 

 

(1,873)

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2018

 

$

10,658

 

$

112,256

 

$

(11,522)

 

$

111,392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

    

 

    

Accumulated

    

    

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

 

 

Undivided

 

Comprehensive

 

Net

 

    

Surplus

    

Profits

    

Loss

    

Worth

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2018

 

$

10,658

 

$

116,394

 

$

(8,989)

 

$

118,063

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

14,022

 

 

 —

 

 

14,022

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 —

 

 

 —

 

 

(322)

 

 

(322)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2019

 

$

10,658

 

$

130,416

 

$

(9,311)

 

$

131,763


(1)

Adoption of Accounting Standard Update 2018-02, reclassification from accumulated other comprehensive loss to undivided profits for stranded tax effects resulting from Tax Cuts and Jobs Act.

See accompanying notes to unaudited consolidated financial statements.

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PIONEER SAVINGS BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

 

March 31, 

 

    

2019

    

2018

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

  

 

 

  

Net income

 

$

14,022

 

$

7,361

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

  

 

 

  

Depreciation and amortization

 

 

2,101

 

 

1,955

Provision for loan losses

 

 

1,780

 

 

1,400

Net accretion on securities

 

 

(400)

 

 

(64)

Earnings on bank-owned life insurance

 

 

(95)

 

 

(95)

Net loss on sale of loans

 

 

 —

 

 

26

Proceeds from sale of loans

 

 

227

 

 

2,771

Net losses on the sale, disposal or write-down of premises and equipment, and other real estate owned

 

 

575

 

 

87

Net gains on securities transactions

 

 

 —

 

 

(135)

Deferred tax expense

 

 

173

 

 

2,215

Increase in accrued interest receivable

 

 

(421)

 

 

(442)

(Increase) decrease in other assets

 

 

(6,072)

 

 

206

(Decrease) increase in other liabilities

 

 

(3,963)

 

 

4,674

Net cash provided by operating activities

 

 

7,927

 

 

19,959

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

  

 

 

  

Proceeds from maturities, paydowns and calls of securities available for sale

 

 

43,589

 

 

52,200

Proceeds from sales of securities available for sale

 

 

 —

 

 

457

Purchases of securities available for sale

 

 

(49,725)

 

 

(58,801)

Proceeds from maturities and paydowns of securities held to maturity

 

 

4,553

 

 

4,807

Purchases of securities held to maturity

 

 

(3,378)

 

 

(4,691)

Net redemptions of FHLBNY stock

 

 

 —

 

 

379

Net increase in loans receivable

 

 

(56,925)

 

 

(54,202)

Purchases of premises and equipment

 

 

(1,791)

 

 

(7,404)

Proceeds from sale of premises and equipment, and other real estate owned

 

 

578

 

 

70

Acquisitions

 

 

 —

 

 

(1,426)

Net cash used in investing activities

 

 

(63,099)

 

 

(68,611)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

  

 

 

  

Net increase in deposits

 

 

93,579

 

 

172,643

Net decrease in mortgagors’ escrow deposits

 

 

(1,901)

 

 

(1,601)

Net decrease in borrowings from FHLBNY

 

 

 —

 

 

(5,000)

Net cash provided by financing activities

 

 

91,678

 

 

166,042

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

36,506

 

 

117,390

Cash and cash equivalents at beginning of period

 

 

120,280

 

 

40,261

Cash and cash equivalents at end of period

 

$

156,786

 

$

157,651

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

  

 

 

  

Cash paid during the period for:

 

 

  

 

 

  

Interest

 

$

3,189

 

$

2,281

Income taxes

 

$

3,500

 

$

2,750

Non-cash investing and financing activity:

 

 

  

 

 

  

Loans transferred to other real estate owned

 

$

226

 

$

127

 

 

 

See accompanying notes to unaudited consolidated financial statements.

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PIONEER SAVINGS BANK AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations and Principles of Consolidation

The accompanying unaudited interim consolidated financial statements of Pioneer Savings Bank and Subsidiaries (the “Bank”) conform, in all material respects, to accounting principles generally accepted in the United States of America (“GAAP”) and to general practice within the banking industry.

The Bank provides financial services through its twenty-two offices in the Capital Region of New York State. Its primary deposit products are checking, savings, money market, and certificate accounts, and its primary lending products are residential mortgage, home equity, commercial business and commercial real estate loans. There are no significant concentrations of loans to any one customer or industry. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the Bank’s market area.

The consolidated financial statements include the accounts of Pioneer Savings Bank, as well as Pioneer Commercial Bank, Pioneer Financial Services, Inc., and Anchor Agency, Inc., its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The interim financial data at March 31, 2019 and for the three and nine months ended March 31, 2019 and 2018, respectively, are unaudited and reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three and nine months ended March 31, 2019 are not necessarily indicative of the results to be achieved for the remainder of fiscal 2019 or any other period.

The unaudited interim consolidated financial statements should be read in conjunction with the Bank’s audited consolidated financial statements and notes thereto for the year ended June 30, 2018 contained in Pioneer Bancorp, Inc.’s final prospectus dated May 14, 2019 (the “Prospectus”) filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on May 24, 2019.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ substantially from those estimates. The allowance for loan losses, valuation of securities and other financial instruments, the funded status and expense of employee benefit plans, and the realizability of deferred tax assets are particularly subject to change.

Reclassifications

Amounts in the prior period’s consolidated financial statements are reclassified whenever necessary to conform to the current period’s presentation.

Impact of Recent Accounting Pronouncements

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018‑02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides guidance concerning the treatment of the so-called stranded effects in accumulated other income (loss) resulting from the reduction in the federal corporate income tax

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rate to 21% made by the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law on December 22, 2017. ASU 2018‑02 amends accounting standards to allow reclassification to retained earnings of the effects of re-measuring deferred tax liabilities and deferred tax assets relating to items remaining within accumulated other comprehensive income (loss) as a result of the Tax Act. The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income (loss) at the previously enacted U.S. federal corporate income tax rate and the amount that would have been charged or credited directly to other comprehensive income (loss) by applying the newly enacted 21% rate, but excluding the effect of any valuation allowance previously charged to income from continuing operations. The Bank has elected to early adopt ASU 2018‑02 as of December 31, 2017, it is reflected in the accompanying consolidated financial statements and resulted in a $1.9 million increase to undivided profits and a corresponding increase to accumulated other comprehensive loss.

In May 2014, the FASB issued ASU 2014‑09 to amend its guidance on “Revenue from Contracts with Customers (Topic 606)”. The objective of this ASU is to align the recognition of revenue with the transfer of promised goods or services provided to customers in an amount that reflects the consideration which the entity expects to be entitled in exchange for those goods or services. This ASU will replace most existing revenue recognition guidance under GAAP when it becomes effective. In August 2015, the FASB issued an amendment (ASU 2015‑14) which defers the effective date of this new guidance by one year. More detailed implementation guidance on Topic 606 was issued in March 2016 (ASU 2016‑08), April 2016 (ASU 2016‑10), May 2016 (ASU 2016‑12), December 2016 (ASU 2016‑20), February 2017 (ASU 2017‑05), and September 2017 (ASU‑2017‑13) and the effective date and transition requirements for these ASUs are the same as the effective date and transition requirements of ASU 2014‑09. The amendments in ASU 2014‑09 are effective for the Bank for the fiscal year beginning July 1, 2019. A significant amount of the Bank’s revenues are derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance. With respect to noninterest income, the Bank has identified revenue streams within the scope of the guidance and is performing its accounting analysis of the underlying contracts. The Bank does not presently expect that changes in the timing of revenue recognition will be material to the amount of annual revenue recognized by the Bank.

In January 2016, the FASB issued ASU 2016‑01 to its guidance on “Financial Instruments (Subtopic 825‑10)”. This amendment addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. These amendments require equity securities to be measured at fair value with changes in the fair value to be recognized through net income. The amendments also simplify the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. The amendments in ASU 2016‑01 are effective for the Bank for the fiscal year beginning July 1, 2019. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

In February 2016, the FASB issued ASU 2016‑02 to its guidance on “Leases (Topic 842)”. The new leases standard applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. The new leases standard requires a lessor to classify leases as either sales-type, direct financing or operating, similar to existing U.S. GAAP. Classification depends on the same five criteria used by lessees plus certain additional factors. The subsequent accounting treatment for all three lease types is substantially equivalent to existing U.S. GAAP for sales-type leases, direct financing leases, and operating leases. However, the new standard updates certain aspects of the lessor accounting model to align it with the new lessee accounting model, as well as with the new revenue standard under Topic 606. Lessees and lessors are required to provide certain qualitative and quantitative disclosures to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The amendments in ASU 2016‑02 are effective for the Bank for the fiscal year beginning July 1, 2020. Early adoption is permitted. The adoption of this ASU will result in a gross up of the Consolidated Statements of Condition for right-of-use assets and associated lease liabilities for operating leases in which the Bank is the lessee. In July 2018, the FASB issued ASU No. 2018‑10, Codification Improvements to Topic 842 - Leases to address certain narrow aspects of the guidance issued in ASU No. 2016‑02. In July 2018, the FASB issued ASU No. 2018‑11, Leases (Topic 842): Targeted Improvements, which amends FASB Accounting Standards Codification (ASC), Leases (Topic 842), to (1) add an optional transition method that would permit entities to apply the new requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption, and (2) provide a practical expedient for lessors regarding the separation of the lease and non-lease components of a contract. In December 2018, the FASB issued ASU

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No. 2018‑20, Narrow-Scope Improvements for Lessors, which addresses issues related to (1) sales tax and similar taxes collected from lessees, (2) certain lessor costs, and (3) recognition of variable payments for contracts with lease and non-lease components. The Bank is evaluating the significance and other effects of adoption on the consolidated financial statements and related disclosures. The Bank is performing its accounting analysis of its branch building and other leases underlying contracts. The Bank is currently evaluating the potential impact on adoption of this ASU on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016‑13 to its guidance on “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. ASU 2016‑13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument. The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above. Further, the ASU made certain targeted amendments to the existing impairment model for available-for-sale (AFS) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis. The amendments in this ASU are effective for the Bank for the fiscal year beginning July 1, 2021. All entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). In November 2018, the FASB issued ASU 2018‑19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which aligns the implementation date for nonpublic entities’ annual financial statements with the implementation date for their interim financial statements and clarifies the scope of the guidance in the amendments in ASU 2016‑13. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.  ASU 2019-04 clarifies or addresses stakeholders’ specific issues about certain aspects of the amendments in Update 2016-13 related to measuring the allowance for loan losses under the new guidance. The effective dates and transition requirements for the amendments related to this Update are the same as the effective dates and transition requirements in Update 2016-13. The Bank is currently evaluating the potential impact on our consolidated results of operations or financial position. The initial adjustment will not be reported in earnings and therefore will not have any material impact on our consolidated results of operations, but it is expected that it will have an impact on our consolidated financial position at the date of adoption of this ASU. At this time, we have not calculated the estimated impact that this ASU will have on our allowance for loan losses, however, we anticipate it will have a significant impact on the methodology process we utilize to calculate the allowance. Alternative methodologies are currently being considered. Data requirements and integrity are being reviewed and enhancements incorporated into standard processes. The Bank is currently evaluating the potential impact on adoption of this ASU on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016‑15 which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are intended to reduce diversity in practice. The amendment covers the following cash flows: Cash payments for debt prepayment or extinguishment costs will be classified in financing activities. Upon settlement of zero-coupon bonds and bonds with insignificant cash coupons, the portion of the payment attributable to imputed interest will be classified as an operating activity, while the portion of the payment attributable to principal will be classified as a financing activity. Cash paid by an acquirer that is not soon after a business combination for the settlement of a contingent consideration liability will be separated between financing activities and operating activities. Cash payments up to the amount of the contingent consideration liability recognized at the acquisition date will be classified in financing activities; any excess will be classified in operating activities. Cash paid soon after the business combination will be classified in investing activities. Cash proceeds received from the settlement of insurance claims will be classified on the basis of the related insurance coverage (that is, the nature of the loss). Cash proceeds from lump-sum settlements will be classified based on the nature of each loss included in the settlement. Cash proceeds received

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from the settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies will be classified as cash inflows from investing activities. Cash payments for premiums on COLI and BOLI may be classified as cash outflows for investing, operating, or a combination of both. A transferor’s beneficial interest obtained in a securitization of financial assets will be disclosed as a noncash activity, and cash received from beneficial interests will be classified in investing activities. Distributions received from equity method investees will be classified using either a cumulative earnings approach or a look- through approach as an accounting policy election. The ASU contains additional guidance clarifying when an entity should separate cash receipts and cash payments and classify them into more than one class of cash flows (including when reasonable judgment is required to estimate and allocate cash flows) versus when an entity should classify the aggregate amount into one class of cash flows on the basis of predominance. The amendments in this ASU are effective for the Bank for the fiscal year beginning July 1, 2019. Early adoption is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

In November 2016, the FASB issued ASU 2016‑18 to its guidance on “Statement of Cash Flows (Topic 230) Restricted Cash” addresses diversity in practice from entities classifying and presenting transfers between cash and restricted cash as operating, investing or financing activities or as a combination of those activities in the statement of cash flows. The ASU requires entities to show the changes in the total cash, cash equivalents, restricted cash and restricted cash equivalents in the Statement of Cash Flows. As a result, transfers between such categories will no longer be presented in the Statement of Cash Flows. The amendments in this ASU are effective for the Bank for the fiscal year beginning July 1, 2019. Early adoption is permitted provided all amendments are adopted in the same period. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

In March 2017, the FASB issued ASU 2017‑07 to its guidance on “Compensation - Retirement Benefits (Topic 715)” to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. ASU 2017‑07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments in this ASU are effective for the Bank for the fiscal year beginning July 1, 2019. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, early adoption should be within the first interim period if an employer issues interim financial statements. Disclosures of the nature of and reason for the change in accounting principle are required in the first interim and annual periods of adoption. The amendments in this ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit costs in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net period pension cost and net periodic postretirement benefit in assets. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In March 2017, the FASB issued ASU 2017‑08 to its guidance on “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310‑20) related to premium amortization on purchased callable debt securities. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this ASU are effective for the Bank for the fiscal year beginning July 1, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosure about a change in accounting principle. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

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In August 2018, the FASB issued ASU 2018‑13 to its guidance on “Fair Value Measurement (Topic 820)”. This update modifies the disclosure requirements on fair value measurements. The following disclosure requirements were removed from Topic 820: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; (3) the valuation processes for Level 3 fair value measurements; and (4) for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The following disclosure requirements were modified in Topic 820: (1) in lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; (2) for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and (3) the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The following disclosure requirements were added to Topic 820; however, the disclosures are not required for nonpublic entities: (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. In addition, the amendments eliminate at a minimum from the phrase “an entity shall disclose at a minimum” to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments in ASU No. 2018‑13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018‑13 and delay adoption of the additional disclosures until their effective date. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

In August 2018, the FASB has issued ASU No. 2018‑14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715‑20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans”, that applies to all employers that sponsor defined benefit pension or other postretirement plans. The amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The following disclosure requirements were removed from Subtopic 715‑20: (1) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; (2) the amount and timing of plan assets expected to be returned to the employer; (3) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan; (4) for nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. However, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets; and (5) for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of net periodic benefit costs and (b) benefit obligation for postretirement health care benefits. The following disclosure requirements were added to Subtopic 715‑20: (1) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates; and (2) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715‑20‑50‑3, which state that the following information for defined benefit pension plans should be disclosed: (1) the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets; and (2) the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. ASU No. 2018‑14 is effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after

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December 15, 2021, for all other entities. Early adoption is permitted for all entities. The adoption of this guidance is not expected to have a material impact on our consolidated results of operations or financial position.

In April 2019, the FASB issued an Update (ASU 2019-04), Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.

The amendments to Topic 326 and other Topics in this Update include items related to the amendments in Update 2016-13 discussed at the June 2018 and November 2018 Credit Losses TRG meetings. The amendments clarify or address stakeholders' specific issues about certain aspects of the amendments in Update 2016-13 on a number of different topics, including the following:

·

Accrued Interest

·

Transfers between Classifications or Categories for Loans and Debt Securities

·

Recoveries

·

Consideration of Prepayments in Determining the Effective Interest Rate

·

Consideration of Estimated Costs to Sell When Foreclosure Is Probable

·

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

·

Contractual Extensions and Renewals

The ASU also covered a number of issues that related to hedge accounting including:

·

Partial-Term Fair Value Hedges of Interest Rate Risk

·

Amortization of Fair Value Hedge Basis Adjustments

·

Disclosure of Fair Value Hedge Basis Adjustments

·

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

·

Scoping for Not-for-Profit Entities

·

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

·

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

·

Transition Guidance

For Codification Improvements specific to ASU 2016-01, the following topics were covered within ASU 2019 - 04:

·

Scope Clarifications

·

Held-to-Maturity Debt Securities Fair Value Disclosures

·

Applicability of Topic 820 to the Measurement Alternative

·

Remeasurement of Equity Securities at Historical Exchange Rates

ASU 2019-04 has various implementation dates dependent on a number of factors as it pertains to the above items.

 

 

 

2.ACQUISITIONS

On May 29, 2018 and July 1, 2017 respectively, the Bank acquired substantially all of the operating assets of Ward Financial Management, LTD, a financial services agency that offers a full line of financial services, for total cash consideration of $3.4 million and the Capital Region Strategic Employee Benefits Services, LLC, an insurance agency that offers a full line of employee benefits products and services, for total cash consideration of $1.3 million. As part of the acquisitions $1.2 million is being held in escrow with payment contingent on the retention of commission revenue, as well as, to secure the seller’s indemnification obligations. The acquisitions were made to expand the Bank’s insurance and wealth management services. The results of operations have been included in the consolidated statement of income from the respective date of each acquisition. The estimated fair values of the assets acquired as of the acquisition dates included goodwill of $2.0 million and other intangible assets of $2.7 million. The goodwill from the acquisitions is expected to be deductible for tax purposes.

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3.SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY

The amortized cost and estimated fair value of securities are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

    

Cost

    

Gains

 

Losses

    

Fair Value

Securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Government and agency obligations

 

$

69,671

 

$

60

 

$

(47)

 

$

69,684

Mortgage-backed securities – residential

 

 

118

 

 

 3

 

 

 —

 

 

121

Asset-backed securities

 

 

81

 

 

54

 

 

(1)

 

 

134

Collateralized mortgage obligations - residential

 

 

553

 

 

387

 

 

(35)

 

 

905

Municipal obligations

 

 

14,805

 

 

28

 

 

 —

 

 

14,833

Total debt securities

 

 

85,228

 

 

532

 

 

(83)

 

 

85,677

Preferred stocks

 

 

6,007

 

 

37

 

 

(1,201)

 

 

4,843

Common stocks

 

 

2,809

 

 

1,054

 

 

(220)

 

 

3,643

Total available for sale securities

 

$

94,044

 

$

1,623

 

$

(1,504)

 

$

94,163

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal obligations

 

$

4,123

 

$

16

 

$

 —

 

$

4,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

    

Cost

    

Gains

    

Losses

    

Fair Value

Securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Government and agency obligations

 

$

58,743

 

$

 —

 

$

(185)

 

$

58,558

Mortgage-backed securities – residential

 

 

146

 

 

 4

 

 

 —

 

 

150

Asset-backed securities

 

 

115

 

 

49

 

 

(2)

 

 

162

Collateralized mortgage obligations - residential

 

 

692

 

 

415

 

 

(28)

 

 

1,079

Municipal obligations

 

 

19,264

 

 

 3

 

 

(4)

 

 

19,263

Total debt securities

 

 

78,960

 

 

471

 

 

(219)

 

 

79,212

Preferred stocks

 

 

6,007

 

 

24

 

 

(282)

 

 

5,749

Common stocks

 

 

2,541

 

 

727

 

 

(166)

 

 

3,102

Total available for sale securities

 

$

87,508

 

$

1,222

 

$

(667)

 

$

88,063

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

  

 

 

  

 

 

  

 

 

  

Municipal obligations

 

$

5,297

 

$

29

 

$

 —

 

$

5,326

 

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The estimated fair value and gross unrealized losses aggregated by security category and length of time such securities have been in a continuous unrealized loss position, is summarized as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

Less than 12 Months

 

12 Months or Longer

 

Total

 

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

Securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

U.S. Government and agency obligations

 

$

13,951

 

$

(11)

 

$

22,909

 

$

(36)

 

$

36,860

 

$

(47)

Mortgage-backed securities-residential (1)

 

 

 6

 

 

 —

 

 

 —

 

 

 —

 

 

 6

 

 

 —

Asset-backed securities

 

 

 —

 

 

 —

 

 

 5

 

 

(1)

 

 

 5

 

 

(1)

Collateralized mortgage obligations - residential

 

 

35

 

 

(14)

 

 

161

 

 

(21)

 

 

196

 

 

(35)

Preferred stocks

 

 

 —

 

 

 —

 

 

4,804

 

 

(1,201)

 

 

4,804

 

 

(1,201)

Common stocks

 

 

96

 

 

(19)

 

 

715

 

 

(201)

 

 

811

 

 

(220)

 

 

$

14,088

 

$

(44)

 

$

28,594

 

$

(1,460)

 

$

42,682

 

$

(1,504)