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.

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

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.

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 May 28, 2020, there were 4,753,883 shares outstanding of the registrant’s common stock.

March 31,

December 31,

(In thousands, except share and per share data)

2020

2019

ASSETS:

Cash and due from banks

$
48,671

$
8,284

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

8,908

11,876

Total cash and cash equivalents

57,579

20,160

Available-for-sale securities, at fair value

121,458

111,134

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

120,549

122,988

Marketable equity securities, at fair value

340

534

Federal Home Loan Bank stock, at cost

4,758

4,834

Loans

750,372

745,516

Loans held-for-sale ⁽¹⁾

150

35,935

Less: Allowance for loan losses

9,606

8,669

Loans receivable, net

740,916

772,782

Premises and equipment, net

22,304

22,699

Operating lease right-of-use assets

2,349

2,386

Accrued interest receivable

3,700

3,712

Foreclosed real estate

58

88

Intangible assets, net

145

149

Goodwill

4,536

4,536

Bank owned life insurance

17,519

17,403

Other assets

11,432

10,402

Total assets

$
1,107,643

$
1,093,807

LIABILITIES AND SHAREHOLDERS' EQUITY:

Deposits:

Interest-bearing

$
786,316

$
774,392

Noninterest-bearing

113,544

107,501

Total deposits

899,860

881,893

Short-term borrowings

8,138

25,138

Long-term borrowings

83,299

67,987

Subordinated loans

15,136

15,128

Accrued interest payable

407

396

Operating lease liabilities

2,618

2,650

Other liabilities

9,874

9,946

Total liabilities

1,019,332

1,003,138

Shareholders' equity:

Preferred stock, par value $0.01 per share; no liquidation preference; 10,000,000 and 10,000,000 shares
authorized, respectively; 1,155,283 and 1,155,283 shares issued and outstanding, respectively

12

12

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

47

47

Additional paid in capital

49,659

49,362

Retained earnings

46,174

44,839

Accumulated other comprehensive loss

(7,077
)

(2,971
)
Unearned ESOP

(809
)

(855
)
Total Pathfinder Bancorp, Inc. shareholders' equity

88,006

90,434

Noncontrolling interest

305

235

Total equity

88,311

90,669

Total liabilities and shareholders' equity

$
1,107,643

$
1,093,807

~~(1)~~

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

~~The accompanying notes are an integral part of the consolidated financial statements.~~

For the three months ended,

(In thousands, except per share data)

March 31, 2020

March 31, 2019

Interest and dividend income:

Loans, including fees

$
9,242

$
7,575

Debt securities:

Taxable

1,692

1,799

Tax-exempt

7

108

Dividends

70

77

Federal funds sold and interest earning deposits

32

110

Total interest and dividend income

11,043

9,669

Interest expense:

Interest on deposits

2,556

2,345

Interest on short-term borrowings

57

167

Interest on long-term borrowings

445

393

Interest on subordinated loans

206

217

Total interest expense

3,264

3,122

Net interest income

7,779

6,547

Provision for loan losses

1,067

144

Net interest income after provision for loan losses

6,712

6,403

Noninterest income:

Service charges on deposit accounts

356

282

Earnings and gain on bank owned life insurance

116

121

Loan servicing fees

49

27

Net gains on sales and redemptions of investment securities

26

79

(Losses) gains on marketable equity securities

(194
)

41

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

672

(8
)

Debit card interchange fees

163

144

Insurance agency revenue

337

243

Other charges, commissions & fees

223

164

Total noninterest income

1,748

1,093

Noninterest expense:

Salaries and employee benefits

3,247

3,650

Building and occupancy

754

655

Data processing

600

574

Professional and other services

316

336

Advertising

176

239

FDIC assessments

189

111

Audits and exams

125

100

Insurance agency expense

192

199

Community service activities

107

138

Foreclosed real estate expenses

30

237

Other expenses

509

472

Total noninterest expense

6,245

6,711

Income before income taxes

2,215

785

Provision for income taxes

455

251

Net income attributable to noncontrolling interest and
Pathfinder Bancorp, Inc.

1,760

534

Net income attributable to noncontrolling interest

70

20

Net income attributable to Pathfinder Bancorp Inc.

$
1,690

$
514

Convertible preferred stock dividends

69

-

Warrant dividends

8

-

Undistributed earnings allocated to participating securities

290

-

Net income available to common shareholders

$
1,323

$
514

Earnings per common share - basic

$
0.29

$
0.12

Earnings per common share - diluted

$
0.29

$
0.12

Dividends per common share

$
0.06

$
0.06

~~The accompanying notes are an integral part of the consolidated financial statements.~~

For the three months ended

(In thousands)

March 31, 2020

March 31, 2019

Net Income

$
1,760

$
534

Other Comprehensive (Loss) Income

Retirement Plans:

Retirement plan net losses recognized in plan expenses

58

84

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

Unrealized holding (losses) gains arising during the period

(3,633
)

1,988

Reclassification adjustment for net gains included in net
   income

(26
)

(79
)

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

(3,659
)

1,909

Derivatives and hedging activities:

Unrealized holding losses arising during the period

(1,344
)

-

Net unrealized losses on derivatives and hedging activities

(1,344
)

-

Accretion of net unrealized loss on securities transferred to held-to-
   maturity⁽¹⁾

8

6

Other comprehensive (loss) income, before tax

(4,937
)

1,999

Tax effect

1,037

(419
)

Other comprehensive (loss) income, net of tax

(3,900
)

1,580

Comprehensive (loss) income

$
(2,140
)

$
2,114

Comprehensive income, attributable to noncontrolling interest

$
70

$
20

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

$
(2,210
)

$
2,094

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

Retirement plan net losses recognized in plan expenses

$
(12
)

$
(19
)

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

764

(416
)

Reclassification adjustment for net gains included in net
   income

5

17

Unrealized losses on derivatives and hedging arising during the
   period

282

-

Accretion of net unrealized loss on securities transferred to held-to-
   maturity⁽¹⁾

(2
)

(1
)

Income tax effect related to other comprehensive (loss) income

$
1,037

$
(419
)

~~(1)~~

The accretion of the unrealized holding losses in accumulated other comprehensive loss at the date of transfer at September 30, 2013 partially offsets the amortization of the difference between the par value and the fair value of the investment securities at the date of transfer, and is an adjustment of yield.

~~The accompanying notes are an integral part of the consolidated financial statements.~~

Accumulated

Additional

Other Com-

Non-

Preferred

Common

Paid in

Retained

prehensive

Unearned

controlling

(In thousands, except share and per share data)

Stock

Stock

Capital

Earnings

Loss

ESOP

Interest

Total

Balance, January 1, 2020

$
12

$
47

$
49,362

$
44,839

$
(2,971
)

$
(855
)

$
235

$
90,669

Net income

-

-

-

1,690

-

-

70

1,760

Reevaluation of deferred tax asset valuation allowance⁽¹⁾

-

-

-

-

(206
)

-

-

(206
)
Other comprehensive loss, net of tax

-

-

-

-

(3,900
)

-

-

(3,900
)
ESOP shares earned (6,111 shares)

-

-

37

-

-

46

-

83

Stock based compensation

-

-

66

-

-

-

-

66

Stock options exercised

-

-

194

-

-

-

-

194

Common stock dividends declared ($0.06 per share)

-

-

-

(278
)

-

-

-

(278
)
Preferred stock dividends declared ($0.06 per share)

-

-

-

(69
)

-

-

-

(69
)
Warrant dividends declared ($0.06 per share)

-

-

-

(8
)

-

-

-

(8
)
Balance, March 31, 2020

$
12

$
47

$
49,659

$
46,174

$
(7,077
)

$
(809
)

$
305

$
88,311

Balance, January 1, 2019

$
-

$
44

$
29,139

$
42,114

$
(6,042
)

$
(1,034
)

$
238

$
64,459

Net income

-

-

-

514

-

-

20

534

Other comprehensive income, net of tax

-

-

-

-

1,580

-

-

1,580

ESOP shares earned (6,111 shares)

-

-

42

-

-

45

-

87

Stock based compensation

-

-

73

-

-

-

-

73

Stock options exercised

-

-

200

-

-

-

-

200

Cumulative effect of change in measurement of
operating leases ⁽²⁾

-

-

-

(239
)

-

-

-

(239
)
Common stock dividends declared ($0.06 per share)

-

-

-

(256
)

-

-

-

(256
)
Balance, March 31, 2019

$
-

$
44

$
29,454

$
42,133

$
(4,462
)

$
(989
)

$
258

$
66,438

~~(1)~~

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

~~(2)~~

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

~~The accompanying notes are an integral part of the consolidated financial statements.~~

For the three months ended March 31,

(In thousands)

2020

2019

OPERATING ACTIVITIES

Net income attributable to Pathfinder Bancorp, Inc.

$
1,690

$
514

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

Provision for loan losses

1,067

144

Amortization of operating leases

5

11

Proceeds from sales of loans

36,614

-

Originations of loans held-for-sale

(150
)

-

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

Real estate acquired through foreclosure

7

8

Loans

(679
)

-

Available-for-sale investment securities

-

(86
)
Held-to-maturity investment securities

(26
)

7

Marketable equity securities

194

(41
)
Depreciation

414

360

Amortization of mortgage servicing rights

(279
)

3

Amortization of deferred loan costs

75

66

Amortization of deferred financing from subordinated debt

8

8

Earnings and gain on bank owned life insurance

(116
)

(121
)
Net amortization of premiums and discounts on investment securities

268

228

Amortization of intangible assets

4

4

Stock based compensation and ESOP expense

149

160

Net change in accrued interest receivable

12

(296
)
Net change in other assets and liabilities

(1,262
)

(2,532
)
Net cash flows from operating activities

37,995

(1,563
)
INVESTING ACTIVITIES

Purchase of investment securities available-for-sale

(38,422
)

(5,081
)
Purchase of investment securities held-to-maturity

(7,492
)

(26,835
)
Purchase of Federal Home Loan Bank stock

(1,121
)

(1,346
)
Proceeds from redemption of Federal Home Loan Bank stock

1,197

3,195

Proceeds from maturities and principal reductions of investment securities
available-for-sale

24,244

6,879

Proceeds from maturities and principal reductions of investment securities
held-to-maturity

8,824

1,906

Proceeds from sales, redemptions and calls of:

Available-for-sale investment securities

-

22,277

Held-to-maturity investment securities

1,068

30

Real estate acquired through foreclosure

81

1,020

Net change in loans

(5,119
)

(38,031
)
Purchase of premises and equipment

(19
)

(1,276
)
Net cash flows from investing activities

(16,759
)

(37,262
)

FINANCING ACTIVITIES

Net change in demand deposits, NOW accounts, savings accounts, money management
deposit accounts, MMDA accounts and escrow deposits

35,546

960

Net change in time deposits

2,137

43,477

Net change in brokered deposits

(19,716
)

34,031

Net change in short-term borrowings

(17,000
)

(26,000
)
Payments on long-term borrowings

-

(15,100
)
Proceeds from long-term borrowings

15,312

-

Proceeds from exercise of stock options

194

200

Cash dividends paid to common shareholders

(283
)

(263
)
Cash dividends paid to preferred shareholders

(69
)

-

Cash dividends paid on warrants

(8
)

-

Change in noncontrolling interest, net

70

20

Net cash flows from financing activities

16,183

37,325

Change in cash and cash equivalents

37,419

(1,500
)
Cash and cash equivalents at beginning of period

20,160

26,316

Cash and cash equivalents at end of period

$
57,579

$
24,816

CASH PAID DURING THE PERIOD FOR:

Interest

$
3,253

$
2,955

Income taxes

200

-

NON-CASH INVESTING ACTIVITY

Real estate acquired in exchange for loans

58

479

RESTRICTED CASH

Federal Reserve Bank Reserve Requirements included in interest earning deposits

-

4,632

Collateral deposits for hedge position included in interest earning deposits

1,300

-

~~The accompanying notes are an integral part of the consolidated financial statements.~~

~~The accompanying unaudited consolidated financial statements of Pathfinder Bancorp, Inc.,~~ (the “Company”)~~, Pathfinder Bank~~ is filing this Amendment No. 1 on Form 10-Q/A (the ~~“Bank”~~“Amendment”) ~~and~~to amend its ~~other wholly owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions for~~Quarterly Report on Form 10-Q ~~and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary~~ for a complete presentation of consolidated financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included. Certain amounts in the 2019 consolidated financial statements may have been reclassified to conform to the current period presentation. These reclassifications had no effect on net income or comprehensive income as previously reported. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2020 or any other interim period.

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain accounting policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices or are provided by unaffiliated third-party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management.

Although the Company owns, through its subsidiary Pathfinder Risk Management Company, Inc., 51% of the membership interest in FitzGibbons Agency, LLC (“Agency”), the Company is required to consolidate 100% of the Agency within the consolidated financial statements. The 49% of which the Company does not own is accounted for separately as noncontrolling interests within the consolidated financial statements.

The Financial Accounting Standards FASB (“FASB”) and, to a lesser extent, other authoritative rulemaking bodies, promulgate generally accepted accounting principles (“GAAP”) to regulate the standards of accounting in the United States. From time to time, the FASB issues new GAAP standards, known as Accounting Standards Updates (“ASUs”) some of which, upon adoption, may have the potential to change the way in which the Company recognizes or reports within its consolidated financial statements. The following presentation provides a description of standards adopted in the first quarter of 2020 as well as standards that are not currently effective, but could have an impact on the Company's consolidated financial statements upon adoption.

~~Standard: Fair Value Measurement (ASU 2018-13: Fair Value Measurement [Topic 820]: Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement~~

~~Description:~~ The FASB is issuing the amendments in this ASU as part of the disclosure framework project. The disclosure framework project’s objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP that is most important to

~~users of each entity’s financial statements. The amendments in this ASU modify the disclosure requirements for entities such as the Company on fair value measurements in Topic 820,~~ ~~Fair Value Measurement~~.

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

~~The policy for timing of transfers between levels.~~

~~The valuation processes for Level 3 fair value measurements.~~

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.

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

~~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.~~

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.

~~Required Date of Implementation:~~ The amendments in this ASU 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 upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date.

~~Effect on Consolidated Financial Statements:~~ ~~The adoption of this ASU had no material impact to its consolidated statements of condition or income.~~

~~Standard:~~ ~~Leases (ASU 2019-01: Leases [Topic 842] Codification Improvements)~~

~~Description:~~ On February 25, 2016, the FASB issued Accounting Standards ASU No. 2016-02, Leases [Topic 842], to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing essential information about leasing transactions. ASU 2019-01 addresses three Issues: (1) Determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; (2) Presentation on the statement of cash flows for sales-type and direct financing leases; and (3) Transition disclosures related to Topic 250, ~~Accounting Changes and Error Corrections~~.

The amendments in this ASU address Issue 1, described above, and reinstate the exception in Topic 842 for lessors that are not manufacturers or dealers (generally financial institutions and captive finance companies). Specifically, those lessors will use their cost, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset. However, if significant time lapses between the acquisition of the underlying asset and lease commencement, those lessors will be required to apply the definition of fair value (exit price) in Topic 820.

Topic 840 does not provide guidance on how cash received from leases by lessors from sales-type and direct financing leases should be presented in the cash flow statement. The amendments in this ASU address Issue 2, described above, as

to the concerns of lessors within the scope of Topic 942 about where “principal payments received under leases” should be presented. Specifically, lessors that are depository and lending institutions within the scope of Topic 942 will present all “principal payments received under leases” within investing activities in the Statement of Cash Flows.

~~Required Date of Implementation~~: The amendments in this ASU amend Topic 842. The effective date of those amendments for public business entities, such as the Company, is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.

~~Effect on Consolidated Financial Statements:~~ ~~The adoption of this ASU had no material impact to its consolidated statements of condition or income.~~

~~Standard: Various Codification Improvements~~ ~~(ASU 2019-04:Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments)~~

~~Description:~~ ~~Since 2016, the FASB has issued the following Updates related to financial instruments:~~

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

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

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

The FASB has an ongoing project on its agenda for improving the Codification or correcting its unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or to create a significant administrative cost for most entities. The amendments in this ASU are similar to those items and are summarized below.

~~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~~

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 Transition Resource Group (“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~~

~~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 (ASU-2017-12) 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~~

~~Required Dates of Implementation: This ASU 2019-04 has various implementation dates dependent on a number of factors as it pertains to the above items. The Company has adopted ASU 2016-01.~~

~~Effect on Consolidated Financial Statements:~~ ~~The adoption of this ASU had no material impact to its consolidated statements of condition or income.~~

~~Standard:~~ ~~Measurement of Credit Losses on Financial Instruments (ASU 2016-13: Financial Instruments—Credit Losses [Topic 326]: Measurement of Credit Losses on Financial Instruments~~)

~~Description:~~ The amended guidance replaces the current incurred loss model for determining the allowance for credit losses. The guidance requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses will represent a valuation account that is deducted from the amortized cost basis of the financial assets to present their net carrying value at the amount expected to be collected. The income statement will reflect the measurement of credit losses for newly recognized financial assets as well as expected increases or decreases of expected credit losses that have taken place during the period. When determining the allowance, expected credit losses over the contractual term of the financial asset(s) (taking into account prepayments) will be estimated considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amended guidance also requires recording an allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. The initial allowance for these assets will be added to the purchase price at acquisition rather than being reported as an expense. Subsequent changes in the allowance will be recorded through the income statement as an expense adjustment. In addition, the amended guidance requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. The calculation of credit losses for available-for-sale securities will be similar to how it is determined under existing guidance.

~~Required Date of Implementation:~~ ~~January 1, 2023 (early adoption permitted as of January 1, 2019).~~

~~Effect on Consolidated Financial Statements:~~ The Company is assessing the new guidance to determine what modifications to existing credit estimation processes may be required. The new guidance is complex and management is still evaluating the preliminary output from models that have been developed during this evaluative phase. In addition, future levels of allowances will also reflect new requirements to include estimated credit losses on investment securities classified as held-to-maturity, if any. The Company has formed an Implementation Committee, whose membership includes representatives of senior management, to develop plans that will encompass: (1) internal methodology changes (2) data collection and management activities, (3) internal communication requirements, and (4) estimation of the projected impact of this guidance. It has been generally assumed that the conversion from the incurred loss model, required under current GAAP, to the CECL methodology will, more likely than not, result in increases to the allowances for credit losses at many financial institutions. However, the amount of any change in the allowance for credit losses resulting from the new guidance will ultimately be impacted by the provisions of this guidance as well as by the loan and debt security portfolios composition and asset quality at the adoption date, and economic conditions and forecasts at the time of adoption. The amendments in this Update should be applied on a modified retrospective basis by means of a

~~cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in Update 2016-13.~~

~~Standard:~~ ~~Transition Relief for the Implementation of ASU-2016-13 (ASU 2019-5: Financial Instruments—Credit Losses [Topic 326]: Targeted Transition Relief~~)

~~Description:~~ ~~The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10,~~ ~~Financial Instruments—Overall~~, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, ~~Fair Value Measurement—Overall~~, and 825-10. General guidance for the use of the fair value option is contained in Subtopic 825-10. The irrevocable election of the fair value option must be applied on an instrument-by-instrument basis for eligible instruments, whose characteristics are within the scope of Subtopic 326-20. Upon adoption of Topic 326, for items measured at fair value in accordance with paragraph 326-10-65-1(i), the difference between the carrying amount and the fair value shall be recorded by means of a cumulative-effect adjustment to the opening retained earnings balance as of the beginning of the first reporting period that an entity has adopted ASU 2016-13. Those differences may include, but are not limited to: (1) unamortized deferred costs, fees, premiums, and discounts (2) valuation allowances (for example, allowance for loan losses), or (3) accrued interest.

~~Required Date of Implementation:~~ ~~See comments above related to ASU 2016-13.~~

~~Effect on Consolidated Financial Statements:~~ ~~See comments above related to ASU 2016-13.~~

~~Standard:~~ ~~Simplifying the Test for Goodwill Impairment (ASU 2017-04: Intangibles—Goodwill and Other [Topic 350]: Simplifying the Test for Goodwill Impairment~~)

~~Description:~~ Current guidance requires a two-step approach to determining if recorded goodwill is impaired. In Step 1, reporting entities must first evaluate whether or not the carrying value of a reporting unit is greater than its fair value. In Step 2, if a reporting unit’s carrying value is greater than its fair value, then the entity should calculate the implied fair value of goodwill. If the carrying value of goodwill is more than the implied fair value, an impairment charge for the difference must be recorded. The amended guidance eliminates Step 2 from the goodwill impairment test. Therefore, under the new guidance, if the carrying value of a reporting unit is greater than its fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of the recorded goodwill).

~~Required Date of Implementation:~~ ~~January 1, 2020 (early adoption permitted).~~

~~Effect on Consolidated Financial Statements:~~ The amendments should be applied using a prospective transition method. The Company does not expect the guidance will have a material impact on its consolidated financial statements, unless at some point in the future one of its reporting units were to fail Step 1 of the goodwill impairment test.

~~Standard: Compensation (ASU 2018-14: Compensation - Retirement Benefits - Defined Benefit Plans - General [Subtopic 715 – 20]: Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans)~~

~~Description:~~ The FASB is issuing the amendments in this ASU as part of the disclosure framework project. The amendments in this ASU modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

~~The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.~~

~~The amount and timing of plan assets expected to be returned to the employer.~~

~~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.~~

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 weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates.~~

~~An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.~~

~~The amendments in this ASU 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:~~

~~The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets.~~

~~The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.~~

~~Effect on Consolidated Financial Statements:~~ ~~The Company does not expect the new guidance will have a material impact to its consolidated statements of condition or income.~~

~~Standard: Investments (~~ASU 2020-01- Equity Securities [Topic 321], Investments—Equity Method and Joint Ventures [Topic 323], and Derivatives and Hedging [Topic 815]—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815)

~~Description:~~ ~~The amendments in this Update clarify the interaction of the accounting for equity securities under Topic 321~~ and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments clarify that for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the ~~underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options.~~

~~Effect on Consolidated Financial Statements:~~ ~~The amendments in this Update should be applied prospectively. The Company does not expect the new guidance will have a material impact to its consolidated statements of condition or income.~~

~~Standard:~~ ~~Income Taxes~~ ~~(ASU 2019-12- Simplifying the Accounting for Income Taxes)~~

~~Description:~~ The FASB Board is issuing this Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The specific areas of potential simplification in this Update were submitted by stakeholders as part of the Simplification Initiative.

~~The amendments in this Update simplify the accounting for income taxes by removing the following exceptions:~~

Exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income)

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

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

~~Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.~~

~~The amendments in this Update also simplify the accounting for income taxes by doing the following:~~

~~Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax.~~

Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.

Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority.

~~Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.~~

~~Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.~~

~~Required Date of Implementation:~~ The amendments in this ASU are effective for fiscal years ending after December 15, 2020, for public business entities and for fiscal years ending after December 15, 2021, for all other entities. Early adoption of the amendments is permitted, including adoption in any interim period for (1) public business entities for periods for which financial statements have not yet been issued and (2) all other entities for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period.

~~Effect on Consolidated Financial Statements~~: The amendments in this Update related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. The Company does not expect the new guidance will have a material impact to its consolidated statements of condition or income.

~~Standard: Financial Instruments—Credit Losses~~ ~~(ASU 2019-11- Codification Improvements to Topic 326)~~

~~Description:~~ ~~On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13,~~ ~~Financial Instruments—Credit Losses (Topic 326)~~: Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss model for the impairment of financial assets measured at amortized cost basis. That model replaces the probable, incurred loss model for those assets. Through the amendments in that Update, the Board added Topic 326, ~~Financial Instruments—Credit Losses~~, and made several consequential amendments to the Codification. The Board has an ongoing project on its agenda for improving the Codification or correcting its unintended application. The items addressed in that project generally are not expected to have a significant effect on current accounting practice or create a significant administrative cost for most entities. The amendments in this Update are similar to those items. However, the Board decided to issue a separate Update for improvements to the amendments in Update 2016-13 to increase stakeholder awareness of those amendments and to expedite the improvement process. The amendments include items brought to the Board's attention by stakeholders.

~~The amendments in this Update clarify or address stakeholders' specific issues about certain aspects of the amendments in Update 2016-13 as described below:~~

~~Expected Recoveries for Purchased Financial Assets with Credit Deterioration (PCDs)~~: The amendments clarify that the allowance for credit losses for PCD assets should include in the allowance for credit losses expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. In addition, the amendments clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cash flows after acquisition.

~~Transition Relief for Troubled Debt Restructurings (TDRs)~~: The amendments provide transition relief by permitting entities an accounting policy election to adjust the effective interest rate on existing TDRs using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring.

~~Disclosures Related to Accrued Interest Receivables:~~ ~~The amendments extend the disclosure relief for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis.~~

~~Financial Assets Secured by Collateral Maintenance Provisions:~~ The amendments clarify that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. The amendments clarify that an entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero.

~~Conforming Amendment to Subtopic 805-20: The amendment to Subtopic 805-20,~~ ~~Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest, clarifies the guidance by removing the cross-reference to Subtopic 310-30~~ ~~in paragraph 805-20-50-1 and replacing it with a cross-reference to the guidance on PCD assets in Subtopic 326-20.~~

~~Required Date of Implementation:~~ January 1, 2023 (early adoption permitted as of January 1, 2019). The effective dates and transition requirements for the amendments are the same as the effective dates and transition requirements in Update 2016-13.

projected impact of this guidance. It has been generally assumed that the conversion from the incurred loss model, required under current GAAP, to the CECL methodology will, more likely than not, result in increases to the allowances for credit losses at many financial institutions. However, the amount of any change in the allowance for credit losses resulting from the new guidance will ultimately be impacted by the provisions of this guidance as well as by the loan and debt security portfolios composition and asset quality at the adoption date, and economic conditions and forecasts at the time of adoption. The amendments in this Update should be applied on a modified retrospect~~ive basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in~~ ~~Update 2016-13~~.

~~Standard: Reference Rate Reform~~ ~~(ASU 2020-04- Facilitation of the Effects of Reference Rate Reform on Financial Reporting)~~

~~Description:~~ The amendments provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments (1) apply to contract modifications that replace a reference rate affected by reference rate reform, (2) provide exceptions to existing guidance related to changes to the critical terms of a hedging relationship due to reference rate reform (3) provide optional expedients for fair value hedging relationships, cash flow hedging relationships, and net investment hedging relationships, and (4) provide a onetime election to sell, transfer, or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020.

~~Required Date of Implementation:~~ ~~The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022.~~

~~Effect on Consolidated Financial Statements:~~ The amendments for contract modifications can be elected to be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. The amendments for existing hedging relationships can be elected to be applied as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company is evaluating the impact that the guidance will have on its consolidated financial statements.

The Company entered into a securities purchase agreement with Castle Creek Capital Partners VII, L.P. on May 8, 2019, pursuant to which the Company sold: (i) 37,700 shares of the Company’s common stock, par value $0.01 per share, at a purchase price of $14.25 per share; (ii) 1,155,283 shares of a new series of preferred stock, Series B convertible perpetual preferred stock, par value $0.01 per share, at a purchase price of $14.25 per share; and (iii) a warrant, with an approximate fair value of $373,000, to purchase 125,000 shares of common stock of the Company at an exercise price equal to $14.25 per share, in a private placement transaction (the “Private Placement”) for gross proceeds of approximately $17.0 million. As a result of the securities purchase agreement, the Company has common stock, preferred stock and a warrant that are all eligible to participate in dividends equal to the common stock dividends on a per share basis. Securities that participate in dividends, such as the Company’s preferred stock and warrant, are considered “participating securities.” The Company calculates net income available to common shareholders using the two-class method required for capital structures that include participating securities.

In applying the two-class method for the three months ended March 31, 2020, basic net income per share was calculated by dividing net income (less any dividends on participating securities) by the weighted average number of shares of common stock and participating securities outstanding for the period. Diluted earnings per share may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is calculated by applying either the two-class method or the Treasury Stock method to the assumed exercise or vesting of potentially dilutive common shares. The method yielding the more dilutive result is ultimately reported for the applicable period. Potentially dilutive common stock equivalents primarily consist of employee stock options and restricted stock units. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released to plan participants.

Basic earnings per share for the three months ended March 31, 2019 was calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Net income available to common shareholders is net income to Pathfinder Bancorp, Inc. less the total of preferred dividends declared, if any. Diluted earnings per share include the potential dilutive effect that could occur upon the assumed exercise of issued stock options using the Treasury Stock method. Unallocated common shares held by the ESOP are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released to plan participants.

Anti-dilutive shares are common stock equivalents with average exercise prices in excess of the weighted average market price for the period presented. Anti-dilutive stock options, not included in the computation below, were -0- for both the three months ended March 31, 2020 and March 31, 2019.

~~The following table sets forth the calculation of basic and diluted earnings per share.~~

~~The amortized cost and estimated fair value of investment securities are summarized as follows:~~

March 31, 2020

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

(In thousands)

Cost

Gains

Losses

Value

Available-for-Sale Portfolio

Debt investment securities:

US Treasury, agencies and GSEs

$
19,645

$
25

$
(25
)

$
19,645

State and political subdivisions

7,395

-

(515
)

6,880

Corporate

12,303

244

(337
)

12,210

Asset backed securities

14,227

-

(1,811
)

12,416

Residential mortgage-backed - US agency

20,112

173

(139
)

20,146

Collateralized mortgage obligations - US agency

35,843

62

(805
)

35,100

Collateralized mortgage obligations - Private label

15,680

7

(832
)

14,855

Total

125,205

511

(4,464
)

121,252

Equity investment securities:

Common stock - financial services industry

206

-

-

206

Total

206

-

-

206

Total available-for-sale

$
125,411

$
511

$
(4,464
)

$
121,458

Held-to-Maturity Portfolio

Debt investment securities:

US Treasury, agencies and GSEs

$
1,999

$
13

$
-

$
2,012

State and political subdivisions

8,484

75

(81
)

8,478

Corporate

24,780

210

(1,012
)

23,978

Asset backed securities

26,016

-

(1,992
)

24,024

Residential mortgage-backed - US agency

13,157

320

(66
)

13,411

Collateralized mortgage obligations - US agency

22,950

378

(177
)

23,151

Collateralized mortgage obligations - Private label

23,163

-

(1,129
)

22,034

Total held-to-maturity

$
120,549

$
996

$
(4,457
)

$
117,088

December 31, 2019

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

(In thousands)

Cost

Gains

Losses

Value

Available-for-Sale Portfolio

Debt investment securities:

US Treasury, agencies and GSEs

$
16,850

$
-

$
(30
)

$
16,820

State and political subdivisions

1,735

1

-

1,736

Corporate

12,347

230

(23
)

12,554

Asset backed securities

13,190

61

(19
)

13,232

Residential mortgage-backed - US agency

19,012

56

(88
)

18,980

Collateralized mortgage obligations - US agency

31,320

35

(570
)

30,785

Collateralized mortgage obligations - Private label

16,767

97

(43
)

16,821

Total

111,221

480

(773
)

110,928

Equity investment securities:

Common stock - financial services industry

206

-

-

206

Total

206

-

-

206

Total available-for-sale

$
111,427

$
480

$
(773
)

$
111,134

Held-to-Maturity Portfolio

Debt investment securities:

US Treasury, agencies and GSEs

$
1,998

$
2

$
-

$
2,000

State and political subdivisions

8,534

124

(4
)

8,654

Corporate

25,779

584

(29
)

26,334

Asset backed securities

23,099

101

(115
)

23,085

Residential mortgage-backed - US agency

13,715

247

(3
)

13,959

Collateralized mortgage obligations - US agency

19,607

300

(29
)

19,878

Collateralized mortgage obligations - Private label

30,256

35

(53
)

30,238

Total held-to-maturity

$
122,988

$
1,393

$
(233
)

$
124,148

The amortized cost and estimated fair value of debt investments at March 31, 2020 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

The Company’s investment securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

March 31, 2020

Less than Twelve Months

Twelve Months or More

Total

Number of

Number of

Number of

Individual

Unrealized

Fair

Individual

Unrealized

Fair

Individual

Unrealized

Fair

(Dollars in thousands)

Securities

Losses

Value

Securities

Losses

Value

Securities

Losses

Value

Available-for-Sale Portfolio

US Treasury, agencies and GSE's

1

$
(25
)

$
4,952

-

$
-

$
-

1

$
(25
)

$
4,952

State and political subdivisions

5

(515
)

5,390

-

-

-

5

(515
)

5,390

Corporate

8

(337
)

5,143

-

-

-

8

(337
)

5,143

Asset backed securities

11

(1,797
)

12,027

1

(14
)

367

12

(1,811
)

12,394

Residential mortgage-backed - US agency

7

(133
)

7,989

1

(6
)

1,483

8

(139
)

9,472

Collateralized mortgage obligations - US agency

11

(212
)

18,524

8

(593
)

7,132

19

(805
)

25,656

Collateralized mortgage obligations - Private label

9

(477
)

9,434

4

(355
)

4,339

13

(832
)

13,773

Totals

52

$
(3,496
)

$
63,459

14

$
(968
)

$
13,321

66

$
(4,464
)

$
76,780

Held-to-Maturity Portfolio

State and political subdivisions

2

$
(81
)

$
3,046

-

$
-

$
-

2

$
(81
)

$
3,046

Corporate

12

(1,012
)

12,236

-

-

-

12

(1,012
)

12,236

Asset backed securities

12

(1,992
)

22,048

-

-

-

12

(1,992
)

22,048

Residential mortgage-backed - US agency

3

(66
)

4,021

-

-

-

3

(66
)

4,021

Collateralized mortgage obligations - US agency

3

(177
)

5,623

-

-

-

3

(177
)

5,623

Collateralized mortgage obligations - Private label

11

(1,089
)

14,214

2

(40
)

811

13

(1,129
)

15,025

Totals

43

$
(4,417
)

$
61,188

2

$
(40
)

$
811

45

$
(4,457
)

$
61,999

December 31, 2019

Less than Twelve Months

Twelve Months or More

Total

Number of

Number of

Number of

Individual

Unrealized

Fair

Individual

Unrealized

Fair

Individual

Unrealized

Fair

(Dollars in thousands)

Securities

Losses

Value

Securities

Losses

Value

Securities

Losses

Value

Available-for-Sale Portfolio

US Treasury, agencies and GSE's

4

$
(30
)

$
16,820

-

$
-

$
-

4

$
(30
)

$
16,820

Corporate

1

(23
)

786

-

-

-

1

(23
)

786

Asset backed securities

3

(7
)

5,211

1

(12
)

594

4

(19
)

5,805

Residential mortgage-backed - US agency

10

(77
)

10,709

4

(11
)

2,543

14

(88
)

13,252

Collateralized mortgage obligations - US agency

10

(67
)

15,791

10

(503
)

10,034

20

(570
)

25,825

Collateralized mortgage obligations - Private label

2

(7
)

3,818

5

(36
)

3,959

7

(43
)

7,777

Totals

30

$
(211
)

$
53,135

20

$
(562
)

$
17,130

50

$
(773
)

$
70,265

Held-to-Maturity Portfolio

State and political subdivisions

1

$
(4
)

$
3,027

-

$
-

$
-

1

$
(4
)

$
3,027

Corporate

2

(29
)

2,974

-

-

-

2

(29
)

2,974

Asset backed securities

6

(115
)

11,091

-

-

-

6

(115
)

11,091

Residential mortgage-backed - US agency

-

-

-

1

(3
)

198

1

(3
)

198

Collateralized mortgage obligations - US agency

2

(29
)

4,907

-

-

-

2

(29
)

4,907

Collateralized mortgage obligations - Private label

6

(49
)

9,396

2

(4
)

1,132

8

(53
)

10,528

Totals

17

$
(226
)

$
31,395

3

$
(7
)

$
1,330

20

$
(233
)

$
32,725

Excluding the effects of changes in the characteristics of individual debt securities that potentially give rise to other-than-temporary impairment (“OTTI”), as described below, the fair market value of a debt security as of a particular measurement date is highly dependent upon prevailing market and economic environmental factors at the measurement date relative to the prevailing market and economic environmental factors present at the time the debt security was acquired. The most significant market and environmental factors include, but are not limited to (1) the general level of interest rates, (2) the relationship between shorter-term interest rates and longer-term interest rates (referred to as the “slope” of the interest rate yield curve), (3) general bond market liquidity, (4) the recent and expected near-term volume of new issuances of similar debt securities, and (5) changes in the market values of individual loan collateral underlying mortgage-backed debt securities. Changes in interest rates affect the fair market values of debt securities by influencing the discount rate applied to the securities’ future expected cash flows. The higher the discount rate, the lower the resultant security price. Conversely, the lower the discount rate, the higher the resultant security price. In addition, the cumulative amount and timing of undiscounted cash flows of debt securities may be also affected by changes in interest rates. For any given level of movement in the general market and economic environmental factors described above, the magnitude of any particular debt security’s price changes will also depend heavily upon security-specific factors such as (1) the

duration of the security, (2) imbedded optionality contractually granted to the issuer of the security with respect to principal prepayments, and (3) changes in the level of market premiums demanded by investors for securities with imbedded credit risk (where applicable).

The Company conducts a formal review of investment securities on a quarterly basis for the presence of OTTI. The Company assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the statement of condition date. Under these circumstances, OTTI is considered to have occurred (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not anticipated to be sufficient to recover the entire amortized cost basis. The guidance requires that credit-related OTTI is recognized in earnings while non-credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”). Non-credit-related OTTI is based on other factors, including illiquidity and changes in the general interest rate environment. Presentation of OTTI is made in the consolidated statement of income on a gross basis, including both the portion recognized in earnings as well as the portion recorded in OCI. The gross OTTI would then be offset by the amount of non-credit-related OTTI, showing the net as the impact on earnings.

Management does not believe any individual unrealized loss in the securities portfolio as of March 31, 2020 represented OTTI. At March 31, 2020, the Bank had the following securities, in a loss position for 12 months or more relative to their amortized historical cost, which were deemed to have no credit impairment, thus, the disclosed unrealized losses related directly to changes in interest rates subsequent to the acquisition of the individual securities. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.

One privately-issued asset-backed security, categorized as available-for-sale, with an amortized historical cost of $381,000 and an aggregate market value of $367,000 (unrealized loss of $14,000 or 3.8%). This security maintains a credit rating established by one or more NRSRO above the minimum level required to be considered as investment grade and therefore, no credit-related OTTI is deemed to be present.

Four privately-issued collateralized mortgage obligation securities, categorized as available-for-sale, with an aggregate amortized historical cost of $4.7 million and an aggregate market value of $4.3 million (unrealized aggregate loss of $355,000 or 8.2%). These securities were not rated at the time of their issuances by any NRSRO but each security remains significantly collateralized through subordination and other credit enhancements. Therefore, no credit-related OTTI is deemed to be present.

Two privately-issued collateralized mortgage obligation securities, categorized as held-to-maturity, with an aggregate amortized historical cost of $851,000 and an aggregate market value of $811,000 (aggregate unrealized loss of $40,000 or 4.9%). These securities were not rated at the time of their issuance by any NRSRO but each security remains significantly collateralized through subordination and other credit enhancements. Therefore, no credit-related OTTI is deemed to be present.

All other securities with market values less than their amortized historical costs are issued by United States agencies or government sponsored enterprises and consist of mortgage-backed securities, collateralized mortgage obligations and direct agency financings. These positions in US government agency and government-sponsored enterprises are deemed to have no credit impairment, thus, the disclosed unrealized losses related directly to changes in interest rates subsequent to the acquisition of the individual securities. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.

In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the length of time the equity security’s fair value has been below the carrying amount. The Company had no equity securities that were impaired at March 31, 2020 or December 31, 2019.

~~The comprehensive loss recorded in~~ the quarter ended March 31, 2020, was primarily the result of the unrealized depreciation in the fair market value of the available-for-sale investment securities portfolio during the three months ended March 31, 2020. This depreciation was primarily due to the effects of the COVID-19 pandemic on global fixed income markets at the end of March 2020, as trading activity in those markets was substantially halted and normal market-based price discovery mechanisms were temporarily, but substantially, incapacitated. As a result, available market

~~price quotations for many of the securities within the Company’s investment securities portfolio were not reflective of the fair values that would be obtainable in normally functioning markets~~.

~~Gross realized gains (losses) on sales of securities for the indicated periods are detailed below:~~

For the three months

ended March 31,

(In thousands)

2020

2019

Realized gains on investments

$
33

$
222

Realized losses on investments

(7
)

(143
)

$
26

$
79

As of March 31, 2020 and December 31, 2019, securities with a fair value of $113.5 million and $92.4 million, respectively, were pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of $25.6 million and $21.3 million, respectively, were pledged against certain borrowing arrangements.

Management has reviewed its mortgage-backed securities portfolios and determined that, to the best of its knowledge, little exposure exists to sub-prime or other high-risk residential mortgages. With limited exceptions in the Company’s investment portfolio involving the most senior tranches of securitized bonds, the Company is not in the practice of investing in, or originating, these types of investments or loans.

The Company has a noncontributory defined benefit pension plan covering most employees. The plan provides defined benefits based on years of service and final average salary. On May 14, 2012, the Company informed its employees of its decision to freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan. The plan was frozen on June 30, 2012. Compensation earned by employees up to June 30, 2012 is used for purposes of calculating benefits under the plan but there are no future benefit accruals after this date. Participants as of June 30, 2012 will continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work. In addition, the Company provides certain health and life insurance benefits for a limited number of eligible retired employees. The healthcare plan is contributory with participants’ contributions adjusted annually; the life insurance plan is noncontributory. Employees with less than 14 years of service as of January 1, 1995, are not eligible for the health and life insurance retirement benefits.

~~The composition of net periodic pension plan and postretirement plan costs for the indicated periods is as follows:~~

The Company will evaluate the need for further contributions to the defined benefit pension plan during 2020. The prepaid pension asset is recorded in other assets on the statement of condition as of March 31, 2020 and December 31, 2019.

~~(1)~~

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

Although the Bank may sometimes purchase or fund loan participation interests outside of its primary market areas, the Bank generally originates residential mortgage, commercial, and consumer loans largely to customers throughout Oswego and Onondaga counties. Although the Bank has a diversified loan portfolio, a substantial portion of its borrowers’ abilities to honor their loan contracts is dependent upon the counties’ employment and economic conditions.

As part of the Company’s overall balance sheet management strategies and the management’s ongoing efforts to profitably deploy its increased capital position following the equity sales transactions completed in May 2019, the Bank acquired seven diverse pools of loans, originated by unrelated third parties, in six separate transactions during 2019. The purchase of participations in loans that are originated by third parties only occurs after the completion of thorough pre-acquisition due diligence. Loans in which the Company acquires a participating interest are determined to meet, in all material respects, the Company’s internal underwriting policies, including credit and collateral suitability thresholds, prior to acquisition. In addition, the financial condition of the originating entity, which are generally retained as the ongoing loan servicing provider for participations acquired by the Bank, are analyzed prior to the acquisition of the participating interests and monitored on a regular basis thereafter for the life of those interests.

The Bank acquired $15.6 million, $10.2 million, and $24.6 million of loans originated by an unrelated financial institution, located outside of the Bank’s market area, in January 2017, April 2017, and March 2019, respectively. The acquired loan pools represented a 90% participating interest in a total of 2,283 loans secured by liens on automobiles with maturities ranging primarily from two to six years. These loans will be serviced through their respective maturities by the originating financial institution. At March 31, 2020 and December 31, 2019~~, there were 1,573 loans outstanding with a remaining outstanding carrying value of $24.9 million and 1,657 loans outstanding with a remaining outstanding carrying~~ value of $27.2 million, respectively. The unamortized premium included in the carrying value at March 31, 2020 and December 31, 2019 was $833,000 and $930,000, respectively. Since the acquisition of these loan pools, a total of 32 loans had cumulative net charge-offs totaling $204,000, with $8,000 in net-charge-offs for the three months ended March 31, 2020 and $37,000 in net charge-offs for the three months ended March 31, 2019.

The Bank acquired a $5.0 million pool of consumer loans and a $5.0 million pool of commercial and industrial loans originated by an unrelated financial institution, located outside of the Bank’s market area, in June 2019. In December 2019, the Bank acquired an additional $1.8 million in commercial and industrial loans and $392,000 of consumer loans from the same institution. The acquired loan pools represented a 100% interest in a total of 89 unsecured consumer loans and a total of 43 commercial and industrial loans. These loans have maturities ranging primarily from four to ten years. At March 31, 2020, there were 85 unsecured consumer loans outstanding with a remaining outstanding carrying value of $4.7 million and 43 commercial and industrial loans outstanding with a remaining outstanding carrying value of $6.4 million. At December 31, 2019, there were 87 unsecured consumer loans outstanding with a remaining outstanding carrying value of $5.0 million and 43 commercial and industrial loans outstanding with a remaining outstanding carrying value of $6.6 million. These loans have no unamortized premium or discount included in the carrying value. No charge-offs have occurred since the acquisition of these loan pools.

The Bank acquired a $21.9 million pool of home equity lines of credit originated by an unrelated financial technology company, located outside of the Bank’s market area, in August 2019. The acquired loan pool represented a 100% interest in a total of 395 secured home equity lines of credit. These lines of credit have maturities ranging primarily from four to thirty years. These lines of credit will be serviced through their respective maturities by the originating financial technology company. At March 31, 2020 and December 31, 2019, there were 355 secured home equity lines of credit outstanding with a remaining outstanding carrying value of $18.8 million and there were 376 secured home equity lines of credit outstanding with a remaining outstanding carrying value of $20.1 million, respectively. The unamortized premium included in the carrying value at March 31, 2020 and December 31, 2019 was $368,000 and $390,000, respectively. No charge-offs have occurred since the acquisition of these loan pools.

The Bank acquired a $26.6 million pool of unsecured consumer loans originated by an unrelated financial technology company, located outside of the Bank’s market area, in November 2019. The acquired loan pool represents a 59.2% interest in a total of 2,787 unsecured consumer loans. These loans have maturities ranging primarily from three to five years. These loans will be serviced through their respective maturities by the originating unrelated financial technology company. At March 31, 2020 and December 31, 2019, there were 2,754 unsecured consumer loans outstanding with a remaining outstanding carrying value of $23.7 million and 2,768 unsecured consumer loans outstanding with a remaining outstanding carrying value of $25.8 million, respectively. The unamortized premium included in the carrying value at March 31, 2020 and December 31, 2019 was $100,000 and $114,000, respectively. Since the acquisition of theses loan pools, a total of one loan had a cumulative net charge-off totaling $19,000, with $19,000 in net charge-offs for the three months ended March 31, 2020.

The Bank acquired a $10.3 million pool of unsecured consumer loans originated by an unrelated financial technology company, located outside of the Bank’s market area, in December 2019. The acquired loan pool represents a 100% interest in a total of 4,259 unsecured consumer loans. These loans have maturities ranging primarily from less than one year to seven years. These loans will be serviced through their respective maturities by the originating unrelated financial technology company. At March 31, 2020 and December 31, 2019, there were 3,936 unsecured consumer loans outstanding with a remaining outstanding carrying value of $8.8 million and 4,259 unsecured consumer loans outstanding with a remaining outstanding carrying value of $10.3 million, respectively. The unamortized premium included in the carrying value at March 31, 2020 and December 31, 2019 was $213,000 and $245,000, respectively. No charge-offs have occurred since the acquisition of these loan pools.

The Bank acquired a $2.1 million pool of secured first lien residential mortgage loans originated by an unrelated non-profit housing and community development organization, located within the Bank’s market area, in December 2019. The acquired loan pool represents a 100% interest in a total of 25 secured first lien residential mortgage loans. These loans have maturities ranging primarily from 22 to 24 years. These loans will be serviced through their respective maturities by the unrelated non-profit housing and community development organization. At March 31, 2020 and December 31, 2019, there were 25 residential mortgage loans outstanding with a remaining outstanding carrying value of $2.0 million and 25 residential mortgage loans outstanding with a remaining outstanding carrying value of $2.1 million, respectively. The unamortized premium included in the carrying value at March 31, 2020 and December 31, 2019, was $133,000 and $135,000, respectively. No charge-offs have occurred since the acquisition of these loan pools.

As of March 31, 2020 and December 31, 2019, residential mortgage loans with a carrying value of $110.3 million and $136.9 million, respectively, have been pledged by the Company to the Federal Home Loan Bank of New York (“FHLBNY”) under a blanket collateral agreement to secure the Company’s line of credit and term borrowings.

~~The Company’s lending policies and procedures are presented in Note 5 to the audited consolidated financial statements included in the 2019 Annual Report on Form 10-K~~originally filed with the Securities and Exchange Commission (the “SEC”) on May 29, 2020 (the “Original Form 10-Q”), solely to add this Explanatory Note, which was inadvertently omitted from the Original Form 10-Q, to disclose that the Company had filed the Original Form 10-Q after the May 15, 2020 deadline applicable to the Company for the filing of a Form 10-Q in reliance on the 45-day extension provided by an order issued by the SEC under Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) Granting Exemptions from Specified Provisions of the Exchange Act and Certain Rules Thereunder, dated March ~~23,~~4, 2020 (Release No. 34-88318), as modified and ~~have not changed.~~ superseded by a new SEC order under Section 36 of the Exchange Act Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies, dated March 25, 2020 (Release No. 34-88465) (collectively, the “Order”).

~~To develop~~On May 15, 2020, the Company filed a Current Report on Form 8-K (the “Form 8-K”) to indicate its intention to rely on the Order for such extension. Specifically, the Company disclosed that its operations and ~~document a systematic methodology for determining~~business have experienced disruptions due to the ~~allowance for loan losses,~~unprecedented conditions surrounding COVID-19 in the United States, resulting in the Company having to modify its business practices. Since the middle of March 2020, the Company has ~~divided~~been following the ~~loan portfolio into three portfolio segments, each with different~~recommendations of state and local health authorities to minimize the exposure risk characteristics but with similar methodologies for assessing risk. Each portfolio segment is broken down into loan classes where appropriate. Loan classes contain unique measurement attributes, risk characteristics, and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses. Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class.

~~The following table illustrates the portfolio segments and classes~~ for the Company’s ~~loan portfolio:~~

~~Portfolio Segment~~	~~Class~~

~~Residential Mortgage Loans~~	~~1-4 family first-lien residential mortgages~~
	~~Construction~~

~~Commercial Loans~~	~~Real estate~~
	~~Lines of credit~~
	~~Other commercial and industrial~~
	~~Tax exempt loans~~

~~Consumer Loans~~	~~Home equity and junior liens~~
	~~Other consumer~~

~~The following tables present~~COVID-19 and related events on the ~~classes of~~Company’s operations and financial position and developing operational and financial plans to address those matters, which temporarily diverted management resources from completing tasks necessary to file the loan portfolio, not including net deferred loan costs, summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of the dates indicated:

As of March 31, 2020

Special

(In thousands)

Pass

Mention

Substandard

Doubtful

Total

Residential mortgage loans:

1-4 family first-lien residential mortgages

$
208,451

$
1,037

$
1,473

$
1,188

$
212,149

Construction

2,338

-

-

-

2,338

Loans held-for-sale

150

-

-

-

150

Total residential mortgage loans

210,939

1,037

1,473

1,188

214,637

Commercial loans:

Real estate

245,927

12,523

2,771

708

261,929

Lines of credit

51,845

7,207

302

-

59,354

Other commercial and industrial

75,475

8,367

891

41

84,774

Tax exempt loans

7,937

-

-

-

7,937

Total commercial loans

381,184

28,097

3,964

749

413,994

Consumer loans:

Home equity and junior liens

43,844

159

454

275

44,732

Other consumer

76,489

174

176

-

76,839

Total consumer loans

120,333

333

630

275

121,571

Total loans

$
712,456

$
29,467

$
6,067

$
2,212

$
750,202

As of December 31, 2019

Special

(In thousands)

Pass

Mention

Substandard

Doubtful

Total

Residential mortgage loans:

1-4 family first-lien residential mortgages

$
205,554

$
1,093

$
1,731

$
1,181

$
209,559

Construction

3,963

-

-

-

3,963

Loans held-for-sale

35,790

-

-

-

35,790

Total residential mortgage loans

245,307

1,093

1,731

1,181

249,312

Commercial loans:

Real estate

238,288

12,473

3,194

302

254,257

Lines of credit

50,396

7,945

276

-

58,617

Other commercial and industrial

72,653

8,473

923

43

82,092

Tax exempt loans

8,067

-

-

-

8,067

Total commercial loans

369,404

28,891

4,393

345

403,033

Consumer loans:

Home equity and junior liens

45,414

191

477

307

46,389

Other consumer

82,252

167

188

-

82,607

Total consumer loans

127,666

358

665

307

128,996

Total loans

$
742,377

$
30,342

$
6,789

$
1,833

$
781,341

~~Management has reviewed its loan portfolio and determined that,~~Original Form 10-Q prior to the ~~best of its knowledge, no material exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of originating these types of loans.~~

Loans are placed on nonaccrual when the contractual payment of principal and interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing.

~~Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment~~ due date.

~~An age analysis of past due loans, not including net deferred loan costs, segregated by portfolio segment and class of loans, as of~~On March ~~31,~~27, 2020, ~~and December 31, 2019, are detailed in~~ the ~~following tables:~~

As of March 31, 2020

30-59 Days

60-89 Days

90 Days

Total

Total Loans

(In thousands)

Past Due

Past Due

and Over

Past Due

Current

Receivable

Residential mortgage loans:

1-4 family first-lien residential mortgages

$
1,569

$
600

$
1,040

$
3,209

$
208,940

$
212,149

Construction

-

-

-

-

2,338

2,338

Loans held-for-sale

-

-

-

-

150

150

Total residential mortgage loans

1,569

600

1,040

3,209

211,428

214,637

Commercial loans:

Real estate

5,829

-

2,268

8,097

253,832

261,929

Lines of credit

2,838

1,967

111

4,916

54,438

59,354

Other commercial and industrial

1,388

3,738

232

5,358

79,416

84,774

Tax exempt loans

-

-

-

-

7,937

7,937

Total commercial loans

10,055

5,705

2,611

18,371

395,623

413,994

Consumer loans:

Home equity and junior liens

147

72

429

648

44,084

44,732

Other consumer

243

164

228

635

76,204

76,839

Total consumer loans

390

236

657

1,283

120,288

121,571

Total loans

$
12,014

$
6,541

$
4,308

$
22,863

$
727,339

$
750,202

As of December 31, 2019

30-59 Days

60-89 Days

90 Days

Total

Total Loans

(In thousands)

Past Due

Past Due

and Over

Past Due

Current

Receivable

Residential mortgage loans:

1-4 family first-lien residential mortgages

$
947

$
744

$
1,613

$
3,304

$
206,255

$
209,559

Construction

-

-

-

-

3,963

3,963

Loans held-for-sale

-

-

-

-

35,790

35,790

Total residential mortgage loans

947

744

1,613

3,304

246,008

249,312

Commercial loans:

Real estate

953

100

2,271

3,324

250,933

254,257

Lines of credit

4,464

25

68

4,557

54,060

58,617

Other commercial and industrial

2,747

315

591

3,653

78,439

82,092

Tax exempt loans

-

-

-

-

8,067

8,067

Total commercial loans

8,164

440

2,930

11,534

391,499

403,033

Consumer loans:

Home equity and junior liens

315

130

480

925

45,464

46,389

Other consumer

335

50

151

536

82,071

82,607

Total consumer loans

650

180

631

1,461

127,535

128,996

Total loans

$
9,761

$
1,364

$
5,174

$
16,299

$
765,042

$
781,341

The Company is required to disclose certain activities related to Troubled Debt Restructurings (“TDR”) in accordance with accounting guidance. Certain loans have been modified in a TDR where economic concessions have been granted to a borrower who is experiencing, or expected to experience, financial difficulties. These economic concessions could include a reduction in the loan interest rate, extension of payment terms, reduction of principal amortization, or other actions that it would not otherwise consider for a new loan with similar risk characteristics.

The Company is required to disclose new TDRs for each reporting period for which an income statement is being presented. The pre-modification outstanding recorded investment is the principal loan balance less the provision for loan losses before the loan was modified as a TDR. The post-modification outstanding recorded investment is the principal balance less the provision for loan losses after the loan was modified as a TDR. Additional provision for loan losses is the change in the allowance for loan losses between the pre-modification outstanding recorded investment and post-modification outstanding recorded investment.

~~The Company had no loans that have been modified as TDRs for the three months ended March 31, 2020.~~

~~The Company had no loans that have been modified as TDRs for the three months ended March 31, 2019.~~

The Company is required to disclose loans that have been modified as TDRs within the previous 12 months in which there was payment default after the restructuring. The Company defines payment default as any loans 90 days past due on contractual payments.

~~The Company had no loans that had been modified as TDRs during the twelve months prior to March 31, 2020, which had subsequently defaulted during the three months ended March 31, 2020.~~

~~The Company had no loans that had been modified as TDRs during the twelve months prior to March 31, 2019, which had subsequently defaulted during the three months ended March 31, 2019.~~

~~The~~ United States ~~has been operating under a state of emergency related to~~Congress passed the Coronavirus Disease 2019 (“COVID-19”) pandemic since March 13, 2020. The direct and indirect effects of the COVID-19 pandemic have resulted in a dramatic reduction in economic activity that has severely hampered the ability for businesses and consumers to meet their current repayment obligations. The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”)~~, signed into law on March 27, 2020, in addition~~ which was intended to ~~providing financial assistance~~provide approximately $2.5 trillion of direct support to ~~both~~U.S. citizens and businesses and consumers, creates a forbearance program for federally-backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the national emergency, and provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. The banking regulatory agencies have likewise issued guidance encouraging financial

institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. That guidance, with concurrence of the Financial Accounting Standards Board, and provisions of the CARES Act allow modifications made on a good faith basis in response to COVID-19 to borrowers who were generally current with their payments prior to any relief, to not be treated as troubled debt restructurings. Modifications may include payment deferrals, fee waivers, extensions of repayment term, or other delays in payment. The Company has begun working with its customers affected by ~~COVID-19 and expects a significant amount of modifications across many of its loan portfolios in the near term. Through May 15, 2020, the Bank granted payment deferral requests primarily for 90 days, on 540 loans representing approximately $142.9 million of existing loan balances.~~ ~~To the extent that such modifications meet the criteria previously described, such modifications are not expected to be classified as troubled debt restructurings.~~

When the Company modifies a loan within a portfolio segment that is individually evaluated for impairment, a potential impairment is analyzed either based on the present value of the expected future cash flows discounted at the interest rate of the original loan terms or the fair value of the collateral less costs to sell. If it is determined that the value of the loan is less than its recorded investment, then impairment is recognized as a component of the provision for loan losses, an associated increase to the allowance for loan losses or as a charge-off to the allowance for loan losses in the current period.

~~The following tables summarize impaired loan information by portfolio class at the indicated dates:~~

March 31, 2020

December 31, 2019

Unpaid

Unpaid

Recorded

Principal

Related

Recorded

Principal

Related

(In thousands)

Investment

Balance

Allowance

Investment

Balance

Allowance

With no related allowance recorded:

1-4 family first-lien residential mortgages

$
1,023

$
1,023

$
-

$
1,027

$
1,027

$
-

Commercial real estate

3,979

4,052

-

3,996

4,067

-

Commercial lines of credit

83

83

-

86

86

-

Other commercial and industrial

336

355

-

69

77

-

Home equity and junior liens

77

77

-

40

40

-

Other consumer

55

55

-

55

55

-

With an allowance recorded:

1-4 family first-lien residential mortgages

581

581

95

584

584

97

Commercial real estate

448

448

76

450

450

78

Commercial lines of credit

98

98

98

98

98

98

Other commercial and industrial

545

545

379

866

866

406

Home equity and junior liens

142

142

128

180

180

150

Other consumer

35

35

1

36

36

1

Total:

1-4 family first-lien residential mortgages

1,604

1,604

95

1,611

1,611

97

Commercial real estate

4,427

4,500

76

4,446

4,517

78

Commercial lines of credit

181

181

98

184

184

98

Other commercial and industrial

881

900

379

935

943

406

Home equity and junior liens

219

219

128

220

220

150

Other consumer

90

90

1

91

91

1

Totals

$
7,402

$
7,494

$
777

$
7,487

$
7,566

$
830

~~The following table presents the average recorded investment in impaired loans for the periods indicated:~~

~~The following table presents the cash basis interest income recognized on impaired loans for the periods indicated:~~

Management extensively reviews recent trends in changes in the size and composition of the loan portfolio, historical loss experience, qualitative factors, and specific reserve needs on loans individually evaluated for impairment, in its determination of the adequacy of the allowance for loan losses. We recorded $1.1 million in provision for loan losses for the three-month period ended March 31, 2020, as compared to $144,000 for the three-month period ended March 31, 2019. The $923,000 increase in the provision for loan losses in the first quarter of 2020, as compared to the same quarter in 2019, resulted from year-over-year increases in: (1) the qualitative factors used in determining the adequacy of the allowance for loan losses, (2) the size of the loan portfolio, and (3) delinquent and nonaccrual loans. The increase in the quantitative factors used in determining the provision for loan losses reflects the substantial increase in economic uncertainty and the resultant potential for increased credit losses in future periods as a consequence of the COVID-19 ~~pandemic. Outstanding loan balances increased $92.9 million, or 14.1%, in the quarter ended March 31, 2020, as compared to the same quarter in the previous year,~~outbreak. The operational management and therefore required a corresponding increase in the estimable and probable loan losses inherent in the loan portfolio. Finally, the provision for loan losses in the quarter ended March 31, 2020 was further increased, as compared to the same quarter in 2019, by the effectsstaff of an increase in the ratio of delinquent loans to total loans, which increased to 3.05% at March 31, 2020 as compared to 2.75% at March 31, 2019, coupled with an increase in nonaccrual loans that increased $1.2 million to $4.7 million at March 31, 2020 as compared to $3.4 million at March 31, 2019.

Summarized in the tables below are changes in the allowance for loan losses for the indicated periods and information pertaining to the allocation of the allowance for loan losses, balances of the allowance for loan losses, loans receivable based on individual, and collective impairment evaluation by loan portfolio class. An allocation of a portion of the allowance to a given portfolio class does not limit the Company’s ability to absorb losses in another portfolio class.

March 31, 2020

1-4 family

first-lien

Residential

Other

residential

construction

Commercial

Commercial

commercial

(In thousands)

mortgage

mortgage

real estate

lines of credit

and industrial

Allowance for loan losses:

Beginning Balance

$
580

$
-

$
4,010

$
1,195

$
1,645

Charge-offs

(26
)

-

-

-

-

Recoveries

1

-

-

2

-

Provisions

176

-

233

21

113

Ending balance

$
731

$
-

$
4,243

$
1,218

$
1,758

Ending balance: related to loans
   individually evaluated for impairment

$
95

$
-

$
76

$
98

$
379

Ending balance: related to loans
   collectively evaluated for impairment

$
636

$
-

$
4,167

$
1,120

$
1,379

Loans receivables:

Ending balance

$
212,149

$
2,338

$
261,929

$
59,354

$
84,774

Ending balance: individually
   evaluated for impairment

$
1,604

$
-

$
4,427

$
181

$
881

Ending balance: collectively
   evaluated for impairment

$
210,545

$
2,338

$
257,502

$
59,173

$
83,893

Home equity

Other

Tax exempt

and junior liens

Consumer

Unallocated

Total

Allowance for loan losses:

Beginning Balance

$
1

$
553

$
413

$
272

$
8,669

Charge-offs

-

(28
)

(133
)

-

(187
)
Recoveries

-

29

25

-

57

Provisions (credits)

-

57

541

(74
)

1,067

Ending balance

$
1

$
611

$
846

$
198

$
9,606

Ending balance: related to loans
   individually evaluated for impairment

$
-

$
128

$
1

$
-

$
777

Ending balance: related to loans
   collectively evaluated for impairment

$
1

$
483

$
845

$
198

$
8,829

Loans receivables:

Ending balance

$
7,937

$
44,732

$
76,839

$
150

$
750,202

Ending balance: individually
   evaluated for impairment

$
-

$
219

$
90

$
-

$
7,402

Ending balance: collectively
   evaluated for impairment

$
7,937

$
44,513

$
76,749

$
150

$
742,800

March 31, 2019

1-4 family

first-lien

Residential

Other

residential

construction

Commercial

Commercial

commercial

(In thousands)

mortgage

mortgage

real estate

lines of credit

and industrial

Allowance for loan losses:

Beginning Balance

$
766

$
-

$
3,578

$
730

$
1,285

   Charge-offs

-

-

-

(107
)

(1
)
   Recoveries

-

-

-

-

-

   Provisions (credits)

(44
)

-

(208
)

179

276

Ending balance

$
722

$
-

$
3,370

$
802

$
1,560

Ending balance: related to loans
   individually evaluated for impairment

$
104

$
-

$
98

$
92

$
464

Ending balance: related to loans
   collectively evaluated for impairment

$
618

$
-

$
3,272

$
710

$
1,096

Loans receivables:

Ending balance

$
237,917

$
3,855

$
208,388

$
55,238

$
67,542

Ending balance: individually
   evaluated for impairment

$
1,422

$
-

$
2,863

$
318

$
1,052

Ending balance: collectively
   evaluated for impairment

$
236,495

$
3,855

$
205,525

$
54,920

$
66,490

Home equity

Other

Tax exempt

and junior liens

Consumer

Unallocated

Total

Allowance for loan losses:

Beginning Balance

$
1

$
409

$
385

$
152

$
7,306

   Charge-offs

-

-

(67
)

-

(175
)
   Recoveries

-

-

9

-

9

   Provisions (credits)

-

21

72

(152
)

144

Ending balance

$
1

$
430

$
399

$
-

$
7,284

Ending balance: related to loans
   individually evaluated for impairment

$
-

$
139

$
9

$
-

$
906

Ending balance: related to loans
   collectively evaluated for impairment

$
1

$
291

$
390

$
-

$
6,378

Loans receivables:

Ending balance

$
9,256

$
26,212

$
49,272

$
657,680

Ending balance: individually
   evaluated for impairment

$
-

$
207

$
101

$
5,963

Ending balance: collectively
   evaluated for impairment

$
9,256

$
26,005

$
49,171

$
651,717

The Company’s methodology for determining its allowance for loan losses includes an analysis of qualitative factors that are added to the historical loss rates in arriving at the total allowance for loan losses needed for this general pool of loans. The qualitative factors include:

~~Changes in national and local economic trends;~~

~~The rate of growth in the portfolio;~~

~~Trends of delinquencies and nonaccrual balances;~~

~~Changes in loan policy; and~~

~~Changes in lending management experience and related staffing.~~

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. These qualitative factors, applied to each product class, make the evaluation inherently subjective, as it requires material estimates that may be susceptible to significant revision as more information becomes available. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan losses analysis and calculation.

~~The allocation of the allowance for loan losses summarized on the basis of the Company’s calculation methodology was as follows:~~

March 31, 2020

1-4 family

first-lien

Residential

Other

residential

construction

Commercial

Commercial

commercial

(In thousands)

mortgage

mortgage

real estate

lines of credit

and industrial

Specifically reserved

$
95

$
-

$
76

$
98

$
379

Historical loss rate

66

-

101

100

57

Qualitative factors

570

-

4,066

1,020

1,322

Total

$
731

$
-

$
4,243

$
1,218

$
1,758

Home equity

Other

Tax exempt

and junior liens

consumer

Unallocated

Total

Specifically reserved

$
-

$
128

$
1

$
-

$
777

Historical loss rate

-

146

584

-

1,054

Qualitative factors

1

337

261

-

7,577

Other

-

-

-

198

198

Total

$
1

$
611

$
846

$
198

$
9,606

March 31, 2019

1-4 family

first-lien

Residential

Other

residential

construction

Commercial

Commercial

commercial

(In thousands)

mortgage

mortgage

real estate

lines of credit

and industrial

Specifically reserved

$
104

$
-

$
98

$
92

$
464

Historical loss rate

65

-

151

18

26

Qualitative factors

553

-

3,121

692

1,070

Total

$
722

$
-

$
3,370

$
802

$
1,560

Home equity

Other

Tax exempt

and junior liens

consumer

Unallocated

Total

Specifically reserved

$
-

$
139

$
9

$
-

$
906

Historical loss rate

-

13

149

-

422

Qualitative factors

1

278

241

-

5,956

Total

$
1

$
430

$
399

$
-

$
7,284

~~The Company is required to disclose the carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession of the property at each reporting period.~~

~~At March 31, 2020 and December 31, 2019, the Company reported $1.0 million and $341,000, respectively, in residential real estate loans in the process of foreclosure.~~

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Generally, all letters of credit, when issued have expiration dates within one year. The credit risks involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had $2.3 million of standby letters of credit as of March 31, 2020. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The fair value of standby letters of credit was not significant to the Company’s consolidated financial statements.

Accounting guidance related to fair value measurements and disclosures specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:

~~Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.~~

Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

~~Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.~~

~~An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.~~

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs, minimize the use of unobservable inputs, to the extent possible, and considers counterparty credit risk in its assessment of fair value.

~~The Company used the following methods and significant assumptions to estimate fair value:~~

Investment securities: The fair values of available-for-sale and marketable equity securities are obtained from an independent third party and are based on quoted prices on nationally recognized securities exchanges where available (Level 1). If quoted prices are not available, fair values are measured by utilizing matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management made no adjustment to the fair value quotes that were received from the independent third party pricing service. Level 3 securities are assets whose fair value cannot be determined by using observable measures, such as market prices or pricing models. Level 3 assets are typically very illiquid, and fair values can only be calculated using estimates or risk-adjusted value ranges. Management applies known factors, such as currently applicable discount rates, to the valuation of those investments in order to determine fair value at the reporting date.

The Company holds two corporate investment securities, categorized as Level 2, with an aggregate amortized historical cost of $4.7 million and an aggregate fair market value of $4.9 million as of March 31, 2020. These securities have valuations that are determined using published net asset values (NAV) derived by analyses of the securities’ underlying assets. These securities are comprised primarily of broadly-diversified real estate and adjustable-rate senior secured business loans and are traded in secondary markets on an infrequent basis. While these securities are redeemable at least annually through tender offers made by their respective issuers, the liquidation value of the securities may be below their stated NAVs and also subject to restrictions as to the amount of securities that can be redeemed at any single scheduled

redemption. The Company anticipates that these securities will be redeemed by their respective issuers on indeterminate future dates as a consequence of the ultimate liquidation strategies employed by the management of these investments.

Interest rate derivatives: The fair value of the interest rate derivatives, characterized as either fair value or cash flow hedges, are calculated based on a discounted cash flow model. All future floating rate cash flows are projected and both floating rate and fixed rate cash flows are discounted to the valuation date. The benchmark interest rate curve utilized for projecting cash flows and applying appropriate discount rates is built by obtaining publicly available third party market quotes for various swap maturity terms.

~~Impaired loans: Impaired loans are those loans in which~~ the Company has measured impairment based on the fair value of the loan’s collateral or the discounted value of expected future cash flows. Fair value is generally determined based upon market value evaluations by third parties of the properties and/or estimates by management of working capital collateral or discounted cash flows based upon expected proceeds. These appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property), and the cost approach. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as, changes in absorption rates or market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.

Foreclosed real estate: Fair values for foreclosed real estate are initially recorded based on market value evaluations by third parties, less costs to sell (“initial cost basis”). Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to foreclosed real estate are charged to the allowance for loan losses. Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash flow analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as, changes in absorption rates and market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition. Either change could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level 3 within the fair value hierarchy.

The following tables summarize assets measured at fair value on a recurring basis as of the indicated dates, segregated by the level of valuation inputs within the hierarchy utilized to measure fair value:

March 31, 2020

Total Fair

(In thousands)

Level 1

Level 2

Level 3

Value

Available-for-Sale Portfolio

Debt investment securities:

US Treasury, agencies and GSEs

$
-

$
19,645

$
-

$
19,645

State and political subdivisions

-

6,880

-

6,880

Corporate

-

7,271

-

7,271

Asset backed securities

-

12,416

-

12,416

Residential mortgage-backed - US agency

-

20,146

-

20,146

Collateralized mortgage obligations - US agency

-

35,100

-

35,100

Collateralized mortgage obligations - Private label

-

14,855

-

14,855

Total

116,313

116,313

Corporate measured at NAV

-

-

-

4,939

Total available-for-sale securities

$
-

$
116,313

$
-

$
121,252

Marketable equity securities

$
-

$
340

$
-

$
340

Interest rate swap derivative fair value hedge

$
-

$
(194
)

$
-

$
(194
)

Interest rate swap derivative cash flow hedges

$
-

$
(1,344
)

$
-

$
(1,344
)

December 31, 2019

Total Fair

(In thousands)

Level 1

Level 2

Level 3

Value

Available-for-Sale Portfolio

Debt investment securities:

US Treasury, agencies and GSEs

$
-

$
16,820

$
-

$
16,820

State and political subdivisions

-

1,736

-

1,736

Corporate

-

7,631

-

7,631

Asset backed securities

-

13,232

-

13,232

Residential mortgage-backed - US agency

-

18,980

-

18,980

Collateralized mortgage obligations - US agency

-

30,785

-

30,785

Collateralized mortgage obligations - Private label

-

16,821

-

16,821

Total

-

106,005

-

106,005

Corporate measured at NAV

-

-

-

4,923

Total available-for-sale securities

$
-

$
106,005

$
-

$
110,928

Marketable equity securities

$
-

$
534

$
-

$
534

Interest rate swap derivative fair value hedge

$
-

$
(92
)

$
-

$
(92
)

been heavily engaged with Pathfinder ~~Bank had the following assets measured at fair value on a nonrecurring basis as of March 31, 2020 and December 31, 2019:~~

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value at the indicated dates.

		~~Quantitative Information about Level 3 Fair Value Measurements~~
	~~Valuation~~	~~Unobservable~~	~~Range~~
	~~Techniques~~	~~Input~~	~~(Weighted Avg.)~~
~~At March 31, 2020~~
~~Foreclosed real estate~~	~~Appraisal of collateral~~	~~Appraisal Adjustments~~	~~15% - 15% (15%)~~
	~~(Sales Approach)~~	~~Costs to Sell~~	~~6% - 9% (8%)~~

		~~Quantitative Information about Level 3 Fair Value Measurements~~
	~~Valuation~~	~~Unobservable~~	~~Range~~
	~~Techniques~~	~~Input~~	~~(Weighted Avg.)~~
~~At December 31, 2019~~
~~Impaired loans~~	~~Appraisal of collateral~~	~~Appraisal Adjustments~~	~~5% - 20% (9%)~~
	~~(Sales Approach)~~	~~Costs to Sell~~	~~7% - 13% (11%)~~
	~~Discounted Cash Flow~~

~~There have been no transfers of assets into or out of any fair value measurement level during the three months ended March 31, 2020.~~

Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated statement of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

The Company has various processes and controls in place to ensure that fair value is reasonably estimated. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process.

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.

FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the financial assets and liabilities were valued at a price that represents the Company’s exit price or the price at which these instruments would be sold or transferred.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of

valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The Company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:

~~Cash and cash equivalents – The carrying amounts of these assets approximate their fair value and are classified as Level 1.~~

~~Federal Home Loan Bank stock – The carrying amount of these assets approximates their fair value and are classified as Level 2.~~

Net loans – For variable-rate loans that re-price frequently, fair value is based on carrying amounts. The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans, and commercial and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality. Loan value estimates include judgments based on expected prepayment rates. The measurement of the fair value of loans, including impaired loans, is classified within Level 3 of the fair value hierarchy.

~~Accrued interest receivable and payable – The carrying amount of these assets approximates their fair value and are classified as Level 1.~~

Deposits – The fair values disclosed for demand deposits (e.g., interest-bearing and noninterest-bearing checking, passbook savings and certain types of money management accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) and are classified within Level 1 of the fair value hierarchy. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates of deposits to a schedule of aggregated expected monthly maturities on time deposits. Measurements of the fair value of time deposits are classified within Level 2 of the fair value hierarchy.

Borrowings – Fixed/variable term “bullet” structures are valued using a replacement cost of funds approach. These borrowings are discounted to the FHLBNY advance curve. Option structured borrowings’ fair values are determined by the FHLB for borrowings that include a call or conversion option. If market pricing is not available from this source, current market indications from the FHLBNY are obtained and the borrowings are discounted to the FHLBNY advance curve less an appropriate spread to adjust for the option. These measurements are classified as Level 2 within the fair value hierarchy.

Subordinated loans – The Company secures quotes from its pricing service based on a discounted cash flow methodology or utilizes observations of recent highly-similar transactions which result in a Level 2 classification.

~~The carrying amounts and fair values of the Company’s financial instruments as of the indicated dates are presented in the following table:~~

March 31, 2020

December 31, 2019

Fair Value

Carrying

Estimated

Carrying

Estimated

(In thousands)

Hierarchy

Amounts

Fair Values

Amounts

Fair Values

Financial assets:

Cash and cash equivalents

1

$
57,579

$
57,579

$
20,160

$
20,160

Investment securities - available-for-sale

2

116,313

116,313

106,005

106,005

Investment securities - available-for-sale

NAV

4,939

4,939

4,923

4,923

Investment securities - marketable equity

2

340

340

534

534

Investment securities - held-to-maturity

2

120,549

117,088

122,988

124,148

Federal Home Loan Bank stock

2

4,758

4,758

4,834

4,834

Net loans

3

740,916

748,532

772,782

767,654

Accrued interest receivable

1

3,700

3,700

3,712

3,712

Financial liabilities:

Demand Deposits, Savings, NOW and MMDA

1

$
495,806

$
495,806

$
460,293

$
460,293

Time Deposits

2

404,054

406,487

421,600

422,409

Borrowings

2

91,437

93,956

93,125

93,643

Subordinated loans

2

15,136

13,874

15,128

14,921

Accrued interest payable

1

407

407

396

396

Interest rate swap derivative fair value hedge

2

194

194

92

92

Interest rate swap derivative cash flow hedges

2

1,344

1,344

-

-

~~The Company is exposed to certain risks from both its business operations and changes in economic conditions.~~ As part of managing interest rate risk, the Company enters into standardized interest rate derivative contracts (designated as hedging agreements) to modify the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The Company designates interest rate hedging agreements utilized in the management of interest rate risk as either fair value hedges or cash flow hedges. Interest rate hedging agreements are generally entered into with counterparties that meet established credit standards and the agreements contain master netting, collateral and/or settlement provisions protecting the at-risk party. Based on adherence to the Company’s credit standards and the presence of the netting, collateral or settlement provisions, the Company believes that the credit risk inherent in these contracts was not material at March 31, 2020. Interest rate hedging agreements ~~are recorded at fair value as other assets or liabilities. The Company had no derivative contracts not designated as hedging agreements at March 31, 2020 or December 31, 2019.~~

As a result of interest rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate in fair value. When effectively hedged, this appreciation or depreciation will generally be offset by fluctuations in the fair value of derivative instruments that are linked to the hedged assets and liabilities. This strategy is referred to as a fair value hedge. In a fair value hedge, the fair value of the derivative (the interest rate hedging agreement) and changes in the fair value of the hedged item are recorded in the Company’s consolidated balance sheet with the corresponding gain or loss recognized in current earnings. The difference between changes in the fair value of the interest rate hedging agreements and the hedged items represents hedge ineffectiveness and is recorded as an adjustment to the interest income or interest expense of the respective hedged item.

Cash flows related to floating rate assets and liabilities will fluctuate with changes in the underlying rate index. When effectively hedged, the increases or decreases in cash flows related to the floating-rate asset or liability will generally be offset by changes in cash flows of the derivative instruments designated as a hedge. This strategy is referred to as a cash flow hedge. In a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the derivative’s gain or loss on cash flow hedges is accounted for similar to that associated with fair value hedges.

Among the array of interest rate hedging contracts, potentially available to the Company, are interest rate swap and interest rate cap (or floor) contracts. The Company uses interest rate swaps, cap or floor contracts as part of its interest rate risk management strategy. Interest rate swaps involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed payments over the life of the agreements without the exchange of the underlying notional amount. An interest rate cap is a type of interest rate derivative in which the buyer receives payments at the end of each contractual period in which the index interest rate exceeds the contractually agreed upon strike price rate. The purchaser of a cap contract will continue to benefit from any rise in interest rates above the strike price. Similarly an interest rate floor is a derivative contract in which the buyer receives payments at the end of each period in which the interest rate is below the agreed strike price. The purchaser of a floor contract will continue to benefit from any rise in interest rates above the strike price.

The Company entered into a pay-fixed/receive variable interest rate swap with a notional amount of $9.2 million in April 2019, which was designated as a fair value hedge, associated with specific pools within the Company’s fixed-rate consumer loan portfolio. The swap contract will be in force from April 2019 to April 2021 and the Company will be required to pay 2.39% to the swap counterparty, while receiving 3-month LIBOR indexed payments from the same counterparty, with both payments calculated on the notional amount.

~~As of March 31, 2020 and December 31, 2019, the following amounts were recorded on the balance sheet related to the cumulative basis adjustments for fair value hedges:~~

(In thousands)

Carrying Amount of the Hedged Assets at
March 31, 2020

Cumulative Amount of Fair Value Hedging Adjustment Included in The Carrying Amount of the Hedged Assets at March 31, 2020

Carrying Amount of the Hedged Assets at
December 31, 2019

Cumulative Amount of Fair Value Hedging Adjustment Included in The Carrying Amount of the Hedged Assets at December 31, 2019

Line item on the balance sheet in which the hedged item is included:

Loans receivable ⁽¹⁾

$
18,021

$
164

$
19,254

$
75

~~(1)~~

These amounts include the amortized cost basis of the hedged portfolio used to designate the hedging relationship in which the hedged item is the remaining amortized cost of the last layer expected to be remaining at the end of the hedging contract term. At March 31, 2020 and December 31, 2019, the amortized cost of the basis of the closed portfolio used in the hedging relationship was $18.0 million and $19.3 million, the cumulative basis adjustment associated with the hedging relationship was $164,000 and $75,000, and the amount of the designated hedged item was $9.2 million and $9.2 million, respectively.

At March 31, 2020 and December 31, 2019, the fair value of the fair value derivative resulted in a net liability position of $194,000 and $92,000 under the agreement, respectively, recorded by the Company in other liabilities. The Company’sBank’s participation ~~in the swap contract reduced total loan interest income, recognized in consolidated earnings, by $16,000 in the quarter ended March 31, 2020.~~

In February 2020, the Company entered into an interest rate cap contract in the notional amount of $40.0 million, intended to reduce the Company’s exposure to potential rising interest rates. This contractual agreement has been designated as a cash flow hedge with changes in the fair value of the contract, net of changes in the fair value of the designated hedged liability (certain short-term certificates of deposit with rates of interest that are highly correlated to the 3-month LIBOR index) being accounted for through other comprehensive income. The term of the cap contract will commence on May 1, 2020 and expire on May 1, 2023. The Company paid $228,000 in a one-time premium for the cap contract and has no further contractual obligations to the counterparty over the three-year life of the contract. The premium will be amortized ratably over the contractual term of the cap contract with an annual average cost to the Company of approximately 19 basis points relative to the notional amount. The Company will potentially benefit during the term of this cap contract, in the manner described above, for the period of time that the 3-month LIBOR index exceeds 1.85% (the strike price). The cap contract had no effect on recorded interest expense in the quarter ended March 31, 2020.

In March 2020, the Company entered into an interest rate swap contract in the notional amount of $40.0 million, intended to reduce the Company’s exposure to potential rising interest rates. This contractual agreement has been designated as a cash flow hedge with changes in the fair value of the contract, net of changes in the fair value of the designated hedged liability (certain short-term certificates of deposit with rates of interest that are highly correlated to the 3-month LIBOR index) being accounted for through other comprehensive income. The term of the swap contract will commence on May 15, 2020 and expire on May 15, 2023. Under the terms of the swap contract, the Company will be obligated to pay the contractual counterparty an annual rate of 1.39% (the strike price) times the notional amount of the contract. Simultaneously, for the duration of the swap contract, the counterparty will be obligated to pay the Company the annual rate of the 3-month LIBOR index, as determined each calendar quarter, times the notional contractual amount. The swap contract had no effect on recorded interest expense in the quarter ended March 31, 2020.

(In thousands)

March 31, 2020

December 31, 2019

Cash flow hedges:

Total unamortized premium

$
228

$
-

Fair market value adjustment interest rate cap

(192
)

Total unamortized cap

36

-

Fair market value adjustment interest rate swap

(1,152
)

-

Total loss in comprehensive income

$
(1,344
)

$
-

The amounts of hedge ineffectiveness, recognized during the quarter ended March 31, 2020, for cash flow hedges were not material to the Company’s consolidated results of operations. The Company had no hedged positions at March 31, 2019. Some or the entire amount included in accumulated other comprehensive loss would be reclassified into current earnings should a portion of, or the entire hedge no longer be considered effective, but at this time, management expects the hedge to remain fully effective during the remaining term of the swap. ~~The changes in the fair values of the interest rate hedging agreements and the hedged items primarily result from the effects of changing interest rates and spreads.~~

The Company manages its potential credit exposure on interest rate swap transactions by entering into a bilateral credit support agreements with each counterparty. These agreements require collateralization of credit exposures beyond specified minimum threshold amounts. The Company posted cash in escrow of $1.3 million under collateral arrangements to satisfy collateral requirements associated with the interest rate swap contract at March 31, 2020.

For the three months ended March 31,

(In thousands)

2020

2019

Balance as of December 31:

$
-

$
-

Amount of losses recognized in other comprehensive income

(1,344
)

-

Balance as of March 31:

$
(1,344
)

$
-

~~Changes in the components of accumulated other comprehensive income (loss) (“AOCI”), net of tax, for the periods indicated are summarized in the table below.~~

For the three months ended March 31, 2020

(In thousands)

Retirement
Plans

Unrealized Gains
and Losses on
Available-for-
Sale Securities

Unrealized
Losses on
Derivatives
and Hedging
Activities

Unrealized Loss
on Securities
Transferred to
Held-to-Maturity

Total

Beginning balance

$
(2,717
)

$
(216
)

$
-

$
(38
)

$
(2,971
)
Reevaluation of deferred tax asset valuation allowance ⁽¹⁾

(188
)

(15
)

-

(3
)

(206
)
Other comprehensive income before reclassifications

-

(2,869
)

(1,062
)

6

(3,925
)
Amounts reclassified from AOCI

46

(21
)

-

-

25

Ending balance

$
(2,859
)

$
(3,121
)

$
(1,062
)

$
(35
)

$
(7,077
)

~~(1)~~

For the three months ended March 31, 2019

(In thousands)

Retirement
Plans

Unrealized Gains
and Losses on
Available-for-
Sale Securities

Unrealized Loss
on Securities
Transferred to
Held-to-Maturity

Total

Beginning balance

$
(3,152
)

$
(2,832
)

$
(58
)

$
(6,042
)
Other comprehensive income before reclassifications

-

1,572

5

1,577

Amounts reclassified from AOCI

65

(62
)

-

3

Ending balance

$
(3,087
)

$
(1,322
)

$
(53
)

$
(4,462
)

~~The following table presents the amounts reclassified out of each component of AOCI for the indicated period:~~

Amount Reclassified

from AOCI ⁽¹⁾

(Unaudited)

(In thousands)

For the three months ended

Details about AOCI ⁽¹⁾ components

March 31, 2020

March 31, 2019

Affected Line Item in the Statement of Income
Retirement plan items

Retirement plan net losses
recognized in plan expenses ⁽²⁾

$
(58
)

$
(84
)

Salaries and employee benefits
Tax effect

12

19

Provision for income taxes

$
(46
)

$
(65
)

Net Income

Available-for-sale securities

Realized gain (loss) on sale of securities

$
26

$
79

Net gains (losses) on sales and redemptions
of investment securities
Tax effect

(5
)

(17
)

Provision for income taxes

$
21

$
62

Net Income

~~(1)~~

~~Amounts in parentheses indicates debits in net income.~~

~~(2)~~

~~These items are included in net periodic pension cost.~~

~~The Company has included the following table regarding the Company’s noninterest income for the periods presented.~~

For the three months

ended March 31,

(In thousands)

2020

2019

Service fees

Insufficient funds fees

$
275

$
208

Deposit related fees

55

52

ATM fees

26

22

    Total service fees

356

282

Fee Income

Insurance commissions

335

235

Investment services revenue

68

48

ATM fees surcharge

54

46

Banking house rents collected

71

34

    Total fee income

528

363

Card income

Debit card interchange fees

163

144

Merchant card fees

16

16

    Total card income

179

160

Mortgage fee income and realized gain on sale of loans
  and foreclosed real estate

Loan servicing fees

49

27

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

672

(8
)
Total mortgage fee income and realized gain on sale of
   loans and foreclosed real estate

721

19

Total

1,784

824

Earnings and gain on bank owned life insurance

116

121

Net gains on sales and redemptions of investment
   securities

26

79

(Losses)/gains on marketable equity securities

(194
)

41

Other miscellaneous income

16

28

Total noninterest income

$
1,748

$
1,093

~~The following is a discussion of key revenues within the scope of the new revenue guidance:~~

~~Service fees –~~ Revenue is earned through insufficient funds fees, customer initiated activities or passage of time for deposit related fees, and ATM service fees. Transaction-based fees are recognized at the time the transaction is executed, which is the same time the Company’s performance obligation is satisfied. Account maintenance fees are earned over the course of the month as the monthly maintenance performance obligation to the customer is satisfied.

~~Fee income –~~ Revenue is earned through commissions on insurance and securities sales, ATM surcharge fees, and banking house rents collected. The Company earns investment advisory fee income by providing investment management services to customers under investment management contracts. As the direction of investment management accounts is provided over time, the performance obligation to investment management customers is satisfied over time, and therefore, revenue is recognized over time.

~~Card income –~~ Card income consists of interchange fees from consumer debit card networks and other related services. Interchange rates are set by the card networks. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur.

~~Mortgage fee income and realized gain on sale of loans and foreclosed real estate~~ ~~– Revenue from mortgage fee income and realized gain on sale of loans and foreclosed real estate is earned through the origination of residential~~

and commercial mortgage loans, sales of one-to-four family residential mortgage loans, sales of government guarantees portions of SBA loans, and sales of foreclosed real estate, and is earned as the transaction occurs.

The Company has operating leases for certain banking offices and land under noncancelable agreements. Our leases have remaining lease terms that vary from less than one year up to 30 years, some of which include options to extend the leases for various renewal periods. All options to renew are included in the current lease term when we believe it is reasonably certain that the renewal options will be exercised.

For the three months

ended March 31,

(In thousands)

2020

2019

Operating lease cost

$
61

$
59

Finance lease cost

20

-

For the three months

ended March 31,

(In thousands)

2020

2019

Cash paid for amount included in the measurement of lease liabilities:

     Operating cash flows from operating leases

$
56

$
48

     Operating cash flows from finance leases

20

-

     Financing cash flows from finance leases

18

-

(In thousands, except lease term and discount rate)

March 31, 2020

December 31, 2019

Operating Leases:

Operating lease right-of-use assets

$
2,349

$
2,386

Operating lease liabilities

$
2,618

$
2,650

Finance Leases:

Financial Liability

$
581

$
578

Weighted Average Remaining Lease Term:

Operating Leases

19.45 years

19.58 years

Finance Leases

29.17 years

29.42 years

Weighted Average Discount Rate:

Operating Leases

3.72
%

3.71
%
Finance Leases

13.75
%

13.75
%

Twelve Months Ending March 31,

(In thousands)

2021

$
114

2022

97

2023

102

2024

111

2025

120

Thereafter

2,655

Total minimum lease payments

$
3,199

~~The Company owns certain properties that it leases to unaffiliated third parties at market rates. Lease rental income was $71,000~~ ~~and~~ ~~$34,000 for the twelve months ended March 31, 2020 and 2019, respectively. All lease agreements are accounted for as operating leases.~~

As a result, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. The Company has many employees working remotely and has significantly reduced physical customer contact with employees and other customers by limiting branch activities to drive-thru transactions wherever possible, teleconferencing and in-branch “appointments only” services. Transactional volume has also increased through the Bank’s telephone and internet banking channels. We will take further actions as may be required by government authorities or that we determine to be in the best interests of our employees, customers and business partners.

Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted both domestic and international financial markets prompting the world’s central banks to inject significant amounts of monetary stimulus into their respective economies. In the United States, the Federal Reserve System’s Federal Open Market Committee, swiftly cut the target Federal Funds rate to a range of 0% to 0.25%, including a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis point reduction on March 15, 2020. In addition, the Federal Reserve initiated various market support programs to ease the stress on financial markets.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on March 27, 2020, provides financial assistance in various forms to both businesses and consumers. In addition, the CARES Act also created many directives affecting the operations of financial services providers, such as the Company, including a forbearance program for federally-backed mortgage loans and protections for borrowers from negative credit reporting due to loan accommodations related to the national emergency. The banking regulatory agencies have likewise issued guidance encouraging financial institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations because of the effects of COVID-19. The Company has begun working with its business and individual customers affected by COVID-19 and expects a significant amount of modifications across many of its loan portfolios in the near term. Through May 15, 2020, the Bank granted payment deferral requests primarily for 90 days, on 540 loans representing approximately $142.9 million of existing loan balances.

Borrowers that were delinquent in their payments to the Bank, prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case by case basis for troubled debt restructure classification and non-performing loan status. In the instances where the Company granted a payment deferral to a delinquent borrower, the borrower’s delinquency status was frozen as of February 29, 2020, and their loans will continue to be reported as delinquent during the deferment period based on their delinquency status as of that date. The Company anticipates that the number and amount of COVID-19 financial hardship payment deferral requests will increase significantly during the second quarter of 2020. Consistent with industry regulatory guidance, borrowers that were granted COVID-19 related deferrals but were otherwise current on loan payments will continue to have their loans reported as current loans during the agreed upon deferral period, accrue interest and not be accounted for as troubled debt restructurings.

The future performance of the Company’s loan portfolios with respect to credit losses will be highly dependent upon the course and duration, both nationally and within the Company’s market area, of the public health and economic factors related to the pandemic, as well as the concentrations in the Company’s loan portfolio. Concentrations of loans within a portfolio that are made to a singular borrower, to a related groups of borrowers, or to a limited number of industries, are generally considered to be additional risk factors in estimating future credit losses. Therefore, the Company monitors all of its credit relationships to ensure that the total loan amounts extended to one borrower, or to a related group of borrowers, does not exceed the maximum permissible levels defined by applicable regulation or the Company’s generally more restrictive internal policy limits.

Loans to a single borrower, or to a related group of borrowers, are referred to as total related credits. Total related credits encompass all related or affiliated borrower loan balances, including available unused lines of credit, for both personal and business loans. At March 31, 2020, the Company had 25 total related credit relationships, comprised of 179 individual loans, with outstanding balances in excess of $5.0 million. These total related credits ranged from $5.0 million to $12.8 million on that date with aggregate balances of $192.0 million. Of the $192.0 million in total related credits, $182.4 million was secured by various collateral assets, primarily commercial real estate, and $9.6 million was unsecured.

In addition, the future credit-related performance of a loan portfolio generally depends upon the types of loans within the portfolio, concentrations by type of loan and the quality of the collateral securing the loans. The following table details the Company's loan portfolio by collateral type within major categories as of March 31, 2020:

(Dollars in thousands)

Balance

Number
of Loans

Average Loan Balance

Minimum/
Maximum
Loan Balance

Allowance for Loan Losses

Percent of Total Loans

Residential Mortgage Loans

$
214,637

2,096

$
102

$
1

-
$
1,576

$
731

29
%

Commercial Real Estate:

Mixed Use

$
44,722

50

$
894

$
39

-
$
7,433

$
724

6
%
Multi-Family Residential

39,216

58

676

27

-

6,015

635

5
%
Hotels and Motels

32,576

10

3,258

226

-

11,500

528

4
%
Office

31,560

57

554

14

-

4,927

511

4
%
Retail

23,661

54

438

2

-

5,248

383

3
%
1-4 Family Residential

18,604

147

127

10

-

1,250

301

2
%
Automobile Dealership

16,054

10

1,605

174

-

6,099

260

2
%
Recreation/Golf Course/Marina

10,857

15

723

35

-

3,150

176

1
%
Warehouse

10,173

15

678

10

-

2,700

165

1
%
Manufacturing/Industrial

6,458

14

461

5

-

1,450

105

1
%
Restaurant

6,386

25

255

11

-

1,325

104

1
%
Automobile Repair

4,853

10

485

61

-

2,342

79

1
%
Not-For-Profit & Community Service
Real Estate

3,398

3

1,133

110

-

1,698

55

1
%
Land

3,204

6

534

28

-

2,000

52

1
%
Skilled Nursing Facility

2,833

1

2,833

2,833

-

2,833

46

1
%
All Other

7,374

37

199

1

-

746

119

1
%
Total Commercial Real Estate Loans

$
261,929

512

$
512

$
4,243

35
%

Commercial and Industrial:

Secured Term Loans

$
64,025

366

$
175

$
0

-
$
6,335

$
1,322

9
%
Unsecured Term Loans

20,749

133

156

0

-

1,647

429

3
%
Secured Lines of Credit

48,009

284

169

0

-

5,000

991

6
%
Unsecured Lines of Credit

11,345

139

82

0

-

2,999

234

1
%
Total Commercial and Industrial
Loans

$
144,128

922

$
156

$
2,976

19
%

Tax Exempt Loans

$
7,937

24

$
331

$
9

-
$
2,425

$
1

1
%

Consumer:

Home Equity Lines of Credit

$
44,732

1,100

$
41

$
1

-
$
418

$
536

6
%
Automobile

33,832

2,076

16

1

-

375

405

4
%
Consumer Secured

4,726

85

56

24

-

157

57

1
%
Consumer Unsecured

35,827

7,095

5

1

-

120

429

4
%
All Others

2,454

849

3

0

-

60

30

1
%
Total Consumer Loans

$
121,571

11,205

$
11

$
1,457

16
%

Net deferred loan fees

320

-

-

-

-

-

Unallocated allowance for loan losses

-

-

-

-

198

-

Total Loans

$
750,522

$
14,759

$
51

$
9,606

100
%

Including the potential effects of the COVID-19 outbreak on the Company’s loan portfolios, the ongoing and dynamic nature of the pandemic and the resultant, potentially severe and long-lasting, economic dislocations, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

~~Demand for our products and services may decline, making it difficult to grow assets and income;~~

If the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

~~Collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;~~

~~Our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;~~

~~The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;~~

As the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

~~A material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;~~

~~Our cyber security risks are increased as the result of an increase in the number of employees working remotely;~~

~~We rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and~~

~~Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.~~

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

~~Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.~~

~~Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)~~

The Company is a Maryland corporation headquartered in Oswego, New York. The Company is 100% owned by public shareholders. The primary business of the Company is its investment in Pathfinder Bank (the "Bank"), a New York State chartered commercial bank, which is 100% owned by the Company. The Bank has two wholly owned operating subsidiaries, Pathfinder Risk Management Company, Inc. (“PRMC”) and Whispering Oaks Development Corp. All significant inter-company accounts and activity have been eliminated in consolidation. Although the Company owns, through its subsidiary PRMC, 51% of the membership interest in FitzGibbons Agency, LLC (“Agency”), the Company is required to consolidate 100% of FitzGibbons within the consolidated financial statements. The 49% of which the Company does not own is accounted for separately as noncontrolling interests within the consolidated financial statements. At March 31, 2020, the Company and subsidiaries had total assets of $1.1 billion, total liabilities of $1.0 billion and shareholders' equity of $88.0 million plus noncontrolling interest of $305,000, which represents the 49% of FitzGibbons not owned by the Company.

The following discussion reviews the Company's financial condition at March 31, 2020 and the results of operations for the three month periods ended March 31, 2020 and 2019. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The following material under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is written with the presumption that the users of the interim financial statements have read, or have access to, the Company's latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 23, 2020 (“the consolidated annual financial statements”) as of December 31, 2019 and 2018 and for the two years then ended. Therefore, only material changes in financial condition and results of operations are discussed in the remainder of Item 2.

Certain statements contained herein are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to:

~~Credit quality and the effect of credit quality on the adequacy of our allowance for loan losses;~~

~~Deterioration in financial markets that may result in impairment charges relating to our securities portfolio;~~

~~Competition in our primary market areas;~~

~~Changes in interest rates and national or regional economic conditions;~~

~~Changes in monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;~~

~~Significant government regulations, legislation and potential changes thereto;~~

~~A reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;~~

~~Increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;~~

~~Cyberattacks, computer viruses and other technological threats that may breach the security of our websites or other systems;~~

~~Technological changes that may be more difficult or expensive than expected;~~

~~Limitations on our ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations; and~~

~~Other risks described herein and in the other reports and statements we file with the SEC.~~

In addition to the risk factors enumerated above, the economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following additional risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: