Pathfinder Bancorp
Annual Report 2015

Plain-text annual report

MAIN OFFICE MEXICO OFFICE CENTRAL SQUARE OFFICE 214 West First Street, Oswego Norman & Main Streets, Mexico 3025 East Avenue, Central Square 343-0057 PLAZA OFFICE 963-7248 676-2265 FULTON OFFICE CICERO OFFICE State Route 104 East, Oswego 5 West First Street South, Fulton 6194 State Route 31, Cicero 343-4483 592-9545 752-0033 DOWNTOWN DRIVE-THRU LACONA OFFICE PIKE BLOCK BUSINESS OFFICE 34 East Bridge Street, Oswego 1897 Harwood Drive, Lacona 109 West Fayette, Syracuse 343-2577 387-3437 207-8020 WWW.PATHFINDERBANK.COM 2 0 1 5 A N N U A L R E P O R T LOCAL. COMMUNITY. TRUST. Pathfinder Bank is an independent community bank. Our mission is to foster relationships with individuals and businesses within our communities to be the financial provider of choice. Our goal is to continually enhance the value of the bank for the benefit of our shareholders, customers, employees and communities. S T H G I L H G I H L A I C N A N I F YEAR END (IN THOUSANDS) Total assets Investment securities (AFS) Investment securities (HTM) Loans receivable, net Deposits Borrowings and subordinated debt Shareholders’ equity FOR THE YEAR (IN THOUSANDS) Net interest income Core noninterest income (a) Net gains on sales, redemptions and impairment of investment securities Net gains (losses) on sales of loans and foreclosed real estate Noninterest expense (b) Regulatory assessments Interest income Interest expense Provision for loan losses Net income attributable to the Company PER SHARE Net income (basic) (c) Net income (diluted) (c) Book value per common share Tangible book value per common share (d) Cash dividends declared 2015 2014 2013 2012 2011 $623,254 98, 942 44,297 424,732 490,315 41,300 71,229 $561,024 88,073 40,875 382,189 415,568 66,100 69,204 $503,793 80,959 34,412 336,592 410,140 40,853 43,070 $477,796 108,339 - 329,247 391,805 34,964 40,747 $442,980 100,395 - 300,770 366,129 26,074 37,841 $18,767 3,716 $17,085 3,415 $15,619 2,581 $14,857 2,627 $14,263 2,451 422 310 365 375 791 34 17,179 408 21,424 2,657 1,349 2,889 $0.67 0.66 13.28 12.19 0.16 34 15,287 398 19,699 2,614 1,205 2,745 $0.64 0.63 12.82 11.78 0.12 470 14,336 415 18,883 3,264 1,032 2,406 $0.58 0.58 11.33 10.16 0.12 61 13,207 311 18,765 3,908 825 2,648 $0.53 0.53 10.60 9.13 0.12 (50) 12,758 390 18,604 4,341 940 2,323 $0.32 0.32 9.49 8.02 0.12 PERFORMANCE RATIOS Return on average assets 0.48% 0.51% 0.48% 0.57% 0.55% Return on average equity Return on average tangible equity (d) Return on average common equity Average equity to average assets Equity to total assets at end of period Dividend payout ratio (e) Net interest rate spread Net interest margin Average interest-earning assets to average interest-bearing liabilities Noninterest income to average assets Noninterest expense to average assets Efficiency ratio (f) 6.68 7.40 8.26 8.48 8.53 11.37 3.28 3.41 5.86 6.47 8.58 8.24 8.55 12.47 3.23 3.34 5.50 6.11 7.45 9.27 12.26 13.89 3.31 3.40 4.08 4.46 5.00 11.76 11.36 25.22 3.21 3.31 6.75 7.59 5.09 8.21 8.54 12.87 3.52 3.66 117.88 0.70 2.92 76.51 121.73 0.69 2.92 78.22 115.85 0.69 2.96 79.14 113.89 0.66 2.89 75.53 112.22 0.76 3.14 77.56 ASSET QUALITY RATIOS Nonperforming loans as a percent of total loans 1.24% 1.61% 1.57% 1.66% 1.55% 1.19 Nonperforming assets as a percent of total assets Allowance for loan losses to loans receivable 1.31 Allowance for loan losses as a percent of nonperforming loans 1.25 1.35 1.16 1.38 0.94 1.33 1.18 1.48 107.30 81.13 94.22 84.18 85.50 REGULATORY CAPITAL RATIOS (BANK ONLY) Total Core Capital (to Risk-Weighted Assets) 16.22% 16.60% 14.13% 14.20% 14.94% Tier 1 Capital (to Risk-Weighted Assets) Tier 1 Common Equity (to Risk-Weighted Assets) Tier 1 Capital (to Assets) 13.66 13.66 9.37 15.31 15.31 10.55 12.82 12.82 8.72 12.90 12.90 8.80 14.95 14.95 10.00 NUMBER OF: Banking offices Full-time equivalent employees 9 124 9 122 8 112 8 110 8 110 (a) Exclusive of net gains (losses) on sales and impairment of investment securities and net gains (losses) on sales of loans and foreclosed real estate. (b) Exclusive of regulatory assessments. (c) Adjusted to reflect the 1.6472 exchange ratio used in the conversion. (d) Tangible equity excludes intangible assets. (e) The dividend payout ratio is calculated using dividends declared and not waived by the Mutual Holding Company, divided by net income. (f) The efficiency ratio is calculated as noninterest expense, including regulatory assessments, divided by the sum of taxable-equivalent net interest income and noninterest income excluding net gains on sales, redemptions and impairment of investment securities and net gains (losses) on sales of loans and foreclosed real estate. 1 Chris R. Burritt Thomas W. Schneider, Chairman of the Board President and CEO WE ARE PLEASED TO PRESENT OUR 20TH ANNUAL REPORT TO SHAREHOLDERS. Loan Growth Over 10 years ($ in millions) LOAN PORTFOLIO $500.0 $450.0 $400.0 $350.0 $300.0 $250.0 $200.0 $150.0 05 06 07 08 09 10 11 12 13 14 15 1.7% 10.4% Loan Composition December 31, 2005 8.0% 16.8% 63.1% Residential Real Estate Commercial Real Estate Commercial Loans Municipal Loans Consumer Loans 2.1% 6.6% 17.2% 30.1% 44.0% Loan Composition December 31, 2015 Residential Real Estate Commercial Real Estate Commercial Loans Municipal Loans Consumer Loans In 1995, Pathfinder Bank (formerly named Oswego City Savings Bank) completed its initial offering of common stock to depositors and the public. In the following 20 years, the Bank has: n Transformed its balance sheet from a traditional savings bank to a full service community bank. n Extended our market reach throughout Central New York. n Expanded our services to include insurance and investments. n Enhanced our systems, delivery channels and risk management processes commensurate to the evolving competitive and regulatory landscape. n Provided a strong return to our shareholders. This transformation has been measured, consistent and progressive through 3 economic cycles, and in accordance with our risk management philosophies. Throughout this period, we have remained consistent with our vision and our value systems and the understanding of the competitive advantages of being a local, community focused bank, trusted by our customers. 2015 was a year in which we again achieved record levels of total assets, loans, deposits, revenue and net income. As we have done in past reports, we provide charts to demonstrate the consistent and stable growth of our balance sheet, as well as the diversification of our loan and deposit portfolios in conformance to our Strategic Plan execution. ASSET GROWTH Asset Growth Over 10 years ($ in millions) 05 06 07 08 09 10 11 12 13 14 15 $650.0 $550.0 $450.0 $350.0 $250.0 2 DEPOSIT PORTFOLIO $500.0 $450.0 $400.0 $350.0 $300.0 $250.0 $200.0 $70.0 $60.0 $50.0 $40.0 $30.0 $20.0 $10.0 Deposit Growth Over 10 years ($ in millions) 05 06 07 08 09 10 11 12 13 14 15 Non-Interest Bearing Demand Accounts Growth Over 10 Years ($ in millions) 05 06 07 08 09 10 11 12 13 14 15 5.5% 11.0% 83.4% Deposit Composition December 31, 2005 Retail Commercial Municipal 23.4% 18.5% 58.2% Deposit Composition December 31, 2015 Retail Commercial Municipal CONVERSION TO A NEW YORK STATE CHARTERED COMMERCIAL BANK Consistent with our balance sheet diversification strategy, the Board of Directors approved a Plan of Conversion to merge Pathfinder Bank with its limited purpose subsidiary, Pathfinder Commercial Bank, with the resultant entity being Pathfinder Bank, a New York State chartered commercial bank. Pathfinder Bank was originally chartered as a savings bank in 1859. Under New York State Municipal Law, public funds held by government entities and municipalities can only be deposited in a commercial bank. Our limited purpose subsidiary was formed for this reason in 2002. We have received approval for the merger and Plan of Conversion from the Federal Deposit Insurance Corporation (FDIC) and the New York State Department of Financial Services (NYSDFS). We anticipate completing this process in the second quarter of 2016. The conversion will streamline operations, reduce customer confusion, and allow us to operate with additional powers under a charter more consistent with our business model and balance sheet composition. EARNINGS While net income achieved historic levels, there are two trends which have created challenging headwinds for more robust returns: 1. Capacity Building 2. Flattening Yield Curve We feel it is essential to continue to build our capacity and capabilities and position the bank to operate in the future as a billion dollar bank. Towards this end we have been investing in: n Quality people on both the production and risk management sides. n Systems and delivery channels. n Facilities and market reach. The expansion of digital channels has, thus far, not replaced existing delivery channels but merely expanded them to the convenience of customers. We believe we currently have the capabilities to deliver across all channels as well as any bank in the marketplace. In 2015, we performed next generation upgrades to our internet banking platforms, not only enhancing functionality and navigability, but allowing the introduction of mobile deposit and electronic statements. With these enhanced delivery channels, combined with our remote deposit capture services, we feel we can not only meet all of our consumer electronic needs but also offer robust Treasury Management Services to our business customers. The challenges inherent in the flattening of the yield curve as longer term rates fall will impact the revenue growth opportunities of our robust growing balance sheet. Cost control will be increasingly important the longer this cycle lasts and will be focused on and accomplished while maintaining our growth trends and strong risk culture. CAPITAL MANAGEMENT In February 2016, we redeemed the $13.0 million in preferred stock issued by the U.S. Treasury through the Small Business Lending Fund (SBLF) that had been created as part of the Small Business Jobs Act of 2010. The SBLF was an excellent source of capital to enable our growth over the last four years and an excellent example of good execution by the Federal Government to temporarily stimulate small business lending and to ultimately be replaced, as in the case of Pathfinder, with capital from the private sector. The dividend rate on the SBLF preferred stock was 5.0% at issuance, could decline to 1.0% based upon a community bank’s ability to generate qualified small business loans (QSBL) and was set to increase to 9.0% four and a half years after the issuance. 3 We issued the $13.0 million in preferred stock to the Treasury in 2011. During the term in which we held SBLF, we grew our qualified small business loan portfolio by $84.3 million, or 118.8%. This level of lending activity allowed us to reduce our annual preferred dividend rate to 1.0%, which was the lowest possible rate obtainable under the SBLF program during that time. At the time we participated in SBLF we began planning for its eventual repayment. In October 2014, we raised $25.0 million in net proceeds through an oversubscribed common stock offering. In October 2015, we issued $10.0 million in subordinated debt to provide liquidity and Tier 2 capital at the holding company. The market timing and acceptance for both transactions was favorable. REVENUE DIVERSIFICATION Given the challenges to net interest income inherent in a flat yield curve, it is important to note progress in revenue diversification and in other value added services. INSURANCE SERVICES In January 2015, the FitzGibbons Agency completed its acquisition of Baldwinsville, New York based Huntington Agency. The FitzGibbons Agency has demonstrated consistent revenue growth since our affiliation in December 2013, and combined with the Huntington Agency purchase, is poised to deliver their local services in the same manner as the Bank across the same geographic footprint. MARKET CONSOLIDATION INVESTMENT SERVICES Mergers and acquisitions will continue to have a significant impact on the industry, our regional market, banking customers and market share. Over the past 5 years, there have been 3 significant acquisitions in our marketplace. The disruptions to customers, as local decision making and community involvement is limited, has been an important and positive impact on our market place growth and brand recognition. Our commitment to being a locally governed and managed bank, integrally involved in our communities, has led to a growing trust among consumers, businesses and municipalities seeking a banking partner. The pending Key Bank/First Niagara acquisition will significantly alter the competitive landscape in our marketplace, and we stand ready to take advantage of the inevitable customer disruption and disenfranchisement. DEPOSIT MARKET RANK OSWEGO AND ONONDAGA COUNTY COMBINED 2015 TOTAL DEPOSITS 2015 % TOTAL MARKET AT JUNE 30TH 1. M & T Bank Corp. (NY) 2. Bank of America Corp. (NC) 2. KeyCorp (OH) 4. JP Morgan Chase & Co. (NY) 5. First Niagara Finl Group (NY) 2,813,353 1,687,223 1,312,769 875,259 763,827 6. Solvay Bank Corp. (NY) 697,320 7. NBT Bancorp Inc. (NY) 8. Pathfinder Bancorp Inc. (NY) 520,044 470,914 9. Geddes FS&LA (NY) 416,893 10. Community Bank System Inc. (NY) 308,649 11. Berkshire Hills Bancorp Inc. (MA) 284,758 13. Citizens Bank, NA 262,055 12. Fulton Savings Bank (NY) 241,148 15. Seneca FS&LA (NY) 103,612 16. Lyons Bancorp Inc (NY) 31,546 17. Adirondack Bank 17. Woodforest Financial Group (TX) 8,119 450 TOTAL INSTITUTION SHARE 10,797,939 4 26.05% 15.63% 12.16% 8.11% 7.07% 6.46% 4.82% 4.36% 3.86% 2.86% 2.64% 2.43% 2.23% 0.96% 0.29% 0.08% 0.00% Investment Services are also a value added offering to our communities and has demonstrated positive trends in revue growth. Insurance Company Revenue ($ in thousands) $700.0 $500.0 $300.0 $100.0 Investment Services Revenue ($ in millions) $280.0 $230.0 $180.0 $130.0 $80.0 $30.0 14 15 11 12 13 14 15 GOVERNANCE We are pleased that Melanie Littlejohn, Regional Executive for National Grid, and a significant leader in Central New York’s economic development and community enhancement organizations, has agreed to join the Board of Pathfinder and stand for election to the Company board at this year’s Annual Meeting. We are proud of the trends we have demonstrated and believe firmly in our market, our business model, and our employees to build value for our franchise, our customers, our communities and our shareholders. We appreciate the support of our shareholders and we are confident in our future. Melanie Littlejohn Regional Executive, National Grid Chris R. Burritt Chairman of the Board Thomas W. Schneider, President and CEO CORPORATE INFORMATION PATHFINDER BANCORP, INC. BOARD OF DIRECTORS (1) Chris R. Burritt, Chairman David A. Ayoub William A. Barclay John P. Funiciello Adam Gagas George P. Joyce Thomas W. Schneider John F. Sharkey, III Lloyd “Buddy” Stemple PATHFINDER EXECUTIVE OFFICERS Thomas W. Schneider President, Chief Executive Officer James A. Dowd, CPA Senior Vice President, Chief Financial Officer Edward A. Mervine, Esq. Senior Vice President, General Counsel, Corporate Secretary Melissa A. Miller Senior Vice President, Chief Operating Officer Daniel R. Phillips Senior Vice President, Chief Information Officer Ronald Tascarella Senior Vice President, Chief Credit Officer PATHFINDER OFFICERS Calvin Corriders First Vice President, Sales Manager Will O’Brien First Vice President, Credit Administration Beth K. Alfieri Vice President, Business Sales Officer Heather Bush Vice President, Human Resources Robert Butkowski Vice President, Branch Administration Roberta J. Davis Vice President, Financial Analyst Rhonda Hutchins Vice President, Compliance Lisa A. Kimball Vice President, Controller Michael Quenville Vice President, Sales Officer Walter F. Rusnak Vice President, Finance Michele C. Torbitt Vice President, Electronic Commerce Manager John Andrews Assistant Vice President, Branch Manager Randall Barnard Assistant Vice President, Branch Manager Susan Cahill Assistant Vice President, Branch Manager Jodi DeAugustine Assistant Vice President, Market Manager Jeremy Fadden Assistant Vice President, Business Account Manager Jessica DeGrenier Assistant Vice President, Commercial Loan Mitigation Theresa L. Dullen Assistant Vice President, Internal Audit Amy E. Favata Assistant Vice President, Financial Reporting Specialist Shari Gordon Assistant Vice President, Information Security Officer Lorna Hall Bank Secrecy and Security Officer April Jordal Assistant Vice President, Sales Support Manager Laurie L. Lockwood Assistant Vice President, Assistant Controller Denise Lyga Assistant Vice President, Branch Manager Joseph P. McManus Assistant Vice President, Computer Operations Manager Deana Michaels Assistant Vice President, Branch Manager Craig Nessel Assistant Vice President, Branch Manager Reyne Pierce Assistant Vice President, Retail Lending Manager Crystal Rafte Assistant Vice President, Operations Manager Robert Rickert Assistant Vice President, Retail Loss Mitigation Amy Shaw Assistant Vice President, Branch Manager Jennifer Wright, Assistant Vice President Municipal and Business Deposit Sales Manager CORPORATE HEADQUARTERS 214 West First Street Oswego, NY 13126 (315) 343-0057 ANNUAL MEETING Wednesday, May 4, 2016, 10:00 AM Alexandria’s, at the Lake Ontario Conference and Events Center 26 East First Street, Oswego, NY 13126 STOCK LISTING The NASDAQ Capital Market Symbol: PBHC SPECIAL COUNSEL Luse, Gorman, Pomerenk & Schick 5335 Wisconsin Avenue N.W. Suite 400 Washington, D.C. 20015 INDEPENDENT AUDITORS Bonadio & Co., LLP 432 North Franklin Street, Suite 60 Syracuse, NY 13204 TRANSFER AGENT Computershare 480 Washington Blvd, 29th Floor Jersey City, NJ 07310 INVESTOR RELATIONS Thomas W. Schneider President, Chief Executive Officer James A. Dowd, CPA Senior Vice President, Chief Financial Officer 214 West First Street Oswego, NY 13126 (315) 343-0057 GENERAL INQUIRIES AND REPORTS A copy of the Bank’s 2015 Annual Report to the Securities and Exchange Commission, Form 10-K, may be obtained without charge by written request of shareholders to: Edward A. Mervine, Esq. Senior Vice President, General Counsel Corporate Secretary Pathfinder Bank 214 West First Street Oswego, NY 13126 A copy of this Annual Report on Form 10K and our 2016 Annual Proxy Statement is also available free of charge on our website at: www.pathfinderbank.com/annualmeeting The public may read and copy any mate- rials the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain informa- tion on the operation of the Public Ref- erence Room by calling the SEC at 1-800-SEC-0330. The Company’s filings are also available electronically free of charge at the SEC website: http://www.sec.gov and at the Company’s website:http://www.pathfinderbank.com FDIC DISCLAIMER This Annual Report has not been reviewed or confirmed for accuracy or relevance by the FDIC. (1) Information concerning the principal occupation of the Directors is available in the Company’s Proxy Statement MAIN OFFICE 214 West First Street, Oswego 343-0057 MEXICO OFFICE Norman & Main Streets, Mexico 963-7248 CENTRAL SQUARE OFFICE 3025 East Avenue, Central Square 676-2265 PLAZA OFFICE State Route 104 East, Oswego 343-4483 FULTON OFFICE 5 West First Street South, Fulton 592-9545 CICERO OFFICE 6194 State Route 31, Cicero 752-0033 DOWNTOWN DRIVE-THRU 34 East Bridge Street, Oswego 343-2577 LACONA OFFICE 1897 Harwood Drive, Lacona 387-3437 PIKE BLOCK BUSINESS OFFICE 109 West Fayette, Syracuse 207-8020 WWW.PATHFINDERBANK.COM 2 0 1 5 A N N U A L R E P O R T LOCAL. COMMUNITY. TRUST. 

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