2 0 1 7
A N N UA L
R E P O R T
Our Purpose
To be the Local Bank Our Community Trusts.
Our Vision
Local
We have proudly served Central New York for over 150 years. Like our
customers, we live, work and play here. That fact not only allows us to know
our customers better, but gives our customers access to decision makers
right here in Central New York.
Community
Our success is intertwined with the success of the communities we serve.
For that reason, and because it is the right thing to do, we invest our
resources, time, and talents in those communities.
Trust
Because we want to serve our local communities for another 150 years,
we must earn the trust of our customers every day. We do that by being
ethical, capable, honest, reliable and responsive. We do not sell products
and services to our customers. We listen, and inquire, to determine our
customers’ needs. Then, with the help of a team of trusted advisors, we
develop a program of services and products to uniquely satisfy those needs.
2017
2016
2015
2014
2013
YEAR END (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Total assets
Investment securities (AFS)
Investment securities (HTM)
Loans receivable, net
Deposits
Borrowings and subordinated debt
Shareholders’ equity
$881,257
171,138
66,196
573,705
723,603
88,947
62,144
$749,034
141,955
54,645
485,900
610,983
73,972
58,361
$623,254
98, 942
44,297
424,732
490,315
56,291
71,229
$561,024
88,073
40,875
382,189
415,568
71,255
69,204
$503,793
80,959
34,412
336,592
410,140
46,008
43,070
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
$23,123
3,653
$20,289
3,629
$18,767
3,716
$17,085
3,415
$15,619
2,581
489
594
422
310
365
37
20,715
473
29,413
6,290
1,769
3,491
$0.86
0.83
14.44
13.34
0.215
(40)
18,765
345
24,093
3,804
953
3,272
$0.79
0.78
13.67
12.55
0.20
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
PERFORMANCE RATIOS
Return on average assets 0.42% 0.48% 0.48% 0.51% 0.48%
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)
4.08
4.46
5.00
11.76
11.36
25.22
3.21
3.31
5.50
6.11
7.45
9.27
12.26
13.89
3.31
3.40
5.86
6.47
8.58
8.24
8.55
12.47
3.23
3.34
5.35
5.80
5.35
8.97
7.73
25.18
3.03
3.14
5.69
6.16
5.69
7.47
7.01
25.21
2.83
2.97
121.73
0.69
2.92
78.22
117.88
0.70
2.92
76.51
115.85
0.69
2.96
79.14
118.35
0.61
2.81
79.90
116.05
0.51
2.58
79.13
ASSET QUALITY RATIOS
Nonperforming loans as a percent of total loans 0.84% 0.98% 1.24% 1.61% 1.57%
Nonperforming assets as a percent of total assets
Allowance for loan losses to loans receivable
Allowance for loan losses as a percent of
nonperforming loans
1.18
1.48
1.16
1.38
0.94
1.33
0.72
1.27
0.61
1.23
107.30
129.85
145.61
85.50
94.22
REGULATORY CAPITAL RATIOS (BANK ONLY)
Total Core Capital (to Risk-Weighted Assets) 13.97% 14.79% 16.22% 16.60% 14.13%
Tier 1 Capital (to Risk-Weighted Assets)
Tier 1 Common Equity (to Risk-Weighted Assets)
Tier 1 Capital (to adjusted assets)
14.95
14.95
10.00
15.31
15.31
10.55
12.82
12.82
8.72
13.54
13.54
9.06
12.72
12.72
8.16
NUMBER OF
Banking offices
Full-time equivalent employees
10
140
9
133
9
124
9
122
8
112
(a) Exclusive of net gains on sales, redemptions 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 for 2014 and prior years.
(d) Tangible equity excludes intangible assets.
(e) The dividend payout ratio is calculated using dividends declared and not waived by Pathfinder Bancorp, MHC for periods prior to the Conversion and Offering that occurred on October 16, 2014.
(f) The efficiency ratio is calculated as noninterest expense divided by the sum of 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.
S
T
H
G
I
L
H
G
I
H
L
A
I
C
N
A
N
I
F
1
Chris R. Burritt
Chairman of the Board
Thomas W. Schneider
President and CEO
ANNUAL SHAREHOLDER REPORT
On behalf of the Board of Directors of Pathfinder Bancorp, Inc., we are pleased to present our 2017 Annual Report
to Shareholders. We are proud of our people who have produced, serviced, and risk-managed through a year
of historic growth; however, we are not fully satisfied with our ability to convert a strong, diversified, organic
balance sheet into return metrics that meet our expectations.
We are also firmly committed to doing the necessary work that continues to build value for our franchise, our
owners, our customers, our community and our staff of hard working banking and financial service professionals.
Our results, our resolve, and commitment forward as well as our Vision for our growing franchise is centered on:
■ Being a trusted source and provider of financial solutions for our customers.
■ Building a diversified balance sheet through organic, regional growth of deposit gathering and lending.
■ Providing strong risk management and compliance capability to ensure long-term value build.
The market (our customers and our community partners) is stating, through testimony and action, that it regards
and values our community based approach to banking. The tremendous efforts and outcomes achieved by our
employees to meet the demands of this organic growth, while building our competencies and our systems and
maintaining disciplined risk management focus is also a testament to our staff’s commitment to our business
and our vision.
6.00%
5.00%
Deposit
Deposit Market Rank
ket Rank
Osw
Oswego and Onondaga Counties Combined
nd Onond
ounties Co
ed
at Jun
2017
at June 30, 2017
* C A G R = 6 . 7 2 %
C A G R =
2 %
5.41%
4.69%
■ Managing capital to provide a strong total return through a sustainable, valued business model that earns
continued trust in our markets.
4.00%
4.45%
4.36%
■ Providing pathways to success and value build for our employees.
■ Engaging and providing leadership in our communities to strengthen the economic, social, cultural
and civic fabric of our communities.
3.00%
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
*Compound Annual Growth Rate
OUR MARKET
OUR MODEL
Comprised of the Central New York region, and to a lesser but growing extent, the Mohawk Valley and Finger
Lakes regions of New York, our communities are centered along the old industrial complexes fostered by the
transportation channel of the Erie Canal. We believe the economy initially built on these complexes, many now
gone, is in the early cycles of a revitalization and reinvention that includes:
■ Re-urbanization of our cities.
■ Closer alignment of government, business and academic sectors.
We firmly believe the key driver of our growth is building trust by being very intentional in how a community
bank should serve our community.
This trust build needs to be earned daily, and we do so through leadership, and engagement to strengthen
the core of our communities. Our vision of Local, Community, Trust, is not merely a marketing tag line, but the
message we put forth into our communities and throughout our organization, and then it is the message we seek
to live as we serve each other.
■ Leveraging of our outstanding higher education and health care institutions.
PERFORMANCE AND RESULTS
■ Workforce development and anti-poverty initiatives that foster entrepreneurism and employment.
■ Technology and energy production and distribution.
■ Small manufacturing growth, as well as a core of larger manufacturers that remain committed to the
excellent work force and quality of life in Upstate New York.
This revitalization and economic reinvention is following a shallow, but sustainable growth path. The business,
consumer, and municipal customers in this market demonstrate by their support, a desire to work with Pathfinder
Bank and align with our vision and purpose to be “the Local Bank our Community Trusts.”
The record rate of growth of customer base and balance sheet that we have achieved is clearly being driven more
from being sought by our customers and community, rather than through aggressive prospecting.
Balance sheet growth has been the primary driver of our performance over the last five years. Meeting the needs
of our business, consumer, and residential community through our full-service lending products, continues
to accelerate. This acceleration is both a function of our expansion within our primary market and, more
importantly, a response to increased demand for our services. This increased demand results from combining:
the positive economic vitality of our region; our reputation in the market towards working hard on our customers’
behalf to provide for their needs; and a reflection of our growing brand awareness as an engaged community
bank striving to solve and build for the communities we serve and represent.
2
$1,000.0
$850.0
$700.0
$550.0
$400.0
$250.0
$650.0
$483.3
$800.0
$650.0
$500.0
$350.0
et Grow
ver 6 yey
Asset Growth Over 6 years
(With 5
(With 5 Year CAGR)
CAGR)
($ in
ons)
($ in millions)
y
2 %
2 %%
3 . 0
C A G R = 1
C A G R = 1
A G R
$623.3
$561.0
$881.3
$749.0
$477.8
2
1
0
2
$503.8
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
Below is a sampling of the balance sheet movements over the past year:
($ in millions)
LOANS
Residential Mortgages
Commercial Real Estate
Commercial Term Loans
Municipal Loans
Consumer Loans
DEPOSITS
Retail
Business
Municipal
DECEMBER
2017
DECEMBER
2016
$
CHANGE
%
CHANGE
$222
193
101
10
55
$453
105
165
$208
151
90
13
31
$343
105
162
$14
42
11
(3)
24
$110
0
3
6.7%
27.8%
12.2%
-23.1%
77.4%
32.1%
0%
1.9%
n Grow
ver 6 yey
Loan Growth Over 6 years
(With 5
(With 5 Year CAGR)
CAGR)
($ in
ons)
($ in millions)
y
$580.8
RETURNS
%%
7 2 %
C A G R = 1 1 . 7 2 %
A G R = 1 11
C
1
$492.1
$430.4
$387.5
$316.7
$333.7
$341.6
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
$150.0
Growth of our deposit base has maintained the pace necessary to fund our loan originations, but will require
an expansion of ease of access for our Onondaga County customers, and an upgrade in electronic delivery
platforms for our larger business customers.
p
osit Grow
y
y
Over 6 y
s
Deposit Growth Over 6 years
(With 5
(With 5 Year CAGR)
CAGR)
($ in
ons)
($ in millions)
$723.6
5 %
5 %
%%
3 . 0
0
3
3
A G R = 1
A G R = 1
A G
A G
C
C
$611.0
$490.3
While balance sheet growth has driven net interest revenue higher, the disproportionate increase in short-
term interest rates has flattened the yield curve. Essentially, the increased costs of our raw materials (deposits
and borrowings) squeezes margin as this cost cannot be immediately passed on in our finished goods (loans
and securities). Our liability-sensitive balance sheet and net interest margin is well modeled, under numerous
stress scenarios, and we are comfortable that rising rates will transfer to increased revenue within an 18-month
horizon, given a fairly normalized economic cycle.
We believe that the strategic build of our balance sheet over the past ten years to fully integrate commercial
loans into a traditional residential portfolio, provides resilience and earnings reliance during the interest rate
movements that accompany economic cycles.
In 2017, however, increasing rates adversely impacted revenue as indicated below and more extensively in
our Rate/Volume Analysis table on page 40 of the Management Discussion and Analysis in this report.
Rate/Volume Summarization 2017:
DEC. 2017 VS. DEC. 2016
($ in thousands)
RATE
VOLUME
Increase (Decrease) Due to
Loans
Securities
Deposits
Borrowings
Net Change in Interest Income
PROVISIONS FOR LOAN RISK
$4,073
698
588
369
$ 3,839
$(384)
841
875
1,023
$ (1,005)
$391.8
$410.1
$415.6
Additionally,our provisions for loan and leases is maintained in proportion to our strong loan growth, further
impacting net income, yet central to our risk management discipline.
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
$200.0
As we move through our strategic objectives in 2018 and 2019, these delivery and platform expansions will be
a vital component of our continued success.
$2,000
$1,700
$1,400
$1,100
Pro
Provision for Loan Losses to
sion for
an Loss
to
Allowance for Loan Losses
A
wance fo
Loan Lo
s
($ in t
($ in thousands)
sands)
$8,000
$1,769
1,761 761 761 761 761 761 761 761 761 7671 7677
1 769
1,769
$1 769
$1,769
$1 769
$1,769
$1 769
$1,769
$1 769
$1,769
$1 769
$1,769
$1 769
$1,769
$1 769
$1,769
$1 769
$1,769
$1 769
$1,769
$1 769
$1,769
$1 769
$$1,769
999
$$
$7,000
Allowance
Provision
1 341 341 341 343
1 349
1,349
$1,349
$1,349
$1,349
$1,349
$1,349
49
$1,349
$1,205
1 201 201 201 2020
1 205
1,201,205,21,205
1,20,$1,205
1,20,$1,205
1,20,$1,205
1,205,$1,205
1,205,$1,205
$1,205,$1,205
$ ,$1,205
55
1 031 031 031 0303
1 032
1,032
1,032
1,032
1,032
$1,032
$1,032
$1,032
$1,032
$1,032
$$1,032
2
$
$1,032
$953
$800
$825$825$825$825$825$825$825$825$82582582582
$825
2012
2013
2014
2015
2016
2017
$6,000
$5,000
$4,000
3
NON-INTEREST INCOME
CAPITAL MANAGEMENT
Contributions from fees and other revenue sources have been muted. We lag in fee charges relative to competition
and need to gain more value going forward from our services provided, particularly given thinner margins.
We expect the second half of 2018 to normalize to the higher market rate fees on services provided, enhancing
income without adverse impact on our customer centricity.
Investment and Insurance Services provide a rounded array of financial services for our customers and are
self-sustaining, but have not achieved the scale or synergy necessary to positively impact net income.
$5,000
$4,588
$4,175
$3,763
$3,350
$2,938
$2,525
$2,113
$1,700
Core
Core Non-Interest Income Over 6 Years
Interest
ome Ov
Years
(With 5
(With 5 Year CAGR)
CAGR)
($ in
ands)
($ in thousands)
%
C A G R = 6 . 8 1 %
A G R = 6
A G R
C A
$3,716
$3,629
$3,653
$3,415
$2,627
$2,581
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
OPERATING EXPENSE
Expense has grown at an annual rate of 10.87% in 2017, and 9.40% annually over the last five years.
Revenue growth during the same periods has risen 11.94% and 8.89%, respectively.
$28,000
$26,000
$24,000
$22,000
$20,000
$18,000
$16,000
$14,000
$12,000
$10,000
Revenue and Operating Expense Trends
(000’s)
Total Revenue
Total Expense
2013
2014
2015
2016
2017
The separation of rate of growth of operating expenses relative to revenue, is projected to move favorably as
we build to scale. The build of our balance sheet and franchise as we move toward $1.0 billion in total assets
requires our continued investment in people, technology, risk management, and infrastructure. Expectations of
our constituents and regulatory oversight shift dramatically higher for banks over $1.0 billion. Our forecasted
projections have us obtaining this significant milestone sometime around mid-year 2019. We are focused on
preparing for these higher expectations with confidence and competence. Our expenses reflect a pre-build of
capacity for this next evolution of our community bank.
While operating expense to total average assets for 2017 is at an historically low 2.58%, our efficiency ratio
of 79.13%, clearly shows that we are not attaining a high enough level of revenue to contribute to earnings
and capital. We believe the efficiency ratio reflects more on our need to grow revenue rather than a function of
expense management. That stated, all elements are required to meet our projected benchmarks to contribute to
return on shareholder investment and capital growth.
$1.00
$0.75
Earni
Earnings Per Share-Basic Over 6 Years
Per Sha
asic Ov
Years
(With 5
(With 5 Year CAGR)
CAGR)
7 %
C A G R = 1 0 . 1 7 %
C A G R = 1
A G R = 1
A G R = 1
$0.79
$0.86
The rate of growth in our balance sheet has exceeded the replenishment of capital through retained earnings
as we leverage your capital contributions made in October 2014.
As we continue to expand franchise and meet the demands in our market, the potential need to access capital
markets for additional contribution grows. We understand it is incumbent upon us to demonstrate growth
in earnings per share to ensure forward confidence.
EPS has grown at an annual rate of 10.17% over the last five years. As our capacity build meets the forward
expectations of operating at over $1 billion in total assets, and the interest rate cycle allows asset repricing at
higher rates, we are confident that we will demonstrate our capabilities to provide the appropriate risk-managed
return on investment.
FRANCHISE BUILD AND MARKET EXPANSION
During 2017, we opened a loan production office in Utica, NY. We see opportunities to meet market needs with
our community banking model in the Mohawk Valley, a market well known to our senior management and Board
of Directors.
However, our primary focus remains the greater Syracuse, NY market relative to expansion opportunity.
We continue to become an increasingly vital banking resource in the Syracuse Market and a respected, engaged
business in that community.
To further enhance our presence, the following actions have, or will be, taken in 2018.
■ Calvin Corriders, a six-year member of our bank team, was named Regional President, Syracuse Market in
January 2018. Calvin has been a highly respected member of the Syracuse community and a banker in that
market for 30+ years. His active presence and enhanced authority on our behalf, as well as our aligned values
and vision, further foster confidence in our bank in the Syracuse market.
■ We have filed application and received approval to open a branch office on Route 31 in the Town of Clay.
A strongly growing bedroom community between Oswego and Syracuse, we expect to begin operation in
the 4th quarter of 2018. We are filing application to open a branch office in the Southwest neighborhood of
Syracuse, with the support of community leadership. As this office will serve a market deemed underserved,
we are applying for a Banking Development District designation under the New York Department of Financial
Services program designed to encourage and support such districts. We look forward to fulfilling our
responsibility and commitment to serve all those in the communities we operate.
■ We are making significant technology investments in our delivery platforms to meet the growing sophistication
of our customer base and the continued increased use of electronic delivery channels.
GOVERNANCE/MANAGEMENT
We believe that there is no such thing as a bad company with good governance or a good company with
bad governance.
Our strength always begins with the quality of our independent Board of Directors. Our Board is fully engaged
in our communities and the active oversight of our company.
Our management team has demonstrated that we foster positive, mutually beneficial relationships with
community and business partners, civic and non-profit leadership, and the respected members of our regulatory
oversight bodies. We are focused on building a banking franchise of long-term value for our shareholders,
our customers, our community, and our dedicated staff of bank professionals.
We are grateful for the support we receive and we are honored to be a part of the stewardship of this community
bank serving our market for 159 years. We look forward to a mutually rewarding future to all of you who have
contributed so much to allow us the privilege to serve, solve and build value in Central New York.
$0.50
$0.53
$0.58
$0.63
$0.67
Chris R. Burritt
Chairman of the Board
Thomas W. Schneider
President and CEO
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
$0.25
$0.00
4
2 0 1 7
F I N A N C I A L
R E V I E W
2 0 1 6
F I N A N C I A L
R E V I E W
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2017
Commission File No. 001-36695
PATHFINDER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
38-3941859
(I.R.S. Employer
Identification No.)
214 West First Street
Oswego, NY 13126
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code (315) 343-0057
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted 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 and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐ (Do not check if a smaller reporting company)
Emerging growth company
☐
Accelerated filer
☐
Smaller reporting company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to
the last sale price on June 30, 2017, as reported by the NASDAQ Capital Market ($15.70), was approximately $66.9 million.
As of March 26, 2018, there were 4,292,586 shares outstanding of the Registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the 2018 Annual Meeting of Shareholders of the Registrant (Part III).
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2017
PATHFINDER BANCORP, INC.
Page
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
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PART I
FORWARD-LOOKING STATEMENTS
When used in this Annual Report the words or phrases “will likely result”, “are expected to”, “will continue”, “is anticipated”,
“estimate”, ”project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties. Actual results
and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these
forward-looking statements. Important factors that could cause the Company’s actual results and financial condition to differ
from those indicated in the forward-looking statements include, among others:
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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 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 consumer protection laws and
regulations; and
Other risks described herein and in the other reports and statements we file with the SEC.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be
placed on such statements. Undue reliance should not be placed on any such forward-looking statements, which speak only as of
the date made. The factors listed above could affect the Company’s financial performance and could cause the Company’s
actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in
any current statements. Additionally, all statements in this document, including forward-looking statements, speak only as of
the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future
events.
ITEM 1: BUSINESS
GENERAL
Pathfinder Bancorp, Inc.
Pathfinder Bancorp, Inc. (the "Company") is a Maryland corporation headquartered in Oswego, New York. The primary
business of the Company is its investment in Pathfinder Bank (the "Bank") which is 100% owned by the Company. Pathfinder
Bank is a commercial bank chartered by the New York State Department of Financial Services (the “NYSDFS”). The Bank
provides loans to, and gathers deposits from, customers primarily within Oswego and Onondaga Counties in Central New York
State.
At December 31, 2017 and 2016, 4,280,227 and 4,236,744 shares of Company common stock were outstanding, respectively.
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On October 15, 2015, the Company executed a $10.0 million non-amortizing subordinated loan agreement (“subordinated
loan”) with an unrelated third party that is scheduled to mature on October 1, 2025. The Company has the right to prepay the
subordinated loan at any time after October 15, 2020 without penalty. The terms of the subordinated loan required interest
payments at an annual interest rate of 3.50% from October 15, 2015 to February 29, 2016. The annual interest rate increased to
6.25% on March 1, 2016 through the maturity date. The subordinated loan is senior in the Company’s credit repayment
hierarchy only to the Company’s common equity and, as a result, qualifies as Tier 2 capital for the Company for all future
periods when applicable. The Company paid $172,000 in origination and legal fees as part of this transaction. These fees are
amortized over the life of the subordinated loan through its first call date of October 1, 2020 using the effective interest method.
The cost of funds related to this transaction is 6.44% calculated under this method.
The proceeds from the subordinated loan were used to repay preferred stock issued to the U.S. Treasury as part of the Small
Business Lending Program (“SBLF”), which was retired on February 16, 2016. The issuance of the subordinated loan increases
interest expense by $644,000 per year but prospectively reduces the amount payable to the SBLF in preferred stock dividends.
Effective April 1, 2016, the annual dividend rate for the preferred stock would have been 9.0%. The retirement of the $13.0
million of the SBLF Preferred Series B stock, therefore, resulted in an annual reduction of preferred dividends payable of
approximately $1.2 million. The Company paid $0 in preferred dividends in 2017 and $16,000 in 2016 through the date that the
preferred stock was retired. These transactions had no effect on the regulatory capital position of the Bank.
On June 1, 2016, the Company announced that it had completed the process of its previously announced restructuring plan to
combine the operations of its then-existent subsidiaries, Pathfinder Bank and Pathfinder Commercial Bank, into a single full
service New York State chartered commercial bank. This transaction was completed on May 31, 2016.
At December 31, 2017, the Company had total consolidated assets of $881.3 million, total deposits of $723.6 million and
shareholders' equity of $61.8 million plus a noncontrolling interest of $333,000, which represents the 49% not owned by the
Company as a result of the 2013 acquisition of the FitzGibbons Agency, LLC.
The Company's executive office is located at 214 West First Street, Oswego, New York and the telephone number at that
address is (315) 343-0057. Its internet address is www.pathfinderbank.com. Information on our website is not and should not
be considered to be a part of this report.
Pathfinder Bank
The Bank is a New York-chartered stock commercial bank and its deposit accounts are insured up to applicable limits by the
Federal Deposit Insurance Corporation (“FDIC”) through the Deposit Insurance Fund (“DIF”). The Bank is subject to extensive
regulation by the NYSDFS, as its chartering agency, and by the FDIC, as its deposit insurer and primary federal regulator. The
Bank is a member of the Federal Home Loan Bank of New York (“FHLBNY”) and is also subject to certain regulations by the
Federal Home Loan Bank System.
The Bank is primarily engaged in the business of attracting deposits from the general public in the Bank's market area, and
investing such deposits, together with other sources of funds, in loans secured by residential real estate, commercial real estate,
small business loans, and consumer loans. The Bank also invests a portion of its assets in a broad range of debt securities issued
by the United States Government and its agencies and sponsored enterprises, state and municipal governments and agencies,
and corporations. The Company invests primarily in debt securities but will from time to time also invest in mutual funds and
equity securities. The Company also invests in mortgage-backed securities issued or guaranteed by United States Government
sponsored enterprises, collateralized mortgage obligations and similar debt securities issued by both government sponsored
entities and private (non-governmental) issuers, and asset-backed securities that are generally issued by private entities. The
Bank's principal sources of funds are deposits, principal and interest payments on loans and investments, as well as borrowings
from correspondent financial institutions. The principal source of income is interest on loans and investment securities. The
Bank's principal expenses are interest paid on deposits, employee compensation and benefits, data processing and facilities.
The Company owns a non-consolidated Delaware statutory trust subsidiary, Pathfinder Statutory Trust II, of which 100% of the
common equity is owned by the Company. Pathfinder Statutory Trust II was formed in connection with the issuance of $5.2
million in trust preferred securities.
The Bank owned Pathfinder REIT, Inc., a New York corporation, as a wholly-owned real estate investment trust subsidiary.
Pathfinder REIT, Inc. ceased all operations in December 2017 and all of its assets and liabilities were transferred at that time to
the Bank. The cessation of Pathfinder REIT, Inc.’s operations and the transfer of all assets and liabilities from Pathfinder REIT,
Inc. to the Bank had no effect on the Company’s consolidated financial position at December 31, 2017 or the results of its
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operations for the year ended December 31, 2017. The formal dissolution of Pathfinder REIT, Inc. as a legal entity will be
completed in 2018.
The Bank also owns 100% of Whispering Oaks Development Corp. (“Whispering Oaks”), a New York corporation that is
retained to operate or develop real estate-related projects. At December 31, 2017, Whispering Oaks operated a small tenant-
occupied commercial building that houses an ATM facility for the Bank, and, through a wholly-owned second-tier subsidiary, is
the sole limited partner in an unconsolidated special-purpose partnership. The partnership currently operates a low-income
residential housing facility. The activities of Whispering Oaks resulted in a pre-tax loss of $44,000 in 2017.
Additionally, the Bank owns 100% of Pathfinder Risk Management Company, Inc., which was established to record the 51%
controlling interest upon the December 2013 purchase of the FitzGibbons Agency, an Oswego County property, casualty and
life insurance brokerage business with approximately $803,000 in annual revenues. The activities of Pathfinder Risk
Management Company, Inc. resulted in pre-tax losses of $139,000 in 2017.
Employees
As of December 31, 2017, the Bank had 136 full-time employees and 8 part-time employees. The employees are not
represented by a collective bargaining unit and we consider our relationship with our employees to be good.
MARKET AREA AND COMPETITION
Market Area
We provide financial services to individuals, families, small to mid-size businesses and municipalities through our seven branch
offices located in Oswego County, two branch offices in Onondaga County and one loan production office in Oneida County.
Our primary lending market area includes both Oswego and Onondaga Counties. However, our primary deposit generating area
is concentrated in Oswego County and the areas surrounding our Onondaga County branches.
The economy in Oswego County is based primarily on manufacturing, energy production, heath care, education, and
government. The broader Central New York market has a more diverse array of economic sectors, including, food processing
production and transportation, in addition to financial services. The region has also developed particular strength in emerging
industries such as bio-processing, medical devices and renewable energy.
Based on recent independent market survey reports, median home values were $131,900 in Onondaga County and $96,700 in
Oswego County at the end of 2017. Home values have shown only modest increases in recent years within the Syracuse metro
area, including Onondaga and Oswego Counties. This modest increase in home values within the area followed a period in
which home values within the area exhibited relative stability compared to many other areas of the country during the most
recent economic recession that began in 2008.
Competition
Pathfinder Bank encounters strong competition both in attracting deposits and in originating real estate and other loans. Our
most direct competition for deposits and loans comes from commercial banks, savings institutions and credit unions in our
market area, including money-center banks such as JPMorgan Chase & Co. and Bank of America, regional banks such as M&T
Bank and Key Bank N. A., and community banks such as NBT Bank and Community Bank N.A., all of which have greater total
assets than we do. We compete for deposits by offering depositors a high level of personal service, a wide range of
competitively priced financial services, and a well distributed network of branches, ATMs, and electronic banking. We
compete for loans through our competitive pricing, our experienced and active loan officers, local knowledge of our market and
local decision making, strong community support and involvement, and a highly reputable brand. As the economy has
improved, and loan demand has increased, competition from financial institutions for commercial and residential loans has also
increased. Additionally, some of our competitors offer products and services that we do not offer, such as trust services and
private banking. Our primary focus is to build and develop profitable consumer and commercial customer relationships while
maintaining our role as a community bank.
As of June 30, 2017, based on the most recently-available FDIC data, we had the largest market share in Oswego County,
representing 42.2% of all deposits, and we additionally held 1.2% of all deposits in Onondaga County. In addition, when
combining both Oswego and Onondaga Counties, we have the sixth largest market share of sixteen institutions, representing
5.4% of the total market.
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LENDING ACTIVITIES
General
Our primary lending activity is originating commercial real estate and commercial loans, the vast majority of which have
periodically adjustable rates of interest and one-to-four family residential real estate loans, the majority of which have fixed
rates of interest. Our loan portfolio also includes municipal loans, home equity loans and lines and consumer loans. In order to
diversify our loan portfolio, increase our revenues, and make our loan portfolio less interest rate sensitive, the Company has
actively sought to increase its commercial real estate and commercial business lending activities, consistent with safe and sound
underwriting practices. Accordingly, we offer adjustable-rate commercial mortgage loans, short-and medium-term mortgage
loans, and floating rate commercial loans and lines.
Commercial Real Estate Loans
Over the past several years, we have focused on originating commercial real estate loans, and we believe that commercial real
estate loans will continue to provide growth opportunities for us. We expect to increase, subject to our underwriting standards
and market conditions, this business line in the future with a target loan size of $500,000 to $1.0 million to small businesses and
real estate projects in our market area. Commercial real estate loans are secured by properties such as multi-family residential,
office, retail, warehouse and owner-occupied commercial properties.
Our commercial real estate underwriting policies provide that such real estate loans may be made in amounts up to 80% of the
appraised value of the property. Commercial real estate loans are offered with interest rates that are fixed for up to three or five
years then are adjustable based on the FHLBNY advance rate. Contractual maturities generally do not exceed 20 years. In
reaching a decision whether to make a commercial real estate loan, we consider market conditions, operating trends, net cash
flows of the property, the borrower’s expertise and credit history, and the appraised value of the underlying property. We will
also consider the terms and conditions of the leases and the stability of the tenant base. We generally require that the properties
securing these real estate loans have debt service coverage ratios (the ratio of earnings before interest, taxes, depreciation and
amortization divided by interest expense and current maturities of long term debt) of at least 120%. Environmental due
diligence is generally conducted for commercial real estate loans. Typically, commercial real estate loans made to corporations,
partnerships and other business entities require personal guarantees by the principals and by the owners of 20% or more of the
borrower.
A commercial real estate borrower’s financial condition is monitored on an ongoing basis by requiring periodic financial
statement updates, payment history reviews, property inspections and periodic face-to-face meetings with the borrower. We
generally require borrowers with aggregate outstanding balances exceeding $100,000 to provide annual updated financial
statements and federal tax returns. These requirements also apply to all guarantors on these loans. We also require borrowers to
provide an annual report of income and expenses for the property, including a rent-roll, as applicable.
Loans secured by commercial real estate generally have greater credit risk than one-to-four family residential real estate loans.
The increased credit risk associated with commercial real estate loans is a result of several factors, including larger loan
balances concentrated with a limited number of borrowers, the impact of local and general economic conditions on the
borrower’s ability to repay the loan. Furthermore, the repayment of loans secured by commercial real estate properties typically
depends upon the successful operation of the real property securing the loan. If the cash flows from the property are reduced,
the borrower’s ability to repay the loan may be impaired. However, commercial real estate loans generally have higher interest
rates than loans secured by one-to-four family residential real estate.
Commercial Loans
We typically originate commercial loans, including commercial term loans and commercial lines of credit, on the basis of a
borrower’s ability to make repayment from the cash flows of the borrower’s business, conversion of current assets in the normal
course of business (for seasonal working capital lines), the industry and market in which they operate, experience and stability
of the borrower’s management team, earnings projections and the underlying assumptions, and the value and marketability of
any collateral securing the loan. As a result, the availability of funds for the repayment of commercial loans and commercial
lines of credit is substantially dependent on the success of the business itself and the general economic environment in our
market area. Therefore, commercial loans and commercial lines of credit that we originate have greater credit risk than one-to-
four family residential real estate loans.
Commercial term loans are typically secured by equipment, furniture and fixtures, inventory, accounts receivable or other
business assets, or, in some circumstances, such loans may be unsecured. From time to time, we also originate commercial
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loans through Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) guaranteed loan
programs. Over the past several years, we have focused on increasing our commercial lending and our business strategy is to
continue to increase our originations of commercial loans to small businesses in our market area, subject to our underwriting
standards and market conditions. Our commercial loans are generally comprised of adjustable-rate loans, indexed to the prime
rate, with terms consisting of three to seven years, depending on the needs of the borrower and the useful life of the underlying
collateral. We make commercial loans to businesses operating in our market area for purchasing equipment, property
improvements, business expansion or working capital. If a commercial loan is secured by equipment, the maturity of a term
loan will depend on the useful life of the equipment purchased, the source of repayment for the loan and the purpose of the loan.
We generally obtain personal guarantees on our commercial loans.
Our commercial lines of credit are typically adjustable rate lines, indexed to the prime interest rate. Generally, our commercial
lines of credit are secured by business assets or other collateral, and generally payable on-demand pursuant to an annual review.
Since the commercial lines of credit may expire without being drawn upon, the total committed amounts do not necessarily
represent future cash requirements.
Residential Real Estate Loans
Historically, our primary lending focus consisted of originating one-to-four family, owner-occupied residential mortgage loans,
substantially all of which were secured by properties located in our market area. As noted above, we have shifted our lending
focus in recent years towards originating more commercial real estate and commercial loans.
We currently offer one-to-four family residential real estate loans with terms up to 30 years that are generally underwritten
according to Federal National Mortgage Association (“Fannie Mae”) guidelines, and we refer to loans that conform to such
guidelines as “conforming loans.” We generally originate both fixed-rate and adjustable-rate mortgage loans in amounts up to
the maximum conforming loan limits as established by the Federal Housing Finance Agency, which as of December 31, 2017,
was generally $424,100 for single-family homes in our market area.
Although conforming loans are saleable, we generally hold our one-to-four family residential real estate loans in our portfolio
but have the capability to sell the mortgages into the secondary market, at management’s discretion, as a source of liquidity or
as a means of managing interest-rate risk. Such loan sales were conducted on a limited basis in 2017 and 2016. A significant
portion of our loan portfolio consists of fixed-rate one-to-four family residential real estate loans with terms in excess of 15
years. We also originate one-to-four family residential real estate loans secured by non-owner occupied properties. However,
we generally do not make loans in excess of 80% loan-to-value on non-owner occupied properties.
Our fixed-rate one-to-four family residential real estate loans include loans that generally amortize on a monthly basis over
periods between 10 to 30 years. Fixed-rate one-to-four family residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms because borrowers have the right to refinance or prepay their loans.
Our adjustable-rate one-to-four family residential real estate loans generally consist of loans with initial interest rates fixed for
one, three, or five years, and annual adjustments thereafter are indexed based on changes in the one-year United States Treasury
bill constant maturity rate. Our adjustable-rate mortgage loans generally have an interest rate adjustment limit of 200 basis
points per adjustment, with a maximum lifetime interest rate adjustment limit of 600 basis points. In the current low interest
rate environment, we have not originated a significant amount of adjustable-rate mortgage loans. Although adjustable-rate one-
to-four family residential real estate loans may reduce, to an extent, our vulnerability to changes in market interest rates because
they periodically re-price, as interest rates increase the required payments due from a borrower also increase (subject to rate
caps), thereby increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the
loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments
of the contractual interest rate are also limited by our maximum periodic and lifetime rate adjustments.
For borrowers who do not obtain private mortgage insurance (“PMI”), our lending policies limit the maximum loan-to-value
ratio on both fixed-rate and adjustable-rate mortgage loans to 80% of the appraised value of the collateralized property, with the
exception of a limited use product which allows for loans up to 90% with no PMI. For most one-to-four family residential real
estate loans with loan-to-value ratios of between 80% and 95%, we require the borrower to obtain private mortgage insurance.
For first mortgage loan products, we require the borrower to obtain title insurance. We also require homeowners’ insurance, fire
and casualty, and, if necessary, flood insurance on properties securing real estate loans. We do not, and have never offered or
invested in, one-to-four family residential real estate loans specifically designed for borrowers with sub-prime credit scores,
including interest-only, negative amortization or payment option adjustable-rate mortgage loans.
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Residential Construction Loans
Our one-to-four family residential real estate loan portfolio also includes residential constructions loans. Our residential
construction loans generally have initial terms of up to six months, subject to extension, during which the borrower pays interest
only. Upon completion of construction, these loans typically convert to permanent loans secured by the completed residential
real estate. Our construction loans generally have rates and terms comparable to residential real estate loans that we originate.
Tax-exempt Loans
We make loans to local governments and municipalities for either tax anticipation or for small expenditure projects, including
equipment acquisitions and construction projects. Our municipal loans are generally fixed for a term of one year or less, and are
generally unsecured. Interest earned on municipal loans is tax exempt for federal tax purposes, which enhances the overall yield
on each loan. Generally, the municipality will have a deposit relationship with us along with the lending relationship.
We also make tax-exempt loans to commercial borrowers based on obligations issued by a state or local authority to provide
economic development such as the state dormitory authority.
Home Equity Loans and Junior Liens
Home equity loans and junior liens are made up of lines of credit secured by owner-occupied and non-owner occupied one-to-
four family residences and second and third real estate mortgage loans. Home equity loans and home equity lines of credit are
generally underwritten using the same criteria that we use to underwrite one-to-four family residential mortgage loans. We
typically originate home equity loans and home equity lines of credit on the basis of the applicant's credit history, an assessment
of the applicant's ability to meet existing obligations and payments on the proposed loan, and the value of the collateral securing
the loan. Home equity loans are offered with fixed interest rates. Lines of credit are offered with adjustable rates, which are
indexed to the prime rate, and with a draw period of up to 10 years and a payback period of up to 20 years. The loan-to-value
ratio for our home equity loans is generally limited to 80% when combined with the first security lien, if applicable. The loan to
value of our home equity lines of credit is generally limited to 80%, unless the Bank holds the first mortgage. If we hold the
first mortgage, we will permit a loan to value of up to 90%, and we adjust the interest rate and underwriting standards to
compensate for the additional risk.
For all first lien position mortgage loans, we use outside independent appraisers. For second position mortgage loans where we
also hold the existing first mortgage, we will use the lesser of the existing appraisal amount used in underwriting the first
mortgage or assessed value. For all other second mortgage loans, we will use a third-party service which gathers all data from
real property tax offices and gives the property a low, middle and high value, together with similar properties for comparison.
The middle value from the third-party service will be the value used in underwriting the loan. If the valuation method for the
loan amount requested does not provide a value, or the value is not sufficient to support the loan request and it is determined
that the borrower(s) are credit worthy, a full appraisal may be ordered.
Home equity loans and junior liens secured by junior mortgages have greater risk than one-to-four family residential mortgage
loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and
costs of foreclosure, after repayment of the senior mortgages, if applicable. When customers default on their loans, we attempt
to work out the relationship in order to avoid foreclosure because the value of the collateral may not be sufficient to compensate
us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers.
Moreover, decreases in real estate values could adversely affect our ability to fully recover the loan balance in the event of a
default.
Consumer Loans
We are authorized to make loans for a variety of personal and consumer purposes and our consumer loan portfolio consists
primarily of automobile, recreational vehicles and unsecured personal loans, as well as unsecured lines of credit and loans
secured by deposit accounts. Our procedure for underwriting consumer loans includes an assessment of the applicant’s credit
history and ability to meet existing obligations and payments for the proposed loan, as well as an evaluation of the value of the
collateral security, if any.
Consumer loans generally entail greater credit-related risk than one-to-four family residential mortgage loans, particularly in the
case of loans that are unsecured or are secured by assets that tend to depreciate in value, such as automobiles. As a result,
consumer loan collections are primarily dependent on the borrower’s continuing financial stability and thus are more likely to
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be adversely affected by job loss, divorce, illness or personal bankruptcy. In these cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the outstanding loan, and the remaining value often does
not warrant further substantial collection efforts against the borrower.
The Company will invest from time to time in pools of collateralized consumer loans originated and serviced by financial
institutions operating outside of the Company’s primary market area. Loan pools will, in some instances, have economic
advantages in terms of yield and/or other portfolio characteristics, such as interest rate risk sensitivity, superior to investment
securities and are used to increase the performance characteristics of the Company’s earning-asset portfolios viewed as a whole.
Typically, the Company will acquire a participating interest from the originating institution in an amount that is less than 100%
of the outstanding principal balance of the entire pool and the originating institution will retain a residual principal interest in
the portion of the loans not acquired by the Company. Loans acquired through these transactions are required by the
Company’s internal policies to be underwritten to standards that are consistent with those of the Company’s own underwriting
guidelines and internal practices. Pre-purchase due diligence is performed that includes a thorough review of the originating
institution’s regulatory compliance procedures, underwriting practices and individual loan documentation. Since these pools are
subject to borrower credit default and are collateralized by out-of-market assets, the Company relies on the best efforts of the
originating institution, acting as the loans’ servicer, to collect on the loans within the pool and to mitigate losses due to such
defaults. Such mitigation efforts include the orderly and timely liquidation of loan collateral, as necessary. Accordingly, such
loan pools have both the credit risk typically associated with consumer loans and servicer risk components that are carefully
monitored by the Company on an ongoing basis.
Loan Originations, Purchases, Sales and Servicing
We benefit from a number of sources for our loan originations, including real estate broker referrals, existing customers,
borrowers, builders, attorneys, and “walk-in” customers. Our loan origination activity may be affected adversely by a rising
interest rate environment which may result in decreased loan demand. Other factors, such as the overall health of the local
economy and competition from other financial institutions, can also impact our loan originations. Although we originate both
fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon borrower demand, market interest
rates, borrower preference for fixed-rate versus adjustable-rate loans, and the interest rates offered on each type of loan by other
lenders in our market area. These lenders include commercial banks, savings institutions, credit unions, and mortgage banking
companies that also actively compete for local real estate loans. Accordingly, the volume of loan originations may vary from
period to period.
The majority of the fixed rate residential loans that are originated each year meet the underwriting guidelines established by
Fannie Mae. While infrequent, in the past, we have sold residential mortgage loans in the secondary market, and we may do so
in the future, although we continue to service loans once they are sold.
From time to time, although infrequent, we may purchase commercial loan participations in which we are not the lead lender. In
these circumstances, we follow our customary loan underwriting and approval policies. We also have participated out portions
of commercial and commercial real estate loans that exceeded our loans-to-one borrower legal lending limit and for purposes of
risk diversification. Except in the case of broadly diversified pools of collateralized consumer loans, as described above, we do
not purchase whole loans.
Loan Approval Procedures and Authority
The Bank’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures
established by management and the board of directors. Our policies are designed to provide loan officers with guidelines on
acceptable levels of risk, given a broad range of factors. The loan approval process is intended to assess the borrower’s ability
to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will secure the loan, if applicable.
The board of directors grants loan officers individual lending authority to approve extensions of credit. The level of authority
for loan officers varies based upon the loan type, total relationship, form of collateral and risk rating of the borrower. Each loan
officer is charged with the responsibility of achieving high credit standards. Individual lending authority can be increased,
suspended or removed by the board of directors, as recommended by the President or Executive Vice President and Chief Credit
Officer.
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If a loan is in excess of any individual loan officer’s lending authority, the extension of credit must be referred to the Officer
Loan Committee (“OLC”). The OLC is comprised of the President (serving as chairman), the Executive Vice President and
Chief Credit Officer (serving as chair in the absence of the President), the Senior Vice President and General Counsel, as well as
other members of the management team and retail and commercial lenders as may be appointed by the President. The OLC has
authority to approve all commercial loans, and one-to-four family residential real estate loans where the total related credit is $1
million or less which are not within the lenders’ individual authority. In addition, the OLC may approve all municipal loans,
where the total related credit is $2.5 million or less, and the individual loan amount is $2.5 million or less for rated municipal
loans, and $1.5 million for unrated credits. The OLC has the authority to approve all consumer loans where the total related
credit is $2.5 million or less and the individual loan amount is $200,000 for unsecured loans or $750,000 for secured loans. The
Executive Loan Committee, which consists of members of the Bank’s board of directors, must approve all extensions of credit
in excess of the limits for the OLC and lenders individual authority.
Loans to One Borrower
Under New York law, New York commercial banks are subject to loans-to-one borrower limits, which are substantially similar
as those applicable to national banks, which restrict loans to one borrower to an amount equal to 15% of unimpaired capital and
unimpaired surplus, which was $11.7 million at December 31, 2017, on an unsecured basis, and an additional amount equal to
10% of unimpaired capital and unimpaired surplus, which was $7.7 million at December 31, 2017, if the loan is secured by
readily marketable collateral (generally, financial instruments and bullion, but not real estate), subject to exceptions.
Additionally, our internal loan policies limit the total related credit to be extended to any one borrower (after application of the
rules of attribution), with respect to any and all loans with Pathfinder Bank to 10% of tier 1 and 2 capital, subject to certain
exceptions. The indebtedness includes all credit exposure whether direct or contingent, used or unused.
ASSET QUALITY
Loan Delinquencies and Collection Procedures
When a loan becomes delinquent, we make attempts to contact the borrower to determine the cause of the delayed payments and
seek a solution to permit the loan to be brought current within a reasonable period of time. The outcome can vary with each
individual borrower. In the case of mortgage loans and consumer loans, a late notice is sent 15 days after an account becomes
delinquent. If delinquency persists, notices are sent at the 30 day delinquency mark, the 45 day delinquency mark and the 60
day delinquency mark. We also attempt to establish telephone contact with the borrower early on in the process. In the case of
residential mortgage loans, included in every late notice is a letter that includes information regarding home-ownership
counseling. As part of a workout agreement, we will accept partial payments during the month in order to bring the account
current. If attempts to reach an agreement are unsuccessful and the customer is unable to comply with the terms of the workout
agreement, we will review the account to determine if foreclosure is warranted, in which case, consistent with New York law,
we send a 90 day notice of foreclosure and then a 30 day notice before legal proceedings are commenced. A consumer final
demand letter is sent in the case of a consumer loan. In the case of commercial loans and commercial mortgage loans, we
follow a similar notification practice with the exception of the previously mentioned information on home-ownership
counseling. In addition, commercial loans do not require 90 day notices of foreclosure. Generally, commercial borrowers only
receive 10 day notices before legal proceedings can be commenced. Commercial loans may experience longer workout times
that may trigger a need for a loan modification that could meet the requirements of a troubled debt restructured loan.
Impaired Loans, Non-performing Loans and Troubled Debt Restructurings
The policy of the Bank is to provide a continuous assessment of the quality of its loan portfolio through the maintenance of an
internal and external loan review process. The process incorporates a loan risk grading system designed to recognize degrees of
risk on individual commercial and mortgage loans in the portfolio. Management is responsible for monitoring of asset quality
and risk grade designations, which are communicated to the board on a regular basis.
We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past
due or management has serious doubts about further collectability of principal or interest, even though the loan is currently
performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured.
When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Interest received on non-accrual
loans generally is applied against principal or interest if it is recognized on the cash basis method. Generally, loans are restored
to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable
period of time, generally for a minimum of six months, and the ultimate collectability of the total contractual principal and
interest is no longer in doubt.
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Our Allowance for Loan and Lease Losses policy (“ALLL”) establishes criteria for selecting loans to be measured for
impairment based on the following:
Residential and Consumer Loans:
•
•
All loans rated substandard or worse, on nonaccrual, and above our total related credit (“TRC”) threshold balance of
$300,000.
All Troubled Debt Restructured Loans
Commercial Lines and Loans, Commercial Real Estate and Tax-exempt loans:
•
•
All loans rated substandard or worse, on nonaccrual, and above our TRC threshold balance of $100,000.
All Troubled Debt Restructured Loans
Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the
fair value of the collateral adjusted for market conditions and selling expenses as compared to the loan carrying value.
Troubled Debt Restructurings (“TDR”)
TDRs are loan restructurings in which we, for economic or legal reasons related to an existing borrower’s financial difficulties,
grant a concession to the debtor that we would not otherwise consider. Typically, a troubled debt restructuring involves a
modification of terms of debt, such as reduction of the stated interest rate for the remaining original life of the debt, extension of
the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk, reduction of the face
amount of the debt, or reduction of accrued interest. We consider modifications only after analyzing the borrower’s current
repayment capacity, evaluating the strength of any guarantors based on documented current financial information, and assessing
the current value of any collateral pledged. These modifications are made only when there is a reasonable and attainable
workout plan that has been agreed to by the borrower and that is in our best interests. Some examples of residential TDRs
include restructures encouraged by the Federal Government’s HAMP and HARP Programs, in which we have participated.
Loans on non-accrual status at the date of modification are initially classified as non-accrual troubled debt restructurings. Our
policy provides that troubled debt restructured loans are returned to accrual status after a period of satisfactory and reasonable
future payment performance under the terms of the restructuring. Satisfactory payment performance is generally no less than
six consecutive months of timely payments and demonstrated ability to continue to repay.
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 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.
Loan delinquencies together with properties within our Foreclosed Real Estate portfolio are reviewed monthly by the board of
directors.
Classified Assets
Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the
FDIC to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets
include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies
are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the
added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts,
conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible”
and of such little value that their continuance as assets without the establishment of a specific allowance for loan losses is not
warranted. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses are designated as “special mention” by our management.
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When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an
amount deemed prudent by management to cover losses that are both probable and reasonable to estimate. General allowances
represent allowances which have been established to cover accrued losses associated with lending activities that are both
probable and reasonable to estimate, but which, unlike specific allowances, have not been allocated to particular problem assets.
When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution’s determination as to the
classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which
may require the establishment of additional general or specific allowances.
In connection with the filing of our periodic regulatory reports and in accordance with our classification of assets policy, we
continuously assess the quality of our loan portfolio and we regularly review the problem loans in our loan portfolio to
determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch
list” initially because of emerging financial weaknesses even though the loan is currently performing in accordance with its
terms, or delinquency status, or if the loan possesses weaknesses although currently performing. Management reviews the
status of our loan portfolio delinquencies, by loan types, with the full board of directors on a monthly basis. Individual
classified loan relationships are discussed as warranted. If a loan deteriorates in asset quality, the classification is changed to
“special mention,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90
days or more past due are placed on nonaccrual status and classified “substandard.”
We also employ a risk grading system for our loans to help assure that we are not taking unnecessary and/or unmanageable risk.
The primary objective of the loan risk grading system is to establish a method of assessing credit risk to further enable
management to measure loan portfolio quality and the adequacy of the allowance for loan losses. Further, we contract with an
external loan review firm to complete a credit risk assessment of the loan portfolio on a regular basis to help determine the
current level and direction of our credit risk. The external loan review firm communicates the results of their findings to the
Executive Loan Committee in writing and by periodically attending the Executive Loan Committee meetings. Any material
issues discovered in an external loan review are also communicated immediately to the President of the Bank. See Note 5 to the
consolidated financial statements for further details on the Company’s credit quality indicators that define our risk grading
system.
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the date of the
statement of condition and it is recorded as a reduction of loans. The allowance for loan losses is maintained at a level
considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of
the adequacy of the allowance. The allowance is increased by the provision for loan losses, and decreased by charge-offs, net of
recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if
any, are credited to the allowance. All or part of the principal balance of loans receivable are charged off to the allowance as
soon as it is determined that the repayment of all or part of the principal balance is highly unlikely. Non-residential consumer
loans are generally charged off no later than 120 days past due on a contractual basis, unless productive collection efforts are
providing results. Consumer loans may be charged off earlier in the event of bankruptcy, or if there is an amount that is deemed
uncollectible. No portion of the allowance for loan losses is restricted to any individual loan type and the entire allowance is
available to absorb any and all loan losses.
The allowance is based on three major components which are: (i) specific components for impaired loans, (ii) recent historical
losses and several qualitative factors applied to a general pool of loans, and (iii) an unallocated component.
The first component is the specific allowance that relates to loans that are classified as impaired. For these loans, an allowance
is established when the discounted cash flows or collateral value of the impaired loan are lower than the carrying value of the
loan. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to
collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.
Impairment is measured by either the present value of the expected future cash flows discounted at the loan’s effective interest
rate or the fair value of the underlying collateral if the loan is collateral dependent. The majority of our loans utilize the fair
value of the underlying collateral. Factors considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and shortfalls on a case-by case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length and reason for the delay, the borrower’s prior payment record and
the amount of shortfall in relation to what is owed.
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The second component is the general allowance which covers pools of loans, by loan class, not considered impaired, smaller
balance homogenous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are
evaluated for loss exposure based on historical loss rates for each of these categories of loans. The ratio of net charge-offs to
loans outstanding within each loan class over the most recent eight quarters, lagged by one quarter, is used to generate the
historical loss rates. In addition, qualitative factors 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.
The third component may consist of an unallocated allowance which is maintained to cover uncertainties that could affect
management’s estimate of probable losses. The unallocated component of the allowance, when present, reflects an additional
margin for potential imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and
general losses in the portfolio. This component would typically be appropriate in times of significant economic dislocations or
uncertainties in either, or both, the local and national economies. The unallocated allowance generally comprises less than 10%
of the total allowance for loan losses and can be as little as 0% of total allowance as was the case in at December 31, 2017 and
December 31, 2016.
When a loan is determined to be impaired, we will reevaluate the collateral which secures the loan. For real estate loans, we will
obtain a new appraisal or broker’s opinion, whichever is considered to provide the most accurate value in the event of sale. An
evaluation of equipment held as collateral will be obtained from an independent firm able to provide such an evaluation.
Collateral will be inspected not less than annually for all impaired loans and will be reevaluated not less than every two years.
Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated
fair value. The discounts also include estimated costs to sell the property. For commercial and industrial loans secured by non-
real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the
borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications
of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
Large groups of homogeneous loans are evaluated for impairment in the aggregate. Accordingly, we do not separately identify
individual residential mortgage loans with outstanding principal balances less than $300,000, home equity and other consumer
loans for impairment disclosures. We make exceptions to this general rule when such loans are (1) rated substandard or worse,
on nonaccrual status and are related to borrowers with total related credit exposure in excess of our threshold balance of
$300,000; or (2) the loans are subject to a troubled debt restructuring agreement.
In addition, the FDIC and NYSDFS, as an integral part of their examination process, periodically review our allowance for loan
losses and may require us to recognize additions to the allowance based on their judgments about information available to them
at the time of their examination, which may not be currently available to management. Based on management’s comprehensive
analysis of the loan portfolio, we believe the current level of the allowance for loan losses is adequate.
INVESTMENT AND HEDGING ACTIVITIES
Our investment policy is established by the board of directors. Our investment policy dictates that investment decisions will be
made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with our
interest rate risk management objectives. The Asset Liability Management Committee (the “ALCO”) of the board of directors
acts in the capacity of an investment committee and is responsible for overseeing our investment program and evaluating on an
ongoing basis our investment policy and objectives. Our President, Chief Financial Officer and Chief Investment Officer have
the authority to purchase and sell securities within specific guidelines established by the investment policy. All transactions are
reviewed by the board of directors at its regular meetings.
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All investment securities must meet regulatory guidelines and be permissible bank investments. Our investment securities
include United States Government obligations, securities of various federal agencies and of state and municipal governments,
deposits at the FHLBNY, certificates of deposit at federally insured institutions, and federal funds. Within certain regulatory
limits, we may also invest a portion of our assets in mutual funds, equity securities and investment grade corporate debt
securities. As part of our membership in the FHLBNY, we are required to maintain a dividend-earning investment in FHLBNY
stock.
All securities purchased will be classified at the time of purchase as either held-to-maturity or available-for-sale. We do not
maintain a trading account. Securities purchased with the intent and ability to hold until maturity will be classified as held-to-
maturity. Securities placed in the held-to-maturity category will be accounted for at amortized cost.
Securities that do not qualify or are not categorized as held-to-maturity are classified as available-for-sale. This classification
includes securities that may be sold in response to changes in interest rates, the security's prepayment risk, liquidity needs, the
availability of and the yield on alternative investments, and funding sources and terms. These securities are reported at fair
value, which is determined on a monthly basis. Unrealized gains and losses are reported as a separate component of capital, net
of tax. The aggregate change in value of the portfolio is reported to the board of directors monthly.
The general objectives of the investment portfolio are to assist in the overall interest rate risk management of Pathfinder Bank,
generate a reasonable rate of return consistent with the safety of principal, provide a source of liquidity, minimize our tax
liability, and mitigate our interest rate and credit risk. We purchase securities to provide necessary liquidity for day-to-day
operations and when investable funds exceed loan demand. The effect that the proposed security would have on our credit and
interest rate risk and risk-based equity is also considered.
Securities classified as held-to-maturity, other than mortgage-backed securities and collateralized mortgage obligations, consist
primarily of state and political subdivision securities, and to a lesser extent, federal agency obligations and corporate securities.
Our securities classified as available-for-sale consist primarily of corporate securities and federal agency obligations, which
include Federal Farm Credit Bank notes, FHLBNY notes, Fannie Mae notes and Federal Home Loan Mortgage Corporation
(“Freddie Mac”) notes. For a discussion on mortgage backed securities, see “Mortgage-Backed Securities and Collateralized
Mortgage Obligations.”
We also have an investment in FHLBNY stock which is classified separately from securities due to the restrictions on sale or
transfer. For further information regarding our securities portfolio, see Note 4 to the consolidated financial statements.
On five occasions during 2017, the Company sold, and subsequently repurchased, U.S. Treasury securities in the approximate
amount of $40.0 million for each transaction. These transactions were intended to act as hedges against rising short-term interest
rates. The Company was in controlling possession of, but did not own, the securities at the time of each sale. On each occasion,
the Treasury securities had been received by the Company, under industry-standard repurchase agreements, from an unrelated
third party as collateral for a 30-day loan of approximately $40.0 million which was made at market interest rates to that third
party. The security sale on each occasion provided the funds necessary to advance the loan to the third party and placed the
Company in what is generally described as a “short position” with respect to the sold U.S. Treasury security. These transactions
acted as a hedge against rising short-term interest rates because the price of each sold security would be expected to decline in a
rising short-term interest rate environment and could therefore be re-acquired at the conclusion of each 30-day loan period at a
price lower than the price at which the securities were originally sold. Generally, short-term rates rose over the combined
duration of these transactions and, consequently, the Company recognized aggregate gains on the sale and repurchase of the
securities of $428,000 in 2017. The transactions’ gains were characterized as capital gains for tax purposes. These capital gains
utilized existing, previously reserved-for, capital loss tax carryforwards that were established in 2013. The Company recognized
tax benefits related to these transactions of $150,000 in 2017. The tax benefits arose from the reversal of reserves established in
2013 against the portion of the Company’s deferred tax assets related to existing capital loss carryforward tax positions. The
reserves were originally established due to the uncertainty at that time related to the Company’s ability to generate future capital
gain income within the five-year statutory life of the capital loss carryforward position under the Internal Revenue Code. The
recognized tax benefit from the reversal of those reserves reduced the Company’s effective tax rate from what would have been
24.0% to 20.6 % in 2017 without regard to the effects of the one-time charge related to the enactment on December 22, 2017 of
the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).
The capital gain income and the additional recognized tax benefits derived from these transactions were partially offset by an
additional $368,000 in after-tax interest expense on borrowings from additional pre-tax interest expense on those borrowings of
$598,000 that reduced pretax net interest margin by that amount in 2017. In total, after-tax net income increased by $178,000
for the twelve months ended December 31, 2017 as a result of these hedging transactions.
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On one occasion during 2016, the Company sold, and subsequently repurchased, a U.S. Treasury security in the approximate
amount of $25.0 million. This transaction was intended to act as a hedge against rising short-term interest rates. The security
was received by the Company, under an industry-standard repurchase agreement, from an unrelated third party as collateral for a
30-day loan of approximately $25.0 million, which was made at zero interest to that third party. Short-term interest rates rose
over the duration of this transaction and, consequently, the Company recognized a gain on the sale and repurchase of the
security of $85,000 and a related tax benefit of $34,000 in 2016. The recognized tax benefit reduced the Company’s effective
tax rate from what would have been 26.3% to 25.5% in 2016.
The capital gain income and the additional recognized tax benefits derived from these 2016 transactions were partially offset by
an additional $54,000 in after-tax interest expense on borrowings derived from additional pre-tax interest expense on those
borrowings of $88,000 that reduced pretax net interest margin by that amount in 2016. In total, after-tax net income increased
by $65,000 for the twelve months ended December 31, 2016 as a result of this hedging transaction.
MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS
We purchase mortgage-backed securities and collateralized mortgage obligations guaranteed by Fannie Mae, Freddie Mac and
the Government National Mortgage Association (“Ginnie Mae”). In recent years, the Company has also increase the level of its
investments in mortgage-backed securities and collateralized mortgage obligations issued by private entities. These securities
are generally senior tranches of larger issuances that provide substantial credit enhancements and therefore reasonable, but not
absolute, protection for the Company from the risks of default. We invest in mortgage-backed securities and collateralized
mortgage obligations to achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk
through geographic diversification. These securities are generally relatively short in duration and therefore reduce the Bank’s
sensitivity to changes in interest rates. All asset-backed securities held by the Bank at December 31, 2017 were either rated at
or above the lowest investment grade for credit quality by a nationally-recognized statistical rating organization (a “NRSRO”)
or were the most senior tranches of securitizations hat were not rated by a NRSRO at the time of the securities’ issuance. We
regularly monitor the credit quality of this portfolio. At December 31, 2017, no securities held by the Bank in this category had
been downgraded by a NRSRO.
Mortgage-backed securities and collateralized mortgage obligations are created by pooling mortgages and issuing a security
with an interest rate which is less than the interest rate on the underlying mortgages. These securities typically represent a
participation interest in a pool of single-family or multi-family mortgages, although we focus our investments on mortgage
related securities backed by one-to-four family real estate loans. The issuers of such securities pool and resell the participation
interests in the form of securities to investors such as the Bank, and in the case of government agency sponsored issues,
guarantee the payment of principal and interest to investors. Mortgage-backed securities and collateralized mortgage obligations
generally yield less than the loans that underlie such securities because of the cost of payment guarantees, if any, and credit
enhancements. These fixed-rate securities are usually more liquid than individual mortgage loans.
Investments in collateralized mortgage obligations involve a risk that actual prepayments may differ from estimated
prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments, thereby changing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities or if such securities are redeemed by the issuer. In addition, the market
value of such securities may be adversely affected in a rising interest rate environment, particularly since all of our
collateralized mortgage obligations have a fixed rate of interest. The relatively short weighted average remaining life of our
collateralized mortgage obligation portfolio mitigates our potential risk of loss in a rising interest rate environment.
ASSET-BACKED SECURITIES
We also purchase asset-backed securities issued by private entities. These securities typically represent a participation interest
in a pool of non-mortgage loans. Asset-backed securities are created by pooling homogenous non-mortgage loans (such as
unsecured consumer loans) and issuing a security with an interest rate which is less than the interest rate on the underlying loan
notes. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as the
Bank. Asset-backed securities generally yield less than the loans that underlie such securities because of the cost of credit
enhancements. These securities, which may be fixed or adjustable-rate are usually more substantially more liquid than
individual loans.
The securities of the type the Bank typically invests in are typically collateralized by consumer loans or trade receivables and
are generally senior tranches of larger issuances. These tranches provide substantial credit enhancements and therefore
reasonable, but not absolute, protection for the Company from the risks of default. We invest in asset-backed securities to
achieve positive interest rate spreads with minimal administrative expense, and to lower our credit risk through geographical
- 15 -
and asset-type diversification. These securities are generally relatively short in duration and therefore reduce the Bank’s
sensitivity to changes in interest rates. All asset-backed securities held by the Bank at December 31, 2017 were either rated at
or above the lowest investment grade for credit quality by a NRSRO or were the most senior tranches of securitizations that
were not rated by a NRSRO at the time of the securities’ issuance. We regularly monitor the credit quality of this portfolio. At
December 31, 2017, no securities held by the Bank in this category had been downgraded by a NRSRO.
SOURCES OF FUNDS
General
Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also rely on
advances from the FHLBNY and the Certificates of Deposit Account Registry Service (“CDARS”) provided by an independent
third-party, Promontory Interfinancial Network, as a form of brokered deposits. In addition to deposits and borrowings, we
derive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on interest-
earning assets. While scheduled loan payments and income on interest-earning assets are relatively stable sources of funds,
deposit inflows and outflows can vary widely and are influenced by prevailing market interest rates, economic conditions and
competition from other financial institutions.
Deposits
A majority of our depositors are persons or businesses who work or reside or operate in Oswego and Onondaga Counties. We
offer a variety of deposits, including checking, savings, money market deposit accounts, and certificates of deposit. Deposit
account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must
remain on deposit and the interest rate. We establish interest rates, maturity terms, service fees and withdrawal penalties on a
periodic basis. Management determines the rates and terms based on rates paid by competitors, our need for funds or liquidity,
overall growth goals and federal and state regulations. The flow of deposits is influenced significantly by general economic
conditions, changes in interest rates and competition. The variety of deposit accounts that we offer allows us to be competitive
in generating deposits and to respond with flexibility to changes in our customers’ demands. We believe that deposits are a
stable source of funds, but our ability to attract and maintain deposits at favorable rates will be affected by market conditions,
including competition and prevailing interest rates. In addition, the Bank holds municipal deposits, which have been a more
volatile source of funds.
The CDARS is a form of a brokered deposit program in which we have been a participant since 2009. In addition to offering
depositors enhanced FDIC insurance coverage, being a participant in CDARS allows us to fund our balance sheet through the
CDARS’ One-Way Buy program. This program uses a competitive bid process for available deposits, up to $50 million, at
specified terms. These deposits work well for us because of their weekly availability, coupled with their short term duration,
which allows us to more closely mirror our funding needs. We believe this arrangement is a viable source of funding provided
that we maintain our “well-capitalized” status. See Note 11 to the consolidated financial statements for further details on our
brokered deposits.
Borrowings
The Bank has a number of existing credit facilities available to it. At December 31, 2017, the Bank had existing lines of credit
at FHLBNY, the Federal Reserve Bank (“FRB”), and three other correspondent banks. We obtain advances primarily from the
FHLBNY utilizing the security of the common stock we own in the FHLBNY and qualifying residential mortgage loans as
collateral, provided certain standards related to creditworthiness are met. These advances are made pursuant to several credit
programs, each of which has its own interest rate and range of maturities. FHLBNY advances are generally available to meet
seasonal and other withdrawals of deposit accounts and to permit increased lending.
In addition to the above borrowing capability, on October 15, 2015, the Company executed the $10.0 million non-amortizing
Subordinated Loan with an unrelated third party that is scheduled to mature on October 1, 2025. The Company has the right to
prepay the Subordinated Loan at any time after October 15, 2020 without penalty. The Subordinated Loan is senior in the
Company’s credit repayment hierarchy only to the Company’s common equity and, as a result, qualifies as Tier 2 capital for the
Company for all future periods when applicable. The cost of funds related to this transaction is 6.44% calculated under the
effective interest method.
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SUPERVISION AND REGULATION
General
Pathfinder Bank is a New York-chartered stock commercial bank and the Company is a Maryland corporation and a registered
bank holding company. Pathfinder Bank’s deposits are insured up to applicable limits by the FDIC. Pathfinder Bank is subject
to extensive regulation by NYSDFS, as its chartering agency, and by the FDIC, its primary federal regulator and deposit insurer.
Pathfinder Bank is required to file reports with, and is periodically examined by, the FDIC and the NYSDFS concerning its
activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but
not limited to, mergers with or acquisitions of other financial institutions. As a registered bank holding company, the Company
is regulated by the Federal Reserve Board.
The regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage
and is intended primarily for the protection of depositors and the deposit insurance funds, rather than for the protection of
shareholders and creditors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies, including policies concerning the establishment of
deposit insurance assessment fees, classification of assets and establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulatory requirements and policies, whether by the New York State legislature, the NYSDFS,
the FDIC, the Federal Reserve Board or the United States Congress, could have a material adverse impact on the financial
condition and results of operations of the Company and Pathfinder Bank. As is further described below, the Dodd-Frank Act has
significantly changed the bank regulatory structure and may affect the lending, investment and general operating activities of
depository institutions and their holding companies.
Set forth below is a summary of certain material statutory and regulatory requirements applicable to the Company and
Pathfinder Bank. The summary is not intended to be a complete description of such statutes and regulations and their effects on
the Company and Pathfinder Bank.
The Dodd-Frank Act
The Dodd-Frank Act significantly changed bank regulation and has affected the lending, investment, trading and operating
activities of depository institutions and their holding companies. The Dodd-Frank Act created a new Consumer Financial
Protection Bureau with extensive powers to supervise and enforce consumer protection laws. The Consumer Financial
Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and
savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer
Financial Protection Bureau also has examination and enforcement authority over all banks and savings institutions with more
than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as Pathfinder Bank, continue to
be examined by their applicable federal bank regulators. The Dodd-Frank Act also gave state attorneys general the ability to
enforce applicable federal consumer protection laws.
The Dodd-Frank Act broadened the base for FDIC assessments for deposit insurance and permanently increased the maximum
amount of deposit insurance to $250,000 per depositor. The Dodd-Frank Act also, among other things, required originators of
certain securitized loans to retain a portion of the credit risk, stipulated regulatory rate-setting for certain debit card interchange
fees, repealed restrictions on the payment of interest on commercial demand deposits and contained a number of reforms related
to mortgage originations. The Dodd-Frank Act increased the ability of shareholders to influence boards of directors by
requiring companies to give shareholders a non-binding vote on executive compensation and so-called “golden parachute”
payments. The Dodd-Frank Act also directed the Federal Reserve Board to promulgate rules prohibiting excessive
compensation paid to company executives, regardless of whether the company is publicly traded or not.
The Dodd-Frank Act has increased the regulatory burden, compliance costs and interest expense for Pathfinder Bank and the
Company.
New York Bank Regulation
Pathfinder Bank derives its lending, investment, branching and other authority primarily from the applicable provisions of New
York State Banking Law and the regulations of the NYSDFS, as limited by federal laws and regulations. Under these laws and
regulations, commercial banks, including Pathfinder Bank, may invest in real estate mortgages, consumer and commercial
loans, certain types of debt securities, including certain corporate debt securities and obligations of federal, state and local
governments and agencies, certain types of corporate equity securities and certain other assets. Under the statutory authority for
investing in equity securities, a bank may invest up to 2% of its assets or 20% of its capital, whichever is less in exchange-
registered corporate stock. Investment in the stock of a single corporation is limited to the lesser of 1% of the bank’s assets or
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15% of the Bank’s capital. The Bank’s authority to invest in equity securities is constrained by federal law, as explained later.
Such equity securities must meet certain earnings ratios and other tests of financial performance. A bank may also exercise trust
powers upon approval of the NYSDFS. Pathfinder Bank does not presently have trust powers.
New York State chartered banks may also invest in subsidiaries. A bank may use this power to invest in corporations that
engage in various activities authorized for banks, plus any additional activities that may be authorized by the NYSDFS.
Furthermore, New York banking regulations impose requirements on loans which a bank may make to its executive officers and
directors and to certain corporations or partnerships in which such persons have equity interests. These requirements include
that (i) certain loans must be approved in advance by a majority of the entire board of directors and the interested party must
abstain from participating directly or indirectly in voting on such loan, (ii) the loan must be on terms that are not more favorable
than those offered to unaffiliated third parties, and (iii) the loan must not involve more than a normal risk of repayment or
present other unfavorable features.
Under the New York State Banking Law, the Superintendent may issue an order to a New York State chartered banking
institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and to keep
prescribed books and accounts. Upon a finding by the NYSDFS that any director, trustee or officer of any banking organization
has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization
after having been notified by the Superintendent to discontinue such practices, such director, trustee or officer may be removed
from office after notice and an opportunity to be heard. Pathfinder Bank does not know of any past or current practice,
condition or violation that may lead to any proceeding by the Superintendent or the NYSDFS against Pathfinder Bank or any of
its directors or officers.
New York State Community Reinvestment Regulation
Pathfinder Bank is also subject to provisions of the New York State Banking Law which imposes continuing and affirmative
obligations upon banking institutions organized in New York State to serve the credit needs of its local community (“NYCRA”)
which are substantially similar to those imposed by the Federal Community Reinvestment Act (“CRA”). Pursuant to the
NYCRA, a bank must file copies of all federal CRA reports with the NYSDFS. The NYCRA requires the NYSDFS to make a
written assessment of a bank’s compliance with the NYCRA every 24 to 36 months, utilizing a four-tiered rating system and
make such assessment available to the public. The NYCRA also requires the Superintendent to consider a bank’s NYCRA
rating when reviewing a bank’s application to engage in certain transactions, including mergers, asset purchases and the
establishment of branch offices or automated teller machines, and provides that such assessment may serve as a basis for the
denial of any such application. Pathfinder Bank’s NYCRA most recent rating, dated March 31, 2015, was “satisfactory.”
Federal Regulations
Capital Requirements. Federal regulations require federally insured depository institutions to meet several minimum capital
standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%,
a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. These capital requirements
were effective January 1, 2015 and are the result of a final rule implementing recommendations of the Basel Committee on
Banking Supervision and certain requirements of the Dodd-Frank Act.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including
certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk
weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are
required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common
stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1
capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital
plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting
specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory
convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for
loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out
election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-
for-sale equity securities with readily determinable fair market values. Pathfinder Bank exercised the opt-out election.
Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing
an institution’s capital adequacy, regulators take into consideration, not only these numeric factors, but qualitative factors as
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well, and has the authority to establish higher capital requirements for individual institutions when and where deemed
necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain
discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5%
of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital
requirements. The capital conservation buffer requirement began being phased in beginning January 1, 2016 at 0.625% of risk-
weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. The buffer requirement rose to
1.875% on January 1, 2018.
Standards for Safety and Soundness. As required by statute, the federal banking agencies have adopted final regulations and
Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The
guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. The guidelines address internal controls and information
systems, internal audit systems, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality,
earnings, compensation, fees and benefits and, more recently, safeguarding customer information. If the appropriate federal
banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require
the institution to submit to the agency an acceptable plan to achieve compliance with the standard.
Business and Investment Activities. Under federal law, all state-chartered FDIC-insured banks, including commercial banks,
have been limited in their activities as principal and in their equity investments to the type and the amount authorized for
national banks, notwithstanding state law. Federal law permits certain exceptions to these limitations.
The FDIC is also authorized to permit state banks to engage in state authorized activities or investments not permissible for
national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is
determined that such activities or investments do not pose a significant risk to the FDIC insurance fund. The FDIC has adopted
regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-
Leach-Bliley Act of 1999 specified that a state bank may control a subsidiary that engages in activities as principal that would
only be permitted for a national bank to conduct in a “financial subsidiary,” if a bank meets specified conditions and deducts its
investment in the subsidiary for regulatory capital purposes.
Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take
“prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law
establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized.
The regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were
effective January 1, 2015. Under the amended regulations, an institution is deemed to be “well capitalized” if it has a total risk-
based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater
and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital
ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common
equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than
8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of
less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than
6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of
less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in
the regulations) to total assets that is equal to or less than 2.0%.
“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required
to submit a capital restoration plan. A bank’s compliance with such a plan must be guaranteed by any company that controls the
undercapitalized institution in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized
or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an
acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with
one or more of a number of additional measures, including, but not limited to, a required sale of sufficient voting stock to
become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the
dismissal of directors or officers and restrictions on interest rates paid on deposits, compensation of executive officers and
capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures
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including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after being designated
“critically undercapitalized.”
At December 31, 2017, Pathfinder Bank was well-capitalized.
Transactions with Related Parties. Transactions between a bank (and, generally, its subsidiaries) and its related parties or
affiliates are limited by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that
controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding
company and any companies which are controlled by such parent holding company are affiliates of the bank. Generally,
Sections 23A and 23B of the Federal Reserve Act limit the extent to which the bank or its subsidiaries may engage in “covered
transactions” with any one affiliate to 10% of such institution’s capital stock and surplus and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such institution’s capital stock and surplus. The term “covered
transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar transactions.
In addition, loans or other extensions of credit by the institution to the affiliate are required to be collateralized in accordance
with specified requirements. The law also requires that affiliate transactions be on terms and conditions that are substantially the
same, or at least as favorable to the institution, as those provided to non-affiliates.
Pathfinder Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities
controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act
and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of
credit to insiders:
•
•
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less
stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features; and
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate,
which limits are based, in part, on the amount of Pathfinder Bank’s capital.
In addition, extensions of credit in excess of certain limits must be approved by Pathfinder Bank’s board of directors.
Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Enforcement. The FDIC has extensive enforcement authority over insured state banks, including Pathfinder Bank. That
enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and
remove directors and officers. In general, enforcement actions may be initiated in response to violations of laws and regulations
and unsafe or unsound practices. The FDIC also has authority under federal law to appoint a conservator or receiver for an
insured bank under certain circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator
for an insured state non-member bank if the bank was “critically undercapitalized” on average during the calendar quarter
beginning 270 days after the date on which the institution became “critically undercapitalized.”
Federal Insurance of Deposit Accounts. The Dodd-Frank Act permanently increased the maximum amount of deposit
insurance for banks, savings institutions and credit unions to $250,000 per depositor.
The FDIC assesses insured depository institutions to maintain its Deposit Insurance Fund. Under the FDIC’s risk-based
assessment system, institutions deemed less risky pay lower assessments. Assessments for institutions of less than $10 billion
of assets are now based on financial measures and supervisory ratings derived from statistical modeling estimating the
probability of failure of an institution’s failure within three years. That technique, effective July 1, 2016, replaced the previous
system under which institutions were placed into risk categories.
The Dodd-Frank Act required the FDIC to revise its procedures to base assessments upon each insured institution’s total assets
less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5
to 45 basis points of total assets less tangible equity. In conjunction with the Deposit Insurance Fund’s reserve ratio achieving
1.15%, the assessment range (inclusive of possible adjustments) was reduced for insured institutions of less than $10 billion of
total assets to 1.5 basis points to 30 basis points, effective July 1, 2016.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to
1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation must seek to achieve the 1.35% ratio by
September 30, 2020. The Dodd-Frank Act requires insured institutions with assets of $10 billion or more to fund the increase
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from 1.15% to 1.35% and, effective July 1, 2016, such institutions are subject to a surcharge to achieve that goal. The Dodd-
Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance
Corporation, and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long-range fund ratio
of 2%.
In addition to the FDIC assessments, the United States government-sponsored enterprise known as the Financing Corporation
(“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance
costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan
Insurance Corporation. The bonds issued by the FICO are due to fully mature in 2019. The FICO assessment rate is adjusted
quarterly to reflect changes in the assessment base as determined from quarterly Call Report submissions. For the quarter ended
December 31, 2017, the annualized Financing Corporation assessment was equal to 0.54 of a basis point of total assets less
tangible capital.
The FDIC has authority to increase insurance assessments. Any significant increase would have an adverse effect on the
operating expenses and results of operations of Pathfinder Bank. Management cannot predict what assessment rates will be in
the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to
termination of our deposit insurance.
Community Reinvestment Act. Under the CRA, a bank has a continuing and affirmative obligation, consistent with its safe and
sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s
discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA
does require the FDIC, in connection with its examination of a bank, to assess the institution’s record of meeting the credit
needs of its community and to take such record into account in its evaluation of certain applications by such institution,
including applications to establish or acquire branches and merger with other depository institutions. The CRA requires the
FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system.
Pathfinder Bank’s latest FDIC CRA rating, dated March 11, 2016, was “satisfactory.”
Federal Reserve System. The Federal Reserve Board regulations require depository institutions to maintain non-interest-earning
reserves against their transaction accounts (primarily negotiable order of withdrawal (NOW) and regular checking accounts).
The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve
ratio is assessed on net transaction accounts up to and including $122.3 million; a 10% reserve ratio is applied above $122.3
million. The first $16.0 million of otherwise reservable balances are exempted from the reserve requirements. The amounts are
adjusted annually. Pathfinder Bank complies with the foregoing requirements.
Federal Home Loan Bank System. Pathfinder Bank is a member of the Federal Home Loan Bank System, which consists of
twelve regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily
for member institutions as well as other entities involved in home mortgage lending. As a member of the FHLBNY, Pathfinder
Bank is required to acquire and hold a specified amount of shares of capital stock in the FHLBNY. As of December 31, 2017,
Pathfinder Bank was in compliance with this requirement.
Other Regulations
Interest and other charges collected or contracted for by Pathfinder Bank are subject to state usury laws and federal laws
concerning interest rates. Pathfinder Bank’s operations are also subject to federal laws applicable to credit transactions, such as
the:
•
•
•
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one-to-four family
residential real estate receive various disclosures, including good faith estimates of settlement costs, lender
servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement
services;
The TILA-RESPA Integrated Disclosure Rule, commonly known as the TRID rule, which became effective on
October 3, 2015. This rule amended the Truth in Lending Act and the Real Estate Settlement Procedures Act to
integrate several consumer disclosures for mortgage loans;
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•
•
•
•
•
•
•
•
•
•
•
Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs
of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in
extending credit;
Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
Truth in Savings Act; and
Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal
laws;
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial records;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and
withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller
machines and other electronic banking services;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as
digital check images and copies made from that image, the same legal standing as the original paper check;
USA PATRIOT Act, which requires banks operating to, among other things, establish broadened anti-money
laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money
laundering. Such required compliance programs are intended to supplement existing compliance requirements, also
applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control
regulations; and
Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial
institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial
institutions offering financial products or services to retail customers to provide such customers with the financial
institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain
personal financial information with unaffiliated third parties.
Holding Company Regulation
The Company, as a bank holding company, is subject to examination, regulation, and periodic reporting under the Bank Holding
Company Act of 1956, as amended, as administered by the Federal Reserve Board. The Company is required to obtain the prior
approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company.
Prior Federal Reserve Board approval would be required for the Company to acquire direct or indirect ownership or control of
any voting securities of any bank or bank holding company if it would, directly or indirectly, own or control more than 5% of
any class of voting shares of the bank or bank holding company.
A bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of
the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for
activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be
closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing
securities brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property under
certain conditions; (vi) making investments in corporations or projects designed primarily to promote community welfare; and
(vii) acquiring a savings association.
The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including depository
institutions subsidiaries that are “well capitalized” and “well managed,” to opt to become a “financial holding company.” A
“financial holding company” may engage in a broader array of financial activities than permitted a typical bank holding
company. Such activities can include insurance underwriting and investment banking. The Company has elected to be a
“financial holding company.”
The Dodd-Frank Act required the Federal Reserve Board to promulgate consolidated capital requirements for bank and savings
and loan holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those
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applicable to their subsidiary depository institutions. Instruments such as cumulative preferred stock and trust-preferred
securities, which are currently includable as Tier 1 capital, by bank holding companies within certain limits are no longer
includable as Tier 1 capital, subject to certain grandfathering. The previously discussed final rule regarding regulatory capital
requirements implements the Dodd-Frank Act’s directives as to holding company capital requirements.
In December 2014, legislation was passed by Congress that requires the Federal Reserve to revise its “Small Bank Holding
Company Policy Statement” to exempt bank and savings and loan holding companies with less than $1.0 billion of consolidated
assets from the consolidated capital requirements, provided that such companies meet certain other conditions such as not
engaging in significant nonbanking activities. The Federal Reserve maintains authority to apply the consolidated capital
requirements to any bank or savings and loan holding company as warranted for supervisory purposes. Regulations
implementing the exemption were effective in May 2015.
A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or
redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with
the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the
company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines
that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board
order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. The Federal Reserve
Board has adopted an exception to that approval requirement for well-capitalized bank holding companies that meet certain
other conditions. The Federal Reserve Board has issued guidance which requires consultation with the Federal Reserve Board
prior to a redemption or repurchase in certain circumstances.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies. In
general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the
prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs,
asset quality and overall financial condition. The Federal Reserve Board’s policies also require that a bank holding company
serve as a source of financial strength to its subsidiary banks by using available resources to provide capital funds during
periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength
policy. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a
subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or
otherwise engage in capital distributions.
The Federal Deposit Insurance Act makes depository institutions liable to the FDIC for losses suffered or anticipated by the
insurance fund in connection with the default of a commonly controlled depository institution or any assistance provided by the
FDIC to such an institution in danger of default.
The Company and Pathfinder Bank will be affected by the monetary and fiscal policies of various agencies of the United States
Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money
markets, it is impossible for management to accurately predict future changes in monetary policy or the effect of such changes
on the business or financial condition of the Company or Pathfinder Bank.
The Company’s status as a registered bank holding company under the Bank Holding Company Act will not exempt it from
certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.
Federal Securities Laws
The Company’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act
of 1934. We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the
Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of the Company’s shares of common stock issued in the Company’s stock
offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not our affiliates may
be resold without registration. Shares purchased by our affiliates are subject to the resale restrictions of Rule 144 under the
Securities Act of 1933. If we meet the current public information requirements of Rule 144 under the Securities Act of 1933,
each affiliate of ours that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be
aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not
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to exceed, in any three-month period, the greater of 1% of our outstanding shares, or the average weekly volume of trading in
the shares during the preceding four calendar weeks. In the future, we may permit affiliates to have their shares registered for
sale under the Securities Act of 1933.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive
compensation, and enhanced and timely disclosure of corporate information. We have prepared policies, procedures and
systems designed to ensure compliance with these regulations.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Bank and the Company is subject to federal income taxation in the same general manner as other corporations,
with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain
pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company or the
Bank.
On December 22, 2017 the Tax Act was signed into law. The Tax Act instituted significant changes to various sections of the
Internal Revenue Code that effects the Company. Most notably, the Tax Act reduces the Company’s marginal federal income
tax rate from 34% to 21% starting January 1, 2018. Generally Accepted Accounting Principles (“GAAP”) requires that the
impact of the provisions of the Tax Act be accounted for in the period of enactment. Accordingly, the Company recorded an
income tax benefit in the fourth quarter of 2017 related to the Tax Act in the amount of $155,000. The reduction in income tax
expense was largely attributable to the reduction in the value of net deferred tax assets and liabilities reflecting lower future tax
obligations resulting from the Tax Act’s enacted lower federal corporate tax rate.
Our federal tax return for the year ended December 31, 2014 was audited commencing on March 31, 2017. Management
believes that this audit was part of the Internal Revenue Service’s normal audit and review cycle. The Company anticipates that
this audit will be concluded without any material impact on the Company’s financial position. The Company’s federal tax
returns have not been audited in the five years previous to 2014.
Method of Accounting. For federal income tax purposes, the Company currently reports its income and expenses on the accrual
method of accounting and uses a tax year ending December 31 for filing its federal and state income tax returns.
Bad Debt Reserves. Prior to 1996, Pathfinder Bank was permitted to establish a reserve for bad debts and to make annual
additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at our taxable income.
As a result of tax law changes in 1996, Pathfinder Bank was required to use the specific charge-off method in computing its bad
debt deduction beginning with its 1996 federal tax return. Savings institutions were required to recapture any excess reserves
over those established as of December 31, 1987 (base year reserve). At December 31, 2017, Pathfinder Bank had no reserves
subject to recapture in excess of its base year reserves. The Bank is required to use the specific charge-off method to account
for tax bad debt deductions.
Taxable Distributions and Recapture. Prior to 1996, bad debt reserves created prior to 1988 were subject to recapture into
taxable income if Pathfinder Bank failed to meet certain thrift asset and definitional tests or made certain distributions. Tax law
changes in 1996 eliminated thrift-related recapture rules. However, under current law, pre-1988 tax bad debt reserves remain
subject to recapture if Pathfinder Bank makes certain non-dividend distributions, repurchases any of its common stock, pays
dividends in excess of earnings and profits, or fails to qualify as a “bank” for tax purposes. At December 31, 2017 our total
federal pre-base year bad debt reserve was approximately $1.3 million.
Alternative Minimum Tax. The Tax Act repealed the alternative minimum tax on corporations for the years beginning after
December 31, 2017.
Net Operating Loss Carryovers. Under pre-Tax Act law, generally, a financial institution may carry back net operating losses
to the preceding two taxable years and forward to the succeeding 20 taxable years. Under the Act, for net operating losses
arising in tax years ending after December 31, 2017, the two-year carryback limit is repealed for financial institutions and the
net operating loss may be carried forward indefinitely. For losses arising in tax years beginning after December 31, 2017, the
net operating loss deduction is limited to 80% of taxable income.
- 24 -
Corporate Dividends Received Deduction. The Company may exclude from its federal taxable income 100% of dividends
received from Pathfinder Bank as a wholly-owned subsidiary by filing consolidated tax returns. The corporate dividends
received deduction is 80% when the corporation receiving the dividend owns at least 20% of the stock of the distributing
corporation. The dividends-received deduction is 70% when the corporation receiving the dividend owns less than 20% of the
distributing corporation.
State Taxation
Banking corporations operating in New York State are taxed under the New York State General Business Corporation Franchise
Tax provisions. Under this New York State tax law, the tax rate on the business income base is 6.5%. In addition, various
modifications are available to community banks (defined as banks with less than $8 billion in total assets) regarding certain
deductions associated with interest income. The previously-existing New York State alternative minimum tax for corporations
was repealed effective January 1, 2015.
Our state tax returns were under audit for the years 2012-2014 by the New York State Department of Finance. The Company
received a final notice that the audit was concluded on September 28, 2016, with no findings that were material to the financial
position of the Company or its future operations. Our state tax returns had not been audited in the five years previous to the
audit concluded on September 28, 2016.
As a Maryland business corporation, the Company is required to file an annual report with, and pay franchise taxes to, the State
of Maryland.
ITEM 1A: RISK FACTORS
Not required of a smaller reporting company.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
- 25 -
ITEM 2: PROPERTIES
The Company has seven offices located in Oswego County, two offices in Onondaga County and one loan production office in
Oneida County. Management believes that the Bank’s facilities are adequate for the business conducted. The following table
sets forth certain information concerning the main office and each branch office of the Bank at December 31, 2017. The
aggregate net book value of the Bank's premises and equipment was $16.1 million at December 31, 2017. For additional
information regarding the Bank's properties, see Notes 8 and 18 to the consolidated financial statements.
Location
Main Office
214 West First Street
Oswego, New York 13126
Plaza Branch
Route 104, Ames Plaza
Oswego, New York 13126
Mexico Branch
Norman & Main Streets
Mexico, New York 13114
Oswego East Branch
34 East Bridge Street
Oswego, New York 13126
Lacona Branch
1897 Harwood Drive
Lacona, New York 13083
Fulton Branch
5 West First Street South
Fulton, New York 13069
Central Square Branch
3025 East Ave
Central Square, New York 13036
Cicero Branch
6194 State Route 31
Cicero, New York 13039
Syracuse Pike Block Branch
109 West Fayette Street
Syracuse, New York 13202
Utica Loan Production Office
258 Genesee Street
Utica, New York 13502
Opening Date
1874
Owned/Leased
Owned
1989
Owned (1)
1978
Owned
1994
Owned
2002
Owned
2003
Owned (2)
2005
Owned
2011
Owned
2014
Leased (3)
2017
Leased (4)
(1) The building is owned; the underlying land is leased with an annual rent of $34,000.
(2) The building is owned; the underlying land is leased with an annual rent of $34,000.
(3) The premises are leased with an annual rent of $58,000.
(4) The premises are lease with an annual rent of $16,000.
- 26 -
ITEM 3: LEGAL PROCEEDINGS
There are various claims and lawsuits to which the Company is periodically involved that are incidental to the Company's
business, most notably foreclosures. In the opinion of management, such claims and lawsuits in the aggregate are not expected
to have a material adverse impact on the Company's consolidated financial condition and results of operations at December 31,
2017.
ITEM 4: MINE SAFETY DISCLOSURE
Not applicable.
- 27 -
PART II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock trades on the NASDAQ Capital Market under the symbol “PBHC.”
There were 1,073 shareholders of record as of March 26, 2018. The following table sets forth the high and low closing bid
prices and cash dividends paid per share of common stock for the periods indicated.
Quarter Ended:
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
Price per share
High
15.50 $
15.70 $
15.99 $
15.09 $
13.45 $
12.49 $
11.96 $
12.95 $
Low
15.10 $
15.00 $
14.55 $
13.02 $
12.06 $
11.27 $
10.81 $
10.95 $
Dividend Paid
0.0575
0.0550
0.0525
0.0500
0.0500
0.0500
0.0500
0.0500
$
$
$
$
$
$
$
$
The Company did not repurchase any shares of its common stock during the fourth quarter of 2017.
Equity Compensation Plan Information
The following table provides information as of December 31, 2017 with respect to shares of common stock that may be issued
under the Company’s existing equity compensation plans.
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans
not approved by stockholders
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
Weighted-average exercise
price of outstanding
options, warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plans
395,177
$
N/A
9.68
N/A
47,450
N/A
Dividends and Dividend History
The Company (and its predecessor) has historically paid regular quarterly cash dividends on its common stock. The board of
directors presently intends to continue the payment of regular quarterly cash dividends, subject to the need for those funds for
debt service and other purposes. Payment of dividends on the common stock is subject to determination and declaration by the
board of directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the
payment of dividends, Pathfinder Bank and its subsidiaries’ results of operations and financial condition, tax considerations, and
general economic conditions. More details are included within the section titled Regulation and Supervision.
- 28 -
ITEM 6: SELECTED FINANCIAL DATA
The following selected consolidated financial data sets forth certain financial highlights of the Company and should be read in
conjunction with the consolidated financial statements and related notes, and the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K.
Year End (In thousands, except per share amounts)
Total assets
Investment securities available-for-sale
Investment securities held-to-maturity
Loans receivable, net
Deposits
Borrowings and subordinated loans
Shareholders' equity
For the Year
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Total noninterest income
Total noninterest expense
Net income before income taxes
Income tax expense
Net (loss) income attributable to noncontrolling interest
Net income
Per Share
Income per share - basic (a)
Income per share - diluted (a)
Book value per common share
Tangible book value per common share
Cash dividends declared
For the years ended December 31,
2017
$ 881,257
171,138
66,196
573,705
723,603
88,947
62,144
2016
$ 749,034
141,955
54,645
485,900
610,983
73,972
58,361
2015
$ 623,254
98,942
44,297
424,732
490,315
56,291
71,229
2014
$ 561,024
88,073
40,875
382,189
415,568
71,255
69,204
2013
$ 503,793
80,959
34,412
336,592
410,140
46,008
43,070
$
$
$
$
$
$
29,413
6,290
23,123
1,769
21,354
4,179
21,188
4,345
922
(68)
3,491
0.86
0.83
14.44
13.34
0.215
$
$
$
24,093
3,804
20,289
953
19,336
4,183
19,110
4,409
1,111
26
3,272
0.79
0.78
13.67
12.55
0.200
$
$
$
21,424
2,657
18,767
1,349
17,418
4,172
17,587
4,003
1,071
43
2,889
0.67
0.66
13.28
12.19
0.160
$
$
$
19,699
2,614
17,085
1,205
15,880
3,759
15,685
3,954
1,153
56
2,745
0.64
0.63
12.82
11.78
0.120
Performance Ratios
Return on average assets
Return on average equity
Average equity to average assets
Shareholders' Equity to total assets at end of year
Net interest rate spread
Net interest margin
Average interest-earning assets to average interest-bearing
liabilities
Noninterest expense to average assets
Efficiency ratio (b)
Dividend payout ratio (c)
Return on average common equity
0.42 %
5.69
7.47
7.01
2.83
2.97
0.48 %
5.35
8.97
7.73
3.03
3.14
0.48 %
4.08
11.76
11.36
3.21
3.31
0.51 %
5.50
9.27
12.26
3.31
3.40
116.05
2.61
79.13
25.21
5.69
118.35
2.81
79.90
25.18
5.35
121.73
2.92
78.22
25.22
5.00
117.88
2.92
76.51
13.89
7.45
- 29 -
18,883
3,264
15,619
1,032
14,587
3,416
14,751
3,252
847
(1)
2,406
0.58
0.58
11.33
9.59
0.120
0.48 %
5.86
8.24
8.55
3.23
3.34
115.85
2.96
79.14
12.47
8.58
Asset Quality Ratios
Nonperforming loans as a percent of total loans
Nonperforming assets as a percent of total assets
Allowance for loan losses to loans receivable
Allowance for loan losses as a percent of
nonperforming loans
Regulatory Capital Ratios (Bank Only)
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to adjusted assets)
Tier 1 Common Equity (to risk-weighted assets)
Number of:
Banking offices
Fulltime equivalent employees
2017
2016
2015
2014
2013
For the years ended December 31,
0.84 %
0.61
1.23
0.98 %
0.72
1.27
1.24 %
0.94
1.33
1.61 %
1.16
1.38
1.57 %
1.18
1.48
145.61
129.85
107.30
85.50
94.22
13.97 %
12.72
8.16
12.72
14.79 %
13.54
9.06
13.54
16.22 %
14.95
10.00
14.95
16.60 %
15.31
10.55
15.31
14.13 %
12.82
8.72
12.82
10
140
9
133
9
124
9
122
8
112
(a)
(b)
(c)
Adjusted to reflect the 1.6472 exchange ratio used in the conversion for 2014 and prior years.
The efficiency ratio is calculated as noninterest expense divided by the sum of 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.
The dividend payout ratio is calculated using dividends declared and not waived by Pathfinder Bancorp, MHC for periods
prior to the Conversion and Offering that occurred on October 16, 2014, divided by net income.
NON-GAAP FINANCIAL INFORMATION
Regulation G, a rule adopted by the Securities and Exchange Commission (SEC), applies to certain SEC filings, including
earnings releases, made by registered companies that contain “non-GAAP financial measures.” GAAP is generally accepted
accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing
non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information,
including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure (if a
comparable GAAP measure exists) and a statement of the Company’s reasons for utilizing the non-GAAP financial measure as
part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain
commonly used financial measures that are not based on GAAP. When these exempted measures are included in public
disclosures, supplemental information is not required. Financial institutions, like the Company and its subsidiary bank, are
subject to an array of bank regulatory capital measures that are financial in nature but are not based on GAAP and are not easily
reconcilable to the closest comparable GAAP financial measures, even in those cases where a comparable measure exists. The
Company follows industry practice in disclosing its financial condition under these various regulatory capital measures,
including period-end regulatory capital ratios for its subsidiary bank, in its periodic reports filed with the SEC, and does so
without compliance with Regulation G, on the widely-shared assumption that the SEC regards such non-GAAP measures to be
exempt from Regulation G. The Company uses in this regulatory filing additional non-GAAP financial measures that are
commonly utilized by financial institutions and have not been specifically exempted by the SEC from Regulation G. The
Company provides, as supplemental information, such non-GAAP measures included in this document as described
immediately below.
- 30 -
Year End (In thousands, except per share amounts)
Per Share
Book value per common share
Total Pathfinder Bancorp, Inc. shareholders' equity (book value)
(GAAP)
Preferred stock
Total shares outstanding
Book value per common share
Total common equity
Total equity (GAAP)
Goodwill
Intangible assets
Common equity
Tangible book value per common share
Common equity
Total shares outstanding
Tangible book value per common share
Performance Ratios
Efficiency ratio
Operating expenses (numerator)
Net interest income
Noninterest income
Less: Gain on the sale/redemption of investment
securities/loans/foreclosed real estate
Denominator
Efficiency ratio
Dividend payout ratio
Dividends declared (numerator)
Net income available to common shareholders (denominator)
Dividend payout ratio
Return on average common equity
Net income attributable to Pathfinder Bancorp Inc. (GAAP)
(numerator)
Average equity
Preferred stock
Denominator
Return on average common equity
For the years ended December 31,
2017
2016
2015
2014
2013
$ 61,811
-
4,280
14.44
$
$ 57,929
-
4,237
13.67
$
$ 70,805
13,000
4,354
13.28
$
$ 68,790
13,000
4,352
12.82
$
$ 61,811
4,536
182
$ 57,093
$ 57,929
4,536
198
$ 53,195
$ 57,805
4,536
214
$ 53,055
$ 55,790
4,367
175
$ 51,248
$ 57,093
4,280
13.34
$
$ 53,195
4,237
12.55
$
$ 53,055
4,354
12.19
$
$ 51,248
4,352
11.78
$
$ 21,188
23,123
4,179
$ 19,110
20,289
4,183
$ 17,587
18,767
4,172
$ 15,685
17,085
3,759
$
$
$
$
$
$
$
526
$ 26,776
554
$ 23,918
456
$ 22,483
79.13 %
79.90 %
78.22 %
344
$ 20,500
$
76.51 %
42,712
13,000
2,623
11.33
29,712
4,367
187
25,158
25,158
2,623
9.59
14,751
16,058
3,416
835
18,639
79.14 %
$
$
880
3,491
25.21 %
$
820
3,256
25.18 %
$
696
2,759
25.22 %
$
368
2,650
13.89 %
300
2,406
12.47 %
$
3,491
61,383
-
$ 61,383
$
3,272
61,102
-
$ 61,102
$
2,889
70,819
13,000
$ 57,819
$
2,745
49,870
13,000
$ 36,870
$
2,406
41,028
13,000
28,028
8.58 %
$
7.45 %
5.69 %
5.35 %
5.00 %
- 31 -
Regulatory Capital Ratios (Bank Only)
Total capital (to risk-weighted assets)
Total equity (GAAP)
Goodwill
Intangible assets
Addback: Accumulated other comprehensive income
Total Tier 1 Capital
Allowance for loan and lease losses
Unrealized Gain on available-for-sale securities
Total Tier 2 Capital
Total Tier 1 plus Tier 2 Capital (numerator)
Risk-weighted assets (denominator)
Total capital to risk-weighted assets
Tier 1 capital (to risk-weighted assets)
Total Tier 1 capital (numerator)
Risk-weighted assets (denominator)
Total capital to risk-weighted assets
Tier 1 capital (to adjusted assets)
Total Tier 1 capital (numerator)
Total average assets
Goodwill
Intangible assets
Adjusted assets (denominator)
Total capital to adjusted assets
For the years ended December 31,
2017
2016
2015
2014
2013
$ 71,535
(4,536)
(146)
4,261
$ 71,114
6,991
-
6,991
$
$ 78,105
559,161
$ 66,846
(4,536)
(119)
3,812
$ 66,003
6,095
-
6,095
$
$ 72,098
487,448
$ 64,097
(4,536)
(86)
2,563
$ 62,038
5,193
55
5,248
$
$ 67,286
414,842
$ 61,308
(4,367)
(181)
2,082
$ 58,842
4,812
177
4,989
$
$ 63,831
384,425
$
$
46,339
(4,367)
(195)
1,677
43,454
4,245
163
4,408
$
$
47,862
338,827
13.97 %
14.79 %
16.22 %
16.60 %
14.13 %
$ 71,114
559,161
$ 66,003
487,448
$ 62,038
414,842
$ 58,842
384,425
$
43,454
338,827
12.72 %
13.54 %
14.95 %
15.31 %
12.82 %
$ 71,114
876,263
(4,536)
(146)
$ 871,581
$ 66,003
733,512
(4,536)
(119)
$ 728,857
$ 62,038
625,018
(4,536)
(86)
$ 620,396
$ 58,842
562,100
(4,367)
(181)
$ 557,552
$
43,454
503,140
(4,367)
(195)
$ 498,578
8.16 %
9.06 %
10.00 %
10.55 %
8.72 %
Tier 1 Common Equity (to risk-weighted assets)
Total Tier 1 capital (numerator)
Risk-weighted assets (denominator)
Total Tier 1 Common Equity to risk-weighted assets
$ 71,114
559,161
$ 66,003
487,448
$ 62,038
414,842
$ 58,842
384,425
$
43,454
338,827
12.72 %
13.54 %
14.95 %
15.31 %
12.82 %
- 32 -
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
INTRODUCTION
Throughout Management’s Discussion and Analysis (“MD&A”) the term, the “Company”, refers to the consolidated entity of
Pathfinder Bancorp, Inc. Pathfinder Bank and Pathfinder Statutory Trust II are wholly owned subsidiaries of Pathfinder
Bancorp, Inc.; however, Pathfinder Statutory Trust II is not consolidated for reporting purposes (see Note 13 of the consolidated
financial statements). Pathfinder REIT, Inc., Pathfinder Risk Management Company, Inc., and Whispering Oaks Development
Corp. are wholly owned subsidiaries of Pathfinder Bank). Pathfinder REIT, Inc., ceased all operations in December 2017 and
all of its assets and liabilities were transferred at that time to its parent entity, Pathfinder Bank. The cessation of Pathfinder
REIT, Inc.’s operations and the transfer of all assets and liabilities from Pathfinder REIT, Inc. to Pathfinder Bank had no effect
on the Company’s consolidated financial position at December 31, 2017 or results of operations for the year ended December
31, 2017. The formal dissolution of Pathfinder REIT, Inc. as a legal entity will be completed in 2018.
On October 16, 2014, Pathfinder Bancorp, MHC converted from the mutual to stock form of organization. In connection with
the Conversion, the Company sold 2,636,053 of common stock to depositors at $10.00 per share. Shareholders of Pathfinder-
Federal, the Company’s predecessor, received 1.6472 shares of the Company’s common stock for each share of Pathfinder-
Federal common stock they owned immediately prior to completion of the transaction. Following the completion of the
Conversion, Pathfinder-Federal was succeeded by the Company, a Maryland corporation named Pathfinder Bancorp, Inc., and
Pathfinder Bancorp, MHC ceased to exist. The Company had 4,280,227 and 4,326,744 shares outstanding at December 31,
2017 and December 31, 2016, respectively.
Our previously disclosed strategic conversion from a traditional savings bank to a commercial bank has been substantially
completed. While not reducing our role as a leading originator of one-to-four family residential real estate loans within our
marketplace, which had been our primary focus as a savings bank, we have substantially grown our business and commercial
real estate loan portfolios over the past five years. As a commercial bank, we have been able to offer customized products and
services to meet individual customer needs and thereby definitively differentiate our services from those offered by our
competitors. As a result, we have been able to create a substantially more diversified loan portfolio than the one that was in
place before the conversion process began. When compared to the Bank’s loan portfolio composition prior to this strategic
conversion, it is our view that this portfolio (1) significantly improves upon both the distribution of credit risk across a broader
range of borrowers, industries and collateral types, and (2) is more likely to generate consistent net interest margins in a broader
range of interest rate environments due to the portfolio’s increased percentage of adjustable-rate assets. In a concurrent effort,
the Bank has been able to fund the high level of growth in our loan portfolios primarily with deposits gathered from our local
community. We believe that we have gathered these deposits at a reasonable overall cost in terms of interest, infrastructure and
support service expenses.
We have consistently emphasized developing our business banking franchise by offering products that are attractive to small
businesses in our market area. We seek to differentiate our loan solutions and related services through the maintenance of high
standards of customer service, solution flexibility and convenience. Highlights of our business strategy are as follows:
•
•
•
Continuing emphasis on business banking. We intend to continue to use our branch office network and
experienced commercial loan and deposit specialists to provide convenient commercial loan and deposit products
and services to business customers. We believe that by developing our commercial relationships with small
businesses we will be able to offer a variety of services and deposit products that will provide a sustainable source
of net interest income and will become a growing source of fee income in the future. We will continue to introduce
products and services designed to attract new business customers and increase the breadth of solutions that we can
offer to our existing business customer base.
Continuing our emphasis on commercial business and commercial real estate lending. In recent years, we have
successfully increased our commercial business and commercial real estate lending activities, consistent with safe
and sound underwriting practices. In this regard, we have added, and will continue to add, personnel who are
experienced in originating and underwriting commercial real estate and commercial business loans. We view the
growth of our commercial business and commercial real estate loans as a means of further diversifying and
increasing our interest income. In increasing our business banking activities, we are continuously deepening
relationships with local businesses, which offer recurring and potentially increasing sources of both fee income and
lower-cost transactional deposits. In that regard, our emphasis on commercial business and commercial real estate
lending has complimented, and will continue to compliment, our traditional one-to-four family residential real
estate lending.
Diversifying our products and services with a goal of increasing non-interest income over time. We have sought
to reduce our dependence on net interest income by increasing fee income from the value-added services that we
- 33 -
provide. We offer property and casualty and life insurance through our subsidiary, Pathfinder Risk Management
Company, Inc., and its insurance agency subsidiary, the FitzGibbons Agency, LLC. Additionally, Pathfinder
Bank’s investment services provides brokerage services for purchasing stocks, bonds, mutual funds, annuities, and
long-term care products. We intend to gradually grow these businesses. We believe that there will be opportunities
to cross-sell these products to our deposit and loan customers which will increase our non-interest income over
time.
Continuing to grow our customer relationships and deposit base by expanding our branch network. As
conditions permit, we will expand our branch network through a combination of de novo branching and acquisitions
of branches and/or other financial services companies. We believe that as we expand our branch network, our
customer relationships and deposit base will continue to grow. Our branch expansion focus will be primarily within
Onondaga County, NY, which encompasses the greater Syracuse, NY area. We currently have two branches in
Onondaga County and are actively seeking opportunities for an increased presence within that marketplace as we
believe that we have already achieved meaningful brand recognition among potential customers there. Consistent
with this strategy, we have recently acquired a vacated branch site in suburban Syracuse from another financial
institution. This branch will be opened, pending regulatory approval, in the fall of 2018. We are also actively
exploring the addition of a specific branch site within the City of Syracuse and will continue to seek similar
opportunities in the future. In 2017, we opened a loan production office in Utica, located in Oneida County, NY, to
increase our availability to potential commercial and business loan customers within that marketplace.
Banking Platform and Technologies. We have committed significant resources to establish a banking platform to
accommodate future growth by upgrading our information technology, maintaining a robust risk management and
compliance staff, improving credit administration functionality, and upgrading our physical infrastructure. We
believe that these investments will enable us to achieve operational efficiencies with minimal additional
investments, while providing increased convenience for our customers.
Managing Capital. The Company received $24.9 million in net proceeds from the sale of approximately 2.6 million
shares of common stock as a result of the Conversion in October 2014. In October 2015, the Company executed the
issuance of the $10.0 million non-amortizing Subordinated Loan and subsequently used those proceeds in February
2016 to substantially fund the full retirement of $13.0 million in SBLF Preferred stock. We have successfully
leveraged this $27.9 million in net additional capital by growing our assets by $300.8 million, or 51.8%, since
October 2014. It is our intent to balance our future growth with capital adequacy considerations in a manner that
will continue to allow us to effectively serve all of our key stakeholders.
Providing quality customer service. Our strategy emphasizes providing quality customer service and meeting the
financial needs of our customer base by offering a full complement of loan, deposit, financial services and online
banking solutions. Our competitive advantage is our ability to make decisions, such as approving loans, more
quickly than our larger competitors. Customers enjoy, and will continue to enjoy, access to senior executives and
local decision makers at Pathfinder Bank and the flexibility it brings to their businesses.
•
•
•
•
APPLICATION OF CRITICAL ACCOUNTING POLICIES
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 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 other third-party sources, when available. When
third party information is not available, valuation adjustments are estimated in good faith by management.
The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial
statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion,
provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those
values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the
methods, assumptions, and estimates underlying those amounts, management has identified the allowance for loan losses,
deferred income taxes, pension obligations, the evaluation of investment securities for other than temporary impairment, the
annual evaluation of the Company’s goodwill for possible impairment, and the estimation of fair values for accounting and
- 34 -
disclosure purposes to be the accounting areas that require the most subjective and complex judgments. These areas could be
the most subject to revision as new information becomes available.
Allowance for Loan Losses. The allowance for loan losses represents management's estimate of probable loan losses inherent in
the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because
it requires significant judgment on the use of estimates related to the amount and timing of expected future cash flows on
impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and environmental factors,
all of which may be susceptible to significant change. The Company establishes a specific allowance for all commercial loans
in excess of the total related credit threshold of $100,000 and single borrower residential mortgage loans in excess of the total
related credit threshold of $300,000 identified as being impaired which are on nonaccrual and have been risk rated under the
Company’s risk rating system as substandard, doubtful, or loss. The Company also establishes a specific allowance, regardless
to the size of the loan, for all loans subject to a troubled debt restructuring agreement. In addition, an accruing substandard loan
could be identified as being impaired. The measurement of impaired loans is generally based upon the present value of future
cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral, less costs to sell. At December 31, 2017, the Bank’s position in impaired
loans consisted of 51 loans totaling $9.2 million. Of these loans, 25 loans, totaling $5.3 million, were valued using the present
value of future cash flows method; and 26 loans, totaling $3.9 million, were valued based on a collateral analysis. For all other
loans, the Company uses the general allocation methodology that establishes an allowance to estimate the probable incurred loss
for each risk-rating category. Note 1 to the consolidated financial statements describes the methodology used to determine the
allowance for loan losses and a discussion of the factors driving changes in the amount of the allowance for loan losses is
included in this report.
Deferred Income Tax Assets and Liabilities. Deferred income tax assets and liabilities are determined using the liability
method. Under this method, the net deferred tax asset or liability is recognized for the future tax consequences. This is
attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases as well as net operating and capital loss carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the
period that includes the enactment date. If current available evidence about the future raises doubt about the likelihood of a
deferred tax asset being realized, a valuation allowance is established. The judgment about the level of future taxable income,
including that which is considered capital, is inherently subjective and is reviewed on a continual basis as regulatory and
business factors change. In prior years, management believed that it may not have been able to generate sufficient future taxable
income in the form of capital gains to offset its capital loss carry forward position before those potential tax benefits expired.
Accordingly, a valuation allowance of $150,000 was maintained at December 31, 2016. During 2017, the Company recognized
net capital gains of $428,000, effectively utilizing all capital loss carryforward tax benefits established in prior years and
thereby eliminating the need for any valuation allowance related to the future utilization of those carryforwards at December 31,
2017. As a result, the Company maintained no valuation allowance related to future tax benefits related to the utilization of
capital loss carryforwards at December 31, 2017.
On December 22, 2017 the Tax Act was signed into law. The Tax Act instituted significant changes to various sections of the
Internal Revenue Code that effects the Company. Most notably, the Tax Act reduces the Company’s marginal federal income
tax rate from 34% to 21% starting January 1, 2018. Generally Accepted Accounting Principles (“GAAP”) requires that the
impact of the provisions of the Tax Act be accounted for in the period of enactment. Accordingly, the Company recorded an
income tax benefit in the fourth quarter of 2017 related to the Tax Act in the amount of $155,000. The reduction in income tax
expense was largely attributable to the reduction in the value of net deferred tax assets and liabilities reflecting lower future tax
obligations resulting from the Tax Act’s enacted lower federal corporate tax rate.
The Company’s effective tax rate differs from the statutory rate due primarily to non-taxable interest income and other tax-
advantaged income derived from investments in bank owned life insurance. In addition to these recurring reductions in the
Company’s effective tax rates, its effective tax rate for 2017 was increased by the effects of the one-time incremental tax
expense related to the Tax Act, partially offset by the tax-reducing effects of the utilization of its remaining capital loss
carryforwards. See Note 17 to the consolidated financial statements contained herein.
Pension Obligations. Pension and postretirement benefit plan liabilities and expenses are based upon actuarial assumptions of
future events, including fair value of plan assets, interest rates, and the length of time the Company will have to provide those
benefits. The assumptions used by management are discussed in Note 14 to the consolidated financial statements contained
herein.
- 35 -
Evaluation of Investment Securities for Other-Than-Temporary-Impairment (“OTTI”). The Company carries all of its
available-for-sale investments at fair value with any unrealized gains or losses reported net of tax as an adjustment to
shareholders' equity and included in accumulated other comprehensive income (loss), except for the credit-related portion of
debt security impairment losses and OTTI of equity securities which are charged to earnings. The Company's ability to fully
realize the value of its investments in various securities, including corporate debt securities, is dependent on the underlying
creditworthiness of the issuing organization. In evaluating the debt security (both available-for-sale and held-to-maturity)
portfolio for other-than-temporary impairment losses, management considers (1) if we intend to sell the security before recovery
of its amortized cost; (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) if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. When the
fair value of a held-to-maturity or available-for-sale security is less than its amortized cost basis, an assessment is made as to
whether OTTI is present. The Company considers numerous factors when determining whether a potential OTTI exists and the
period over which the debt security is expected to recover. The principal factors considered are (1) the length of time and the
extent to which the fair value has been less than the amortized cost basis, (2) the financial condition of the issuer and (guarantor,
if any) and adverse conditions specifically related to the security, industry or geographic area, (3) failure of the issuer of the
security to make scheduled interest or principal payments, (4) any changes to the rating of the security by a rating agency, and
(5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.
Evaluation of Goodwill. Management performs an annual evaluation of the Company’s goodwill for possible impairment.
Based on the results of the 2017 evaluation, management has determined that the carrying value of goodwill is not impaired as
of December 31, 2017. The evaluation approach is described in Note 10 of the consolidated financial statements contained
herein.
Estimation of Fair Value. The estimation of fair value is significant to several of our assets; including investment securities
available-for-sale, interest rate derivative (discussed in detail in Note 22 of the consolidated financial statements), intangible
assets, foreclosed real estate, and the value of loan collateral when valuing loans. These are all recorded at either fair value, or
the lower of cost or fair value. Fair values are determined based on third party sources, when available. Furthermore,
accounting principles generally accepted in the United States require disclosure of the fair value of financial instruments as a
part of the notes to the consolidated financial statements. Fair values on our available-for-sale securities may be influenced by a
number of factors; including market interest rates, prepayment speeds, discount rates, and the shape of yield curves.
Fair values for securities available-for-sale are obtained from an independent third party pricing service. Where available, fair
values are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values
are measured using quoted market prices for similar benchmark securities. Management made no adjustments to the fair value
quotes that were provided by the pricing source. The fair values of foreclosed real estate and the underlying collateral value of
impaired loans are typically determined based on evaluations by third parties, less estimated costs to sell. When necessary,
appraisals are updated to reflect changes in market conditions.
RECENT EVENTS
On December 22, 2017, the board of directors declared a quarterly dividend of $0.0575 per common share. The dividend was
payable on February 2, 2018 to shareholders of record on January 12, 2018.
EXECUTIVE SUMMARY AND RESULTS OF OPERATIONS
The Company reported net income of $3.5 million for 2017, an increase of $219,000, or 6.7%, as compared to net income of
$3.3 million for 2016. Net income increased during 2017, as compared to the previous year, due to an increase in net interest
income before the provision for loan losses of $2.8 million and a reduction of income tax expense of $189,000, partially offset
by increases in noninterest expenses, and provision for loan losses of $2.0 million, and $816,000, respectively. Basic and diluted
earnings per share in 2017 were $0.86 and $0.83, respectively, as compared to $0.79 and $0.78 in 2016, respectively. Return on
average assets decreased to 0.42% in 2017 from 0.48% in 2016. Return on average equity increased 0.34% to 5.69% in 2017 as
compared to 5.35% in 2016. The decrease in return on average assets in 2017, as compared to the previous year, was primarily
due to the rate of increase in net income being below the rate of increase in average assets. Average assets increased in 2017 by
$134.2 million, or 20.7% as the Company grew its total assets from $749.0 million at December 31, 2016 to $881.3 million at
December 31, 2017. The increase in return on average equity in 2017, as compared to the previous year, was primarily due to
the increase in net income in 2017.
Net interest income before provision for loan losses increased $2.8 million, or 14.0%, to $23.1 million in 2017 on average
earning assets of $779.9 million as compared to net interest income before provision for loan losses of $20.3 million in 2016 on
- 36 -
average earning assets of $645.7 million. Interest and dividend income increased $5.3 million in 2017 to $29.4 million, as
compared to interest and dividend income of $24.1 million in 2016. The aggregate increase in the average balances of interest-
earning assets of $134.2 million in 2017 led to an increase in interest income of $4.8 million, that was further enhanced by an
increase of four basis points in the overall average yield earned on those assets that contributed an additional $524,000 in
interest income in 2017, as compared to the previous year. The $5.3 million increase in interest income was partially offset by
an increase in interest expense of $2.5 million due to an increase in average interest-bearing liabilities of $126.4 million and an
increase in the average rate paid on those liabilities of 24 basis points in 2017 as compared to 2016.
The Company recorded a provision for loan losses of $1.8 million in 2017 as compared to $953,000 in the prior year. The
$816,000 year-over-year increase in provision for loan losses reflects the effects of an 18% increase in aggregate loan balances
from December 31, 2016 to December 31, 2017. This increase in year-over-year loan balances necessitated a corresponding
increase in the provision for loan losses that was partially offset by the loan portfolio’s generally improving credit quality
metrics. In addition, the Company recorded a specific reserve of $300,000 for a single commercial real estate loan with an
outstanding balance of $1.7 million. The loan is collateralized by a special-purpose property and the balance of the loan may
not be fully realizable in the future. The Company recorded $890,000 in net charge-offs in 2017 as compared to $412,000 in net
charge-offs in 2016. The ratio of net charge-offs to average loans increased to 0.16% in 2017 from 0.09% in 2016. The
increase in the year-over-year charge-off rate was due primarily to the charge-off in 2017 of a single fully-reserved commercial
real estate loan in the amount of $565,000.
Noninterest income was $4.2 million in both 2017 and 2016. Net gains on the sales and redemptions of investment securities
decreased $105,000 to $489,000 in 2017. During 2017, the Company engaged in certain short-term interest hedging strategies
that generated net gains of $428,000. In addition, the Company realized net gains on the sales and redemptions of investment
securities of $61,000 as the Company sold certain securities as part of its overall asset management strategies. All other
categories of noninterest income increased $101,000 in aggregate during 2017, as compared to the previous year, primarily due
to gains on the sales of loans and foreclosed real estate that increased by $77,000.
Noninterest expense increased $2.1 million, or 10.9% in 2017 to $21.2 million in 2017 from $19.1 million in 2016. Noninterest
expenses increased in 2017, as compared to the previous year, as all categories of expense increased in a manner that was
substantially proportional to the Company’s increased asset size.
The provision for income taxes decreased $189,000 between 2017 and 2016 primarily due to a recognized reduction of income
tax expense in 2017 in the amount of $155,000 for the effects of the Tax Act. In addition, an additional reduction of $35,000 in
income tax expense in 2017, as compared to the previous year, was due to increased utilization in 2017 of previously reserved-
for capital loss carryforward credits. The reduction in income tax expense resulting from the recognition of the effects of the
Tax Act was attributable to the reduction in net deferred tax assets and liabilities reflecting lower expected future tax outlays
resulting from the Tax Act’s reduction of the federal corporate tax rate.
Total assets were $881.3 million at December 31, 2017 as compared to $749.0 million at December 31, 2016. The increase in
total assets of $132.2 million, or 17.7%, was the result of the increase in loans, largely commercial real estate and residential
mortgages, and the increase in investment securities. The loan portfolio, net of the allowance for loan losses, increased $87.8
million and the investment securities portfolio, including FHLB stock, increased $41.3 million. The increase in total assets was
funded largely by a $97.2 million increase in customer deposits, a $15.4 million increase in money market and time deposits
acquired through the CDARS program, and by a net increase in borrowings from the FHLBNY of $14.9 million in 2017.
Measured as a percentage of total loans and total assets, the majority of loan credit quality metrics improved in 2017 as
compared to the previous year. Nonperforming loans to total loans were 0.84% at December 31, 2017, down 14 basis points
compared to 0.98% at December 31, 2016. The allowance for loan losses to non-performing loans at December 31, 2017 was
145.61%, compared with 129.85% at December 31, 2016. These improvements in credit quality measures were reflected in a
slight decline in the ratio of the allowance for loan losses to year end loans decreasing from 1.27% at December 31, 2016 to
1.23% at December 31, 2017. This decrease reflects management’s estimate of the probable losses inherent in the current loan
portfolio.
The ratio of net charge-offs to average loans increased to 0.16% for 2017 as compared to 0.09% for 2016. This activity reflects
charge-offs for those accounts deemed uncollectible but reserved for in prior years through the provision for loan losses. Total
past due loans measured as a percent of total loans, increased from 1.98% at December 31, 2016 to 2.12% at December 31,
2017. The level of nonperforming loans increased in aggregate by $83,000, or 1.7%, led by an increase in nonperforming
commercial and commercial real estate loans of $580,000, partially offset by a decrease in nonperforming residential real estate
loans of $472,000. Commensurate with the decline in nonperforming loans to year end loans, the ratio of nonperforming assets
- 37 -
to total assets decreased to 0.61% at December 31, 2017 from 0.72% at December 31, 2016. The improvements in our
nonperforming loan measures largely reflect the $87.8 million increase in our aggregate loan portfolio achieved while we
continued to maintain our conservative underwriting practices.
The Company’s shareholders’ equity increased $3.9 million, or 6.7%, to $61.8 million at December 31, 2017 from $57.9 million
at December 31, 2016. This increase was primarily due to an increase in retained earnings of $3.4 million resulting from the
Company’s reported net income of $3.5 million in 2017 and a one-time reclassification from additional paid-in capital to
retained earnings of $790,000 (resulting in no net effect on total shareholders’ equity) related to “stranded tax effects” within
accumulated other comprehensive income that resulted from the effects of remeasurement of deferred tax assets and liabilities
related to the Tax Act. The Company elected to reclassify the “stranded tax effects” in accordance with Accounting Standards
Update 2018-02 (ASU 2018-02) – Income Statement – Reporting Comprehensive Income (Topic 220), Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income. These increases to retained earnings were partially offset
by common stock dividend distributions of $880,000. In addition, additional paid in capital increased $687,000 in 2017 due to
stock-based compensation-related increases of $500,000 and accretion of unearned ESOP shares of $187,000. All other
aggregate decreases to shareholders’ equity in 2017 related to recurring factors and totaled $206,000.
Net Interest Income
Net interest income is the Company's primary source of operating income. It is the amount by which interest earned on interest-
earning deposits, loans and investment securities exceeds the interest paid on deposits and borrowed money. Changes in net
interest income and the net interest margin ratio resulted from the interaction between the volume and composition of earning
assets, interest-bearing liabilities, and their respective yields and funding costs.
The following comments refer to the table of Average Balances and Rates and the Rate/Volume Analysis, both of which follow
below.
Net interest income, before provision for loan losses, increased $2.8 million, or 14.0%, to $23.1 million in 2017 as compared to
$20.3 million in the previous year. Our net interest margin for the year ended December 31, 2017 decreased to 2.97% from
3.14% for the comparable prior year. Interest income increased $5.3 million, or 22.1%, in 2017 as compared to the previous
year. The increase in interest income was primarily due to a 22.1% increase in interest and dividend income in 2017 to $29.4
million primarily as a result of the $134.2 million increase in the average balances on these earning assets. This increase in
interest income was partially offset by an increase in interest expense on time deposits, MMDA accounts, FHLBNY borrowings
(excluding short-term interest rate hedging activities) of $767,000, $685,000, and $505,000, respectively. Increases between
2017 and 2016 were recorded in average rates paid on FHLBNY borrowings, time deposits, and MMDA accounts of 38 basis
points, 29 basis points and 18 basis points, respectively. In addition to interest paid to the FHLBNY, interest expense on
borrowings also included $598,000 in net interest expense paid on short-term hedging activities in 2017 as compared to $88,000
in 2016.
- 38 -
Average Balances and Rates
The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the
yields and rates thereon. Interest income and resultant yield information in the table has not been adjusted for tax equivalency.
Averages are computed on the daily average balance for each month in the period divided by the number of days in the period.
Yields and amounts earned include loan fees. Nonaccrual loans have been included in interest-earning assets for purposes of
these calculations.
2017
For the twelve months ended December 31,
2016
2015
Average
Balance Interest
Average
Yield /
Cost
Average
Balance Interest
Average
Yield /
Cost
Average
Balance Interest
Average
Yield /
Cost
$546,193 $24,392
184,170 3,827
28,497 1,038
4.47% $455,129 $20,703
2.08% 142,277 2,461
865
3.64% 32,387
4.55% $404,434 $18,450
1.73% 118,035 2,190
763
2.67% 27,841
4.56%
1.86%
2.74%
20,999
156
779,859 29,413
0.74% 15,898
64
3.77% 645,691 24,093
0.40% 16,036
21
3.73% 566,346 21,424
0.13%
3.78%
50,147
(6,381)
(1,642)
$821,983
41,097
(5,965)
397
$681,220
40,606
(5,674)
790
$602,068
105
$ 67,581 $
13,960
25
231,671 1,384
84,092
82
189,614 2,308
15,041
794
70,071 1,592
672,030 6,290
92
0.16% $ 56,541 $
35
0.18% 14,392
699
0.60% 167,817
0.10% 79,317
74
1.22% 165,464 1,541
792
5.28% 15,006
2.27% 47,051
571
0.94% 545,588 3,804
86
0.16% $ 46,044
21
0.24% 12,981
628
0.42% 125,396
0.09% 75,307
62
0.93% 155,040 1,165
300
5.28%
6,826
1.21% 43,663
395
0.70% 465,257 2,657
0.19%
0.16%
0.50%
0.08%
0.75%
4.39%
0.90%
0.57%
(Dollars in thousands)
Interest-earning assets:
Loans
Taxable investment securities
Tax-exempt investment securities
Fed funds sold and
interest-earning deposits
Total interest-earning assets
Noninterest-earning assets:
Other assets
Allowance for loan losses
Net unrealized gains
on available for sale securities
Total assets
Interest-bearing liabilities:
NOW accounts
Money management accounts
MMDA accounts
Savings and club accounts
Time deposits
Subordinated loans
Borrowings
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Demand deposits
Other liabilities
83,053
5,517
760,600
61,383
Total liabilities & shareholders' equity $821,983
Total liabilities
Shareholders' equity
69,898
4,632
620,118
61,102
$681,220
62,751
3,241
531,249
70,819
$602,068
Net interest income
Net interest rate spread
Net interest margin
Ratio of average interest-earning assets
to average interest-bearing liabilities
Rate/Volume Analysis
$23,123
$20,289
$18,767
2.83%
2.97%
3.03%
3.14%
3.21%
3.31%
116.05%
118.35%
121.73%
Net interest income can also be analyzed in terms of the impact of changing interest rates on interest-earning assets and interest-
bearing liabilities, and changes in the volume or amount of these assets and liabilities. The following table represents the extent
to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have
affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (change in volume multiplied by prior rate); (ii) changes
attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) total increase or decrease. Changes
attributable to both rate and volume have been allocated ratably. Tax-exempt securities have not been adjusted for tax
equivalency.
- 39 -
Years Ended December 31,
2017 vs. 2016
Increase/(Decrease) Due to
2016 vs. 2015
Increase/(Decrease) Due to
Volume
Rate
Total
Increase
(Decrease)
Volume
Rate
Total
Increase
(Decrease)
4,073
811
(113)
25
4,796
17
(1)
320
5
247
2
367
957
3,839 $
(384)
555
286
67
524
(4)
(9)
365
3
520
-
654
1,529
(1,005) $
3,689
1,366
173
92
5,320
13
(10)
685
8
767
2
1,021
2,486
2,834
$
2,306
427
122
-
2,855
19
2
189
3
82
421
33
749
2,106 $
(53)
(156)
(20)
43
(186)
(13)
12
(118)
9
294
71
143
398
(584) $
2,253
271
102
43
2,669
6
14
71
12
376
492
176
1,147
1,522
(In thousands)
Interest Income:
Loans
Taxable investment securities
Tax-exempt investment securities
Interest-earning deposits
Total interest income
Interest Expense:
NOW accounts
Money management accounts
MMDA accounts
Savings and club accounts
Time deposits
Subordinated loans
Borrowings
Total interest expense
Net change in net interest income
$
Interest Income
Changes in interest income result from changes in the average balances of loans, securities, and interest-earning deposits and the
related average yields on those balances.
Interest income increased $5.3 million, or 22.1%, to $29.4 million in 2017 as compared to $24.1 million in 2016 due principally
to the $134.2 million, or 20.8%, increase in average interest-earning assets. The increase in average interest-earning assets was
due to the increase in average balances of loans and taxable investment securities, which increased 20.0% and 29.4%,
respectively. The increase in the average balance of loans was due principally to increases in adjustable-rate commercial real
estate loans. The average yields earned on loans, however, decreased by eight basis point to 4.47% in 2017 from 4.55% in 2016
as maturing higher rate loans were replaced by loans at current lower market rates. The increase in the average balance of
taxable investment securities was due principally to increases in fixed-rate residential and commercial mortgage-backed
securities. The average yields earned on taxable investment securities increased 35 basis points to 2.08% in 2017 as compared
to 1.73% in 2016, primarily due to increases in short-term interest rates that allowed amortizing and maturing security balances
to be replaced in 2017 with generally higher-yielding securities.
Interest Expense
Changes in interest expense result from changes in the average balances of deposits and borrowings and the related average
interest costs on those balances.
Interest expense increased $2.5 million to $6.3 million in 2017 compared to $3.8 million in 2016 due primarily to increases in
interest expense on time deposits, MMDA accounts, time deposits, and FHLBNY borrowings of $767,000, $685,000, $505,000,
respectively. Increases between 2017 and 2016 were recorded in average rates paid on FHLBNY borrowings, time deposits,
and MMDA of 38 basis points, 29 basis points and 18 basis points, respectively. In addition to interest paid to the FHLBNY,
interest expense on borrowings included $598,000 in net interest expense paid on short-term hedging activities in 2017 as
compared to $88,000 in 2016.
In addition the effects on total interest expense paid in 2017 as compared to the previous year as a result of the increases in the
rates paid on MMDA accounts, time deposits, FHLBNY borrowings, as noted above, total interest expense also increased in
2017, as compared to the previous year, due to increases in the average balance of MMDA accounts, time deposits, FHLBNY
borrowings of $63.9 million, $24.2 million and $23.0 million, respectively. The average balance increase of time deposits in
- 40 -
2017 was due to an increase of $15.8 million in time deposits originated by the Bank customer base and $8.3 million in time
deposits acquired through the CDARS program. The increase in the average balance of time deposits, and to a lesser extent, the
increase in the average balance of MMDA accounts were largely the result of promotional activity designed to increase balances
within these deposit categories.
In addition to the factors discussed above related to the increase in interest expense in 2017 as compared to the previous year,
the Company incurred $598,000 in pre-tax interest expense related to short-term interest rate hedging activities in 2017. This
represented an increase of $510,000 as compared to the pre-tax interest expense incurred as a result of those activities in 2016.
On five occasions during 2017 and on one occasion in 2016, the Company sold, and subsequently repurchased, a U.S. Treasury
security in the approximate amount of $40.0 million for each transaction in 2017 and in the amount of $25.0 million in 2016.
These transactions were intended to act as hedges against rising short-term interest rates. The Company was in controlling
possession of, but did not own, the securities at the time of each sale. The securities had been received by the Company, under
industry-standard repurchase agreements, from an unrelated third party as collateral for 30-day loans approximately equal to the
value of the sold Treasury security on each occasion which were made at market rates of interest to that third party in 2017 and
at zero interest in 2016. The security sale on each occasion provided the funds necessary to advance the loan to the third party
and placed the Company in what is generally described as a “short position” with respect to the sold U.S. Treasury security.
These transactions acted as a hedge against rising short-term interest rates because the price of each sold security would be
expected to decline in a rising short-term interest rate environment and could therefore be re-acquired at the conclusion of each
30-day loan period at a price lower than the price at which the security was originally sold. Short-term rates generally rose over
the combined duration of these transactions and, consequently, the Company recognized aggregate gains on the sale and
repurchase of the securities in the amounts of $428,000 for the twelve months ended December 31, 2017 and $85,000 for the
same twelve month period in 2016. The transactions’ gains were characterized as capital gains for tax purposes. These capital
gains utilized existing, previously reserved-for, capital loss tax carryforwards that were established in 2013. The Company
recognized tax benefits related to these transactions of $150,000 and $34,000 for the twelve months ended December 31, 2017
and 2016, respectively. The tax benefits arose from the reversal of reserves established in 2013 against the portion of the
Company’s deferred tax asset related to existing capital loss carryforward positions. The reserves were originally established
due to the uncertainty at that time of the Company’s ability to generate future capital gain income within the five-year statutory
life of the capital loss carryforward position under the Internal Revenue Code. The reversals of these reserves against deferred
tax assets had the effect of reducing the Company’s effective income tax rate by 3.3% in 2017 and 0.8% in 2016.
The capital gain income and the additional recognized tax benefits derived from these transactions were partially offset by an
additional $369,000 in after-tax interest expense on borrowings and an additional $54,000 in after-tax interest expense on
borrowings for the years ended December 31, 2017 and 2016, respectively. In total, net after-tax net income was increased by
$178,000 and $65,000 for 2017 and 2016, respectively, as a result of the hedging transactions.
All hedging transactions were closed at December 31, 2017 and 2016 and had no effect on the Company’s consolidated
financial position on those dates with the exception of deferred fees for consulting services related to the transactions in the
amount of $53,000 at December 31, 2016. These deferred fees were recognized in other assets at December 31, 2016 and as a
component of interest expense in 2017. The hedge position was closed as of December 31, 2017.
Provision for Loan Losses
We establish a provision for loan losses, which is charged to operations, at a level management believes is appropriate to absorb
probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management
considers historical loss experience, the types and amount of loans in the loan portfolio, adverse situations that may affect a
borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available
or as future events change. The provision for loan losses represents management’s estimate of the amount necessary to maintain
the allowance for loan losses at an adequate level.
The Company recorded a provision for loan losses of $1.8 million in 2017 as compared to $953,000 in the prior year. The
$816,000 year-over-year increase in provision for loan losses reflects the effects of an 18% increase in aggregate loan balances
from December 31, 2016 to December 31, 2017. This increase in year-over-year loan balances necessitated a corresponding
increase in the provision for loan losses that was partially offset by the loan portfolio’s generally improving credit quality
metrics. In addition, the Company recorded a specific reserve of $300,000 for a single commercial real estate loan with an
outstanding balance of $1.7 million. The loan is collateralized by a special-purpose property and the balance of the loan may
not be fully realizable in the future. The Company recorded $890,000 in net charge-offs in 2017 as compared to $412,000 in net
charge-offs in 2016. The ratio of net charge-offs to average loans increased to 0.16% in 2017 from 0.09% in 2016. The
- 41 -
increase in the year-over-year charge-off rate was due primarily to the charge-off in 2017 of a single fully-reserved commercial
real estate loan in the amount of $565,000.
Noninterest Income
The Company's noninterest income is primarily comprised of fees on deposit account balances and transactions, loan servicing,
commissions and net gains or losses on sales of securities, loans, and foreclosed real estate.
The following table sets forth certain information on noninterest income for the years indicated.
Years Ended December 31,
(Dollars in thousands)
Service charges on deposit accounts
Earnings and gain on bank owned life insurance
Loan servicing fees
Debit card interchange fees
Other charges, commissions and fees
Noninterest income before gains
Net gains on sales and redemptions of investment securities
Net gains (losses) on sales of loans and foreclosed real estate
Total noninterest income
$
$
2017
1,130 $
284
149
578
1,512
3,653
489
37
4,179 $
2016
1,141 $
307
138
557
1,486
3,629
594
(40)
4,183 $
Change
(11)
(23)
11
21
26
24
(105)
77
(4)
-1.0%
-7.5%
8.0%
3.8%
1.7%
0.7%
-17.7%
-192.5%
-0.1%
Noninterest income for the year ended December 31, 2017 decreased $4,000, or 0.1%, from the year ended December 31, 2016.
Noninterest income before gains on the sales and redemptions of investment securities and gains (losses) on the sale of loans
and foreclosed real estate increased $24,000, or 0.7%, to $3.7 million with all categories of such income remaining substantially
identical in 2017 to the levels recorded in the previous year. Net gains on sales and redemptions of investment securities
declined $105,000 in 2017 as compared to 2016 as a result of reductions of $448,000 in net gains in securities sold within the
Company’s portfolio to $61,000 in 2017 as compared to $387,000 in 2016. These reductions in net gains from the sale of
investment securities were partially offset by an increase in gains resulting from short-term interest rate hedging activities that
increased to $428,000 in 2017 as compared to $85,000 in 2016. Net gains (losses) on sales of loans and foreclosed real estate
increased $77,000 in 2017, as compared to the previous year, due to a limited number of activities in each year related to the
dispositions of foreclosed real estate.
Noninterest Expense
The following table sets forth certain information on noninterest expense for the years indicated.
(Dollars in thousands)
Salaries and employee benefits
Building occupancy
Data processing
Professional and other services
Advertising
FDIC assessments
Audits and exams
Other expenses
Total noninterest expenses
Years Ended December 31,
2017
11,917 $
2,196
1,779
952
809
473
353
2,709
21,188 $
2016
10,772 $
1,936
1,682
834
730
345
329
2,482
19,110 $
$
$
Change
1,145
260
97
118
79
128
24
227
2,078
10.6%
13.4%
5.8%
14.1%
10.8%
37.1%
7.3%
9.1%
10.9%
Noninterest expense for 2017 increased $2.1 million, or 10.9%, to $21.2 million from $19.1 million for the prior year. Higher
noninterest expenses largely reflect investments related to the Company’s continued efforts to expand brand awareness and
increase its business activities in the Syracuse market, an increase in the Company’s risk management capabilities and to
improve its service levels to customers. Specifically, the year-over-year increase in noninterest expenses was due in part to
higher personnel expenses that increased $1.1 million, or 10.6%, in 2017 as compared to 2016. These increases resulted
primarily from increases of $521,000, or 7.8%, in salaries, $207,000, or 21.5%, in commission expense (of which $202,000 of
the increase related to incentives paid to the senior management team of the FitzGibbons Agency), $158,000, or 13.3%, in
- 42 -
employee benefits and $152,000, or 25.5%, in stock-based compensation. The increase in salaries expense was due to the
expansion of the Company’s staffing levels in a number of areas, primarily focused on enhanced business development, risk
management activities and service-related activities. Employee benefits expense increased due to increases in employee
medical insurance premiums of $65,000 and increased 401(k) contributions of $46,000 in 2017 as compared to the previous
year. Stock-based compensation increased due to the adoption of new stock-based compensation plans approved by a vote of the
shareholders in May of 2016 and reflect a full year of those costs in 2017, as well as the granting of options previously available
from plans adopted with shareholder consent in prior years.
Building and occupancy expense increased $260,000, or 13.4%, primarily due to increased maintenance, depreciation and
communications expenses principally related to the Company’s ongoing refurbishment and modernization programs for its
physical facilities.
Data Processing expense increased $97,000, or 5.8%, primarily due to increased transaction-related fees paid to third-party
vendors. These increased fees resulted from higher transaction volumes derived from both greater numbers of customers in
2017, as compared to the previous year, and increased utilization levels by existing customers of the Bank’s electronic banking
offerings.
Professional and other services expense increased $118,000, or 14.1%, primarily due to the increased use of external
management consulting services related to operational and strategic planning in 2017.
Advertising expense increased $79,000, or 10.8%, in 2017 as compared to the previous year, as the Company’s management
sought to increase brand awareness and corresponding business activity within the Company’s market area, particularly in
Onondaga County.
FDIC assessments expense increased $128,000, or 37.1%, in 2017 primarily due to the $138.1 million, or 20.7%, increase in
total average assessable net assets to $806.1 million at December 31, 2017 from $668.0 million at December 31, 2016. In
addition, the Company’s overall FDIC assessment rate increased in 2017 as a result of the dissolution of Pathfinder Commercial
Bank. Pathfinder Commercial Bank had received favorable assessment rate treatment as a stand-alone entity due to the limited
scope of its deposit gathering and investment activities. Pathfinder Commercial Bank, which was a subsidiary of Pathfinder
Bank, was merged into Pathfinder Bank in 2016 and the overall assessment rate has been increasing for the merged Pathfinder
Bank as the beneficial blending of the Commercial Bank’s more favorable rate has been phased out in succeeding assessment
periods.
Audits and exams expense increased $24,000, or 7.3%, in 2017 principally due to increased utilization of third-party internal
audit services in 2017 as compared to the previous year.
Other expenses increased in 2017 by $227,000 as compared to the previous year, principally due to increases in ORE expenses
of $90,000, expenses associated with “no closing cost” customer loans of $28,000, meals and entertainment expenses of
$21,000 and community service donations of $17,000. All other categories of other expenses increased in 2017 in aggregate by
$71,000, as compared to 2016.
Income Tax Expense
The Company reported income tax expense of $922,000 in 2017 and $1.1 million in 2016. Income tax expense decreased
$189,000 in 2017. On December 22, 2017 the Tax Act was signed into law. The Tax Act instituted significant changes to
various sections of the Internal Revenue Code that effects the Company. Most notably, the Tax Act reduces the Company’s
marginal federal income tax rate from 34% to 21% starting January 1, 2018. Generally Accepted Accounting Principles
(“GAAP”) requires that the impact of the provisions of the Tax Act be accounted for in the period of enactment. Accordingly,
the Company recorded an income tax benefit in the fourth quarter of 2017 related to the Tax Act in the amount of $155,000.
The reduction in income tax expense was largely attributable to the reduction in the value of net deferred tax assets and
liabilities reflecting lower future tax obligations resulting from the Tax Act’s enacted lower federal corporate tax rate. Absent
this one-time income tax benefit, the Company’s income tax expense for 2017 would have been $1.1 million, a reduction of
$34,000 from 2016. The Company’s reported effective tax rate for 2017 was 20.6% as compared to 25.5% in 2016. Absent this
one-time tax benefit discussed above, the Company’s effective tax rate in 2017 would have been 24.0%.
The Company’s effective tax rate, absent the effects of the one-time benefit related to the Tax Act, was further reduced by 3.4%
from 24.0% to 20.6% due to the reversal of $150,000 in allowances for deferred tax assets related to capital loss carryforward
tax positions established in previous years. The company was able to generate sufficient capital gains in 2017 to offset all
- 43 -
capital loss carryforward positions at December 31, 2016 and thereby eliminate the need for a reserve against their related
deferred tax assets. The Company’s effective tax rate was reduced by 0.8% from 26.3% in 2016 to 25.5% due to the reversal of
$34,000 in allowances for deferred tax assets related to capital loss carryforward tax positions established in previous years. At
December 31, 2017, the Company had no unused capital loss carryforward positions or deferred tax assets related to those
positions.
The Company’s effective tax rate differs from the federal statutory rate due primarily to non-taxable interest income and other
tax-advantaged income derived from investments in bank owned life insurance, partially offset by the effects of state income
taxes. See Note 17 to the consolidated financial statements for the reconciliation of the statutory tax rate to the effective tax
rate.
Earnings Per Share
Basic and diluted earnings per share for the year ended December 31, 2017 were $0.86 and $0.83, respectively, as compared to
basic and diluted earnings per share of $0.79 and $0.78 for the year ended December 31, 2016. The decrease in basic and
diluted earnings per share comparing year-over-year periods was due to the decrease in net income available to common
shareholders between these two years.
CHANGES IN FINANCIAL CONDITION
Total assets were $881.3 million at December 31, 2017 as compared to $749.0 million at December 31, 2016. The increase in
total assets of $132.2 million, or 17.7%, was the result of the increase in loans, largely commercial real estate and residential
mortgages, and the increase in investment securities. The loan portfolio, net of the allowance for loan losses, increased $87.8
million and the investment securities portfolio increased $40.7 million. The increase in total assets was funded largely by a
$97.2 million increase in customer deposits, a $15.4 million increase in time deposits acquired through the CDARS program
and by a net increase in borrowings from the FHLBNY of $14.9 million in 2017.
Investment Securities
The investment portfolio represented 27.3% of the Company’s average interest earning assets in 2017 and is designed to
generate a favorable rate of return consistent with safety of principal while assisting the Company in meeting its liquidity needs
and interest rate risk strategies. All of the Company’s investments are classified as either available-for-sale or held-to-maturity.
The Company does not hold any trading securities. The Company invests primarily in securities issued by United States
Government agencies and sponsored enterprises (“GSE”), mortgage-backed securities, collateralized mortgage obligations, state
and municipal obligations, mutual funds, equity securities, investment grade corporate debt instruments, and common stock
issued by the Federal Home Loan Bank of New York (“FHLBNY”). By investing in these types of assets, the Company
reduces the credit risk of its asset base through geographical and collateral-type diversification but must accept lower yields
than would typically be available on loan products. Our mortgage-backed securities and collateralized mortgage obligations
portfolio includes privately-issued but substantially over-collateralized pass-through securities as well as pass-through securities
guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. The investment securities portfolio has approximately 6.6% of its
composition in pass-through securities comprised of seasoned mortgage-backed securities whose collateral was considered sub-
prime or high-risk at their time of issuance. These privately-issued mortgage-backed securities are believed to be over
collateralized by subordinate structures and therefore extremely well insulated from loss of principal due to credit default.
At December 31, 2017, available-for-sale and held-to-maturity investment securities increased 20.6% to $171.1 million and
21.1% to $66.2 million, respectively. There were no securities that exceeded 10% of consolidated shareholders’ equity. See
Note 4 to the consolidated financial statements for further discussion on securities.
Our available-for-sale investment securities are carried at fair value and our held-to-maturity investment securities are carried at
amortized cost.
- 44 -
The following table sets forth the carrying value of the Company's investment portfolio at December 31:
(In thousands)
Investment Securities:
US treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Mutual funds
Equity securities
Total investment securities
Available-for-Sale
Held-to-Maturity
2017
2016
2017
2016
$
$
41,336 $
13,681
8,600
6,644
35,742
53,348
11,052
-
735
171,138 $
24,184 $
16,481
15,195
6,664
30,566
40,986
6,577
626
676
141,955 $
4,948 $
35,130
8,311
-
6,853
7,574
3,380
-
-
66,196 $
4,928
30,697
8,240
-
6,386
2,927
1,467
-
-
54,645
The following table sets forth the scheduled maturities, amortized cost, fair values and average yields for the Company's
investment securities at December 31, 2017. Average yield is calculated on the amortized cost to maturity. Adjustable rate
mortgage-backed securities are included in the period in which interest rates are next scheduled to be reset.
AVAILABLE FOR SALE
(Dollars in thousands)
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Total
Mortgage-backed securities:
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total
Other non-maturity investments:
Equity securities
Total
Total investment securities
One Year or Less
More Than One
to Five Years
More Than Five
to Ten Years
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
$
$
$
$
$
$
$
20,982
511
62
-
21,555
1.05% $
1.43%
2.61%
-
1.06% $
20,507
6,464
756
1,230
28,957
1.59% $
2.38%
3.76%
4.44%
1.94% $
-
1,984
5,967
3,636
11,587
-
-
-
-
-
-
-
-
$
$
5,392
7,663
-
13,055
2.19% $
2.35%
-
2.28% $
8,742
6,161
-
14,903
663
663
22,218
1.74% $
1.74% $
1.08% $
-
-
42,012
$
-
$
-
2.05% $
-
-
26,490
-
1.72%
2.54%
3.02%
2.55%
1.99%
2.09%
-
2.03%
-
-
2.26%
- 45 -
(Dollars in thousands)
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Total
Mortgage-backed securities:
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total
Other non-maturity investments:
Equity securities
Total
Total investment securities
HELD-TO-MATURITY
(Dollars in thousands)
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Total
Mortgage-backed securities:
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total
Total investment securities
(Dollars in thousands)
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Total
Mortgage-backed securities:
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total
Total investment securities
More Than Ten Years
Total Investment Securities
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
Fair
Value
$
$
$
$
$
$
$
-
5,001
1,799
1,796
8,596
22,080
40,657
11,193
73,930
-
-
82,526
-
$
1.97%
4.01%
2.98%
2.61% $
2.20% $
2.31%
2.99%
2.38% $
41,489 $
13,960
8,584
6,662
70,695 $
41,336
13,681
8,600
6,644
70,261
36,214 $
54,481
11,193
101,888 $
35,742
53,348
11,052
100,142
$
-
-
$
2.40% $
663 $
663 $
173,246 $
735
735
171,138
1.32%
2.11%
2.95%
3.27%
1.86%
2.15%
2.29%
2.99%
2.32%
1.74%
1.74%
2.13%
One Year or Less
More Than One
to Five Years
More Than Five
to Ten Years
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
$
$
$
$
$
-
1,680
-
1,680
-
-
-
-
1,680
-
$
1.60%
-
1.60% $
4,948
5,328
1,105
11,381
1.97% $
2.79%
3.37%
2.49% $
-
12,023
4,970
16,993
$
-
-
-
$
-
1.60% $
-
1,929
-
1,929
13,310
-
$
3.22%
-
$
-
2.60% $
2,384
1,012
-
3,396
20,389
-
3.35%
5.25%
3.91%
2.36%
3.05%
-
2.57%
3.68%
More Than Ten Years
Total Investment Securities
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
Fair
Value
$
$
$
$
$
-
16,099
2,236
18,335
4,469
4,633
3,380
12,482
30,817
-
$
2.74%
3.74%
2.86% $
2.87% $
3.51%
2.39%
2.98% $
2.91% $
4,948 $
35,130
8,311
48,389 $
6,853 $
7,574
3,380
17,807 $
66,196 $
4,948
35,460
8,303
48,711
6,896
7,442
3,377
17,715
66,426
1.97%
2.90%
4.59%
3.09%
2.69%
3.37%
2.39%
2.92%
3.05%
The yield information disclosed above does not give effect to changes in fair value that are reflected in accumulated other
comprehensive loss in consolidated shareholders’ equity.
- 46 -
Loans Receivable
Average loans receivable represented 70.0% of the Company’s average interest earning assets in 2017 and account for the
greatest portion of total interest income. At December 31, 2017, the Company has the largest portion of its loan portfolio in
commercial loan products that represent 52.4% of total loans. These products include credits extended to businesses and
political subdivisions within its marketplace that are typically secured by commercial real estate, equipment, inventories, and
accounts receivable. The residential mortgage loans product segment represents 38.2% of total loans at December 31, 2017.
The Company has seen the proportion of commercial loan products to total loans increase in recent years and it will continue to
emphasize these types of loans. Notwithstanding this emphasis, the Company also anticipates a continued commitment to
financing the purchase or improvement of residential real estate in its market area.
The following table sets forth the composition of our loan portfolio, including net deferred costs, in dollar amount and as a
percentage of loans. There were no loans classified as loans held for sale at the dates indicated.
(Dollars in thousands)
Residential real estate
Commercial real estate
Commercial and tax exempt
Home equity and junior liens
Consumer loans
Total loans receivable
2016
2017
December 31,
2015
$221,623 38.2% $206,900 42.0% $189,367 44.0% $175,322 45.2% $168,493 49.3%
192,540 33.2% 150,569 30.6% 129,481 30.1% 125,883 32.5% 95,510 28.0%
111,786 19.2% 103,394 21.0% 83,016 19.3% 59,268 15.3% 52,241 15.3%
6.2%
26,235
1.2%
28,647
$580,831 100.0% $492,147 100.0% $430,438 100.0% $387,538 100.0% $341,633 100.0%
5.9% 21,223
4,166
1.1%
5.5% 22,905
4,160
1.1%
5.1% 23,688
4,886
1.3%
4.5% 24,991
6,293
4.9%
2013
2014
The following table shows the amount of loans outstanding, including net deferred costs, as of December 31, 2017 which, based
on remaining scheduled repayments of principal, are due in the periods indicated. Demand loans having no stated schedule of
repayments, no stated maturity, and overdrafts are reported as one year or less. Adjustable and floating rate loans are included
in the period on which interest rates are next scheduled to adjust, rather than the period in which they contractually mature.
Fixed rate loans are included in the period in which the final contractual repayment is due.
(In thousands)
Real estate:
Commercial real estate
Residential real estate
Commercial and tax exempt
Home Equity and junior liens
Consumer
Total loans
Due Under
One Year
Due 1-5
Years
Due Over
Five Years
Total
$
$
3,555 $
190
3,745
50,379
19
1,019
55,162 $
4,555 $ 184,430 $ 192,540
221,623
217,938
3,495
414,163
402,368
8,050
111,786
36,565
24,842
25,145
1,071
26,235
28,647
15,080
12,548
46,511 $ 479,158 $ 580,831
The following table sets forth fixed- and adjustable-rate loans at December 31, 2017 that are contractually due after December
31, 2017:
(In thousands)
Interest rates:
Fixed
Variable
Total loans
Due After
One Year
$
$
313,489
212,180
525,669
Total loans receivable, including net deferred costs, increased $88.7 million, or 18.0%, to $580.8 million at December 31, 2017
when compared to the prior year, primarily due to the growth in adjustable-rate commercial and commercial real estate loans,
and fixed-rate residential mortgage loans. The Company does not originate sub-prime, Alt-A, negative amortizing or other
higher risk structured residential mortgages. Commercial and commercial real estate loans increased $50.4 million, or 19.8%, to
$304.3 at December 31, 2017 as compared to $253.9 million at December 31, 2016. The Company maintained its previously
established credit standards, but continued to benefit from the growth of the office in downtown Syracuse that opened in 2014
and expanding relationship-derived business activity within the markets that the Bank serves.
- 47 -
Nonperforming Loans and Assets.
The following table represents information concerning the aggregate amount of nonperforming assets:
(Dollars In thousands)
Nonaccrual loans:
Commercial and commercial real estate loans
Consumer
Residential mortgage loans
Total nonaccrual loans
Total nonperforming loans
Foreclosed real estate
Total nonperforming assets
Accruing troubled debt restructurings
2017
2016
December 31,
2015
2014
2013
2,443
363
2,088
4,894
4,894
468
5,362
$
$
1,863
388
2,560
4,811
4,811
597
5,408
$
$
3,238
365
1,715
5,318
5,318
517
5,835
$
$
4,030
324
1,902
6,256
6,256
261
6,517
$
$
2,709
447
2,194
5,350
5,350
619
5,969
2,539
$
5,531
$
1,916
$
2,219
$
2,459
$
$
$
Nonperforming loans to total loans
Nonperforming assets to total assets
0.84%
0.61%
0.98%
0.72%
1.24%
0.94%
1.61%
1.16%
1.57%
1.18%
Nonperforming assets include nonaccrual loans, nonaccrual troubled debt restructurings (“TDR”), and foreclosed real estate
(“FRE”). Loans are considered a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to
the borrower that it would not otherwise consider. These modifications may include an extension of the term of the loan, and
granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the
loan or at maturity. TDRs are included in the above table within the categories of nonaccrual loans or accruing TDRs.
Total nonperforming loans increased $83,000 between December 31, 2016 and December 31, 2017, driven by a $580,000
increase in commercial and commercial real estate nonperforming loans, partially offset by decreases of $472,000 and $25,000
in nonperforming residential real estate and consumer loans, respectively. The increase in nonperforming commercial and
commercial real estate loans was comprised of 18 loans that were nonperforming at December 31, 2017 as compared to 12 loans
that were nonperforming at December 31, 2016. The decrease in nonperforming residential real estate loans was comprised of
28 loans that were nonperforming at December 31, 2017 as compared to 33 loans that were nonperforming at December 31,
2016. Management believes that the increases in nonperforming commercial and commercial real estate loans are transitory and
that the value of the collateral properties underlying the loans is sufficient to preclude any significant losses related to these
loans. Management continues to monitor and react to national and local economic trends as well as general portfolio conditions
which may impact the quality of the portfolio, and considers these environmental factors in support of the allowance for loan
loss reserve. Management believes that the current level of the allowance for loan losses, at $7.1 million at December 31, 2017,
adequately addresses the current level of risk within the loan portfolio, particularly considering the types and levels of
collateralization supporting the substantial majority of the portfolio. The Company maintains strict loan underwriting standards
and carefully monitors the performance of the loan portfolio.
Foreclosed Real estate (“FRE”) balances decreased by $129,000 at December 31, 2017, from the prior year and reflects the
timing of foreclosures versus sales in 2017. FRE properties decreased from seven to five between these two dates.
The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is
deemed unsatisfactory and the loan is past due 90 days or more. There are no loans that are past due 90 days or more and still
accruing interest. The Company considers a loan impaired when, based on current information and events, it is probable that
the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual
terms of the loan.
Had the loans in nonaccrual status performed in accordance with their original terms, additional interest income of $66,000 and
$51,000 would have been recorded for the years ended December 31, 2017 and December 31, 2016, respectively.
The measurement of impaired loans is based upon the fair value of the collateral or the present value of future cash flows
discounted at the historical effective interest rate for impaired loans when the receipt of contractual principal and interest is
probable. At December 31, 2017 and December 31, 2016, the Company had $9.2 million and $8.6 million in loans, which were
deemed to be impaired, each having specific reserves of $1.1 million. The $571,000 year-over-year increase in impaired loans
- 48 -
was principally due to a $428,000 increase in impaired commercial real estate loans, and a $245,000 increase in impaired
residential real estate loans. All other loan product segments (which include commercial loans, home equity loans, junior liens
and other consumer loans) reported modest year-over-year decreases in impaired loans of $102,000 in aggregate. The threshold
for individually measuring impairment on commercial real estate or commercial loans remains at $100,000 and for residential
mortgage loans remains at $300,000 at December 31, 2017. The thresholds described above do not apply to loans that have been
classified as troubled debt restructurings, which are individually measured for impairment at the time that the restructuring is
affected.
Appraisals are obtained at the time a real estate secured loan is originated. For commercial real estate held as collateral, the
property is inspected every two years.
Management has identified certain loans with potential credit which may result in the borrowers not being able to comply with
the current loan repayment terms and which may result in possible future impaired loan reporting. Potential problem loans
decreased $2.9 million to $4.0 million at December 31, 2017, compared to $6.9 million at December 31, 2016. These loans
have been internally classified as special mention, substandard, or doubtful, yet are not currently considered impaired. The
decrease in potential problem loans was primarily due to a $2.5 million decrease in potential problem commercial real estate
loans and a $453,000 decrease in potential problem commercial lines of credit. Potential problem loans decreased $41,000 in
aggregate within all other loan product segments. The $2.5 million decrease in potential problem commercial real estate loans in
2017 was primarily due to the repayment in full of a single commercial real estate loan with an outstanding balance of $2.1
million during 2017 that had been a classified as a TDR at December 31, 2016.
Total potential problem loans, including impaired loans, were $13.2 million at December 31, 2017, comprised of special
mention, substandard and doubtful loans of $3.0 million, $5.3 million and $4.9 million, respectively. Total problem loans were
$15.5 million at December 31, 2016, comprised of special mention, substandard and doubtful loans of $6.7 million, $7.5 million
and $1.3 million, respectively. Special mention and substandard loans declined $3.7 million and $2.2 million, respectively, at
December 31, 2017 as compared to December 31, 2016, partially offset by an increase of $3.6 million in loans classified as
doubtful. The increase in loans classified as doubtful was primarily due to increases of $2.1 million in commercial real estate
loans and $1.1 million in residential real estate loans. The increase of $2.2 million in commercial real estate loans classified as
doubtful at December 31, 2017, as compared to December 31, 2016, was primarily due to the classification of a single
commercial real estate loans as doubtful with an outstanding balance of $1.7 million. The increase of $1,1 million in residential
real estate loans classified as doubtful at December 31, 2017, as compared to December 31, 2016, was primarily due to the
classification of two residential real estate loans as doubtful with a combined outstanding balance of $810,000.
The Company measures delinquency based on the amount of past due loans as a percentage of total loans. The ratio of
delinquent loans to total loans increased to 2.12% at December 31, 2017 as compared to 1.98% at December 31, 2016.
Delinquent loans increased $2.6 million year-over-year which represented a rate of increase that was modestly more than the
rate of increase in total loan balances. At December 31, 2017, there were $12.4 million in loans past due including $4.3 million,
$3.2 million and $4.9 million in loans 30-59 days, 60-89 days, and greater than 90 days past due, respectively. At December 31,
2016, there were $9.8 million in loans past due including $3.6 million, $1.4 million and $4.8 million in loans 30-59 days, 60-89
days, and greater than 90 days past due, respectively.
The increase of $2.6 million in total loans past due at December 31, 2017, as compared to December 31, 2016, was primarily
due to an increase of $1.8 million in loans 60-89 days past due. The increase in loans 60-89 days past due at December 31,
2017, as compared to December 31, 2016, was primarily due to one commercial real estate loan with an outstanding balance of
$1.7 million that was 60-89 days past due at December 31, 2017. Loans delinquent 90 days and over represented 0.84% of the
total loan portfolio at December 31, 2017, as compared to 0.98% of the total loan portfolio at December 31, 2016.
The ratio of the allowance to loan losses to period-end loans at December 31, 2017 was 1.23% as compared to 1.27% at
December 31, 2016.
In the normal course of business, the Bank has, from time to time, sold residential mortgage loans and participation interests in
commercial loans. As is typical in the industry, the Bank makes certain representations and warranties to the buyer. Pathfinder
Bank maintains a quality control program for closed loans and considers the risks and uncertainties associated with potential
repurchase requirements to be minimal.
- 49 -
Allowance for Loan Losses
The allowance for loan losses is established through provision for loan losses and reduced by loan charge-offs net of recoveries.
The allowance for loan losses represents the amount available for probable credit losses in the Company’s loan portfolio as
estimated by management. In its assessment of the qualitative factors used in arriving at the required allowance for loan losses,
management considers changes in national and local economic trends, the rate of the portfolios’ growth, trends in delinquencies
and nonaccrual balances, changes in loan policy, and changes in management experience and staffing. These factors, coupled
with the recent historical loss experience within the loan portfolio by product segment support the estimable and probable losses
within the loan portfolio.
The Company establishes a specific allocation for all commercial loans identified as being impaired with a balance in excess of
$100,000 that are also on nonaccrual or have been risk rated under the Company’s risk rating system as substandard, doubtful,
or loss. The measurement of impaired loans is based upon either the present value of future cash flows discounted at the
historical effective interest rate or the fair value of the collateral, less costs to sell for collateral dependent loans. At December
31, 2017, the Bank’s position in impaired loans consisted of 51 loans totaling $9.2 million. Of these loans, 25 loans, totaling
$5.3 million, were valued using the present value of future cash flows method; and 26 loans, totaling $3.9 million, were valued
based on a collateral analysis. The Company uses the fair value of collateral, less costs to sell to measure impairment on
commercial and commercial real estate loans. Residential real estate loans in excess of $300,000 will also be included in this
individual loan review. Residential real estate loans less than this amount will be included in impaired loans if it is part of the
total related credit to a previously identified impaired commercial loan. The Company also establishes a specific allowance,
regardless to the size of the loan, for all loans subject to a troubled debt restructuring agreement.
The allowance for loan losses at December 31, 2017 and 2016 was $7.1 million and $6.2 million, or 1.23% and 1.27% of total
year end loans, respectively. Net loan charge-offs were $890,000 during 2017, as compared to $412,000 in 2016. The increase
in net loan charge-offs were reported in all loan categories and were led principally the result of the charging off of a single,
fully reserved-for in prior periods, commercial real estate loan in the amount of $565,000.
For further discussion of our allowance for loan losses procedures, please see “Business-Allowance for Loan Losses” and in
Note 6 to the consolidated financial statements contained in this Annual Report on Form 10-K.
The following table sets forth the allocation of allowance for loan losses by loan category for the periods indicated. The
allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
(Dollars in thousands)
Residential real estate
Commercial real estate
Commercial and tax exempt
Home equity and junior liens
Consumer loans
Unallocated
Total
2017
Allocation Percent of
of the Loans to
Allowance Total Loans
$
38.2 % $
33.1 %
19.2 %
4.5 %
4.9 %
865
3,589
1,950
514
208
-
7,126
$
100.0 % $
2016
Allocation Percent of
of the Loans to
Allowance Total Loans
2015
Allocation Percent of
of the Loans to
Allowance Total Loans
2014
Allocation Percent of
of the Loans to
Allowance Total Loans
2013
Allocation Percent of
of the Loans to
Allowance Total Loans
759
2,935
2,056
331
166
-
6,247
42.0 % $
30.6 %
21.0 %
5.1 %
1.3 %
100.0 % $
581
2,983
1,674
350
118
-
5,706
44.0 % $
30.1 %
19.3 %
5.5 %
1.1 %
100.0 % $
509
2,801
1,497
388
98
56
5,349
45.2 % $
32.5 %
15.3 %
5.9 %
1.1 %
100.0 % $
649
2,302
1,233
433
136
288
5,041
49.3%
28.0%
15.3%
6.2%
1.2%
100.0%
- 50 -
The following table sets forth the allowance for loan losses for the years indicated and related ratios:
(Dollars In thousands)
Balance at beginning of year
Provisions charged to operating expenses
Recoveries of loans previously charged-off:
$
2017
6,247
1,769
$
2016
5,706
953
$
2015
5,349
1,350
$
2014
5,041
1,205
$
2013
4,501
1,032
Commercial real estate and loans
Consumer and home equity
Residential real estate
Total recoveries
Loans charged off:
Commercial real estate and loans
Consumer and home equity
Residential real estate
Total charged-off
Net charge-offs
Balance at end of year
Net charge-offs to average loans outstanding
Allowance for loan losses to year-end loans
$
Deposits
15
46
13
74
(587)
(211)
(166)
(964)
(890)
7,126
$
0.16%
1.23%
31
63
13
107
48
69
40
157
(69)
(208)
(242)
(519)
(412)
6,247
$
0.09%
1.27%
(787)
(129)
(234)
(1,150)
(993)
5,706
$
0.25%
1.33%
23
52
2
77
(634)
(183)
(157)
(974)
(897)
5,349
$
0.25%
1.38%
41
71
47
159
(319)
(179)
(153)
(651)
(492)
5,041
0.15%
1.48%
The Company’s deposit base is drawn from nine full-service offices in its market area. The deposit base consists of demand
deposits, money management and money market deposit accounts, savings, and time deposits. Average deposits increased
$116.5 million, or 21.1%, in 2017. For the year ended December 31, 2017, 71.7% of the Company's average deposit base of
$670.0 million consisted of core deposits. Core deposits, which exclude time deposits, are considered to be more stable and
provide the Company with a lower cost source of funds than time deposits. The Company will continue to emphasize retail and
business core deposits by providing depositors with a full range of deposit product offerings and will maintain its recent focus
on deposit gathering within the Syracuse market.
At December 31, 2017, consumer deposits, and commercial and business deposits increased $107.7 million and $4.8 million,
respectively, partially offset by a decrease in municipal deposits of $2.0 million, when compared to December 31, 2016. The
increase in consumer deposits reflects the Bank’s increased market penetration among non-business customers, particularly in
northern Onondaga County, driven by the Bank’s focused marketing initiatives. The increase in commercial and business
deposits was the result of the Company’s successful execution of its strategy to expand products and services to our existing
commercial and business relationships within the markets that we serve.
Total deposits of $723.6 million at December 31, 2017 consisted in part of $94.1 million and $51.1 million in brokered money
market and certificate of deposit accounts, respectively. Brokered deposit represented 20.1% of all deposits at December 31,
2017. Total deposits of $611.0 million at December 31, 2016 consisted in part of $86.9 million and $42.8 million in brokered
money market and certificate of deposit accounts, respectively. Brokered deposit represented 21.2% of all deposits at December
31, 2016.
At December 31, 2017, time deposits in excess of $100,000 totaled $147.2 million, or 68.9% of time deposits and 20.3% of total
deposits. At December 31, 2016, these deposits totaled $130.4 million, or 68.9% of time deposits and 21.4% of total deposits.
The following table indicates the amount of the Company’s certificates of deposit of $100,000 or more by time remaining until
maturity as of December 31, 2017:
(In thousands)
Remaining Maturity:
Three months or less
Three through six months
Six through twelve months
Over twelve months
Total
$
$
55,215
28,715
24,498
38,723
147,151
- 51 -
Borrowings
Short-term borrowings are comprised primarily of advances and overnight borrowing at the FHLBNY. At December 31, 2017
and December 31, 2016 there were $30.6 million and $42.0 million, respectively, in short-term borrowings outstanding.
The following table represents information regarding short-term borrowings during 2017 and 2016.
(Dollars in thousands)
Maximum outstanding at any month end
Average amount outstanding during the year
Balance at the end of the period
Average interest rate during the year
Average interest rate at the end of the period
$
2017
41,600
31,268
30,600
$
1.34%
1.32%
2016
65,100
31,468
42,000
0.68%
0.85%
Long-term borrowed funds consist of advances from the FHLBNY. Long-term borrowed funds, totaled $43.3 million at
December 31, 2017 as compared to $17.0 million at December 31, 2016.
On October 15, 2015, the Company executed a $10.0 million non-amortizing Subordinated Loan with an unrelated third party
that is scheduled to mature on October 1, 2025. The Company has the right to prepay the Subordinated Loan at any time after
October 15, 2020 without penalty. The terms of the Subordinated Loan require interest payments at an annual interest rate of
3.50% from October 15, 2015 to February 29, 2016. The annual interest rate charged to the Company increased to 6.25% on
March 1, 2016 through the maturity date. The Subordinated Loan is senior in the Company’s credit repayment hierarchy only
to the Company’s common equity and, as a result, qualifies as Tier 2 capital for all future periods when applicable. The
Company paid $172,000 in origination and legal fees as part of this transaction. These fees will be amortized over the life of the
Subordinated Loan through its first call date using the effective interest method. The effective cost of funds related to this
transaction is 6.44% calculated under this method.
Capital
The Company’s shareholders’ equity increased $3.9 million, or 6.7%, to $61.8 million at December 31, 2017 from $57.9 million
at December 31, 2016. Shareholders’ equity was increased in 2017 by net income of $3.5 million and stock-based
compensation-related increases of $500,000 in additional paid in capital and $367,000 in accretion of unearned ESOP shares. In
addition, shareholder’s equity was increased in 2017 by $404,000 for decreases in accumulated other comprehensive loss, net of
tax. These increases to shareholders’ equity in 2017, totaling $4.2 million, were partially offset by common stock dividend
distributions of $880,000 paid during the year.
At December 31, 2017, the Company adopted ASU 2018-02 under the early adoption permissibility provisions of that Standard.
Accordingly, the Company elected to reclassify to retained earnings in the statement of stockholders’ equity the stranded tax
effects related to cumulative net unrealized losses on available-for-sale securities in AOCI related to the Tax Act. The Company
determined the amount of this adjustment using the portfolio approach as specified in the Standard. The reclassification, as it
relates to the Company, encompassed only the change in corporate income tax rates as other potential effects of the Tax Act
considered by the provisions of ASU 2018-02 were not considered to be applicable to the Company.
Risk-based capital provides the basis for which all banks are evaluated in terms of capital adequacy. Capital adequacy is
evaluated primarily by the use of ratios which measure capital against total assets, as well as against total assets that are
weighted based on defined risk characteristics. The Company’s goal is to support growth and expansion activities, while
maintaining a strong capital position and exceeding regulatory standards. At December 31, 2017, the Bank exceeded all
regulatory required minimum capital ratios and met the regulatory definition of a “well-capitalized” institution. See
“Supervision and Regulation – Federal Regulations – Capital Requirements.”
On February 16, 2016, the Company redeemed all 13,000 shares of the Series B Preferred Stock outstanding with the payment
of $13.0 million to the SBLF. This redemption was substantially financed by the issuance of the $10 million Subordinated Loan
on October 15, 2015. The issuance of the Subordinated Loan will increase interest expense by $644,000 per year but
prospectively reduce the amount payable to the SBLF in preferred stock dividends. Effective April 1, 2016, the annual dividend
rate for the preferred stock would have been 9.0%. The retirement of the $13.0 million of the SBLF Preferred Series B stock,
therefore, resulted in an annual reduction of preferred dividends payable of $1.2 million. The Company paid $0 and $16,000 in
- 52 -
preferred stock dividends in 2017 and 2016, respectively. These transactions had no effect on the regulatory capital position of
the Bank.
As a result of the Dodd-Frank Act, the Company’s ability to raise new capital through the use of trust preferred securities may
be limited because these securities will no longer be included in Tier 1 capital. In addition, our ability to generate or originate
additional revenue producing assets may be constrained in the future in order to comply with the new capital standards required
by federal regulation that took effect January 1, 2016. See Note 20 to the consolidated financial statements contained herein and
the regulation and supervision section within Part I of this Annual Report on Form 10-K for further discussion on regulatory
capital requirements.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined).
As of December 31, 2017, the Bank’s most recent notification from the Federal Deposit Insurance Corporation categorized the
Bank as “well-capitalized”, under the regulatory framework for prompt corrective action. To be categorized as “well-
capitalized”, the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios. There are no conditions or
events since that notification that management believes have changed the Bank’s category.
The regulations also impose a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted
assets above the amount necessary to meet its minimum risk-based capital requirements. The buffer is separate from the capital
ratios required under the Prompt Corrective Action (“PCA”) standards and imposes restrictions on dividend distributions and
discretionary bonuses. In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum the
following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. The capital
conservation buffer requirement began being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and
increasing each year until fully implemented at 2.5% on January 1, 2019. At December 31, 2017, the Bank exceeded all current
and projected regulatory required minimum capital ratios, including the maximum capital buffer level that will be required on
January 1, 2019.
LIQUIDITY
Liquidity management involves the Company’s ability to generate cash or otherwise obtain funds at reasonable rates to support
asset growth, meet deposit withdrawals, maintain reserve requirements, and otherwise operate the Company on an ongoing
basis. The Company's primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans and
maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While
scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and competition. The Company manages the pricing of
deposits to maintain a desired deposit balance. In addition, the Company invests excess funds in short-term interest-earning and
other assets, which provide liquidity to meet lending requirements.
The Company's liquidity has been enhanced by its ability to borrow from the FHLBNY, whose competitive advance programs
and lines of credit provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in deposits
in the future could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could
include, but are not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-
sale" investment securities, the sale of loans, or the sale of whole loans. Such actions could result in higher interest expense
costs and/or losses on the sale of securities or loans.
For the year ended December 31, 2017, cash and equivalents decreased by $428,000. The Company reported net cash flows
from financing activities of $126.7 million generated principally by an increase in deposits of $112.6 million and an increase in
long-term borrowings of $33.2 million, partially offset by a decrease in short-term borrowings of $18.3 million. Additionally,
$6.8 million was provided through operating activities. These cash flows were primarily invested in a net increases in loans
- 53 -
outstanding of $90.7 million and investment securities of $41.8 million net of proceeds from sales, maturities and principal
reductions during 2017.
Certificates of deposit due within one year of December 31, 2017 totaled $146.3 million, representing 68.6% of certificates of
deposit at December 31, 2017, an increase from 63.3% at December 31, 2016. We believe the large percentage of certificates of
deposit that mature within one year reflect customers’ hesitancy to invest their funds for long periods in the current low interest
rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds,
including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates
on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2017.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating
expenses, the Company is responsible for paying any dividends declared to its shareholders and making payments on its
subordinated loans. The Company may repurchase shares of its common stock. The Company’s primary sources of funds are
the proceeds it retained from the conversion and offering, interest and dividends on securities and dividends received from the
Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without prior
regulatory approval, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two
calendar years. The Company believes that this restriction will not have an impact on the Company's ability to meet its ongoing
cash obligations. At December 31, 2017 and 2016, the Company had cash and cash equivalents of $22.0 million and $22.4
million, respectively.
In June 2017, the Bank entered into a $26.0 million Irrevocable Stand-By Letter of Credit (“LOC”) with the FHLBNY as
another means of collateralizing public funds deposits. This letter of credit is due to expire in June 2018. These LOCs are
conditional commitments issued by the FHLBNY to guarantee the performance of the Bank with respect to large public funds
deposits. These deposits are placed with the Bank by entities, such as municipalities and other political subdivisions within the
Bank’s market area, and typically exceed the statutory FDIC deposit insurance limits for individual accounts. As a matter of
New York State statute, municipal depositors require that collateral be directly deposited by the Bank with an independent
safekeeping agent, or in certain cases, that LOCs be issued by a third party that is acceptable to the depositor. The Bank finds
that, with certain depositor relationships, this later method of collateralization for the benefit of the municipal depositors is more
economically efficient than posting specific securities with a safekeeping agent. The Bank committed a portion of its mortgage
loan portfolio as pledged collateral to the FHLBNY for the LOC. Loans encumbered as collateral for letters of credit reduce the
Bank’s available liquidity position in that available borrowing capacity with the FHLBNY is decreased substantially on a dollar-
for-dollar basis.
The Bank has a number of existing credit facilities available to it. At December 31, 2017, total credit available under the
existing lines of credit was approximately $182.4 million at FHLBNY, the FRB, and three other correspondent banks. At
December 31, 2017, the Company had $99.9 million of the available lines of credit utilized, including encumbrances supporting
the outstanding letters of credit, described above, on its existing lines of credit with the remainder of $82.5 million available.
The Asset Liability Management Committee of the Company is responsible for implementing the policies and guidelines for the
maintenance of prudent levels of liquidity. As of December 31, 2017, management reported to the board of directors that the
Bank was in compliance with its liquidity policy guidelines.
OFF-BALANCE SHEET ARRANGEMENTS
The Bank is also a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of
credit. At December 31, 2017, the Bank had $126.8 million in outstanding commitments to extend credit and standby letters of
credit. See Note 18 within the Notes to Consolidated Financial Statements contained herein.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required of a smaller reporting company.
- 54 -
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Pathfinder Bancorp, Inc.
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Condition – December 31, 2017 and 2016
Consolidated Statements of Income – Years ended December 31, 2017 and 2016
Consolidated Statements of Comprehensive Income – Years ended December 31, 2017 and 2016
Consolidated Statements of Changes in Shareholders’ Equity – Years ended December 31, 2017 and 2016
Consolidated Statements of Cash Flows – Years ended December 31, 2017 and 2016
Notes to Consolidated Financial Statements
Page
56
57
58
59
60
61
62
63
- 55 -
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with policies or procedures may deteriorate. The Company’s internal control over
financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal
financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the
Company’s financial statements for external reporting purposes in accordance with United States generally accepted accounting
principles.
Under the supervision and with the participation of management, including the Company’s principal executive officer and
principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial
reporting based on the framework in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on its evaluation under that framework, management concluded that the
Company’s internal control over financial reporting was effective as of December 31, 2017. In addition, based on our
assessment, management has determined that there were no material weaknesses in the Company’s internal controls over
financial reporting.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm
regarding internal control over financial reporting pursuant to the rules of the Dodd-Frank Act that exempts the Company from
such attestation and requires only management’s report.
/s/ Thomas W. Schneider
/s/ James A. Dowd
Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
Oswego, New York
March 30, 2018
James A. Dowd
James A. Dowd
Executive Vice President, Chief Operating Officer
and Chief Financial Officer
- 56 -
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Pathfinder Bancorp, Inc.
Oswego, New York:
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of condition of Pathfinder Bancorp, Inc. and subsidiaries (the
“Company”) as of December 31, 2017 and 2016 and the related consolidated statements of income, comprehensive income,
changes in shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2017 and the
related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and
the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over
financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2011.
Bonadio & Co., LLP
Syracuse, New York
March 30, 2018
/s/ BONADIO & CO., LLP
- 57 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Condition
(In thousands, except share and per share data)
ASSETS:
Cash and due from banks
Interest-earning deposits
Total cash and cash equivalents
Available-for-sale securities, at fair value
Held-to-maturity securities, at amortized cost (fair value of $66,426 and $54,429,
respectively)
Federal Home Loan Bank stock, at cost
Loans
Less: Allowance for loan losses
Loans receivable, net
Premises and equipment, net
Accrued interest receivable
Foreclosed real estate
Intangible assets, net
Goodwill
Bank owned life insurance
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing
Noninterest-bearing
Total deposits
Short-term borrowings
Long-term borrowings
Subordinated loans
Accrued interest payable
Other liabilities
Total liabilities
Shareholders' equity:
Common stock, par value $0.01; 25,000,000 authorized shares; 4,280,227 and 4,236,744
shares outstanding, respectively
Additional paid in capital
Retained earnings
Accumulated other comprehensive loss
Unearned ESOP
Total Pathfinder Bancorp, Inc. shareholders' equity
Noncontrolling interest
Total equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
December 31,
2017
December 31,
2016
$
$
$
$
9,708 $
12,283
21,991
171,138
66,196
3,855
580,831
7,126
573,705
16,117
3,047
468
182
4,536
11,742
8,280
881,257 $
633,820 $
89,783
723,603
30,600
43,288
15,059
186
6,377
819,113
43
28,170
39,020
(4,208)
(1,214)
61,811
333
62,144
881,257 $
6,968
15,451
22,419
141,955
54,645
3,250
492,147
6,247
485,900
15,177
2,532
597
198
4,536
11,458
6,367
749,034
535,701
75,282
610,983
41,947
17,000
15,025
75
5,643
690,673
43
27,483
35,619
(3,822)
(1,394)
57,929
432
58,361
749,034
- 58 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
Interest and dividend income:
Loans, including fees
Debt securities:
Taxable
Tax-exempt
Dividends
Federal funds sold and interest earning deposits
Total interest and dividend income
Interest expense:
Interest on deposits
Interest on short-term borrowings
Interest on long-term borrowings
Interest on subordinated loans
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Earnings and gain on bank owned life insurance
Loan servicing fees
Net gains on sales and redemptions of investment securities
Net gains (losses) on sales of loans and foreclosed real estate
Debit card interchange fees
Other charges, commissions & fees
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Building occupancy
Data processing
Professional and other services
Advertising
FDIC assessments
Audits and exams
Other expenses
Total noninterest expenses
Income before income taxes
Provision for income taxes
Net income attributable to noncontrolling interest and
Pathfinder Bancorp, Inc.
Net (loss) income attributable to noncontrolling interest
Net income attributable to Pathfinder Bancorp Inc.
Preferred stock dividends
Net income available to common shareholders
Earnings per common share - basic
Earnings per common share - diluted
Dividends per common share
For the
year ended
December 31, 2017
For the
year ended
December 31, 2016
$
24,392
$
3,598
1,038
229
156
29,413
3,904
997
595
794
6,290
23,123
1,769
21,354
1,130
284
149
489
37
578
1,512
4,179
11,917
2,196
1,779
952
809
473
353
2,709
21,188
4,345
922
3,423
(68)
3,491
-
3,491
0.86
0.83
0.215
$
$
$
$
$
$
$
$
20,703
2,327
865
134
64
24,093
2,441
301
270
792
3,804
20,289
953
19,336
1,141
307
138
594
(40)
557
1,486
4,183
10,772
1,936
1,682
834
730
345
329
2,482
19,110
4,409
1,111
3,298
26
3,272
16
3,256
0.79
0.78
0.200
The accompanying notes are an integral part of the consolidated financial statements.
- 59 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
Net Income
Other Comprehensive Loss
Retirement Plans:
Retirement plan net losses recognized in plan expenses
Plan (losses) gains not recognized in plan expenses
Net unrealized (loss) gain on retirement plans
Unrealized holding gains on financial derivative:
Change in unrealized holding gains on financial derivative
Reclassification adjustment for interest expense included in net income
Net unrealized gain on financial derivative
Unrealized holding gains (losses) on available for sale securities
Unrealized holding gains (losses) arising during the period
Reclassification adjustment for net gains included in net income
Net unrealized gain (loss) on available for sale securities
Accretion of net unrealized loss on securities transferred to held-to-maturity(1)
Other comprehensive income (loss), before tax
Tax effect
Other comprehensive income (loss), net of tax
Comprehensive income
Comprehensive (loss) income, attributable to noncontrolling interest
Comprehensive income attributable to Pathfinder Bancorp, Inc.
Tax Effect Allocated to Each Component of Other Comprehensive Loss
Retirement plan net losses recognized in plan expenses
Plan (losses) gains not recognized in plan expenses
Change in unrealized holding gains on financial derivative
Reclassification adjustment for interest expense included in net income
Unrealized holding gains (losses) arising during the period
Reclassification adjustment for net gains included in net income
Accretion of net unrealized loss on securities transferred to held-to-maturity(1)
Income tax effect related to other comprehensive income
Years Ended
December 31, 2017 December 31, 2016
3,298
$
3,423 $
150
(631)
(481)
-
-
-
1,454
(489)
965
191
675
(271)
404
3,827 $
(68) $
3,895 $
(61) $
252
-
-
(582)
196
(76)
(271) $
222
330
552
2
25
27
(2,394)
(594)
(2,988)
316
(2,093)
836
(1,257)
2,041
26
2,015
(87)
(134)
(1)
(10)
958
236
(126)
836
$
$
$
$
$
(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.
- 60 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
Years ended December 31, 2017 and December 31, 2016
(In thousands, except share and per share data)
$
Balance, January 1, 2017
Stock
- $
Stock
43 $
Preferred
Common
Additional
Paid in
Retained
Capital
Earnings
27,483 $ 35,619 $
Accumulated
Other Com-
prehensive
Unearned
Non-
controlling
Loss
ESOP
(3,822) $ (1,394) $
Interest
Total
432 $ 58,361
Net income (loss)
Other comprehensive income, net of tax
ESOP shares earned (24,442 shares)
Restricted stock awards (15,720 shares)
Stock based compensation
Stock options exercised
Common stock dividends declared ($0.215
per share)
Reclassification of effect of tax rate
change(1)
Distributions from affiliates
Balance, December 31, 2017
$
-
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
-
3,491
-
187
-
345
155
-
-
-
-
-
-
(880)
-
404
-
-
-
-
-
-
790
(790)
-
-
180
-
-
-
-
-
(68)
3,423
-
-
-
-
-
404
367
-
345
155
-
(880)
-
-
-
43 $
-
-
28,170 $ 39,020 $
-
-
(4,208) $ (1,214) $
(31)
(31)
333 $ 62,144
Balance, January 1, 2016
$ 13,000 $
44 $
28,717 $ 33,183 $
(2,565) $ (1,574) $
424 $ 71,229
Net income
Other comprehensive loss, net of tax
-
-
Preferred stock redemption (13,000 shares)
(13,000)
Preferred stock dividends - SBLF
ESOP shares earned (18,332 shares)
Stock based compensation
Stock options exercised
Purchase of common stock shares (143,400)
Common stock dividends declared ($0.20
per share)
Distributions from affiliates
Balance, December 31, 2016
$
-
-
-
-
-
-
-
- $
-
3,272
-
-
-
-
-
-
-
-
-
-
-
113
264
143
-
-
(16)
-
-
-
-
(1)
(1,754)
-
-
(820)
-
-
-
-
180
-
-
-
-
26
3,298
-
(1,257)
- (13,000)
-
-
-
-
(16)
293
264
143
-
(1,755)
-
(820)
(1,257)
-
-
-
-
-
-
-
-
-
-
43 $ 27,483 $35,619 $
-
-
(3,822) $ (1,394) $
(18)
(18)
432 $58,361
(1) Reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting from the
newly enacted Federal corporate income tax rate reduction from 34% to 21%.
The accompanying notes are an integral part of the consolidated financial statements.
- 61 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Cash Flows
(In thousands)
OPERATING ACTIVITIES
Net income attributable to Pathfinder Bancorp, Inc.
Adjustments to reconcile net income to net cash flows from operating activities:
Provision for loan losses
Deferred income tax (benefit)
Proceeds from sale of loans
Originations of loans held-for-sale
Realized (gains) losses on sales, redemptions and calls of:
Real estate acquired through foreclosure
Loans
Available-for-sale investment securities
Held-to-maturity investment securities
Depreciation
Amortization of mortgage servicing rights
Amortization of deferred loan costs
Amortization of deferred financing from subordinated debt
Earnings and gain on bank owned life insurance
Net amortization of premiums and discounts on investment securities
Amortization of intangible assets
Stock based compensation and ESOP expense
Net change in accrued interest receivable
Net change in other assets and liabilities
Net cash flows from operating activities
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale
Purchase of investment securities held-to-maturity
Net (purchases of) proceeds of Federal Home Loan Bank stock
Proceeds from maturities and principal reductions of investment securities available-for-sale
Proceeds from maturities and principal reductions of investment securities held-to-maturity
Proceeds from sales, redemptions and calls of:
Available-for-sale investment securities
Held-to-maturity investment securities
Real estate acquired through foreclosure
Realized gains on hedging activity
Net change in loans
Purchase of premises and equipment
Net cash flows from investing activities
FINANCING ACTIVITIES
Net change in demand deposits, NOW accounts, savings accounts, money management deposit accounts,
MMDA accounts and escrow deposits
Net change in time deposits
Net change in brokered deposits
Net change in short-term borrowings
Payments on long-term borrowings
Proceeds from long-term borrowings
Repayment of loan on cash surrender value of bank owned life insurance
Redemption of preferred stock - SBLF
Purchase of common stock
Proceeds from exercise of stock options
Cash dividends paid to preferred shareholder - SBLF
Cash dividends paid to common shareholders
Change in noncontrolling interest, net
Net cash flows from financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
CASH PAID DURING THE PERIOD FOR:
Interest
Income taxes
NON-CASH INVESTING ACTIVITY
Real estate acquired in exchange for loans
The accompanying notes are an integral part of the consolidated financial statements.
- 62 -
$
$
For the Years ended December 31,
2017
$
3,491
$
2016
3,272
953
(249 )
202
(197 )
50
(10 )
(456 )
(53 )
1,019
12
222
34
(307 )
1,211
16
557
(479 )
574
6,371
(145,264 )
(16,859 )
(826 )
68,506
3,659
30,228
3,000
279
(85 )
(62,733 )
(1,362 )
(121,457 )
57,830
28,594
34,244
17,147
(3,000 )
3,500
(536 )
(13,000 )
(1,755 )
143
(49 )
(866 )
8
122,260
7,174
15,245
22,419
3,928
970
390
1,769
(100 )
53
(53 )
(31 )
(6 )
(29 )
(32 )
1,035
28
322
34
(284 )
1,678
16
712
(515 )
(1,246 )
6,842
(132,748 )
(21,449 )
(605 )
38,262
7,080
65,010
2,635
993
(428 )
(90,718 )
(1,975 )
(133,943 )
92,470
18,329
1,821
(11,347 )
(7,000 )
33,228
-
-
-
155
-
(884 )
(99 )
126,673
(428 )
22,419
21,991
6,179
945
822
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The accompanying consolidated financial statements include the accounts of Pathfinder Bancorp, Inc. (the “Company”) and its
wholly owned subsidiary, Pathfinder Bank (the “Bank”). The Company is a Maryland corporation headquartered in Oswego,
New York. On October 16, 2014, the Company completed its conversion from the mutual holding company structure and the
related public offering and is now a stock holding company that is fully owned by the public. As a result of the conversion, the
mutual holding company and former mid-tier holding company were merged into Pathfinder Bancorp, Inc. The primary
business of the Company is its investment in Pathfinder Bank (the "Bank") which is 100% owned by the Company. The
Company sold 2,636,053 shares of common stock in the offering, including 105,442 shares sold to the Pathfinder Bank
employee stock ownership plan (“ESOP”). All shares were sold at a price of $10.00 per share raising $26.4 million in gross
proceeds. Additionally, $197,000 in cash was received from the merger of MHC into the company; and after accounting for
conversion related expenses of $1.5 million, the Company received $24.9 million in net proceeds. Concurrent with the
completion of the offering, publicly owned shares of Pathfinder Bancorp, Inc., a federal corporation, were exchanged for 1.6472
shares of the Company’s common stock. At December 31, 2017, 4,280,227 shares of common stock were outstanding. 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
(“FitzGibbons”), 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.
The Company has seven branch offices located in Oswego County and two branch offices in Onondaga County and one loan
production office in Oneida County. The Company is primarily engaged in the business of attracting deposits from the general
public in the Company’s market area, and investing such deposits, together with other sources of funds, in loans secured by
commercial real estate, business assets, one-to-four family residential real estate and investment securities.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates. Management has identified
the allowance for loan losses, deferred income taxes, pension obligations, the annual evaluation of the Company’s goodwill for
possible impairment and the evaluation of investment securities for other than temporary impairment and the estimation of fair
values for accounting and disclosure purposes to be the accounting areas that require the most subjective and complex
judgments, and as such, could be the most subject to revision as new information becomes available.
The Company is subject to the regulations of various governmental agencies. The Company also undergoes periodic
examinations by the regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of
required loss allowances, and operating restrictions resulting from the regulators' judgments based on information available to
them at the time of their examinations.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located primarily in Oswego and Onondaga counties of New York
State. A large portion of the Company’s portfolio is centered in residential and commercial real estate. The Company closely
monitors real estate collateral values and requires additional reviews of commercial real estate appraisals by a qualified third
party for commercial real estate loans in excess of $400,000. All residential loan appraisals are reviewed by an individual or
third party who is independent of the loan origination or approval process and was not involved in the approval of appraisers or
selection of the appraiser for the transaction, and has no direct or indirect interest, financial or otherwise in the property or the
transaction. Note 4 discusses the types of securities that the Company invests in. Note 5 discusses the types of lending that the
Company engages in. The Company does not have any significant concentrations to any one industry or customer.
Advertising
The Company follows the policy of charging the costs of advertising to expense as incurred.
- 63 -
Noncontrolling Interest
Noncontrolling interest represents the portion of ownership and profit or loss that is attributable to the minority owners of the
FitzGibbons Agency.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks and interest-bearing deposits (with original maturity
of three months or less).
Investment Securities
The Company classifies investment securities as either available-for-sale or held-to-maturity. The Company does not hold any
securities considered to be trading. Available-for-sale securities are reported at fair value, with net unrealized gains and losses
reflected as a separate component of shareholders’ equity, net of the applicable income tax effect. Held-to-maturity securities
are those that the Company has the ability and intent to hold until maturity and are reported at amortized cost.
Gains or losses on investment security transactions are based on the amortized cost of the specific securities sold. Premiums
and discounts on securities are amortized and accreted into income using the interest method over the period to maturity.
Note 4 to the consolidated financial statements includes additional information about the Company’s accounting policies with
respect to the impairment of investment securities.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of its district FHLB
according to a predetermined formula. The stock is carried at cost.
Transfers of Financial Assets
Transfers of financial assets, including sales of loans and loan participations, are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated
from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to
pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Loans
The Company grants mortgage, commercial, municipal, and consumer loans to customers. Loans that management has the
intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at their outstanding unpaid principal
balances, less the allowance for loan losses plus net deferred loan origination costs. The ability of the Company’s debtors to
honor their contracts is dependent upon the real estate and general economic conditions in the market area. Interest income is
generally recognized when income is earned using the interest method. Nonrefundable loan fees received and related direct
origination costs incurred are deferred and amortized over the life of the loan using the interest method, resulting in a constant
effective yield over the loan term. Deferred fees are recognized into income and deferred costs are charged to income
immediately upon prepayment of the related loan.
The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. The residential
mortgage segment consists of one-to-four family first-lien residential mortgages and construction loans. Commercial loans
consist of the following classes: real estate, lines of credit, other commercial and industrial, and tax-exempt loans. Consumer
loans include both home equity lines of credit and loans with junior liens and other consumer loans.
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the date of the
statement of condition and it is recorded as a reduction of loans. The allowance is increased by the provision for loan losses,
and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan
losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable
- 64 -
are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly
unlikely. Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis,
unless productive collection efforts are providing results. Consumer loans may be charged off earlier in the event of
bankruptcy, or if there is an amount that is deemed uncollectible. No portion of the allowance for loan losses is restricted to any
individual loan product and the entire allowance is available to absorb any and all loan losses.
The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably
anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on three
major components which are; specific components for larger loans, recent historical losses and several qualitative factors
applied to a general pool of loans, and an unallocated component.
The first component is the specific component that relates to loans that are classified as impaired. For these loans, an allowance
is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that
loan.
The second or general component covers pools of loans, by loan class, not considered impaired, smaller balance homogeneous
loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss
exposure first based on historical loss rates for each of these categories of loans. The ratio of net charge-offs to loans
outstanding within each product class, over the most recent eight quarters, lagged by one quarter, is used to generate the
historical loss rates. In addition, qualitative factors are added to the historical loss rates in arriving at the total allowance for
loan loss need 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 loss analysis and calculation.
The third or unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable
losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions
used in the methodologies for estimating specific and general losses in the portfolio and generally comprises less than 10% of
the total allowance for loan loss.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment status, collateral value and the probability of
collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and
shortfalls on a case-by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower,
including the length and reason for the delay, the borrower’s prior payment record and the amount of shortfall in relation to
what is owed. Impairment is measured by either the present value of the expected future cash flows discounted at the loan’s
effective interest rate or the fair value of the underlying collateral if the loan is collateral dependent. The majority of the
Company’s loans utilize the fair value of the underlying collateral.
An allowance for loan loss is established for an impaired loan if its carrying value exceeds its estimated fair value. The
estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the
loan’s collateral. For loans secured by real estate, estimated fair values are determined primarily through third-party appraisals,
less costs to sell. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to
be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment,
estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings
or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the
financial information or the quality of the assets.
Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately
identify individual residential mortgage loans less than $300,000, home equity and other consumer loans for impairment
disclosures, unless such loans are related to borrowers with impaired commercial loans or they are subject to a troubled debt
restructuring agreement. Loans that are related to borrowers with impaired commercial loans or are subject to a troubled debt
restructuring agreement are evaluated individually for impairment. .
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Commercial loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers
concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled
debt restructuring generally include but are not limited to a temporary reduction in the interest rate or an extension of a loan’s
stated maturity date. Commercial loans classified as troubled debt restructurings are designated as impaired and evaluated
individually as discussed above.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s
overall financial condition, repayment sources, guarantors and value of the collateral, if appropriate, are evaluated not less than
annually for commercial loans or when credit deficiencies arise on all loans. Credit quality risk ratings include regulatory
classifications of special mention, substandard, doubtful and loss. See Note 5 for a description of these regulatory
classifications.
In addition, Federal and State regulatory agencies, as an integral part of their examination process, periodically review the
Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination, which may not be currently available to
management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of
the allowance for loan losses is adequate.
Income Recognition on Impaired and Nonaccrual Loans
For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or 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. A loan may remain on accrual status if it is either well secured or guaranteed and in the
process of collection. When a loan is placed on nonaccrual status, unpaid interest is reversed and charged to interest income.
Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as
interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable
period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in
doubt. Nonaccrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the
modified terms, are current for six consecutive months after modification.
For nonaccrual loans, when future collectability of the recorded loan balance is expected, interest income may be recognized on
a cash basis. In the case where a nonaccrual loan had been partially charged off, recognition of interest on a cash basis is limited
to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in
excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully
recovered.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under
standby letters of credit. Such financial instruments are recorded when they are funded.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight-line basis over
the estimated useful lives of the related assets, ranging up to 40 years for premises and 10 years for equipment. Maintenance and
repairs are charged to operating expenses as incurred. The asset cost and accumulated depreciation are removed from the
accounts for assets sold or retired and any resulting gain or loss is included in the determination of income.
Foreclosed Real Estate
Physical possession of residential real estate property collateralizing a residential mortgage loan occurs when legal title is
obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through
completion of a deed-in-lieu of foreclosure or through a similar legal agreement. Properties acquired through foreclosure, or by
deed-in-lieu of foreclosure, are recorded at their fair value less estimated costs to sell. Fair value is typically determined based
on evaluations by third parties. Costs incurred in connection with preparing the foreclosed real estate for disposition are
capitalized to the extent that they enhance the overall fair value of the property. Any write-downs on the asset’s fair value less
costs to sell at the date of acquisition are charged to the allowance for loan losses. Subsequent write downs and expenses of
foreclosed real estate are included as a valuation allowance and recorded in noninterest expense.
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Goodwill and Intangible Assets
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. Goodwill is not amortized,
but is evaluated annually for impairment. Intangible assets, such as customer relationships, are amortized over their useful
lives, generally 15 years.
Mortgage Servicing Rights
Originated mortgage servicing rights are recorded at their fair value at the time of transfer of the related loans and are amortized
in proportion to, and over the period of, estimated net servicing income or loss. The carrying value of the originated mortgage
servicing rights is periodically evaluated for impairment or between annual evaluations under certain circumstances.
Stock-Based Compensation
Compensation costs related to share-based payment transactions are recognized based on the grant-date fair value of the stock-
based compensation issued. Compensation costs are recognized over the period that an employee provides service in exchange
for the award. Compensation costs related to the Employee Stock Ownership Plan are dependent upon the average stock price
and the shares committed to be released to plan participants through the period in which income is reported.
Retirement Benefits
The Company has a non-contributory defined benefit pension plan that covered substantially all employees. 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 will be 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. Pension expense under these plans is charged to
current operations and consists of several components of net pension cost based on various actuarial assumptions regarding
future experience under the plans.
Gains and losses, prior service costs and credits, and any remaining transition amounts that have not yet been recognized
through net periodic benefit cost are recognized in accumulated other comprehensive loss, net of tax effects, until they are
amortized as a component of net periodic cost. Plan assets and obligations are measured as of the Company’s statement of
condition date.
The Company has unfunded deferred compensation and supplemental executive retirement plans for selected current and former
employees and officers that provide benefits that cannot be paid from a qualified retirement plan due to Internal Revenue Code
restrictions. These plans are nonqualified under the Internal Revenue Code, and assets used to fund benefit payments are not
segregated from other assets of the Company, therefore, in general, a participant's or beneficiary's claim to benefits under these
plans is as a general creditor.
The Bank sponsors an Employee Stock Ownership Plan (“ESOP”) covering substantially all full time employees. The cost of
shares issued to the ESOP but not committed to be released to the participants is presented in the consolidated statement of
condition as a reduction of shareholders’ equity. ESOP shares are released to the participants on an annual basis in accordance
with a predetermined schedule. The Company records ESOP compensation expense based on the shares committed to be
released and allocated to the participant’s accounts multiplied by the average share price of the Company’s stock over the
period. Dividends related to unallocated shares are recorded as compensation expense.
Derivative Financial Instruments
Derivatives are recorded on the statement of condition as assets and liabilities measured at their fair value. The accounting for
increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify in
whole or in part for the provisions of hedge accounting. The Company had one interest rate swap, which has been determined
to be a cash flow hedge that expired in 2016 and was not renewed. The fair value of cash-flow hedging instruments (“Cash
Flow Hedge”) are recorded in either other assets or other liabilities. On an ongoing basis, the statement of condition is adjusted
to reflect the then current fair value of the Cash Flow Hedge. The related gains or losses are reported in other comprehensive
income (loss) and are subsequently reclassified into earnings, as a yield adjustment in the same period in which the related
interest on the hedged item (primarily a variable-rate debt obligation) affects earnings. To the extent that the Cash Flow Hedge
is not effective, the ineffective portion of the Cash Flow Hedge is immediately recognized as interest expense.
- 67 -
As a hedge against rising short-term interest rates, the Company sold a series of U.S. Treasury securities in the amount of $40
million during 2017. The Company was in controlling possession of, but did not own, the securities which had been received as
collateral, under industry-standard repurchase agreements, for a corresponding series of 30-day loans of approximately $40
million on each occurrence to an unrelated third party at market rates of interest. The sale of these securities provided the funds
necessary to advance the loan to the third party and placed the Company in what is generally described as a “short position”
with respect to the sold U.S. Treasury securities. This transaction acted as a hedge against rising short-term interest rates
because the price of the sold securities would be expected to decline in a rising short-term interest rate environment and could
be subsequently re-acquired at the conclusion of the 30-day loan period at a price lower than the price at which it was originally
sold. Short-term rates generally rose during the successive 30-day loan periods and, consequently, the Company recognized
gains on the sale of those securities in the amount of $428,000 when the Treasury securities were repurchased.
In 2016 the Company sold a U.S. Treasury security in the amount of $25 million which had been received as collateral, under an
industry-standard repurchase agreement, for a 30-day loan of approximately $25 million to an unrelated third party, at no
interest. The sale of this security provided the funds necessary to advance the loan to the third party and placed the Company in
what is generally described as a “short position” with respect to the sold U.S. Treasury securities. Short-term rates rose during
the 30-day loan periods and, consequently, the Company recognized a gain on the sale of the security in the amount of $85,000.
The hedge positions were closed on December 31, 2017 and 2016.
Income Taxes
Provisions for income taxes are based on taxes currently payable or refundable and deferred income taxes on temporary
differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.
Deferred tax assets and liabilities are reported in the consolidated financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.
On December 22, 2017 the Tax Act was signed into law. The Tax Act instituted significant changes to various sections of the
Internal Revenue Code that effects the Company. Most notably, the Tax Act reduces the Company’s marginal federal income
tax rate from 34% to 21% starting January 1, 2018. Generally Accepted Accounting Principles (“GAAP”) requires that the
impact of the provisions of the Tax Act be accounted for in the period of enactment. Accordingly, the Company recorded an
income tax benefit in the fourth quarter of 2017 related to the Tax Act in the amount of $155,000. The reduction in income tax
expense was largely attributable to the reduction in the value of net deferred tax assets and liabilities reflecting lower future tax
obligations resulting from the Tax Act’s enacted lower federal corporate tax rate.
Earnings Per Share
Basic earnings per common share are computed by dividing net income, after preferred stock dividends and preferred stock
discount accretion, by the weighted average number of common shares outstanding throughout each year. Diluted earnings per
share gives effect to weighted average shares that would be outstanding assuming the exercise of issued stock options using the
treasury stock method. Unallocated shares of the Company’s ESOP plan are not included when computing earnings per share
until they are committed to be released.
Segment Reporting
The Company has evaluated the activities relating to its strategic business units. The controlling interest in the FitzGibbons
Agency is dissimilar in nature and management when compared to the Company’s other strategic business units which are
judged to be similar in nature and management. The Company has determined that the FitzGibbons Agency is below the
reporting threshold in size in accordance with Accounting Standards Codification 280. Accordingly, the Company has
determined it has no reportable segments.
Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the
statement of condition, such items, along with net income, are components of comprehensive income.
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Accumulated other comprehensive loss represents the sum of these items, with the exception of net income, as of the balance
sheet date and is represented in the table below.
Accumulated Other Comprehensive Loss By Component:
Unrealized loss for pension and other postretirement obligations
Tax effect
Net unrealized loss for pension and other postretirement obligations
Unrealized loss on available-for-sale securities
Tax effect
Net unrealized loss on available-for-sale securities
Unrealized loss on securities transferred to held-to-maturity
Tax effect
Net unrealized loss on securities transferred to held-to-maturity
Accumulated other comprehensive loss
As of December 31,
2017
(3,003) $
783
(2,220)
(2,108)
550
(1,558)
(585)
155
(430)
(4,208) $
2016
(2,520)
1,007
(1,513)
(3,072)
1,227
(1,845)
(774)
310
(464)
(3,822)
$
$
(1) Reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting from the
newly enacted Federal corporate income tax rate reduction from 34% to 21%.
Reclassifications
Certain amounts in the 2016 consolidated financial statements have been reclassified to conform to the current year
presentation. These reclassifications had no effect on net income as previously reported.
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NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS
The following Table provides a description of accounting standards that were adopted in 2017 as well as standards that are
currently effective but could have an impact on the Company's consolidated financial statements upon adoption.
Standard
Standards Adopted in 2017
Description
Improvements to Employee
Share-Based Payment Accounting
(ASU 2016-09: Compensation—
Stock Compensation [Topic 718]:
Improvements to Employee
Share-Based Payment
Accounting)
The amended guidance requires that all
excess tax benefits and tax deficiencies
related to share-based compensation be
recognized in income tax expense in the
income statement and that such amounts
be recognized in the period in which the
tax deduction arises or in the period in
which an expiration of an award occurs.
Required Date of
Implementation
Effect on Consolidated Financial
Statements
January 1, 2017
The adoption of this guidance resulted
in a $37,000 reduction of income tax
expense for the year ended December
31, 2017 that under previous accounting
guidance would have been recognized
directly in shareholders’ equity.
Simplifying the Transition to
Equity Method of Accounting
(ASU 2016-07: Investments—
Equity Method and Joint Ventures
[Topic 323]: Simplifying the
Transition to the Equity Method
of Accounting)
Derivatives and Hedging
Amendments (ASU 2016-05:
Derivatives and Hedging [Topic
815]: Effect of Derivative
Contract Novations on Existing
Hedge Accounting Relationships)
Reclassification of Certain Tax
Effects from Accumulated Other
Comprehensive Income (ASU
2018-02: Income Statement—
Reporting Comprehensive Income
[Topic 220]: Reclassification of
Certain Tax Effects from
Accumulated Other
Comprehensive Income)
The amended guidance eliminates the
requirement that an investor
retroactively apply the equity method of
accounting as a result of an increase in
the level of ownership interest or degree
of influence. The amended guidance
instead requires the investor to adopt the
equity method of accounting as of the
date the investment first qualifies for
such accounting.
One amendment clarifies that a change
in the counterparty to a derivative
instrument that has been designated as
the hedging instrument does not, in and
of itself, require dedesignation of that
hedging relationship provided that all
other hedge accounting criteria continue
to be met. A second amendment clarifies
the requirements for assessing whether
contingent call (put) options that can
accelerate the payment of principal on
debt instruments are clearly and closely
related to their debt hosts.
The amended guidance allows a
reclassification from accumulated other
comprehensive income to retained
earnings for stranded tax effects
resulting from the newly enacted federal
corporate income tax rate. The amount
of reclassification would be the
difference between the historical
corporate income tax and the new
enacted 21 percent corporate income tax
rate.
January 1, 2017
The adoption of this guidance did not
have a material effect on the Company’s
consolidated financial position or results
of operations.
January 1, 2017
The adoption of this guidance did not
have a material effect on the Company’s
consolidated financial position or results
of operations.
January 1, 2018
(Early adoption
permitted)
The Company early adopted the
amended guidance following enactment
of the Tax Act in 2017. The adoption of
this guidance resulted in a $790,000
reclassification from AOCI to retained
earnings.
- 70 -
Standard
Description
Standards Not Yet Adopted as of December 31, 2017
Required Date of
Implementation
Effect on Consolidated Financial
Statements
The Company adopted the revenue
recognition guidance effective January
1, 2018, and expects to apply the
modified retrospective approach for
reporting purposes. A significant
amount of the Company’s revenues are
derived from net interest income on
financial assets and liabilities, which are
excluded from the scope of the amended
guidance. With respect to noninterest
income, under the new guidance credit
card interchange revenue will be
presented net of rewards expense in
other revenues from operations. For the
years ended December 31, 2017 and
2016, The Company recognized
$94,000 and $111,000, respectively, of
credit card rewards expense in other
costs of operations. The adjustment to
beginning retained earnings as well as
the impact of any changes in the timing
of revenue recognition of noninterest
income items within the scope of this
guidance will not be material to the
Company’s financial position or results
of operations.
The Company held marketable equity
securities with a fair value of $515,000
in its available-for-sale portfolio at
December 31, 2017. Effective January
1, 2018, fair value changes in such
equity securities will be recognized in
the consolidated statement of income as
opposed to AOCI where they had been
recognized under previous accounting
guidance. Although those securities
have historically fluctuated in value,
how those securities could change in
value in the future is not predictable.
January 1, 2019
(Early adoption
permitted)
The Company adopted the amended
guidance on January 1, 2018 and does
not expect such adoption will have a
material impact on its consolidated
financial statements.
Revenue from Contracts with
Customers (ASU 2014-09:
Revenue from Contracts with
Customers [Topic 606])
The core principle of the accounting
guidance is that an entity should
recognize revenue to depict the transfer
of promised goods or services to
customers in an amount that reflects the
consideration to which the entity expects
to be entitled in exchange for those
goods or services.
January 1, 2018
January 1, 2018
Recognition and Measurement of
Financial Assets and Financial
Liabilities (ASU 2016-01:
Financial Instruments—Overall
[Subtopic 825-10]: Recognition
and Measurement of Financial
Assets and Financial Liabilities)
Improvements to Accounting
for Hedging Activities (ASU
2017-12: Derivatives and
Hedging [Topic 815]: Targeted
Improvements to Accounting for
Hedging Activities)
The amended guidance requires equity
investments (excluding those accounted
for under the equity method of
accounting or those that result in
consolidation of the investee) be
measured at fair value with changes in
fair value recognized in net income,
public entities to use the exit price when
measuring the fair value of financial
instruments for disclosure purposes, and
an entity to present separately in other
comprehensive income a change in the
instrument-specific credit risk when the
entity has elected to measure a liability
at fair value in accordance with the fair
value option.
The amended guidance expands and
clarifies hedge accounting for
nonfinancial and financial risk
components, aligns the recognition and
presentation of the effects of the hedging
instrument and hedged item in the
financial statements, and simplifies the
requirements for assessing effectiveness
in a hedging relationship.
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Standard
Description
Standards Not Yet Adopted as of December 31, 2017
Required Date of
Implementation
Effect on Consolidated Financial
Statements
Improving the Presentation of Net
Periodic Pension Cost and Net
Periodic Postretirement Benefit
Cost (ASU 2017-07:
Compensation — Retirement
Benefits [Topic 715] Improving
the Presentation of Net Periodic
Pension Cost and Net Periodic
Postretirement Benefit Cost)
Scope of Modification
Accounting for Share-Based
Payment Awards (ASU 2016-09:
Compensation — Stock
Compensation [Topic 718]:
Improvements to Employee
Share-Based Payment
Accounting)
Restricted Cash (ASU 2016-18:
Statements of Cash Flows [Topic
230]: Restricted Cash)
The amended guidance requires the
service cost component of the net
periodic pension cost and net periodic
postretirement benefit cost to be
reported in the same line item in the
income statement as other compensation
costs arising from services rendered by
the pertinent employees during the
period. The amendments also require
that the other components of net benefit
costs be presented separately from the
service cost component.
January 1, 2018
The Company adopted the new
reporting requirements effective January
1, 2018. The Company has previously
reported all of its net periodic pension
and postretirement benefit costs in
salaries and employee benefits within
the consolidated statement of
income. Information about net periodic
pension and postretirement benefit costs
that were not service cost-related is
included in Note 14.
The amended guidance addresses which
changes to the terms and conditions of a
share-based payment award require an
entity to apply modification accounting.
January 1, 2018
The Company adopted the amended
guidance on January 1, 2018. The
guidance is to be applied on a
prospective basis for awards modified
on or after the adoption date.
The amended guidance requires that
restricted cash and restricted cash
equivalents be included with cash and
cash equivalents when reconciling the
beginning-of-period and end-of-period
total amounts shown on the statement of
cash flows. In addition, when cash, cash
equivalents, and restricted cash or
restricted cash equivalents are presented
in more than one line item within the
statement of financial position, the line
items and amounts must be presented on
the face of the statement of cash flows or
disclosed in the notes to the financial
statements. Information about the nature
of restrictions on an entity’s cash and
cash equivalents must also be disclosed.
January 1, 2018
The guidance will be applied using a
retrospective transition method
beginning with first quarter 2018
reporting.
Classification of Certain Cash
Receipts and Cash Payments
(ASU 2016-15: Statement of Cash
Flows [Topic 230]: Classification
of Certain Cash Receipts and
Cash Payments)
This amendment provides clarifying
guidance for classifying cash inflows or
outflows on the statement of cash flows
where current guidance is unclear or
silent.
January 1, 2018
The guidance will be applied using a
retrospective transition method
beginning with first quarter 2018
reporting.
Clarifying the Definition of a
Business (ASU 2017-01: Business
Combinations [Topic 805]:
Clarifying the Definition of a
Business)
The amended guidance clarifies the
definition of a business for purposes of
evaluating whether transactions would
be accounted for as acquisitions (or
disposals) of assets or businesses.
January 1, 2018
The guidance should be applied using a
prospective transition method. The
Company does not expect the guidance
to have a material impact on its
consolidated financial statements.
- 72 -
Standard
Description
Standards Not Yet Adopted as of December 31, 2017
Required Date of
Implementation
Effect on Consolidated Financial
Statements
Leases (ASU 2016-02: Leases
[Topic 842])
The new guidance requires lessees to
record a right-of-use asset and a lease
liability for all leases with a term greater
than 12 months. While the guidance
requires all leases to be recognized in
the balance sheet, there continues to be a
differentiation between finance leases
and operating leases for purposes of
income statement recognition and cash
flow statement presentation. For finance
leases, interest on the lease liability and
amortization of the right-of-use asset
will be recognized separately in the
statement of income. Repayments of
principal on those lease liabilities will be
classified within financing activities and
payments of interest on the lease liability
will be classified within operating
activities in the statement of cash
flows. For operating leases, a single
lease cost is recognized in the statement
of income and allocated over the lease
term, generally on a straight-line
basis. All cash payments are presented
within operating activities in the
statement of cash flows. The accounting
applied by lessors is largely unchanged
from existing GAAP, however, the
guidance eliminates the accounting
model for leveraged leases for leases
that commence after the effective date of
the guidance.
January 1, 2019
(Early adoption
permitted)
The Company occupies certain banking
offices and uses certain equipment
under noncancelable operating lease
agreements which currently are not
reflected in its consolidated balance
sheet. Upon adoption of the guidance,
the Company expects to report
increased assets and increased liabilities
as a result of recognizing right-of-use
assets and lease liabilities on its
consolidated balance sheet. The
Company was committed to $1.1
million of minimum lease payments
under noncancelable operating lease
agreements at December 31, 2017. The
Company does not expect the new
guidance will have a material impact to
its consolidated statement of income.
Premium Amortization on
Purchased Callable Debt
Securities (ASU 2017-08:
Receivables—Nonrefundable
Fees and Other Costs [Subtopic
310-20]: Premium Amortization
on Purchased Callable Debt
Securities)
The amended guidance requires the
premium on callable debt securities to be
amortized to the earliest call date. The
amendments do not require an
accounting change for securities held at
a discount; the discount continues to be
amortized to maturity.
January 1, 2019
(Early adoption
permitted)
The amendments should be applied on a
modified retrospective basis through a
cumulative-effect adjustment directly to
retained earnings as of the beginning of
the period of adoption. The Company
does not expect the guidance to have a
material impact on its consolidated
financial statements.
- 73 -
Standard
Description
Standards Not Yet Adopted as of December 31, 2017
Required Date of
Implementation
Effect on Consolidated Financial
Statements
Measurement of Credit Losses on
Financial Instruments (ASU 2016-
13: Financial Instruments—
Credit Losses [Topic 326]:
Measurement of Credit Losses on
Financial Instruments)
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.
January 1, 2020
(Early adoption
permitted as of
January 1, 2019)
Simplifying the Test for Goodwill
Impairment (ASU 2017-04:
Intangibles—Goodwill and Other
[Topic 350]: Simplifying the Test
for Goodwill Impairment)
The amended guidance eliminates Step 2
from the goodwill impairment test.
January 1, 2020
(Early adoption
permitted)
- 74 -
The Company is assessing the new
guidance to determine what
modifications to existing credit
estimation processes may be required.
The Company expects that the new
guidance will result in an increase in its
allowance for credit losses as a result of
considering credit losses over the
expected life of its loan and debt
securities portfolios. Increases in the
level 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. 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 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
Description
Standards Not Yet Adopted as of December 31, 2017
Required Date of
Implementation
Effect on Consolidated Financial
Statements
Share-based Payment Awards
(ASU 2017-11: Earnings per
Share [Topic 260])
The amended guidance clarifies which
changes to the terms or conditions of a
share-based payment award require an
entity to apply modification accounting
in FASB Topic 18. An entity should
account for the effects of a modification
unless specific criteria regarding fair
value, vesting condition, and
classification are met. The current
disclosure requirements in FASB Topic
18 apply regardless of whether an entity
is required to apply modification
accounting under the amendments in this
guidance.
January 1, 2018
The guidance will be applied using a
prospective transition method. The
Company does not expect the guidance
to have a material impact on its
consolidated financial statements.
NOTE 3: EARNINGS PER SHARE
Basic earnings per share are 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. 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. 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 23,065 and 214,415 for the years ended
2017 and 2016, respectively. 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.
The following table sets forth the calculation of basic and diluted earnings per share.
(In thousands, except per share data)
Basic Earnings Per Common Share
Net income available to common shareholders
Weighted average common shares outstanding
Basic earnings per common share
Diluted Earnings Per Common Share
Net income available to common shareholders
Weighted average common shares outstanding
Effect of assumed exercise of stock options
Diluted weighted average common shares outstanding
Diluted earnings per common share
Years ended
December 31,
2017
3,491 $
4,081
0.86 $
3,491 $
4,081
108
4,189
0.83 $
2016
3,256
4,105
0.79
3,256
4,105
85
4,190
0.78
$
$
$
$
- 75 -
NOTE 4: INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are summarized as follows:
(In thousands)
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total
Equity investment securities:
Common stock - financial services industry
Total
Total available-for-sale
Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total held-to-maturity
December 31, 2017
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
$
$
$
41,489 $
13,960
8,584
6,662
36,214
54,481
11,193
172,583
663
663
173,246 $
4,948 $
35,130
8,311
6,853
7,574
3,380
66,196 $
1 $
12
108
12
23
-
62
218
72
72
290 $
14 $
641
151
53
83
7
949 $
(154) $
(291)
(92)
(30)
(495)
(1,133)
(203)
(2,398)
41,336
13,681
8,600
6,644
35,742
53,348
11,052
170,403
-
-
(2,398) $
735
735
171,138
(14) $
(311)
(159)
(10)
(215)
(10)
(719) $
4,948
35,460
8,303
6,896
7,442
3,377
66,426
- 76 -
(In thousands)
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total
Equity investment securities:
Mutual funds:
Ultra short mortgage fund
Common stock - financial services industry
Total
Total available-for-sale
Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total held-to-maturity
December 31, 2016
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
$
$
$
24,263 $
17,185
15,560
6,696
31,204
42,124
6,682
143,714
643
663
1,306
145,020 $
4,928 $
30,697
8,240
6,386
2,927
1,467
54,645 $
1 $
33
20
5
-
45
-
104
-
13
13
117 $
30 $
572
85
31
96
-
814 $
(80) $
(737)
(385)
(37)
(638)
(1,183)
(105)
(3,165)
24,184
16,481
15,195
6,664
30,566
40,986
6,577
140,653
(17)
-
(17)
(3,182) $
626
676
1,302
141,955
(18) $
(693)
(228)
(20)
-
(71)
(1,030) $
4,940
30,576
8,097
6,397
3,023
1,396
54,429
The majority of the Company’s investments in mortgage-backed securities include pass-through securities and collateralized
mortgage obligations issued and guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. At December 31, 2017, the
Company also held a total of seventeen private-label mortgage-backed securities or collateralized mortgage obligations with an
aggregate book balance of $25.2 million and six private-label asset backed securities collateralized by consumer loans with an
aggregate book balance of $6.0 million. At December 31, 2016, the Company held a total of seven private-label mortgage-
backed securities or collateralized mortgage obligations with an aggregate book balance of $9.8 million and five private-label
asset backed securities collateralized by consumer loans with an aggregate book balance of $6.7 million. These investments are
relatively short-duration securities with significant credit enhancements. The Company’s investments in state and political
obligation securities are generally municipal obligations that are categorized as general obligations of the issuer that are
supported by the overall taxing authority of the issuer, and in some cases are insured. The obligations issued by school districts
are generally supported by state administered insurance funds or credit enhancement programs.
- 77 -
The amortized cost and estimated fair value of debt investments at December 31, 2017 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.
Available-for-Sale
Held-to-Maturity
(In thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Sub-total
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Totals
$
Amortized
Cost
21,555 $
28,957
11,587
8,596
70,695
36,214
54,481
11,193
172,583 $
$
Estimated
Fair Value
Amortized
Cost
1,680 $
11,381
16,993
18,335
48,389
6,853
7,574
3,380
66,196 $
Estimated
Fair Value
1,680
11,488
17,479
18,064
48,711
6,896
7,442
3,377
66,426
21,506 $
28,830
11,642
8,283
70,261
35,742
53,348
11,052
$
170,403
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, is as follows:
Less than Twelve Months
Number of
Individual Unrealized
Securities
December 31, 2017
Twelve Months or More
Total
Number of
Number of
Fair Individual Unrealized
Fair Individual Unrealized
Losses Value Securities
Losses Value Securities
Fair
Losses Value
(Dollars in thousands)
Available-for-Sale Portfolio
US Treasury, agencies and GSE's
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Totals
Held-to-Maturity Portfolio
US Treasury, agencies and GSE's
State and political subdivisions
Corporate
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Totals
(49) $13,957
(267) 5,041
(73) 1,727
742
(13)
(336) 10,463
(938) 25,395
-
(1,676) $57,325
-
(12) $
988
(256) 8,644
(149) 2,087
-
-
-
(417) $11,719
-
-
-
9 $
30
3
3
24
35
4
108 $
3 $
19
4
2
2
1
31 $
(154) $ 41,316
7,521
(291)
3,518
(92)
3,865
(30)
(495) 32,014
(1,133) 49,185
7,439
(2,398) $144,858
(203)
(14) $
2,978
(311) 14,312
3,499
(159)
1,909
(10)
4,418
(215)
1,119
(10)
(719) $ 28,235
5 $
18
2
2
15
14
4
60 $
2 $
8
3
2
2
1
18 $
(105) $27,359
(24) 2,480
(19) 1,791
(17) 3,123
(159) 21,551
(195) 23,790
(203) 7,439
(722) $87,533
(2) $ 1,990
(55) 5,668
(10) 1,412
(10) 1,909
(215) 4,418
(10) 1,119
(302) $16,516
4 $
12
1
1
9
21
-
48 $
1 $
11
1
-
-
-
13 $
- 78 -
(Dollars in thousands)
Available-for-Sale Portfolio
US Treasury, agencies and GSE's
State and political subdivisions
Corporate
Asset backed securities
Equity and other investments
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Totals
Held-to-Maturity Portfolio
US Treasury, agencies and GSE's
State and political subdivisions
Corporate
Residential mortgage-backed - US agency
Collateralized mortgage obligations - Private label
Totals
Less than Twelve Months
Number of
Individual Unrealized
Securities
December 31, 2016
Twelve Months or More
Total
Number of
Number of
Fair Individual Unrealized
Fair Individual Unrealized
Losses Value Securities
Losses Value Securities
Fair
Losses Value
6 $
53
10
3
1
23
28
5
129 $
1 $
16
5
3
1
26 $
(37)
(17)
(80) $ 22,161
(737) 14,057
(385) 10,587
4,455
626
(638) 29,849
(1,087) 33,376
6,577
(3,086) $121,688
(105)
(18) $
982
(693) 10,038
4,402
(228)
1,869
(20)
1,396
(71)
(1,030) $ 18,687
- $
-
-
-
-
-
4
-
4 $
- $
-
-
-
-
- $
- $
-
-
-
-
-
-
-
-
-
-
-
(96) 2,514
-
(96) $ 2,514
-
- $
-
-
-
-
- $
-
-
-
-
-
-
6 $
53
10
3
1
23
32
5
133 $
1 $
16
5
3
1
26 $
(37)
(17)
(80) $ 22,161
(737) 14,057
(385) 10,587
4,455
626
(638) 29,849
(1,183) 35,890
6,577
(3,182) $124,202
(105)
(18) $
982
(693) 10,038
4,402
(228)
1,869
(20)
1,396
(71)
(1,030) $ 18,687
The Company conducts a formal review of investment securities on a quarterly basis for the presence of other-than-temporary
impairment (“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 other securities within the portfolio as of December 31, 2017
represents OTTI. All securities which have been in an unrealized loss position for 12 months or more 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 relate 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. At December 31, 2016, the Company
had one mutual fund investment, categorized as an equity security, with a fair value below its book value. This security, which
was sold in 2017, at a realized loss $19,000, represented an ownership interest in a mutual fund primarily invested in adjustable-
rate mortgage securities. This security had a fair value of $626,000 at December 31, 2016 and that value was $17,000 below its
book value at that date.
Proceeds of $67.6 million and $33.2 million, respectively on sales and redemptions of securities for the years ended December
31 resulted in gross realized gains (losses) detailed below:
(In thousands)
Realized gains on investments
Realized gains on hedging activity
Realized losses on investments
2017
427 $
428
(366)
489 $
2016
526
85
(17)
594
$
$
- 79 -
As of December 31, 2017 and December 31, 2016, securities with a fair value of $113.0 million and $96.4 million, respectively,
were pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of $19.9
million and $12.9 million were pledged against certain borrowing arrangements.
Management has reviewed its loan and mortgage-backed securities portfolios and determined that, to the best of its knowledge,
little or no exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of
investing in, or originating, these types of investments or loans.
NOTE 5: LOANS
Major classifications of loans are as follows:
(In thousands)
Residential mortgage loans:
1-4 family first-lien residential mortgages
Construction
Total residential mortgage loans
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Tax exempt loans
Total commercial loans
Consumer loans:
Home equity and junior liens
Other consumer
Total consumer loans
Total loans
Net deferred loan fees
Less allowance for loan losses
Loans receivable, net
December 31,
2017
December 31,
2016
$
216,793 $
5,558
222,351
192,525
51,131
50,251
10,405
304,312
25,935
28,646
54,581
581,244
(413)
(7,126)
573,705 $
$
199,000
8,505
207,505
150,698
50,477
40,394
12,523
254,092
24,722
6,293
31,015
492,612
(465)
(6,247)
485,900
The Company originates residential mortgage, commercial and consumer loans largely to customers throughout Oswego,
Onondaga and surrounding counties. Although the Company has a diversified loan portfolio, a substantial portion of its
borrowers’ abilities to honor their contracts is dependent upon the counties’ employment and economic conditions.
Although the Bank may occasionally 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.
The Bank acquired $15.6 million and $10.2 million of loans originated by an unrelated financial institution, located outside of
the Bank’s market area, in January 2017 and April 2017, respectively. The acquired loan pools represented a 90% participating
interest in a total of 1,231 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 December 31, 2017 there
were 1,082 loans outstanding with a remaining outstanding carrying value of $19.6 million. Since the acquisition of these loan
pools, a total of two loans, with a combined outstanding balance of $44,800, have been charged-off as uncollectible.
As of December 31, 2017 and December 31, 2016, residential mortgage loans with a carrying value of $148.1 million and
$140.3 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.
- 80 -
Loan Origination / Risk Management
The Company has lending policies and procedures in place that are designed to maximize loan income within an acceptable
level of risk. Management and the board of directors reviews and approves these policies and procedures on a regular basis. A
reporting system supplements the review process by frequently providing management with reports related to loan production,
loan quality, loan delinquencies, nonperforming and potential problem loans. Diversification in the loan portfolio is a means of
managing risk associated with fluctuations in economic conditions.
Risk Characteristics of Portfolio Segments
Each portfolio segment generally carries its own unique risk characteristics.
The residential mortgage loan segment is impacted by general economic conditions, unemployment rates in the Bank’s service
area, real estate values and the forward expectation of improvement or deterioration in economic conditions.
The commercial loan segment is impacted by general economic conditions but, more specifically, the industry segment in which
each borrower participates. Unique competitive changes within a borrower’s specific industry, or geographic location could
cause significant changes in the borrower’s revenue stream, and therefore, impact its ability to repay its obligations.
Commercial real estate is also subject to general economic conditions but changes within this segment typically lag changes
seen within the consumer and commercial segment. Included within this portfolio are both owner occupied real estate, in which
the borrower occupies the majority of the real estate property and upon which the majority of the sources of repayment of the
obligation is dependent upon, and non-owner occupied real estate, in which several tenants comprise the repayment source for
this portfolio segment. The composition and competitive position of the tenant structure may cause adverse changes in the
repayment of debt obligations for the non-owner occupied class within this segment.
The consumer loan segment is impacted by general economic conditions, unemployment rates in the geographic areas in which
borrowers and loan collateral are located, and the forward expectation of improvement or deterioration in economic conditions.
Real estate loans, including residential mortgages, commercial real estate loans and home equity, comprise 76% of the portfolio
in 2017, substantially identical to the composition in 2016, where such loans represented 78% of total loans. Loans secured by
real estate generally provide strong collateral protection and thus significantly reduce the inherent credit risk in the portfolio.
Management has reviewed its loan portfolio and determined that, to the best of its knowledge, little or no exposure exists to sub-
prime or other high-risk residential mortgages. The Company is not in the practice of originating these types of loans.
Description of Credit Quality Indicators
The Company utilizes an eight tier risk rating system to evaluate the quality of its loan portfolio. Loans that are risk rated “1”
through “4” are considered “Pass” loans. In accordance with regulatory guidelines, loans rated “5” through “8” are termed
“criticized” loans and loans rated “6” through “8” are termed “classified” loans. A description of the Company’s credit quality
indicators follows.
For Commercial Loans:
1.
2.
3.
Prime: A loan that is fully secured by properly margined Pathfinder Bank deposit account(s) or an obligation of the
US Government. It may also be unsecured if it is supported by a very strong financial condition and, in the case of
a commercial loan, excellent management. There exists an unquestioned ability to repay the loan in accordance
with its terms.
Strong: Desirable relationship of somewhat less stature than Prime grade. Possesses a sound documented
repayment source, and back up, which will allow repayment within the terms of the loan. Individual loans backed
by solid assets, character and integrity. Ability of individual or company management is good and well established.
Probability of serious financial deterioration is unlikely.
Satisfactory: Stable financial condition with cash flow sufficient for debt service coverage. Satisfactory loans of
average strength having some deficiency or vulnerability to changing economic or industry conditions but
performing as agreed with documented evidence of repayment capacity. May be unsecured loans to borrowers with
satisfactory credit and financial strength. Satisfactory provisions for management succession and a secondary
source of repayment exists.
- 81 -
4.
5.
6.
7.
8.
Satisfactory Watch: A four is not a criticized or classified credit. These credits do not display the characteristics of a
criticized asset as defined by the regulatory definitions. A credit is given a Satisfactory Watch designation if there
are matters or trends observed deserving attention somewhat beyond normal monitoring. Borrowing obligations
may be handled according to agreement but could be adversely impacted by developing factors such as industry
conditions, operating problems, litigation pending of a significant nature or declining collateral quality and
adequacy.
Special Mention: A warning risk grade that portrays one or more weaknesses that may be tolerated in the short
term. Assets in this category are currently protected but are potentially weak. This loan would not normally be
booked as a new credit, but may have redeeming characteristics persuading the Bank to continue working with the
borrower. Loans accorded this classification have potential weaknesses which may, if not checked or corrected,
weaken the company’s assets, inadequately protect the Bank’s position or effect the orderly, scheduled reduction of
the debt at some future time.
Substandard: The relationship is inadequately protected by the current net worth and cash flow capacity of the
borrower, guarantor/endorser, or of the collateral pledged. Assets have a well-defined weakness or weaknesses that
jeopardize the orderly liquidation of the debt. The relationship shows deteriorating trends or other deficient areas.
The loan may be nonperforming and expected to remain so for the foreseeable future. Relationship balances may
be adequately secured by asset value; however a deteriorated financial condition may necessitate collateral
liquidation to effect repayment. This would also include any relationship with an unacceptable financial condition
requiring excessive attention of the officer due to the nature of the credit risk or lack of borrower cooperation.
Doubtful: The relationship has all the weaknesses inherent in a credit graded 5 with the added characteristic that the
weaknesses make collection on the basis of currently existing facts, conditions and value, highly questionable or
improbable. The possibility of some loss is extremely high, however its classification as an anticipated loss is
deferred until a more exact determination of the extent of loss is determined. Loans in this category must be on
nonaccrual.
Loss: Loans are considered uncollectible and of such little value that continuance as bankable assets is not
warranted. It is not practicable or desirable to defer writing off this basically worthless asset even though partial
recovery may be possible in the future.
For Residential Mortgage and Consumer Loans:
Residential mortgage and consumer loans are assigned a “Pass” rating unless the loan has demonstrated signs of weakness as
indicated by the ratings below.
5.
6.
7.
Special Mention: All loans sixty days past due are classified Special Mention. The loan is not upgraded until it has
been current for six consecutive months.
Substandard: All loans 90 days past due are classified Substandard. The loan is not upgraded until it has been
current for six consecutive months.
Doubtful: The relationship has all the weaknesses inherent in a credit graded 5 with the added characteristic that the
weaknesses make collection on the basis of currently existing facts, conditions and value, highly questionable or
improbable. The possibility of some loss is extremely high.
The risk ratings for classified loans are evaluated at least quarterly for commercial loans or when credit deficiencies arise, such
as delinquent loan payments, for commercial, residential mortgage or consumer loans. See further discussion of risk ratings in
Note 1.
- 82 -
The following table presents the segments and classes of the loan portfolio summarized by the aggregate pass rating and the
criticized and classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system:
(In thousands)
Residential mortgage loans:
1-4 family first-lien residential mortgages
Construction
Total residential mortgage loans
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Tax exempt loans
Total commercial loans
Consumer loans:
Home equity and junior liens
Other consumer
Total consumer loans
Total loans
(In thousands)
Residential mortgage loans:
1-4 family first-lien residential mortgages
Construction
Total residential mortgage loans
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Tax exempt loans
Total commercial loans
Consumer loans:
Home equity and junior liens
Other consumer
Total consumer loans
Total loans
As of December 31, 2017
Special
Mention
Pass
Substandard
Doubtful
Total
$ 211,825 $
5,558
217,383
891 $
891
1,869 $
-
1,869
2,208 $ 216,793
5,558
222,351
-
2,208
187,073
50,353
48,892
10,405
296,723
25,396
28,584
53,980
$ 568,086 $
1,372
195
407
-
1,974
61
55
116
2,981 $
2,024
523
532
-
3,079
304
7
311
5,259 $
2,056
60
420
-
2,536
192,525
51,131
50,251
10,405
304,312
174
-
174
25,935
28,646
54,581
4,918 $ 581,244
As of December 31, 2016
Special
Mention
Pass
Substandard
Doubtful
Total
$ 194,377 $
8,505
202,882
1,445 $
-
1,445
2,115 $
-
2,115
1,063 $ 199,000
8,505
207,505
-
1,063
143,126
49,393
39,027
12,523
244,069
23,963
6,224
30,187
$ 477,138 $
3,714
684
661
-
5,059
170
17
187
6,691 $
3,858
400
702
-
4,960
389
8
397
7,472 $
-
-
4
-
4
150,698
50,477
40,394
12,523
254,092
200
44
244
24,722
6,293
31,015
1,311 $ 492,612
- 83 -
Nonaccrual and Past Due Loans
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, exclusive of deferred costs, segregated by class of loans were as follows:
As of December 31, 2017
(In thousands)
Residential mortgage loans:
30-59 Days 60-89 Days 90 Days
and
Past Due
and Accruing and Accruing
Past Due
Total Loans
Over Past Due Current Receivable
Total
1-4 family first-lien residential mortgages
Construction
$
Total residential mortgage loans
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Tax exempt loans
Total commercial loans
Consumer loans:
Home equity and junior liens
Other consumer
Total consumer loans
Total loans
(In thousands)
Residential mortgage loans:
1,196 $
-
1,196
720
1,482
575
-
2,777
94
192
286
4,259 $
925 $
-
925
2,088 $
-
2,088
4,209 $ 212,584 $
5,558
4,209 218,142
-
216,793
5,558
222,351
2,056
31
60
-
2,147
1,545
132
766
-
2,443
4,321 188,204
1,645 49,486
1,401 48,850
- 10,405
7,367 296,945
192,525
51,131
50,251
10,405
304,312
74
50
124
3,196 $
300
63
363
468 25,467
305 28,341
773 53,808
4,894 $ 12,349 $ 568,895 $
25,935
28,646
54,581
581,244
As of December 31, 2016
$
30-59 Days 60-89 Days 90 Days
and
Past Due
and Accruing and Accruing
Past Due
Total Loans
Over Past Due Current Receivable
Total
1-4 family first-lien residential mortgages
Construction
$
Total residential mortgage loans
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Tax exempt loans
Total commercial loans
Consumer loans:
Home equity and junior liens
Other consumer
Total consumer loans
Total loans
$
1,247 $
-
1,247
1,063
819
333
-
2,215
105
8
113
3,575 $
832 $
-
832
2,560 $
-
2,560
4,639 $ 194,361 $
8,505
4,639 202,866
-
199,000
8,505
207,505
375
-
-
-
375
1,223
-
640
-
1,863
2,661 148,037
819 49,658
973 39,421
- 12,523
4,453 249,639
150,698
50,477
40,394
12,523
254,092
157
13
170
1,377 $
338
50
388
4,811 $
600 24,122
6,222
71
671 30,344
9,763 $ 482,849 $
24,722
6,293
31,015
492,612
- 84 -
Year-end nonaccrual loans, segregated by class of loan, were as follows:
(In thousands)
Residential mortgage loans:
1-4 family first-lien residential mortgages
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Consumer loans:
Home equity and junior liens
Other consumer
Total nonaccrual loans
December 31,
2017
December 31,
2016
$
$
2,088 $
2,088
1,545
132
766
2,443
300
63
363
4,894 $
2,560
2,560
1,223
-
640
1,863
338
50
388
4,811
There were no loans past due ninety days or more and still accruing interest at December 31, 2017 or 2016.
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.
Pre-modification outstanding recorded investment is the principal loan balance less the provision for loan losses before the loan
was modified as a TDR. 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 one loan that had been modified as a TDR for the year ended December 31, 2017, which subsequently paid
off in the fourth quarter of 2017. Both the pre-modification and post-modification recorded investment in the commercial real
estate loan was $2.0 million as a result of economic concessions granted, which included extended interest only payment terms.
The Company was not required to increase the specific reserves against this loan during the third quarter of 2017.
The table below details loans that had been modified as TDRs for the year ended December 31, 2016.
(In thousands)
Individually evaluated for impairment:
Residential mortgage loans
Commercial real estate loans
For the year ended December 31, 2016
Post-modification
Pre-modification
outstanding
outstanding
recorded
recorded
investment
investment
Additional
provision
for loan
losses
Number of
loans
3 $
1 $
127 $
2,088 $
135 $
2,088 $
29
-
The TDRs individually evaluated for impairment have been classified as TDRs due to economic concessions granted, which
consisted of additional funds advanced without associated increases in collateral, interest rate reduction, extended term and/or
extended interest only payment terms. The Company was required to increase the specific reserves against the loans
individually reviewed for impairment by $29,000, which was a component of the provision for loan losses in the fourth quarter
of 2016.
- 85 -
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 December 31, 2017, which had
subsequently defaulted during the year ended December 31, 2017.
The Company had no loans that had been modified as TDRs during the twelve months prior to December 31, 2016, which had
subsequently defaulted during the year ended December 31, 2016.
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.
Impaired Loans
The following table summarizes impaired loans information by portfolio class:
(In thousands)
With no related allowance recorded:
1-4 family first-lien residential mortgages
Commercial real estate
Commercial lines of credit
Other commercial and industrial
Home equity and junior liens
With an allowance recorded:
1-4 family first-lien residential mortgages
Commercial real estate
Commercial lines of credit
Other commercial and industrial
Home equity and junior liens
Total:
1-4 family first-lien residential mortgages
Commercial real estate
Commercial lines of credit
Other commercial and industrial
Home equity and junior liens
Totals
$
December 31, 2017
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Recorded
Investment
December 31, 2016
Unpaid
Principal
Balance
Related
Allowance
$
900 $
3,314
507
523
80
958
2,186
40
525
210
1,858
5,500
547
1,048
290
9,243 $
909 $
3,360
507
524
80
958
2,187
40
525
210
1,867
5,547
547
1,049
290
9,300 $
- $
-
-
-
-
850 $
4,254
400
470
140
857 $
4,344
400
470
140
210
320
40
391
142
210
320
40
391
142
1,103 $
763
818
-
552
345
1,613
5,072
400
1,022
485
8,592 $
763
872
-
552
345
1,620
5,216
400
1,022
485
8,743 $
-
-
-
-
-
117
455
-
553
5
117
455
-
553
5
1,130
- 86 -
The following table presents the average recorded investment in impaired loans for the years ended December 31:
(In thousands)
1-4 family first-lien residential mortgages
Commercial real estate
Commercial lines of credit
Other commercial and industrial
Home equity and junior liens
Other consumer
Total
$
$
2017
1,553
5,097
447
976
283
-
8,356
$
$
2016
777
4,325
479
724
325
2
6,632
The following table presents the cash basis interest income recognized on impaired loans for the years ended December 31:
(In thousands)
1-4 family first-lien residential mortgages
Commercial real estate
Commercial lines of credit
Other commercial and industrial
Home equity and junior liens
Other consumer
Total
$
$
2017
71
247
27
30
13
-
388
$
$
2016
64
161
22
44
13
-
304
- 87 -
NOTE 6: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 2017 and 2016 and information pertaining to the
allocation of the allowance for loan losses and balances of the allowance for loan losses and loans receivable based on
individual and collective impairment evaluation by loan portfolio class at the indicated dates are summarized in the tables
below. 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.
(In thousands)
Allowance for loan losses:
Beginning Balance
Charge-offs
Recoveries
Provisions (credits)
Ending balance
Ending balance: related to loans
individually evaluated for impairment
Ending balance: related to loans
collectively evaluated for impairment
Loans receivables:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
December 31, 2017
1-4 family
first-lien
residential
mortgage
Construction
Commercial
real estate
Commercial
lines of credit
Other
commercial
and industrial
$
$
$
$
759 $
(166)
13
259
865 $
210 $
655 $
- $
-
-
-
- $
- $
2,935 $
(505)
-
1,159
3,589 $
397 $
(60)
-
398
735 $
320 $
40 $
- $
3,269 $
695 $
1,658
(22)
15
(437)
1,214
391
823
$
216,793 $
5,558 $
192,525 $
51,131 $
50,251
$
$
1,858 $
- $
5,500 $
547 $
1,048
214,935 $
5,558 $
187,025 $
50,584 $
49,203
Tax exempt
Home equity
and junior liens
Other
consumer
Unallocated
Total
Allowance for loan losses:
Beginning Balance
Charge-offs
Recoveries
Provisions
Ending balance
Ending balance: related to loans
individually evaluated for impairment
Ending balance: related to loans
collectively evaluated for impairment
Loans receivables:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$
$
$
$
$
$
$
1 $
-
-
-
1 $
- $
1 $
331 $
(69)
6
246
514 $
166 $
(142)
40
144
208 $
- $
- $
- $
- $
- $
6,247
(964)
74
1,769
7,126
142 $
- $
- $
1,103
372 $
208 $
- $
6,023
10,405 $
25,935 $
28,646
$
581,244
- $
290 $
-
$
9,243
10,405 $
25,645 $
28,646
$
572,001
- 88 -
(In thousands)
Allowance for loan losses:
Beginning Balance
Charge-offs
Recoveries
Provisions (credits)
Ending balance
Ending balance: related to loans
individually evaluated for impairment
Ending balance: related to loans
collectively evaluated for impairment
Loans receivables:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
December 31, 2016
1-4 family
first-lien
residential
mortgage
Construction
Commercial
real estate
Commercial
lines of credit
Other
commercial
and industrial
$
$
$
$
581 $
(242)
13
407
759 $
117
642
- $
-
-
-
- $
- $
2,983 $
-
6
(54)
2,935 $
401 $
(69)
11
54
397 $
1,270
-
14
374
1,658
455 $
- $
553
- $
2,480 $
397 $
1,105
$
199,000 $
8,505 $
150,698 $
50,477 $
40,394
$
$
1,613 $
- $
5,072 $
400 $
1,022
197,387 $
8,505 $
145,626 $
50,077 $
39,372
Tax exempt
Home equity
and junior liens
Other
consumer
Unallocated
Total
Allowance for loan losses:
Beginning Balance
Charge-offs
Recoveries
Provisions (credits)
Ending balance
Ending balance: related to loans
individually evaluated for impairment
Ending balance: related to loans
collectively evaluated for impairment
Loans receivables:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$
$
$
$
$
$
$
3 $
-
-
(2)
1 $
- $
1 $
350 $
(147)
10
118
331 $
118 $
(61)
53
56
166 $
- $
-
-
-
- $
5,706
(519)
107
953
6,247
5 $
-
- $
1,130
326 $
166
- $
5,117
12,523 $
24,722 $
6,293
$
492,612
- $
485 $
-
$
8,592
12,523 $
24,237 $
6,293
$
484,020
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.
- 89 -
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:
(In thousands)
Specifically reserved
Historical loss rate
Qualitative factors
Total
Specifically reserved
Historical loss rate
Qualitative factors
Total
(In thousands)
Specifically reserved
Historical loss rate
Qualitative factors
Total
Specifically reserved
Historical loss rate
Qualitative factors
Total
December 31, 2017
1-4 family
first-lien
residential
mortgage
Construction
Commercial
real estate
Commercial
lines of credit
$
$
210 $
104
551
865 $
- $
-
-
- $
320 $
103
3,166
3,589 $
Other
commercial
and industrial
391
15
808
1,214
40 $
40
655
735 $
Total
1,103
362
5,661
7,126
Tax exempt
$
- $
-
1
1 $
Home equity
and junior liens
Other
consumer
Unallocated
142 $
41
331
514 $
- $
59
149
208 $
December 31, 2016
- $
-
-
- $
1-4 family
first-lien
residential
mortgage
Construction
Commercial
real estate
Commercial
lines of credit
117 $
106
536
759 $
- $
-
-
- $
455 $
45
2,435
2,935 $
Other
commercial
and industrial
553
50
1,055
1,658
- $
31
366
397 $
Home equity
and junior liens
Tax exempt
$
- $
-
1
1 $
Other
Unallocated
consumer
-
$
16
150
166 $
- $
-
-
- $
Total
1,130
283
4,834
6,247
$
$
$
$
5 $
35
291
331 $
- 90 -
NOTE 7: SERVICING
Loans serviced for others are not included in the accompanying consolidated statements of condition. At December 31, 2017
and 2016, the Bank serviced 231 and 268 residential mortgage loans for others, respectively. The unpaid principal balances of
mortgage loans serviced for others were $14.3 million and $17.0 million at December 31, 2017 and 2016, respectively. The
balance of capitalized servicing rights included in other assets at December 31, 2017 and 2016, was $28,000 and $40,000,
respectively.
The following summarizes mortgage servicing rights capitalized and amortized:
(In thousands)
Mortgage servicing rights capitalized
Mortgage servicing rights amortized
$
$
2017
- $
12 $
2016
-
12
NOTE 8: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, is as follows:
(In thousands)
Land
Buildings
Furniture, fixtures and equipment
Construction in progress
Less: Accumulated depreciation
2017
2,205 $
14,917
13,515
650
31,287
15,170
16,117 $
2016
2,205
13,704
12,948
455
29,312
14,135
15,177
$
$
Depreciation expense was $1.0 million in both 2017 and 2016.
NOTE 9: FORECLOSED REAL ESTATE
The Company is required to disclose the carrying amount of foreclosed residential real estate properties held at each reporting
period as a result of obtaining physical possession of the property.
(Dollars in thousands)
Foreclosed residential real estate
Number of
properties
5 $
December 31,
2017
468
Number of
properties
7 $
December 31,
2016
393
At December 31, 2017, the Company reported $805,000 in residential real estate loans in the process of foreclosure.
NOTE 10: GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. Goodwill is not amortized,
but is evaluated annually for impairment or between annual evaluations in certain circumstances. Management performs an
annual assessment of the Company’s goodwill to determine whether or not any impairment of the carrying value may exist.
Of the $4.5 million of goodwill carried on the Company’s books as of December 31, 2017, $3.8 million of this amount was due
to prior periods acquisitions of bank branches and $696,000 was due to the 2013 acquisition of the FitzGibbons Agency by
Pathfinder Risk Management Company, Inc. and the 2015 acquisition of the Huntington Agency.
The Company is permitted to assess qualitative factors to determine if it is more likely than not that the fair value of the
reporting unit is less than the carrying value. Based on the results of the assessment, management has determined that the
carrying value of goodwill in the amount of $4.5 million is not impaired as of December 31, 2017.
The identifiable intangible asset of $182,000 as of December 31, 2017 was due to the acquisition of the FitzGibbons and
Huntington Agencies and represents the amortized carrying amount of the customer lists intangible. The weighted average
amortization period of this intangible asset is 7.0 years.
- 91 -
The gross carrying amount and annual amortization for this identifiable intangible asset are as follows:
(In thousands)
Gross carrying amount
Accumulated amortization
Net amortizing intangibles
December 31,
2017
198 $
(16)
182 $
2016
214
(16)
198
$
$
The estimated amortization expense for each of the five succeeding years ended December 31, is as follows:
(In thousands)
2018
2019
2020
2021
2022
Thereafter
Total
$
$
16
16
16
16
16
102
182
NOTE 11: DEPOSITS
A summary of deposits at December 31 is as follows:
(In thousands)
Savings accounts
Time accounts
Time accounts of $250,000 or more
Money management accounts
MMDA accounts
Demand deposit interest-bearing
Demand deposit noninterest-bearing
Mortgage escrow funds
Total Deposits
2017
80,587 $
160,736
52,691
14,905
253,088
66,093
89,783
5,720
723,603 $
$
$
At December 31, 2017, the scheduled maturities of time deposits are as follows:
(In thousands)
Year of Maturity:
2018
2019
2020
2021
2022
Thereafter
Total
$
$
- 92 -
2016
80,139
132,007
57,349
14,718
192,692
53,587
75,282
5,209
610,983
146,318
42,244
14,522
5,889
2,613
1,841
213,427
In addition to deposits obtained from its business operations within its target market areas, the Bank also obtains brokered
deposits through various programs administered by Promontory Interfinancial Network.
At December 31,
(In thousands)
Savings accounts
Time accounts
Time accounts of $250,000 or more
Money management accounts
MMDA accounts
Demand deposit interest-bearing
Demand deposit noninterest-bearing
Mortgage escrow funds
Total Deposits
$
$
NOTE 12: BORROWED FUNDS
2017
Non-
Brokered
- $
Brokered
80,587 $
109,666
52,691
14,905
159,032
66,093
89,783
5,720
Total
80,587
51,070 $ 160,736
52,691
14,905
94,056 $ 253,088
66,093
89,783
5,720
578,477 $ 145,126 $ 723,603
- $
- $
- $
- $
- $
2016
Non-
Brokered
Brokered
80,139 $
89,200
57,349
14,718
105,755
53,587
75,282
5,209
- $
42,807
-
-
86,937
-
-
-
481,239 $ 129,744 $
Total
80,139
132,007
57,349
14,718
192,692
53,587
75,282
5,209
610,983
$
$
The composition of borrowings (excluding subordinated loans) at December 31 is as follows:
(In thousands)
Short-term:
FHLB Advances
Deferred fees hedging
Total short-term borrowings
Long-term:
FHLB advances
Total long-term borrowings
2017
2016
$
$
$
$
30,600 $
-
30,600 $
43,288 $
43,288 $
42,000
(53)
41,947
17,000
17,000
The principal balances, interest rates and maturities of the outstanding long-term borrowings, all of which are at a fixed rate, at
December 31, 2017 are as follows:
Term
(Dollars in thousands)
Advances with FHLB
Due within 1 year
Due within 2 years
Due within 10 years
Total advances with FHLB
Total long-term fixed rate borrowings
Principal
Rates
$
$
$
2,000
1.04%
31,228 1.16-2.00%
10,060 1.62-2.55%
43,288
43,288
At December 31, 2017, scheduled repayments of long-term debt are as follows:
(In thousands)
2018
2019
2020
2021
2022
Thereafter
Total
$
$
2,000
31,228
7,060
1,000
2,000
-
43,288
The Company has access to Federal Home Loan Bank advances, under which it can borrow at various terms and interest rates.
Residential mortgage loans with a carrying value of $148.1 million and FHLB stock with a carrying value of $3.9 million have
- 93 -
been pledged by the Company under a blanket collateral agreement to secure the Company’s borrowings at December 31, 2017.
The total outstanding indebtedness under borrowing facilities with the FHLB cannot exceed the total value of the assets pledged
under the blanket collateral agreement. The Company has a $19.9 million line of credit available at December 31, 2017 with
the Federal Reserve Bank of New York through its Discount Window and has pledged various corporate and municipal
securities against the line. The Company has $14.4 million in lines of credit available with three other correspondent banks. $9.4
million of that line of credit is available on an unsecured basis and the remaining $5.0 million must be collateralized with
marketable investment securities. Interest on the lines is determined at the time of borrowing.
NOTE 13: SUBORDINATED LOANS
The Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust II, of which the Company owns 100% of the
common equity. The Trust issued $5,000,000 of 30-year floating rate Company-obligated pooled capital securities of
Pathfinder Statutory Trust II (“Floating-Rate Debentures”). The Company borrowed the proceeds of the capital securities from
its subsidiary by issuing floating rate junior subordinated deferrable interest debentures having substantially similar terms. The
capital securities mature in 2037 and are treated as Tier 1 capital by the Federal Deposit Insurance Corporation and the Federal
Reserve Board (“FRB”). The capital securities of the trust are a pooled trust preferred fund of Preferred Term Securities VI,
Ltd. and are tied to the 3-month LIBOR (1.69%) plus 1.65% for a total of 3.34% at December 31, 2017 with a five-year call
provision. The Company guarantees all of these securities.
The Company's equity interest in the trust subsidiary is included in other assets on the Consolidated Statements of Financial
Condition at December 31, 2017 and 2016. For regulatory reporting purposes, the Federal Reserve has indicated that the
preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If
regulators make a determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities
become callable and the Company may redeem them.
On October 15, 2015, the Company executed the $10.0 million non-amortizing subordinated loan with an unrelated third party
that is scheduled to mature on October 1, 2025. The Company has the right to prepay the subordinated loan at any time after
October 15, 2020 without penalty. The terms of the subordinated loan required interest payments at an annual interest rate of
3.50% from October 15, 2015 to February 29, 2016. The annual interest rate charged the Company increased to 6.25% on
March 1, 2016 through the maturity date. The Subordinated Loan is senior in the Company’s credit repayment hierarchy only
to the Company’s common equity and, as a result, qualifies as Tier 2 capital for all future periods when applicable. The
Company paid $172,000 in origination and legal fees as part of this transaction. These fees will be amortized over the life of the
subordinated loan through its first call date using the effective interest method. The effective cost of funds related to this
transaction is 6.44% calculated under this method.
The composition of subordinated loans at December 31 is as follows:
(In thousands)
Subordinated loans:
Junior subordinated debenture
Subordinated loan
Total subordinated loans
2017
$
$
5,155 $
9,904
15,059 $
2016
5,155
9,870
15,025
The principal balances, interest rates and maturities of the subordinated loans at December 31, 2017 are as follows:
Term
(Dollars in thousands)
Subordinated loans:
Due within 10 years
Due within 20 years
Total subordinated loans
Principal
Rates
$
$
9,904
5,155 3-Month Libor + 1.65%
15,059
6.48%
- 94 -
At December 31, 2017, scheduled repayments of the subordinated loans:
(In thousands)
2018
2019
2020
2021
2022
Thereafter
Total
$
$
-
-
-
-
-
15,059
15,059
NOTE 14: EMPLOYEE BENEFITS AND DEFERRED COMPENSATION AND SUPPLEMENTAL RETIREMENT
PLANS
The Company has a noncontributory defined benefit pension plan covering substantially all 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 will be 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 following tables set forth the changes in the plans’ benefit obligations, fair value of plan assets and the plans’ funded status
as of December 31:
(In thousands)
Change in benefit obligations:
Benefit obligations at beginning of year
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Benefit obligations at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Benefits paid
Employer contributions
Fair value of plan assets at end of year
Funded Status - asset (liability)
Pension Benefits
Postretirement Benefits
2017
2016
2017
2016
$
$
9,323 $
-
473
916
(243)
10,469
13,634
1,565
(243)
-
14,956
4,487 $
9,319 $
-
464
(231)
(229)
9,323
12,808
1,055
(229)
-
13,634
4,311 $
154 $
-
8
332
(13)
481
-
-
(13)
13
-
(481) $
159
-
8
-
(13)
154
-
-
(13)
13
-
(154)
The funded status of the pension was recorded within other assets on the statement of condition. The unfunded status of the
postretirement plan is recorded as a liability on the statement of condition.
Amounts recognized in accumulated other comprehensive loss as of December 31 are as follows:
(In thousands)
Net loss/(gain)
Tax Effect
Pension Benefits
Postretirement Benefits
2017
2,827 $
1,131
1,696 $
2016
2,685 $
1,074
1,611 $
2017
176 $
70
106 $
2016
(165)
(66)
(99)
$
$
- 95 -
Gains and losses in excess of 10% of the greater of the benefit obligation or the fair value of assets are amortized over the
average remaining service period of active participants.
The Company utilized the actual projected cash flows of the participants in both plans for the years ended December 31, 2017
and December 31, 2016. The following points address the approach taken.
1.
2.
3.
An analysis of the defined benefit pension plan’s expected future cash flows and high-quality fixed income
investments currently available and expected to be available during the period to maturity of the pension benefits
yielded a single discount rate of 4.58% at December 31, 2017.
An analysis of the postretirement health plan’s expected future cash flows and high-quality fixed-income
investments currently available and expected to be available during the period to maturity of the retiree medical
benefits yielded a single discount rate of 4.58% at December 31, 2017.
Each discount rate was developed by matching the expected future cash flows of Pathfinder Bank to high quality
bonds. Every bond considered has earned ratings of at least AA by Fitch Group, AA by Standard & Poor’s, or Aa2
by Moody’s Investor Services.
The accumulated benefit obligation for the defined benefit pension plan was $10.5 million and $9.3 million at December 31,
2017 and 2016, respectively. The postretirement plan had an accumulated benefit obligation of $481,000 and $154,000 at
December 31, 2017 and 2016, respectively.
The significant assumptions used in determining the benefit obligations as of December 31, are as follows:
Weighted average discount rate
Rate of increase in future compensation levels
Pension Benefits
Postretirement Benefits
2017
4.58%
-
2016
5.15%
-
2017
4.58%
-
2016
5.32%
-
Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plan.
The annual rates of increase in the per capita cost of covered medical and prescription drug benefits for future years were
assumed to be 5.00% for 2018, gradually decreasing to 4.50% in 2021 and remain at that level thereafter.
The composition of the net periodic benefit plan cost for the years ended December 31 is as follows:
(In thousands)
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Amortization of net losses/(gains)
Amortization of unrecognized past service liability
Net periodic benefit plan benefit
Pension Benefits
Postretirement Benefits
2017
- $
473
(945)
-
154
-
(318) $
2016
- $
464
(951)
-
226
-
(261) $
2017
- $
8
-
-
(3)
(5)
- $
2016
-
8
-
-
(3)
(5)
-
$
$
The significant assumptions used in determining the net periodic benefit plan cost for years ended December 31, were as
follows:
Weighted average discount rate
Expected long term rate of return on plan assets
Rate of increase in future compensation levels
Pension Benefits
Postretirement Benefits
2017
4.58%
7.00%
-
2016
5.05%
7.50%
-
2017
4.58%
-
-
2016
5.23%
-
-
The long term rate of return on assets assumption was set based on historical returns earned by equities and fixed income
securities, adjusted to reflect expectations of future returns as applied to the plan’s target allocation of asset classes. Equities
and fixed income securities were assumed to earn real rates of return in the ranges of 6.0%-8.0% and 3.0%-5.0%, respectively.
The long-term inflation rate was estimated to be 2.5%. When these overall return expectations are applied to the plan’s target
- 96 -
allocation, the expected rate of return was determined to be in the range of 5.0% to 7.0%. Management chose to use a 7.0%
expected long-term rate of return in 2017 and a 7.0% expected long-term rate of return in 2018 reflecting current economic
conditions and expected rates of return. Based on the $15.0 million fair value of plan assets at December 31, 2017, each 50
basis point decrease in the expected long-term rate of return would reduce after tax net income at 2018 expected marginal tax
rate of 26.1% by approximately $55,000.
The estimated net actuarial loss that will be amortized from accumulated other comprehensive loss into net periodic benefit plan
income during 2018 is $164,000. The estimated amortization of the unrecognized transition obligation and actuarial loss for the
postretirement health plan in 2018 is $13,000. The expected net periodic benefit plan benefit for 2018 is estimated to be
$371,000 for both retirement plans in aggregate.
Plan assets are invested in four diversified investment funds of the Pentegra Retirement Trust (the “Trust”, formerly known as
RSI Retirement Trust). The Trust has been given discretion by the Plan Sponsor to determine the appropriate strategic asset
allocation versus plan liabilities, as governed by the Trust’s Investment Policy Statement. The Plan is structured to utilize a
Liability Driven Investment (LDI) approach which seeks to fund the current and future liabilities of the Plan and aims to
mitigate funded status and contribution volatility.
The Plan’s asset allocation targets to hold 38% of assets in equity securities via investment in the Long-Term Growth – Equity
Portfolio (‘LTGE’), 16% in intermediate-term investment grade bonds via investment in the Long-Term Growth – Fixed-
Income Portfolio (‘LTGFI’), 35% in long duration bonds via the Liability Focused Fixed-Income Portfolio (‘LFFI’), 10% in an
alternative asset fund (the ALT Portfolio), and 1% in a cash equivalents portfolio (for liquidity).
LTGE is a diversified portfolio that invests in a number of actively and passively managed equity-focused mutual funds and
collective investment trusts. The Portfolio holds a diversified mix of equity funds in order to gain exposure to the U.S. and non-
U.S. equity markets. LTGFI is a diversified portfolio that invests in a number of fixed-income mutual funds and collective
investment trusts. The Portfolio invests primarily in intermediate-term bond funds with a focus on Core Plus fixed-income
investment approaches. LFFI is a diversified high quality fixed-income portfolio that currently invests in passively managed
collective investment trusts that hold long duration bonds. The ALT Portfolio invests in professionally managed private funds
that hold alternative assets. The Portfolio currently invests in long/short equity hedge funds.
The investment objectives, investment strategies and risk of each of the daily valued and unitized Portfolios and the funds held
within the Portfolios are detailed in the Private Placement Memorandum and the Trust’s Investment Policy Statement.
The overall long-term investment objectives are to maintain plan assets at a level that will sufficiently cover long-term
obligations and to generate a return on plan assets that will meet or exceed the rate at which long-term obligations will grow.
The LTGE and LTGFI Portfolios are designed to provide long-term growth of equity and fixed-income assets with the objective
of achieving an investment return in excess of the cost of funding the active life, deferred vested, and all 30-year term and
longer obligations of retired lives in the Trust. The LFFI Portfolio is designed with a relatively long duration and to be
correlated with plan liabilities. The ALT Strategy is designed to add diversification via the addition of relatively low correlation
assets. Risk/volatility is further managed by the distinct investment objectives of each of the Trust’s Portfolios.
In addition, significant consideration is paid to the plan’s funding levels when determining the overall asset allocation. If the
plan is considered to be well-funded, approximately 65% of the plan’s assets are allocated to equities and approximately 35%
allocated to fixed-income. Asset rebalancing normally occurs when the equity and fixed-income allocations vary by more than
10% from their respective targets (i.e., a 10% policy range guideline).
- 97 -
Pension plan assets measured at fair value are summarized below:
(In thousands)
Asset Category:
Mutual funds - equity
Large-cap value (a)
Large-cap Growth (b)
Large-cap Core (c)
Mid-cap Value (d)
Mid-cap Growth (e)
Mid-cap Core (f)
Small-cap Value (g)
Small-cap Growth (h)
Small-cap Core (i)
International Equity (j)
Equity -Total
Fixed Income Funds
Fixed Income-US Core (k)
Intermediate Duration (l)
Long Duration (m)
Fixed Income-Total
Long/Short Equity(n)
Company Common Stock
Cash Equivalents-Money market*
Total
(In thousands)
Asset Category:
Mutual funds - equity
Large-cap value (a)
Large-cap Growth (b)
Large-cap Core (c)
Mid-cap Value (d)
Mid-cap Growth (e)
Mid-cap Core (f)
Small-cap Value (g)
Small-cap Growth (h)
Small-cap Core (i)
International Equity (j)
Equity -Total
Fixed Income Funds
Fixed Income-US Core (k)
Intermediate Duration (l)
Long Duration (m)
Fixed Income-Total
Long/Short Equity(n)
Company Common Stock
Cash Equivalents-Money market*
Total
At December 31, 2017
Level 1
Level 2
Level 3
Total Fair
Value
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
58
58 $
1,058 $
1,102
733
236
223
239
178
169
349
1,419
5,706
1,713
3,075
2,630
7,418
1,533
-
241
14,898 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
1,058
1,102
733
236
223
239
178
169
349
1,419
5,706
1,695
2,932
2,474
7,418
1,533
-
299
14,956
At December 31, 2016
Level 1
Level 2
Level 3
Total Fair
Value
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
70
70 $
958 $
860
609
204
186
209
167
140
312
1,131
4,776
1,695
2,932
2,474
7,101
1,165
-
522
13,564 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
958
860
609
204
186
209
167
140
312
1,131
4,776
1,695
2,932
2,474
7,101
1,165
-
592
13,634
$
$
$
$
- 98 -
*Includes cash equivalents investments in equity and fixed income strategies
a) This category contains large-cap stocks with above-average yield. The portfolio typically holds between 60 and 70
stocks.
b) This category seeks long-term capital appreciation by investing primarily in large growth companies based in the
U.S.
c) This fund tracks the performance of the S&P 500 index by purchasing the securities represented in the index in
approximately the same weightings as the index.
d) This category employs an indexing investment approach designed to track the performance of the CRSP US Mid-Cap
Value Index.
e) This category employs an indexing investment approach designed to track the performance of the CRSP US Mid-Cap
Growth Index.
f) This category seeks to track the performance of the S&P Midcap 400 Index.
g) This category consists of a selection of investments based on the Russell 2000 Value Index.
h) This category consists of a selection of investments based on the Russell 2000 Growth Index.
i) This category consists of an index fund designed to track the Russell 2000, along with a fund investing in readily
marketable securities of U.S. companies with market capitalizations within the smallest 10% of the market universe,
or smaller than the 1000th largest US company.
j) This category has investments in medium to large non-US companies, including high quality, durable growth
companies and companies based in countries with stable economic and political systems. A portion of this category
consists of an index fund designed to track the MSC ACWI ex-US Net Dividend Return Index.
k) This category currently includes equal investments in three mutual funds, two of which usually hold at least 80% of
fund assets in investment grade fixed income securities, seeking to outperform the Barclays US Aggregate Bond
Index while maintaining a similar duration to that index. The third fund targets investments of 50% or more in
mortgage-backed securities guaranteed by the US government and its agencies.
l) This category consists mostly of a fund which seeks to track the Barclays Capital US Corporate A or Better 5-20
Year, Bullets only Index, along with a diversified mutual fund holding fixed income securities rated A or better.
m) This category consists of a fund that seeks to approximate the performance of the Barclays Capital US Corporate A
or Better, 20+ Year Bullets Only Index over the long term.
n) This category currently invests in three long/short equity hedge funds.
For the fiscal year ending December 31, 2018, the Company expects to contribute approximately $32,000 to the postretirement
plan.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid from both
retirement plans:
(In thousands)
Years ending December 31:
2018
2019
2020
2021
2022
Years 2023-2027
Pension
Benefits
Postretirement
Benefits
Total
$
297 $
306
324
341
364
2,626
32 $
34
35
37
39
140
329
340
359
378
403
2,766
The Company also offers a 401(k) plan to its employees. Contributions to this plan by the Company were $333,000 and
$300,000 for 2017 and 2016, respectively.
In addition, the Company made a $244,000 safe harbor contribution to the plan in
2017.
The Company maintains optional deferred compensation plans for its directors and certain executive officers, whereby fees and
income normally received are deferred and paid by the Company based upon a payment schedule commencing at age 65 and
continuing monthly for 10 years. Directors must serve on the board for a minimum of 5 years to be eligible for the Plan. At
December 31, 2017 and 2016, other liabilities include approximately $2.6 million and $2.4 million, respectively, relating to
deferred compensation. Deferred compensation expense for the years ended December 31, 2017 and 2016 amounted to
approximately $351,000 and $339,000, respectively.
- 99 -
To assist in the funding of the Company’s benefits under the supplemental executive retirement plan and deferred compensation
plans, the Company is the owner of single premium life insurance policies on selected participants. At December 31, 2017 and
2016, the cash surrender values of these policies were $11.7 million and $11.5 million, respectively.
The Bank adopted a Defined Contribution Supplemental Executive Retirement Plan (the “SERP”), effective January 1, 2014.
The SERP benefits certain key senior executives of the Bank who are selected by the Board to participate, including our Named
Executive Officers. The SERP is intended to provide a benefit from the Bank upon retirement, death, disability or voluntary or
involuntary termination of service (other than “for cause”), subject to the requirements of Section 409A of the Internal Revenue
Code. Accordingly, the SERP obligates the Bank to make a contribution to each executive’s account on the last business day of
each calendar year. In addition, the Bank, may, but is not required to, make additional discretionary contributions to the
executive’s accounts from time to time. All executives currently participating in the plan, including the Named Executive
Officers, are fully vested in the Bank’s contribution to the plan. In the event the executive is terminated involuntarily or resigns
for good reason within 24 months following a change in control, the Bank is required to make additional annual contributions
the lesser of: (1) three years or (2) the number of years remaining until the executive’s benefit age, subject to potential
reduction to avoid an excess parachute payment under Code Section 280G. In the event of the executive’s death, disability or
termination within 24 months after a change in control, the executive’s account will be paid in a lump sum to the executive or
his beneficiary, as applicable. In the event the executive is entitled to a benefit from the SERP due to retirement or other
termination of employment, the benefit will be paid either in a lump sum or in 10 annual installments as detailed in his or her
participant agreement. At December 31, 2017, other liabilities included $631,000 accrued under this plan.
NOTE 15: STOCK BASED COMPENSATION PLANS
All share and per share values have been adjusted, where appropriate, by the 1.6472 exchange rate used in the Conversion and
Offering that occurred on October 16, 2014.
April 2010 Stock Option Grants
In June 2011, the board of directors of the Company approved the grant of stock option awards to its directors and executive
officers under the 2010 Stock Option Plan that had 247,080 shares authorized for award. A total of 74,124 stock option awards
were granted to the nine directors of the Company, at that time, and 123,540 stock option awards, in total, were granted to the
Chief Executive Officer and the Company’s then four senior vice presidents. The awards will vest ratably over five years (20%
per year for each year of the participant’s service with the Company) and will expire ten years from the date of the grant, or
June 2021. The fair value of each option grant was established at the date of grant using the Black-Scholes option pricing
model. The Black-Scholes model used the following weighted average assumptions: risk-free interest rate of 2.2%; volatility
factors of the expected market price of the Company's common stock of 0.45; weighted average expected lives of the options of
7.0 years: cash dividend yield of 1.49%. Based upon these assumptions, the weighted average fair value of options granted was
$2.29.
In July 2013, the board of directors of the Company approved the grant of 16,472 stock option awards in total to two newly
elected directors of the Company. The awards will vest ratably over five years (20% per year for each year of the participant’s
service with the Company) and will expire ten years from the date of the grant, or July 2023. The fair value of each option grant
was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following
weighted average assumptions: risk-free interest rate of 2.0%; volatility factors of the expected market price of the Company's
common stock of 0.45; weighted average expected lives of the options of 7.0 years: cash dividend yield of 1.0%. Based upon
these assumptions, the weighted average fair value of options granted was $3.69.
In November 2015, the board of directors of the Company approved the grant of 16,472 stock option awards in total to two
newly elected directors of the Company. The awards will vest ratably over five years (20% per year for each year of the
participant’s service with the Company) and will expire ten years from the date of the grant, or November 2025. The fair value
of each option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes
model used the following weighted average assumptions: risk-free interest rate of 1.9%; volatility factors of the expected market
price of the Company's common stock of 0.23; weighted average expected lives of the options of 7.0 years: cash dividend yield
of 1.4%. Based upon these assumptions, the weighted average fair value of options granted was $2.56.
In April 2016, the board of directors of the Company approved the grant of 47,768 stock option awards in total to three officers
and one recently promoted senior officer. The awards will vest ratably over five years (20% per year for each year of the
participant’s service with the Company) and will expire ten years from the date of the grant, or April 2026. The fair value of
each option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model
- 100 -
used the following weighted average assumptions: risk-free interest rate of 1.6%; volatility factors of the expected market price
of the Company's common stock of 0.32; weighted average expected lives of the options of 7.0 years: cash dividend yield of
1.55%. Based upon these assumptions, the weighted average fair value of options granted was $3.17.
May 2016 Stock Option Grants
In May 2016, the board of directors of the Company approved the grant of stock option awards to its directors, executive
Officers, senior officers and officers under the 2016 Equity Incentive Plan that was approved at the Annual Meeting of
Shareholders on May 4, 2016 when 263,605 shares were authorized for award.
A total of 79,083 stock option awards were granted to the nine directors of the Company and 44,812 stock option awards, in
total, were granted to thirteen officers. The awards will vest ratably over five years (20% per year for each year of the
participant’s service with the Company) and will expire ten years from the date of the grant, or May 2026. The fair value of
each option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model
used the following weighted average assumptions: risk-free interest rate of 1.6%; volatility factors of the expected market price
of the Company's common stock of 0.32; weighted average expected lives of the options of 7.0 years: cash dividend yield of
1.55%. Based upon these assumptions, the weighted average fair value of options granted was $3.32.
A total of 92,261 stock option awards were granted to the Chief Executive Officer, two executive officers and three senior
officers. The awards will vest ratably over seven years (approximately 14.28% per year for each year of the participant’s
service with the Company) with the exception of one senior officer whose awards vested upon retirement on August 1, 2017 and
will expire ten years from the date of the grant, or May 2026. The fair value of each option grant was established at the date of
grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted average
assumptions: risk-free interest rate of 1.7%; volatility factors of the expected market price of the Company's common stock of
0.32; weighted average expected lives of the options of 7.0 years: cash dividend yield of 1.55%. Based upon these assumptions,
the weighted average fair value of options granted was $3.59.
Activity in the stock option plans is as follows:
(Shares in thousands)
Outstanding at December 31, 2015
Granted
Newly vested
Exercised
Expired
Outstanding at December 31, 2016
Granted
Newly vested
Exercised
Expired
Outstanding at December 31, 2017
Options
Outstanding
Weighted
Average
Exercise Price
185 $
264 $
-
(26)
-
423 $
- $
-
(28)
-
395 $
5.75
11.25
6.21
-
-
6.21
-
10.92
-
-
10.92
Shares
Exercisable
128
-
37
(26)
-
139
-
57
(28)
-
168
The aggregate intrinsic value of a stock option represents the total pre-tax intrinsic value (the amount by which the current
market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option
holders had all option holders exercised their options prior to the expiration date. The intrinsic value can change based on
fluctuations in the market value of the Company’s stock. At December 31, 2017, the intrinsic value of the stock options was
$2.3 million. At December 31, 2016, the intrinsic value of the stock options was $1.7 million.
At December 31, 2017, there were 395,177 options outstanding, of which 167,835 were exercisable at an average exercise price
of $7.61, and an average remaining contractual life of 5.3 years.
May 2016 Restricted Stock Unit Grants
In May 2016, the board of directors of the Company approved the grant of restricted stock units to its directors, executive
officers, senior officers and officers under the 2016 Equity Incentive Plan that was approved at the Annual Meeting of
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Shareholders on May 4, 2016 when 105,442 shares were authorized for award. A total of 31,635 restricted stock units were
granted to the nine directors of the Company and 8,436 restricted stock units, in total, were granted to two officers. The units
will vest ratably over five years (20% per year for each year of the participant’s service with the Company).
A total of 46,570 restricted stock units, in total, were granted to the Chief Executive Officer, two executive officers and three
senior officers. The units will vest ratably over seven years (approximately 14.28% per year for each year of the participant’s
service with the Company) with the exception of one senior officer whose units vested upon retirement on August 1, 2017.
The compensation expense of the stock option awards and restricted stock units is based on the fair value of the instruments on
the date of grant. The Company recorded compensation expense in the amount of $345,000 and $264,000 in 2017 and 2016,
respectively, and is expected to record $320,000, $313,000, $312,000, $173,000, $110,000 and $37,000 in 2018 through 2023.
NOTE 16: EMPLOYEE STOCK OWNERSHIP PLAN
The Bank established the Pathfinder Bank Employee Stock Ownership Plan (“Plan”) to purchase stock of the Company for the
benefit of its employees. In July 2011, the Plan received a $1.1 million loan from Community Bank, N.A., guaranteed by the
Company, to fund the Plan’s purchase of 125,000 shares of the Company’s treasury stock. The loan was being repaid in equal
quarterly installments of principal plus interest over ten years beginning October 1, 2011. Interest accrued at the Wall Street
Journal Prime Rate plus 1.00%, and was secured by the unallocated shares of the ESOP stock. This loan was refinanced in
connection with the Conversion and Offering that occurred on October 16, 2014.
In connection with the Conversion and Offering, the ESOP purchased 105,442 shares issued in the offering by obtaining a loan
from the Company which was used to purchase both the additional shares and refinance the remaining outstanding balance on
the loan from Community Bank N.A. There were 138,982.5 shares associated with the refinanced loan resulting in a total of
244,424.5 shares associated with the new loan provided by the Company.
The ESOP loan from the Company has a ten year term and is being repaid in equal payments of principal and interest under a
fixed rate of interest equal to 3.25% which was the prime rate of interest on the date of the closing of the offering. This ESOP
loan from the Company, also referred to as an internally leveraged ESOP, does not appear as a liability on the Company’s
consolidated statement of condition as of December 31, 2017 in accordance with ASC 718-40-25-9d.
In accordance with the payment of principal on the loan, a proportionate number of shares are allocated to the employees over
the ten year time horizon of the loan. Participants’ vesting interest in the shares of Company stock is at the rate of 20% per
year. Compensation expense is recorded based on the number of shares released to the participants times the average market
value of the Company’s stock over that same period. Dividends on unallocated shares, recorded as compensation expense on
the income statement, are made available to the participants' account. The Company recorded $404,000 and $333,000 in
compensation expense in 2017 and 2016, respectively, including $37,000 and $40,000 for dividends on unallocated shares in
these same time periods. At December 31, 2017, there were 164,987 unearned ESOP shares with a fair value of $2.5 million.
NOTE 17: INCOME TAXES
The provision for income taxes for the years ended December 31, is as follows:
(In thousands)
Current
Deferred
The provision for income taxes includes the following
(In thousands)
Federal Income Tax
State Tax
2017
1,022 $
(100)
922 $
2017
741 $
181
922 $
2016
1,360
(249)
1,111
2016
980
131
1,111
$
$
$
$
- 102 -
The components of the net deferred tax asset, included in other assets as of December 31, are as follows:
$
(In thousands)
Assets:
Deferred compensation
Allowance for loan losses
Postretirement benefits
Subordinated loan interest
Investment securities and financial derivative
Impairment losses on investment securities
Loan origination fees
Capital loss carryforward
Held-to-maturity securities
Other
Total
Liabilities:
Prepaid pension
Depreciation
Accretion
Intangible assets
Mortgage servicing rights
Prepaid expenses and transaction fees
Total
Less: deferred tax asset valuation allowance
Net deferred tax asset
$
2017
847 $
1,862
126
23
551
-
108
-
153
212
3,882
(1,173)
(968)
(120)
(1,004)
(7)
(79)
(3,351)
531
-
531 $
2016
912
2,392
56
37
1,229
88
184
62
310
166
5,436
(1,605)
(1,083)
(211)
(1,470)
(15)
(204)
(4,588)
848
(150)
698
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient
taxable income within the carry back period. A valuation allowance is provided when it is more likely than not that some
portion, or all of the deferred tax assets, will not be realized. In assessing the need for a valuation allowance, management
considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income and the projected future
level of taxable income over the periods in which the temporary differences comprising the deferred tax assets will be
deductible.
Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax
asset or liability is recognized for the future tax consequences. This is attributable to the differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating and capital
loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. If current
available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance
is established. The judgment about the level of future taxable income, including that which is considered capital, is inherently
subjective and is reviewed on a continual basis as regulatory and business factors change. In prior years, management believed
that it may not have been able to generate sufficient future taxable income in the form of capital gains to offset its capital loss
carry forward position before those potential tax benefits expired. Accordingly, a valuation allowance of $150,000 was
maintained at December 31, 2016. During 2017, the Company recognized net capital gains of $428,000, effectively utilizing all
capital loss carryforward tax benefits established in prior years and thereby eliminating the need for any valuation allowance
related to the future utilization of those carryforwards at December 31, 2017. As a result, the Company maintained no valuation
allowance related to future tax benefits related to the utilization of capital loss carryforwards at December 31, 2017.
On December 22, 2017 the Tax Act was signed into law. The Tax Act instituted significant changes to various sections of the
Internal Revenue Code that effects the Company. Most notably, the Tax Act reduces the Company’s marginal federal income
tax rate from 34% to 21% starting January 1, 2018. Generally Accepted Accounting Principles (“GAAP”) requires that the
impact of the provisions of the Tax Act be accounted for in the period of enactment. Accordingly, the Company recorded an
income tax benefit in the fourth quarter of 2017 related to the Tax Act in the amount of $155,000. The reduction in income tax
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expense was largely attributable to the reduction in the value of net deferred tax assets and liabilities reflecting lower future tax
obligations resulting from the Tax Act’s enacted lower federal corporate tax rate.
A reconciliation of the federal statutory income tax rate to the effective income tax rate for the years ended December 31, is as
follows:
Federal statutory income tax rate
State tax, net of federal benefit
Tax-exempt interest income
Increase in value of bank owned life insurance less premiums paid
Change in valuation allowance
Remeasurement of net deferred tax assets for tax rate reduction - Tax Cuts & Jobs Act
Other
Effective income tax rate - Pathfinder Bancorp, Inc.
Minority interest
Effective income tax rate
2017
34.0 %
2.9
(11.2)
(2.0)
(3.5)
(3.5)
4.5
21.2 %
(0.6)
20.6 %
2016
34.0 %
1.9
(8.6)
(2.0)
(2.6)
-
2.5
25.2 %
0.3
25.5 %
NOTE 18: COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit.
Such commitments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated
statement of condition. The contractual amount of those commitments to extend credit reflects the extent of involvement the
Company has in this particular class of financial instrument. The Company’s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual
amount of the instrument. The Company uses the same credit policies in making commitments as it does for on-balance sheet
instruments.
At December 31, 2017 and 2016, the following financial instruments were outstanding whose contract amounts represent credit
risk:
(In thousands)
Commitments to grant loans
Unfunded commitments under lines of credit
Unfunded commitments related to construction loans in progress
Standby letters of credit
$
Contract Amount
2017
58,235 $
62,879
3,506
2,153
2016
46,649
48,653
5,918
1,900
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a
fee. Since some of the commitment amounts are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-
case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on
management’s credit evaluation of the counter party. Collateral held varies but may include residential real estate and income-
producing commercial properties. Loan commitments outstanding at December 31, 2017 with fixed interest rates amounted to
approximately $11.1 million. Loan commitments, including unused lines of credit and standby letters of credit, outstanding at
December 31, 2017 with variable interest rates amounted to approximately $112.2 million. These outstanding loan
commitments carry current market rates.
Unfunded commitments under standby letters of credit, revolving credit lines and overdraft protection agreements are
commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a
specified maturity date and may not be drawn upon to the total extent to which the Company is committed.
Letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a
third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in
issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company
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generally holds collateral and/or personal guarantees supporting these commitments. 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 Company leases land and leasehold improvements under agreements that expire in various years with renewal options over
the next 30 years. Rental expense, included in building occupancy expense, amounted to $166,000 for 2017 and $149,000 for
2016.
Approximate minimum rental commitments for non-cancelable operating leases are as follows:
Years Ending December 31:
(In thousands)
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
$
203
184
170
145
136
301
1,139
NOTE 19: DIVIDENDS AND RESTRICTIONS
The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the
Company. In addition to state law requirements and the capital requirements discussed in Note 20, federal statutes, regulations
and policies limit the circumstances under which the Bank may pay dividends. The amount of retained earnings legally
available under these regulations approximated $11.6 million as of December 31, 2017. Dividends paid by the Bank to the
Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum
capital requirements. The Bank made no dividend payments to the Company in the years ended December 31, 2017, December
31, 2016 or December 31, 2015.
Capital adequacy is evaluated primarily by the use of ratios which measure capital against total assets, as well as against total
assets that are weighted based on defined risk characteristics. The Company’s goal is to maintain a strong capital position,
consistent with the risk profile of its banking operations. This strong capital position serves to support growth and expansion
activities while at the same time exceeding regulatory standards. At December 31, 2017, the Bank met the regulatory definition
of a “well-capitalized” institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 8%, Tier
1 common equity exceeding 6.5%, and a total risk-based capital ratio exceeding 10%.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain
discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5%
of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital
requirements. The buffer is separate from the capital ratios required under the Prompt Corrective Action (“PCA”) standards. In
order to avoid these restrictions, the capital conservation buffer effectively increases the minimum the following capital to risk-
weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. The capital conservation buffer requirement
began being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully
implemented at 2.5% on January 1, 2019. At December 31, 2017, the Bank exceeded all current and projected regulatory
required minimum capital ratios, including the maximum capital buffer level that will be required on January 1, 2019.
NOTE 20: REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
- 105 -
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of
Tier 1 capital (as defined) to average assets (as defined).
As of December 31, 2017, the Bank’s most recent notification from the Federal Deposit Insurance Corporation categorized the
Bank as “well-capitalized”, under the regulatory framework for prompt corrective action. To be categorized as “well-
capitalized”, the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the tables
below. There are no conditions or events since that notification that management believes have changed the Bank’s category.
As noted above, the regulations also impose a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital
to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The buffer is separate
from the capital ratios required under the Prompt Corrective Action (“PCA”) standards and imposes restrictions on dividend
distributions and discretionary bonuses. In order to avoid these restrictions, the capital conservation buffer effectively increases
the minimum the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity.
The capital conservation buffer requirement began being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets
and increasing each year until fully implemented at 2.5% on January 1, 2019. At December 31, 2017, the Bank exceeded all
current and projected regulatory required minimum capital ratios, including the maximum capital buffer level that will be
required on January 1, 2019.
The Bank’s actual capital amounts and ratios as of December 31, 2017 and 2016 are presented in the following table.
(Dollars in thousands)
As of December 31, 2017:
Total Core Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Tier 1 Common Equity (to Risk-Weighted Assets)
Tier 1 Capital (to Assets)
As of December 31, 2016:
Total Core Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Tier 1 Common Equity (to Risk-Weighted Assets)
Tier 1 Capital (to Assets)
Minimum For
Capital
Adequacy
Purposes
Amount Ratio
Minimum To Be
"Well-
Capitalized"
Under Prompt
Corrective
Provisions
Amount Ratio
Well-Capitalized
With Buffer,
Fully
Phased In 2019
Amount Ratio
Actual
Amount Ratio
$78,105
$71,114
$71,114
$71,114
13.97% $44,733
12.72% $33,550
12.72% $25,162
8.16% $34,863
8.00% $55,916
6.00% $44,733
4.50% $36,345
4.00% $43,579
10.00% $58,712
8.00% $47,529
6.50% $39,141
5.00% $43,579
10.50%
8.50%
7.00%
5.00%
$72,098
$66,003
$66,003
$66,003
14.79% $38,996
13.54% $29,247
13.54% $21,935
9.06% $29,154
8.00% $48,745
6.00% $38,996
4.50% $31,684
4.00% $36,443
10.00% $51,182
8.00% $41,433
6.50% $34,121
5.00% $36,443
10.50%
8.50%
7.00%
5.00%
On September 1, 2011, the Company entered into a Securities Purchase Agreement with the Secretary of the Treasury
(“Treasury”) pursuant to which the Company sold to the Treasury, 13,000 shares of its Senior Non-Cumulative Perpetual
Preferred Stock, Series B (“Series B Preferred Stock”), having a liquidation preference of $1,000 per share for aggregate
proceeds of $13.0 million. This transaction was entered into as part of the SBLF.
The Series B Preferred Stock was entitled to receive non-cumulative dividends payable quarterly, on each January 1, April 1,
July 1 and October 1, beginning October 1, 2011. The dividend rate, which was calculated on the aggregate liquidation amount,
was initially set at 4.2% per annum based upon the level of “Qualified Small Business Lending,” or “QSBL” (as defined in the
Securities Purchase Agreement) by Pathfinder Bank. The dividend rate for dividend periods subsequent to the initial period was
set based upon the “Percentage Change in Qualified Lending” (as defined in the Securities Purchase Agreement) between each
dividend period and the “Baseline” QSBL level. In general, the dividend rate decreased as the level of Pathfinder Bank’s
QSBL increased. Our dividend rate as of December 31, 2015 was 1.0%. Such dividends were not cumulative, but we could
only declare and pay dividends on our common stock (or any other equity securities junior to the Series B Preferred Stock) if we
have declared and paid dividends for the current dividend period on the Series B Preferred Stock. We were also subject to other
restrictions on our ability to repurchase or redeem other securities.
The Company had the right to redeem the shares of Series B Preferred Stock, in whole or in part, at any time at a redemption
price equal to the sum of the liquidation amount per share and the per-share amount of any unpaid dividends for the then-current
period, subject to any required prior approval by its primary federal regulator. On February 16, 2016, the Company redeemed
- 106 -
all 13,000 shares of the Series B Preferred Stock outstanding with the payment of $13.0 million to the SBLF. This redemption
was substantially financed by the issuance of the $10 million Subordinated Loan on October 15, 2015. The issuance of the
Subordinated Loan increased interest expense by $644,000 per year but prospectively reduced the amount payable to the SBLF
in preferred stock dividends. Effective April 1, 2016, the annual dividend rate for the preferred stock would have been 9.0%.
The retirement of the $13.0 million of the SBLF Preferred Series B stock, therefore resulted in an annual reduction of preferred
dividends payable of $1.2 million. The Company paid $0 and $16,000 in preferred dividends in 2017 and 2016, respectively.
These transactions had no effect on the regulatory capital position of the Bank.
The Company’s goal is to maintain a strong capital position, consistent with the risk profile of its subsidiary banks that supports
growth and expansion activities while at the same time exceeding regulatory standards. At December 31, 2017, the Bank
exceeded all regulatory required minimum capital ratios and met the regulatory definition of a “well-capitalized” institution, i.e.
a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6% and a total risk-based capital ratio
exceeding 10%.
The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2017 and 2016,
these reserve balances amounted to $6.3 million and $13.2 million, respectively and are included in cash and due from banks in
the statement of condition.
NOTE 21: INTEREST RATE DERIVATIVE
Derivative instruments are entered into primarily as a risk management tool of the Company. Financial derivatives are recorded
at fair value as other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been
designated and qualifies as part of a hedging relationship. For a fair value hedge, changes in the fair value of the derivative
instrument and changes in the fair value of the hedged asset or liability are recognized currently in earnings. For a cash flow
hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in other
comprehensive income and subsequently reclassified to earnings as the hedged transaction impacts net income. Any ineffective
portion of a cash flow hedge is recognized currently in earnings. See Note 22 for further discussion of the fair value of the
interest rate derivative.
The Company has $5.0 million of floating rate trust preferred debt indexed to 3-month LIBOR. As a result, it is exposed to
variability in cash flows related to changes in projected interest payments caused by changes in the benchmark interest rate.
During the fourth quarter of fiscal 2009, the Company entered into an interest rate swap agreement, with a $2.0 million notional
amount, to convert a portion of the floating rate trust preferred debt to a fixed rate for a term of approximately seven years at a
rate of 4.96%. This swap agreement expired in the second quarter of 2016 and was not renewed. The derivative, while in
effect, was designated as a cash flow hedge. The hedging strategy ensured that changes in cash flows from the derivative would
have been highly effective at offsetting changes in interest expense from the hedged exposure.
On five occasions during 2017, the Company sold, and subsequently repurchased, U.S. Treasury securities in the approximate
amount of $40.0 million for each transaction. These transactions were intended to act as hedges against rising short-term interest
rates. The Company was in controlling possession of, but did not own, the securities at the time of each sale. The securities had
been received by the Company, under industry-standard repurchase agreements, from an unrelated third party as collateral for a
series of 30-day loans of approximately $40.0 million on each occasion which were made at market rates of interest to that third
party. The security sale on each occasion provided the funds necessary to advance the loan to the third party and placed the
Company in what is generally described as a “short position” with respect to the sold U.S. Treasury securities. These
transactions acted as a hedge against rising short-term interest rates because the price of each sold security would be expected to
decline in a rising short-term interest rate environment and could therefore be re-acquired at the conclusion of each 30-day loan
period at a price lower than the price at which the securities were originally sold. Short-term generally rates rose over the
combined duration of these transactions and, consequently, the Company recognized aggregate gains on the sale and repurchase
of the securities in the amounts of $428,000 in 2017. The transactions’ gains were characterized as capital gains for tax
purposes.
On one occasion during 2016, the Company sold, and subsequently repurchased, a U.S. Treasury securities in the approximate
amount of $25.0 million. This transaction was intended to act as a hedge against rising short-term interest rates. The security
was received by the Company, under an industry-standard repurchase agreement, from an unrelated third party as collateral for a
30-day loan of approximately $25.0 million which was made at zero interest to that third party. Short-term rates rose over the
duration of this transaction and, consequently, the Company recognized a gain on the sale and repurchase of the security in the
amounts of $85,000 and a related tax benefit of $34,000 in 2016.
- 107 -
All hedging transactions were closed at December 31, 2017 and 2016 and had no effect on the Company’s consolidated
financial position on those dates with the exception of deferred fees for consulting services related to the transactions in the
amount of $53,000 at December 31, 2016. These deferred fees were recognized in other assets at December 31, 2016 and as a
component of interest expense in 2017.
NOTE 22: FAIR VALUE MEASUREMENTS AND DISCLOSURES
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 securities available-for-sale 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.
Interest rate swap derivative: The fair value of the interest rate swap derivative is obtained from a third party pricing agent and
is calculated based on a discounted cash flow model. All future floating cash flows are projected and both floating and fixed
cash flows are discounted to the valuation date. The curve utilized for discounting and projecting is built by obtaining publicly
available third party market quotes for various swap maturity terms, and therefore is classified within Level 2 of the fair value
hierarchy. The swap agreement presented in the accompanying financial statements expired in the second quarter of 2016 and
was not renewed.
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.
- 108 -
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 December 31, segregated by the level of
valuation inputs within the hierarchy utilized to measure fair value:
(In thousands)
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Equity investment securities:
Common stock - Financial services industry
Total available-for-sale securities
(In thousands)
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs
State and political subdivisions
Corporate
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Equity investment securities:
Mutual funds:
Ultra short mortgage fund
Common stock - Financial services industry
Total available-for-sale securities
December 31, 2017
Level 1
Level 2
Level 3
Total Fair
Value
- $
-
-
-
-
-
-
41,336
13,681
8,600
6,644
35,742
53,348
11,052
41,336 $
13,681
8,600
6,644
35,742
53,348
11,052
- $
-
-
-
-
-
-
-
- $
220
170,623 $
515
515 $
735
171,138
December 31, 2016
Level 1
Level 2
Level 3
Total Fair
Value
$
-
-
-
-
-
-
-
$
24,184
16,481
15,195
6,664
30,566
40,986
6,577
$
-
-
-
-
-
-
-
24,184
16,481
15,195
6,664
30,566
40,986
6,577
626
-
626
$
-
220
140,873
$
-
456
456
$
626
676
141,955
$
$
$
$
- 109 -
The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis as of December 31 were as
follows:
(In thousands)
Balance - December 31, 2016
Total gains realized/unrealized:
Included in earnings
Included in other comprehensive income
Settlements
Sales
Balance - December 31, 2017
Changes in unrealized gains included in earnings related to assets still held at December 31, 2017
Common Stock -
Financial Services
Industry
$
$
456
-
59
-
-
515
-
The following table summarizes the valuation techniques and significant unobservable inputs used for the Company's
investments that are categorized within Level 3 of the fair value hierarchy at the indicated dates:
(In thousands)
Investment Type
Common Stock - Financial
Services Industry
(In thousands)
Investment Type
Common Stock - Financial
Services Industry
Fair
Value
Valuation Techniques
Unobservable Input
Weight
At December 31, 2017
$
515
Inputs to comparables
Weight ascribed to comparable companies
100%
Fair
Value
Valuation Techniques
Unobservable Input
Weight
At December 31, 2016
$
456
Inputs to comparables
Weight ascribed to comparable companies
100%
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair
value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is
evidence of impairment).
The following tables summarize assets measured at fair value on a nonrecurring basis as of December 31, segregated by the
level of valuation inputs within the hierarchy utilized to measure fair value:
(In thousands)
Impaired loans
Foreclosed real estate
(In thousands)
Impaired loans
Foreclosed real estate
December 31, 2017
Level 1
-
-
$
$
Level 2
-
-
$
$
Level 3
4,887
434
December 31, 2016
Level 1
-
-
$
$
Level 2
-
-
$
$
Level 3
4,049
393
$
$
$
$
Total Fair
Value
4,887
434
$
$
Total Fair
Value
4,049
393
$
$
- 110 -
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.
Valuation
Techniques
Quantitative Information about Level 3
Fair Value Measurements
Unobservable
Input
At December 31, 2017
Impaired loans
Appraisal of collateral
(Sales Approach)
Discounted Cash Flow
Appraisal Adjustments
Costs to Sell
Range
(Weighted Avg.)
5% - 30% (9%)
7% - 13% (11%)
Foreclosed real estate
Appraisal of collateral
(Sales Approach)
Appraisal Adjustments
Costs to Sell
15% - 15% (15%)
6% - 8% (7%)
Valuation
Techniques
Quantitative Information about Level 3
Fair Value Measurements
Unobservable
Input
At December 31, 2016
Impaired loans
Appraisal of collateral
(Sales Approach)
Discounted Cash Flow
Appraisal Adjustments
Costs to Sell
Range
(Weighted Avg.)
5% - 10% (5%)
8% - 13% (10%)
Foreclosed real estate
Appraisal of collateral
(Sales Approach)
Appraisal Adjustments
Costs to Sell
15% - 15% (15%)
6% - 8% (7%)
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.
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.
- 111 -
Interest earning time deposits – The carrying amounts of these assets approximate their fair value and are classified as Level 1.
Investment securities – The fair values of securities available-for-sale and held-to-maturity are obtained from an independent
third party and are based on quoted prices on nationally recognized exchange 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.
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.
Interest rate swap derivative – The fair value of the interest rate swap derivative is obtained from a third party pricing agent and
is calculated based on a discounted cash flow model. All future floating cash flows are projected and both floating and fixed
cash flows are discounted to the valuation date. The curve utilized for discounting and projecting is built by obtaining publicly
available third party market quotes for various swap maturity terms, and therefore is classified within Level 2 of the fair value
hierarchy. The swap agreement presented in the accompanying financial statements expired in the second quarter of 2016 and
was not renewed.
- 112 -
The carrying amounts and fair values of the Company’s financial instruments as of December 31 are presented in the following
table:
(In thousands)
Financial assets:
Cash and cash equivalents
Investment securities - available-for-sale
Investment securities - available-for-sale
Investment securities - available-for-sale
Investment securities - held-to-maturity
Federal Home Loan Bank stock
Net loans
Accrued interest receivable
Financial liabilities:
Demand Deposits, Savings, NOW and MMDA
Time Deposits
Borrowings
Subordinated loans
Accrued interest payable
Fair Value
Hierarchy
December 31, 2017
Carrying
Amounts
Estimated
Fair Values
December 31, 2016
Carrying
Amounts
Estimated
Fair Values
$
$
1
1
2
3
2
2
3
1
1
2
2
2
1
$
21,991
-
170,623
515
66,196
3,855
573,705
3,047
$
21,991
-
170,623
515
66,426
3,855
570,439
3,047
$
22,419
626
140,873
456
54,645
3,250
485,900
2,532
22,419
626
140,873
456
54,429
3,250
484,704
2,532
$
510,176
213,427
73,888
15,059
186
$
510,176
212,453
73,575
14,953
186
$
421,627
189,356
58,947
15,025
75
421,627
189,197
58,918
14,310
75
NOTE 23: PARENT COMPANY – FINANCIAL INFORMATION
The following represents the condensed financial information of Pathfinder Bancorp, Inc. as of and for the years ended
December 31:
Statements of Condition
(In thousands)
Assets
Cash
Investments
Investment in bank subsidiary
Investment in non-bank subsidiary
Other assets
Total assets
Liabilities and Shareholders' Equity
Accrued liabilities
Subordinated loans
Shareholders' equity
Total liabilities and shareholders' equity
2017
2016
5,004 $
515
71,883
155
117
77,674 $
471 $
15,059
62,144
77,674 $
5,424
455
67,281
155
475
73,790
404
15,025
58,361
73,790
$
$
$
$
- 113 -
Statements of Income
(In thousands)
Income
Dividends from non-bank subsidiary
Realized gains on available-for sale investment securities
Operating, net
Total income
Expenses
Interest
Operating, net
Total expenses
Loss before taxes and equity in undistributed net
income of subsidiaries
Tax benefit
Loss before equity in undistributed net income of subsidiaries
Equity in undistributed net income of subsidiaries
Net income
Statements of Cash Flows
(In thousands)
Operating Activities
Net Income
Equity in undistributed net income of subsidiaries
Realized gains on available-for-sale investment securities
Stock based compensation and ESOP expense
Amortization of deferred financing from subordinated loan
Net change in other assets and liabilities
Net cash flows from operating activities
Investing Activities
Purchase investments
Net gain on hedging transaction
Proceeds from sale of investment
Net cash flows from investing activities
Financing activities
Redemption of preferred stock - SBLF
Proceeds from exercise of stock options
Purchase of common stock
Cash dividends paid to preferred shareholders
Cash dividends paid to common shareholders
Net cash flows from financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2017
2016
4 $
428
15
447
1,371
169
1,540
(1,093)
262
(831)
4,322
3,491 $
4
108
-
112
880
230
1,110
(998)
254
(744)
4,016
3,272
2017
2016
3,491 $
(4,322)
-
712
34
822
737
-
(428)
-
(428)
-
155
-
-
(884)
(729)
(420)
5,424
5,004 $
3,272
(4,016)
(23)
557
34
(152)
(328)
(130)
(85)
43
(172)
(13,000)
143
(1,755)
(16)
(866)
(15,494)
(15,994)
21,418
5,424
$
$
$
$
NOTE 24: RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted loans to certain directors, executive officers and their affiliates
(collectively referred to as “related parties”). These loans were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with other unaffiliated parties and do not involve more
than normal risk of collectability.
- 114 -
The following represents the activity associated with loans to related parties during the year ended December 31, 2017:
(In thousands)
Balance at the beginning of the year
Originations and Officer additions
Principal payments
Balance at the end of the year
$
$
10,884
2,287
(3,899)
9,272
Deposits of related parties at December 31, 2017 and December 31, 2016 were $3.2 million and $3.4 million, respectively.
NOTE 25: CONVERSION AND REORGANIZATION
On October 16, 2014, the former Pathfinder Bancorp (“former Pathfinder”) completed the conversion and reorganization
pursuant to which Pathfinder Bancorp, MHC converted to the stock holding company form of organization under a “second
step” conversion (the “Conversion”), and the Bank reorganized from the two-tier mutual holding company structure to the stock
holding company structure. Prior to the completion of the Conversion, the MHC owned approximately 60.4% of the common
stock of the Company. The Company, the new stock holding company for Pathfinder Bank, sold 2,636,053 shares of common
stock at $10.00 per share, for gross offering proceeds of $26.4 million in its stock offering. In addition, $197,000 in cash was
received by the Company from the MHC upon it ceasing to exist.
Concurrent with the completion of the offering, shares of common stock of the Company owned by the public were exchanged
for shares of the Company’s common stock so that the shareholders now own approximately the same percentage of the
Company’s common stock as they owned of the former Pathfinder’s common stock immediately prior to the
Conversion. Shareholders of the former Pathfinder received 1.6472 shares of the Company’s common stock for each share of
the former Pathfinder’s common stock that they owned immediately prior to completion of the transaction. As a result of the
offering and the exchange of shares, the Company had 4,353,850 shares outstanding at December 31, 2014. The Company has
4,236,744 and 4,280,227 shares outstanding at December 31, 2016 and December 31, 2017, respectively.
The Conversion was accounted for as a change in corporate form with no resulting change in the historical basis of the
Company’s assets, liabilities, and equity. Costs related to the offering were primarily marketing fees paid to the Company’s
investment banking firm, legal and professional fees, registration fees, printing and mailing costs and totaled $1.5 million.
Accordingly, net proceeds were $24.9 million. In addition, as part of the Conversion and dissolution of the MHC, the Company
received $197,000 of cash previously held by the MHC. As a result of the Conversion and Offering, Pathfinder Bancorp, Inc., a
federal corporation, was succeeded by a new fully public Maryland corporation with the same name and the MHC ceased to
exist.
The shares of common stock sold in the offering and issued began trading on the NASDAQ Capital Market on October 17, 2014
under the trading symbol “PBHC.”
In accordance with Board of Governors of the Federal Reserve System regulations, at the time of the reorganization, the
Company substantially restricted retained earnings by establishing a liquidation account. The liquidation account will be
maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The
Bank will establish a parallel liquidation account to support the Company’s liquidation account in the event the Company does
not have sufficient assets to fund its obligations under its liquidation account. The liquidation accounts will be reduced annually
to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder’s interest in the liquidation accounts. In the event of a complete liquidation of the Bank or the
Company, each account holder will be entitled to receive a distribution in an amount proportionate to the adjusted qualifying
account balances then held.
The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.
- 115 -
NOTE 26: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in the components of accumulated other comprehensive income (loss) (“AOCI”), net of tax, for the periods indicated
are summarized in the table below.
(In thousands)
Beginning balance
Other comprehensive income before
reclassifications
Amounts reclassified from AOCI
Reclassification of effect of tax rate
change(1)
Ending balance
Retirement
Plans
(1,513) $
$
(379)
89
(417)
(2,220) $
$
For the years ended December 31, 2017
Unrealized Gains
and Losses
on Financial
Derivative
-
-
-
-
-
$
$
Unrealized Gains
and Losses on
Available-for-
Sale Securities
Unrealized Loss
on Securities
Transferred to
Held-to-
Maturity
(1,845) $
(464) $
Total
(3,822)
872
(293)
(292)
(1,558) $
115
-
608
(204)
(81)
$
(430)
(790)
(4,208)
(1) Reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting from the
newly enacted Federal corporate income tax rate reduction from 34% to 21%.
(In thousands)
Beginning balance
Other comprehensive income before
reclassifications
Amounts reclassified from AOCI
Ending balance
$
$
Retirement
Plans
(1,844) $
198
133
(1,513) $
For the years ended December 31, 2016
Unrealized Gains
and Losses
on Financial
Derivative
Unrealized Gains
and Losses on
Available-for-
Sale Securities
(16) $
1
15
- $
(51) $
(1,436)
(358)
(1,845) $
Unrealized Loss
on Securities
Transferred to
Held-to-
Maturity
(654)
190
-
(464)
$
Total
(2,565)
(1,047)
(210)
(3,822)
The following table presents the amounts reclassified out of each component of AOCI for the indicated annual period:
(In thousands)
For the years ended
Details about AOCI1 components
December 31, 2017 December 31, 2016
Affected Line Item in the Statement
of Income
Unrealized holding gain on financial derivative:
Reclassification adjustment for
interest expense included in net income
Retirement plan items
Retirement plan net losses
recognized in plan expenses2
Available-for-sale securities
Realized gain on sale of securities
$
$
$
$
$
$
(25)
10
(15)
Interest on long term borrowings
Provision for income taxes
Net Income
(222)
89
(133)
Salaries and employee benefits
Provision for income taxes
Net Income
594
(236)
358
Net gains on sales and redemptions of
investment securities
Provision for income taxes
Net Income
- $
-
- $
(150) $
61
(89) $
489 $
(196)
293 $
- 116 -
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
REPORT OF MANAGEMENT’S RESPONSIBILITY
The Company’s management, including the Company’s principal executive officer and principal financial officer, have
evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the
principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the
Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange
Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s report on internal control over financial reporting is contained in “Item 8 – Financial Statements and
Supplementary Data” in this annual report in Form 10-K.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm
regarding internal control over financial reporting pursuant to the rules of the SEC that exempts the Company from such
attestation and requires only management’s report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal
quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
ITEM 9B: OTHER INFORMATION
None.
- 117 -
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(a)
(b)
(c)
(d)
Information concerning the directors of the Company is incorporated herein by reference to Proposal 1 of the
Company’s Proxy Statement for the Annual Meeting of Shareholders.
Information concerning the officers and directors compliance with Section 16(a) of the Securities Exchange Act is
incorporated herein by reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders under
the caption “Section 16(a) Beneficial Ownership Reporting Compliance”.
Information concerning the Company’s Code of Ethics is incorporated herein by reference to the Company’s Proxy
Statement for the Annual Meeting of Shareholders under the caption “Code of Ethics”.
Information concerning the Company’s Audit Committee and “financial expert” thereof is incorporated herein by
reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders under the caption “Audit
Committee”.
(e)
Set forth below is information concerning the Executive Officers of the Company at December 31, 2017.
Name
Thomas W. Schneider
James A. Dowd, CPA
Ronald Tascarella
Edward A. Mervine
Daniel Phillips
Age
56
50
59
61
53
Positions Held With the Company
President and Chief Executive Officer
Executive Vice President, Chief Operating Officer and Chief Financial
Officer
Executive Vice President, Chief Credit Officer
Senior Vice President, General Counsel
Senior Vice President, Chief Information Officer
ITEM 11: EXECUTIVE COMPENSATION
(a)
(a)
Information with respect to management compensation and transactions required under this item is incorporated by
reference hereunder in the Company's Proxy Materials for the Annual Meeting of Shareholders under the caption
"Compensation Committee".
Information concerning director compensation is incorporated herein by reference to the Company’s Proxy Statement for
the Annual Meeting of Shareholders under the caption “Directors Compensation”.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference hereunder in the Company’s Proxy Materials for the Annual
Meeting of Shareholders under the caption "Voting Securities and Principal Holders Thereof."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference hereunder in the Company’s Proxy Materials for the Annual
Meeting of Shareholders under the captions “Independence and Diversity of Directors” and "Transactions with Certain Related
Persons”.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference hereunder in the Company’s Proxy Materials for the Annual
Meeting of Shareholders under the caption "Audit and Related Fees".
- 118 -
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
(a)(2)
(b)
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
Financial Statements - The Company’s consolidated financial statements, for the years ended December 31, 2017
and 2016, together with the Report of Independent Registered Public Accounting Firm are filed as part of this Form
10-K report. See “Item 8: Financial Statements and Supplementary Data.”
Financial Statement Schedules - All financial statement schedules have been omitted as the required information is
inapplicable or has been included in “Item 7: Management Discussion and Analysis.”
Exhibits
Articles of Incorporation of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.1 to Pathfinder
Bancorp, Inc.’s Registration Statement on Form S-1, file no. 333-196676, originally filed on June 11, 2014)
Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.2 to Pathfinder Bancorp, Inc.’s
Registration Statement on Form S-1, file no. 333-196676, filed on June 11, 2014)
Form of Stock Certificate of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 4 to Pathfinder
Bancorp, Inc.’s Registration Statement on Form S-1, file no. 333-196676, filed on June 11, 2014)
Indenture between Pathfinder Bancorp, Inc., a federal corporation, and Wilmington Trust Company, as trustee,
dated March 22, 2007 (Incorporated herein by reference to Exhibit 4.1 to Pathfinder Bancorp, Inc.’s Current Report
on Form 8-K, file no. 001-36695, filed on October 22, 2014)
Supplemental Indenture between Pathfinder Bancorp, Inc. and Wilmington Trust Company, as trustee, dated
October 16, 2014 (Incorporated herein by reference to Exhibit 4.2 to Pathfinder Bancorp, Inc.’s Current Report on
Form 8-K, file no. 001-36695, filed on October 22, 2014)
2003 Executive Deferred Compensation Plan (Incorporated herein by reference to Exhibit 10.3 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2008 file no. 000-23601, filed on March 27, 2009)
2003 Trustee Deferred Fee Plan (Incorporated herein by reference to Exhibit 10.4 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2008 file no. 000-23601, filed on March 27, 2009)
Employment Agreement between Pathfinder Bank and Thomas W. Schneider, President and Chief Executive
Officer (Incorporated by reference to Exhibit 10.5 to Pathfinder Bancorp, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 2008, file no. 000-23601, filed on March 27, 2009)
Change of Control Agreement between Pathfinder Bank and Ronald Tascarella (Incorporated by reference to
Exhibit 10.7 to Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008,
file no. 000-23601, filed on March 27, 2009)
Change of Control Agreement between Pathfinder Bank and James A. Dowd (Incorporated by reference to Exhibit
10.8 to Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008, file no.
000-23601, filed on March 27, 2009)
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and Thomas W. Schneider effective
February 24, 2014 (Incorporated by reference to Exhibit 10.13 to Pathfinder Bancorp, Inc.’s Current Report Form
8-K, file no. 000-23601, filed on February 25, 2014)
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and James A. Dowd effective
February 24, 2014 (Incorporated by reference to Exhibit 10.15 to Pathfinder Bancorp, Inc.’s Current Report Form
8-K, file no. 000-23601, filed on February 25, 2014)
Amended and Restated Declaration of Trust among Pathfinder Bancorp, Inc., a federal corporation, as Sponsor,
Wilmington Trust Company, as Delaware and Institutional Trustee, and the administrative trustees of the
Pathfinder Statutory Trust II (Incorporated herein by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s
Current Report on Form 8-K, file no. 001-36695, filed on October 22, 2014)
Amendment two to the Trustee Deferral Fee Plan (Incorporated by reference to Exhibit 10.17 to Pathfinder
Bancorp, Inc.’s Annual Report on Form 10-K, file no. 001-36695, filed on March 18, 2015)
Amendment one to the Executive Deferral Compensation Plan (Incorporated by reference to Exhibit 10.18 to
Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K, file no. 001-36695, filed on March 18, 2015)
- 119 -
10.11
10.12
10.13
10.14
14
21
23
31.1
31.2
32
101
Amendment one to the Supplemental Executive Retirement Plan (Incorporated by reference to Exhibit 10.19 to
Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K, file no. 001-36695, filed on March 18, 2015)
Subordinated Loan Agreement (Incorporated herein by reference to Pathfinder Bancorp, Inc.’s Current Report on
Form 8-K, file no. 001-36695, filed on October 19, 2015)
2016 Pathfinder Bancorp, Inc. Equity Incentive Plan (incorporated by reference to Appendix A to Pathfinder
Bancorp, Inc.’s Proxy Statement, file no. 001-36695, filed on March 29, 2016.
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and Ronald Tascarella effective
February 24, 2014 filed herewith.
Code of Ethics (Incorporated by reference to Exhibit 14 to Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K
for the year ended December 31, 2003, file no. 000-23601, filed on March 31, 2004)
Subsidiaries of Registrant
Consent of Bonadio & Co., LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition as of
December 31, 2017 and 2016, (ii) the Consolidated Statements of Income for the years ended December 31, 2017
and 2016, (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2017 and
2016, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2017
and 2016, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016, and
(vi) the Notes to the Consolidated Financial Statements
ITEM 16: FORM 10-K SUMMARY
None.
- 120 -
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2018
Pathfinder Bancorp, Inc.
By:
/s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
By: /s/ Thomas W. Schneider
By: /s/ James A. Dowd
Thomas W. Schneider, President and
Chief Executive Officer
(Principal Executive Officer)
James A. Dowd, Executive Vice President, Chief
Operating Officer and Chief Financial Officer
(Principal Financial Officer)
Date: March 30, 2018
Date: March 30, 2018
By: /s/ Lloyd Stemple
Lloyd Stemple, Director
Date: March 30, 2018
By: /s/John P. Funiciello
John Funiciello, Director
Date: March 30, 2018
By: /s/ David A. Ayoub
David A. Ayoub, Director
Date: March 30, 2018
By: /s/ George P. Joyce
George P. Joyce, Director
Date: March 30, 2018
By: /s/ Adam C. Gagas
Adam C. Gagas, Director
Date: March 30, 2018
By: /s/ Lisa A. Kimball
Lisa A. Kimball, Vice President and
Controller (Principal Accounting Officer)
Date: March 30, 2018
By: /s/ William A. Barclay
William A. Barclay, Director
Date: March 30, 2018
By: /s/ Chris R. Burritt
Chris R. Burritt, Director
Date: March 30, 2018
By: /s/ John F. Sharkey
John F. Sharkey, Director
Date: March 30, 2018
By: /s/ Melanie Littlejohn
Melanie Littlejohn, Director
Date: March 30, 2018
- 121 -
EXHIBIT 21: SUBSIDIARIES OF THE REGISTRANT
Name
Pathfinder Bank
Pathfinder Statutory Trust II
Pathfinder REIT, Inc.
Whispering Oaks Development Corp.
State of Incorporation
New York (direct)
Delaware (direct)
New York (indirect)
New York (indirect)
Pathfinder Risk Management Company Inc.
New York (indirect)
FitzGibbons Agency, LLC (1)
New York (indirect)
(1) Pathfinder Bancorp, Inc. indirectly owns 51% of FitzGibbons Agency, LLC
The Company has evaluated the activities relating to its strategic business units. The controlling interest in the FitzGibbons
Agency is dissimilar in nature and management when compared to the Company’s other strategic business units which are
judged to be similar in nature and management. The Company has determined that the FitzGibbons Agency is below the
reporting threshold in size in accordance with Accounting Standards Codification 280. Accordingly, the Company has
determined it has no reportable segments.
EXHIBIT 23: CONSENT OF BONADIO & CO., LLP
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Pathfinder Bancorp, Inc.
Oswego, New York
We hereby consent to the incorporation by reference in this Annual Report on Form 10-K of Pathfinder Bancorp, Inc. and
subsidiaries for the year ended December 31, 2017 of our report dated March 30, 2018 included in its Registration Statement on
Form S-8 (No. 333-202081) relating to the consolidated financial statements for the two years ended December 31, 2017.
/s/ Bonadio & Co., LLP
Bonadio & Co., LLP
Syracuse, New York
March 30, 2018
EXHIBIT 31.1: Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Thomas W. Schneider, President and Chief Executive Officer, certify that:
1.
2.
3.
4.
I have reviewed this Annual report on Form 10-K of Pathfinder Bancorp, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the consolidated financial statements, and other financial information included in this report,
fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting, to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes in accordance with generally accepted
accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
March 30, 2018
/s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
EXHIBIT 31.2: Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial Officer
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James A. Dowd, Executive Vice President, Chief Operating Officer and Chief Financial Officer, certify that:
1.
2.
3.
4.
I have reviewed this Annual report on Form 10-K of Pathfinder Bancorp, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the consolidated financial statements, and other financial information included in this report,
fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting, to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes in accordance with generally accepted
accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
March 30, 2018
/s/ James A. Dowd
James A. Dowd
Executive Vice President, Chief Operating Officer and
Chief Financial Officer
EXHIBIT 32 Section 1350 Certification of the Chief Executive and Chief Financial Officers
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Thomas W. Schneider, President and Chief Executive Officer, and James A. Dowd, Executive Vice President, Chief Operating
Officer and Chief Financial Officer of Pathfinder Bancorp, Inc. (the "Company"), each certify in his capacity as an officer of the
Company that he has reviewed the Annual Report of the Company on Form 10-K for the year ended December 31, 2017 and
that to the best of his knowledge:
1.
2.
the report fully complies with the requirements of Sections 13(a) of the Securities Exchange Act of 1934; and
the information contained in the report fairly presents, in all material respects, the consolidated financial condition and
results of operations of the Company.
The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended
by Section 906 of the Sarbanes-Oxley Act of 2002.
March 30, 2018
March 30, 2018
/s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
/s/ James A. Dowd
James A. Dowd
Executive Vice President, Chief Operating Officer and
Chief Financial Officer
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
Melanie Littlejohn
Thomas W. Schneider
John F. Sharkey, III
Lloyd “Buddy” Stemple
PATHFINDER EXECUTIVE OFFICERS
Thomas W. Schneider
President, Chief Executive Officer
James A. Dowd, CPA
Executive Vice President,
Chief Operating Officer, Chief Financial Officer
Ronald Tascarella
Executive Vice President, Chief Credit Officer
Edward A. Mervine, Esq.
Senior Vice President, General Counsel,
Chief Risk Officer, Corporate Secretary
Daniel R. Phillips
Senior Vice President,
Chief Information Officer
Calvin Corriders
Regional President, Syracuse Market
PATHFINDER OFFICERS
Robert Butkowski
First Vice President, Branch Administration
Will O’Brien
First Vice President,
Credit Administration
Walter F. Rusnak
First Vice President, Finance
Beth K. Alfieri
Vice President,
Senior Business Development Officer
Heather Bush
Vice President, Human Resources
Roberta J. Davis
Vice President, Financial Analyst
Karri Hibbert
Vice President, Facilities Manager
Rhonda Hutchins
Vice President, Compliance
Lisa A. Kimball
Vice President, Controller
Mary McConkey
Vice President,
Electronic Commerce Manager
Joseph P. McManus
Vice President, Computer Operations Manager
April Phillips
Vice President, Core Systems/Deposit
Operations Manager
Michael Quenville
Vice President, Business Development Officer
Reyne Pierce
Vice President, Team Leader Residential
and Consumer Lending
Ronald G. Tascarella
Vice President, Commercial Team Leader
John Andrews
Assistant Vice President, Branch Manager
Randall Barnard
Assistant Vice President, Branch Manager
Susan Cahill
Assistant Vice President, Branch Manager
Theresa L. Colburn
Assistant Vice President,
Internal Audit Manager
Jodi DeAugustine
Assistant Vice President, Branch Manager
Jessica DeGrenier
Assistant Vice President,
Commercial Loss Mitigation
Shari Gordon
Assistant Vice President,
Information Security Officer
Lorna Hall
Assistant Vice President, Bank Secrecy
and Security Officer
Laurie L. Lockwood
Assistant Vice President, Assistant Controller,
Benefits Adminstrator
Denise Lyga
Assistant Vice President, Branch Manager
Deana Michaels
Assistant Vice President, Branch Manager
Craig Nessel
Assistant Vice President, Branch Manager
Crystal Rafte
Assistant Vice President, Branch Analyst
Robert Rickert
Assistant Vice President, Retail Loss Mitigation
Paloma Sarkar
Assistant Vice President, Credit Risk
Team Leader
Amy Shaw
Assistant Vice President, Branch Manager
Jennifer Wright, Assistant Vice President
Business Deposit Sales Manager
Sydney DiPierro
Banking Officer Portfolio Manager
Nick Tryniski
Banking Officer Portfolio Manager
CORPORATE HEADQUARTERS
214 West First Street
Oswego, NY 13126
(315) 343-0057
ANNUAL MEETING
Friday, May 9, 2018, 10:00 AM
The Lake Ontario Conference and Events Center
25 East First Street
Oswego, NY 13126
STOCK LISTING
The NASDAQ Capital Market
Symbol: PBHC Listing: PathBcp
SPECIAL COUNSEL
Luse Gorman, PC
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
Executive Vice President,
Chief Operating Officer, Chief Financial Officer
214 West First Street
Oswego, NY 13126
(315) 343-0057
GENERAL INQUIRIES AND REPORTS
A copy of the Bank’s 2017 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 2018 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
(315) 343-0057
PLAZA OFFICE
State Route 104 East
Oswego
(315) 343- 4483
DOWNTOWN DRIVE-THRU
34 East Bridge Street
Oswego
(315) 343-2577
MEXICO OFFICE
Norman & Main Streets
Mexico
(315) 963-7248
FULTON OFFICE
5 West First Street South
Fulton
(315) 592-9545
LACONA OFFICE
1897 Harwood Drive
Lacona
(315) 387-3437
CENTRAL SQUARE OFFICE
3025 East Avenue
Central Square
(315) 676-2265
CICERO OFFICE
6194 State Route 31
Cicero
(315) 752-0033
PIKE BLOCK OFFICE
109 West Fayette
Syracuse
(315) 207- 8020
UTICA LOAN PRODUCTION OFFICE
200 Genesee Street
Utica
(315) 343-0057
LOCAL. COMMUNITY. TRUST.
WWW.PATHFINDERBANK.COM