UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 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.
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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
Emerging growth company
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Accelerated filer
Smaller reporting company
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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, 2018,
as reported by the NASDAQ Capital Market ($15.97), was approximately $69.2 million.
As of March 26, 2019, there were 4,387,244 shares outstanding of the Registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the 2019 Annual Meeting of Shareholders of the Registrant (Part III).
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2018
PATHFINDER BANCORP, INC.
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. The Company is subject to supervision and regulation by the Board of Governors of the
Federal Reserve System (the “Federal Reserve Board”). Pathfinder Bank is a commercial bank chartered by the New York State Department of Financial Services
(the “NYSDFS”).
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.
At December 31, 2018 and 2017, 4,362,328 and 4,280,227 shares of Company common stock were outstanding, respectively.
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At December 31, 2018, the Company had total consolidated assets of $933.1 million, total deposits of $727.1 million and shareholders' equity of $64.2 million plus
a noncontrolling interest of $238,000, which represents the 49% of the FitzGibbons Agency, LLC not owned by the Company.
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 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 commercial real estate, residential 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 and borrowed funds, employee compensation and benefits, data processing and facilities.
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, 2018, 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 income of $22,000 in 2018.
Pathfinder REIT, Inc., a subsidiary of the Bank, 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 was completed in the first quarter of 2019.
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 $840,000 in
annual revenues. The activities of Pathfinder Risk Management Company, Inc. resulted in pre-tax losses of $45,000 in 2018. The Company’s 51% controlling
interest in this entity resulted in a loss of $22,000 for the Company on a consolidated basis in 2018.
Employees
As of December 31, 2018, the Bank had 156 full-time employees and 7 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,
three branch offices in Onondaga County and one limited purpose office in Oneida County.
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Our primary lending market area includes both Oswego and Onondaga Counties. However, our primary deposit generating area is concentrated in Oswego County
and in the areas surrounding our Onondaga County branches.
The economies of Oswego County and Onondaga County are 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, aircraft systems and renewable energy.
Based on recent independent market survey reports, median home values were $141,200 in Onondaga County and $106,400 in Oswego County at the end of
2018. 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. In addition, potential new competitors may be emerging that are generically defined as financial technology (also referred to
as “FinTech” or “fintech”) companies. These entities seek to employ new technology and various forms of innovation in order to compete with traditional methods
of delivering financial services. The advanced use of smartphones for mobile banking, automated investing services and cryptocurrency are examples of such
technologies. Financial technology companies consist of both startups and established financial institutions and technology companies trying to replace or enhance
the usage of financial services provided by existing financial service entities, such as the Company. Many existing financial institutions are implementing fintech
solutions and technologies in order to improve and develop their services, as well as gaining an improved competitive position. Many of these technologies either
are implemented to varying degrees by the Bank, or will be available to the Bank for future implementation through its network of service providers and computer
system vendors. It cannot be predicted with certainty at this time how effective these new competitors will be in our marketplace or what costs the Company will
incur in the future to implement and maintain competitive technologies.
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, 2018, based on the most recently-available FDIC data, we had the largest market share in Oswego County, representing 44.4% of all deposits, and
we additionally held 1.5% 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 6.4% 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 one-to-four family
residential loans, 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 $2.0 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 generally 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 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/or 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 that are guaranteed by the Unites States Small Business Administration (“SBA”) or United States Department of Agriculture (“USDA”) 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, 2018, was generally $453,100 for single-family homes in our market area.
Although conforming loans are generally saleable at management’s discretion, 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 2018 and 2017. 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 interest 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 Banking 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 Banking Officer (serving as chair in the absence of the President), the
Executive Vice President, Chief Operating Officer, 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 $1.2
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 $12.5 million at December 31,
2018, on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus, which was $8.3 million at December 31, 2018,
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 the 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 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.
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 the Board-designated 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, mortgage-backed and asset-backed
securities issued by private issuers, 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 the 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 (which are issued by government-sponsored
enterprises and private issuers), 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 mortgage- and asset-backed securities, corporate securities and federal agency
obligations. Federal agency obligations include Federal Farm Credit Bank notes, Federal Home Loan Bank 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 valuation allowances
established in 2013 against the portion of the Company’s deferred tax assets related to existing capital loss carryforward tax positions. The valuation allowances
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 valuation allowances 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
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for the twelve months ended December 31, 2017 as a result of these hedging transactions. The Company did not have any hedging activities during the twelve
months ended December 31, 2018.
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 increased the level of its investments in mortgage-backed securities and collateralized
mortgage obligations issued by private entities. These securities are generally senior tranches of multi-class issuances that provide substantial credit enhancements
to the senior tranches 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 privately
issued mortgage-backed securities held by the Bank at December 31, 2018 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 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, 2018, 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 commercial business trade receivables and are generally
senior tranches of multi-class issuances. These tranches are offered with 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 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, 2018 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, 2018, no securities held by the Bank in this category had been downgraded by a NRSRO.
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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.
On May 24, 2018, The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”) was enacted, which repealed or modified
certain provisions of the Dodd-Frank Act and eased regulations on all financial institutions with the exception of the largest banks. The EGRRCPA’s provisions
include, among other items, clarifying that, subject to various conditions, reciprocal deposits of another depository institution obtained using a deposit broker
through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s
brokered-deposit regulations. At December 31, 2017, the Bank had $145.1 million in deposits that were categorized under the then-applicable regulations as
brokered deposits. Of the $145.1 million in deposits categorized as brokered deposits at December 31, 2017, $59.5 million would be considered to be brokered
deposits under the EGRRCPA regulations in effect at December 31, 2018.
Brokered deposits are employed by the Bank’s management to supplement the funding that the Bank obtains from customer deposits and other borrowings,
principally from the FHLB-NY, and are used to increase the overall efficiency of the Bank’s funding mix. Management intends to continue to use brokered deposits
in the future as an integral part of its overall funding strategies.
Borrowings
The Bank has a number of existing credit facilities available to it. At December 31, 2018, the Bank had existing lines of credit at FHLBNY, the Federal Reserve
Bank (“FRB”), and two 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.
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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 FDIC and the FRB. The capital securities of the trust are a pooled trust
preferred fund of Preferred Term Securities VI, Ltd., with interest rates that reset quarterly, and are indexed to the 3-month LIBOR plus 1.65%. These securities
have 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, 2018 and
2017. 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 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 annual interest rate charged
to the Company will be 6.25% through the maturity date of the subordinated loan. 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. Accordingly, interest expense of $647,000
and $645,000 were recorded in the years ended December 31, 2018 and 2017, respectively.
SUPERVISION AND REGULATION
General
Pathfinder Bank is a New York-chartered commercial bank and the Company is a Maryland corporation and a registered bank holding company. The Bank’s
deposits are insured up to applicable limits by the FDIC. The Bank is subject to extensive regulation by NYSDFS, as its chartering agency, and by the FDIC, its
primary federal regulator and deposit insurer. The 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 the Bank.
Set forth below is a summary of certain material statutory and regulatory requirements applicable to the Company and the Bank. The summary is not intended to be
a complete description of such statutes and regulations and their effects on the Company and the 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 the 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. Banks and savings
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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 Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”)
On May 24, 2018, the EGRRCPA was enacted, which repealed or modified certain provisions of the Dodd-Frank Act and eased regulations on all financial
institutions with the exception of the largest banks. The EGRRCPA’s provisions include, among other items: (i) exempting banks with less than $10 billion in
assets from the ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) not requiring appraisals for certain transactions
valued at less than $400,000 in rural areas; (iii) exempting banks that originate fewer than 500 open-end and 500 closed-end mortgages from HMDA’s expanded
data disclosures; (iv) clarifying that, subject to various conditions, reciprocal deposits of another depository institution obtained using a deposit broker through a
deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-
deposit regulations; (v) raising eligibility for the 18-month exam cycle from $1 billion to banks with $3 billion in assets; and (vi) simplifying capital calculations by
requiring regulators to establish for institutions under $10 billion in assets a community bank leverage ratio (tangible equity to average consolidated assets) at a
percentage not less than 8% and not greater than 10%; that such institutions may elect to replace the general applicable risk-based capital requirements for
determining well-capitalized status. In addition, the law required the Federal Reserve Board to raise the asset threshold under its Small Bank Holding Company
Policy Statement from $1 billion to $3 billion for bank or savings and loan holding companies that are exempt from consolidated capital requirements, provided
that such companies meet certain other conditions such as not engaging in significant nonbanking activities .
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 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. The Bank does not know of any past or current practice, condition or
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violation that may lead to any proceeding by the Superintendent or the NYSDFS against the 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 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 was phased in beginning January 1, 2016 at
0.625% of risk-weighted assets and increased each year until fully implemented at 2.5% on January 1, 2019. Notwithstanding the foregoing, pursuant to the
EGRRCPA, the FDIC proposed a rule that establishes a community bank leverage ratio (tangible equity to average consolidated assets) at 9% for institutions under
$10 billion in assets that such institutions may elect to utilize in lieu of the general applicable risk-based capital requirements under Basel III. Such institutions that
meet the community bank leverage ratio and certain other qualifying criteria will automatically be deemed to be well-capitalized. Until the FDIC’s proposed rule is
finalized, the Basel III risk-based and leverage ratios remain in effect.
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
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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.
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 including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after being designated “critically
undercapitalized.”
As noted above, the EGRRCPA has eliminated the Basel III requirements for banks with less than $10.0 billion in assets who elect to follow the community bank
leverage ratio once the FDIC’s rule is finalized. The FDIC’s proposed rule provides that the Bank will be well-capitalized with a community bank leverage ratio of
9% or greater, adequately capitalized with a community bank leverage ratio of 7.5% or greater, undercapitalized if the Bank’s community bank leverage ratio is
less than 7.5% and greater than 6% and significantly undercapitalized if the Bank’s community bank leverage ratio is less than 6%. The definition of critically
undercapitalized is unchanged from the current regulations.
At December 31, 2018, 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 (“BHC”) 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
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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 increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured
deposits. The FDIC was required to seek to achieve the 1.35% ratio by September 30, 2020. The FDIC indicated that the 1.35% ratio was exceeded in November
2018. Insured institutions of less than $10 billion of assets will receive credits for the portion of their assessments that contributed to the reserve ratio between
1.15% and 1.35%. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC, and the FDIC 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 September 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, 2018, the annualized Financing Corporation assessment was equal to 0.32 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.
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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 $124.2 million; a 10% reserve ratio is
applied above $124.2 million. The first $16.3 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, 2018, 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;
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;
Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws;
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•
•
•
•
•
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 21 st 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 BHC, 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 BHC 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 BHC 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 BHC 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 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.
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On August 28, 2018, pursuant to EGRRCPA, the FRB issued an interim final rule revising the Policy Statement increasing the consolidated asset limit to $3 billion.
U nder the Policy Statement, a BHC that meets certain Qualitative Requirements :
•
•
is exempt from the FRB's risk-based capital and leverage rules (Appendixes A and D of Regulation Y); and
may use debt to finance up to 75% of the purchase price of an acquisition allowing (in theory) a BHC to have a debt-to-equity ratio of up to 3:1.
The Policy Statement now applies to a BHC with consolidated assets of less than $3 billion that meets the following Qualitative Requirements: (i) it is not engaged
in significant non-banking activities either directly or through a non-bank subsidiary; (ii) it does not conduct significant off-balance sheet activities, including
securitizations or asset management or administration, either directly or through a non-bank subsidiary; or (iii) it does not have a material amount of debt or equity
securities outstanding (other than trust preferred securities) that are registered with the SEC. BHCs that meet these Qualitative Requirements are determined to be
"Qualifying BHCs". A Qualifying BHC is exempt from the FRB's risk-based capital and leverage rules. As a consequence, it does not have to comply with the
Basel III Capital Adequacy rules. Each subsidiary bank of a Qualifying BHC must comply with the Basel III Capital Adequacy rules and must be well-capitalized.
If any subsidiary bank is not, the FRB expects it to become well-capitalized within a brief period of time. This Policy Statement applies to the Company.
A BHC 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 BHCs. 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 BHC appears consistent with the
organization’s capital needs, asset quality and overall financial condition. The Federal Reserve Board’s policies also require that a BHC 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 BHC 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 Company and the 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 the Bank.
The Company’s status as a registered BHC 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 to exceed, in any three-month period, the greater
of 1% of our outstanding shares, or the average weekly volume of trading in
- 24 -
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 Cuts and Jobs Act (“Tax Act’) was signed into law. The Tax Act instituted significant changes to various sections of the Internal
Revenue Code that affect the Company. Most notably, the Tax Act reduced the Company’s marginal federal income tax rate from 34% to 21% effective 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 a nonrecurring 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 federal tax return was under audit for the year ended December 31, 2014 by the Internal Revenue Service. The Company received a final notice
that the audit was concluded on April 16, 2018, with no findings or changes to our reported tax. 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, 2018, 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, 2018 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 Tax 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.
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
- 25 -
received deduction is 65 % when the corporation receiving the dividend owns at least 20% of the stock of the distributing corporation. The dividends-received
deduction is 50 % when the corporation receiving the dividend owns less than 20% of the distributing corporation.
Interest Expense. The Tax Act limits a taxpayer’s annual deduction of business interest expense to the sum of (i) business interest income and (ii) 30% of
“adjusted taxable income”, defined as a business’s taxable income without taking into account business interest income or expense, net operating losses, and, for
2018 through 2021, depreciation, amortization and depletion. Because we generate significant amounts of net interest income, we do not expect to be impacted by
this limitation.
Employee Compensation. A publicly held corporation is not permitted to deduct compensation in excess of $1 million per year paid to certain employees. The Tax
Act eliminates certain exceptions to the $1 million limit applicable under prior law related to performance-based compensation, such as equity grants and cash
bonuses that are paid only on the attainment of performance goals. Based on our current compensation plans, we do not expect to be impacted by this limitation.
Business Asset Expensing. The Tax Act allows taxpayers to immediately expense the entire cost of certain depreciable tangible property and real property
improvements acquired and placed in service after September 27, 2017 and before January 1, 2023 (with an additional year for certain property). This 100% bonus
depreciation is phased out proportionately for property placed in service on or after January 1, 2023 and before January 1, 2027 (with an additional year for certain
property).
State Taxation
New York State franchise tax is imposed in an amount equal to the greater of 6.5% of Business Income, .075% of average Business Capital, or a fixed dollar
amount based on New York sourced gross receipts. Various Business Income subtraction modifications are available to qualified banks based on its qualified loan
portfolio. Commencing January 1, 2018, the Company changed its subtraction modification from that of a captive real estate investment trust (REIT) to one based
on interest income from qualifying loans. This change follows the laws enacted by New York State effective January 1, 2015. As a result, for 2018 the Company
is subject to a fixed dollar amount and the current effective income tax rate in New York State was reduced to close to $0. It is anticipated that the Company’s
New York State effective income tax will remain substantially at 0.0% for future periods under the current law.
The Bank maintains a pool of loans that generates income sourced from the State of Indiana. Taxes from this activity are considered to be nominal to the overall
financial statements.
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.
- 26 -
ITEM 2: PR OPERTIES
The Company has seven offices located in Oswego County, three 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, 2018. The aggregate net book value of the Bank's premises and equipment was $20.6 million at December 31, 2018.
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
Clay Branch
3775 State Route 31
Liverpool, NY 13090
Utica Loan Production Office
258 Genesee Street
Utica, New York 13502
(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 $37,000.
(3) The premises are leased with an annual rent of $59,000.
(4) The premises are leased with an annual rent of $16,000.
- 27 -
Opening Date
1874
Owned/Leased
Owned
1989
1978
1994
2002
2003
2005
2011
2014
2018
2017
Owned (1)
Owned
Owned
Owned
Owned (2)
Owned
Owned
Leased (3)
Owned
Leased (4)
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, 2018.
ITEM 4: MINE SAFETY DISCLOSURE
Not applicable.
- 28 -
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 338 shareholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms) as of March 26,
2019. 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, 2018
September 30, 2018
June 30, 2018
March 31, 2018
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
$
$
$
$
$
$
$
$
Price per share
High
15.66 $
15.97 $
16.20 $
15.86 $
15.50 $
15.70 $
15.99 $
15.09 $
Low
13.46 $
15.03 $
15.04 $
15.21 $
15.10 $
15.00 $
14.55 $
13.02 $
Dividend Paid
0.0600
0.0600
0.0600
0.0600
0.0575
0.0550
0.0525
0.0500
The Company did not repurchase any shares of its common stock during the fourth quarter of 2018.
Equity Compensation Plan Information
The following table provides information as of December 31, 2018 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
Dividends and Dividend History
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
324,930
$
N/A
10.50
N/A
47,450
N/A
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.
- 29 -
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
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
$
$
$
$
$
$
$
$
2018
933,115
177,664
53,908
612,964
727,060
133,628
64,459
34,810
9,044
25,766
1,497
24,269
3,835
23,549
4,555
546
(22)
4,031
0.97
0.94
14.72
13.65
0.240
$
$
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
$
$
$
29,413
6,290
23,123
1,769
21,354
4,085
21,094
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
4,072
18,999
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
4,062
17,477
4,003
1,071
43
2,889
0.67
0.66
13.28
12.19
0.160
$
$
$
$
0.45 %
6.33
7.09
6.88
2.85
3.02
0.42 %
5.69
7.47
7.01
2.83
2.97
0.48 %
5.35
8.97
7.73
3.03
3.14
116.52
2.62
79.04
24.93
6.33
116.05
2.57
79.06
25.21
5.69
118.35
2.79
79.80
25.18
5.35
0.48 %
4.08
11.76
11.36
3.21
3.31
121.73
2.90
78.12
25.22
5.00
- 30 -
2014
561,024
88,073
40,875
382,189
415,568
71,255
69,204
19,699
2,614
17,085
1,205
15,880
3,663
15,589
3,954
1,153
56
2,745
0.64
0.63
12.82
11.78
0.120
0.51 %
5.50
9.27
12.26
3.31
3.40
117.88
2.90
76.40
13.89
7.45
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
2018
2017
For the years ended December 31,
2015
2016
0.35 %
0.36
1.18
0.84 %
0.61
1.23
0.98 %
0.72
1.27
1.24 %
0.94
1.33
2014
1.61 %
1.16
1.38
340.13
145.61
129.85
107.30
85.50
13.69 %
12.49
8.31
12.49
13.97 %
12.72
8.16
12.72
14.79 %
13.54
9.06
13.54
16.22 %
14.95
10.00
14.95
11
160
10
140
9
133
9
124
16.60 %
15.31
10.55
15.31
9
122
(a)
(b)
(c)
Adjusted to reflect the 1.6472 exchange ratio used in the conversion for 2014.
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.
See table below for a reconciliation of the non-GAAP financial measures.
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.
- 31 -
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: (Loss)/Gain on the sale/redemption of investment
securities/loans/foreclosed real estate
Less : Loss on marketable equity securities
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
$
$
$
$
$
$
$
$
$
$
$
2018
For the years ended December 31,
2017
2016
2015
2014
$
$
$
$
$
$
$
64,221
-
4,362
14.72
64,221
4,536
165
59,520
59,520
4,362
13.65
23,549
25,766
3,835
$
$
$
$
$
$
$
61,811
-
4,280
14.44
61,811
4,536
182
57,093
57,093
4,280
13.34
21,094
23,123
4,085
$
$
$
$
$
$
$
57,929
-
4,237
13.67
57,929
4,536
198
53,195
53,195
4,237
12.55
18,999
20,289
4,072
$
$
$
$
$
$
$
70,805
13,000
4,354
13.28
57,805
4,536
214
53,055
53,055
4,354
12.19
17,477
18,767
4,062
68,790
13,000
4,352
12.82
55,790
4,367
175
51,248
51,248
4,352
11.78
15,589
17,085
3,663
(132)
(62)
29,795
$
79.04 %
526
-
26,682
$
79.06 %
554
-
23,807
$
79.80 %
456
-
22,373
$
78.12 %
344
-
20,404
76.40 %
$
1,005
4,031
24.93 %
$
880
3,491
25.21 %
$
820
3,256
25.18 %
$
696
2,759
25.22 %
368
2,650
13.89 %
$
$
$
$
4,031
63,667
-
63,667
3,491
61,383
-
61,383
3,272
61,102
-
61,102
2,889
70,819
13,000
57,819
$
6.33 %
$
5.69 %
$
5.35 %
$
5.00 %
2,745
49,870
13,000
36,870
7.45 %
- 32 -
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 core 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
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
$
$
$
$
$
$
$
$
2018
86,614
(4,536)
(165)
(6,042)
75,871
7,306
-
7,306
83,177
607,414
For the years ended December 31,
2017
2016
2015
2014
$
$
$
$
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
13.69 %
13.97 %
14.79 %
16.22 %
16.60 %
75,871
607,414
$
71,114
559,161
$
66,003
487,448
$
62,038
414,842
$
58,842
384,425
12.49 %
12.72 %
13.54 %
14.95 %
15.31 %
75,871
917,740
(4,536)
(165)
913,039
$
$
$
$
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
$
8.31 %
$
8.16 %
$
9.06 %
$
10.00 %
58,842
562,100
(4,367)
(181)
557,552
10.55 %
75,871
607,414
$
71,114
559,161
$
66,003
487,448
$
62,038
414,842
$
58,842
384,425
12.49 %
12.72 %
13.54 %
14.95 %
15.31 %
- 33 -
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 was completed in the first quarter of 2019.
On October 16, 2014, Pathfinder Bancorp, MHC converted from the mutual to stock form of organization (the “Conversion”). In connection with the Conversion,
the Company sold 2,636,053 shares of common stock to depositors at $10.00 per share. Shareholders of Pathfinder Bancorp, Inc., a federal corporation
(“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
and Pathfinder Bancorp, MHC ceased to exist. The Company had 4,362,328 and 4,280,227 shares outstanding at December 31, 2018 and December 31, 2017,
respectively.
Since the Conversion, we have transformed from a traditional savings bank to a commercial bank. 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 four years. As a commercial bank, we have been able to offer customized products and services to meet
individual customer needs and thereby more 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 the 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 shorter-term and/or 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 deposit interest rates, as well as at a reasonable overall level of related infrastructure and customer support service expenses.
On June 1, 2016, Pathfinder Bank, a savings bank chartered by the NYSDFS, merged into Pathfinder Commercial Bank, a limited purpose commercial bank also
chartered by the NYSDFS. Prior to the merger, Pathfinder Bank owned 100% of Pathfinder Commercial Bank. On that same date, NYSDFS expanded the powers
that it had previously granted to Pathfinder Commercial Bank and chartered Pathfinder Commercial Bank as a fully-empowered commercial bank. Simultaneously,
the entity that had operated as “Pathfinder Commercial Bank” changed its name to “Pathfinder Bank.” As a result of this charter conversion and accompanying
name change, the entity now known as “Pathfinder Bank” is a commercial bank with the full range of powers granted under a commercial banking charter in New
York State. The merger, which had no effect on the Company’s results of operations, converted the consolidated Bank from a savings bank to a commercial bank
and was completed in order to better align the Bank’s charter with its long-term strategic focus.
We have consistently emphasized developing our business and commercial banking franchise by offering products that are attractive to small- to medium-sized
businesses in our market area. We 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 continuing to
develop our commercial relationships with small businesses we will offer a variety of services and deposit products that will provide a sustainable
source of net interest income for the Company 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
- 34 -
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 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 provide brokerage services for purchasing stocks, bonds, mutual funds, annuities, and long-term care
insurance 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 three branches in Onondaga County,
including the branch in Clay, NY that we opened in the fourth quarter of 2018. We continue to actively seek opportunities for an increased presence
within that marketplace. This is consistent with our belief that we have already achieved meaningful brand recognition among potential customers
there. Consistent with this strategy, in November 2018, the Bank acquired an additional site location on West Onondaga Street in Syracuse, which
will be renovated and converted into another full-service banking location. We consider the Syracuse Southwest Corridor neighborhood, where this
site is located, to be an under-banked area of the region and believe that this branch will qualify for various economic incentives under New York
State’s Banking Development District, or BDD, program. The BDD program is designed to encourage the establishment of bank branches in areas
where there is a demonstrated need for additional banking services. The program was developed in recognition of the fact that banks play a
critically important role in promoting individual wealth, community development, and revitalization. This investment demonstrates Pathfinder
Bank’s firm commitment to servicing diverse economic areas within its geographic market. We plan to soon begin renovation work on the acquired
facility and expect to open our new Syracuse Southwest branch office by the end of 2019. We will continue to seek similar branch network
expansion opportunities in the future. In addition to the full-service branches located in Oswego and Onondaga Counties, we opened, in 2017, a loan
production office in Utica, located in Oneida County, NY, to increase our availability to potential commercial and business loan customers within
that market area.
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 consolidated assets by $352.7 million, or 60.8%, 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 and maintain our “well capitalized” capital position.
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 the Bank and the flexibility it brings to their businesses.
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•
•
•
•
•
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 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 of 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, 2018, the Bank’s position in impaired loans consisted of 44 loans totaling $6.0 million. Of these loans, 23 loans, totaling $2.1
million, were valued using the present value of future cash flows method; and 21 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 or in subsequent
periods. 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, 2018 or December 31, 2017.
- 36 -
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 reduced the Company’s marginal federal income tax rate from 34% to 21% starting January 1, 2018. 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 liabilities and assets reflecting lower future tax obligations resulting from the Tax Act’s enacted lower federal corporate tax rate. 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.
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 2018
evaluation, management has determined that the carrying value of goodwill is not impaired as of December 31, 2018. 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 20, 2018, the board of directors declared a quarterly dividend of $0.06 per common share. The dividend was payable on February 8, 2019 to
shareholders of record on January 18, 2019.
- 37 -
EXECUTIVE SUMMARY AND RESULTS OF OPERATIONS
The Company reported net income of $4.0 million for 2018, an increase of $540,000, or 15.5%, as compared to net income of $3.5 million for 2017. Net income
increased during 2018, as compared to the previous year, due to an increase in net interest income before the provision for loan losses of $2.6 million, a reduction
of income tax expense of $376,000, and a reduction in the provision for loan losses of $272,000. These increases in net income were partially offset by an increase
in noninterest expense of $2.5 million, and a decrease on total noninterest income of $250,000. Basic and diluted earnings per share in 2018 were $0.97 and $0.94,
respectively, as compared to $0.86 and $0.83 in 2017, respectively. Return on average assets increased three basis points to 0.45% in 2018 from 0.42% in
2017. Return on average equity increased 64 basis points to 6.33% in 2018 as compared to 5.69% in 2017. The increase in return on average assets in 2018, as
compared to the previous year, was primarily due to the rate of increase in net income being above the rate of increase in average assets. Average assets increased
in 2018 by $76.1 million, or 9.25% as the Company grew its total assets from $881.3 million at December 31, 2017 to $933.1 million at December 31, 2018. The
increase in return on average equity in 2018, as compared to the previous year, was primarily due to the increase in net income in 2018.
Net interest income before provision for loan losses increased $2.6 million, or 11.4%, to $25.8 million in 2018 on average interest earning assets of $852.1 million
as compared to net interest income before provision for loan losses of $23.1 million in 2017 on average interest earning assets of $779.9 million. Interest and
dividend income increased $5.4 million in 2018 to $34.8 million, as compared to interest and dividend income of $29.4 million in 2017. The aggregate increase in
the average balance of interest-earning assets of $72.2 million in 2018 as compared to 2017 led to an increase in interest and dividend income of $2.7 million, that
was further enhanced by an increase of 32 basis points in the overall average yield earned on those assets that contributed an additional $2.7 million in interest
income in 2018, as compared to the previous year. The $5.4 million increase in interest income was partially offset by an increase in interest expense of $2.8
million due to an increase in average interest-bearing liabilities of $59.2 million and an increase in the average rate paid on those liabilities of 30 basis points in
2018 as compared to 2017.
The Company recorded a provision for loan losses of $1.5 million in 2018 as compared to $1.8 million in the prior year. The $272,000 year-over-year decrease in
provision for loan losses reflected the loan portfolio’s generally improving credit quality metrics partially offset by the effects of a 6.8% increase in aggregate loan
balances from December 31, 2017 to December 31, 2018. In addition, during 2017, 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 was collateralized by a special-purpose commercial property and the balance of the loan was
considered to not be fully realizable at that time. The Company recorded $1.5 million in net charge-offs in 2018 as compared to $890,000 in net charge-offs in
2017. The ratio of net charge-offs to average loans increased to 0.22% in 2018 from 0.16% in 2017. The increase in the year-over-year charge-off rate was due
primarily to the charge-off in 2018 of a single fully-reserved commercial real estate loan in the amount of $596,000 and the charge-off of a single fully-reserved
commercial and industrial loan in the amount of $124,000.
Noninterest income was $3.8 million in 2018, a decrease of $250,000, or 6.1%, from $4.1 million in 2017. Net gains on the sales and redemptions of investment
securities decreased $671,000 from a gain of $489,000 in 2017 to a loss of $182,000 in 2018. During 2018, the Company realized losses of $182,000 on the sales
of certain securities in order to provide funding for reinvestment into loans and securities considered to be better matches for the Company’s overall balance sheet
strategies. During 2017, the Company engaged in certain short-term interest rate 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 $421,000 in aggregate during 2018, as compared to the previous year, primarily due to increases in
other charges, commissions and fees of $196,000 and earnings and gain on bank owned life insurance of $143,000.
Noninterest expense increased $2.5 million, or 11.6% to $23.5 million in 2018 from $21.1 million in 2017. The year-over-year increase in noninterest expenses
was primarily due to personnel expenses that increased $1.4 million, or 11.6%, in 2018 as compared to 2017. All other noninterest expenses increased $1.1
million, or 11.6%, in 2018, as compared to the previous year, as all categories of noninterest expense, not related to personnel costs, increased in a manner that was
substantially proportional to the Company’s increased asset size. In addition, the increase in these non-personnel related expenses in 2018, as compared to 2017,
reflected the deployment of additional resources by the Company into risk management systems and improved customer service activities. See the detailed
discussion noninterest expense, below.
In 2018, the Company’s effective tax rate was 11.9%, as compared to 20.6% in 2017. The Company’s federal statutory income tax rate of 21.0% was reduced
6.2% in 2018 by the combined effects of tax exempt income received in the form of interest on tax exempt loans and investment securities, and the increase in the
value of its bank owned life insurance. All other individually
- 38 -
immaterial items related to the calculation of the Company’s effective tax rate in aggregate decreased the Company’s effective tax rate by 2.9% in 2018.
In 2017, GAAP required that the impact of the provisions of the Tax Act on deferred tax assets and liabilities 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. The Company’s reported effective tax rate for 2017 was 20.6%. Absent this one-time tax benefit discussed above, the Company’s effective tax rate in
2017 would have been 24.1%.
The Company’s effective tax rate in 2017, absent the effects of the one-time benefit related to the Tax Act, was further reduced in 2017 by 3.5% from 24.1% to
20.6% due to the reversal of $150,000 in valuation 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 capital loss carryforward positions at December 31, 2016 and thereby eliminate the
need for a reserve against their related deferred tax assets. At December 31, 2018 and 2017, the Company had no unused capital loss carryforward positions or
deferred tax assets related to those positions.
Total assets were $933.1 million at December 31, 2018 as compared to $881.3 million at December 31, 2017. The increase in total assets of $51.9 million, or
5.9%, was the result of the increase in loans, principally commercial real estate and residential mortgages of $39.4 million, partially offset by a $5.3 million
reduction in investment securities. All other assets increased by a net $17.7 million, primarily due to an increase in bank owned life insurance, cash and
equivalents and premises and equipment of $5.2 million, $4.3 million and $4.5 million, respectively. The increase in total assets in 2018 was funded largely by a
$44.7 million increase in borrowings from the FHLBNY, and a $21.6 million increase in customer deposits, partially offset by an $18.1 million decrease in time
deposits acquired through the CDARS program.
Measured as a percentage of total loans and total assets, the majority of loan credit quality metrics improved in 2018 as compared to the previous
year. Nonperforming loans to total loans were 0.35% at December 31, 2018, down 49 basis points compared to 0.84% at December 31, 2017. The allowance for
loan losses to non-performing loans at December 31, 2018 was 340.13%, compared with 145.61% at December 31, 2017. This increase was the result of t wo non-
performing commercial real estate loans of significant size that were effectively resolved in 2018. 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 1.23% at December 31, 2017 to 1.18% at December 31, 2018. This
decrease reflected management’s estimate of the probable losses inherent in the current loan portfolio.
The ratio of net charge-offs to average loans increased to 0.22% for 2018 as compared to 0.16% for 2017. This activity reflected 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, decreased from
2.09% at December 31, 2017 to 1.81% at December 31, 2018. The level of nonperforming loans decreased in aggregate by $2.7 million, or 56.1%, led by a
decrease in nonperforming residential loans of $1.1 million and a decrease in nonperforming residential mortgage loans of $912,000. Commensurate with the
decline in nonperforming loans to year end loans, the ratio of nonperforming assets to total assets decreased to 0.36% at December 31, 2018 from 0.61% at
December 31, 2017. The improvements in our nonperforming loan measures largely reflect the $39.4 million increase in our aggregate loan portfolio achieved
while we continued to maintain our conservative underwriting practices.
The Company’s shareholders’ equity increased $2.4 million, or 3.9%, to $64.2 million at December 31, 2018 from $61.8 million at December 31, 2017. This
increase was primarily due to an increase in retained earnings of $3.1 million, resulting from the Company’s reported net income of $4.0 million in 2018, partially
offset by common stock dividend distributions of $1.0 million, a $969,000 increase in additional paid in capital, and the accretion of $180,000 unearned ESOP
shares. Paid in capital increased in 2018 due to the exercise of stock options during the year primarily by members of the Company’s management team. These net
increases to shareholders’ equity were partially offset by a $1.8 million increase in the Company’s accumulated other comprehensive loss. The increase in
accumulated other comprehensive loss at December 31, 2018, as compared to December 31, 2017, was the result of an unrealized decline, after tax effects, of $1.3
million related to the Company’s available-for-sale investment securities portfolio, and an unrealized loss, after tax effects, for pension and other postretirement
obligations of $932,000. The unrealized decline in the value of the Company’s available-for-sale investment securities portfolio was primarily due to the increases
in market interest rates that occurred in 2018. The increase in the unrealized loss for pension and other postretirement obligations was primarily due to the
significant declines in global equity markets that took place in the fourth quarter of 2018. These increases in accumulated other comprehensive loss were partially
offset by an increase of
- 39 -
$373,000, after tax effects, primarily related to the transfer of $35.2 million in securities from held-to-maturity to available-for-sale concurrent with the adoption in
2018 of ASU 20 17-12: Derivatives and Hedging [ Topic 815 ] : Targeted Improvements to Accounting for Hedging Activities.
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 interest 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 $2.6 million, or 11.4%, to $25.8 million in 2018 as compared to $23.1 million in the previous year.
Our net interest margin for the year ended Decembe r 31, 2018 increased to 3.02% from 2.97% for the comparable prior year. The increase in net interest income
was primarily due to a $5.4 million, or 18.4%, increase in interest and dividend income in 2018 to $34.8 million primarily as a result of the $72.2 million, or 9.3%,
increase in the average balances on interest earning assets. This increase in interest income was partially offset by an increase in interest expense of $2.7 million,
or 43.8%, during 2018, as compared to the previous year. The increase in interest expense was primarily the result of increases in interest paid on time deposits and
MMDA accounts of $2.0 million and $878,000, respectively. Increases between 2018 and 2017 were recorded in average rates paid on time deposits, FHLBNY
borrowings (net of hedging activities in the amount of $598,000 recorded in 2017) and MMDA accounts of 56 basis points, 51 basis points and 35 basis points,
respectively.
- 40 -
Aver age 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.
(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
Total liabilities
Shareholders' equity
Total liabilities & shareholders' equity
Net interest income
Net interest rate spread
Net interest margin
Ratio of average interest-earning assets
to average interest-bearing liabilities
2018
For the twelve months ended December 31,
2017
2016
Average
Balance
Interest
Average
Yield /
Cost
Average
Balance
Interest
Average
Yield /
Cost
Average
Balance
Interest
Average
Yield /
Cost
$ 609,648 $ 28,426
5,418
197,477
720
28,444
4.66% $ 546,193 $ 24,392
3,827
2.74% 184,170
1,038
28,497
2.53%
4.47% $ 455,129 $ 20,703
2,461
2.08% 142,277
865
32,387
3.64%
16,496
852,065
246
34,810
1.49%
20,999
4.09% 779,859
156
29,413
0.74%
15,898
3.77% 645,691
64
24,093
4.55%
1.73%
2.67%
0.40%
3.73%
57,529
(7,531)
(4,018)
$ 898,045
$ 66,934 $
13,584
236,958
83,511
243,342
15,075
71,875
731,279
96,719
6,380
834,378
63,667
$ 898,045
50,147
(6,381)
(1,642)
$ 821,983
41,097
(5,965)
397
$ 681,220
116
21
2,262
85
4,328
846
1,386
9,044
0.17% $ 67,581 $
13,960
0.15%
0.95% 231,671
0.10%
84,092
1.78% 189,614
5.61%
15,041
70,071
1.93%
1.24% 672,030
105
25
1,384
82
2,308
794
1,592
6,290
0.16% $ 56,541
14,392
0.18%
0.60% 167,817
0.10%
79,317
1.22% 165,464
5.28%
15,006
47,051
2.27%
0.94% 545,588
92
35
699
74
1,541
792
571
3,804
0.16%
0.24%
0.42%
0.09%
0.93%
5.28%
1.21%
0.70%
83,053
5,517
760,600
61,383
$ 821,983
69,898
4,632
620,118
61,102
$ 681,220
$ 25,766
$ 23,123
$ 20,289
2.85%
3.02%
2.83%
2.97%
3.03%
3.14%
116.52%
116.05%
118.35%
- 41 -
Rate/Volume Analysis
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.
Years Ended December 31,
2018 vs. 2017
Increase/(Decrease) Due to
2017 vs. 2016
Increase/(Decrease) Due to
Volume
Rate
Total
Increase
(Decrease)
2,924
293
(2)
(39)
3,176
(1)
(1)
32
(1)
769
2
40
840
2,336 $
1,110
1,298
(316)
129
2,221
12
(3)
846
4
1,251
50
(246)
1,914
307 $
4,034
1,591
(318)
90
5,397
11
(4)
878
3
2,020
52
(206)
2,754
2,643
$
Volume
4,073
811
(113)
25
4,796
17
(1)
320
5
247
2
367
957
3,839 $
Total
Increase
(Decrease)
3,689
1,366
173
92
5,320
13
(10)
685
8
767
2
1,021
2,486
2,834
Rate
(384)
555
286
67
524
(4)
(9)
365
3
520
-
654
1,529
(1,005) $
(In thousands)
Interest Income:
Loans
Taxable investment securities
Tax-exempt investment securities
Interest-earning deposits
Total interest and dividend 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 and dividend income increased $5.4 million, or 18.4%, to $34.8 million in 2018 as compared to $29.4 million in 2017 due principally to the $72.2 million,
or 9.3%, increase in average interest-earning assets. The increase in average interest-earning assets was primarily due to the increase in the average balances of
loans, which increased $63.5 million or 11.6% in 2018, as compared to the previous year. The increase in the average balance of loans was due principally to
increases in adjustable-rate commercial business and commercial real estate loans. The average yields earned on loans increased 19 basis points to 4.66% in 2018
from 4.47% in 2017 as maturing lower rate loans were replaced by loans at current higher market rates. Interest on taxable investment securities increase $1.6
million in 2018, as compared with the previous year. The average yields earned on taxable investment securities increased 66 basis points to 2.74% in 2018 as
compared to 2.08% in 2017, accounting for an increase in interest income of $1.3 million in 2018, as compared to 2017. The year-over-year increase in the interest
rates earned on taxable investment securities was primarily due to increases in shorter-term interest rates that allowed amortizing and maturing securities’ balances
to be replaced in 2018 with generally higher-yielding securities. The average balance of taxable investment securities increased $13.3 million, or 7.2%, in 2018, as
compared to the previous year, accounting for an increase in 2018 interest income from investment securities of $293,000, as compared to 2017.
- 42 -
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 $2.7 million, or 43.8%, to $9.0 million in 2018, as compared to $6.3 million in the previous year. The increase in interest expense was
primarily the result of increases in interest paid on time deposits and MMDA accounts of $2.0 million and $878,000, respectively. Increases between 2018 and
2017 were recorded in average rates paid on time deposits, FHLBNY borrowings (net of hedging activities in the amount of $598,000 recorded in 2017) and
MMDA accounts of 56 basis points, 51 basis points and 35 basis points, respectively. The increase in interest expense was primarily due to a generally rising
interest rate environment in 2018 and the competitive interest rates offered in the Bank’s market place.
Total interest expense also increased in 2018, as compared to the previous year, due to increases in the average balance of time deposits and MMDA accounts of
$53.7 million and $5.3 million, respectively. The increase in the average balance of time deposits in 2018 was due to an increase of $28.7 million in time deposits
acquired through the CDARS program and $25.0 million in time deposits obtained by the Bank through its customer base. 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 and, to a lesser extent, the opening of the Bank’s tenth full-service branch location in the fourth quarter of 2018.
In addition to the factors discussed above related to the increase in interest expense in 2018 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. On five occasions during 2017, the Company sold, and subsequently
repurchased, a U.S. Treasury security 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 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. 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. 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 for the twelve months ended December 31,
2017. The tax benefits arose from the reversal of valuation allowances established in 2013 against the portion of the Company’s deferred tax asset related to
existing capital loss carryforward positions. The valuation allowances 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 valuation allowances against deferred tax assets had the effect of reducing the Company’s effective income tax rate by 3.3% in 2017.
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 for the year ended December 31, 2017. In total, net after-tax net income was increased by $178,000 in 2017 as a result of the
hedging transactions. All hedging transactions were closed at December 31, 2017 and had no effect on the Company’s consolidated statement of condition on that
date. There were no hedging activities in 2018.
- 43 -
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 $1.5 million in 2018 as compared to $1.8 million in the prior year. The $272,000 year-over-year decrease in
provision for loan losses reflected the loan portfolio’s generally improving credit quality metrics partially offset by the effects of a 6.8% increase in aggregate loan
balances from December 31, 2017 to December 31, 2018. In addition, during 2017, 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 was collateralized by a special-purpose commercial property and the balance of the loan was
considered to not be fully realizable at that time. The Company recorded $1.3 million in net charge-offs in 2018 as compared to $890,000 in net charge-offs in
2017. The ratio of net charge-offs to average loans increased to 0.22% in 2018 from 0.16% in 2017. The increase in the year-over-year charge-off rate was due
primarily to the charge-off in 2018 of a single fully-reserved commercial real estate loan in the amount of $596,000 and the charge-off of a single fully-reserved
commercial and industrial loan in the amount of $124,000.
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.
(Dollars in thousands)
Service charges on deposit accounts
Earnings and gain on bank owned life insurance
Loan servicing fees
Debit card interchange fees
Insurance agency revenue
Other charges, commissions and fees
Noninterest income before gains
Net (losses) gains on sales and redemptions of investment securities
Net gains on sales of loans and foreclosed real estate
Loss on marketable equity securities
Total noninterest income
Years Ended December 31,
$
$
2018
1,148 $
427
170
576
840
868
4,029
(182)
50
(62)
3,835 $
2017
1,130 $
284
149
484
803
709
3,559
489
37
-
4,085 $
Change
18
143
21
92
37
159
470
(671)
13
(62)
(250)
1.6%
50.4%
14.1%
19.0%
4.6%
22.4%
13.2%
-137.2%
35.1%
100.0%
-6.1%
Noninterest income for the year ended December 31, 2018 decreased $250,000, or 6.1%, from the year ended December 31, 2017. Noninterest income before
gains (losses) on the sales and redemptions of investment securities, loss on marketable equity securities, and gains on the sale of loans and foreclosed real estate
increased $470,000, or 13.2%, to $4.0 million in 2018 as compared to $3.6 million in 2017. This $470,000 increase in 2018, as compared with the previous year,
was primarily due to increases in other charges, commissions and fees of $196,000, increased gains on bank owned life insurance of $143,000, and aggregate
increases of $131,000 in service charges on deposit accounts, loan servicing fees and debit card interchange fees.
Net gains (losses) on the sales and redemptions of investment securities decreased $671,000 from a gain of $489,000 in 2017 to a loss of $182,000 in 2018. During
2018, the Company realized losses of $182,000 on the sales of certain securities in order to provide funding for reinvestment into loans and securities considered to
be better matches for the Company’s overall balance sheet strategies. During 2017, the Company engaged in certain short-term interest rate 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.
- 44 -
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
Insurance agency expense
Community service activities
Other expenses
Total noninterest expenses
Years Ended December 31,
2018
13,304 $
2,325
1,995
1,360
935
492
422
875
541
1,300
23,549 $
$
$
2017
11,917 $
2,196
1,779
952
809
473
353
932
415
1,268
21,094 $
Change
1,387
129
216
408
126
19
69
(57)
126
32
2,455
11.6%
5.9%
12.1%
42.9%
15.6%
4.0%
19.5%
-6.1%
30.4%
2.5%
11.6%
Noninterest expense for 2018 increased $2.5 million, or 11.6%, to $23.6 million from $21.1 million for the prior year. Higher noninterest expenses largely reflect
investments in personnel and support functionality related to the Company’s continued efforts to increase its business activities, primarily in the Syracuse
market. In addition, these higher expenses reflect management’s execution of its planned enhancements to the Company’s risk management capabilities and
improvements to the Company’s customer service level functionality.
The year-over-year increase in noninterest expenses was primarily due to higher personnel expenses that increased $1.4 million, or 11.6%, in 2018 as compared to
2017. 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 customer service-related activities. These increases in personnel expenses resulted from increases of $1.4 million, or
20.0%, in salaries expense and $252,000, or 12.6%, in aggregate employee benefits and payroll taxes, partially offset by decreases of $242,000, or 20.7%, in
commission expense, and $63,000, or 4.0%, in all other personnel expense categories. Personnel expense in 2018 was increased by $536,000 ($443,000 in salaries
and employee benefits, and $93,000 in stock-based compensation) due to the contractually-mandated acceleration of certain retirement benefits for a senior officer
who elected to retire prior to his originally scheduled full retirement date. Absent the effects of this nonrecurring accelerated retirement expense, personnel
expense would have been reduced by $536,000 from $13.3 million to $12.8 million for the year ended December 31, 2018 and would have represented a 7.1%
increase from the $11.9 million in personnel expense recorded in 2017.
Building and occupancy expense increased $129,000, or 5.9%, primarily due to increased maintenance, depreciation and communications expenses principally
related to the Company’s ongoing refurbishment and modernization programs for its physical facilities and the opening of the Bank’s tenth full-service branch
location, located in Clay NY, in November 2018.
Data processing expense increased $216,000, or 12.1%, primarily due to increased equipment depreciation related to system upgrades and increased transaction-
related fees paid to third-party vendors. These increased transaction-related fees resulted from higher transaction volumes derived from both greater numbers of
customers in 2018, as compared to the previous year, and increased utilization levels by existing customers of the Bank’s internet and mobile banking offerings.
Professional and other services expense increased $408,000, or 42.9%, primarily due to the increased use in 2018 of externally-sourced management consulting
services. The increased use of these services related primarily to operational and strategic planning activities that took place during 2018.
Advertising expense increased $126,000, or 15.6%, in 2018 as compared to the previous year, as the Company sought to increase brand awareness and
corresponding business activity within the Company’s market area, particularly in Onondaga County. In addition, the Company increased its overall direct-to-
customer advertising expenditures in the latter half of 2018 in support of the opening of the Bank’s tenth full-service branch location.
Audits and exams expense increased $69,000, or 19.6%, in 2018 principally due to increased utilization of third-party internal audit services in 2018, as compared
to the previous year.
- 45 -
Community service activities increased $126,000, or 30.4%, in 2018 primarily due to the Company’s expanded presence in the Syracuse market. These activities,
include event sponsorships, financial support for community development agencies, memberships and other direct support for economic development agencies and
similar organizations dedicated to growing the economies, and increasing employment, within our marketplace, and charitable donations. These activities are
intended to support overall economic and social development within the communities in which we serve and to promote overall brand awareness.
Income Tax Expense
The Company reported income tax expense of $546,000 in 2018 and $922,000 in 2017. Income tax expense decreased $376,000 in 2018 as compared to the
previous year. 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 affects the Company. Most notably, the Tax Act reduced the Company’s marginal federal income tax rate from 34.0% to 21.0% starting January 1,
2018. 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 bank owned life insurance. Other factors, such as the effects of state income taxes have typically partially offset to the effective tax rate reducing
effects of tax advantaged income.
New York State franchise tax is imposed in an amount equal to the greater of 6.5% of Business Income, .075% of average Business Capital, or a fixed dollar
amount based on New York sourced gross receipts. Various Business Income subtraction modifications are available to qualified banks based on its qualified loan
portfolio. Commencing January 1, 2018, the Company changed its subtraction modification from that of a captive real estate investment trust (REIT) to one based
on interest income from qualifying loans. This change follows the laws enacted by New York State effective January 1, 2015. As a result, for 2018 the Company
is subject to a fixed dollar amount and the current effective income tax in New York State was reduced to close to $0. It is anticipated that the Company’s New
York State effective income tax rate will remain substantially at 0.0% for future periods under the current law.
The Bank maintains a pool of loans that generates income sourced from the State of Indiana. Taxes from this activity are considered to be nominal to the overall
financial statements.
As a Maryland business corporation, the Company is required to file an annual report with, and pay franchise taxes to, the State of Maryland.
In 2018, the Company’s effective tax rate was 11.9%, as compared to 20.6% in 2017. The Company’s federal statutory income tax rate of 21.0% was reduced
6.2% in 2018 by the combined effects of tax exempt income received in the form of interest on tax exempt loans and investment securities, and the increase in the
value of its bank owned life insurance. All other individually immaterial items related to the calculation of the Company’s effective tax rate decreased the
Company’s effective tax rate by an aggregate 2.9% in 2018.
In 2017, GAAP required that the impact of the provisions of the Tax Act on deferred tax assets and liabilities 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. The Company’s reported effective tax rate for 2017 was 20.6%. Absent this one-time tax benefit discussed above, the Company’s effective tax rate in
2017 would have been 24.1%.
The Company’s effective tax rate in 2017, absent the effects of the one-time benefit related to the Tax Act, was further reduced in 2017 by 3.5% from 24.1% to
20.6% due to the reversal of $150,000 in valuation 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 capital loss carryforward positions at December 31, 2016 and thereby eliminate the
need for a reserve against their related deferred tax assets. At December 31, 2018 and 2017, the Company had no unused capital loss carryforward positions or
deferred tax assets related to those positions.
See Note 17 to the consolidated financial statements for the reconciliation of the statutory tax rate to the effective tax rate.
- 46 -
Earnings Per Share
Basic and diluted earnings per share for the year ended December 31, 2018 were $0.97 and $0.94, respectively, as compared to basic and diluted earnings per share
of $0.86 and $0.83 for the year ended December 31, 2017. The increase in basic and diluted earnings per share comparing year-over-year was due to the increase
in net income available to common shareholders between these two years.
CHANGES IN FINANCIAL CONDITION
Total assets were $933.1 million at December 31, 2018 as compared to $881.3 million at December 31, 2017. The increase in total assets of $51.9 million, or
5.9%, was the result of the increase in loans, principally commercial real estate and residential mortgages of $39.4 million, partially offset by a $5.3 million
reduction in investment securities. All other assets increased by a net $17.7 million, primarily due to an increase in bank owned life insurance, cash and
equivalents and premises and equipment of $5.2 million, $4.3 million and $4.5 million, respectively. The increase in total assets in 2018 was funded largely by a
$44.7 million increase in borrowings from the FHLBNY, and a $21.6 million increase in customer deposits, partially offset by an $18.1 million decrease in time
deposits acquired through the CDARS program.
Investment Securities
The investment portfolio represented 26.5% of the Company’s average interest earning assets in 2018 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,
with the exception of marketable equity securities, 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 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 6.5% of its composition in pass-through securities comprised
of seasoned mortgage-backed securities whose underlying collateral was, to varying degrees (depending on the individual security’s initial and current
composition), considered sub-prime or high-risk at the securities’ issuance dates. These privately-issued mortgage-backed securities are believed to be adequately
collateralized by subordinate structures and ongoing credit support mechanisms and are, therefore, well insulated from loss of principal due to credit default.
At December 31, 2018, available-for-sale investment securities increased 3.8% to $177.7 million and held-to-maturity investment securities decreased 18.6% to
$53.9 million. There were no securities that exceeded 10% of consolidated shareholders’ equity. During 2018, the bank transferred $35.2 million in securities from
held-to-maturity to available-for-sale concurrent with the adoption in 2018 of ASU 2017-12: Derivatives and Hedging [Topic 815]: Targeted Improvements to
Accounting for Hedging Activities. The transfer had had no material effect on the results of operations in 2018. 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.
- 47 -
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
Common stock - financial services industry
Total investment securities
Available-for-Sale
Held-to-Maturity
2018
2017
2018
2017
17,031 $
23,065
17,200
18,119
31,666
46,441
23,936
206
177,664 $
41,336 $
13,681
8,600
6,644
35,742
53,348
11,052
735
171,138 $
3,987 $
5,089
9,924
1,509
11,601
13,972
7,826
-
53,908 $
4,948
35,130
8,311
-
6,853
7,574
3,380
-
66,196
$
$
- 48 -
The following table sets forth the scheduled maturities, amortized cost, fair values and average yields for the Company's investment securities at December 31, 201
8 . 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
(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
Amortized
Cost
Annualized
Weighted
Avg Yield
More Than One
to Five Years
More Than Five
to Ten Years
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
$
$
$
$
$
$
$
10,173
281
37
-
10,491
-
-
-
-
1.61% $
1.75%
2.81%
-
1.62% $
-
-
-
-
$
$
206
206
10,697
1.39%
1.39% $
1.61% $
5,000
5,686
3,814
3,548
18,048
5,592
1,945
5,090
12,627
-
-
30,675
2.30% $
2.57%
3.19%
4.26%
2.96% $
2.45% $
1.94%
4.00%
3.00% $
$
-
-
$
2.97% $
1,998
5,382
13,538
8,055
28,973
10,127
4,600
-
14,727
-
-
43,700
3.47%
2.33%
4.17%
3.88%
3.70%
2.41%
2.11%
-
2.32%
-
-
3.23%
More Than Ten Years
Total Investment Securities
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
$
$
$
$
$
$
$
-
12,312
-
6,640
18,952
16,690
41,556
19,227
77,473
-
-
96,425
- 49 -
$
-
2.58%
-
4.74%
3.34% $
2.51% $
2.50%
3.40%
2.73% $
$
-
-
$
2.85% $
17,171 $
23,661
17,389
18,243
76,464 $
32,409 $
48,101
24,317
104,827 $
206 $
206 $
181,497 $
Fair
Value
17,031
23,065
17,200
18,119
75,415
31,666
46,441
23,936
102,043
206
206
177,664
Annualized
Weighted
Avg Yield
2.03%
2.51%
3.95%
4.27%
3.15%
2.47%
2.44%
3.53%
2.70%
1.39%
1.39%
2.89%
HELD-TO-MATURITY
(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
Total investment securities
(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
Total investment securities
One Year or Less
Amortized
Cost
Annualized
Weighted
Avg Yield
More Than One
to Five Years
More Than Five
to Ten Years
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
$
$
$
$
$
1,996
1,114
-
-
3,110
-
-
-
-
3,110
1.78% $
2.38%
-
-
1.99% $
$
-
-
-
$
-
1.99% $
1,991
1,485
2,809
1,509
7,794
1,472
2,957
2,000
6,429
14,223
1.89% $
2.78%
3.69%
4.16%
3.15% $
3.01% $
3.17%
4.72%
3.62% $
3.36% $
-
1,780
4,996
-
6,776
4,484
1,478
2,172
8,134
14,910
-
3.08%
5.29%
-
4.71%
3.33%
3.63%
3.86%
3.53%
4.06%
More Than Ten Years
Total Investment Securities
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
$
$
$
$
$
-
710
2,119
-
2,829
5,645
9,537
3,654
18,836
21,665
$
-
4.97%
3.74%
-
4.05% $
3.56% $
3.63%
3.54%
3.59% $
3.65% $
3,987 $
5,089
9,924
1,509
20,509 $
11,601 $
13,972
7,826
33,399 $
53,908 $
Fair
Value
3,952
5,027
9,746
1,496
20,221
11,678
14,052
7,818
33,548
53,769
Annualized
Weighted
Avg Yield
1.83%
3.10%
4.51%
4.16%
3.61%
3.40%
3.53%
3.93%
3.58%
3.59%
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.
Loans Receivable
Average loans receivable represented 71.5% of the Company’s average interest earning assets in 2018 and account for the greatest portion of total interest
income. At December 31, 2018, the Company has the largest portion of its loan portfolio in commercial loan products that represent 53.1% 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 38.5% of total loans at December 31, 2018. 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.
- 50 -
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
2018
$ 238,894
212,622
116,914
26,416
25,424
$ 620,270
2017
38.5% $ 221,623
34.3% 192,540
18.8% 111,786
4.3% 26,235
4.1% 28,647
100.0% $ 580,831
December 31,
2016
38.2% $ 206,900
33.2% 150,569
19.2% 103,394
4.5% 24,991
6,293
4.9%
100.0% $ 492,147
2015
42.0% $ 189,367
30.6% 129,481
21.0% 83,016
5.1% 23,688
4,886
1.3%
100.0% $ 430,438
2014
44.0% $ 175,322
30.1% 125,883
19.3% 59,268
5.5% 22,905
4,160
1.1%
100.0% $ 387,538
45.2%
32.5%
15.3%
5.9%
1.1%
100.0%
The following table shows the amount of loans outstanding, including net deferred costs, as of December 31, 2018 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
$
$
5,164 $
105
5,269
46,695
60
1,196
53,220 $
5,500 $
4,677
10,177
26,185
713
18,380
55,455 $
201,958 $
234,112
436,070
44,034
25,643
5,848
511,595 $
Total
212,622
238,894
451,516
116,914
26,416
25,424
620,270
The following table sets forth fixed- and adjustable-rate loans at December 31, 2018 that are contractually due after December 31, 2019:
(In thousands)
Interest rates:
Fixed
Variable
Total loans
Due After
One Year
$
$
271,986
295,064
567,050
Total loans receivable, including net deferred costs, increased $39.4 million, or 6.8%, to $620.3 million at December 31, 2018 when compared to $580.8 million at
December 31, 2017, 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 $25.2 million, or 8.3%, to $329.5 million at December 31, 2018 as compared to $304.3 million at December 31, 2017. The Company maintained its
previously established credit standards, but continued to benefit from the expanding relationship-derived business activity within the markets that the Bank serves.
- 51 -
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
Nonperforming loans to total loans
Nonperforming assets to total assets
$
$
$
2018
830
142
1,176
2,148
2,148
1,173
3,321
$
$
December 31,
2016
$
$
1,863
388
2,560
4,811
4,811
597
5,408
$
$
2017
2,443
363
2,088
4,894
4,894
468
5,362
2015
3,238
365
1,715
5,318
5,318
517
5,835
$
$
2014
4,030
324
1,902
6,256
6,256
261
6,517
2,574
$
2,539
$
5,531
$
1,916
$
2,219
0.35%
0.36%
0.84%
0.61%
0.98%
0.72%
1.24%
0.94%
1.61%
1.16%
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 decreased $2.7 million, or 56.1%, between December 31, 2017 and December 31, 2018, driven by decreases of $1.6 million, $912,000
and $221,000 in nonperforming commercial and commercial real estate, residential real estate and consumer loans, respectively. The decrease in nonperforming
commercial and commercial real estate loans was comprised of 11 loans that were nonperforming at December 31, 2018 as compared to 18 loans that were
nonperforming at December 31, 2017. The decrease in nonperforming residential real estate loans was comprised of 11 loans that were nonperforming at
December 31, 2018 as compared to 28 loans that were nonperforming at December 31, 2017. Management believes 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 $7.3 million at December 31, 2018, 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 increased by $705,000 at December 31, 2018, from the prior year end and reflected the timing of foreclosures versus sales
in 201 8. The number of FRE properties remained constant at five properties at December 31, 2018 and December 31, 2017.
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 $75,000 and $66,000 would have been recorded
for the years ended December 31, 2018 and December 31, 2017, 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, 2018 and December 31, 2017, the Company had
$6.0 million and $9.2 million in loans, which were deemed to be impaired, having specific reserves of $631,000 and $1.1 million, respectively. The $3.3 million
year-over-year
- 52 -
decrease in impaired loans was principally due to decreases of $2.6 million, $291,000 and $22 4 ,000 in impaired commercial real estate loans, impaired
commercial lines of credit, and impaired other commercial and industrial loans, respectively. All other loan product segments (which include residential loans,
home equity loans, and junior lien loans on residential property) reported modest year-over-year decreases in impaired loans of $114,000 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, 2018. 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 profiles that 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 increased $10.7 million to $14.6 million at December 31, 2018,
compared to $3.9 million at December 31, 2017. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently
considered impaired. The increase in potential problem loans was primarily due to a $7.5 million increase in potential problem commercial real estate loans, a $2.9
million increase in commercial and industrial loans, and a $1.3 million increase in commercial lines of credit. These increases were partially offset by a decrease of
$977,000 in potential problem residential real estate loans. The $7.5 million increase in potential problem commercial real estate loans was primarily due to the
addition of seven relationships; six relationships rated special mention with an outstanding balance of $6.9 million, and one loan rated substandard with an
outstanding balance of $527,000.
Total potential problem loans, including impaired loans, were $20.6 million at December 31, 2018, comprised of special mention, substandard and doubtful loans
of $14.3 million, $4.2 million and $2.1 million, respectively. Total problem 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. Substandard and doubtful loans declined $1.1 million and $2.8 million,
respectively, at December 31, 2018 as compared to December 31, 2017, partially offset by an increase of $11.3 million in loans classified as special mention. The
decrease in loans classified as doubtful was primarily due to a $2.0 million decrease in commercial real estate loans, due to a single commercial real estate loan
with an outstanding balance of $1.7 million that was doubtful at December 31, 2017, and was charged off and moved into foreclosure at December 31, 2018. The
decrease in loans classified as substandard was primarily due to a decrease in residential real estate loans and commercial lines of credits, which decreased
$679,000 and $290,000, respectively. The increase in loans classified as special mention was primarily due to the $11.1 million increase in commercial real estate
loans, other commercial and industrial loans and commercial lines of credit, due to the addition of one aggregated relationship totaling $8.9 million and five other
individually unrelated relationships with an outstanding balance of $1.9 million. The aggregated relationship, classified as special mention, in the amount of $8.9
million, consists of eight loans made to a real estate developer secured by, or related to, multiple projects. The eight loans include three secured commercial real
estate loans totaling $5.5 million, two unsecured commercial and industrial loans totaling $2.2 million, and three secured commercial lines of credit totaling $1.2
million. All loans were current as of December 31, 2018 and as of the date of this filing. The aggregated relationship was classified as special mention, in
conformance with the Bank’s internal policies, due to an analysis of factors related to the management capacity of the borrowers.
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 decreased to
1.81% at December 31, 2018 as compared to 2.09% at December 31, 2017. Delinquent loans decreased $921,000 year-over-year, primarily due to a decrease of
$864,000 in delinquent residential real estate loans. At December 31, 2018, there were $11.2 million in loans past due including $8.1 million, $1.1 million and $2.0
million in loans 30-59 days, 60-89 days, and greater than 90 days past due, respectively. At December 31, 2017, there were $12.2 million in loans past due
including $4.3 million, $3.3 million and $4.6 million in loans 30-59 days, 60-89 days, and greater than 90 days past due, respectively.
The decrease of $921,000 in total loans past due at December 31, 2018, as compared to December 31, 2017, was primarily due to a decrease of $2.5 million and
$2.2 million in loans 90 days and over past due and 60-89 days past due, respectively, partially offset by an increase of $3.8 million in loans 30-59 days past due.
The decrease in loans 90 days and over past due was primarily due to a decrease of $1.1 million in commercial real estate loans. At December 31, 2018 there were
three new loans with an outstanding balance of $323,000 that were over 90 days past due, while at December 31, 2017, there were seven loans with an outstanding
balance of $1.4 million. The decrease in loans 60-89 days past due was primarily due to a decrease of $1.8 million in commercial real estate loans, due to a single
commercial real estate loan with an outstanding balance of $1.7 million
- 53 -
that was 60-89 days past due at December 31, 2017, and was charged o ff and moved into foreclosure as of December 31, 2018. The increase in loans 30-59 days
past due was primarily due to an increase of $3.5 million in commercial real estate loans. At December 31, 2018 there were eight loans with an outstanding
balance of $4.3 million that were 30-59 days past due , while at December 31, 2017, there were five loans with an outstanding balance of $720,000 that were 30-59
days past due .
The ratio of the allowance to loan losses to period end loans at December 31, 2018 was 1.18% as compared to 1.23% at December 31, 2017.
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.
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, 2018, the Bank’s position in impaired loans consisted of 44 loans totaling $6.0 million. Of these loans, 23 loans, totaling $2.1
million, were valued using the present value of future cash flows method; and 21 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, 2018 and 2017 was $7.3 million and $7.1 million, or 1.18% and 1.23% of total year end loans, respectively. The
Company recorded $1.3 million in net charge-offs in 2018 as compared to $890,000 in net charge-offs in 2017. The ratio of net charge-offs to average loans
increased to 0.22% in 2018 from 0.16% in 2017. The increase in the year-over-year charge-off rate was due primarily to the charge-off in 2018 of a single fully-
reserved commercial real estate loan in the amount of $596,000 and the charge-off of a single fully-reserved commercial and industrial loan in the amount of
$124,000.
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.
2018
2017
2016
2015
2014
(Dollars in thousands)
Residential real estate
Commercial real estate
Commercial and tax exempt
Home equity and junior liens
Consumer loans
Unallocated
Total
Allocation
of the
Allowance
766
$
3,578
2,016
409
385
152
7,306
$
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
865
3,589
1,950
514
208
-
7,126
38.5% $
34.3%
18.8%
4.3%
4.1%
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
759
2,935
2,056
331
166
-
6,247
38.2% $
33.1%
19.2%
4.5 %
4.9 %
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
581
2,983
1,674
350
118
-
5,706
42.0% $
30.6%
21.0%
5.1%
1.3%
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
509
2,801
1,497
388
98
56
5,349
Percent of
Loans to
Total Loans
45.2%
32.5%
15.3%
5.9%
1.1%
100.0%
44.0 % $
30.1 %
19.3 %
5.5 %
1.1 %
100.0% $
100.0% $
100.0% $
100.0% $
- 54 -
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:
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
Premises and Equipment
$
2018
7,126
1,497
$
2017
6,247
1,769
$
2016
5,706
953
$
2015
5,349
1,350
$
66
58
21
145
(952)
(265)
(245)
(1,462)
(1,317)
7,306
$
0.22%
1.18%
15
46
13
74
(587)
(211)
(166)
(964)
(890)
7,126
$
0.16%
1.23%
31
63
13
107
(69)
(208)
(242)
(519)
(412)
6,247
$
0.09%
1.27%
48
69
40
157
(787)
(129)
(234)
(1,150)
(993)
5,706
$
0.25%
1.33%
$
2014
5,041
1,205
23
52
2
77
(634)
(183)
(157)
(974)
(897)
5,349
0.25%
1.38%
The Company held $20.6 million and $16.1 million in premises and equipment, net of accumulated depreciation, at December 31, 2018 and 2017,
respectively. Premises and equipment, net of accumulated depreciation, increased $4.5 million, or 27.9%, at December 31, 2018, as compared to December 31,
2017. The increase was primarily due to the acquisition and development costs associated with the Bank’s tenth branch location, in Clay, NY, and the investment
in a mixed use office and retail property located in downtown Oswego, NY. The Clay branch site was acquired, refurbished and opened in 2018. The mixed use
office and retail property, acquired in the fourth quarter of 2018, was under development at December 31, 2018. This property is being developed primarily as a
source of future rental income. The new branch location and the mixed use property added $2.1 million and $1.6 million, respectively, to the Company’s total
premises and equipment, net of accumulated depreciation, during 2018. The $1.6 million recorded for the mixed use office and retail property was the full
contractual price of the acquisition. Of that amount, $400,000 is being held by the Company in escrow pending the successful completion of certain property
development activities by the property’s previous owner. This $400,000 amount is recorded as an addition to other liabilities at December 31, 2018. The $942,000
remainder of the increase in premises and equipment, net of accumulated depreciation, at December 31, 2018, as compared to December 31, 2017, was related to a
variety of smaller, individually immaterial, replacement and refurbishment projects for both properties and data processing equipment infrastructure, and the site
acquisition of the Syracuse Southwest Corridor branch site in the amounts of $694,000, in the aggregate, and $248,000, respectively.
Bank Owned Life Insurance
The Company held $16.9 million and $11.7 million in bank owned life insurance at December 31, 2018 and 2017, respectively. Bank owned life insurance
increased $5.2 million, or 44.3%, at December 31, 2018, as compared to December 31, 2017. The increase was primarily due to the purchase of $5.0 million in
additional bank owned life insurance in April 2018 and the increase in the cash value of the policies, in the amount of $427,000, recorded as income in 2018,
partially offset by the surrender of a policy related to a deceased former employee.
Deposits
The Company’s deposit base is drawn from ten 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 $71.1 million, or 10.6%, in 2018. For the year ended December 31, 2018,
67.2% of the Company's average deposit base of $741.0 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
- 55 -
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, 2018, consumer deposits, and commercial and business deposits increased $8.6 million and $23.1 million, respectively, partially offset by a
decrease in municipal deposits of $28.3 million, when compared to December 31, 2017. The decrease in municipal deposits at December 31, 2018 as compared to
December 31, 2017, was largely due to factors that the Company’s management believes to be transitory. The increase in consumer deposits reflected 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. The decrease in municipal deposits at December 31, 2018, as compared to December 31,
2017, was largely due to factors that the Company’s management believes to be transitory in nature, and primarily due to the specific short-term cash management
requirements of a small number of large balance municipal depositors.
Total deposits of $727.0 million at December 31, 2018 consisted in part of $41.4 million in brokered money market and certificates of deposit accounts,
respectively. Brokered deposits represented 5.7% of all deposits at December 31, 2018. 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 certificates of deposit accounts, respectively. Brokered deposit represented 20.1% of all deposits at
December 31, 2017.
The EGRRCPA repealed or modified certain provisions of the Dodd-Frank Act and eased regulations on all financial institutions with the exception of the largest
banks. The EGRRCPA’s provisions include, among other items, clarifying that, subject to various conditions, reciprocal deposits of another depository institution
obtained using a deposit broker through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered
deposits subject to the FDIC’s brokered-deposit regulations. At December 31, 2018, the Bank held $41.4 million in deposits that under the EGRRCPA were
categorized as brokered deposits. At December 31, 2017, the Bank had $145.1 million in deposits that were categorized under the then-applicable regulations as
brokered deposits. Of the $145.1 million in deposits categorized as brokered deposits at December 31, 2017, $59.5 million would be considered to be brokered
deposits under the EGRRCPA regulations in effect at December 31, 2018.
The following table sets forth our deposit composition in dollar amount and as a percentage of total deposits.
(Dollars 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
2018
80,545
199,598
77,224
13,180
189,679
57,407
103,124
6,303
727,060
$
$
December 31,
2017
11.1% $
27.4%
10.6%
1.8%
26.1%
7.9%
14.2%
0.9%
100.0% $
80,587
160,736
52,691
14,905
253,088
66,093
89,783
5,720
723,603
11.1% $
22.2%
7.3%
2.1%
35.0%
9.1%
12.4%
0.8%
100.0% $
2016
80,139
132,007
57,349
14,718
192,692
53,587
75,282
5,209
610,983
13.1%
21.6%
9.4%
2.4%
31.5%
8.8%
12.3%
0.9%
100.0%
At December 31, 2018, time deposit accounts in excess of $100,000 totaled $156.8 million, or 56.6% of time deposits and 21.6% of total deposits. At December
31, 2017, these deposits totaled $147.2 million, or 68.9% of time deposits and 20.3% of total deposits.
The following table indicates the amount of the Company’s time deposit accounts of $100,000 or more by time remaining until maturity as of December 31, 2018:
(In thousands)
Remaining Maturity:
Three months or less
Three through six months
Six through twelve months
Over twelve months
Total
$
$
38,097
25,316
43,427
49,912
156,752
- 56 -
Borrowings
Borrowings are comprised primarily of advances and overnight borrowing at the FHLBNY.
The following table represents information regarding short-term borrowings for the years ended December 31:
(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
$
2018
39,000
13,556
39,000
$
1.63%
2.15%
The following table represents information regarding long-term borrowings for the years ended December 31:
(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
Subordinated Loans
$
2018
79,534
58,316
79,534
$
2.00%
2.32%
2017
41,600
31,268
30,600
$
1.34%
1.32%
2017
43,288
38,276
43,288
$
1.55%
1.68%
2016
65,100
31,468
42,000
0.68%
0.85%
2016
17,000
16,163
17,000
1.67%
1.59%
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 FDIC and FRB. The capital securities of the trust are a pooled trust
preferred fund of Preferred Term Securities VI, Ltd., whose interest rate resets quarterly, and are indexed to the 3-month LIBOR rate plus 1.65%. These securities
have a five-year call provision. The Company paid $199,000 and $149,000 in interest expense related to this issuance in 2018 and 2017, respectively. 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, 2018 and
2017. 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 at its discretion.
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 annual interest rate charged
to the Company will be 6.25% through the maturity date of the subordinated loan. 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. Accordingly, interest expense of $647,000
and $645,000 were recorded in the years ended December 31, 2018 and 2017, respectively.
Other Liabilities
The Company had $7.7 million and $6.4 million in other liabilities at December 31, 2018 and 2017, respectively. Other liabilities increased $1.3 million, or 20.2%,
at December 31, 2018, as compared to December 31, 2017. The increase was primarily due to (1) an accrual of $443,000, charged to income in 2018, related to the
contractually-mandated acceleration of certain retirement benefits for a senior officer who elected to retire prior to his originally scheduled full retirement date; and
(2) a $400,000 amount, held in escrow, related to the purchase of the downtown Oswego, NY, mixed use office and retail property, described above. This reserve
balance, included in the purchase price of the property as a component of premises and equipment, net of depreciation, at December 31, 2018, will be paid in two
installments of $200,000 each in 2019 and 2020,
- 57 -
respectively, pending the successful completion of certain property development activities by the property’s previous owner. The $443,000 liability related to the
retired senior officer will be paid out in 30 month ly installments commencing in January 2019. The $444,000 aggregate remainder of the increase in other
liabilities at December 31, 2018, as compared to December 31, 2017, was due to a variety of individually immaterial items.
Capital
The Company’s shareholders’ equity increased $2.4 million, or 3.9%, to $64.2 million at December 31, 2018 from $61.8 million at December 31, 2017. This
increase was primarily due to an increase in retained earnings of $3.1 million, resulting from the Company’s reported net income of $4.0 million in 2018, partially
offset by common stock dividend distributions of $1.0 million, a $969,000 increase in additional paid in capital, and the accretion of $180,000 unearned ESOP
shares. Paid in capital increased in 2018 due to the exercise of stock options during the year primarily by members of the Company’s management team. These net
increases to shareholders’ equity were partially offset by a $1.8 million increase in the Company’s accumulated other comprehensive loss. The increase in
accumulated other comprehensive loss at December 31, 2018, as compared to December 31, 2017, was the result of an unrealized decline, after tax effects, of $1.3
million related to the Company’s available-for-sale investment securities portfolio, and an unrealized loss, after tax effects, for pension and other postretirement
obligations of $932,000. The unrealized decline in the value of the Company’s available-for-sale investment securities portfolio was primarily due to the increases
in market interest rates that occurred in 2018. The increase in the unrealized loss for pension and other postretirement obligations was primarily due to the
significant declines in global equity markets that took place in the fourth quarter of 2018. These increases in accumulated other comprehensive loss were partially
offset by an increase of $373,000, after tax effects, primarily related to the transfer of $35.2 million in securities from held-to-maturity to available-for-sale
concurrent with the adoption in 2018 of ASU 2017-12: Derivatives and Hedging [Topic 815]: Targeted Improvements to Accounting for Hedging Activities.
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 Accumulated Other Comprehensive Income (“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, 2018, 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.”
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, 2018, 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-
- 58 -
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 was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased each year until fully implemented at 2.5% on January
1, 2019. At December 31, 2018, the Bank exceeded all current and projected regulatory required minimum capital ratios, including the maximum capital buffer
level that was 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, 2018, cash and equivalents increased by $4.3 million. The Company reported net cash flows from financing activities of $47.4
million generated principally by an increase in the net proceeds from long-term borrowings of $36.2 million, a net increase in non-brokered deposits of $21.6
million, and an $8.4 million increase in short-term borrowings, partially offset by a by a decrease in brokered deposits of $18.1 million. Additionally, $9.0 million
was provided through operating activities. These cash flows were primarily invested in: (1) net increases in loans outstanding of $42.5 million, (2) $5.6 million in
the purchase of premises and equipment, and (3) $5.0 million in bank owned life insurance during 2018.
Certificates of deposit due within one year of December 31, 2018 totaled $187.0 million, representing 67.6% of certificates of deposit at December 31, 2018, a
decrease from 68.6% at December 31, 2017. 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, 2018.
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, 2018 and 2017, the Company had cash and cash equivalents of $26.3
million and $22.0 million, respectively.
In June 2018, the Company renewed a $12.0 million portion of an expiring $26.0 million Irrevocable Stand-By Letter of Credit (“LOC”), first established in June
2016, with the FHLBNY as an alternative means of collateralizing certain public funds deposits. A LOC is a conditional commitment 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
statute, these 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
- 59 -
that, with certain depositor relationships, this 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, 2018, total credit available under the existing lines of credit was approximately
$189.3 million at FHLBNY, the FRB, and two other correspondent banks. At December 31, 2018, the Company had $130.5 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 $58.8 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, 2018, 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, 2018, the Bank had $118.7 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.
- 60 -
ITEM 8: FINANCIAL STATEMEN TS 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, 2018 and 201 7
Consolidated Statements of Income – Years ended December 31, 2018 and 201 7
Consolidated Statements of Comprehensive Income – Years ended December 31, 2018 and 201 7
Consolidated Statements of Changes in Shareholders’ Equity – Years ended December 31, 2018 and 201 7
Consolidated Statements of Cash Flows – Years ended December 31, 2018 and 201 7
Notes to Consolidated Financial Statements
- 61 -
Page
62
63
64
65
66
67
68
70
MANAGEMENT’S REPORT ON INTERNAL C ONTROL 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, 2018. 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
Thomas W. Schneider
President and Chief Executive Officer
Oswego, New York
March 27, 2019
/s/ Walter F. Rusnak
Walter R. Rusnak
Senior Vice President, Chief Financial Officer
- 62 -
Report of Independent Regist ered 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, 2018
and 2017 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, 2018 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, 2018 and 2017, and the results of its
operations and its cash flows for each of the years in the two-year period ended December 31, 2018, 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
consolidated 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 consolidated 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
Pittsford, New York
March 27, 2019
/s/ BONADIO & CO., LLP
- 63 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Condition
(In thousands, except share and per share data)
ASSETS:
Cash and due from banks
Interest-earning deposits (including restricted balances of $3,993 and $6,342,
respectively)
Total cash and cash equivalents
Available-for-sale securities, at fair value
Held-to-maturity securities, at amortized cost (fair value of $53,769 and $66,426,
respectively)
Marketable equity securities, at fair value
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; 4,362,328 and 4,280,227
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.
- 64 -
December 31,
2018
December 31,
2017
$
9,610 $
9,708
16,706
26,316
177,664
53,908
453
5,937
620,270
7,306
612,964
20,623
3,068
1,173
165
4,536
16,941
9,367
933,115 $
623,936 $
103,124
727,060
39,000
79,534
15,094
304
7,664
868,656
44
29,139
42,114
(6,042)
(1,034)
64,221
238
64,459
933,115 $
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
$
$
$
(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 (losses) gains on sales and redemptions of investment securities
Loss on marketable equity securities
Net gains on sales of loans and foreclosed real estate
Debit card interchange fees
Insurance agency revenue
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
Insurance agency expense
Community service activities
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 attributable to noncontrolling interest
Net income available to common shareholders
Earnings per common share - basic
Earnings per common share - diluted
Dividends per common share
Pathfinder Bancorp, Inc.
Consolidated Statements of Income
For the
year ended
December 31, 2018
For the
year ended
December 31, 2017
$
28,426
$
5,159
720
259
246
34,810
6,812
221
1,165
846
9,044
25,766
1,497
24,269
1,148
427
170
(182)
(62)
50
576
840
868
3,835
13,304
2,325
1,995
1,360
935
492
422
875
541
1,300
23,549
4,555
546
4,009
(22)
4,031
0.97
0.94
0.24
$
$
$
$
$
$
$
$
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
484
803
709
4,085
11,917
2,196
1,779
952
809
473
353
932
415
1,268
21,094
4,345
922
3,423
(68)
3,491
0.86
0.83
0.215
The accompanying notes are an integral part of the consolidated financial statements.
- 65 -
Pathfinder B ancorp, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
Net Income
Other Comprehensive (Loss) Income
Retirement Plans:
Retirement plan net losses recognized in plan expenses
Plan losses not recognized in plan expenses
Net unrealized loss on retirement plans
Unrealized holding (losses) gains on available-for-sale securities
Unrealized holding (losses) gains arising during the period
Reclassification adjustment for net (losses) gains included in net income
Net unrealized (loss) gain on available-for-sale securities
Accretion of net unrealized loss on securities transferred to held-to-maturity (1)
Other comprehensive (loss) income, before tax
Tax effect
Other comprehensive (loss) income, net of tax
Comprehensive income
Comprehensive loss, attributable to noncontrolling interest
Comprehensive income attributable to Pathfinder Bancorp, Inc.
Tax Effect Allocated to Each Component of Other Comprehensive (Loss) Income
Retirement plan net losses recognized in plan expenses
Plan losses not recognized in plan expenses
Unrealized holding (losses) gains arising during the period
Reclassification adjustment for net (losses) 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 (loss) income
Years ended
December 31, 2018
December 31, 2017
$
4,009 $
3,423
171
(1,432)
(1,261)
(1,991)
182
(1,809)
175
(2,895)
755
(2,140)
1,869 $
(22) $
1,891 $
(45) $
374
520
(48)
(46)
755 $
150
(631)
(481)
1,454
(489)
965
191
675
(271)
404
3,827
(68)
3,895
(61)
252
(582)
196
(76)
(271)
$
$
$
$
$
(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.
- 66 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
Years ended December 31, 2018 and December 31, 2017
$
$
$
(In thousands, except share and per share data)
Balance, January 1, 2018
Net income (loss)
Other comprehensive loss, net of tax
ESOP shares earned (24,442 shares)
Restricted stock awards (14,490 shares)
Stock based compensation
Stock options exercised
Cumulative effect of change in measurement of
equity securities (1)
Cumulative effect of change in investment
securities transfer (2)
Common stock dividends declared ($0.24 per share)
Cumulative effect of affiliate capital allocation
Distributions from affiliates
Balance, December 31, 2018
Balance, January 1, 2017
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 (3)
Distributions from affiliates
Balance, December 31, 2017
$
Common
Stock
Additional
Paid in
Capital
28,170
Accumulated
Other Com-
prehensive
Loss
Retained
Earnings
$ 39,020 $
Unearned
ESOP
(1,214) $
(4,208) $
Non-
controlling
Interest
43 $
-
-
-
-
-
1
-
-
-
-
-
44 $
43 $
-
-
-
-
-
-
-
-
-
43 $
-
-
195
-
398
384
-
-
-
(8)
-
4,031
-
-
-
-
-
53
-
(1,005)
15
-
-
(2,140)
-
-
-
-
(53)
359
-
-
-
-
-
180
-
-
-
-
-
-
-
-
29,139 $ 42,114
$
(6,042) $
(1,034) $
27,483 $ 35,619 $
(3,822) $
(1,394) $
-
-
187
-
345
155
-
-
-
3,491
-
-
-
-
-
(880)
790
-
-
404
-
-
-
-
-
(790)
-
-
-
180
-
-
-
-
-
-
28,170 $ 39,020 $
(4,208) $
(1,214) $
Total
333 $ 62,144
4,009
(22)
(2,140)
-
375
-
-
-
398
-
385
-
-
-
359
-
(1,005)
-
-
(7)
(66)
(66)
238 $ 64,459
432 $ 58,361
3,423
(68)
404
-
367
-
-
-
345
-
155
-
(880)
-
-
-
(31)
(31)
333 $ 62,144
(1) Cumulative effect of unrealized gain on marketable equity securities based on the adoption of ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-
10): Recognition and Measurement of Financial Assets and Liabilities.
(2) Cumulative effect of unrealized gains on the transfer of 52 investment securities from held-to-maturity classification to available-for-sale classification based
on the adoption of ASU 2017-12: Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
(3) 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.
- 67 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Cash Flows
For the Years ended December 31,
(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
Premise and equipment
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
Pension plan contribution
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
Purchase of Federal Home Loan Bank stock
Proceeds from redemption 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
Premise and equipment
Purchase of bank owned life insurance
Proceeds from bank owned life insurance
Realized gains on hedging activity
Net change in loans
Purchase of premises and equipment
Net cash flows from investing activities
- 68 -
2018
$
4,031
$
1,497
343
216
(212)
(47)
(3)
171
11
(8)
1,180
12
321
35
(427)
1,656
17
773
(21)
(825)
262
8,982
(55,291)
(28,452)
(8,679)
6,597
44,577
5,842
34,631
953
744
14
(5,000)
228
-
(42,497)
(5,692)
(52,025)
2017
3,491
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)
(10,213)
9,608
38,262
7,080
65,010
2,635
993
-
-
-
(428)
(90,718)
(1,975)
(133,943)
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
Proceeds from exercise of stock options
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
RESTRICTED CASH
Federal Reserve Bank Reserve Requirements included in interest earning
deposits
The accompanying notes are an integral part of the consolidated financial statements.
- 69 -
(43,969)
65,525
(18,099)
8,400
(2,000)
38,246
385
(1,025)
(95)
$
$
47,368
4,325
21,991
26,316
8,925
662
1,420
3,993
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
6,342
$
$
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, 2018, 4,362,328
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, three branch offices in Onondaga County and one limited purpose 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 accordance 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 consolidated 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.
- 70 -
Advertising
The Company generally follows the policy of charging the costs of advertising to expense as incurred. Expenditures for new marketing and advertising material
designs and/or media content, related to specifically-identifiable marketing campaigns are capitalized and expensed over the estimated life of the campaign. Such
periods of time are generally 12-24 months in duration and do not exceed 36 months.
Noncontrolling Interest
Noncontrolling interest represents the portion of ownership and profit or loss that is attributable to the minority owners of FitzGibbons.
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.
The Company records its investment in marketable equity securities (“MES”) at fair value. Changes in the fair value of MES are recorded as additions to, or
subtractions from, net income in the period that the change occurs. These changes in fair value are separately disclosed as gains (losses) on equity securities on the
Consolidated Statements of Income.
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.
- 71 -
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 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,
- 72 -
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.
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
- 73 -
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.
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 lists, 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
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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 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.
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.
The hedge positions were closed on December 31, 2017 and there was no additional activity during 2018.
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 affect the
Company. Most notably, the Tax Act reduced the Company’s marginal federal income tax rate from 34% to 21% effective January 1, 2018. GAAP requires that
the impact of the provisions of the Tax Act on deferred tax assets and liabilities 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.
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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.
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
Reclassifications
As of December 31,
2018
(4,266) $
1,114
(3,152)
(3,833)
1,001
(2,832)
(82)
24
(58)
(6,042) $
2017
(3,003)
783
(2,220)
(2,108)
550
(1,558)
(585)
155
(430)
(4,208)
$
$
Certain amounts in the 2017 consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no
effect on net income as previously reported.
NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (“FASB”) and, to a lesser extent, other authoritative rulemaking bodies promulgate GAAP to regulate the standards of
accounting in the United States. From time to time, the FASB issues new GAAP standards, known as Accounting Standards Updates (“ASUs”) some of which,
upon adoption, may have the potential to change the way in which the Company recognizes or reports within its consolidated financial statements. The following
presentation provides a description of standards that were adopted in 2018 and standards not yet adopted as of December 31, 2018, but could have an impact on the
Company's consolidated financial statements upon adoption.
Standard : Revenue from Contracts with Customers ( ASU 2014-09: Revenue from Contracts with Customers [Topic 606] )
Standards Adopted in 2018
Description: This accounting guidance promulgates a core principle 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.
Adopted: January 1, 2018
Effect on Consolidated Financial Statements: As described in Note 27, the Company adopted the revenue recognition guidance and applied the modified
retrospective approach for reporting purposes. The substantial majority of the Company’s revenues are derived from net interest income on financial assets and
liabilities. Income of this nature is specifically excluded from the scope of this amended guidance. With respect to noninterest income, under the new guidance
credit card interchange revenue is now presented net of related customer rewards expense within other revenues from operations. For the years ended December
31, 2018 and 2017, the Company recognized $100,000 and $94,000, respectively, of credit card customer rewards expense within other revenues from operations.
____
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Standard: 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 )
Description: The amended guidance requires (1) 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, (2) public entities to use the exit price when measuring
the fair value of financial instruments for disclosure purposes, and (3) 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.
Adopted: January 1, 2018
Effect on Consolidated Financial Statements: 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 were recognized in the consolidated statement of income as opposed to
AOCI where they had been recognized under previous accounting guidance. The Company recognized losses of $62,000 during 2018 related to an unrealized
decline in value of the marketable equity securities held by the Bank, which had a fair value of $453,000 at December 31, 2018. Management believes the declines
in the value of those securities to be transitory in nature. Although those securities have historically fluctuated in value, how those securities could change in value
in the future is not predictable.
____
Standard: Improvements to Accounting for Hedging Activities ( ASU 2017-12: Derivatives and Hedging [Topic 815]: Targeted Improvements to Accounting for
Hedging Activities )
Description: The amended guidance (1) expands and clarifies hedge accounting for nonfinancial and financial risk components, (2) aligns the recognition and
presentation of the effects of the hedging instrument and hedged item in the financial statements, and (3) simplifies the requirements for assessing effectiveness in a
hedging relationship.
Adopted: The Company adopted this guidance, effective January 1, 2018, in the second quarter of 2018.
Effect on Consolidated Financial Statements: As a result of the adoption of this Update, the Company transferred 52 securities with an aggregate amortized cost
of $35.2 million from the held-to-maturity classification to the available-for-sale classification as of the adoption date. The transfer of these securities resulted in a
decrease in accumulated other comprehensive loss of $359,000 on the adoption date. The Company had no derivative or hedging positions at December 31, 2018
and had no derivative or hedging positions during the year ended December 31, 2018. The Company anticipates that it will use derivatives and hedging
transactions in the future as part of its overall risk management programs. The use of derivatives and hedging transactions may be significant and result in material
impacts to the consolidated financial statements in the future. However, due to the highly uncertain nature and timing of the potential use of these instruments
and/or transactions, management cannot predict the effect that this Update will have on the consolidated financial statements in future periods.
____
Standard: 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 )
Description: 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.
Adopted: January 1, 2018
Effect on Consolidated Financial Statements : The Company modified its defined benefit pension plan in 2012, thereby eliminating the further accumulation of
service cost credits by its employees after that date. The Company previously reported, and continues to report, 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.
____
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Standard: Scope of Modification Accounting for Share-Based Payment Awards ( ASU 2016-09: Compensation — Stock Compensation [Topic 718]:
Improvements to Employee Share-Based Payment Accounting )
Description: The amended guidance addresses which changes to the terms and conditions of a share-based payment award require an entity to apply modification
accounting.
Adopted: January 1, 2018
Effect on Consolidated Financial Statements: The guidance is to be applied on a prospective basis for awards modified on or after the adoption date. There
were no such award modifications in 2018.
____
Standard: Restricted Cash (ASU 2016-18: Statements of Cash Flows [Topic 230]: Restricted Cash)
Description: 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.
Adopted: January 1, 2018
Effect on Consolidated Financial Statements: This disclosure guidance was applied using a retrospective transition method beginning with first quarter 2018
reporting and did not have a material impact on the Company’s consolidated financial statements.
____
Standard: 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 )
Description: This amendment provides clarifying guidance for classifying cash inflows or outflows on the statement of cash flows where previous guidance was
unclear or silent.
Adopted: January 1, 2018
Effect on Consolidated Financial Statements: This disclosure guidance was applied using a retrospective transition method beginning with first quarter 2018
reporting and did not have a material impact on the Company’s consolidated financial statements.
____
Standard: Clarifying the Definition of a Business (ASU 2017-01: Business Combinations [Topic 805]: Clarifying the Definition of a Business)
Description: 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.
Adopted: January 1, 2018
Effect on Consolidated Financial Statements: The guidance should be applied using a prospective transition method if applicable transactions occur. The
Company had no transactions that would be accounted for as acquisitions (or disposals) of assets or businesses under the provisions of this Update in either 2018 or
2017.
____
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Standard: Share-based Payment Awards ( ASU 2017-11: Earnings per Share [Topic 260] )
Description : The amended guidance clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting described 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.
Adopted: January 1, 2018
Effect on Consolidated Financial Statements: The guidance will be applied using a prospective transition method required under the guidance for awards
modified on or after the adoption date. There were no such modifications in 2018.
Standard : Leases ( ASU 2016-02: Leases [Topic 842] )
Standards Not Yet Adopted as of December 31, 2018
Description: 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.
Required Date of Implementation: January 1, 2019
Effect on Consolidated Financial Statements: The Company occupies certain banking offices and land under noncancelable operating lease agreements which
were not reflected in its consolidated balance sheet at December 31, 2018. Upon adoption of the guidance on January 1, 2019, the Company recorded an asset of
$2.5 million and a corresponding liability in the amount of $2.7 million, as a result of recognizing right-of-use assets and lease liabilities on its consolidated
statement of financial condition. The Company elected to adopt the transition relief under Topic 842, Leases, using the modified retrospective transition method
recognizing a cumulative effect adjustment to the opening balance of retained earnings in the amount of $239,000.
The Company owns certain properties that it leases to unaffiliated third parties at market rates. Lease rental income was $134,000 and $122,000 for the twelve
months ended December 31, 2018 and 2017, respectively. All lease agreements are accounted for as operating leases. The Company has no unamortized initial
direct costs related to the establishment of these lease agreements at January 1, 2019.
____
Standard: 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 )
Description: 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.
Required Date of Implementation: January 1, 2019
Effect on Consolidated Financial Statements : The Company has consistently employed accounting methodologies with respect to securities with purchased
premiums that are consistent with the guidance provided in this Update. Accordingly, the Company does not expect the guidance to have a material impact on its
consolidated financial statements.
____
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Standard: Improvements to Nonemployee Share-Based Payment Accounting ( ASU 2018-07: Compensation - Stock Compensation [Topic 718])
Description: Consistent with the accounting requirement for employee share-based payment awards, under the new guidance, nonemployee share-based payment
awards within the scope of Topic 718 are measured on the grant date at the grant-date fair value of the equity instruments that an entity is obligated to issue when
the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been
satisfied. The amendments in this Update affect all entities that enter into share-based payment transactions for acquiring goods and services from nonemployees.
Required Date of Implementation: January 1, 2019
Effect on Consolidated Financial Statements: The amendments should be applied using a prospective transition method. The Company is not currently party to
any nonemployee share-based payment awards whereby the participant is obligated to any specific performance requirement other than to remain in the service of
the Company through a specified vesting date, or schedule of vesting dates. Therefore, the Company does not expect the guidance will have a material impact on its
consolidated financial statements.
____
Standard: Measurement of Credit Losses on Financial Instruments ( ASU 2016-13: Financial Instruments—Credit Losses [Topic 326]: Measurement of Credit
Losses on Financial Instruments )
Description: The amended guidance replaces the current incurred loss model for determining the allowance for credit losses with a current expected credit loss
(“CECL”) methodology. 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 substantially unchanged from how it is determined
under existing guidance.
Required Date of Implementation: January 1, 2020 (early adoption permitted)
Effect on Consolidated Financial Statements: The transition guidance requires an entity to make a cumulative-effect adjustment to opening retained earnings as
of the beginning of the first reporting period in which the amendments are effective. The Company is assessing the new guidance to determine what modifications
to existing credit estimation processes may be required. Accordingly, the Company has engaged external consulting service and analytical software providers to
assist management with the transition to the CECL methodology. The implementation of this update is not expected to take place earlier than the required
implementation date of January 1, 2020. The Company expects that the new guidance will likely 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. The amount of the increase in the allowance for loan losses required under
the CECL methodology, if any, cannot be determined as of the date of this report. The increase, if required, will at least partially depend on many factors not yet
determinable, including changes to the composition of the Bank’s loan portfolio, updates to loan portfolio credit histories and changes in general economic
conditions between the date of this report and the implementation date for this Update. 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.
____
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Standard: Simplifying the Test for Goodwill Impairment ( ASU 2017-04: Intangibles—Goodwill and Other [Topic 350]: Simplifying the Test for Goodwill
Impairment )
Description: Current guidance requires a two-step approach to determining if recorded goodwill is impaired. In Step 1, reporting entities must first evaluate
whether or not the carrying value of a reporting unit is greater than its fair value. In Step 2, if a reporting unit’s carrying value is greater than its fair value, then the
entity should calculate the implied fair value of goodwill. If the carrying value of goodwill is more than the implied fair value, an impairment charge for the
difference must be recorded. The amended guidance eliminates Step 2 from the goodwill impairment test. Therefore, under the new guidance, if the carrying value
of a reporting unit is greater than its fair value, a goodwill impairment charge will be recorded for the difference (up to the carrying value of the recorded goodwill).
Required Date of Implementation: January 1, 2020 (early adoption permitted)
Effect on Consolidated Financial Statements: The amendments should be applied using a prospective transition method. The Company does not expect the
guidance will have a material impact on its consolidated financial statements, unless at some point in the future one of its reporting units were to fail Step 1 of the
goodwill impairment test.
____
Standard : Fair Value Measurement ( ASU 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for
Fair Value Measurement
Description: The Board is issuing the amendments in this Update as part of the disclosure framework project. The disclosure framework project’s objective and
primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by
GAAP that is most important to users of each entity’s financial statements. The amendments in this Update modify the disclosure requirements for entities such as
the Company on fair value measurements in Topic 820, Fair Value Measurement:
The following disclosure requirements were removed from Topic 820:
1.
2.
3.
The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy
The policy for timing of transfers between levels
The valuation processes for Level 3 fair value measurements
The following disclosure requirements were modified in Topic 820:
1.
2.
3.
In lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value
hierarchy and purchases and issues of Level 3 assets and liabilities.
For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the
date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly.
The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the
reporting date.
The following disclosure requirements were added to Topic 820:
1.
2.
The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at
the end of the reporting period
The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an
entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that
other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3
fair value measurements.
Required Date of Implementation: The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs
used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent
interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their
effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of
this Update and delay adoption of the additional disclosures until their effective date.
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Effect on Consolidated Financial Statements: The Company does not expect the new guidance will have a material impact to its consolidated statements of
condition or income.
____
Standard : Compensation ( ASU 2018-14: Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715 - 20): Disclosure Framework -
Changes to the Disclosure Requirements for Defined Benefit Plans)
Description: The Board is issuing the amendments in this Update as part of the disclosure framework project. The amendments in this Update modify the
disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.
The following disclosure requirements are removed from Subtopic 715-20:
1.
2.
3.
4.
The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.
The amount and timing of plan assets expected to be returned to the employer.
Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the
employer or related parties and the plan.
The effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of
net periodic benefit costs and (b) benefit obligation for postretirement health care benefits.
The following disclosure requirements are added to Subtopic 715-20:
1.
2.
The weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates.
An explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.
The amendments in this Update also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit
pension plans should be disclosed:
1.
2.
The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets.
The accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.
Required Date of Implementation: The amendments in this Update are effective for fiscal years ending after December 15, 2020, for public business entities and
for fiscal years ending after December 15, 2021, for all other entities. Early adoption is permitted for all entities.
Effect on Consolidated Financial Statements: The Company does not expect the new guidance will have a material impact to its consolidated statements of
condition or income.
____
Standard : Derivatives and Hedging ( ASU 2018-16: Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight
Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes)
Description: Topic 815, Derivatives and Hedging, provides guidance on the risks associated with financial assets or liabilities that are permitted to be hedged.
Among those risks is the risk of changes in fair values or cash flows of existing or forecasted issuances or purchases of fixed-rate financial assets or liabilities
attributable to the designated benchmark interest rate (referred to as interest rate risk). At present in the United States, eligible benchmark interest rates are the
interest rates on direct Treasury obligations of the U.S. government (UST), the London Interbank Offered Rate (LIBOR) swap rate, and the Overnight Index Swap
(OIS) Rate based on the Fed Funds Effective Rate. Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities, introduced the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate as the fourth permissible
U.S. benchmark rate.
The amendments in this Update permit the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in
addition to the UST, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate, and the SIFMA Municipal Swap Rate.
Required Date of Implementation: The Company adopted ASU 2017-12 in the quarter ended June 30, 2018. For public business entities that already have
adopted the amendments in Update 2017-12, such as the Company, the amendments are effective for fiscal years beginning after December 15, 2018, and interim
periods within those fiscal years.
- 82 -
Effect on Consolidated Financial Statements: The Company has certain assets, primarily in its investment securities portfolio, that have adjustable rates of
interest based on LIBOR. To the extent that the Company utilizes hedging strategies involving those securities in the future, or uses hedging strategies designed to
modify the effective repricing characteristics of its fixed-rate asset or fixed-rate liabilities portfolios to floating-rate assets or floating-rate liabilities in the future the
use of the liabilities in the future, the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes may have an effect on
future results of operations. The Company had no hedging activities in place at December 31, 2018 and does not expect the new guidance will have a material
impact to its consolidated statements of condition or income.
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 -0- and 26,065 for the years ended 2018 and 2017, 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,
2018
4,031 $
4,171
0.97 $
4,031 $
4,171
95
4,266
0.94 $
2017
3,491
4,081
0.86
3,491
4,081
108
4,189
0.83
$
$
$
$
- 83 -
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
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Total held-to-maturity
Amortized
Cost
December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
17,171 $
23,661
17,389
18,243
32,409
48,101
24,317
181,291
206
206
181,497 $
3,987 $
5,089
9,924
1,509
11,601
13,972
7,826
53,908 $
$
$
$
$
- 84 -
18 $
6
220
13
34
31
17
339
-
-
339 $
- $
22
4
-
124
93
17
260 $
(158) $
(602)
(409)
(137)
(777)
(1,691)
(398)
(4,172)
-
-
(4,172) $
(35) $
(84)
(182)
(13)
(47)
(13)
(25)
(399) $
17,031
23,065
17,200
18,119
31,666
46,441
23,936
177,458
206
206
177,664
3,952
5,027
9,746
1,496
11,678
14,052
7,818
53,769
(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
Amortized
Cost
December 31, 2017
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)
-
-
(2,398) $
(14) $
(311)
(159)
(10)
(215)
(10)
(719) $
41,336
13,681
8,600
6,644
35,742
53,348
11,052
170,403
735
735
171,138
4,948
35,460
8,303
6,896
7,442
3,377
66,426
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, 2018, the Company also held a total of 21 private-label mortgage-backed securities
or collateralized mortgage obligations with an aggregate book balance of $32.1 million and 14 private-label asset backed securities collateralized by consumer
loans with an aggregate book balance of $19.8 million. At December 31, 2017, the Company held a total of 17 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. 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.
- 85 -
The amortized cost and estimated fair value of debt investments at December 31, 2018 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.
(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
Available-for-Sale
Held-to-Maturity
Amortized
Cost
10,490 $
22,893
24,128
18,953
76,464
32,409
48,101
24,317
181,291 $
Estimated
Fair Value
10,397 $
22,858
23,677
18,483
75,415
31,666
46,441
23,936
177,458
$
Amortized
Cost
3,111 $
7,794
6,775
2,829
20,509
11,601
13,972
7,826
53,908 $
Estimated
Fair Value
3,111
7,734
6,694
2,682
20,221
11,678
14,052
7,818
53,769
$
$
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:
(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
Asset backed securities
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Totals
Less than Twelve Months
December 31, 2018
Twelve Months or More
Total
Number of
Individual
Securities
Unrealized
Losses
Fair
Value
Number of
Individual
Securities
Unrealized
Losses
Fair
Value
Number of
Individual
Securities
Unrealized
Losses
Fair
Value
1 $
5
10
7
6
3
7
39 $
1 $
-
4
1
3
4
-
13 $
977
(22) $
5,213
(76)
8,266
(137)
10,470
(91)
3,519
(83)
2,792
(98)
(275)
14,011
(782) $ 45,248
(8) $
-
(41)
(13)
(8)
(13)
-
982
-
3,214
1,496
1,447
3,972
-
(83) $ 11,111
- 86 -
2 $
26
4
2
21
28
5
88 $
3 $
6
2
-
2
-
2
15 $
(136) $ 12,017
14,206
(526)
3,374
(272)
3,059
(46)
24,154
(694)
35,765
(1,593)
5,907
(123)
(3,390) $ 98,482
(27) $
(84)
(141)
-
(39)
-
(25)
2,970
2,310
2,507
-
1,769
-
1,874
(316) $ 11,430
3 $
31
14
9
27
31
12
127 $
4 $
6
6
1
5
4
2
28 $
(158) $ 12,994
(602) 19,419
(409) 11,640
(137) 13,529
(777) 27,673
(1,691) 38,557
(398) 19,918
(4,172) $ 143,730
(35) $
(84)
(182)
(13)
(47)
(13)
(25)
3,952
2,310
5,721
1,496
3,216
3,972
1,874
(399) $ 22,541
(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
Less than Twelve Months
December 31, 2017
Twelve Months or More
Total
Number of
Individual
Securities
Unrealized
Losses
Fair
Value
Number of
Individual
Securities
Unrealized
Losses
Fair
Value
Number of
Individual
Securities
Unrealized
Losses
Fair
Value
5 $
18
2
2
15
14
4
60 $
2 $
8
3
2
2
1
18 $
(105) $ 27,359
2,480
(24)
1,791
(19)
3,123
(17)
21,551
(159)
23,790
(195)
(203)
7,439
(722) $ 87,533
1,990
(2) $
5,668
(55)
1,412
(10)
1,909
(10)
4,418
(215)
(10)
1,119
(302) $ 16,516
4 $
12
1
1
9
21
-
48 $
1 $
11
1
-
-
-
13 $
(49)
(267)
(73)
(13)
(336)
(938)
-
$ 13,957
5,041
1,727
742
10,463
25,395
-
(1,676) $ 57,325
(12)
(256)
(149)
-
-
-
(417)
$
988
8,644
2,087
-
-
-
$ 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)
(30)
3,865
(495) 32,014
(1,133) 49,185
7,439
(2,398) $ 144,858
(203)
2,978
(14) $
(311) 14,312
3,499
(159)
1,909
(10)
4,418
(215)
(10)
1,119
(719) $ 28,235
The Company conducts a formal review of investment securities on a quarterly basis for the presence of OTTI. The Company assesses whether OTTI is present
when the fair value of a debt security is less than its amortized cost basis at the statement of condition date. Under these circumstances, OTTI is considered to have
occurred (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or
(3) the present value of expected cash flows is not anticipated to be sufficient to recover the entire amortized cost basis. The guidance requires that credit-related
OTTI is recognized in earnings while non-credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”). Non-
credit-related OTTI is based on other factors, including illiquidity and changes in the general interest rate environment. Presentation of OTTI is made in the
consolidated statement of income on a gross basis, including both the portion recognized in earnings as well as the portion recorded in OCI. The gross OTTI would
then be offset by the amount of non-credit-related OTTI, showing the net as the impact on earnings.
Management does not believe any individual unrealized loss in other securities within the portfolio as of December 31, 2018 represents OTTI. There were a total
of 88 securities classified as available-for-sale and 15 securities classified as held-to-maturity that were in an unrealized loss position for 12 months or longer at
December 31, 2018. Each security which has been in an unrealized loss position for 12 months or more has been analyzed and is not considered to be
impaired. These securities have unrealized losses primarily due to changes in general interest rates that occurred since the securities were acquired or due to
changes in certain assumptions related to the securities’ such as the timing of projected prepayment activity. Of the 103 securities in an unrealized loss position for
12 months or more at December 31, 2018, 56 securities, representing 68.68% of the unamortized cost of the total securities 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 primarily to changes in interest rates subsequent to the acquisition of the individual securities. In addition to
these securities, the Company held the following issuances that were in an unrealized loss position for 12 or more months at December 31, 2018:
26 securities issued by state and local political subdivisions, classified as available-for-sale, with aggregate losses of $526,000, or 3.57%. These securities were
either unrated at issuance (and are generally notes of $250,000 or less, issued by political subdivisions within the Company’s general market area) or are rated at or
above the lowest investment grade by one or more nationally-recognized statistical rating organization (NRSRO) and none of the securities are deemed to be
impaired at December 31, 2018.
Four securities issued by corporations, classified as available-for-sale, with aggregate losses of $272,000, or 7.46%. These securities were rated at or above the
lowest investment grade by one or more NRSRO and none of these securities are deemed to be impaired at December 31, 2018.
Two securities issued by private entities, backed by pooled assets other than residential or commercial mortgages, classified as available-for-sale, with aggregate
losses of $46,000, or 1.48%. These asset-backed securities were either unrated at issuance or
- 87 -
are rated at or above the lowest investment grade by one or more NRSRO. Asset-backed securities (ABS) that are held by the Company that were unrated at
issuance are the most senior securities in the securitization structure of that overall issuance and have substantial credit enhancements and/or credit enhancement
mechanisms in place. Accordingly, none of these securities are deemed to be impaired at December 31, 2018.
Five securities issued by private entities, backed by pooled residential or commercial mortgages, classified as available-for-sale, with aggregate losses of $123,000,
or 2.08%. These mortgage-backed securities (MBS) were either unrated at issuance or are rated at or above the lowest investment grade by one or more
NRSRO. Securities of this type that are held by the Company that were unrated at issuance are the most senior securities in the securitization structure of that
overall issuance and have substantial credit enhancements and/or credit enhancement mechanisms in place. Accordingly, none of these securities are deemed to be
impaired at December 31, 2018.
Six securities issued by state and local political subdivisions, classified as held-to-maturity, with aggregate losses of $84,000, or 3.51%. These securities were
either unrated at issuance (and are generally notes of $250,000 or less, issued by political subdivisions within the Company’s general market area) or are rated at or
above the lowest investment grade by one or more nationally-recognized statistical rating organization (NRSRO) and none of the securities are deemed to be
impaired at December 31, 2018.
The Company held two securities issued by corporations, classified as held-to-maturity, with aggregate losses of $141,000, or 5.32%. These securities were rated
at or above the lowest investment grade by one or more NRSRO and none of these securities are deemed to be impaired at December 31, 2018.
The Company held two securities issued by private entities, backed by pooled residential or commercial mortgages, classified as held-to-maturity, with aggregate
losses of $25,000, or 1.32%. These MBS were either unrated at issuance or are rated at or above the lowest investment grade by one or more NRSRO. Securities
of this type that are held by the Company that were unrated at issuance are the most senior securities in the securitization structure of that overall issuance and have
substantial credit enhancements and/or credit enhancement mechanisms in place. Accordingly, none of these securities are deemed to be impaired at December 31,
2018.
The Company does not intend to sell any of the securities in an unrealized loss position for 12 or months 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.
Proceeds of $35.6 million and $67.6 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
$
$
2018
242 $
-
(424)
(182) $
2017
427
428
(366)
489
The Company adopted ASU 2017-12: Derivatives and Hedging [Topic 815]: Targeted Improvements to Accounting for Hedging Activities, effective January 1,
2018, in the second quarter of 2018 . The amended guidance within this Update 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. The Company did not have any hedging activities in 2018, but expects to utilize hedging in the
future to improve the management of its risk profiles. In order to facilitate potential future hedging activities, the Company transferred 52 investment securities
with an aggregate amortized cost before transfer of $35.2 million from the held-to-maturity classification to the available-for-sale classification at the date of
adoption.
As of December 31, 2018 and December 31, 2017, securities with a fair value of $69.8 million and $113.0 million, respectively, were pledged to collateralize
certain municipal deposit relationships. As of the same dates, securities with a fair value of $19.5 million and $19.9 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.
- 88 -
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,
2018
December 31,
2017
$
232,523 $
7,121
239,644
212,314
44,235
63,359
9,320
329,228
26,109
25,424
51,533
620,405
(135)
(7,306)
612,964 $
$
216,793
5,558
222,351
192,525
51,285
50,097
10,405
304,312
25,935
28,646
54,581
581,244
(413)
(7,126)
573,705
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, 2018 and December 31, 2017, there were 909 loans outstanding with a remaining carrying value of $13.3 million, and 1,082 loans outstanding with a
remaining outstanding carrying value of $19.6 million, respectively. Since the acquisition of these loan pools, a total of 20 loans had cumulative net charge-offs
totaling $120,000 with $75,000 in net charge-offs for the twelve months ended December 31, 2018.
As of December 31, 2018 and December 31, 2017, residential mortgage loans with a carrying value of $154.9 million and $148.1 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.
- 89 -
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 77% of the portfolio in 2018, substantially identical to
the composition in 2017, where such loans represented 76% 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.
- 90 -
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, pending litigation 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.
- 91 -
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, 2018
Pass
Special
Mention
Substandard
Doubtful
Total
228,563 $
7,121
235,684
201,997
42,489
59,344
9,320
313,150
25,706
25,294
51,000
599,834 $
999 $
-
999
8,299
1,491
3,268
-
13,058
144
95
239
14,296 $
1,190 $
-
1,190
1,947
233
612
-
2,792
173
35
208
4,190 $
1,771 $
-
1,771
71
22
135
-
228
86
-
86
2,085 $
232,523
7,121
239,644
212,314
44,235
63,359
9,320
329,228
26,109
25,424
51,533
620,405
As of December 31, 2017
Pass
Special
Mention
Substandard
Doubtful
Total
891 $
-
891
1,372
195
407
-
1,974
61
55
116
2,981 $
1,869 $
-
1,869
2,024
523
532
-
3,079
304
7
311
5,259 $
2,208 $
-
2,208
2,056
60
420
-
2,536
174
-
174
4,918 $
216,793
5,558
222,351
192,525
51,285
50,097
10,405
304,312
25,935
28,646
54,581
581,244
211,825 $
5,558
217,383
187,073
50,507
48,738
10,405
296,723
25,396
28,584
53,980
568,086 $
- 92 -
Nonaccrual and Past Due Loans
Loans are placed on nonaccrual when the contractual payment of principal and interest has become 90 days past due or management has serious doubts about
further collectability of principal or interest, even though the loan may be performing.
Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date.
An age analysis of past due loans, not including net deferred loan costs, segregated by portfolio segment and class of loans, for the years ended December 31, are
detailed in the following tables:
(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
$
30-59 Days
Past Due
60-89 Days
Past Due
90 Days
and Over
Total
Past Due
Current
Total Loans
Receivable
As of December 31, 2018
1,507 $
-
1,507
4,261
1,033
814
-
6,108
247
226
473
8,088 $
505 $
-
505
1,176 $
-
1,176
3,188 $
-
3,188
229,335 $
7,121
236,456
364
111
44
-
519
323
22
387
-
732
4,948
1,166
1,245
-
7,359
207,366
43,069
62,114
9,320
321,869
6
65
71
1,095 $
35
107
142
2,050 $
288
398
686
11,233 $
25,821
25,026
50,847
609,172 $
232,523
7,121
239,644
212,314
44,235
63,359
9,320
329,228
26,109
25,424
51,533
620,405
30-59 Days
Past Due
60-89 Days
Past Due
90 Days
and Over
Total
Past Due
Current
Total Loans
Receivable
As of December 31, 2017
1,196 $
-
1,196
720
1,482
575
-
2,777
94
192
286
4,259 $
925 $
-
925
1,931 $
-
1,931
4,052 $
-
4,052
212,741 $
5,558
218,299
1,430
132
766
-
2,328
4,321
1,645
1,401
-
7,367
188,204
49,640
48,696
10,405
296,945
262
63
325
4,584 $
430
305
735
12,154 $
25,505
28,341
53,846
569,090 $
2,171
31
60
-
2,262
74
50
124
3,311 $
- 93 -
216,793
5,558
222,351
192,525
51,285
50,097
10,405
304,312
25,935
28,646
54,581
581,244
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,
2018
December 31,
2017
$
$
1,176 $
1,176
415
28
387
830
35
107
142
2,148 $
2,088
2,088
1,545
132
766
2,443
300
63
363
4,894
There were no loans past due ninety days or more and still accruing interest at December 31, 2018 or 2017.
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 table below details loans that had been modified as TDRs for the year ended December 31, 2018.
(In thousands)
Other commercial and industrial loans
Commercial real estate loans
For the year ended December 31, 2018
Pre-modification
outstanding
recorded
investment
Post-modification
outstanding
recorded
investment
Additional
provision
for loan
losses
Number of loans
1 $
1 $
300 $
123 $
300 $
137 $
-
14
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 and/or an extended maturity date that will result in a delay in payment from the original contractual maturity. The
Company was required to increase the specific reserves against the commercial real estate loan individually reviewed for impairment by $14,000, which was a
component of the provision of loan losses in the fourth quarter of 2018.
- 94 -
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 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, 2018, which had subsequently defaulted during the
year ended December 31, 2018.
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.
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, 2018
December 31, 2017
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
$
$
1,221 $
2,387
228
451
-
606
486
28
373
207
1,827
2,873
256
824
207
5,987 $
1,226 $
2,448
228
452
-
606
486
28
373
207
1,832
2,934
256
825
207
6,054 $
- 95 -
- $
-
-
-
-
108
100
28
255
140
108
100
28
255
140
631 $
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 $
-
-
-
-
-
210
320
40
391
142
210
320
40
391
142
1,103
The following table presents the average recorded investment in impaired loans for 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
Total
$
$
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
Total
$
$
- 96 -
2018
1,842
4,555
343
965
224
7,929
2018
61
175
28
38
12
314
$
$
$
$
2017
1,553
5,097
447
976
283
8,356
2017
71
247
27
30
13
388
NOTE 6: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 2018 and 2017 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
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
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1-4 family
first-lien
residential
mortgage
865 $
(245)
21
125
766 $
108 $
658 $
December 31, 2018
Construction
Commercial
real estate
Commercial
lines of credit
Other
commercial
and industrial
- $
-
-
-
- $
- $
- $
3,589 $
(643)
-
632
3,578 $
735 $
(102)
66
31
730 $
1,214
(207)
-
278
1,285
100 $
28 $
255
3,478 $
702 $
1,030
232,523 $
7,121 $
212,314 $
44,235 $
63,359
1,827 $
- $
2,873 $
256 $
824
230,696 $
7,121 $
209,441 $
43,979 $
62,535
Tax exempt
Home equity
and junior liens
Other
consumer
Unallocated
514 $
(17)
7
(95)
409 $
208 $
(248)
51
374
385 $
- $
- $
- $
152 $
152 $
Total
7,126
(1,462)
145
1,497
7,306
140 $
- $
- $
631
269 $
385 $
152 $
6,675
1 $
-
-
-
1 $
- $
1 $
9,320 $
26,109 $
25,424
$
620,405
- $
207 $
-
$
5,987
9,320 $
25,902 $
25,424
$
614,418
- 97 -
(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
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
1-4 family
first-lien
residential
mortgage
759 $
(166)
13
259
865 $
210
655
December 31, 2017
Construction
Commercial
real estate
Commercial
lines of credit
Other
commercial
and industrial
- $
-
-
-
- $
- $
- $
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 $
51,285 $
50,097
1,858 $
- $
5,500 $
547 $
1,048
214,935 $
5,558 $
187,025 $
50,738 $
49,049
Tax exempt
Home equity
and junior liens
Other
consumer
Unallocated
1 $
-
-
-
1 $
- $
1 $
331 $
(69)
6
246
514 $
166 $
(142)
40
144
208 $
142 $
-
372 $
208
- $
-
-
-
- $
- $
- $
Total
6,247
(964)
74
1,769
7,126
1,103
6,023
10,405 $
25,935 $
28,646
$
581,244
- $
290 $
-
$
9,243
10,405 $
25,645 $
28,646
$
572,001
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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.
- 98 -
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
Other
Total
(In thousands)
Specifically reserved
Historical loss rate
Qualitative factors
Total
Specifically reserved
Historical loss rate
Qualitative factors
Total
1-4 family
first-lien
residential
mortgage
108 $
87
571
766 $
December 31, 2018
Construction
Commercial
real estate
Commercial
lines of credit
- $
-
-
- $
100 $
85
3,393
3,578 $
28 $
20
682
730 $
Tax exempt
Home equity
and junior liens
Other
consumer
Unallocated
- $
-
1
-
1
140 $
15
254
-
409
- $
155
230
-
385
December 31, 2017
- $
-
-
152
152
1-4 family
first-lien
residential
mortgage
210 $
104
551
865 $
Construction
Commercial
real estate
Commercial
lines of credit
- $
-
-
- $
320 $
103
3,166
3,589 $
40 $
40
655
735 $
Other
commercial
and industrial
255
24
1,006
1,285
Total
631
386
6,137
152
7,306
Other
commercial
and industrial
391
15
808
1,214
Tax exempt
Home equity
and junior liens
- $
-
1
1 $
142 $
41
331
514 $
Other
consumer
-
59
149
208 $
$
Unallocated
- $
-
-
- $
Total
1,103
362
5,661
7,126
$
$
$
$
$
$
$
- 99 -
NOTE 7: SERVICING
Loans serviced for others are not included in the accompanying consolidated statements of condition. At December 31, 2018 and 2017, the Bank serviced 206 and
231 residential mortgage loans for others, respectively. The unpaid principal balances of mortgage loans serviced for others were $11.9 million and $14.3 million at
December 31, 2018 and 2017, respectively. The balance of capitalized servicing rights included in other assets at December 31, 2018 and 2017, was $16,000 and
$28,000, respectively.
The following summarizes mortgage servicing rights capitalized and amortized:
(In thousands)
Mortgage servicing rights capitalized
Mortgage servicing rights amortized
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
$
$
$
$
2018
- $
12 $
2017
-
12
2018
2,205 $
16,094
15,029
3,599
36,927
16,304
20,623 $
2017
2,205
14,917
13,515
650
31,287
15,170
16,117
Depreciation expense in 2018 and 2017 was $1.2 million and $1.0 million, respectively.
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
2 $
December 31,
2018
73
Number of
properties
5 $
December 31,
2017
468
At December 31, 2018 and 2017, the Company reported $951,000 and $805,000, respectively, 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, 2018, $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, 2018.
- 100 -
The identifiable intangible asset of $165,000 as of December 31, 2018 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 remaining amortization period of this intangible asset is 5.7 years.
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,
2018
243 $
(78)
165 $
2017
243
(61)
182
$
$
The estimated amortization expense for each of the five succeeding years ended December 31, is as follows:
$
$
16
16
16
16
16
85
165
(In thousands)
2019
2020
2021
2022
2023
Thereafter
Total
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
At December 31, 2018, the scheduled maturities of time deposits are as follows:
(In thousands)
Year of Maturity:
2019
2020
2021
2022
2023
Thereafter
Total
$
$
2018
80,545 $
199,598
77,224
13,180
189,679
57,407
103,124
6,303
727,060 $
$
$
- 101 -
2017
80,587
160,736
52,691
14,905
253,088
66,093
89,783
5,720
723,603
187,044
75,453
5,488
4,528
1,768
2,541
276,822
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.
(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
Non-Brokered
Brokered
2018
80,545 $
158,207
77,224
13,180
189,625
57,407
103,124
6,303
685,615 $
- $
41,391 $
- $
- $
54 $
- $
- $
- $
41,445 $
$
$
At December 31,
Total
80,545
199,598
77,224
13,180
189,679
57,407
103,124
6,303
727,060
$
$
Non-Brokered
Brokered
2017
80,587 $
109,666
52,691
14,905
159,032
66,093
89,783
5,720
578,477 $
- $
51,070
-
-
94,056
-
-
-
145,126 $
Total
80,587
160,736
52,691
14,905
253,088
66,093
89,783
5,720
723,603
On May 24, 2018, The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “EGRRCPA”) was enacted, which repealed or modified
certain provisions of the Dodd-Frank Act and eased regulations on all financial institutions with the exception of the largest banks. The EGRRCPA’s provisions
include, among other items, clarifying that, subject to various conditions, reciprocal deposits of another depository institution obtained using a deposit broker
through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s
brokered-deposit regulations. At December 31, 2018, the Bank held $41.4 million in deposits that under the EGRRCPA were categorized as brokered deposits. At
December 31, 2017, the Bank had $145.1 million in deposits that were categorized under the then-applicable regulations as brokered deposits. Of the $145.1
million in deposits categorized as brokered deposits at December 31, 2017, $59.5 million would be considered to be brokered deposits under the EGRRCPA
regulations in effect at December 31, 2018.
NOTE 12: BORROWED FUNDS
The composition of borrowings (excluding subordinated loans) at December 31 is as follows:
(In thousands)
Short-term:
FHLB Advances
Total short-term borrowings
Long-term:
FHLB advances
Total long-term borrowings
2018
39,000 $
39,000 $
79,534 $
79,534 $
2017
30,600
30,600
43,288
43,288
$
$
$
$
The principal balances, interest rates and maturities of the outstanding long-term borrowings, all of which are at a fixed rate, at December 31, 2018 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
1.16 - 2.00%
1.62 - 3.03%
2.03 - 3.17%
31,227
30,193
18,114
79,534
79,534
$
$
$
- 102 -
At December 31, 2018, scheduled repayments of long-term debt are as follows:
(In thousands)
2019
2020
2021
2022
2023
Thereafter
Total
$
$
31,227
30,193
15,289
2,000
825
-
79,534
The Company has access to FHLBNY advances, under which it can borrow at various terms and interest rates. Residential mortgage loans with a carrying value of
$154.9 million and FHLB stock with a carrying value of $5.9 million have been pledged by the Company under a blanket collateral agreement to secure the
Company’s borrowings at December 31, 2018. 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 $19.5 million line of credit available at December 31, 2018 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 $15.0 million in
lines of credit available with two other correspondent banks. $10.0 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 FDIC and FRB. The capital securities of the trust are a pooled trust
preferred fund of Preferred Term Securities VI, Ltd., whose interest rate resets quarterly, and are indexed to the 3-month LIBOR rate plus 1.65%. These securities
have a five-year call provision. The Company paid $199,000 and $149,000 in interest expense related to this issuance in 2018 and 2017, respectively. 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, 2018 and
2017. 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 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 annual interest rate charged
to the Company will be 6.25% through the maturity date of the subordinated loan. 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. Accordingly, interest expense of $647,000
and $645,000 were recorded in the years ended December 31, 2018 and 2017, respectively.
The composition of subordinated loans at December 31 is as follows:
(In thousands)
Subordinated loans:
Junior subordinated debenture
Subordinated loan
Total subordinated loans
2018
5,155 $
9,939
15,094 $
$
$
- 103 -
2017
5,155
9,904
15,059
The principal balances, interest rates and maturities of the subordinated loans at December 31, 2018 are as follows:
Term
(Dollars in thousands)
Subordinated loans:
Due within 10 years
Due within 19 years
Total subordinated loans
At December 31, 2018, scheduled repayments of the subordinated loans:
Principal
Rates
$
$
9,939
5,155
15,094
6.48%
3-Month Libor + 1.65%
(In thousands)
2019
2020
2021
2022
2023
Thereafter
Total
$
$
-
-
-
-
-
15,094
15,094
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
Plan participants' contribution
Actuarial (gain) loss
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
Plan participants' contribution
Employer contributions
Fair value of plan assets at end of year
Funded (unfunded) status - asset (liability)
Pension Benefits
Postretirement Benefits
2018
2017
2018
2017
$
10,469 $
-
473
-
(581)
(266)
10,095
14,956
(993)
(266)
-
825
14,522
4,427 $
$
- 104 -
9,323 $
-
473
-
916
(243)
10,469
13,634
1,565
(243)
-
-
14,956
4,487 $
481 $
-
21
9
(16)
(41)
454
-
-
(41)
9
32
-
(454) $
154
-
8
-
332
(13)
481
-
-
(13)
-
13
-
(481)
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
Tax Effect
Pension Benefits
Postretirement Benefits
$
$
2018
4,112 $
1,074
3,038 $
2017
2,827 $
1,131
1,696 $
2018
151 $
40
111 $
2017
176
70
106
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, 2018 and December 31, 2017. 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 4.97% at December 31, 2018.
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 4.97% at December 31, 2018.
Each discount rate was developed by matching the expected future cash flows of the 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 $10.1 million and $10.5 million at December 31, 2018 and 2017, respectively. The
postretirement plan had an accumulated benefit obligation of $454,000 and $481,000 at December 31, 2018 and 2017, 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
2018
4.97%
-
2017
4.58%
-
Postretirement Benefits
2018
4.97%
-
2017
4.58%
-
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 2019, gradually decreasing to 4.25% in 2022 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) cost
Pension Benefits
Postretirement Benefits
2018
- $
473
(1,037)
-
164
-
(400) $
2017
- $
473
(945)
-
154
-
(318) $
2018
- $
21
-
-
13
(5)
29 $
2017
-
8
-
-
(3)
(5)
-
$
$
- 105 -
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
2018
4.97%
6.50%
-
2017
4.58%
7.00%
-
Postretirement Benefits
2018
4.97%
-
-
2017
4.58%
-
-
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 allocation, the expected rate of return was determined to be in the range of 5.0% to 7.0%. Management chose to use a 6.5% expected long-term
rate of return in 2018 and a 6.5% expected long-term rate of return in 2019 reflecting current economic conditions and expected rates of return. Based on the
$14.5 million fair value of plan assets at December 31, 2018, each 50 basis point decrease in the expected long-term rate of return would reduce after tax net
income at 2019 expected marginal tax rate of 21.0% by approximately $57,000 .
The estimated net actuarial loss that will be amortized from accumulated other comprehensive loss into net periodic benefit plan income during 2019 is $328,000 .
The estimated amortization of the unrecognized transition obligation and actuarial loss for the postretirement health plan in 2019 is $12,000. The expected net
periodic benefit plan benefit for 2019 is estimated to be $83,000 for both retirement plans in aggregate.
Plan assets are invested in three 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 48% 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’), 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 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 to fund the Trust’s estimated retired lives class of liabilities for 30
years. 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).
- 106 -
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
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, 2018
Level 1
Level 2
Level 3
Total Fair
Value
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
271
271 $
1,132 $
1,157
821
242
247
250
193
337
189
1,409
5,977
2,207
3,255
2,521
7,983
-
291
14,251 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
1,132
1,157
821
242
247
250
193
337
189
1,409
5,977
2,207
3,255
2,521
7,983
-
562
14,522
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
$
$
$
$
- 107 -
* Includes cash equivalents investments in equity and fixed income strategies
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
This category contains large-cap stocks with above-average yield. The portfolio typically holds between 60 and 70 stocks.
This category seeks long-term capital appreciation by investing primarily in large growth companies based in the U.S.
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.
This category employs an indexing investment approach designed to track the performance of the CRSP US Mid-Cap Value Index.
This category employs an indexing investment approach designed to track the performance of the CRSP US Mid-Cap Growth Index.
This category seeks to track the performance of the S&P Midcap 400 Index.
This category consists of a selection of investments based on the Russell 2000 Value Index.
This category consists of a mutual fund invested in smallcap growth companies along with a fund invested in a selection of investments based on the
Russell 2000 Growth Index.
This category consists of a mutual 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.
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.
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.
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.
This category currently invests in three long/short equity hedge funds.
n)
For the fiscal year ending December 31, 2019, the Company expects to contribute approximately $35,000 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:
2019
2020
2021
2022
2023
Years 2024-2028
Pension
Benefits
Postretirement
Benefits
Total
$
305 $
325
343
369
447
2,887
35 $
37
38
40
29
143
340
362
381
409
476
3,030
The Company also offers a 401(k) plan to its employees. Contributions to this plan by the Company were $371,000 and $333,000 for 2018 and 2017, respectively.
In addition, the Company made $273,000 and $244,000 of safe harbor contributions to the plan in 2018 and 2017, respectively .
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 between the ages of 65 and 70 and continuing monthly for 10 years. At December
31, 2018 and 2017, other liabilities include approximately $2.7 million and $2.6 million, respectively, relating to deferred compensation. Deferred compensation
expense for the years ended December 31, 2018 and 2017 amounted to approximately $258,000 and $351,000, respectively.
- 108 -
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, 2018 and 2017, the cash surrender values of these policies were $16.9 million
and $ 11.7 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, 2018 and 2017, other liabilities included $745,000 and $631,000, respectively, 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
- 109 -
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 $3.17.
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:
Options Outstanding
Shares Exercisable
(Shares in thousands)
Outstanding at December 31, 2016
Granted
Newly vested
Exercised
Expired
Outstanding at December 31, 2017
Granted
Newly vested
Exercised
Expired
Outstanding at December 31, 2018
$
$
Number of
Shares
423
-
-
(28)
-
395
-
-
(67)
(3)
$
Weighted Average
Exercise Price
9.41
-
10.92
-
-
9.68
-
11.05
-
11.35
10.50
$
$
325
Number of
Shares
139
-
57
(28)
-
168
-
52
(67)
-
153
$
$
Weighted Average
Exercise Price
5.80
-
-
-
-
7.61
-
-
-
-
9.65
$
$
$
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, 2018, the intrinsic value of the stock
options was $1.7 million. At December 31, 2017, the intrinsic value of the stock options was $2.3 million.
At December 31, 2018, the average remaining contractual life of outstanding options and shares exercisable were 6.7 years and 6.0 years, respectively.
- 110 -
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 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 $398,000 and $345,000 in 2018 and 2017, respectively, and is expected to record $293,000, $291,000, $153,000,
$92,000 and $31,000 in 2019 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, 2018 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 $411,000 and $404,000 in compensation
expense in 2018 and 2017, respectively, including $36,000 and $37,000 for dividends on unallocated shares in these same time periods. At December 31, 2018,
there were 140,544 unearned ESOP shares with a fair value of $2.2 million.
- 111 -
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
$
$
$
$
2018
203 $
343
546 $
2018
714 $
(168)
546 $
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
Loan origination fees
Held-to-maturity securities
Stock-based compensation
Community service activities
Other
Total
Liabilities:
Prepaid pension
Depreciation
Accretion
Intangible assets
Mortgage servicing rights
Prepaid expenses and transaction fees
Total
Net deferred tax asset
2018
$
895 $
1,909
119
23
1,002
35
21
166
153
374
4,697
(1,157)
(1,441)
(177)
(1,004)
(4)
(69)
(3,852)
$
845 $
2017
1,022
(100)
922
2017
741
181
922
2017
847
1,862
126
23
551
108
153
103
30
79
3,882
(1,173)
(968)
(120)
(1,004)
(7)
(79)
(3,351)
531
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
- 112 -
subjective and is reviewed on a continual basis as regulatory and business factors change. Prior to 2017, 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, and
accordingly established a valuation allowance. During 2017, the Company recognized sufficient 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. 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%. However, 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. Commencing on January 1, 2018, the Company changed its elected interest income modification methodology under which its
New York State income tax expense is calculated. This change in the Company’s interest income modification election was adopted following changes to the New
York State Tax Code enacted in 2015 and resulted in a reduction of the Company’s effective income tax rate in New York State in 2018. It is anticipated that the
Company’s New York effective income tax rate will remain substantially at 0.0% in future periods under current law.
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
NOTE 18: COMMITMENTS AND CONTINGENCIES
2018
21.0 %
(3.7)
(4.3)
(1.9)
-
-
0.9
12.0 %
(0.1)
11.9 %
2017
34.0 %
2.9
(11.2)
(2.0)
(3.5)
(3.5)
4.5
21.2 %
(0.6)
20.6 %
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.
- 113 -
At December 31, 2018 and 2017, 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
2018
37,354 $
74,284
5,058
2,007
2017
58,235
62,879
3,506
2,153
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, 2018 with fixed interest rates amounted to approximately $10.5 million. Loan commitments, including
unused lines of credit and standby letters of credit, outstanding at December 31, 2018 with variable interest rates amounted to approximately $103.2 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 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.
In addition to pledging investment securities to secure public funds deposits, the Bank has entered into an agreement with the FHLBNY whereby the FHLBNY
agreed to issue letters of credit for the benefit of securing public funds as an alternate form of collateral for those deposits. In the event the FHLB makes a payment
under this agreement, such payment will constitute an advance to the Bank and shall be immediately due and payable. The Bank has pledged unencumbered
mortgage-related assets to secure letters of credit from the FHLBNY. As of December 31, 2018 and 2017, the Bank had letters of credit outstanding with the
FHLBNY of $12.0 million and $26.0 million, respectively.
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 $198,000 for 2018 and $166,000 for 2017.
Approximate minimum rental commitments for non-cancelable operating leases are as follows:
Years Ending December 31:
(In thousands)
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
204
200
175
166
104
237
1,086
$
- 114 -
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 $13.0 million as of December 31, 2018. 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, 2018, December 31, 2017 or December 31, 2016.
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, 2018, 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, 2018, the Bank exceeded all
current and projected regulatory required minimum capital ratios, including the maximum capital buffer level that was 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.
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, 2018, 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, 2018, the Bank exceeded all current and projected regulatory required minimum capital ratios,
including the maximum capital buffer level that was required on January 1, 2019.
- 115 -
The Bank’s actual capital amounts and ratios as of December 31, 2018 and 2017 are presented in the following table.
(Dollars in thousands)
As of December 31, 2018:
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, 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)
Actual
Minimum For
Capital Adequacy
Purposes
Amount
Ratio
Amount
Ratio
Minimum To Be
"Well-Capitalized"
Under Prompt
Corrective Provisions
Ratio
Amount
Minimum for
Capital Adequacy
With Buffer, Fully
Phased In 2019
Amount
Ratio
$ 83,177
$ 75,871
$ 75,871
$ 75,871
13.69% $ 48,593
12.49% $ 36,445
12.49% $ 27,334
8.31% $ 36,522
8.00% $ 60,741
6.00% $ 48,593
4.50% $ 39,482
4.00% $ 45,652
10.00% $ 63,778
8.00% $ 51,630
6.50% $ 42,519
5.00% $ 45,652
$ 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%
10.50%
8.50%
7.00%
5.00%
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, 2018, 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, 2018 and 2017, these reserve balances amounted
to $4.0 million and $6.3 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.
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 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. 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 in the amounts 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 valuation allowances established in 2013 against the portion of the Company’s deferred tax assets related to existing capital loss carryforward tax
positions. The valuation allowances 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
- 116 -
of the capital loss carryforward position under the Internal Revenue Code. The recognized tax benefit from the reversal of those valuation allowances 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. The
Company did not have any hedging activities during the twelve months ended December 31, 2018.
The Company adopted ASU 2017-12: Derivatives and Hedging [Topic 815]: Targeted Improvements to Accounting for Hedging Activities, effective January 1,
2018, in the second quarter of 2018 . The amended guidance within this Update 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. The Company did not have any hedging activities in 2018, but expects to utilize hedging in the
future to improve the management of its risk profiles. In order to facilitate potential future hedging activities, the Company transferred 52 investment securities
with an aggregate amortized cost before transfer of $35.2 million from the held-to-maturity classification to the available-for-sale classification at the date of
adoption.
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.
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
- 117 -
market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition. Such modifications to the appraised
values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These
measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or
subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid
balance.
Foreclosed real estate: Fair values for foreclosed real estate are initially recorded based on market value evaluations by third parties, less costs to sell (“initial cost
basis”). Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to foreclosed real
estate are charged to the allowance for loan losses. Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash flow
analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis. In the
determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as, changes in absorption rates and
market conditions from the time of valuation and anticipated sales values considering management’s plans for disposition. Either change could result in adjustment
to lower the property value estimates indicated in the appraisals. These measurements are classified as Level 3 within the fair value hierarchy.
The following tables summarize assets measured at fair value on a recurring basis as of 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
Total available-for-sale securities
Marketable equity 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:
Common stock - Financial services industry
Total available-for-sale securities
December 31, 2018
Level 1
Level 2
Level 3
Total Fair
Value
- $
-
-
-
-
-
-
- $
- $
17,031 $
23,065
17,200
18,119
31,666
46,441
23,936
177,458 $
453 $
- $
-
-
-
-
-
-
- $
- $
December 31, 2017
Level 1
Level 2
Level 3
$
$
41,336
13,681
8,600
6,644
35,742
53,348
11,052
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
170,403
$
$
515
515
$
515
170,918
17,031
23,065
17,200
18,119
31,666
46,441
23,936
177,458
453
Total Fair
Value
41,336
13,681
8,600
6,644
35,742
53,348
11,052
$
$
$
$
$
- 118 -
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, 2017
Total gains realized/unrealized:
Included in earnings
Included in other comprehensive income
Settlements
Sales
Transfers to Level 2
Balance - December 31, 2018
Changes in unrealized gains included in earnings related to assets still held at December 31, 2018
Common Stock -
Financial Services
Industry
515
-
-
-
-
(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
Fair Value
Valuation Techniques
Unobservable Input
Weight
At December 31, 2017
$
515
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, 2018
Level 1
-
-
$
$
Level 2
-
-
$
$
Level 3
1,098
1,173
$
$
December 31, 2017
Level 1
-
-
$
$
Level 2
-
-
$
$
Level 3
4,887
434
$
$
Total Fair
Value
1,098
1,173
Total Fair
Value
4,887
434
$
$
$
$
- 119 -
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used
to determine fair value.
At December 31, 2018
Impaired loans
Foreclosed real estate
At December 31, 2017
Impaired loans
Foreclosed real estate
Valuation
Techniques
Appraisal of collateral
(Sales Approach)
Discounted Cash Flow
Appraisal of collateral
(Sales Approach)
Valuation
Techniques
Appraisal of collateral
(Sales Approach)
Discounted Cash Flow
Appraisal of collateral
(Sales Approach)
Quantitative Information about Level 3 Fair Value Measurements
Unobservable
Input
Appraisal Adjustments
Costs to Sell
Appraisal Adjustments
Costs to Sell
Quantitative Information about Level 3 Fair Value Measurements
Unobservable
Input
Appraisal Adjustments
Costs to Sell
Appraisal Adjustments
Costs to Sell
Range
(Weighted Avg.)
5% - 15% (6%)
5% - 13% (11%)
15% - 15% (15%)
6% - 8% (7%)
Range
(Weighted Avg.)
5% - 30% (9%)
7% - 13% (11%)
15% - 15% (15%)
6% - 8% (7%)
The Company owns a small percentage of the common stock of a single, otherwise unaffiliated, financial institution with a fair market value of $453,000 at
December 31, 2018. This financial institution had been recently formed, was relatively limited in the scope of its business activities, and was relatively small in
asset size at the time the shares of common stock were initially acquired by the Company. The shares of this financial institution are not, and have never been,
listed on any public stock exchange. Through December 31, 2017, the Company determined the fair market value of these shares using Level 3
methodologies. The relatively unique characteristics of the institution precluded the use of significant inputs and value drivers observable in active markets through
that date. During the three months ended March 31, 2018, the Company’s management reevaluated the fair value methodology it had previously used with respect
to this investment and determined that the institution’s increased size and current business activities had become reasonably comparable over time with applicable
peer institutions. Consequently, relevant significant inputs and value drivers observable in active markets were deemed to be present and available beginning with
the three months ended March 31, 2018. Accordingly, the Company transferred this asset from Level 3 to Level 2 at March 31, 2018 for purposes of the
accompanying fair value disclosure. The investment was valued using Level 2 methodologies at December 31, 2018 and it is expected to be valued using Level 2
methodologies prospectively.
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
- 120 -
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.
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.
- 121 -
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 - marketable equity
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, 2018
Carrying
Amounts
Estimated
Fair Values
December 31, 2017
Carrying
Amounts
Estimated
Fair Values
1
2
3
2
2
2
3
1
1
2
2
2
1
$
$
$
26,316
177,458
-
453
53,908
5,937
612,964
3,068
$
450,267
276,793
118,534
15,094
304
$
26,316
177,458
-
453
53,769
5,937
601,789
3,068
$
450,267
275,727
118,379
14,485
304
$
21,991
170,623
515
-
66,196
3,855
573,705
3,047
$
510,176
213,427
73,888
15,059
186
21,991
170,623
515
-
66,426
3,855
570,439
3,047
510,176
212,453
73,575
14,953
186
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
2018
2017
$
$
$
$
3,063 $
453
74,769
193
1,961
80,439 $
886 $
15,094
64,459
80,439 $
5,004
515
71,883
155
117
77,674
471
15,059
62,144
77,674
- 122 -
Statements of Income
(In thousands)
Income
Dividends from non-bank subsidiary
Loss on marketable equity securities
Realized gains on available-for sale investment securities
Operating, net
Total (loss) 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
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
Net gain on hedging transaction
Net cash flows from investing activities
Financing activities
Proceeds from exercise of stock options
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
2018
2017
$
6 $
(62)
-
-
(56)
846
175
1,021
(1,077)
340
(737)
4,768
4,031 $
4
-
428
15
447
1,371
169
1,540
(1,093)
262
(831)
4,322
3,491
2018
2017
4,031 $
(4,768)
773
35
(1,372)
(1,301)
-
-
385
(1,025)
(640)
(1,941)
5,004
3,063 $
3,491
(4,322)
712
34
822
737
(428)
(428)
155
(884)
(729)
(420)
5,424
5,004
$
$
$
- 123 -
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.
The following represents the activity associated with loans to related parties during the year ended December 31, 2018:
(In thousands)
Balance at the beginning of the year
Originations and Officer additions
Principal payments and Officer removals
Balance at the end of the year
$
$
9,272
3,207
(1,967)
10,512
Deposits of related parties at December 31, 2018 and December 31, 2017 were $3.9 million and $3.2 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 4,280,227 and 4,362,328 shares outstanding at December 31,
2017 and December 31, 2018, 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.
- 124 -
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
Cumulative effect of change in measurement of
equity securities (1)
Cumulative effect of change in investment securities
transfer (2)
Ending balance
For the years ended December 31, 2018
Unrealized Gains
and Losses on
Available-for-
Sale Securities
Unrealized Loss
on Securities
Transferred to
Held-to-
Maturity
(1,558) $
(1,471)
134
(53)
116
(2,832) $
(430) $
129
-
-
243
(58)
$
Total
(4,208)
(2,400)
260
(53)
359
(6,042)
$
$
Retirement
Plans
(2,220)
(1,058)
126
-
$
-
(3,152)
$
(1)
(2)
Cumulative effect of unrealized gain on marketable equity securities based on the adoption of ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Liabilities.
Cumulative effect of unrealized gains on the transfer of 52 investment securities from held-to-maturity classification to available-for-sale classification based on the
adoption of ASU 2017-12: Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
(In thousands)
Beginning balance
Other comprehensive income before reclassifications
Amounts reclassified from AOCI
Reclassification of effect of tax rate change (1)
Ending balance
(1)
For the years ended December 31, 2017
Unrealized Gains
and Losses on
Available-for-
Sale Securities
(1,845) $
872
(293)
(292)
(1,558) $
Unrealized Loss
on Securities
Transferred to
Held-to-
Maturity
(464) $
115
-
(81)
(430)
$
Total
(3,822)
608
(204)
(790)
(4,208)
Retirement
Plans
(1,513)
(379)
89
(417)
(2,220)
$
$
$
$
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 following table presents the amounts reclassified out of each component of AOCI for the indicated annual period:
(In thousands)
Details about AOCI 1 components
Retirement plan items
Retirement plan net losses
recognized in plan expenses 2
Available-for-sale securities
Realized (loss) gain on sale of securities
(1)
(2)
Amounts in parentheses indicates debits in net income.
These items are included in net periodic pension cost.
For the years ended
December 31, 2018
December 31, 2017
Affected Line Item in the Statement
of Income
(150)
61
(89)
Salaries and employee benefits
Provision for income taxes
Net Income
489
(196)
293
Net gains on sales and redemptions of investment
securities
Provision for income taxes
Net Income
$
$
$
$
(171) $
45
(126) $
(182) $
48
(134) $
- 125 -
NOTE 27: NONINTEREST INCOME
The Company adopted the revenue recognition guidance effective January 1, 2018, and applied the new accounting guidance using a 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.
The Company recognizes revenue as it is earned. The adoption of ASU 2014-09 required that credit card interchange revenue be presented net of rewards expense
in noninterest income. For the year ended December 31, 2018 and 2017, the Company recognized credit cards reward program expense as a reduction of
noninterest income in the amounts of $100,000 and $94,000, respectively.
The Company has included the following table regarding the Company’s noninterest income for the periods presented.
Years Ended December 31,
(In thousands)
Service fees
Insufficient funds fees
Deposit related fees
ATM fees
Total service fees
Fee Income
Insurance commissions
Investment services revenue
ATM fees surcharge
Banking house rents collected
Total fee income
Card income
Debit card interchange fees
Merchant card fees
Total card income
Mortgage fee income and realized gain on sale of loans
and foreclosed real estate
Loan servicing fees
Net gains on sales of loans and foreclosed real estate
Total mortgage fee income and realized gain on sale of
loans and foreclosed real estate
Total
Earnings and gain on bank owned life insurance
Net (losses) gains on sales and redemptions of investment
securities
Loss on marketable equity securities
Other miscellaneous income
Total noninterest income
2018
852
202
94
1,148
831
288
232
134
1,485
576
72
648
170
50
220
3,501
427
(182)
(62)
151
3,835
$
$
$
$
2017
844
190
96
1,130
790
244
217
122
1,373
484
54
538
149
37
186
3,227
284
489
-
85
4,085
The following is a discussion of key revenues within the scope of the new revenue guidance:
•
•
Service fees – Revenue is earned through insufficient funds fees, customer initiated activities or passage of time for deposit related fees, and ATM
service fees. Transaction-based fees are recognized at the time the transaction is executed, which is the same time the Company’s performance
obligation is satisfied. Account maintenance fees are earned over the course of the month as the monthly maintenance performance obligation to the
customer is satisfied.
Fee income – Revenue is earned through commissions on insurance and securities sales, ATM surcharge fees, and banking house rents collected. The
Company earns investment advisory fee income by providing investment management services to customers under investment management
contracts. As the direction of investment management accounts is provided over time, the performance obligation to investment management customers
is satisfied over time, and therefore, revenue is recognized over time.
- 126 -
•
•
Card income – Card income consists of interchange fees from consumer debit card networks and other related services. Interchange rates are set by the
card networks. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur.
Mortgage fee income and realized gain on sale of loans and foreclosed real estate – Revenue from mortgage fee income and realized gain on sale of
loans and foreclosed real estate is earned through the origination of residential and commercial mortgage loans, sales of one-to-four family residential
mortgage loans, sales of government guarantees portions of SBA loans, and sales of foreclosed real estate, and is earned as the transaction occurs.
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 on
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.
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PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(a)
(b)
(c)
(d)
(e)
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”.
Set forth below is information concerning the Executive Officers of the Company at December 31, 2018.
Name
Thomas W. Schneider
James A. Dowd, CPA
Ronald Tascarella
Daniel Phillips
Age
57
51
60
54
Positions Held With the Company
President and Chief Executive Officer
Executive Vice President, Chief Operating Officer and Chief Financial Officer (1)
Executive Vice President, Chief Banking Officer
Senior Vice President, Chief Information Officer
(1) Walter F. Rusnak, age 65, was appointed the Company’s Senior Vice President, Chief Financial Officer on January 23, 2019.
ITEM 11: EXECUTIVE COMPENSATION
(a)
(b)
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".
- 128 -
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
Financial Statements - The Company’s consolidated financial statements, for the years ended December 31, 2018 and 2017, 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.”
(a)(2)
Financial Statement Schedules - All financial statement schedules have been omitted as the required information is inapplicable or has been
(b)
3.1
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)
3.2
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)
4.1
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)
4.2
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)
4.3
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)
10.1
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)
10.2
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)
10.3
10.4
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)
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)
10.5
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)
10.7
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)
10.8
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)
10.9
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)
- 129 -
10.10
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)
10.11
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)
10.12
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.
10.13
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and Ronald Tascarella effective February 24, 2014 (Incorporated by
reference to Exhibit 10.14 to Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K, file no. 001-36695, filed on March 30, 2018).
10.14
Senior Executive Split Dollar Life Insurance Plan (Incorporated by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s Current Report on Form
8-K, filed no. 001-36695, filed on January 7, 2019.
10.15
Change of Control Agreement between Pathfinder Bank and James A. Dowd (Incorporated by reference to Exhibit 10.2 to Pathfinder Bancorp,
Inc.’s Current Report on Form 8-K, filed no. 001-36695, filed on January 7, 2019.
10.16
Change of Control Agreement between Pathfinder Bank and Ronald Tascarella (Incorporated by reference to Exhibit 10.3 to Pathfinder Bancorp,
Inc.’s Current Report on Form 8-K, filed no. 001-36695, filed on January 7, 2019.
14
21
23
31.1
31.2
32
101
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, 2018 and 2017,
(ii) the Consolidated Statements of Income for the years ended December 31, 2018 and 2017, (iii) the Consolidated Statements of Comprehensive
Income for the years ended December 31, 2018 and 2017, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the years ended
December 31, 2018 and 2017, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017, and (vi) the Notes
to the Consolidated Financial Statements
ITEM 16: FORM 10-K SUMMARY
None.
- 130 -
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 27, 2019
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
Thomas W. Schneider, President and
Chief Executive Officer
(Principal Executive Officer)
Date:
March 27, 2019
By: /s/ Lloyd Stemple
Lloyd Stemple, Director
Date:
March 27, 2019
By: /s/John P. Funiciello
John Funiciello, Director
March 27, 2019
Date:
By: /s/ David A. Ayoub
David A. Ayoub, Director
Date:
March 27, 2019
By: /s/ George P. Joyce
George P. Joyce, Director
Date:
March 27, 2019
By: /s/ Adam C. Gagas
Adam C. Gagas, Director
Date:
March 27, 2019
By: /s/ Walter F. Rusnak
Walter F. Rusnak, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date:
March 27, 2019
By: /s/ Lisa A. Kimball
Lisa A. Kimball, Vice President and
Controller (Principal Accounting Officer)
Date:
March 27, 2019
By: /s/ William A. Barclay
William A. Barclay, Director
Date:
March 27, 2019
By: /s/ Chris R. Burritt
Chris R. Burritt, Director
Date:
March 27, 2019
By: /s/ John F. Sharkey
John F. Sharkey, Director
Date:
March 27, 2019
By: /s/ Melanie Littlejohn
Melanie Littlejohn, Director
March 27, 2019
Date:
- 131 -
EXHIBIT 21: SUBSIDIARIES OF THE REGISTRANT
Name
Pathfinder Bank
Pathfinder Statutory Trust II
Pathfinder REIT, Inc. (1)
Whispering Oaks Development Corp.
Pathfinder Risk Management Company Inc.
FitzGibbons Agency, LLC ( 2 )
State of Incorporation
New York (direct)
Delaware (direct)
New York (indirect)
New York (indirect)
New York (indirect)
New York (indirect)
(1)
(2)
Inactive throughout 2018 and formally dissolved in January 2019
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, 2018 of our report dated March 27, 2019 included in its Registration Statements on Form S-8 (No. 333-202081) and (No. 333-224388) relating to the
consolidated financial statements for the two years ended December 31, 2018.
/s/ Bonadio & Co., LLP
Bonadio & Co., LLP
Pittsford, New York
March 27, 2019
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)
(b)
(c)
(d)
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;
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;
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
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)
(b)
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
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 27, 2019
/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, Walter F. Rusnak, Senior Vice President, 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)
(b)
(c)
(d)
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;
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;
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
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)
(b)
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
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 27, 2019
/s/ Walter F. Rusnak
Walter F. Rusnak
Senior Vice President, 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 Walter F. Rusnak, Senior Vice President, 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, 2018 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 27, 2019
March 27, 2019
/s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
/s/ Walter F. Rusnak
Walter F. Rusnak
Senior Vice President, Chief Financial Officer