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
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2020
OR
For the transition period from _______ to _______
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
Trading Symbol(s) Name of each exchange on which registered
PBHC
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
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 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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☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
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, 2020, as reported by the
NASDAQ Capital Market ($9.54), was approximately $32.2 million.
As of March 29, 2021, there were 4,540,520 shares outstanding of the Registrant’s common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the 2021 Annual Meeting of Shareholders of the Registrant (Part III).
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2020
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:
•
•
•
•
•
•
•
•
•
•
•
•
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.
The ongoing progression of the outbreak of Coronavirus Disease 2019 (“COVID-19”), and the related economic disruptions caused directly or
indirectly as a result of the outbreak, could adversely impact a broad range of industries in which the Company’s customers operate and thereby
impair their ability to fulfill their financial obligations to the Company. The outbreak has caused almost all public commerce and related business
activities to be curtailed or limited, to varying degrees, with the goal of decreasing the rate of new infections and the future duration and severity of
these limitations cannot be predicted with certainty.
The spread of the outbreak may continue to cause significant disruptions in the U.S. economy and may continue to disrupt banking and other financial
activity in the areas in which the Company operates and could also potentially create widespread business continuity issues for the Company. The
Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions.
If the global response to contain COVID-19 is unsuccessful, the Company could experience a material adverse effect on its business, financial condition,
results of operations and cash flows.
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.
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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, 2020 and 2019, 4,531,383 and 4,709,238 shares of Company common stock were outstanding, respectively. In addition, the Company had
1,380,283 and 1,155,283 shares of Series B convertible perpetual preferred stock outstanding at December 31, 2020 and 2019, respectively.
At December 31, 2020, the Company had total consolidated assets of $1.2 billion, total deposits of $995.9 million and shareholders' equity of $97.5 million plus a
noncontrolling interest of $266,000, 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 and residential real estate, and commercial business and consumer assets other than real estate. In addition, the Bank
originates unsecured small business 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 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
Company invests primarily in debt securities but will, within certain regulatory limits, invest from time to time in mutual funds and equity securities. 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 the Company’s 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, 2020, 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 real estate management partnership. The partnership
currently operates a low-income residential housing facility. The activities of Whispering Oaks resulted in a pre-tax loss of $34,000 in 2020.
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 $955,000 in annual
revenues. The activities of Pathfinder Risk Management Company, Inc. resulted in pre-tax income of $196,000 in 2020. The Company’s 51% controlling interest in
this entity resulted in income of $100,000 for the Company on a consolidated basis in 2020.
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Human Capital Resources
Our Mission
Our Mission, which is thoroughly communicated to all of our team members, is “To foster relationships with individuals and businesses within our communities to be
the financial provider of choice. Our goal is to continually enhance the value of the Bank for the benefit of our shareholders, customers, employees and
communities.”
Our Values
Our workplace culture is grounded in our customer and employee value proposition. We have adopted a formally-stated set of Values, which are also engrained in our
human capital resource management programs. These Values state that we are:
•
•
•
•
•
•
•
Competent Professionals
Service-Driven
A Family
Respectful
Compassionate
Proud
Honest
Each of the Values, outlined above, are further defined in our internal communications, training programs and team-oriented activities.
Human Capital
The success of our business is highly dependent on our team members, who provide value to our customers and communities through their dedication to our mission
and values. We define, exemplify and foster our culture by the Values listed above. We value our team members by investing in a healthy work-life balance,
competitive compensation and benefit packages, and a vibrant, team-oriented environment centered on professional service and open communication amongst team
members. We strive to build and maintain a high-performing culture by creating a work environment that attracts and retains outstanding, engaged team members who
embody our company mantra of “Local. Community. Trust.”
Demographics
At December 31, 2020, we employed 183 team members, of which 157 were full-time and 12 were part-time. In addition, the Company employed an additional 14
team members who were hired on a temporary basis for purposes that were primarily related to the Company’s response to the Covid-19 pandemic. Our staff is
comprised of approximately 75% women. At December 31, 2019, we employed 162 team members across our three-county footprint.
At December 31, 2020, approximately 39% of our staff is employed at our bank branch and loan production offices, with the remainder of our team employed within
all other functional areas, including our customer-facing electronic commerce and call center units. None of these employees are represented by a collective
bargaining agreement and management considers its relationship with employees to be good. During fiscal year 2020 we hired 53 employees, of which ten were
specifically hired, on a temporary basis, to support instituted COVID-19 safety protocols in the branches. Our voluntary turnover rates for the previous three years are
as follows:
Year
2020
2019
2018
Diversity and Inclusion
Voluntary Turnover %
13.2%
18.8%
10.2%
We seek to hire well-qualified team members who are, at least as importantly, a good fit for our value system. Our selection and promotion processes are without bias
and include the active recruitment of minorities and women. With a commitment to equality, inclusion and workplace diversity, we focus on understanding, accepting,
and valuing the differences between people. To accomplish this, we have established a Diversity, Equity and Inclusion Committee made up of eight employee
representatives comprised of team members located throughout our market footprint. Our goal is to build and leverage a diverse and inclusive workforce and
workplace by building leadership capability and organizational capacity, this requires all team members to do their part. Management must possess diversity and
inclusion competencies to lead and manage an engaged workforce. All team members must treat their colleagues with respect by listening to different viewpoints,
opinions, thoughts and ideas and embracing a culture of inclusion.
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A commitment to diversity and inclusion is essential to reflecting the values of our team members and the society we serve today. It makes business sense because it
helps us to attract and retain the best talent, it enables us to understand and meet clients' needs more effectively and so provide a better quality service. We continued
our commitment to equal employment opportunity through a robust affirmative action plan which includes annual compensation analyses and ongoing reviews of our
selection and hiring practices alongside a continued focus on building and maintaining a diverse workforce.
For the year 2020, the population of our workforce was as follows:
Ethnicity
American Indian or Alaska Native
Asian
Black or African American
Two or more races (Not Hispanic or Latino)
White
%
0.6%
2.7%
1.1%
2.1%
93.4%
Age Range
18-25
26-35
36-45
46-55
56-65
Over 65
Grand Total
Compensation and Benefits
Age Demographics
Total
41
40
42
22
32
6
183
We provide a competitive compensation and benefits program to help meet the needs of our team members. In addition to salaries, these programs include annual
bonuses, stock awards, a 401(k) Plan with an employer matching contribution in addition to an employer-paid annual contribution, healthcare and other insurance
benefits, health savings, flexible spending accounts, paid time off, family leave and an employee assistance program.
Learning and Development
We invest in the growth and development of our team members by providing a multi-dimensional approach to learning that empowers, intellectually grows, and
professionally develops our colleagues. We encourage and support the growth and development of our team members and, wherever possible, seek to fill positions by
promotion and transfer from within the organization. Continual learning and career development is advanced through performance and development conversations
between team members and their managers, internally developed training programs, customized corporate training engagements and educational reimbursement
programs. Reimbursement is available to team members enrolled in pre-approved degree or certification programs at accredited institutions that teach skills or
knowledge relevant to our business, in compliance with Section 127 of the Internal Revenue Code, and for seminars, conferences, and other training events team
members attend in connection with their job duties.
Health and Safety
The safety, health and wellness of our team members is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee
safety while continuing successful operations. Through teamwork and the adaptability of our management and staff, we were able to (1) transition, over a short period
of time, to effectively working from remote locations and (2) ensure a safely-distanced working environment for team members when physically present at each of our
locations. We continue to maintain electronic self-reporting procedures to track, on a daily basis, out-of-market travel, potential contact exposures and other factors
that would call for additional individual-specific attention related to the potential spread of COVID-19 within the Company. All team members are asked not to come
to work when they experience signs or symptoms of a possible COVID-19 illness and have been provided additional paid time off to cover compensation during such
absences. On an ongoing basis, we further promote the health and wellness of our team members by strongly encouraging work-life balance, offering flexible work
schedules, keeping the employee portion of health care premiums to a minimum and sponsoring various wellness programs.
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Retention Efforts
Employee retention helps us operate efficiently and achieve one of our business objectives. We believe our commitment to living out our core values, actively
prioritizing concern for our team members ’ well-being, supporting our team members ’ career goals, offering competitive wages and providing valuable fringe
benefits aids in retention of our top-performing team members . In addition, nearly all of our team members are stockholders of the Company through participation in
our Employee Stock Ownership Plan, which aligns employee and stockholder interests by providing stock ownership on a tax-deferred basis at no investment cost to
our employees. At December 31, 2020, over 32% of our current staff had been with us for ten years or more.
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,
NY, three branch offices located in Onondaga County, NY and one limited purpose office located in Oneida County, NY. 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. In
addition to financial services, the broader Central New York market has a more diverse array of economic sectors, including food processing production and
transportation. The region has more recently also developed particular strength in the commercialization of certain emerging technologies such as bio-processing,
medical devices, aircraft systems and renewable energy.
Based on recent independent market survey reports, median home values were $166,600 in Onondaga County and $129,900 in Oswego County at the end of
2020. Home values have shown only modest increases in recent years within the Syracuse, NY 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
substantially greater total assets than we do. Local credit unions, some of which also have more assets than the Company, are particularly strong competitors for
consumer deposits and consumer loans. 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 well-capitalized startup entities, divisions of established financial institutions and/or established
technology companies. These entities seek to replace or supplement the financial services provided by established financial service entities, such as the Company.
Many established financial institutions are now implementing, or planning to implement, various forms of fintech solutions and technologies in order to broaden their
product and service offerings and/or to gain improved competitive positions in this emerging marketplace. Some of these technologies either have been 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.
Our primary focus is to build and develop profitable consumer and commercial customer relationships while maintaining our role as a community bank. 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. In the five years immediately preceding the onset of the Covid-19
pandemic in the first quarter of 2020, overall economic activity in the local marketplace and, more specifically, demand for commercial and residential loans grew
significantly. This growth in overall loan demand in our market area also attracted increased competition from financial institutions for those loans. Additionally,
some of our competitors offer products and services that we do not offer, such as trust services and private banking.
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As of June 30, 2020, based on the most recently-available FDIC data, we had the largest market share in Oswego County, representing 47.6% of all deposits, and we
additionally held 1.8% of all deposits in Onondaga County. In addition, when combining both Oswego and Onondaga Counties, we have the fifth largest market share
of sixteen institutions, representing 6.8% of the total market.
LENDING ACTIVITIES
General
Our primary lending activities are originating commercial real estate and commercial loans, the vast majority of which have periodically adjustable rates of interest,
and one-to-four family residential real estate loans, the majority of which have fixed rates of interest. Our loan portfolio also includes municipal loans, home equity
loans and lines and consumer loans. In order to diversify our loan portfolio, increase our revenues, and make our loan portfolio less interest rate sensitive, the
Company has actively sought to increase its commercial real estate and commercial business lending activities, consistent with safe and sound underwriting practices.
Accordingly, we offer adjustable-rate commercial mortgage loans and floating rate commercial loans and lines of credit.
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 are typically 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 borrowing entity.
A commercial real estate borrower’s financial condition is monitored on an ongoing basis by requiring current financial statements, rent rolls, 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.
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 loans that are
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guaranteed by the United 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.
The Bank also participated in the Paycheck Protection Program (“PPP”), a specialized low-interest loan program funded by the U.S. Treasury Department and
administered by the U.S. Small Business Administration (“SBA”) pursuant to the CARES Act and subsequent legislation. PPP loans have an interest rate of 1.0% and
a two-year or five-year loan term to maturity. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s
PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the
business are maintained and the loan proceeds are used for qualifying expenses. Through December 31, 2020, the Bank has received approval from the SBA for 699
loans totaling approximately $75.3 million through this program. The program was extended at least through the first quarter of 2021. The Bank is participating in the
second round of PPP. The Bank is now also assisting borrowers with the loan forgiveness phase of the process. As of this filing, the Company has submitted 312
loans totaling approximately $33.7 million to the SBA for forgiveness.
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
As noted above, we have shifted our primary lending focus in recent years towards originating more commercial real estate and commercial loans. However, we have
retained our significant presence in the local marketplace for lending activities concentrated on originating one-to-four family, owner-occupied residential mortgage
loans. Substantially all of these loans are secured by properties located in our market area.
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, 2020, was generally $510,400 for single-family homes in our market area.
Conforming loans are generally saleable at management’s discretion, we hold our one-to-four family residential real estate loans in our portfolio but do sell 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 2019 and to a substantially more significant degree in 2020. The increase in residential mortgage sales in 2020 was directly related to significant
increases in the volume of 20- and 30-year mortgage loans originated by the Bank in 2020. This increase in originated volume was primarily due to increased
customer demand for mortgage loans resulting from declines in mortgage interest rates. A significant portion of our retained 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.
For most owner-occupied 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 (“PMI”). Our lending policies limit the maximum loan-to-value ratio on both fixed-rate and adjustable-rate owner-occupied 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 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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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.
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.
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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 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. Third party-originated consumer loan pools are generally acquired primarily when, in the view of management, they offer superior
risk vs. return characteristics to debt securities. Such pools will, in some instances, have projected economic advantages in terms of yield and/or other portfolio
characteristics, such as interest rate risk sensitivity, superior to debt securities that would otherwise be purchased and are acquired to increase the overall performance
characteristics of the Company’s interest earning-asset portfolios viewed as a whole. 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 real estate 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.
In recent years, the Bank has purchased broadly-diversified pools of essentially homogenous loans from originators outside of the Bank’s market area. These
originators generally specialize in loan types, such as consumer loans, other than those loan types that the Bank specializes in. These loans, which are generally
relatively short in duration, are acquired to provide supplementary interest income as well as to provide improvements to the Bank’s overall asset/liability mix,
particularly with respect to interest rate risk. Third party-originated loan pools are acquired primarily when, in the view of management, they offer superior risk vs.
return characteristics to debt securities. Such loans are generally acquired through the facilitation of third-party brokerages and are serviced in perpetuity by the
originating entries or their designees. Funding for loan purchases of this type is generally obtained through incremental usage of brokered deposits and/or other forms
of borrowed funds. The Bank intends to purchase similar pools of loans on an occasional basis in the future if and when management believes that it is economically
advantageous to do so.
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At December 31, 2020 the Bank held eleven pools of loans originated by seven unaffiliated third-party lenders with an aggregate amortized historical cost of $79.7
million. Of this total, $16.8 million in aggregate amortized historical cost relates to two loan pools acquired in 2020, $58.8 million in aggregate amortized historical
cost relates to seven loan pools acquired in 2019, and $4.1 million in aggregate amortized historical cost relates to two loan pools acquired before 2019. Purchased
loans have certain credit risk profiles distinct from those of the Bank’s self-originated portfolio, most especially the portion of the purchased loans that are classified
as unsecured consumer loans. At December 31, 2020, the Bank held $18.2 million, $17.0 million, and $5.5 million in purchased pooled loans secured by residential
real estate, automobiles, and commercial & industrial collateral, respectively. In addition, the Bank held $39.0 million in purchased unsecured consumer loans at
December 31, 2020. The loans within these pools have performed substantially as anticipated since their acquisition dates and, in many cases, have contractually-
specified credit enhancement provisions provided by the Sellers that continue to reduce the Bank’s realized and potential credit exposures with respect to these loan
pools. Nonperforming and delinquent loans within these loan pools are reported on an aggregate basis as components of the Bank’s overall loan performance statistics
at December 31, 2020 and December 31, 2019, respectively.
The purchased pools of loans were subject to prepurchase analyses led by a team of the Bank’s senior executives and credit analysts. In each case, the Bank’s
analytical processes considered the types of loans being evaluated, the underwriting criteria employed by the originating entity, the historical performance of such
loans, especially in the most recent deeply recessionary environments, the collateral enhancements and other credit loss mitigation factors offered by the seller and the
capabilities and financial stability of the servicing entities involved. In the view of management, from a credit risk perspective, these loan pools also benefit from
broad diversification, including wide geographic dispersion, the readily-verifiable historical performance of similar loans issued by the originators, as well as the
overall experience and skill of the underwriters and servicing entities involved as counterparties to the Bank in these transactions. In addition, these loan pools
generally have significant underlying loan collateral and/or one or more of the following forms of credit enhancement: (1) contractual rights of loan substitution in the
event of individual loan defaults, (2) retention of a portion of the principal amount of each loan by the seller, or (3) contractually-specified credit enhancement
reserves accumulated from the collected cash flows generated by borrowers’ repayment activities in excess of those cash flows due to the Bank. Management believes
that the substantial level of diversification within these loan pools and the presence of other mitigation factors, specific to each of the acquired pools in varying
degrees, provides significant overall reduction of the potential credit risks inherent in these purchases. The performance of all purchased loan pools are monitored
regularly from detailed reports and remittance reconciliations provided at least monthly by the servicing entities.
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.
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 generally restrict loans to one borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus, which was $17.6 million at December 31,
2020, on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus, which was $11.7 million at December 31, 2020, if
the loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate), subject to exceptions.
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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.
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
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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.
Pursuant to the CARES Act and subsequent legislation, financial institutions have the option to temporarily suspend certain requirements under U.S. generally
accepted accounting principles related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. This provision allows a
financial institution the option to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to
COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only
be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Bank elected to adopt these provisions of the
CARES Act.
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.
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
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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.
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, including in 2020 the impact of the COVID-19 pandemic, 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
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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, including purchased 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. The projected credit losses related to purchased
loan pools are evaluated prior to purchase and the performance of those loans against expectations are analyzed at least monthly. Over the life of the purchased loan
pools, the allowance for loan losses is adjusted, through the provision for loan losses, for expected loss experience, over the projected life of the loans. The expected
credit loss experience is determined at the time of purchase and is modified, to the extent necessary, during the life of the purchased loan pools. The Bank does not
initially increase the allowance for loan losses on the purchase date of the loan pools.
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 Operating Officer and Chief Financial 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.
The general objectives of the investment securities portfolio are to assist in the overall interest rate risk management of the Bank, while generating a reasonable rate of
return consistent with the risk of purchased principal, provide a source of liquidity, and reduce our overall credit risk profile. We also purchase securities to provide
necessary liquidity for day-to-day operations and when investable funds exceed loan demand and to provide highly liquid assets under collateralization arrangements
related to municipal deposits. The effect that the proposed security purchase would have on our overall credit and interest rate risk profile and our risk-based equity
ratios is also considered in evaluating the timing, mix and characteristics of investment security purchases.
All investment securities purchased/held must meet regulatory guidelines and be permissible bank investments. Our investment securities include 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 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 Company invests primarily in debt securities but will from time to time also invest, within certain regulatory limits, in mutual
funds and equity securities.
All securities purchased are 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
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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 composition of the investment portfolio is substantially the same for securities classified as both held-to-maturity and available-for-sale, although the portion of
the securities portfolio classified as available-for-sale generally has a higher concentration of shorter-term, and/or more liquid assets. Such securities are held as part
of the Bank’s liquidity management programs. The Bank holds a significant portion of its investment securities in mortgage-backed securities and collateralized
mortgage obligations (many, but not all of which are issued by government-sponsored enterprises) and direct federal government and federal agency
obligations. Federal agency issuers include the Federal Farm Credit Bank, Federal Home Loan Bank, Federal National Mortgage Association (“Fannie Mae”), Federal
Home Loan Mortgage Corporation (“Freddie Mac”) and the Government National Mortgage Association (“Ginnie Mae”), among others. For a discussion on mortgage
backed securities, see “Mortgage-Backed Securities and Collateralized Mortgage Obligations.”
As part of our membership in the FHLBNY, we are required to maintain a dividend-earning investment in FHLBNY stock. This investment is classified separately
from securities due to significant restrictions on sale or transfer of the stock. For further information regarding our securities portfolio, see Note 4 to the consolidated
financial statements.
MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS
We purchase mortgage-backed securities and collateralized mortgage obligations guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. In recent years, the Bank
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, and most often the most senior tranche, of multi-class issuances that provide substantial credit enhancements to their senior tranches and
therefore reasonable, but not absolute, protection for the Bank 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, 2020 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, 2020, 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- or multi-family mortgages and certain types
of commercial real estate loans, although we generally 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 securities, which are most often fixed-rate, are
usually substantially 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 vast majority 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 substantially more liquid than individual loans.
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The securities of the type the Bank typically invests in are 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, 2020 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
underlying credit quality of this portfolio. At December 31, 2020, no securities held by the Bank in this category had been downgraded by a NRSRO.
SOURCES OF FUNDS
General
Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also rely on advances from the FHLBNY, the
Certificates of Deposit Account Registry Service (“CDARS”) provided by an independent third-party, Promontory Interfinancial Network, and other deposits acquired
through unaffiliated third-party financial institutions as forms 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, 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 seasonally volatile source of funds.
The CDARS program is a form of a brokered deposit facility 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 a varying amount that was approximately $50 million at any one weekly bidding session as of December 31, 2020, 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.
In addition, from time to time, the Bank will acquire larger blocks of brokered deposits, outside of the CDARS program, that are obtained from unaffiliated third-party
financial institutions. These brokered deposits generally have modestly longer maturity dates than the CDARS deposits, can be acquired in more substantial block
size, and generally have issuance rates similar to the CDARS program.
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 FHLBNY, 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, 2020, 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 London Interbank Offered Rate
(“LIBOR)” plus 1.65%. These securities have a five-year call provision. The Company guarantees all of these securities.
As currently scheduled, The United Kingdom’s Financial Conduct Authority (“FCA”), the organization responsible for regulating LIBOR, will cease publishing
LIBOR indices at the end of 2021. The Alternative Reference Rates Committee (the “ARRC”), formed by the FRB and the Federal Reserve Bank of New York, has
been charged with developing an alternative rate that will replace LIBOR in the United States (U.S. dollar-denominated LIBOR). The ARRC has identified the
Secured Overnight Financing Rate (“SOFR”) as the rate that represents best practice for use in U.S. dollar-denominated LIBOR derivatives and other financial
contracts. Accordingly, SOFR currently represents the ARRC's preferred alternative to LIBOR. However, the replacement of LIBOR is a highly complex task due to
the large number and aggregate magnitude of currently-outstanding LIBOR-based contracts, as well as the broad range of users of these indices. As a result, there are
a number of significant objections to the adoption of the SOFR index that have been brought forth for consideration by a wide-range of entities. Management has
analyzed the Company’s aggregate exposure to instruments that are indexed to LIBOR (including the Company’s acquired loan participations, fixed-income
investments, hedging instruments and the Floating-Rate Debentures) and concluded that the adoption of SOFR, or another similar index that may ultimately be
promulgated by the ARRC, will not materially impact the Company or the results of its operations.
The Company's equity interest in the trust subsidiary is included in other assets on the Consolidated Statements of Financial Condition at December 31, 2020 and
2019. 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 (the “2015 Subordinated Loan”) with an unrelated third party that is
scheduled to mature on October 1, 2025. The Company has the right to prepay the 2015 Subordinated Loan on the first day of any calendar quarter after October 15,
2020 without penalty. The annual interest rate charged to the Company will be 6.25% through the maturity date of the 2015 Subordinated Loan. The 2015
Subordinated Loan is senior in the Company’s credit repayment hierarchy only to the Company’s common equity and preferred stock 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 were amortized over
the life of the 2015 Subordinated Loan through its first call date using the effective interest method. The effective cost of funds related to this transaction was 6.44%
calculated under this method through October 15, 2020 and is and will be 6.25% thereafter until the stated maturity date. Interest expense, related to this borrowing,
of $650,000 and $650,000 was recorded in the years ended December 31, 2020 and 2019, respectively.
On October 14, 2020, the Company executed a private placement of $25.0 million of its 5.50% Fixed to Floating Rate non-amortizing Subordinated Loan (the “2020
Subordinated Loan”) to certain qualified institutional buyers and accredited institutional investors. The 2020 Subordinated Loan has a maturity date of October 15,
2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.50% per annum until October 15, 2025. Commencing on that date, the interest rate
applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three month Secured Overnight
Financing Rate (SOFR) plus 532 basis points, payable quarterly until maturity. The Company may redeem the 2020 Subordinated Loan at par, in whole or in part, at
its option, any time after October 15, 2025 (the first redemption date). The 2020 Subordinated Loan is senior in the Company’s credit repayment hierarchy only to the
Company’s common equity and preferred stock and, and any future senior indebtedness and is intended to qualify as Tier 2 capital for regulatory capital purposes for
the Company. The Company paid $783,000 in origination and legal fees as part of this transaction. These fees will be amortized over the life of the 2020
Subordinated Loan through its first redemption date using the effective interest method, giving rise to an effective cost of funds of 6.22% from the issuance date
calculated under this method. Accordingly, interest expense of $327,000 was recorded in the year ended December 31, 2020 related to this transaction.
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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 Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”)
The CARES Act, which became law on March 27, 2020, provided over $2 trillion to combat the coronavirus disease (COVID-19) and stimulate the economy. The law
had several provisions relevant to financial institutions, including:
•
•
•
•
Allowing institutions not to characterize loan modifications relating specifically to the COVID-19 pandemic as a troubled debt restructuring and also
allowing them to suspend the corresponding impairment determination for accounting purposes, if there are no impairment triggers other than those
related to the pandemic;
Temporarily reducing the community bank leverage ratio alternative available to institutions of less than $10 billion of assets to 8%;
The establishment of the Paycheck Protection Program (the “PPP”), a specialized low-interest forgivable loan program funded by the U.S. Treasury
Department and administered through the SBA’s 7(a) loan guaranty program to support businesses affected by the COVID-19 pandemic; and
The ability of a borrower of a federally-backed mortgage loan (VA, FHA, USDA, Freddie Mac and Fannie Mae) experiencing financial hardship due,
directly or indirectly, to the COVID-19 pandemic, to request forbearance from paying their mortgage by submitting a request to the borrower’s servicer
affirming their financial hardship during the COVID-19 emergency. Such a forbearance could be granted for up to 180 days, subject to extension for an
additional 180-day period upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or calculated
as if the borrower made all contractual payments on time and in full under the mortgage contract could accrue on the borrower’s account. Except for
vacant or abandoned property, the servicer of a federally-backed mortgage was prohibited from taking any foreclosure action, including any eviction or
sale action, for not less than the 60-day period beginning March 18, 2020, extended by federal mortgage-backing agencies to at least June 30, 2021.
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 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
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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 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 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 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
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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 December 31, 201 8, 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 personnel 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. Notwithstanding the foregoing, pursuant to the EGRRCPA, the FDIC finalized a
rule that established a community bank leverage ratio (“CBLR”). The CBLR (Tier 1 capital to average consolidated assets) was established at 9% for institutions
under $10 billion in assets and such institutions may elect to utilize the CBLR threshold level of capital in lieu of the generally-applicable risk-based capital
requirements under Basel III. Such institutions that meet the CBLR threshold and certain other qualifying criteria will automatically be deemed to be well-capitalized.
The new rule took effect on January 1, 2020. Pursuant to the CARES Act, the federal banking agencies issued final rules to set the Community Bank Leverage Ratio
at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the Community Bank Leverage Ratio will increase to 8.5% for the
calendar year. Community banks will have until January 1, 2022, before the Community Bank Leverage Ratio requirement will return to 9%. A financial institution
can elect to be subject to this new definition. The Bank did not elect to become subject to the Community Bank Leverage Ratio.
Standards for Safety and Soundness. As required by statute, the federal banking agencies have adopted final regulations and Interagency Guidelines Establishing
Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and
information systems, internal audit systems, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings, compensation, fees
and benefits and, more recently, safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard
prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.
Business and Investment Activities. Under federal law, all state-chartered FDIC-insured banks, including commercial banks, have been limited in their activities as
principal and in their equity investments to the type and the amount authorized for national banks, notwithstanding state law. Federal law permits certain exceptions to
these limitations.
The FDIC is also authorized to permit state banks to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary
equity investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the FDIC
insurance fund. The FDIC has adopted regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-
Leach-Bliley Act of 1999
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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.”
At December 31, 2020, 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 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.
- 23 -
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 received credits for the portion of their assessments that contributed to the reserve ratio between 1.15% and
1.35%. The credits were completed as of September 30, 2020. 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%.
The FDIC has authority to increase insurance assessments. Any significant increase would have an adverse effect on the operating expenses and results of operations
of Pathfinder Bank. Management cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any
practice, condition or violation that may lead to termination of our deposit insurance.
Community Reinvestment Act. Under the CRA, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular
community. The CRA does require the FDIC, in connection with its examination of a bank, to assess the institution’s record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain applications by such institution, including applications to establish or acquire branches and
merger with other depository institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered
descriptive rating system. Pathfinder Bank’s latest FDIC CRA rating, dated May 13, 2019, was “satisfactory.”
Federal Reserve System. The Federal Reserve Board regulations require banks to maintain non-interest-earning reserves against their transaction accounts (primarily
negotiable order of withdrawal (NOW) and regular checking accounts). In March 2020, due to a change in its approach to monetary policy due to COVID-19, the
Federal Reserve Board announced an interim rule to amend Regulation D requirements and reduce reserve requirement ratios to zero. The Federal Reserve Board has
indicated that it has no plans to re-impose reserve requirements, but may do so in the future if conditions warrant.
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, 2020, 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;
- 24 -
•
•
•
•
•
•
•
•
•
•
•
•
•
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. 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;
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts
and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made
from that image, the same legal standing as the original paper check;
USA PATRIOT Act, which requires banks operating to, among other things, establish broadened anti-money laundering compliance programs, due
diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to
supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets
Control regulations; and
Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third
parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide
such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal
financial information with unaffiliated third parties.
Holding Company Regulation
The Company, as a 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.”
- 25 -
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 required 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.
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. Under 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 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 (or as of January 1, 2020 the
community bank leverage ratio) 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.
- 26 -
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 initial 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 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
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.
Federal Taxation
General. The Bank and the Company are 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.
The Company’s federal tax returns are statutorily subject to potential audit for the years 2017 through 2020. No federal income tax returns are under audit as of the
date of this report.
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, 2020, Pathfinder Bank had no reserves subject to recapture in excess of
its base year reserves. The Bank continues to be 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, 2020 our total federal pre-base year bad debt
reserve was approximately $1.3 million.
- 27 -
Net Operating Loss Carryovers. Federal tax law allows net operating losses to be carried forward indefinitely with the net operating loss deduction limited to 80% of
taxable income in any carryforward year.
Corporate Dividends Received Deduction. The Company may exclude from its federal taxable income 100% of dividends received from Pathfinder Bank as a wholly-
owned subsidiary by filing consolidated tax returns. The corporate dividends received deduction is 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. Federal tax law 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. Federal tax
law 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. Federal tax law 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, 0.025% 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.
Effective in January 2018, the Company adopted a modification methodology that was at that time newly made available under the New York State tax code, affecting
how the Company’s state income tax liability is computed. Under this adopted methodology, management determined in the first quarter of 2019, it was unlikely that
the Company would pay income taxes to New York State in future periods and therefore in the quarter ended March 31, 2019, the Company established, through a
charge to earnings, a valuation allowance in the amount of $136,000 in order to reserve against deferred tax assets related to New York State income taxes. This
valuation allowance against the value of those deferred tax assets was established to reduce the net deferred tax asset related to New York State income taxes to $-0-
. Management is continuously monitoring its future tax consequences to determine if the Company’s deferred taxes are properly stated. In the first quarter of 2020,
consistent with policy, management reviewed all facts and circumstances related to its deferred taxes and determined that based on the expected filings of future New
York State tax returns, the valuation allowance created in 2019 was no longer needed. Therefore management elected to eliminate its New York State net deferred
tax asset valuation allowance during the quarter ended March 31, 2020.
In the first quarter of 2021, the Company filed amended New York State tax returns for 2015 through 2017 (the “carryback years”). The returns were amended from
their original filings in order to file carryback claims utilizing New York State net operating losses generated under New York State tax law in 2018. As a result, the
Company expects to receive $316,000 in tax refunds from New York State for taxes previously paid in the carryback years. This anticipated refund has been applied
to the effective tax rate of the Company in 2020 in accordance with GAAP.
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.
- 28 -
ITEM 2: PROPERTIES
The Company has seven offices located in Oswego County, three offices in Onondaga County and one limited purpose 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, 2020. The aggregate net book value of the Bank's premises and equipment was $22.3 million at December 31, 2020. For
additional information regarding the Bank's properties, see Notes 8 and 18 to the consolidated financial statements.
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)
Leased (4)
Leased (5)
Location
Main Office
214 West First Street
Oswego, New York 13126
Plaza Branch
291 State Route 104 East
Oswego, New York 13126
Mexico Branch
3361 Main Street
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
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 $35,000.
(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 $90,000.
(4) The premises are leased with an annual rent of $71,000.
(5) The premises are leased with an annual rent of $16,000.
- 29 -
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, 2020.
ITEM 4: MINE SAFETY DISCLOSURE
Not applicable.
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 340 shareholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms) as of March 24,
2021.
The Company did not repurchase any shares of its common stock during the fourth quarter of 2020.
Equity Compensation Plan Information
The following table provides information as of December 31, 2020 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
320,083
$
N/A
10.89
N/A
-
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.
- 30 -
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.
(In thousands, except per share amounts)
Year End
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
Income before income taxes
Income tax expense
Net income (loss) attributable to noncontrolling interest
Net income attributable to Pathfinder Bancorp, Inc.
Convertible preferred stock dividends
Warrant dividends
Undistributed earnings allocated to participating securities
Net income available to common shareholders
Per Share
Income per share - basic
Income per share - diluted
Book value per common share (a)
Tangible book value per common share (a)
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 (a) (b)
Dividend payout ratio
Return on average common equity
2020
2019
2018
2017
2016
For the years ended December 31,
$
$
$
$
$
$
$
$
$
$
1,227,443
128,261
171,224
812,718
995,907
121,450
97,722
42,507
10,864
31,643
4,707
26,936
6,485
25,080
8,341
1,295
96
6,950
291
30
1,224
5,405
1.17
1.17
17.56
16.53
0.240
$
$
$
$
$
1,093,807
111,134
122,988
772,782
881,893
108,253
90,669
41,758
13,528
28,230
1,966
26,264
4,917
25,730
5,451
1,165
10
4,276
208
23
467
3,578
0.80
0.80
15.94
14.95
0.240
$
$
$
$
$
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
-
-
-
4,031
0.97
0.94
14.72
13.65
0.240
$
$
$
$
$
881,257
171,138
66,196
573,705
723,603
88,947
62,144
29,413
6,290
23,123
1,769
21,354
4,085
21,094
4,345
922
(68)
3,491
-
-
-
3,491
0.86
0.83
14.44
13.34
0.215
0.60 %
7.43
8.02
7.94
2.68
2.88
0.43 %
5.34
7.97
8.27
2.73
2.98
0.45 %
6.33
7.09
6.88
2.85
3.02
0.42 %
5.69
7.47
7.01
2.83
2.97
120.49
2.15
68.71
20.39
8.92
116.84
2.56
78.75
30.21
6.02
116.52
2.62
79.04
24.93
6.33
116.05
2.57
79.06
25.21
5.69
- 31 -
749,034
141,955
54,645
485,900
610,983
73,972
58,361
24,093
3,804
20,289
953
19,336
4,072
18,999
4,409
1,111
26
3,272
-
-
-
3,272
0.79
0.78
13.67
12.55
0.200
0.48 %
5.35
8.97
7.73
3.03
3.14
118.35
2.79
79.80
25.18
5.35
Asset Quality Ratios
Nonperforming loans to period end loans
Nonperforming assets to total assets
Allowance for loan losses to period end loans
Allowance for loan losses to 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
2.58 %
1.74
1.55
59.89
13.13 %
11.87
8.63
11.87
2020
2019
2018
2017
2016
For the years ended December 31,
0.67 %
0.49
1.11
165.25
0.35 %
0.36
1.18
340.13
0.84 %
0.61
1.23
145.61
0.98 %
0.72
1.27
129.85
12.28 %
11.16
8.20
11.16
13.69 %
12.49
8.31
12.49
13.97 %
12.72
8.16
12.72
11
176
11
157
11
160
10
140
14.79 %
13.54
9.06
13.54
9
133
(a)
(b)
See table below for reconciliation of the non-GAAP financial measures.
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.
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.
- 32 -
(In thousands, except per share amounts)
Per Share
Book value per common share
Total Pathfinder Bancorp, Inc. shareholders' equity (book value)
(GAAP)
Preferred stock
Total shares outstanding
Book value per common share
Total common equity
Total equity (GAAP)
Goodwill
Intangible assets
Common equity
Tangible book value per common share
Common equity
Total shares outstanding
Tangible book value per common share
Performance Ratios
Efficiency ratio
Operating expenses (numerator)
Net interest income
Noninterest income
Less: Gain/(Loss) 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
Average preferred stock
Denominator
Return on average common equity
$
$
$
$
$
$
$
$
$
$
$
2020
97,456
17,901
4,531
17.56
79,555
4,536
133
74,886
74,886
4,531
16.53
25,080
31,643
6,485
$
$
$
$
$
$
$
For the years ended December 31,
2019
2018
2017
2016
$
$
$
$
$
$
$
90,434
15,370
4,709
15.94
75,064
4,536
149
70,379
70,379
4,709
14.95
25,730
28,230
4,917
$
$
$
$
$
$
$
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
2,255
(629)
36,502
$
68.71 %
393
81
32,673
$
78.75 %
(132)
(62)
29,795
$
79.04 %
526
-
26,682
$
79.06 %
554
-
23,807
79.80 %
$
1,102
5,405
20.39 %
$
1,081
3,578
30.21 %
$
1,005
4,031
24.93 %
$
880
3,491
25.21 %
820
3,256
25.18 %
$
$
$
$
6,950
93,586
15,709
77,877
4,276
80,136
9,074
71,062
4,031
63,667
-
63,667
$
8.92 %
$
6.02 %
$
6.33 %
3,491
61,383
-
61,383
$
5.69 %
3,272
61,102
-
61,102
5.35 %
- 33 -
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
2020
106,720
(4,536)
(133)
2,236
104,287
11,002
-
11,002
115,289
878,380
For the years ended December 31,
2019
2018
2017
2016
$
$
$
$
88,138
(4,536)
(149)
2,971
86,424
8,669
-
8,669
95,093
774,177
$
$
$
$
74,530
(4,536)
(165)
6,042
75,871
7,306
-
7,306
83,177
607,414
$
$
$
$
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
13.13 %
12.28 %
13.69 %
13.97 %
14.79 %
104,287
878,380
$
86,424
774,177
$
75,871
607,414
$
71,114
559,161
$
66,003
487,448
11.87 %
11.16 %
12.49 %
12.72 %
13.54 %
$
$
$
$
$
$
$
$
$
104,287
1,212,512
(4,536)
(133)
$ 1,207,843
$
86,424
1,059,060
(4,536)
(149)
$ 1,054,375
75,871
917,740
(4,536)
(165)
913,039
71,114
876,263
(4,536)
(146)
871,581
8.63 %
$
8.20 %
$
8.31 %
$
8.16 %
66,003
733,512
(4,536)
(119)
728,857
9.06 %
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
$
104,287
878,380
$
86,424
774,177
$
75,871
607,414
$
71,114
559,161
$
66,003
487,448
11.87 %
11.16 %
12.49 %
12.72 %
13.54 %
- 34 -
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 (the “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 Risk Management Company, Inc., and Whispering Oaks
Development Corp. are wholly owned subsidiaries of Pathfinder Bank.
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 4,531,383 and 4,709,238 shares outstanding at December 31, 2020 and December 31, 2019, respectively.
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 organization certificate with its long-term strategic focus.
Since the Conversion, we have substantially transformed our business activities from those of a traditional savings bank to those of a commercial bank. This
transformation of activities has significantly affected the overall composition of our balance sheet. 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 commercial business
and commercial real estate loan portfolios since the Conversion. As a commercial bank, we have been able to offer customized products and services to meet
individual commercial 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 completion of the Conversion. When compared to the Bank’s loan
portfolio composition prior to the Conversion, it is our view that our current asset portfolio (1) significantly improves upon 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
majority of 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 May 8, 2019, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Castle Creek Capital Partners VII, L.P.
(“Castle Creek”), pursuant to which the Company sold: (i) 37,700 shares of the Company’s common stock, par value $0.01 per share, at a purchase price of $14.25 per
share (the “Common Stock”); (ii) 1,155,283 shares of a new series of preferred stock, Series B convertible perpetual preferred stock, par value $0.01 per share, at a
purchase price of $14.25 per share (the “Series B Preferred Stock”); and (iii) a warrant, with an approximate fair value of $373,000, to purchase 125,000 shares of
Common Stock at an exercise price initially equal to $14.25 per share (the “Warrant”), in a private placement transaction (the “Private Placement”) for gross proceeds
of approximately $17.0 million. The Securities Purchase Agreement contains significant representations, warranties, and covenants of the Company and Castle Creek.
The Company also entered into subscription agreements dated as of May 8, 2019 (the “Subscription Agreements”) with certain directors and executive officers of the
Company as well as other accredited investors. Pursuant to the Subscription Agreements, the investors purchased an aggregate of 269,277 shares of Common Stock at
$14.25 per share for gross proceeds of approximately $3.8 million, before payment of placement fees and related costs and expenses. The Subscription Agreements
contain representations, warranties, and covenants of the purchasers and the Company that are customary in private placement transactions. The subscription
agreements were also part of the Private Placement, and the term “Private Placement” includes both transactions.
In total, therefore, the Company issued 306,977 shares of Common Stock, 1,155,283 shares of Series B Preferred Stock and the Warrant at the conclusion of the
Private Placement. The transaction raised $20.8 million in gross proceeds and the final net cash
- 35 -
received from the Private Placement, after all issuance expenses, including placement fees and all other issuance/due diligence costs of $927,000 and $342,000,
respectively, was $19.6 million. The fair value of the Warrant at the time of issuance was $373,000. Following the Private Placement, the Company used the net cash
received from the transaction to strengthen the Company’s general capital and liquidity positions, fund growth within our marketplace, purchase certain loan assets,
and increase the regulatory capital position of the Bank. The Company will continue to use the additional capital raised through the Private Placement primarily to
support the realization of continued growth opportunities within our marketplace and, to a lesser extent, for general corporate purposes.
On May 8, 2019, the Company filed Articles Supplementary with the Maryland Department of Assessments and Taxation to issue 1,155,283 shares of Series B
Preferred Stock to Castle Creek. Each share of the Series B Preferred Stock will be convertible on a one-for-one basis into either (i) Common Stock under certain
circumstances or (ii) non-voting common stock, par value $0.01 per share (which will also be convertible into Common Stock), subject to approval of the creation of
such class of non-voting common stock by the Company’s stockholders.
Pursuant to Nasdaq rules, Castle Creek may not convert the Series B Preferred Stock or, in the future, the non-voting common stock into Common Stock, or exercise
the Warrant if doing so would cause Castle Creek, when combined with the purchases of certain directors and executive officers of the Company as well as other
accredited investors in the Private Placement, to own more than 19.99% of the Common Stock outstanding immediately prior to the execution of the Securities
Purchase Agreement (the “Exchange Cap”). The Company must request stockholder approval to eliminate the Exchange Cap no later than at the 2021 annual meeting
of Company shareholders. In addition, at the same meeting the Company will seek shareholder approval to create a class of non-voting convertible common stock.
Castle Creek will need the approval or non-objection of the Board of Governors of the Federal Reserve System and the New York State Department of Financial
Services if it seeks to increase its ownership of shares of Common Stock in excess of 9.9% of the outstanding shares of Common Stock.
Holders of the Series B Preferred Stock will be entitled to receive dividends if declared by the Company’s board of directors, in the same per share amount as paid on
the Common Stock. No dividends would be payable on the Common Stock unless a dividend identical to that paid on the Common Stock is payable at the same time
on the Series B Preferred Stock. The Series B Preferred Stock will rank, as to payments of dividends and distribution of assets upon dissolution, liquidation or
winding up of the Company, pari passu with the Common Stock pro rata. Holders of Series B Preferred Stock will have no voting rights except as may be required by
law. The Series B Preferred Stock will not be redeemable by either the Company or by the holder.
As discussed above, pursuant to the Securities Purchase Agreement, on May 8, 2019, the Company issued a Warrant to Castle Creek to purchase 125,000 shares of
non-voting common stock at an exercise price equal to $14.25 per share. At the same time, the Company entered into a Warrant Agreement with Castle Creek, to,
among other things, authorize and establish the terms of the Warrant. The Warrant is exercisable at any time after May 8, 2019, and from time to time, in whole or in
part, until May 8, 2026. However, the exercise of such Warrant remains subject to certain contractual provisions, the Exchange Cap, the creation of the non-voting
common stock, and regulatory approval if Castle Creek’s ownership of Common Stock would exceed 9.9%. At December 31, 2020, Castle Creek owned
approximately 9.9% of the Company’s common stock. The Warrant will receive dividends equal to the amount paid on the Company’s common stock. The dividend
payment shall be calculated on (1) the unexercised portion of the 125,000 notional shares encompassed within the terms of the Warrant, less (2) any exercised portion
of the 125,000 shares, times (3) the amount of the quarterly dividend paid to common shareholders. Dividend payments, if declared on the Company’s common stock,
will be made on the Warrant until its expiration date.
Pursuant to the terms of the Securities Purchase Agreement, Castle Creek is entitled to have one representative appointed to the Company’s board of directors for so
long as Castle Creek, together with its respective affiliates, owns, in the aggregate, 4.9% or more of all of the outstanding shares of the Company’s Common Stock. If
Castle Creek, together with its respective affiliates, owns, in the aggregate, 4.9% or more of all of the outstanding shares of the Company’s Common Stock and does
not have a board representative appointed to the Company’s board of directors, the Company will invite a person designated by Castle Creek to attend meetings of the
Company’s Board of Directors as an observer. At December 31, 2020, Castle Creek elected to have an observer present at substantially all meetings of the
Company’s board of directors.
On November 13, 2020, the Company entered into an agreement (the “Exchange Agreement”) with Castle Creek providing for the exchange of 225,000 shares of the
Company’s Common stock owned by Castle Creek for 225,000 shares of the Company’s Series B Preferred Stock. The exchange was consummated simultaneously
with the execution and delivery of the Exchange Agreement. The Company and Castle Creek entered into the Exchange Agreement to enable the equity ownership of
Castle Creek to comply with applicable banking laws and regulations.
As a result of the Exchange Agreement, on November 13, 2020, the Company issued to Castle Creek 225,000 shares of its Series B Preferred Stock in exchange for an
equivalent number of shares of Company Common Stock held by Castle Creek in a transaction exempt from registration under Section 3(a)(9) of the Securities Act of
1933, as amended. Castle Creek is the only stockholder of the
- 36 -
Series B Preferred Stock. The Company received no cash proceeds as a result of the exchange. In addition, the Company is not paying any commission or
remuneration for the solicitation of the exchange. Each share of the Series B Preferred Stock will be convertible on a one for one basis into either (i) non-
voting common stock (which will also be convertible into Common Stock) subject to approval of the creation of such a class of non-voting common stock by the
Company’s common stockholders or (ii) Common Stock under certain circumstances, subject to the approval of the Company’s common stockholders and regulatory
approvals.
On November 13, 2020, the Company filed an amendment to the Articles Supplementary to the Articles of Incorporation of the Company designating the Series B
Preferred Stock with the Maryland Department of Assessments and Taxation to increase the classified number of shares of the Series B Preferred Stock from
1,155,283 to 1,506,000 to allow for the additional issuance of Series B Preferred Stock to Castle Creek. There were no other changes made to the preferences,
limitations, powers and relative rights of the Series B Preferred Stock.
We have consistently maintained our historically strong presence in consumer deposit gathering and residential mortgage lending activities. Notwithstanding the
retention of these business lines, we have strategically 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 commercial 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 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 and portfolio size, consistent with safe and sound underwriting practices. In this
regard, we have added, and will continue to add, personnel who are experienced in originating, underwriting and servicing 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 seek to continuously deepen 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 and consumer deposit gathering franchises.
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 that such access brings to their businesses.
Optimizing our deposit mix. We seek to enhance the overall characteristics of our deposit base by emphasizing both consumer and business
nonmaturity deposit gathering. We also seek to reduce our overall reliance on borrowed funds and brokered deposits as a source of funding for future
asset growth. During the second half of 2019, we began a significant refocusing of the Company’s resources, most notably through personnel training,
modifications to incentive programs, and the high prioritization of operationalizing and/or enhancing customer-facing technologies that are focused on
transactional deposits. The goal of these efforts is to better position the Company to compete in our marketplace for these types of deposits in future
periods. During 2020 the Bank recorded an increase in combined business and consumer nonmaturity deposits of $37.1 million, or 9.7%. This increase
was due to several factors, including the Bank’s continued focus on the gathering of these deposits, the net effects of PPP activity and changing
depositor behavior related to the COVID-19 pandemic. We expect to make nonmaturity deposit gathering a point of significant organizational focus for
the foreseeable future.
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, potentially, 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. 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. We will continue to
seek similar branch network expansion opportunities in the future.
Consistent with this strategy, in November 2018, the Bank acquired a property on West Onondaga Street in Syracuse, which was intended to be
renovated and converted into another full-service banking location. This property was sold in the fourth quarter of 2020. The intent of the sale was to
access the purchaser’s ability to utilize certain available tax
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credits that are more beneficial to the purchaser than they would be to the Company, if the Company accessed those credits directly. It is anticipated
that the benefits of the more-fully-utilized tax credits will be passed through to the Company under the terms of a future lease agreement with the
property’s purchaser acting as lessor. 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 2021. We consider the Syracuse Southwest Corridor neighborhood, where this property is located, to be an under-banked
area within our target marketplace and believe that this branch will qualify for various economic incentives under New York State’s Banking
Development District (“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 property investment demonstrates Pathfinder Bank’s firm commitment
to servicing diverse economic areas within its geographic market.
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-based income across a broad spectrum of loan and deposit products. It is expected that we will also benefit from
increased ancillary income for service activities related to those products. The Company completed a comprehensive study in late 2019 to better
understand and monitor the competitive environment for these types of noninterest income opportunities and to improve its product design and
customer relationship optimization strategies. A significant number of product design changes were implemented in 2020 and are expected to benefit
future periods. In recent years, we have also sought to increase the breath of services that we provide to our customers. 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 operations provide brokerage services to our customers for purchasing stocks, bonds, mutual
funds, annuities, and long-term care insurance products. We intend to gradually increase our emphasis on the growth of these businesses. We believe
that there will be resultant opportunities to cross-sell these products to our deposit and loan customers which will thereby increase our non-interest
income over time.
Banking platform and technologies. We have committed significant resources to establish a banking platform to accommodate future growth by
upgrading our information systems and customer service technologies, 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.
Controlling the rate of growth in operating expenses. The Company has sought to reduce the rate of growth in its operating expenses relative to the
rate of revenue growth and to thereby increase its overall profitability. Substantial new budgetary and expense control mechanisms were implemented
during 2019 that management believes have contributed to a reduction in overall operating expenses in 2020 and that will continue to reduce the rate of
growth in operating expenses in 2021 and beyond. In 2020, the Company’s efficiency ratio was 68.7%, a 10.1 % decline from the 78.8% efficiency
ratio in 2019, which is consistent with the implementation of these budgetary and expense control mechanisms.
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. The Company
received $19.6 million in net proceeds from the sale of 306,977 shares of common stock and 1,155,283 shares of preferred stock as a result of the
Private Placement in May 2019. In October 2020, the Company executed the issuance of the $25.0 million non-amortizing Subordinated Loan. Since
2014, we have successfully leveraged the $44.5 million in net new equity capital and the $35.0 million in the two Subordinated Loans by growing our
consolidated assets by $657.5 million, or 113.3%, to $1.2 billion at December 31, 2020.. 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.
•
•
•
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COVID-19 Response
In early January 2020, the World Health Organization issued an alert that a novel coronavirus outbreak was emanating from Wuhan, Hubei Province in China. Over
the course of the next several weeks, the outbreak continued to spread to various regions of the world, prompting the World Health Organization to declare COVID-19
a global pandemic on March 11, 2020. In the United States, by the end of March 2020, the rapid spread of the COVID-19 virus invoked various Federal and New
York State authorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included restrictions on international
and domestic travel, limitations on public gatherings, implementation of social distancing and sanitization protocols, school closings, orders to shelter in place and
mandates to close all non-essential businesses to the public. To widely varying degrees, largely dependent upon the level of regional and national outbreaks and the
resultant levels of strain on available medical resources, these very substantial mandated curtailments of social and economic activity had been relaxed globally in the
third and fourth quarters of
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2020. However, the number of reported positive cases (partly due to increased testing) in the United States have continued to be at high levels as of the date of this
filing and new strains of the virus, potentially more contagious and more virulent have been reported in many parts of the world, including in the United
States. Further, there still are virtually no localities within the United States that have completely returned to substantively normal business and social activities at the
time of this filing.
As a result of the initial and continuing outbreak, and governmental responses thereto, the spread of the coronavirus has caused us to modify our business practices,
including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. The Company has many
employees working remotely and has significantly reduced physical customer contact with employees and other customers. Initially, branch activities were limited to
drive-thru transactions whenever possible, teleconferencing and in-branch “appointments only” services. The Bank’s branches are now fully accessible to the public
but remain in strict compliance with all applicable social distancing and sanitization guidelines. Since the start of the pandemic, transactional volume has also
increased through the Bank’s telephone, mobile and internet banking channels. We will take further actions, focused on safety, as may be required by government
authorities or that we determine to be in the best interests of our employees, customers and business partners.
Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted both domestic and international financial
markets prompting the world’s central banks to inject significant amounts of monetary stimulus into their respective economies. In the United States, the Federal
Reserve System’s Federal Open Market Committee, swiftly cut the target Federal Funds rate to a range of 0% to 0.25%, where it remains as of the date of this
filing. The reductions in the Fed funds target rate included a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis
point reduction on March 15, 2020. In addition, the Federal Reserve initiated various market support programs to ease the stress on financial markets. This significant
reduction in short-term interest rates has reduced, and will continue to reduce, the Bank’s cost of funds and interest earning-asset yields. The long-term effects of the
current interest rate environment, resulting from government and central bank responses to the pandemic, on the Bank’s net interest margins cannot be predicted with
certainty at this time.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on March 27, 2020, provided financial assistance in various forms to both
businesses and consumers, including the establishment and funding of the Paycheck Protection Program (“PPP”). In addition, the CARES Act also created many
directives affecting the operations of financial services providers, such as the Company, including a forbearance program for federally-backed mortgage loans and
protections for borrowers from negative credit reporting due to loan accommodations related to the national emergency. The banking regulatory agencies have
likewise issued guidance encouraging financial institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations
because of the effects of COVID-19. The Company has worked to assist its business and consumer customers affected by COVID-19.
On December 27, 2020, following passage by the United States Congress, President Donald J. Trump signed into law the Consolidated Appropriations Act, 2021
which included the Coronavirus Response and Relief Supplemental Appropriations Act (“CRRSAA”). The intent of this legislation was to provide another round of
Economic Impact Payments to eligible individuals and families, renew the PPP to support small businesses and their employees, ensure needed access to
unemployment benefits for Americans who have lost their jobs due to COVID-19, and provide additional funding for schools, vaccine distribution, and other
important sectors of the economy. While CRRSSA is expected to benefit the economic recovery and be supportive of the Company’s business activities, the effect of
this legislation on the operations of the Company cannot be determined with certainty at this time.
The Bank participated in the PPP funded by the U.S. Treasury Department and administered by the U.S. SBA pursuant to the CARES Act and subsequent
legislation. PPP loans have an interest rate of 1.0% and a two-year or five-year loan term to maturity. The SBA guarantees 100% of the PPP loans made to eligible
borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the
PPP so long as employee and compensation levels of the business are maintained and the loan proceeds are used for qualifying expenses. Through December 31,
2020, the Bank has received approval from the SBA for 699 loans totaling approximately $75.3 million through this program. The program was extended at least
through the first quarter of 2021. The Bank is participating in the second round of PPP. The Bank is now also assisting borrowers with the loan forgiveness phase of
the process. As of this filing, the Company has submitted 312 loans totaling approximately $33.7 million to the SBA for forgiveness.
Borrowers that were delinquent in their payments to the Bank, prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case by
case basis for troubled debt restructure classification and non-performing loan status. In the instances where the Company granted a payment deferral to a delinquent
borrower because of COVID-19, the borrower’s delinquency status was frozen as of February 29, 2020, and their loans will continue to be reported as delinquent
during the deferment period based on their delinquency status as of that date. The long-term collectability of deferred loan payments will depend on many factors,
including the future progression of the pandemic, potential medical breakthroughs in therapeutic treatments and/or vaccines, the pace of vaccine distributions, further
economic stimulus from government authorities, the rate at which governmental restrictions on business activities are relaxed and the adequacy and sustainability of
other sources of repayment such as loan collateral. Consistent with industry regulatory guidance, borrowers that were granted COVID-19 related deferrals but were
otherwise current on loan
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payments will continue to have their loans reported as current loans during the agreed upon deferral period(s), accrue interest and not be accounted for as troubled debt
restructurings.
Through December 31, 2020, the Bank granted payment deferral requests for an initial period of 90 days on 618 loans representing approximately $137.4 million of
existing loan balances. Upon the receipt of borrower requests, additional 90 day deferral periods were generally granted. Of these granted deferrals, 303 loans,
totaling $24.0 million, were residential mortgage or consumer loans. At December 31, 2020, 265 residential and consumer loans, totaling $21.3 million, have been
returned to non-deferral status. Of these granted deferrals, 315 loans, totaling $113.3 million, were commercial real estate or other commercial and industrial loans.
At December 31, 2020, 291 commercial real estate or other commercial and industrial loans, totaling $98.9 million, have been returned to non-deferral status.
Therefore, at December 31, 2020, 38 residential mortgage and consumer loans, totaling $2.7 million and 24 commercial real estate and other commercial and
industrial loans, totaling $14.4 million remained in deferral status. These loans still in deferral status therefore totaled $17.1 million and represented 2.1% of all loans
outstanding at December 31, 2020. After consultations with certain of these commercial loan borrowers, 11 loans, representing $8.3 million, have been granted an
additional 90 day deferral period beyond 180 days as of December 31, 2020. These loans are included in the $17.1 million in loans still in deferred status at December
31, 2020. On an extremely limited basis, additional deferral periods will potentially be granted subject to further analysis and discussion with specific borrowers. To
the extent that such modifications meet the criteria previously described they have not been classified as troubled debt restructurings nor classified as nonperforming
at December 31, 2020. Loans not granted additional deferral periods have been, and will continue to be, categorized as nonaccrual loans if the borrowers fail to make
the first scheduled payment following the end of the deferral period.
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 tax assets and
liabilities, 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, 2020, the Bank’s position in impaired loans consisted of 52 loans totaling $22.8 million. Of these loans, 15 loans, totaling $1.3 million, were valued using the
present value of future cash flows method; and 37 loans, totaling $21.5 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.
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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. Effective in January
2018, the Company adopted a modification methodology that was at the time newly made available under the New York State tax code, affecting how the Company’s
state income tax liability is computed. Under this adopted methodology, management determined in the first quarter of 2019, it was unlikely that the Company would
pay income taxes to New York State in future periods and therefore in the quarter ended March 31, 2019, the Company established, through a charge to earnings, a
valuation allowance in the amount of $136,000 in order to reserve against deferred tax assets related to New York State income taxes. This valuation allowance
against the value of those deferred tax assets was established to reduce the net deferred tax asset related to New York State income taxes to $0. Management is
continuously monitoring its future tax consequences to determine if the Company’s deferred taxes are properly stated. In the first quarter of 2020, consistent with
policy, management reviewed all facts and circumstances related to its deferred taxes and determined that based on the expected filings of future New York State tax
returns, the valuation allowance created in 2019 was no longer needed. Therefore management elected to eliminate its New York State net deferred tax asset
valuation allowance during the quarter ended March 31, 2020.
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 2020
evaluation, management has determined that the carrying value of goodwill is not impaired as of December 31, 2020. 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.
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RECENT EVENTS
On December 21, 2020, the Company announced that its Board of Directors had declared a cash dividend of $0.06 per common and preferred share, and a cash
dividend of $0.06 per notional share for the issued Warrant. The dividend was payable on February 5, 2021 to shareholders of record on January 15, 2021.
EXECUTIVE SUMMARY AND RESULTS OF OPERATIONS
The Company reported net income of $7.0 million for 2020, an increase of $2.7 million, or 62.5%, as compared to net income of $4.3 million for 2019. Net income
increased during 2020, as compared to the previous year, due to an increase in net interest income before the provision for loan losses of $3.4 million, an increase in
noninterest income of $1.6 million, and a decrease in noninterest expense of $650,000. These increases were partially offset by an increase in the provision for loan
losses of $2.7 million and an increase in income tax expense of $130,000. Basic and diluted earnings per share in 2020 were both $1.17 per share, as compared to
$0.80 per share in 2019. Return on average assets increased 17 basis points to 0.60% in 2020 from 0.43% in 2019. Return on average equity increased 209 basis
points to 7.43% in 2020 as compared to 5.34% in 2019. The increase in return on average assets in 2020, as compared to the previous year, was primarily due to the
increase net income outpacing average asset growth. Average assets increased in 2020 by $161.3 million, or 16.0%, as the Company grew its total assets from $1.1
billion at December 31, 2019 to $1.2 billion at December 31, 2020. The increase in return on average equity in 2020, as compared to the previous year, was primarily
due to the increase in net income outpacing the growth in equity.
Net interest income, before provision for loan losses, increased $3.4 million, or 12.1%, to $31.6 million in 2020 on average interest earning assets of $1.1 billion as
compared to net interest income before provision for loan losses of $28.2 million in 2019 on average interest earning assets of $947.9 million. Interest and dividend
income increased $749,000 in 2020 to $42.5 million, as compared to interest and dividend income of $41.8 million in 2019. The aggregate increase in the average
balance of interest-earning assets of $151.1 million was partially offset by a decrease of 53 basis points in the overall average yield earned on those assets. The
$749,000 increase in interest income was further enhanced by a decrease in interest expense of $2.7 million due to a decrease in the average rate paid on interest-
bearing liabilities of 48 basis points in 2020 as compared to 2019, partially offset by an increase in those average interest-bearing liabilities of $100.8 million.
The Company recorded a provision for loan losses of $4.7 million in 2020 as compared to $2.0 million in the prior year. The $2.7 million year-over-year increase in
provision for loan losses was primarily due to economic uncertainty and the resultant potential for increased credit losses in future periods, as a result of the COVID-
19 pandemic. Additionally, the provision reflected an increase in outstanding loan balances, excluding PPP loans, of $56.8 million, or 8.2%, in 2020 as compared to
2019, as well as an increase in the non-performing loans to period end loans as a result of the addition of three commercial loan relationships. Net loan balances
increased 5.2% from December 31, 2019 to December 31, 2020. The Company recorded $599,000 in net charge-offs in 2020 as compared to $603,000 in net charge-
offs in 2019. The ratio of net charge-offs to average loans decreased to 0.08% in 2020 from 0.09% in 2019.
Noninterest income was $6.5 million in 2020, an increase of $1.6 million, or 31.9%, from $4.9 million in 2019. This increase was primarily the result of a $1.1 million
increase in net gains on the sales of loans and foreclosed real estate, and a $747,000 increase in net gains on sales and redemptions of investment securities. The
increased gain on the sales of loans and foreclosed real estate was primarily the result of the sale of $35.9 million in seasoned, conforming residential mortgage loans
that was completed in January 2020 and resulted in the recognition of a gain of $659,000. The increase in the net gains on sales of loans in 2020 was also the result of
increased originations of 1-4 family residential mortgages sold into the secondary market. The increase in the number of residential originations in 2020 was
primarily due to significant declines in mortgage loan interest rates in 2020 as compared to the previous year. The investment securities sales were part of the
Company’s portfolio optimization and liquidity management strategies and were sold in order to improve the expected future total returns within the investment
portfolio, particularly in light of potentially increased prepayment activity, related to the sharp decline in general interest rates, and/or potential credit downgrade
concerns following the onset of the COVID-19 pandemic. Also contributing to the increase in noninterest income was loan servicing fees, debit card interchange fees,
and insurance agency revenue, which increased $150,000, $114,000, and $111,000, respectively. The net increase in these categories of noninterest income were in
part due to the Company’s increased strategic focus on improving recurring noninterest income. However, overall increases in noninterest income were significantly
muted in the second and third quarters of 2020 by reduced customer activity levels and the Bank’s increased levels of fee waivers and forbearances in response to the
local economic effects of the COVID-19 pandemic. These net increases in noninterest income were partially offset by a $710,000 increase in net losses on equity
securities, as discussed below.
Since 2016, the Company held a passive equity investment, acquired for $534,000, in an otherwise unaffiliated financial institution. The issuer of that originally-
purchased common stock was acquired in June 2020 by another financial institution (the acquiring bank). Upon the closing of the transaction, the acquisition resulted
in the Company receiving total cash and stock compensation of $911,000 for its equity investment, based on the closing stock price of the acquiring institution on June
30, 2020. As
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a result, during the second quarter of 2020, the Company recorded a net gain on sales and redemptions of investment securities of $115,000 and a gain on equity
securities of $438,000. The Company retained its shares of the acquiring bank, valued at $682,000 at December 31, 2020, and has the ability to hold the investment
indefinitely. In the fourth quarter of 2020, the Company received a cash dividend of $7,000 from the acquiring bank and recognized a net gain of $48,000 resulting
from the quarter-over-quarter change in the market value of this investment.
In addition, the Company held a fixed-income, non-exchange traded investment, previously categorized as available-for-sale, which was managed since its acquisition
in 2017 by an external party. The investment was previously reported at its stated net asset value, which was $2.1 million at March 31, 2020. The investment, was
substantially restructured and subsequently listed on June 17, 2020 as a publicly-traded common stock on the New York Stock Exchange. Due to what management
believes were technical factors related to the listing itself, and the almost universal pricing pressure on publicly-traded assets of this type in the current uncertain
economic environment, the closing stock price at June 30, 2020 was significantly below the historical amortized cost of the investment on that date. Therefore, the
restructuring and listing events caused the Company to recognize an unrealized loss in the second quarter of $1.2 million, which was measured by the difference
between the newly-issued stock’s closing price at June 30, 2020 and its net asset value at March 31, 2020. The Company’s management believes that the investment
is fundamentally sound, will sustainably generate significant dividend income in the future and that the Company has the ability to hold the security indefinitely. In
the fourth quarter of 2020, the Company received a cash dividend of $39,000 from the issuer of this stock investment and recognized a net gain of $121,000 resulting
from the quarter-over-quarter change in the market value of this investment.
Noninterest expense decreased $650,000, or 2.5%, to $25.1 million in 2020 from $25.7 million in 2019. The year-over-year decrease in noninterest expense was
principally driven by a $421,000 reduction in community service activities expenses, a $295,000 decrease in other expenses, a $287,000 decrease in foreclosed real
estate expenses, and a $192,000 decrease in personnel expenses. These decreases were partially offset by increases in building and occupancy costs and the FDIC
assessment of $339,000 and $278,000, respectively. The decrease in community service activates was primarily due to the significant restrictions placed on many
business activities as a result of the pandemic and an associated decrease in community-sponsored events and activities by the Bank. The decrease in other expenses
was due to decreases in travel and training expense and meals and entertainment expense. These expenses were substantially curtailed during the year as a result of
the significant restrictions placed on many business activities as a result of the pandemic. Foreclosed real estate expenses decreased $287,000 as a result of a
foreclosed property that the Bank paid taxes on in 2019. This foreclosed property was sold in February 2019. The decrease in personnel expenses in 2020, as
compared to 2019, was primarily due to a decrease in employee benefits. The decrease in employee benefits for the year ended December 31, 2020, as compared to
2019, was primarily due to decreases in pension, employee medical, and other employee benefits expenses. Pension expense decreased primarily due to the higher
market value of pension assets held in trust at January 1, 2020 as compared to the same date in 2019. The higher market values for pension assets resulted from
market value appreciation of those assets in 2019. Medical expenses declined primarily due to reduced employee utilization of elective medical services and increased
cost sharing of certain medical costs with employees in 2020, as compared to the previous year. The decrease in other employee benefits expenses related to reduced
levels of certain training, employee recognition and other employee-related activities due primarily to restrictions on such activities resulting from the pandemic.
Total assets were $1.2 billion at December 31, 2020 as compared to $1.1 billion at December 31, 2019. The increase in total assets of $133.6 million, or 12.2%, was
the result of the increase in investment securities of $66.2 million, the increase in loans, principally commercial loans, of $44.0 million, and the $23.3 million increase
in cash and cash equivalents. All other assets increased by a net $4.1 million. The increase in total assets in 2020 was funded largely by a $114.0 million increase in
deposits, specifically an $80.6 million increase in customer deposits, and a $33.4 million increase in brokered deposits.
Net loan charge-offs to average loans were 0.08% for 2020, as compared to 0.09% for 2019. Nonperforming loans to total loans were 2.58% at December 31, 2020, up
191 basis points compared to 0.67% at December 31, 2019. The allowance for loan losses to non-performing loans at December 31, 2020 was 59.89%, compared with
165.25% at December 31, 2019. Nonperforming loans to total loans increased from December 31, 2019 primarily due to the addition of three commercial loan
relationships, comprised of five individual loans, with aggregate outstanding loan balances of $14.5 million, which were placed in nonaccrual in 2020. These
relationships, include secured loans (secured by third-party pledges, other governmental grants and/or business assets), unsecured loans, and loans collateralized by
commercial real estate.
Pursuant to the CARES Act and subsequent legislation, financial institutions have the option to temporarily suspend certain requirements under U.S. generally
accepted accounting principles related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. This provision allows a
financial institution the option to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to
COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only
be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Bank elected to adopt these provisions of the
CARES Act.
- 43 -
Management is monitoring these entities closely and has incorporated our current estimate of the ultimate collectability of these loans into the reported allowance for
loan losses at December 31, 2020. Overall the allowance for loan losses to year end loans increased from 1.11% at December 31, 2019 to 1.55% at December 31,
2020. This increase reflected management’s estimate of the probable losses inherent in the current loan portfolio.
Total past due loans measured as a percent of total loans, decreased from 2.09% at December 31, 2019 to 1.85% at December 31, 2020, primarily due to a decrease of
$813,000 in past due commercial loans and a $386,000 decrease in past due residential loans, partially offset by a $220,000 increase in past due consumer loans. The
level of nonperforming loans increased in aggregate by $16.1 million led by an increase of $15.0 million in nonperforming commercial loans, a $995,000 increase in
nonperforming residential loans, and a $116,000 increase in nonperforming consumer loans. Commensurate with the increase in nonperforming loans to year end
loans, the ratio of nonperforming assets to total assets increased to 1.74% at December 31, 2020 from 0.49% at December 31, 2019.
The Company’s shareholders’ equity increased $7.0 million, or 7.8%, to $97.5 million at December 31, 2020 from $90.4 million at December 31, 2019. This increase
was primarily due to a $5.4 million increase in retained earnings, a $735,000 increase in comprehensive income, a $662,000 increase in additional paid in capital and a
$180,000 increase in ESOP shares earned. Comprehensive income increased primarily as the result of losses on derivatives and hedging activities, partially offset by
the unrealized gains on available for sale securities during 2020. The increase in retained earnings resulted from $7.0 million in net income recorded in
2020. Partially offsetting this increase in retained earnings were $1.1 million for cash dividends declared on our common stock, $291,000 for cash dividends declared
on our preferred stock, and $30,000 for cash dividends declared on our issued warrant.
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 $3.4 million, or 12.1%, to $31.6 million in 2020 as compared to $28.2 million in the previous year.
Our net interest margin for the year ended December 31, 2020 decreased to 2.88% from 2.98% for the comparable prior year. The increase in net interest income was
primarily due to a $749,000, or 1.8%, increase in interest and dividend income in 2020 to $42.5 million primarily as a result of the $151.1 million, or 15.9%, increase
in the average balance of interest earning assets (due primarily to loan growth), partially offset by the 53 basis point decrease in the average yield earned on those
assets. This increase in interest income was enhanced by a decrease in interest expense of $2.7 million, or 19.7%, during 2020, as compared to the previous year. The
decrease in interest expense was primarily due to a decrease in the average rate paid on interest-bearing liabilities of 48 basis points in 2020 as compared to 2019,
partially offset by an increase in those average interest-bearing liabilities of $100.8 million.
- 44 -
Average Balances and Rates
The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Interest income
and resultant yield information in the table has not been adjusted for tax equivalency. Averages are computed on the daily average balance for each month in the
period divided by the number of days in the period. Yields and amounts earned include loan fees. Nonaccrual loans have been included in interest-earning assets for
purposes of these calculations.
(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 losses
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
2020
For the years ended December 31,
2019
2018
Average
Balance
Interest
Average
Yield /
Cost
Average
Balance
Interest
Average
Yield /
Cost
Average
Balance
Interest
Average
Yield /
Cost
$ 797,099 $ 35,421
6,848
159
256,590
8,992
4.44% $ 691,712 $ 34,035
7,241
231,656
2.67%
178
7,679
1.77%
4.92% $ 609,648 $ 28,426
5,418
3.13% 197,477
720
28,444
2.32%
4.66%
2.74%
2.53%
36,366
1,099,047
79
42,507
0.22%
3.87%
16,939
947,986
304
41,758
1.79%
16,496
4.40% 852,065
246
34,810
1.49%
4.09%
79,024
(10,584)
(447)
$ 1,167,040
66,705
(7,782)
(1,215)
$ 1,005,694
57,529
(7,531)
(4,018)
$ 898,045
$
79,338 $
15,482
211,191
96,381
407,910
20,421
81,434
912,157
159
18
1,381
97
6,457
1,101
1,651
10,864
0.20% $
0.12%
0.65%
0.10%
1.58%
5.39%
2.03%
1.19%
66,945 $
13,711
189,373
83,798
364,636
15,108
77,795
811,366
120
21
1,772
98
8,702
863
1,952
13,528
0.18% $ 66,934 $
0.15%
13,584
0.94% 236,958
0.12%
83,511
2.39% 243,342
15,075
5.71%
2.51%
71,875
1.67% 731,279
116
21
2,262
85
4,328
846
1,386
9,044
0.17%
0.15%
0.95%
0.10%
1.78%
5.61%
1.93%
1.24%
148,739
12,558
1,073,454
93,586
$ 1,167,040
103,727
10,465
925,558
80,136
$ 1,005,694
96,719
6,380
834,378
63,667
$ 898,045
$ 31,643
$ 28,230
$ 25,766
2.68%
2.88%
2.73%
2.98%
2.85%
3.02%
120.49%
116.84%
116.52%
- 45 -
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 years 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,
2020 vs. 2019
Increase/(Decrease) Due to
2019 vs. 2018
Increase/(Decrease) Due to
Volume
Rate
Total
Increase
(Decrease)
Volume
Rate
Total
Increase
(Decrease)
4,878 $
731
27
175
5,811
24
2
187
14
942
289
88
1,546
4,265 $
(3,492) $
(1,124)
(46)
(400)
(5,062)
15
(5)
(578)
(15)
(3,187)
(51)
(389)
(4,210)
(852) $
1,386
(393)
(19)
(225)
749
39
(3)
(391)
(1)
(2,245)
238
(301)
(2,664)
3,413
$
$
3,976 $
1,010
(486)
7
4,507
-
-
(446)
-
2,595
2
122
2,273
2,234 $
1,633 $
813
(56)
51
2,441
4
-
(44)
13
1,779
15
444
2,211
230 $
5,609
1,823
(542)
58
6,948
4
-
(490)
13
4,374
17
566
4,484
2,464
(In thousands)
Interest Income:
Loans
Taxable investment securities
Tax-exempt investment securities
Fed funds sold and 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 $749,000, or 1.8%, to $42.5 million in 2020 as compared to $41.8 million in 2019 due principally to the $151.1 million, or
15.9%, 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 $105.4 million, or 15.2%, in 2020, as compared to the previous year. The increase in the average balance of loans reflected the Company’s continued
success in its expansion within the greater Syracuse market and the Company’s participation in the PPP loan program. The average yield earned on loans decreased
48 basis points to 4.44% in 2020 from 4.92% in 2019 as maturing higher rate loans were replaced by loans at current lower market rates, which was a direct result of
the interest rate environment caused by the pandemic. The average balance of PPP loans outstanding in 2020 was $48.6 million with an average yield of 3.33%.
Excluding PPP loans, the average balance of loans was $748.5 million with an average yield of 4.52%. Interest on taxable investment securities decreased $393,000
in 2020, as compared with the previous year. The average yields earned on taxable investment securities decreased 46 basis points to 2.67% in 2020 as compared to
3.13% in 2019, accounting for a decrease in interest income of $1.1 million in 2020, as compared to 2019. The average balance of taxable investment securities
increased $24.9 million, or 10.8%, in 2020, as compared to the previous year, accounting for an increase in 2020 interest income from taxable investment securities of
$731,000 as compared to 2019.
- 46 -
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 decreased $2.7 million, or 19.7%, to $10.9 million in 2020, as compared to $13.5 million in the previous year. The decrease in interest expense was
primarily the result of a decrease in interest paid on time deposits of $2.2 million. Decreases between 2020 and 2019 were recorded in average rates paid on time
deposits of 81 basis points. The decrease in the average rates paid on those deposits reflected the general decline in market interest rates during 2020. Partially
offsetting the reduction in interest expenses on deposits was an increase of $100.7 million, or 12.4%, in the average balance of interest-bearing deposits in 2020 as
compared to the previous year. Further contributing to the decrease in interest expense was a $301,000 decrease in borrowings expense, which also decreased due to
general decline in market interest rates during 2020. These decreases in borrowed funds expense were partially offset by a $238,000 increase in subordinated loan
expense, which was the result of the Company’s completion of a private placement of the fixed-to-floating rate 2020 subordinated loan during the fourth quarter of
2020. The Company currently plans to redeem approximately $10.0 million of previously issued loans that were outstanding on December 31, 2020, during the second
quarter of 2021.
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 $4.7 million in 2020 as compared to $2.0 million in the prior year. The $2.7 million year-over-year increase in
provision for loan losses was primarily due to economic uncertainty and the resultant potential for increased credit losses in future periods, as a result of the COVID-
19 pandemic. Additionally, the provision reflected an increase in outstanding loan balances, excluding PPP loans, of $56.8 million, or 8.2%, in 2020 as compared to
2019, as well as an increase in the non-performing loans to period end loans as a result of the addition of three commercial loan relationships. Net loan balances
increased 5.2% from December 31, 2019 to December 31, 2020. The Company recorded $599,000 in net charge-offs in 2020 as compared to $603,000 in net charge-
offs in 2019. The ratio of net charge-offs to average loans decreased to 0.08% in 2020 from 0.09% in 2019.
Nonperforming loans to total loans were 2.58% at December 31, 2020, up 191 basis points compared to 0.67% at December 31, 2019. The allowance for loan losses to
non-performing loans at December 31, 2020 was 59.89%, compared with 165.25% at December 31, 2019. Nonperforming loans to total loans increased from
December 31, 2019 primarily due to the addition of three commercial loan relationships, comprised of five individual loans, with aggregate outstanding loan balances
of $14.5 million, which were placed in nonaccrual in 2020. These relationships, include secured loans (secured by third-party pledges, other governmental grants
and/or business assets), unsecured loans, and loans collateralized by commercial real estate.
- 47 -
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 gains on sales and redemptions of investment securities
Net gains on sales of loans and foreclosed real estate
(Losses) gains on marketable equity securities
Total noninterest income
Years Ended December 31,
$
$
2020
1,395 $
460
361
771
955
917
4,859
1,076
1,179
(629)
6,485 $
2019
1,391 $
462
211
657
844
878
4,443
329
64
81
4,917 $
Change
4
(2)
150
114
111
39
416
747
1,115
(710)
1,568
0.3%
-0.4%
71.1%
17.4%
13.2%
4.4%
9.4%
227.1%
1742.2%
-876.5%
31.9%
Noninterest income for the year ended December 31, 2020 increased $1.6 million, or 31.9%, to $6.5 million from $4.9 million for the year ended December 31, 2019.
Noninterest income before gains (losses) on the sales and redemptions of investment securities, gains (losses) on marketable equity securities, and gains on the sale of
loans and foreclosed real estate increased $416,000, or 9.4%, to $4.9 million in 2020 as compared to $4.4 million in 2019. This $416,000 increase in 2020, as
compared with the previous year, was primarily due to increases in loan servicing fees, debit card interchange fees, and insurance agency revenue, which increased
$150,000, $114,000, and $111,000, respectively.
Net gains on the sales of loans and foreclosed real estate increased $1.1 million and net gains on the sales and redemptions of investment securities increased
$747,000. The increased gain on the sales of loans and foreclosed real estate was primarily the result of the sale of $35.9 million in seasoned, conforming residential
mortgage loans that was completed in January 2020 and resulted in the recognition of a gain of $659,000. The increase in the net gains on sale of loans in 2020 was
also the result of increased originations of 1-4 family residential mortgages sold into the secondary market. The increase in the number of residential originations in
2020 was primarily due to significant declines in mortgage loan interest rates in 2020 as compared to the previous year. The investment securities sales were part of
the Company’s portfolio optimization and liquidity management strategies and were sold in order to improve the expected future total returns within the investment
portfolio, particularly in light of potentially increased prepayment activity, related to the sharp decline in general interest rates, and/or potential credit downgrade
concerns following the onset of the COVID-19 pandemic.
Since 2016, the Company held a passive equity investment, acquired for $534,000, in an otherwise unaffiliated financial institution. The issuer of that originally-
purchased common stock was acquired in June 2020 by another financial institution (the acquiring bank). Upon the closing of the transaction, the acquisition resulted
in the Company receiving total cash and stock compensation of $911,000 for its equity investment, based on the closing stock price of the acquiring institution on June
30, 2020. As a result, during the second quarter of 2020, the Company recorded a net gain on sales and redemptions of investment securities of $115,000 and a gain
on equity securities of $438,000. The Company retained its shares of the acquiring bank, valued at $682,000 at December 31, 2020, and has the ability to hold the
investment indefinitely. In the fourth quarter of 2020, the Company received a cash dividend of $7,000 from the acquiring bank and recognized a net gain of $48,000
resulting from the quarter-over-quarter change in the market value of this investment.
In addition, the Company held a fixed-income, non-exchange traded investment, previously categorized as available-for-sale, which was managed since its acquisition
in 2017 by an external party. The investment was previously reported at its stated net asset value, which was $2.1 million at March 31, 2020. The investment, was
substantially restructured and subsequently listed on June 17, 2020 as a publicly-traded common stock on the New York Stock Exchange. Due to what management
believes were technical factors related to the listing itself, and the almost universal pricing pressure on publicly-traded assets of this type in the current uncertain
economic environment, the closing stock price at June 30, 2020 was significantly below the historical amortized cost of the investment on that date. Therefore, the
restructuring and listing events caused the Company to recognize an unrealized loss in the second quarter of $1.2 million, which was measured by the difference
between the newly-issued stock’s closing price at June 30, 2020 and its net asset value at March 31, 2020. The Company’s management believes that the investment
is fundamentally sound, will sustainably
- 48 -
generate significant dividend income in the future and that the Company has the ability to hold the security indefinitely. In the fourth quarter of 2020, the Company
received a cash dividend of $39,000 from the issuer of this stock investment and recognized a net gain of $121,000 resulting from the quarter-over-quarter change in
the market value of this investment.
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
Foreclosed real estate expenses
Other expenses
Total noninterest expenses
Years Ended December 31,
2020
13,468 $
3,013
2,396
1,210
941
699
507
743
199
50
1,854
25,080 $
$
$
2019
13,660 $
2,674
2,339
1,325
962
421
427
816
620
337
2,149
25,730 $
Change
(192)
339
57
(115)
(21)
278
80
(73)
(421)
(287)
(295)
(650)
-1.4%
12.7%
2.4%
-8.7%
-2.2%
66.0%
18.7%
-8.9%
-67.9%
-85.2%
-13.7%
-2.5%
Noninterest expenses for 2020 decreased $650,000, or 2.5%, to $25.1 million from $25.7 million for the prior year. The year-over-year decrease in noninterest
expense was principally driven by a $421,000 reduction in community service activities expenses, a $295,000 decrease in other expenses, a $287,000 decrease in
foreclosed real estate expenses, and a $192,000 decrease in personnel expenses. These decreases were partially offset by increases in building and occupancy costs
and the FDIC assessment of $339,000 and $278,000, respectively.
Community service activities decreased $421,000, or 67.9%, in 2020 primarily due to the significant restrictions placed on many business activities as a result of the
pandemic and an associated decrease in community-sponsored events and activities by the Bank.
Other expenses decreased $295,000, or 13.7%, due to decreases in travel and training expense and meals and entertainment expense. These expenses were
substantially curtailed during the year as a result of the significant restrictions placed on many business activities as a result of the pandemic.
Foreclosed real estate expenses decreased $287,000 as a result of a foreclosed property that the Bank paid taxes on in 2019. This foreclosed property was sold in
February 2019.
The year-over-year decrease of $192,000 in personnel expenses was primarily due to a decrease in employee benefits. The decrease in employee benefits for the year
ended December 31, 2020, as compared to 2019, was primarily due to decreases in pension, employee medical, and other employee benefits expenses. Pension
expense decreased primarily due to the higher market value of pension assets held in trust at January 1, 2020 as compared to the same date in 2019. The higher
market values for pension assets resulted from market value appreciation of those assets in 2019. Medical expenses declined primarily due to reduced employee
utilization of elective medical services and increased cost sharing of certain medical costs with employees in 2020, as compared to the previous year. The decrease in
other employee benefits expenses related to reduced levels of certain training, employee recognition and other employee-related activities due primarily to restrictions
on such activities resulting from the pandemic.
These decreases were offset by increases in building and occupancy costs and the FDIC assessment. Building and occupancy costs increased $339,000 as a result of
an increase in maintenance costs and depreciation expense of $220,000 and $117,000, respectively. These increases are consistent with the Company’s recent
refurbishments of certain branch and administrative locations and the relative timing of certain maintenance activities. The FDIC assessment increased $278,000 and
is consistent with the Bank’s growth in assets.
- 49 -
Income Tax Expense
The Company reported income tax expense of $1.3 million in 2020 and $1.2 million in 2019. Income tax expense increased $130,000 in 2020 as compared to the
previous year. Income tax expense increased in 2020, as compared to the previous year, as a result of the increase in pretax net income of $2.9 million, partially offset
by a decrease in the effective tax rate in 2020, as described below.
The Company’s effective tax rate was 15.9% in 2020, as compared to 21.4% in 2019. The Company’s effective tax rate was reduced from the federal statutory income
tax rate of 21.0% by 3.8% in 2020 as a result of anticipated New York State tax refunds described below and 2.0% 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.
The Company’s effective tax rate was reduced from the federal statutory income tax rate of 21.0% by 2.6% in 2019 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 in aggregate increased the Company’s effective tax rate by 0.5% in 2019.
Effective in January 2018, the Company adopted a modification methodology that was at the time newly made available under the New York State tax code, affecting
how the Company’s state income tax liability is computed. Under this adopted methodology, management determined in the first quarter of 2019, it was unlikely that
the Company would pay income taxes to New York State in future periods and therefore in the quarter ended March 31, 2019, the Company established, through a
charge to earnings, a valuation allowance in the amount of $136,000 in order to reserve against deferred tax assets related to New York State income taxes. This
valuation allowance against the value of those deferred tax assets was established to reduce the net deferred tax asset related to New York State income taxes to $-0-
. Management is continuously monitoring its future tax consequences to determine if the Company’s deferred taxes are properly stated. In the first quarter of 2020,
consistent with policy, management reviewed all facts and circumstances related to its deferred taxes and determined that based on the expected filings of future New
York State tax returns, the valuation allowance created in 2019 was no longer needed. Therefore management elected to eliminate its New York State net deferred
tax asset valuation allowance during the quarter ended March 31, 2020.
In the first quarter of 2021, the Company filed amended New York State tax returns for 2015 through 2017 (the “carryback years”). The returns were amended from
their original filings in order to file carryback claims utilizing New York State net operating losses generated under New York State tax law in 2018. As a result, the
Company expects to receive $316,000 in tax refunds from New York State for taxes previously paid in the carryback years. This anticipated refund has been applied
to the effective tax rate of the Company in 2020 in accordance with GAAP. The recognition of this anticipated tax refund in 2020 reduced the Company’s effective
tax rate by 3.8% in 2020.
As a Maryland business corporation, the Company is required to file an annual report with, and pay franchise taxes to, the State of Maryland.
See Note 17 to the consolidated financial statements for the reconciliation of the statutory tax rate to the effective tax rate.
Earnings Per Share
Basic and diluted earnings per share for the year ended December 31, 2020 were both $1.17, as compared to basic and diluted earnings per share of $0.80 for the year
ended December 31, 2019. The increase in earnings per share between these two periods was due to the increase in net income available to common shareholders
between these two time periods. Further information on earnings per share can be found in Note 3 of this Form 10-K.
CHANGES IN FINANCIAL CONDITION
Total assets were $1.2 billion at December 31, 2020 as compared to $1.1 billion at December 31, 2019. The increase in total assets of $133.6 million, or 12.2%, was
the result of the increase in investment securities of $66.2 million, the increase in loans, principally commercial loans, of $44.0 million, and the $23.3 million increase
in cash and cash equivalents. All other assets increased by a net $4.1 million. The increase in total assets in 2020 was funded largely by a $114.0 million increase in
deposits, specifically an $80.6 million increase in customer deposits, and a $33.4 million increase in brokered deposits.
- 50 -
Investment Securities
The investment portfolio represented 24.2% of the Company’s average interest earning assets in 2020 and is designed to generate a favorable rate of return in
consideration of all risk factors associated with debt securities 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 portfolios include privately-issued but substantially over-collateralized pass-through securities as well as pass-through securities guaranteed by
Fannie Mae, Freddie Mac, or Ginnie Mae. At December 31, 2020, the investment securities portfolio had approximately 2.4% of its composition in various forms of
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, re-performing 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, 2020, available-for-sale investment securities increased 15.4% to $128.3 million and held-to-maturity investment securities increased 39.2% to
$171.2 million. There were no securities that exceeded 10% of consolidated shareholders’ equity.
Our available-for-sale investment securities are carried at fair value and our held-to-maturity investment securities are carried at amortized cost.
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
2020
2019
2018
2020
2019
2018
$
$
6,416 $
23,753
12,668
8,607
25,211
26,464
24,936
206
128,261 $
16,820 $
1,736
12,554
13,232
18,980
30,785
16,821
206
111,134 $
17,031 $
23,065
17,200
18,119
31,666
46,441
23,936
206
177,664 $
1,000 $
16,482
36,441
18,414
11,807
24,482
62,598
-
1,998 $
8,534
25,779
23,099
13,715
19,607
30,256
-
171,224 $
122,988 $
3,987
5,089
9,924
1,509
11,601
13,972
7,826
-
53,908
- 51 -
The following table sets forth the scheduled maturities, amortized cost, fair values and average yields for the Company's investment securities at December 31, 2020.
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
$
$
$
$
$
$
$
-
-
530
-
530
-
-
203
203
206
206
939
$
-
-
2.38%
-
2.38% $
$
-
-
4.84%
4.84% $
0.53% $
0.53% $
2.51% $
-
-
6,888
1,988
8,876
269
1,299
1,753
3,321
-
-
12,197
$
-
-
2.50%
3.75%
2.78% $
3.30% $
1.68%
3.38%
2.71% $
$
-
-
$
2.76% $
6,428
-
4,975
1,713
13,116
985
3,707
-
4,692
-
-
17,808
1.38%
-
4.38%
3.99%
2.86%
2.04%
1.25%
-
1.42%
-
-
2.48%
More Than Ten Years
Total Investment Securities
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Fair
Value
6,416
23,753
12,668
8,607
51,444
25,211
26,464
24,936
76,611
6,428 $
23,235
12,393
8,572
50,628 $
24,856 $
26,776
24,662
76,294 $
206 $
206 $
127,128 $
206
206
128,261
Annualized
Weighted
Avg Yield
0.46%
0.72%
3.09%
3.68%
1.76%
2.53%
0.88%
3.73%
2.35%
0.53%
0.53%
2.11%
$
$
$
$
$
$
$
-
23,235
-
4,871
28,106
23,602
21,770
22,706
68,078
-
-
96,184
- 52 -
$
-
2.15%
-
3.31%
2.35% $
2.25% $
1.39%
2.97%
2.22% $
$
-
-
$
2.25% $
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
$
$
$
$
$
1,000
672
-
-
1,672
-
881
-
881
2,553
1.70% $
3.02%
-
-
2.23% $
$
-
3.94%
-
3.94% $
2.82% $
-
4,804
10,068
2,767
17,639
2,783
7,665
24,955
35,403
53,042
-
$
3.10%
3.83%
4.12%
3.68% $
3.22% $
2.77%
3.94%
3.63% $
3.65% $
-
2,682
24,504
2,433
29,619
202
3,242
1,974
5,418
35,037
-
3.89%
4.68%
4.59%
4.60%
2.80%
2.40%
3.65%
2.87%
4.33%
More Than Ten Years
Total Investment Securities
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
$
$
$
$
$
-
8,324
1,869
13,214
23,407
8,822
12,694
35,669
57,185
80,592
$
-
2.25%
3.74%
2.94%
2.76% $
2.64% $
2.08%
2.79%
2.61% $
2.65% $
1,000 $
16,482
36,441
18,414
72,337 $
11,807 $
24,482
62,598
98,887 $
171,224 $
Fair
Value
1,002
16,951
37,535
18,455
73,943
12,282
25,331
63,379
100,992
174,935
Annualized
Weighted
Avg Yield
1.70%
3.07%
4.08%
3.88%
3.77%
2.17%
2.80%
2.15%
2.31%
2.93%
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 72.5% of the Company’s average interest earning assets in 2020 and account for the greatest portion of total interest income. At
December 31, 2020, the Company has the largest portion of its loan portfolio in commercial loan products that represented 58.3% 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 28.5% of total loans at December 31, 2020. The consumer loan products
represents 13.2% of total loans at December 31, 2020. 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.
- 53 -
The following table sets forth the composition of our loan portfolio, including net deferred costs, in dollar amount and as a percentage of loans.
(Dollars in thousands)
Residential real estate
Residential real estate held-for-sale
Commercial real estate
Commercial and tax exempt
Home equity and junior liens
Consumer loans
Total loans receivable
2020
$ 233,094
1,526
286,066
194,963
38,941
70,905
$ 825,495
2019
28.2% $ 212,663
0.2% 35,936
34.7% 254,781
23.6% 148,776
4.7% 46,688
8.6% 82,607
100.0% $ 781,451
December 31,
2018
27.2% $ 238,894
4.6%
-
32.6% 212,622
19.0% 116,914
6.0% 26,416
10.6% 25,424
100.0% $ 620,270
2017
38.5% $ 221,623
0.0%
-
34.3% 192,540
18.8% 111,786
4.3% 26,235
4.1% 28,647
100.0% $ 580,831
2016
38.2% $ 206,900
0.0%
-
33.2% 150,569
19.2% 103,394
24,991
4.5%
6,293
4.9%
100.0% $ 492,147
42.0%
0.0%
30.6%
21.0%
5.1%
1.3%
100.0%
The following table shows the amount of loans outstanding, including net deferred costs, as of December 31, 2020 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
Total real estate loans
Commercial and tax exempt
Home Equity and junior liens
Consumer
Total loans
Due Under
One Year
Due 1-5
Years
Due Over
Five Years
$
$
44,542 $
9,831
54,373
67,449
16,264
2,635
140,721 $
190,243 $
13,741
203,984
99,756
2,777
43,049
349,566 $
51,281 $
211,048
262,329
27,758
19,900
25,221
335,208 $
Total
286,066
234,620
520,686
194,963
38,941
70,905
825,495
The following table sets forth fixed- and adjustable-rate loans at December 31, 2020 that are contractually due after December 31, 2021:
(In thousands)
Interest rates:
Fixed
Variable
Total loans
Due After
One Year
$
$
426,608
258,166
684,774
Total loans receivable, including net deferred costs, increased $44.0 million, or 5.6%, to $825.5 million at December 31, 2020 when compared to $781.5 million at
December 31, 2019, due to growth in commercial loans of $78.8 million, partially offset by decreases in consumer loans and residential loans of $19.5 million and
$13.9 million, respectively. The Company does not originate sub-prime, Alt-A, negative amortizing or other higher risk structured residential mortgages. Commercial
loans increased primarily due to increases of $60.6 million in PPP loans and $32.0 million in commercial real estate loans. This was reflective of high levels of
participation in the government relief program, organic loan growth and the Company’s continued success in its expansion within the greater Syracuse, New York
market. The decrease in residential mortgage loans was primarily the result of the sale of $35.9 million in seasoned conforming residential mortgage loans in the first
quarter of 2020, which generated a $659,000 gain. The decrease in consumer loans was primarily due to general amortization. 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.
- 54 -
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
$
$
$
2020
17,978
747
2,608
21,333
21,333
-
21,333
$
$
December 31,
2018
$
$
830
142
1,176
2,148
2,148
1,173
3,321
$
$
2019
3,002
631
1,613
5,246
5,246
88
5,334
2017
2,443
363
2,088
4,894
4,894
468
5,362
$
$
2016
1,863
388
2,560
4,811
4,811
597
5,408
3,554
$
2,008
$
2,574
$
2,539
$
5,531
2.58%
1.74%
0.67%
0.49%
0.35%
0.36%
0.84%
0.61%
0.98%
0.72%
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.
Pursuant to the CARES Act and subsequent legislation, financial institutions have the option to temporarily suspend certain requirements under U.S. generally
accepted accounting principles related to troubled debt restructurings for a limited period of time to account for the effects of COVID-19. This provision allows a
financial institution the option to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to
COVID-19 made between March 1, 2020 and the earlier of (i) January 1, 2022 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only
be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Bank elected to adopt these provisions of the
CARES Act.
Total nonperforming loans increased $16.1 million, or 306.7%, between December 31, 2019 and December 31, 2020, driven by increases of $15.0 million, $995,000
and $116,000 in nonperforming commercial and commercial real estate loans, residential real estate loans, and consumer loans, respectively. The increase in
nonperforming commercial and commercial real estate loans was primarily due to the addition of three commercial loan relationships, comprised of five individual
loans, with aggregate outstanding loan balances of $14.5 million, which were placed in nonaccrual in 2020. These relationships, include secured loans (secured by
third-party pledges, other governmental grants and/or business assets), unsecured loans, and loans collateralized by commercial real estate. Management is
monitoring these entities closely and has incorporated our current estimate of the ultimate collectability of these loans into the reported allowance for loan losses at
December 31, 2020. 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 $12.8 million at December 31, 2020, adequately addresses the current level of risk within the loan portfolio, particularly considering the types and
levels of collateralization supporting the substantial majority of the portfolio. The Company maintains strict loan underwriting standards and carefully monitors the
performance of the loan portfolio.
Foreclosed Real Estate (“FRE”) balances decreased by $88,000 at December 31, 2020, from the prior year end and reflected the timing of foreclosures versus sales in
2020. The number of FRE properties decreased from one to zero between these two dates.
The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past
due 90 days or more. There are no loans that are past due 90 days or more and still accruing interest. The Company considers a loan impaired when, based on current
information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the
contractual terms of the loan. Had the loans in nonaccrual status performed in accordance with their original terms, additional interest income of $685,000 and
$222,000 would have been recorded for the years ended December 31, 2020 and December 31, 2019, respectively.
- 55 -
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, 2020 and December 31, 2019, the Company had $22.8
million and $7.5 million in loans, which were deemed to be impaired, having specific reserves of $2.8 million and $830,000, respectively. The $15.3 million year-
over-year increase in impaired loans was principally due to increases of $8.3 million, $6.0 million, and $741,000 in impaired commercial real estate loans, other
commercial and industrial loans, and commercial lines of credit, respectively. All other loan product segments (which include residential loans and commercial lines
of credit) reported modest year-over-year increases in impaired loans of $223,000 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, 2020. 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 decreased $8.3 million to $23.2 million at December 31, 2020, compared to
$31.5 million at December 31, 2019. These loans have been internally classified as special mention, substandard, or doubtful, yet are not currently considered
impaired. The decrease in potential problem loans was primarily due to a $5.7 million decrease in potential problem commercial real estate loans, a $2.3 million
decrease in potential problem commercial and industrial loans and a $592,000 decrease in potential problem commercial lines of credit. These decreases were
partially offset by decreases in potential problem residential estate loans of $558,000. The decrease in potential problem commercial real estate loans, commercial and
industrial loans and commercial lines of credit was a result of the loans that were previously potential problem loans, which were deemed to be impaired during
2020.
Total potential problem loans, including impaired loans, were $45.9 million at December 31, 2020, comprised of special mention, substandard and doubtful loans of
$20.7 million, $23.7 million and $1.5 million, respectively. Total potential problem loans, including impaired loans, were $38.9 million at December 31, 2019,
comprised of special mention, substandard and doubtful loans of $30.3 million, $6.8 million and $1.8 million, respectively. Substandard loans increased $17.0 million,
partially offset by decreases in special mention loans and doubtful loans of $9.6 million and $339,000, respectively, at December 31, 2020 as compared to December
31, 2019. The increase in loans classified as substandard was primarily due to a $15.5 million increase in commercial loans, due to the addition of two relationships
outstanding comprised of eight loans with an outstanding balance of $8.9 million. These relationships, include secured loans (secured by third-party pledges, other
governmental grants and/or business assets), unsecured loans, and loans collateralized by commercial real estate.
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
1.85% at December 31, 2020 as compared to 2.09% at December 31, 2019. The delinquency statistics presented at December 31, 2020 do not include loan payment
deferrals granted under the provisions of the CARES Act. Delinquent loans decreased $979,000 year-over-year, primarily due to a decrease of $813,000 in delinquent
commercial loans. At December 31, 2020, there were $15.3 million in loans past due including $3.8 million, $5.4 million and $6.1 million in loans 30-59 days, 60-89
days, and 90 days and over past due, respectively. At December 31, 2019, there were $16.3 million in loans past due including $9.7 million, $1.4 million and $5.2
million in loans 30-59 days, 60-89 days, and 90 days and over past due, respectively.
The decrease of $979,000 in total loans past due at December 31, 2020, as compared to December 31, 2019, was primarily due to a decrease of $6.0 million in loans
30-59 days past due, partially offset by a $4.0 million and $980,000 increase in loans 60-89 days past due and loans 90 days and over past due, respectively. The
decrease in loans 30-59 days past due was primarily due to a decrease of $6.3 million in commercial loans. At December 31, 2020 there were 13 loans with an
outstanding aggregate balance of $1.8 million that were 30-59 days past due, while at December 31, 2019, there were 18 loans with an outstanding aggregate balance
of $8.2 million. The increase in loans 60-89 days past due was primarily due to an increase of $4.1 million in commercial loans. The increase in loans 90 days and
over past due was primarily due to an increase of $1.5 million in delinquent commercial loans.
The ratio of the allowance to loan losses to year end loans at December 31, 2020 was 1.55% as compared to 1.11% at December 31, 2019.
Loans purchased outside of the Bank’s general market area are subject to substantial prepurchase due diligence. Homogenous pools of purchased loans are subject to
prepurchase analyses led by a team of the Bank’s senior executives and credit analysts. In each case, the Bank’s analytical processes consider the types of loans being
evaluated, the underwriting criteria employed by the originating entity, the historical performance of such loans, especially in the most recent deeply recessionary
period, the collateral enhancements and other credit loss mitigation factors offered by the seller and the capabilities and financial stability of the servicing entities
- 56 -
involved. From a credit risk perspective, these loan pools also benefit from broad diversification, including wide geographic dispersion, the readily-verifiable
historical performance of similar loans issued by the originators, as well as the overall experience and skill of the underwriters and servicing entities involved as
counterparties to the Bank in these transactions. The performance of all purchased loan pools are monitored regularly from detailed reports and remittance
reconciliations provided at least monthly by the servicing entities.
The projected credit losses related to purchased loan pools are evaluated prior to purchase and the performance of those loans against expectations are analyzed at
least monthly. Over the life of the purchased loan pools, the allowance for loan losses is adjusted, through the provision for loan losses, for expected loss experience,
over the projected life of the loans. The expected credit loss experience is determined at the time of purchase and is modified, to the extent necessary, during the life of
the purchased loan pools. The Bank does not initially increase the allowance for loan losses on the purchase date of the loan pools.
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, including the COVID-19 pandemic,
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, 2020, the Bank’s position in impaired loans consisted of 52 loans totaling $22.8 million. Of these loans, 15 loans, totaling $1.3 million, were valued
using the present value of future cash flows method; and 37 loans, totaling $21.5 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 of the size of the loan, for all loans subject to a
troubled debt restructuring agreement.
The allowance for loan losses at December 31, 2020 and 2019 was $12.8 million and $8.7 million, or 1.55% and 1.11% of total year end loans, respectively. The
Company recorded $599,000 in net charge-offs in 2020 as compared to $603,000 in net charge-offs in 2019. The ratio of net charge-offs to average loans decreased to
0.08% in 2020 from 0.09% in 2019.
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.
- 57 -
The following table sets forth the allocation of allowance for loan losses by loan category for the years 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.
2020
2019
2018
2017
2016
(Dollars in thousands)
Residential real estate
Commercial real estate
Commercial and tax exempt
Home equity and junior liens
Consumer loans
Unallocated (1)
Total
Allocation
of the
Allowance
931
$
4,776
4,663
739
1,123
545
12,777
$
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
580
4,010
2,841
553
413
272
8,669
28.2% $
34.7%
23.6%
4.7%
8.6%
0.2%
100.0% $
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
766
3,578
2,016
409
385
152
7,306
27.2% $
32.6%
19.0%
6.0%
10.6%
4.60%
100.0% $
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%
-
100.0% $
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
759
2,935
2,056
331
166
-
6,247
38.2% $
33.2%
19.2%
4.5%
4.9%
-
100.0% $
(1)
Includes loans held-for-sale at December 31, 2020 and 2019. There were no loans classified as held for sale at December 31, 2018, 2017, and 2016.
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
Bank Owned Life Insurance
$
2020
8,669
4,707
$
2019
7,306
1,966
$
2018
7,126
1,497
$
2017
6,247
1,769
$
4
95
2
101
(222)
(353)
(125)
(700)
(599)
$
12,777
$
0.08%
1.55%
1
60
2
63
(294)
(361)
(11)
(666)
(603)
8,669
$
0.09%
1.11%
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%
Percent of
Loans to
Total Loans
42.0%
30.6%
21.0%
5.1%
1.3%
-
100.0%
2016
5,706
953
31
63
13
107
(69)
(208)
(242)
(519)
(412)
6,247
0.09%
1.27%
The Company held $17.9 million and $17.4 million in bank owned life insurance at December 31, 2020 and 2019, respectively. Bank owned life insurance increased
$461,000, or 2.6%, to $17.9 million at December 31, 2020, as compared to December 31, 2019. The increase was primarily due to the increase in the cash value of
the policies recorded as income in 2020.
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 $136.9 million, or 16.7%, in 2020. For the year ended December 31, 2020, 57.5% of
the Company's average deposit base of $959.0 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 of funds than time deposits. The Company will continue to emphasize retail and business core deposits by providing
depositors with a full range of deposit product offerings and will maintain its recent focus on deposit gathering within the Syracuse market.
At December 31, 2020, business deposits, consumer deposits, and municipal deposits increased $70.1 million, $37.4 million and $6.5 million, respectively, when
compared to December 31, 2019. The increase in business deposits was primarily from activities related to PPP loans. Noninterest-bearing deposits, which are
primarily demand deposits, were $162.1 million at year end, compared with $107.5 million on December 31, 2019. A significant, but indeterminate amount of this
increase in noninterest-bearing accounts is comprised of the unused balances in PPP loans that were deposited directly into customer accounts during the second
quarter of 2020. The increase in consumer deposits during the year ended December 31, 2020 reflected increased brokered deposit acceptances and the Bank’s
increased market penetration among non-business customers, particularly in northern Onondaga County. The increase in the
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average balance of brokered deposits accepted by the Bank in 2020, as compared to 2019, resulted from management’s efforts to increase cash and cash equivalent
balances, in response to the COVID-19 pandemic, during the second quarter of 2020. The increase in municipal deposits in 2020, as compared to the previous year,
resulted from transitory factors among a small number of the Bank’s largest municipal depositors.
Total deposits of $995.9 million at December 31, 2020 consisted in part of $170.0 million in brokered money market and certificates of deposit accounts. Brokered
deposits represented 17.1% of all deposits at December 31, 2020. Total deposits of $881.9 million at December 31, 2019 consisted in part of $136.5 million in
brokered money market and certificates of deposit accounts. Brokered deposits represented 15.5% of all deposits at December 31, 2019.
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
2020
103,093
296,824
100,226
15,650
227,970
83,129
162,057
6,958
995,907
$
$
December 31,
2019
10.3% $
29.8%
10.1%
1.6%
22.9%
8.3%
16.3%
0.7%
100.0% $
81,926
301,193
120,450
14,388
185,402
64,533
107,501
6,500
881,893
9.3% $
34.2%
13.7%
1.6%
21.0%
7.3%
12.2%
0.7%
100.0% $
2018
80,545
199,598
77,224
13,180
189,679
57,407
103,124
6,303
727,060
11.1%
27.4%
10.6%
1.8%
26.1%
7.9%
14.2%
0.9%
100.0%
At December 31, 2020, time deposit accounts in excess of $100,000 totaled $200.8 million, or 50.6% of time deposits and 20.2% of total deposits. At December 31,
2019, these deposits totaled $315.3 million, or 74.8% of time deposits and 35.8% 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, 2020:
(In thousands)
Remaining Maturity:
Three months or less
Three through six months
Six through twelve months
Over twelve months
Total
$
$
65,476
89,819
35,237
10,259
200,791
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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
$
$
2020
10,158
8,985
4,020
1.65%
0.26%
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
2020
83,299
72,430
78,030
$
2.08%
1.60%
$
- 60 -
2019
39,038
14,835
25,138
$
2.54%
1.80%
2019
70,514
64,011
67,987
$
2.46%
2.52%
2018
39,000
13,556
39,000
1.63%
2.15%
2018
79,534
58,316
79,534
2.00%
2.32%
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 U.S. dollar-denominated (“USD”) LIBOR
rate plus 1.65%. These securities have a five-year call provision. The Company paid $124,000 and $213,000 in interest expense related to this issuance in 2020 and
2019, respectively. The Company guarantees all of these securities.
Following several earlier transition date announcements in recent years, in December 2020 the United Kingdom’s Financial Conduct Authority (“FCA”), the
organization responsible for regulating LIBOR, stated that it would (i) cease publishing indices at December 31, 2020 for one-week and two-month USD LIBOR after
December 31, 2021, and (ii) cease publishing of all other tenors of USD LIBOR (specifically, one, three, six and 12-month tenors) after June 30, 2023. The
Alternative Reference Rates Committee (the “ARRC”), formed by the FRB and the Federal Reserve Bank of New York, has been charged with developing an
alternative rate that will replace USD LIBOR. The ARRC has identified the Secured Overnight Financing Rate (“SOFR”) as the rate that represents best practice for
use in USD LIBOR derivatives and other financial contracts. Accordingly, SOFR currently represents the ARRC's preferred alternative to USD LIBOR. However, the
replacement of USD LIBOR is a highly complex task due to the large number and aggregate magnitude of currently-outstanding USD LIBOR-based contracts, as well
as the broad range of users of these indices. As a result, there are a number of significant objections to the adoption of the SOFR index that have been brought forth
for consideration by a wide-range of entities. Notwithstanding the uncertainties related to the transition away from USD LIBOR, described above, U.S. banking
regulators have also encouraged banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and, in any event, by
December 31, 2021. Management has analyzed the Company’s aggregate exposure to instruments that are indexed to USD LIBOR (including the Company’s
acquired loan participations, fixed-income investments, hedging instruments and the Floating-Rate Debentures) and concluded that the adoption of SOFR, or another
similar index that may ultimately be promulgated by the ARRC, will not materially impact the Company or the results of its operations.
The Company's equity interest in the trust subsidiary is included in other assets on the Consolidated Statements of Financial Condition at December 31, 2020 and
2019. 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 (the 2015 Subordinated Loan) with an unrelated third party that is
scheduled to mature on October 1, 2025. The Company has the right to prepay the 2015 Subordinated Loan on the first day of any calendar quarter after October 15,
2020 without penalty. The annual interest rate charged to the Company will be 6.25% through the maturity date of the 2015 Subordinated Loan. The 2015
Subordinated Loan is senior in the Company’s credit repayment hierarchy only to the Company’s common equity and preferred stock 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 were amortized over
the life of the 2015 Subordinated Loan through its first call date using the effective interest method. The effective cost of funds related to this transaction was 6.44%
calculated under this method through October 15, 2020 and is and will be 6.25% thereafter until the stated maturity date. Interest expense, related to this borrowing,
of $650,000 and $650,000 was recorded in the years ended December 31, 2020 and 2019, respectively.
On October 14, 2020, the Company executed a private placement of $25.0 million of its 5.50% Fixed to Floating Rate non-amortizing Subordinated Loan (the “2020
Subordinated Loan”) to certain qualified institutional buyers and accredited institutional investors. The 2020 Subordinated Loan has a maturity date of October 15,
2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.50% per annum until October 15, 2025. Commencing on that date, the interest rate
applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three month Secured Overnight
Financing Rate (SOFR) plus 532 basis points, payable quarterly until maturity. The Company may redeem the 2020 Subordinated Loan at par, in whole or in part, at
its option, any time after October 15, 2025 (the first redemption date). The 2020 Subordinated Loan is senior in the Company’s credit repayment hierarchy only to the
Company’s common equity and preferred stock and, and any future senior indebtedness and is intended to qualify as Tier 2 capital for regulatory capital purposes for
the Company, when applicable. The Company paid $783,000 in origination and legal fees as part of this transaction. These fees will be amortized over the life of the
2020 Subordinated Loan through its first redemption date using the effective interest method, giving rise to an effective cost of funds of 6.22% from the issuance date
calculated under this method. Accordingly, interest expense of $327,000 was recorded in the year ended December 31, 2020 related to this transaction.
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Capital
The Company’s shareholders’ equity increased $7.0 million, or 7.8%, to $97.5 million at December 31, 2020 from $90.4 million at December 31, 2019. This increase
was primarily due to a $5.4 million increase in retained earnings, a $735,000 increase in comprehensive income, a $662,000 increase in additional paid in capital and a
$180,000 increase in ESOP shares earned. Comprehensive income increased primarily as the result of losses on derivatives and hedging activities, partially offset by
the unrealized gains on available for sale securities during 2020. The increase in retained earnings resulted from $7.0 million in net income recorded in
2020. Partially offsetting this increase in retained earnings were $1.1 million for cash dividends declared on our common stock, $291,000 for cash dividends declared
on our preferred stock, and $30,000 for cash dividends declared on our issued warrant.
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, 2020, 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 capital standards required by federal regulation. 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, 2020, 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 specifiied 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. At December 31, 2020, the Bank exceeded
all current regulatory required minimum capital ratios, including the capital buffer requirements.
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
- 62 -
not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment securities, or the sale of 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, 2020, cash and cash equivalents increased by $23.3 million. The Company reported net cash flows from financing activities of
$126.0 million generated principally by increased customer deposit balances of $80.6 million, an increase in net proceeds from long-term borrowings of $40.2 million,
increased brokered deposit balances of $33.4 million, and by net proceeds from the 2020 Subordinated Loan of $24.2 million. This was partially offset by an
aggregate decrease in net cash of $1.2 million from all other financing sources, including dividends paid to common and preferred shareholders, and the holder of the
Warrant of $1.4 million. Additionally, $46.6 million was provided through operating activities generated principally by proceeds from the sale of loans. These cash
flows were primarily invested in: (1) $243.7 million in purchases of investment securities in 2020, and (2) net increases in loans outstanding of $81.2 million.
Certificates of deposit due within one year of December 31, 2020 totaled $334.9 million, representing 84.3% of certificates of deposit at December 31, 2020, a
decrease from 91.8% at December 31, 2019. 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, 2021.
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 Private Placement, the issuance of the 2020 Subordinated Loan, interest and dividends on
securities and, potentially, 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, 2020 and 2019, the
Company had cash and cash equivalents of $43.5 million and $20.2 million, respectively.
The Bank has a number of existing credit facilities available to it. At December 31, 2020, total credit available under the existing lines of credit was approximately
$143.8 million at FHLBNY, the FRB, and two other correspondent banks. At December 31, 2020, the Company had $82.1 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 $61.7 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, 2020, 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, 2020, the Bank had $169.2 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.
- 63 -
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Pathfinder Bancorp, Inc.
Management’s Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Condition – December 31, 2020 and 2019
Consolidated Statements of Income – Years ended December 31, 2020 and 2019
Consolidated Statements of Comprehensive Income – Years ended December 31, 2020 and 2019
Consolidated Statements of Changes in Shareholders’ Equity – Years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows – Years ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
- 64 -
Page
65
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69
70
71
72
73
75
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) (the Company’s principal executive
officer and principal financial officer), management conducted an evaluation (the “Evaluation”) of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2020. The term “disclosure controls and
procedures,” under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s
rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed
by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive
officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
In connection with the filing of the Annual Report on Form 10-K as of December 31, 2020, our CEO and CFO concluded that the design and operation of our
disclosure controls and procedures were not effective at December 31, 2020, at the reasonable assurance level, due to the material weakness described below under
“Management’s Report on Internal Control over Financial Reporting.” The control deficiencies creates a reasonable possibility that a material misstatement to the
consolidated financial statements would not be prevented or detected on a timely basis.
Notwithstanding the existence of the material weakness as described above, we believe that the financial statements in this annual report present fairly, in all material
respects, our consolidated statements of condition, statements of operations, statements of comprehensive income (loss), statements of cash flows and statements of
shareholders’ equity as of the dates, and for the periods presented, in conformity with GAAP.
Overview of Internal Control
Internal control processes and procedures help entities achieve important objectives and sustain and improve performance. The COSO Framework (as defined below)
enables organizations to effectively and efficiently develop systems of internal control that adapt to changing business and operating environments, mitigate risks at
acceptable levels and support sound decision making and governance of organizations. The COSO Framework defines internal control as “a process, effected by an
entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations,
reporting and compliance.” The COSO Framework provides three categories of objectives, which allow organizations to focus on differing aspects of internal control:
(a) Operations Objectives, (b) Reporting Objectives and (c) Compliance Objectives.
As noted below in the “Management’s Report on Internal Control over Financial Reporting,” as a result of the Evaluation, management identified material weaknesses
in internal control processes related to transactions with Related Parties and material weaknesses in internal control related to loan processing. To be clear, these
material weaknesses, as identified by the Evaluation, relate solely to the Company’s internal control over financial reporting identified below and does not affect or
relate to either the Company’s compliance with laws or regulations or the Company’s operations (e.g., credit underwriting, loan issuance, loan servicing, disclosure of
information to contractual counterparties, deposit management, collection/retention of funds, account management, compliance with Anti-Money Laundering policies
or any other operational policies).
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with GAAP.
Management evaluates the effectiveness of internal control over financial reporting and tests for reliability of recorded financial information through a program of
ongoing internal audits. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be
circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control
effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement
- 65 -
preparation. Under applicable SEC accounting related rules, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements would not be prevented or
detected on a timely basis.
Management conducted the Evaluation based on the 2013 framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO Framework).
As a result of the Evaluation as of December 31, 2020, management identified two areas that, under applicable SEC accounting rules, each constituted a “material
weakness” at December 31, 2020. The first material weaknesses identified ineffectiveness in the controls related to Related Party (as defined in applicable
regulations) transactions that included procedural and documentary deficiencies related to underwriting risk ratings and the completeness of borrower reviews. The
second identified area of material weakness at December 31, 2020 identified relates to loan authorization, disbursement and file maintenance controls. As a result of
the material weakness described above, management has concluded that, as of December 31, 2020, our internal control over financial reporting was not effective.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that
permit the Company to provide only management’s report in this annual report.
Management’s Financial Reporting Remediation Initiatives
In order to remediate the material weakness related to transactions with Related Parties, management has commenced to initiate enhanced training programs and
revise internal operating procedures designed to identify, summarize and monitor all such transactions and relationships.
In order to remediate the material weakness related to loan authorization, disbursement and file maintenance controls, management has commenced the redesign of
specific processes and controls associated with each of the loan operations and will increase staffing levels where appropriate, improve training, increase the use of
certain automated productivity tools, and install enhanced process oversight and functional controls to ensure that these internal controls are effective.
Management is committed to maintaining a strong internal control environment and believes this remediation effort will represent an improvement in existing
controls. Management anticipates that the new controls, as implemented and when tested for a sufficient period of time, will remediate the material weakness. As we
continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address control deficiencies or
modify certain activities of the remediation measures described above.
Changes in Internal Control over Financial Reporting
Other than the changes described above under “Management’s Report on Internal Control over Financial Reporting,” there were no changes made in our internal
controls during the year ended December 31, 2020 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
/s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
Oswego, New York
March 30, 2021
/s/ Walter F. Rusnak
Walter F. Rusnak
Senior Vice President, Chief Financial Officer
- 66 -
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Pathfinder Bancorp, Inc.
Oswego, New York:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of condition of Pathfinder Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2020 and
2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its
cash flows for each of the years in the two-year period ended December 31, 2020, 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical
audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses
As described in Notes 1 and 6 to the consolidated financial statements, the Company’s allowance for loan losses is 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 to loans. The allowance for loan losses was $12.8 million at December 31,
2020, which consists of three components (i) specific reserves based on probable losses on specific loans (“specific reserves”), and (ii) a general allowance based on
historical loan loss experience, general economic conditions and other qualitative risk factors both internal and external to the Company (“general reserves”). The
specific reserve component relates to loans that are classified as impaired and is established when the collateral value or discounted cash flows of the impaired loan
are lower than the carrying value of the loan. The general reserve component of the allowance for loan losses covers pools of loans, by loan class, and is based on a
variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off
trends, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in
the Company’s market area. The qualitative adjustment for the general reserve includes management’s consideration of 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.
- 67 -
The qualitative adjustment contributes significantly to the general reserve component of the allowance for loan losses. Management’s identification and analysis of
these considerations and related adjustments requires significant judgment and could have a significant effect on the allowance for loan losses. We identified the
estimate of the qualitative adjustments of the general reserve for the allowance for loan losses as a critical audit matter as they represent a significant portion of the
total general reserve and because management’s estimate relies on a qualitative analysis to determine a quantitative adjustment which required especially subjective
auditor judgment.
The primary procedures we performed to address this critical audit matter included performing substantive testing, including evaluating management’s judgments and
assumptions for developing the general reserve qualitative adjustments for the allowance for loan losses, which consisted of the following:
•
•
•
•
•
•
•
Assessing management’s methodology and considering whether relevant risks were reflected in the modeled provision and whether adjustments to
modeled calculations were appropriate
Evaluating the completeness and accuracy of data inputs used as a basis for the adjustments relating to qualitative general reserve factors and considering
whether the sources of data and factors that management used in forming the assumptions are relevant, reliable, and sufficient for the purpose based on the
information gathered.
Evaluating the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of
the general reserve qualitative adjustments for consistency with each other, the supporting data, relevant historical data, and industry data.
Assessing whether historical data is comparable and consistent with data of the current year and considering whether the data is sufficiently reliable.
Among other procedures, our evaluation considered evidence from internal and external sources, loan portfolio performance and whether such
assumptions were applied consistently period to period.
Analytically evaluating the qualitative adjustment in the current year compared to prior years for directional consistency and reasonableness.
Evaluated whether management’s judgments and assumptions adequately contemplated the impact of COVID-19 on management’s quantitative and
qualitative assessment
Testing the calculations used by management to translate the assumptions and key factors into the allowance estimated amount.
Loans
As described in Notes 1 and 5 to the consolidated financial statements, the Company grants loans to customers with the intent and ability to hold for the foreseeable
future or until maturity or pay-off. The Company’s primary lending portfolio consists of originating commercial real estate, commercial loans, and one-to-four
family residential real-estate loans, but also consists of municipal loans, home equity loans, and consumer loans. The balance of loans, net of the allowance for loan
losses and deferred origination costs, was $812.7 million at December 31, 2020. The Company recognizes revenue from loans through interest income, which is
determined based on the underlying interest rate on the loans. The Company offers both fixed and adjustable rate loans based on the type of loan and borrower
specific risk characteristics. During 2020 the Company recognized $35.1 million in interest income associated with loans.
Auditing loans resulted in complexities due to the material weaknesses in the Company’s internal control over financial reporting relating to the insufficient
documentation supporting loan transactions occurring during the year. We obtained an understanding of management’s processes and evaluated the design and
operating effectiveness of certain controls over the Company’s accounting for loans. We tested controls over management’s review of new and existing loans, as well
as controls over the presentation of loans in the consolidated financial statements.
To test the presentation of loans and recognition of interest income during the year, we performed audit procedures that included, among others, third-party
confirmations, independent loan reviews, testing the clerical accuracy of interest income recorded on individual loans, and testing the completeness and accuracy of all
loan and related party disclosures. Because of the material weakness, we expanded our sample sizes selected for substantive testing and modified our testing approach
for certain procedures to encompass a highly statistical method of sampling in order to provide greater assurance over the fair presentation of the consolidated
financial statement amounts. We performed additional testing over the completeness and accuracy of loan data, and evaluated whether management’s accounting,
presentation, and disclosure of loans in the consolidated financial statements followed US Generally Accepted Accounting Principles.
We have served as the Company’s auditor since 2011.
Bonadio & Co., LLP
Pittsford, New York
March 30, 2021
/s/ BONADIO & CO., LLP
- 68 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Condition
(In thousands, except share and per share data)
ASSETS:
Cash and due from banks (including restricted balances of $1,600 and $0, respectively)
Interest-earning deposits (including restricted balances of $0 and $0, respectively)
Total cash and cash equivalents
Available-for-sale securities, at fair value
Held-to-maturity securities, at amortized cost (fair value of $174,935 and $124,148 , respectively)
Marketable equity securities, at fair value
Federal Home Loan Bank stock, at cost
Loans
Loans held-for-sale
Less: Allowance for loan losses
Loans receivable, net
Premises and equipment, net
Operating lease right-of-use assets
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
Operating lease liabilities
Other liabilities
Total liabilities
Shareholders' equity:
Preferred stock, par value $0.01 per share; no liquidation preference; 10,000,000 and 10,000,000 shares
authorized, respectively; 1,380,283 and 1,155,283 shares issued and outstanding, respectively
Common stock, par value $0.01; 25,000,000 authorized shares; 4,531,383 and 4,709,238
shares issued and 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.
- 69 -
December 31,
2020
December 31,
2019
14,906 $
28,558
43,464
128,261
171,224
1,850
4,390
823,969
1,526
12,777
812,718
22,264
2,240
4,549
-
133
4,536
17,864
13,950
1,227,443 $
833,850 $
162,057
995,907
4,020
78,030
39,400
193
2,525
9,646
1,129,721
8,284
11,876
20,160
111,134
122,988
534
4,834
745,516
35,935
8,669
772,782
22,699
2,386
3,712
88
149
4,536
17,403
10,402
1,093,807
774,392
107,501
881,893
25,138
67,987
15,128
396
2,650
9,946
1,003,138
14
12
45
50,024
50,284
(2,236)
(675)
97,456
266
97,722
1,227,443 $
47
49,362
44,839
(2,971)
(855)
90,434
235
90,669
1,093,807
$
$
$
$
(In thousands, except per share data)
Interest and dividend income:
Loans, including fees
Debt securities:
Taxable
Tax-exempt
Dividends
Federal funds sold and interest earning deposits
Total interest and dividend income
Interest expense:
Interest on deposits
Interest on short-term borrowings
Interest on long-term borrowings
Interest on subordinated loans
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Earnings and gain on bank owned life insurance
Loan servicing fees
Net gains on sales and redemptions of investment securities
(Losses) gains 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 and occupancy
Data processing
Professional and other services
Advertising
FDIC assessments
Audits and exams
Insurance agency expense
Community service activities
Foreclosed real estate expenses
Other expenses
Total noninterest expenses
Income before income taxes
Provision for income taxes
Net income attributable to noncontrolling interest and
Pathfinder Bancorp, Inc.
Net income attributable to noncontrolling interest
Net income attributable to Pathfinder Bancorp, Inc.
Convertible preferred stock dividends
Warrant dividends
Undistributed earnings allocated to participating securities
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 years ended
December 31, 2020
December 31, 2019
$
35,421
$
6,524
159
324
79
42,507
8,112
148
1,503
1,101
10,864
31,643
4,707
26,936
1,395
460
361
1,076
(629)
1,179
771
955
917
6,485
13,468
3,013
2,396
1,210
941
699
507
743
199
50
1,854
25,080
8,341
1,295
7,046
96
6,950
291
30
1,224
5,405
1.17
1.17
0.24
$
$
$
$
$
$
$
$
$
$
34,035
6,962
178
279
304
41,758
10,713
377
1,575
863
13,528
28,230
1,966
26,264
1,391
462
211
329
81
64
657
844
878
4,917
13,660
2,674
2,339
1,325
962
421
427
816
620
337
2,149
25,730
5,451
1,165
4,286
10
4,276
208
23
467
3,578
0.80
0.80
0.24
The accompanying notes are an integral part of the consolidated financial statements.
- 70 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
Net Income
Other Comprehensive Income
Retirement Plans:
Retirement plan net losses recognized in plan expenses
Plan gains not recognized in plan expenses
Net unrealized gain on retirement plans
Unrealized holding gains on available-for-sale securities
Unrealized holding gains arising during the period
Reclassification adjustment for net gains included in net income
Net unrealized gains on available-for-sale securities
Derivatives and hedging activities:
Unrealized holding losses arising during the period
Net unrealized losses on derivatives and hedging activities
Accretion of net unrealized loss on securities transferred to held-to-maturity(1)
Other comprehensive income, before tax
Tax effect
Other comprehensive income, net of tax
Comprehensive income
Comprehensive income, attributable to noncontrolling interest
Comprehensive income attributable to Pathfinder Bancorp, Inc.
Tax Effect Allocated to Each Component of Other Comprehensive Income
Retirement plan net losses recognized in plan expenses
Plan gains not recognized in plan expenses
Unrealized holding gains arising during the period
Reclassification adjustment for net gains included in net income
Unrealized losses on derivatives and hedging arising during
the period
Accretion of net unrealized loss on securities transferred to held-to-maturity(1)
Income tax effect related to other comprehensive income
Years ended
December 31, 2020
$
7,046 $
December 31, 2019
4,286
234
610
844
2,352
(926)
1,426
(1,308)
(1,308)
33
995
(260)
735
7,781 $
96 $
7,685 $
(61) $
(159)
(615)
242
342
(9)
(260) $
335
255
590
3,869
(329)
3,540
-
-
27
4,157
(1,086)
3,071
7,357
10
7,347
(88)
(67)
(1,010)
86
-
(7)
(1,086)
$
$
$
$
$
(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.
- 71 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
Years ended December 31, 2020 and December 31, 2019
Common
Stock
Additional
Paid in
Capital
Preferred
Stock
$
Accumulated
Other Com-
prehensive
Loss
Unearned
ESOP
Non-
controlling
Interest
(2,971) $
-
735
(855) $
-
-
Total
235 $ 90,669
7,046
96
735
-
Retained
Earnings
$ 44,839 $
6,950
-
12 $
-
-
2
-
-
-
-
-
-
-
-
-
-
14 $
-
-
-
-
12
-
-
-
-
-
-
-
49,362
-
-
-
90
-
300
223
47 $
-
-
(2)
-
-
-
-
-
-
-
-
-
-
45 $
-
(1,102)
-
(291)
-
7
42
-
(30)
-
(82)
-
3
3,823
15,358
373
160
-
291
218
-
-
-
-
-
-
-
-
-
(1,081)
-
-
-
(208)
(23)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
180
-
-
-
-
-
-
-
-
-
-
-
270
-
300
223
-
(1,102)
-
(291)
-
-
-
-
(675) $
-
(30)
(7)
-
40
-
(98)
(98)
266 $ 97,722
-
-
-
-
-
-
179
-
-
-
-
-
-
10
-
(239)
4,286
3,071
-
3,826
-
-
-
-
-
-
15,370
373
339
-
291
218
-
(1,081)
-
(208)
-
-
(855) $
(23)
-
(13)
(13)
235 $ 90,669
- $
44 $
29,139 $ 42,114 $
(6,042) $ (1,034) $
238 $ 64,459
$
$
50,024 $ 50,284
$
(2,236) $
-
-
-
-
-
-
(239)
4,276
-
-
-
3,071
(In thousands, except share and per share data)
Balance, January 1, 2020
Net income
Other comprehensive income, net of tax
Exchange of common shares to preferred shares,
at par value (1)
ESOP shares earned (24,442 shares)
Restricted stock units (13,437 shares)
Stock based compensation
Stock options exercised
Common stock dividends declared
($0.24 per share)
Preferred stock dividends declared
($0.24 per share)
Warrant dividends declared
($0.24 per share)
Capital transfer from affiliates
Cumulative effect of affiliate capital allocation
Distributions from affiliates
Balance, December 31, 2020
Balance, January 1, 2019
Cumulative effect of change in measurement
of operating leases (2)
Net income
Other comprehensive loss, net of tax
Proceeds of common stock private placement,
net of expenses (3)
Proceeds of preferred stock private placement,
net of expenses (3)
Effect of warrant issued from private placement (3)
ESOP shares earned (24,442 shares)
Restricted stock units (18,709 shares)
Stock based compensation
Stock options exercised
Common stock dividends declared
($0.24 per share)
Preferred stock dividends declared
($0.18 per share)
Warrant dividends declared
($0.18 per share)
Distributions from affiliates
Balance, December 31, 2019
-
-
12 $
-
-
47 $
$
49,362 $ 44,839 $
(2,971) $
(1) On November 13, 2020, the Company issued to Castle Creek 225,000 shares of its Series B Preferred Shares in exchange for an equivalent number of shares of Company
Common Stock held by Castle Creek. Castle Creek is the only stockholder of the Series B Preferred Shares. The Company received no cash proceeds as a result of the
exchange.
Cumulative effect of the adoption of ASU 2016-02, Leases (Topic 842), based on the difference in the right-of-use asset and lease liability as of January 1, 2019.
(2)
(3) On May 8, 2019, the Company entered into a Securities Purchase Agreement with an institutional investor, in which it sold: (i) 37,700 shares of the Company’s common
stock, (ii) 1,155,283 shares of a new series of preferred stock, Series B convertible perpetual preferred stock; and (iii) a warrant to purchase 125,000 shares of common stock
in a private placement transaction. The Company also entered into Subscription Agreements with certain directors and executive officers of the Company as well as other
accredited investors. Pursuant to the Subscription Agreements, the investors purchased an aggregate of 269,277 shares of common stock.
The accompanying notes are an integral part of the consolidated financial statements.
- 72 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Cash Flows
(In thousands)
OPERATING ACTIVITIES
Net income attributable to Pathfinder Bancorp, Inc.
Adjustments to reconcile net income to net cash flows from operating activities:
Provision for loan losses
Deferred income (benefit) tax
Amortization of operating leases
Proceeds from sales 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
Marketable equity securities
Depreciation
Amortization of mortgage servicing rights
Amortization of deferred loan costs
Amortization of deferred financing from subordinated debt
Earnings and gain on bank owned life insurance
Net amortization of premiums and discounts on investment securities
Amortization of intangible assets
Stock based compensation and ESOP expense
Net change in accrued interest receivable
Net change in other assets and liabilities
Net cash flows from operating activities
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale
Purchase of investment securities held-to-maturity
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
Net change in loans
Purchase of premises and equipment
Net cash flows from investing activities
- 73 -
For the years ended December 31,
2020
$
6,950
$
2019
4,276
1,966
(16)
25
1,492
(1,474)
(31)
(33)
(256)
(73)
(81)
1,520
(3)
(272)
34
(462)
1,269
16
630
(644)
237
8,120
(75,551)
(88,892)
(10,201)
11,304
42,433
19,101
102,352
635
1,664
(162,060)
(3,596)
(162,811)
4,707
-
20
50,914
(15,321)
14
(1,193)
(1,042)
(34)
629
1,696
(354)
786
55
(460)
2,104
16
570
(837)
(2,659)
46,561
(143,132)
(97,135)
(3,463)
3,907
98,718
44,918
25,795
3,461
132
(81,163)
(1,261)
(149,223)
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
Proceeds from subordinated loan
Issuance costs of subordinated loan
Cash dividends paid to common shareholders
Cash dividends paid to preferred shareholders
Cash dividends paid on warrants
Net proceeds from common stock private placement
Net proceeds from preferred stock private placement
Proceeds from finance lease transaction
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
Collateral deposits for hedge position included in cash and due from banks
The accompanying notes are an integral part of the consolidated financial statements.
- 74 -
138,651
(58,061)
33,424
(21,118)
(30,193)
40,236
223
25,000
(783)
(1,137)
(277)
(30)
-
-
-
31
125,966
23,304
20,160
43,464
$
$
11,067
2,650
58
1,600
10,021
49,708
95,104
(13,862)
(31,227)
19,680
218
-
-
(1,091)
(139)
(15)
4,199
15,370
572
(3)
148,535
(6,156)
26,316
20,160
13,436
750
548
-
$
$
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 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 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 a $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. The Company received $19.6 million in net proceeds from the sale of 37,700 shares of common stock and 1,155,283 shares of preferred stock as a
result of the Private Placement in May 2019. In October 2020, the Company executed a private placement of a $25.0 million non-amortizing Subordinated Loan and
intends to use the proceeds for general corporate purposes, including ongoing growth, to repay existing subordinated debt, and for potential future strategic
opportunities.
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.
Discussion of COVID-19 Pandemic
A discussion of the effect of the COVID-19 pandemic on the operations of the Company is contained herein in Note 29.
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.
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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.
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
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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. As a result of the COVID-19 pandemic, the Company’s management extensively reviewed a broad array of econometric projections and the potential
effect of changes in those projections on anticipated loan performance. As a result, certain qualitative factors were substantially modified during 2020 in order to
determine the adequacy of the allowance for loan losses during the year and at December 31, 2020.
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.
The CARES Act, signed into law on March 27, 2020, provided financial assistance in various forms to both businesses and consumers. One of the technical provisions
of the CARES Act was to allow financial institutions not to characterize loan modifications specifically related to the COVID-19 pandemic as TDRs although
financial institutions must make impairment determinations for accounting purposes if certain impairment triggers are met. Notwithstanding the Bank’s policies with
respect to impaired and potentially impaired loans, as discussed above, certain loans on deferred payment status were not classified as impaired or TDRs at December
31, 2020, as a result of the application of the provisions of the CARES Act.
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An allowance for loan loss is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the
Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral. For loans secured by real estate, estimated fair values are
determined primarily through third-party appraisals, less costs to sell. Appraised values are discounted to arrive at the estimated selling price of the collateral, which
is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined
based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these
sources are generally discounted based on the age of the financial information or the quality of the assets.
Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential
mortgage loans less than $300,000, home equity and other consumer loans for impairment disclosures, unless such loans are related to borrowers with impaired
commercial loans or they are subject to a troubled debt restructuring agreement. Loans that are related to borrowers with impaired commercial loans or are subject to
a troubled debt restructuring agreement are evaluated individually for impairment.
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
With the exception of loans in deferral at December 31, 2020 as a result of COVID-19 pandemic-related factors, 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.
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Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the
related assets, ranging up to 40 years for premises and 10 years for equipment. Maintenance and repairs are charged to operating expenses as incurred. The asset cost
and accumulated depreciation are removed from the accounts for assets sold or retired and any resulting gain or loss is included in the determination of income.
Foreclosed Real Estate
Physical possession of residential real estate property collateralizing a residential mortgage loan occurs when legal title is obtained upon completion of foreclosure or
when the borrower conveys all interest in the property to satisfy the loan through completion of a deed-in-lieu of foreclosure or through a similar legal
agreement. Properties acquired through foreclosure, or by deed-in-lieu of foreclosure, are recorded at their fair value less estimated costs to sell. Fair value is
typically determined based on evaluations by third parties. Costs incurred in connection with preparing the foreclosed real estate for disposition are capitalized to the
extent that they enhance the overall fair value of the property. Any write-downs on the asset’s fair value less costs to sell at the date of acquisition are charged to the
allowance for loan losses. Subsequent write downs and expenses of foreclosed real estate are included as a valuation allowance and recorded in noninterest expense.
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 or when there
is a triggering event 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
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schedule. The Company records ESOP compensation expense based on the shares committed to be released and allocated to the participant’s accounts multiplied by
the average share price of the Company’s stock over the period. Dividends related to unallocated shares are recorded as compensation expense.
Derivative Financial Instruments
Derivatives are recorded on the statement of condition as assets and liabilities measured at their fair value. The accounting for changes in the fair value of a derivative
depends on whether or not the derivative has been designated and qualifies as part of a hedging relationship. The Company acquires derivatives with the intent of
designating and qualifying those instruments as part of hedging relationships to other balance sheet assets or liabilities. The specific accounting treatment for
increases and decreases in the value of derivatives further depends upon the use of the specific derivatives. There are two primary types of interest rate derivatives
that may be employed by the Company:
•
•
Fair Value Hedge - As a result of interest rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate in fair value over the course of their
economic lives prior to maturity . When effectively hedged, this appreciation or depreciation will generally be offset by fluctuations in the fair value of
derivative instruments that are linked to the hedged assets and liabilities. This strategy is referred to as a fair value hedge. 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 expected to substantially offset each other and these
changes are recognized currently in earnings.
Cash Flow Hedge - Cash flows related to floating rate assets and liabilities will fluctuate with changes in the underlying rate index. When effectively hedged,
the increases or decreases in cash flows related to the floating-rate asset or liability will generally be offset by changes in cash flows of the derivative instrumnets
designated as a hedge. This strategy is referred to as a cash flow hedge. 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.
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.
Earnings Per Share
Basic net income per share was calculated using the two-class method by dividing net income (less any dividends on participating securities) by the weighted average
number of shares of common stock and participating securities outstanding for the period. Diluted earnings per share may include the additional effect of other
securities, if dilutive, in which case the dilutive effect of such securities is calculated by applying either the two-class method or the Treasury Stock method to the
assumed exercise or vesting of potentially dilutive common shares. The method yielding the more dilutive result is ultimately reported for the applicable period.
Potentially dilutive common stock equivalents primarily consist of employee stock options and restricted stock units. Unallocated common shares held by the ESOP
are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be
released to plan participants. Note 3 provides more information related to earnings per share.
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 gain (loss) on available-for-sale securities
Tax effect
Net unrealized gain (loss) on available-for-sale securities
Unrealized holding losses on hedging activities arising during the period
Tax effect
Net unrealized loss on hedging activities
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,
2020
(2,832) $
739
(2,093)
1,133
(296)
837
(1,308)
342
(966)
(22)
8
(14)
(2,236) $
2019
(3,677)
960
(2,717)
(293)
77
(216)
-
-
-
(54)
16
(38)
(2,971)
$
$
Certain amounts in the 2019 consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect
on net income as previously reported.
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Note 2: New Accounting Pronouncements
The 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 table
provides a description of standards that were adopted in 2020 and standards not yet adopted as of December 31, 2020, but could have an impact on the Company's
consolidated financial statements upon adoption.
Standards Adopted in 2020
Standard
Description
Fair Value Measurement
(ASU 2018-13: Fair Value
Measurement [Topic 820]:
Disclosure Framework
Changes to the Disclosure
Requirements for Fair Value
Measurement
The FASB is issuing the amendments in this ASU as part of the disclosure
framework project. The disclosure framework project’s objective and primary
focus are to improve the effectiveness of disclosures in the notes to financial
statements by facilitating clear communication of the information required by
GAAP that is most important to users of each entity’s financial statements. The
amendments in this ASU modify the disclosure requirements for entities such as
the Company on fair value measurements in Topic 820, Fair Value
Measurement.
Required Date
Effect on Consolidated Financial
of Implementation
Statements
January 1, 2020
The adoption of this ASU had no material impact
to the Company's consolidated statements of
condition or income.
The following disclosure requirements were removed from Topic 820:
1. The amount of and reasons for transfers between Level 1 and Level 2 of the
fair value hierarchy.
2. The policy for timing of transfers between levels.
3. The valuation processes for Level 3 fair value measurements.
The following disclosure requirements were modified in Topic 820:
1. 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.
2. 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. 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.
2. The range and weighted average of significant unobservable inputs used to
develop Level 3 fair value measurements. For certain unobservable inputs, an
entity may disclose other quantitative information (such as the median or
arithmetic average) in lieu of the weighted average if the entity determines that
other quantitative information would be a more reasonable and rational method
to reflect the distribution of unobservable inputs used to develop Level 3 fair
value measurements.
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Effect on Consolidated
Financial Statements
The adoption of this ASU had
no material impact to its
consolidated statements of
condition or income.
Required Date
of Implementation
This ASU 2019-04 has
various implementation
dates dependent on a
number of factors as it
pertains to the above
items. The Company
has adopted ASU 2016-
01 and ASU 2017-12,
but has not adopted
ASU 2016-13.
Standard
Description
Various Codification
Improvements (ASU
2019-04:
Codification
Improvements to
Topic 326, Financial
Instruments—Credit
Losses, Topic 815,
Derivatives and
Hedging, and Topic
825, Financial
Instruments)
The FASB is issuing the amendments in this ASU as part of its ongoing project on its agenda for improving the
Codification and correcting its unintended application. The items addressed in that project generally are not
expected to have a significant effect on current accounting practices. The amendments in this ASU are
summarized below.
For Codification Improvements specific to ASU 2016-01, the following topics are covered within ASU 2019-
04:
• Scope Clarifications
• Held-to-Maturity Debt Securities Fair Value Disclosures
• Applicability of Topic 820 to the Measurement Alternative
• Remeasurement of Equity Securities at Historical Exchange Rates
The ASU also covers a number of issues that relate to hedge accounting (ASU-2017-12) including:
• Partial-Term Fair Value Hedges of Interest Rate Risk
• Amortization of Fair Value Hedge Basis Adjustments
• Disclosure of Fair Value Hedge Basis Adjustments
• Consideration of the Hedged Contractually Specified Interest Rate under the Hypothetical Derivative Method
• Scoping for Not-for-Profit Entities
• Hedge Accounting Provisions Applicable to Certain Private Companies and Not-for- Profit Entities
• Application of a First- Payments-Received Cash Flow Hedging Technique to Overall Cash Flows on a Group
of Variable Interest Payments
• Transition Guidance
The amendments to Topic 326 and other Topics in this Update include items related to the amendments in
Update 2016-13 discussed at the June 2018 and November 2018 Credit Losses Transition Resource Group
(“TRG”) meetings. The amendments clarify or address stakeholders’ specific issues about certain aspects of the
amendments in Update 2016-13 on a number of different topics, including the following:
• Accrued Interest
• Transfers between Classifications or Categories for Loans and Debt Securities
• Recoveries
• Consideration of Prepayments in Determining the Effective Interest Rate
• Consideration of Estimated Costs to Sell When Foreclosure Is Probable
• Vintage Disclosures— Line-of-Credit Arrangements Converted to Term Loans
• Contractual Extensions and Renewals
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Standards Not Yet Adopted as of December 31, 2020
Standard
Description
Required Date
Effect on Consolidated Financial
of Implementation
January 1, 2023 (early
adoption permitted as of
January 1, 2019)
Measurement of Credit
Losses on Financial
Instruments (ASU 2016-13:
Financial Instruments—
Credit Losses [Topic 326]:
Measurement of Credit
Losses on Financial
Instruments)
The amended guidance replaces the current incurred loss model for determining
the allowance for credit losses. The guidance requires financial assets measured
at amortized cost to be presented at the net amount expected to be collected. The
allowance for credit losses will represent a valuation account that is deducted
from the amortized cost basis of the financial assets to present their net carrying
value at the amount expected to be collected. The income statement will reflect
the measurement of credit losses for newly recognized financial assets as well as
expected increases or decreases of expected credit losses that have taken place
during the period. When determining the allowance, expected credit losses over
the contractual term of the financial asset(s) (taking into account prepayments)
will be estimated considering relevant information about past events, current
conditions, and reasonable and supportable forecasts that affect the collectability
of the reported amount. The amended guidance also requires recording an
allowance for credit losses for purchased financial assets with a more-than-
insignificant amount of credit deterioration since origination. The initial
allowance for these assets will be added to the purchase price at acquisition rather
than being reported as an expense. Subsequent changes in the allowance will be
recorded through the income statement as an expense adjustment. In addition,
the amended guidance requires credit losses relating to available-for-sale debt
securities to be recorded through an allowance for credit losses. The calculation
of credit losses for available-for-sale securities will be similar to how it is
determined under existing guidance.
Statements
The Company is assessing the new guidance to
determine what modifications to existing credit
estimation processes may be required. The new
guidance is complex and management is still
evaluating the preliminary output from models
that have been developed during this evaluative
phase. In addition, future levels of allowances
will also reflect new requirements to include
estimated credit losses on investment securities
classified as held-to-maturity, if any. The
Company has formed an Implementation
Committee, whose membership includes
representatives of senior management, to develop
plans that will encompass: (1) internal
methodology changes (2) data collection and
management activities, (3) internal
communication requirements, and (4) estimation
of the projected impact of this guidance. It has
been generally assumed that the conversion from
the incurred loss model, required under current
GAAP, to the current expected credit loss
(CECL) methodology (as required upon
implementation of this Update) will, more likely
than not, result in increases to the allowances for
credit losses at many financial
institutions. However, the amount of any change
in the allowance for credit losses resulting from
the new guidance will ultimately be impacted by
the provisions of this guidance as well as by the
loan and debt security portfolios composition and
asset quality at the adoption date, and economic
conditions and forecasts at the time of adoption.
The amendments in this Update should be
applied on a modified retrospective basis by
means of a cumulative-effect adjustment to the
opening retained earnings balance in the
statement of financial position as of the date that
an entity adopted the amendments in Update
2016-13. The cumulative impact of the economic
effects of the COVID-19 pandemic on the
changes to the allowance for loan losses, that will
be required upon the implementation of the
CECL methodology, cannot be estimated at this
time.
- 84 -
Standard
Description
Required Date
Effect on Consolidated Financial
of Implementation
Statements
Transition Relief for the
Implementation of ASU-
2016-13 (ASU 2019-5:
Financial Instruments—
Credit Losses [Topic 326]:
Targeted Transition Relief)
The amendments in this ASU provide entities that have certain instruments
See comments above related
See comments above related to ASU 2016-13.
to ASU 2016-13.
within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—
Measured at Amortized Cost, with an option to irrevocably elect the fair value
option in Subtopic 825-10, Financial Instruments—Overall, applied on an
instrument-by-instrument basis for eligible instruments, upon adoption of Topic
326. The fair value option election does not apply to held-to-maturity debt
securities. An entity that elects the fair value option should subsequently apply
the guidance in Subtopics 820-10, Fair Value Measurement—Overall, and 825-
10. General guidance for the use of the fair value option is contained in Subtopic
825-10. The irrevocable election of the fair value option must be applied on an
instrument-by-instrument basis for eligible instruments, whose characteristics are
within the scope of Subtopic 326-20. Upon adoption of Topic 326, for items
measured at fair value in accordance with paragraph 326-10-65-1(i), the
difference between the carrying amount and the fair value shall be recorded by
means of a cumulative-effect adjustment to the opening retained earnings balance
as of the beginning of the first reporting period that an entity has adopted ASU
2016-13. Those differences may include, but are not limited to: (1) unamortized
deferred costs, fees, premiums, and discounts (2) valuation allowances (for
example, allowance for loan losses), or (3) accrued interest.
Standard
Description
Required Date
Effect on Consolidated Financial
Statements
The Company does not expect that the new
guidance will have a material impact to the
Company's consolidated statements of condition
or income.
of Implementation
The amendments in this
ASU are effective for fiscal
years ending after December
15, 2020, for public business
entities and for fiscal years
ending after December 15,
2021, for all other entities.
Early adoption is permitted
for all entities.
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)
The FASB is issuing the amendments in this ASU as part of the disclosure
framework project. The amendments in this ASU modify the disclosure
requirements for employers that sponsor defined benefit pension or other
postretirement plans.
The following disclosure requirements are removed from Subtopic 715-20:
1. The amounts in accumulated other comprehensive income expected to be
recognized as components of net periodic benefit cost over the next fiscal year.
2. The amount and timing of plan assets expected to be returned to the employer.
3. Related party disclosures about the amount of future annual benefits covered
by insurance and annuity contracts and significant transactions between the
employer or related parties and the plan.
4. 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. The weighted-average interest crediting rates for cash balance plans and other
plans with promised interest crediting rates.
2. An explanation of the reasons for significant gains and losses related to
changes in the benefit obligation for the period.
The amendments in this ASU also clarify the disclosure requirements in
paragraph 715-20-50-3, which state that the following information for defined
benefit pension plans should be disclosed:
1. The projected benefit obligation (PBO) and fair value of plan assets for plans
with PBOs in excess of plan assets.
2. The accumulated benefit obligation (ABO) and fair value of plan assets for
plans with ABOs in excess of plan assets.
- 85 -
Standard
Description
Required Date
Effect on Consolidated Financial
Investments (ASU 2020-01-
Equity Securities [Topic 321],
Investments—Equity Method
and Joint Ventures [Topic
323], and Derivatives and
Hedging [Topic 815]—
Clarifying the Interactions
between Topic 321, Topic
323, and Topic 815)
The amendments in this Update clarify the interaction of the accounting for
equity securities under Topic 321 and investments accounted for under the equity
method of accounting in Topic 323 and the accounting for certain forward
contracts and purchased options accounted for under Topic 815. The
amendments clarify that an entity should consider observable transactions that
require it to either apply or discontinue the equity method of accounting for the
purposes of applying the measurement alternative in accordance with Topic 321
immediately before applying or upon discontinuing the equity method. The
amendments clarify that for the purpose of applying paragraph 815-10-15-141(a)
an entity should not consider whether, upon the settlement of the forward
contract or exercise of the purchased option, individually or with existing
investments, the underlying securities would be accounted for under the equity
method in Topic 323 or the fair value option in accordance with the financial
instruments guidance in Topic 825. An entity also would evaluate the remaining
characteristics in paragraph 815-10-15-141 to determine the accounting for those
forward contracts and purchased options.
Standard
Description
Income Taxes (ASU 2019-12-
Simplifying the Accounting
for Income Taxes)
The FASB Board is issuing this Update as part of its initiative to reduce
complexity in accounting standards (the Simplification Initiative).
The amendments in this Update simplify the accounting for income taxes by
removing the following exceptions, among others not considered to be applicable
to the Company:
1. Exception to the incremental approach for intraperiod tax allocation when
there is a loss from continuing operations and income or a gain from other items
(for example, discontinued operations or other comprehensive income)
2. Exception to the general methodology for calculating income taxes in an
interim period when a year-to-date loss exceeds the anticipated loss for the year.
The amendments in this Update also simplify the accounting for income taxes by
doing the following:
1. Requiring that an entity recognize a franchise tax (or similar tax) that is
partially based on income as an income-based tax and account for any
incremental amount incurred as a non-income-based tax.
2. Requiring that an entity evaluate when a step up in the tax basis of goodwill
should be considered part of the business combination in which the book
goodwill was originally recognized and when it should be considered a separate
transaction.
3. Specifying that an entity is not required to allocate the consolidated amount of
current and deferred tax expense to a legal entity that is not subject to tax in its
separate financial statements. However, an entity may elect to do so (on an
entity-by-entity basis) for a legal entity that is both not subject to tax and
disregarded by the taxing authority.
4. Requiring that an entity reflect the effect of an enacted change in tax laws or
rates in the annual effective tax rate computation in the interim period that
includes the enactment date.
5. Making minor Codification improvements for income taxes related to
employee stock ownership plans and investments in qualified affordable housing
projects accounted for using the equity method.
- 86 -
Statements
The amendments in this Update should be
applied prospectively. The Company does not
expect that the new guidance will have a material
impact to its consolidated statements of
condition or income.
of Implementation
The amendments in this
ASU are effective for fiscal
years ending after December
15, 2020, for public business
entities and for fiscal years
ending after December 15,
2021, for all other entities.
Early adoption is permitted
for all entities.
Required Date
Effect on Consolidated Financial
of Implementation
The amendments in this
Statements
The amendments in this Update related to
separate financial statements of legal entities that
are not subject to tax should be applied on a
retrospective basis for all periods presented. The
amendments related to changes in ownership of
foreign equity method investments or foreign
subsidiaries should be applied on a modified
retrospective basis through a cumulative-effect
adjustment to retained earnings as of the
beginning of the fiscal year of adoption. The
amendments related to franchise taxes that are
partially based on income should be applied on
either a retrospective basis for all periods
presented or a modified retrospective basis
through a cumulative-effect adjustment to
retained earnings as of the beginning of the fiscal
year of adoption. All other amendments should
be applied on a prospective basis. The Company
does not expect the new guidance will have a
material impact to its consolidated statements of
condition or income.
ASU are effective for fiscal
years ending after December
15, 2020, for public business
entities and for fiscal years
ending after December 15,
2021, for all other entities.
Early adoption of the
amendments is permitted,
including adoption in any
interim period for (1) public
business entities for periods
for which financial
statements have not yet been
issued and (2) all other
entities for periods for which
financial statements have not
yet been made available for
issuance. An entity that
elects to early adopt the
amendments in an interim
period should reflect any
adjustments as of the
beginning of the annual
period that includes that
interim period. Additionally,
an entity that elects early
adoption must adopt all the
amendments in the same
period.
Required Date
of Implementation
January 1, 2023 (early
adoption permitted as of
January 1, 2019). The
effective dates and transition
requirements for the
amendments are the same as
the effective dates and
transition requirements in
Update 2016-13.
Effect on Consolidated Financial
Statements
The Company is assessing the new guidance to
determine what modifications to existing credit
estimation processes may be required. The new
guidance is complex and management is still
evaluating the preliminary output from models
that have been developed during this evaluative
phase. In addition, future levels of allowances
will also reflect new requirements to include
estimated credit losses on investment securities
classified as held-to-maturity, if any. The
Company has formed an Implementation
Committee, whose membership includes
representatives of senior management, to
develop plans that will encompass: (1) internal
methodology changes (2) data collection and
management activities, (3) internal
communication requirements, and (4) estimation
of the projected impact of this guidance. It has
been generally assumed that the conversion from
the incurred loss model, required under current
GAAP, to the CECL methodology will, more
likely than not, result in increases to the
allowances for credit losses at many financial
institutions. However, the amount of any change
in the allowance for credit losses resulting from
the new guidance will ultimately be impacted by
the provisions of this guidance as well as by the
loan and debt security portfolios composition
and asset quality at the adoption date, and
economic conditions and forecasts at the time of
adoption. The amendments in this Update should
be applied on a modified retrospective basis by
means of a cumulative-effect adjustment to the
opening retained earnings balance in the
statement of financial position as of the date that
an entity adopted the amendments in Update
2016-13.
Standard
Description
Financial Instruments—
Credit Losses (ASU 2019-11-
Codification Improvements to
Topic 326)
On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments, which introduced an expected credit loss model
for the impairment of financial assets measured at amortized cost basis. That
model replaces the probable, incurred loss model for those assets. Through the
amendments in that Update, the Board added Topic 326, Financial Instruments—
Credit Losses, and made several consequential amendments to the
Codification. The Board has an ongoing project on its agenda for improving the
Codification or correcting its unintended application. The items addressed in that
project generally are not expected to have a significant effect on current
accounting practice or create a significant administrative cost for most entities.
The amendments in this Update are similar to those items. However, the Board
decided to issue a separate Update for improvements to the amendments in
Update 2016-13 to increase stakeholder awareness of those amendments and to
expedite the improvement process. The amendments include items brought to the
Board's attention by stakeholders.
The amendments in this Update clarify or address stakeholders' specific issues
about certain aspects of the amendments in Update 2016-13 as described below:
1. Expected Recoveries for Purchased Financial Assets with Credit Deterioration
(PCDs): The amendments clarify that the allowance for credit losses for PCD
assets should include in the allowance for credit losses expected recoveries of
amounts previously written off and expected to be written off by the entity and
should not exceed the aggregate of amounts of the amortized cost basis
previously written off and expected to be written off by an entity. In addition,
the amendments clarify that when a method other than a discounted cash flow
method is used to estimate expected credit losses, expected recoveries should not
include any amounts that result in an acceleration of the noncredit discount. An
entity may include increases in expected cash flows after acquisition.
2. Transition Relief for Troubled Debt Restructurings (TDRs): The amendments
provide transition relief by permitting entities an accounting policy election to
adjust the effective interest rate on existing TDRs using prepayment assumptions
on the date of adoption of Topic 326 rather than the prepayment assumptions in
effect immediately before the restructuring.
3. Disclosures Related to Accrued Interest Receivables: The amendments extend
the disclosure relief for accrued interest receivable balances to additional relevant
disclosures involving amortized cost basis.
4. Financial Assets Secured by Collateral Maintenance Provisions: The
amendments clarify that an entity should assess whether it reasonably expects the
borrower will be able to continually replenish collateral securing the financial
asset to apply the practical expedient. The amendments clarify that an entity
applying the practical expedient should estimate expected credit losses for any
difference between the amount of the amortized cost basis that is greater than the
fair value of the collateral securing the financial asset (that is, the unsecured
portion of the amortized cost basis). An entity may determine that the expectation
of nonpayment for the amount of the amortized cost basis equal to the fair value
of the collateral securing the financial asset is zero.
5. Conforming Amendment to Subtopic 805-20: The amendment to Subtopic
805-20, Business Combinations—Identifiable Assets and Liabilities, and Any
Noncontrolling Interest, clarifies the guidance by removing the cross-reference to
Subtopic 310-30 in paragraph 805-20-50-1 and replacing it with a cross-reference
to the guidance on PCD assets in Subtopic 326-20.
- 87 -
Standard
Description
Required Date
Effect on Consolidated Financial
Reference Rate Reform (ASU
2020-04- Facilitation of the
Effects of Reference Rate
Reform on Financial
Reporting)
The amendments provide optional expedients and exceptions for applying
generally accepted accounting principles (GAAP) to contracts, hedging
relationships, and other transactions affected by reference rate reform. The
amendments apply only to contracts, hedging relationships, and other
transactions that reference LIBOR or another reference rate expected to be
discontinued because of reference rate reform. The amendments (1) apply to
contract modifications that replace a reference rate affected by reference rate
reform, (2) provide exceptions to existing guidance related to changes to the
critical terms of a hedging relationship due to reference rate reform (3) provide
optional expedients for fair value hedging relationships, cash flow hedging
relationships, and net investment hedging relationships, and (4) provide a
onetime election to sell, transfer, or both sell and transfer debt securities
classified as held to maturity that reference a rate affected by reference rate
reform and that are classified as held to maturity before January 1, 2020.
of Implementation
The amendments in this
Update are effective for all
entities as of March 12,
2020 through December 31,
2022.
Statements
The amendments for contract modifications can
be elected to be applied as of any date from the
beginning of an interim period that includes or is
subsequent to March 12, 2020, or prospectively
from a date within an interim period that
includes or is subsequent to March 12, 2020. The
amendments for existing hedging relationships
can be elected to be applied as of the beginning
of the interim period that includes March 12,
2020 and to new eligible hedging relationships
entered into after the beginning of the interim
period that includes March 12, 2020. The
Company does not expect that the guidance will
have a material effect on its consolidated
statements of condition or income.
Standard
Description
Required Date
Effect on Consolidated Financial
Debt (ASU 2020-06- Debt
with Conversion and Other
Options (Subtopic 470-20)
and Derivatives and Hedging
— Contracts in Entity's Own
Equity (Subtopic 815-40)
of Implementation
The amendments in this
update are effective for
public business entities,
excluding entities eligible to
be smaller reporting
companies as defined by the
SEC, for fiscal years
beginning after December
15, 2021, including interim
periods within those fiscal
years. For all other entities,
the amendments are
effective for fiscal years
beginning after December
15, 2023, including interim
periods within those fiscal
years. Early adoption is
permitted, but no earlier than
fiscal years beginning after
December 15, 2020,
including interim periods
within those fiscal years.
The Board specified that an
entity should adopt the
guidance as of the beginning
of its annual fiscal year.
Statements
The amendments can be applied either on a
modified retrospective method of transition or a
fully retrospective method of transition. In
applying the modified retrospective method, the
guidance should be applied to transactions
outstanding as of the beginning of the fiscal year
in which the amendments are adopted.
Transactions that were settled (or expired) during
prior reporting periods are unaffected. The
cumulative effect of the change should be
recognized as an adjustment to the opening
balance of retained earnings at the date of
adoption. If applying the fully retrospective
method of transition, the cumulative effect of the
change should be recognized as an adjustment to
the opening balance of retained earnings in the
first comparative period presented. The fair
value option is allowed to be irrevocably elected
for any financial instrument that is a convertible
security upon adoption of the amendments. The
Company has not yet determined which
transition method will be applied to the extent
that such transition adjustments are applicable.
The Company does not expect that the guidance
will have a material effect on its consolidated
statements of financial condition or income.
The amendments reduce the number of accounting models for convertible debt
instruments and convertible preferred stock. The amendments also reduce form-
over-substance-based guidance for the derivatives scope exception for contacts in
an entity’s own equity. For convertible instruments, embedded conversion
features no longer are separated from the host contract for convertible
instruments with conversion features that are not required to be accounted for as
derivatives, or that do not result in substantial premiums accounted for as paid-in
capital. Consequently, a convertible debt instrument will be accounted for as a
single liability measured at its amortized cost and a convertible preferred stock
will be accounted for as a single equity instrument measured at its historical cost,
as long as no other features require bifurcation and recognition as derivatives. By
removing those separation models, the interest rate of convertible debt
instruments typically will be closer to the coupon interest rate on the
instrument. The amendments also require certain changes to EPS calculations for
convertible instruments as well as additional disclosures relating to conditions
that cause conversion features to be met.
For contracts in an entity’s own equity, the amendments revise the derivatives
scope exception guidance as follows:
1. Remove the settlement in unregistered shares, collateral, and shareholder
rights conditions from the settlement guidance.
2. Clarify that payment penalties for failure to timely file do not preclude equity
classification.
3. Require instruments that are required to be classified as an asset or liability to
be measured subsequently at fair value, with changes reported in earnings and
disclosed in the financial statements. 4. Clarify that the scope of the disclosure
requirements in the Contracts in an Entity’s Own Equity section of the
Derivatives guidance applies only to freestanding instruments.
5. Clarify that the scope of the reassessment guidance in the Contracts in an
Entity’s Own Equity section of the Derivatives guidance applies to both
freestanding instruments and embedded features.
- 88 -
Standard
Description
Required Date
Effect on Consolidated Financial
Codification Improvements to
Subtopic 310-20, Receivables
—Nonrefundable Fees and
Other Costs (ASU 2020-08)
The amendments affect the guidance in Accounting Standards Update No. 2017-
08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20):
Premium Amortization on Purchased Callable Debt Securities. The amendments
in that Update shortened the amortization period for certain purchased callable
debt securities held at a premium by requiring that entities amortize the premium
associated with those callable debt securities within the scope of paragraph 310-
20-25-33 to the earliest call date. The Board noted in paragraph BC21 of Update
2017-08 that if the security contained additional future call dates, an entity
should consider whether the amortized cost basis exceeded the amount repayable
by the issuer at the next call date. If so, the excess should be amortized to the
next call date. The amendments in this ASU represent changes to clarify the
Codification. The amendments make the Codification easier to understand and
easier to apply by eliminating inconsistencies and providing clarifications.
of Implementation
For public business entities,
the amendments in this ASU
are effective for fiscal years,
and interim periods within
those fiscal years, beginning
after December 15, 2020.
Early application is not
permitted.
Statements
All entities should apply the amendments in this
ASU on a prospective basis as of the beginning
of the period of adoption for existing or newly
purchased callable debt securities. The Company
does not expect this guidance to have a material
effect on its consolidated statements of condition
or income.
Standard
Description
Required Date
Effect on Consolidated Financial
Reference Rate Reform,
Topic 848 (ASU 2021-01)
The amendments in this ASU clarify that certain optional expedients and
exceptions in Topic 848 for contract modifications and hedge accounting apply
to derivatives that are affected by the discounting transition. Specifically, certain
provisions in Topic 848, if elected by an entity, apply to derivative instruments
that use an interest rate for margining, discounting, or contract price alignment
that is modified as a result of reference rate reform. The amendments in this
Update apply to all entities that elect to apply the optional guidance in Topic 848.
of Implementation
The amendments in this
ASU are effective
immediately for all entities.
Statements
An entity may elect to apply the amendments in
this ASU on a full retrospective basis as of any
date from the beginning of an interim period that
includes or is subsequent to March 12, 2020, or
on a prospective basis to new modifications from
any date within an interim period that includes or
is subsequent to the date of the issuance of a final
ASU, up to the date that financial statements are
available to be issued. If an entity elects to apply
any of the amendments in this ASU for an
eligible hedging relationship, any adjustments as
a result of those elections must be reflected as of
the date the entity applies the election. The
amendments in this ASU do not apply to contract
modifications made after December 31, 2022,
new hedging relationships entered into after
December 31, 2022, and existing hedging
relationships evaluated for effectiveness in
periods after December 31, 2022, except for
hedging relationships existing as of December
31, 2022, that apply certain optional expedients
in which the accounting effects are recorded
through the end of the hedging relationship
(including periods after December 31,
2022). The Company does not expect that the
guidance will have a material effect on its
consolidated statements of condition or income.
- 89 -
NOTE 3: EARNINGS PER SHARE
The Company entered into a securities purchase agreement with Castle Creek Capital Partners VII, L.P. on May 8, 2019, pursuant to which the Company sold: (i)
shares of the Company’s common stock, par value $0.01 per share, at a purchase price of $14.25 per share; (ii) shares of a new series of preferred stock, Series B
convertible perpetual preferred stock, par value $0.01 per share, at a purchase price of $14.25 per share; and (iii) a warrant, with an approximate fair value of
$373,000, to purchase 125,000 shares of common stock at an exercise price equal to $14.25 per share, in a Private Placement transaction. As a result of the securities
purchase agreement, the Company has common stock, preferred stock and a warrant that are all eligible to participate in dividends equal to the common stock
dividends on a per share basis. Securities that participate in dividends, such as the Company’s preferred stock and warrant, are considered “participating
securities.” The Company calculates net income available to common shareholders using the two-class method required for capital structures that include
participating securities.
In applying the two-class method, basic net income per share was calculated by dividing net income (less any dividends on participating securities) by the weighted
average number of shares of common stock and participating securities outstanding for the period. Diluted earnings per share may include the additional effect of
other securities, if dilutive, in which case the dilutive effect of such securities is calculated by applying either the two-class method or the Treasury Stock method to
the assumed exercise or vesting of potentially dilutive common shares. The method yielding the more dilutive result is ultimately reported for the applicable period.
Potentially dilutive common stock equivalents primarily consist of employee stock options and restricted stock units. Unallocated common shares held by the ESOP
are not included in the weighted average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be
released to plan participants.
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 175,996 and -0- for the years ended 2020 and 2019, respectively.
The following table sets forth the calculation of basic and diluted earnings per share.
(In thousands, except per share data)
Net income attributable to Pathfinder Bancorp, Inc.
Convertible preferred stock dividends
Warrant dividends
Undistributed earnings allocated to participating securities
Net income available to common shareholders
Basic weighted average common shares outstanding
Effect of assumed exercise of stock options and unvested restricted stock units
Diluted weighted average common shares outstanding
Basic earnings per common share
Diluted earnings per common share
- 90 -
$
$
$
$
Years ended
December 31,
2020
6,950
291
30
1,224
5,405
$
$
4,608
-
4,608
1.17
1.17
$
$
2019
4,276
208
23
467
3,578
4,464
-
4,464
0.80
0.80
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, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
6,428 $
23,235
12,393
8,572
24,856
26,776
24,662
126,922
206
206
127,128 $
1,000 $
16,482
36,441
18,414
11,807
24,482
62,598
171,224 $
$
$
$
$
- 91 -
12 $
538
275
39
355
149
384
1,752
-
-
1,752 $
2 $
527
1,101
217
475
850
902
4,074 $
(24) $
(20)
-
(4)
-
(461)
(110)
(619)
-
-
(619) $
- $
(58)
(7)
(176)
-
(1)
(121)
(363) $
6,416
23,753
12,668
8,607
25,211
26,464
24,936
128,055
206
206
128,261
1,002
16,951
37,535
18,455
12,282
25,331
63,379
174,935
(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, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
$
$
$
16,850 $
1,735
12,347
13,190
19,012
31,320
16,767
111,221
206
206
111,427 $
1,998 $
8,534
25,779
23,099
13,715
19,607
30,256
122,988 $
- $
1
230
61
56
35
97
480
-
-
480 $
2 $
124
584
101
247
300
35
1,393 $
(30) $
-
(23)
(19)
(88)
(570)
(43)
(773)
-
-
(773) $
- $
(4)
(29)
(115)
(3)
(29)
(53)
(233) $
16,820
1,736
12,554
13,232
18,980
30,785
16,821
110,928
206
206
111,134
2,000
8,654
26,334
23,085
13,959
19,878
30,238
124,148
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, 2020, the Company also held a total of 54 private-label mortgage-backed securities or
collateralized mortgage obligations with an aggregate book balance of $87.3 million and 22 private-label asset backed securities collateralized by consumer loans
with an aggregate book balance of $27.0 million. At December 31, 2019, the Company held a total of 33 private-label mortgage-backed securities or collateralized
mortgage obligations with an aggregate book balance of $47.0 million and 23 private-label asset backed securities collateralized by consumer loans with an aggregate
book balance of $36.3 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.
- 92 -
The amortized cost and estimated fair value of debt investments at December 31, 2020 by contractual maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
(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
530 $
Estimated
Fair Value
531 $
$
8,875
13,116
28,107
50,628
24,856
26,776
24,662
126,922 $
9,086
13,197
28,630
51,444
25,211
26,464
24,936
128,055
$
$
Amortized
Cost
1,672 $
17,639
29,619
23,407
72,337
11,807
24,482
62,598
171,224 $
Estimated
Fair Value
1,680
18,385
30,248
23,630
73,943
12,282
25,331
63,379
174,935
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
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, 2020
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
-
2
-
2
3
8 $
3 $
4
4
-
1
4
16 $
-
- $
2,521
(20)
-
-
2,487
(2)
-
-
6,974
(45)
(78)
8,071
(145) $ 20,053
7,063
(58) $
3,775
(7)
4,209
(36)
-
-
1,496
(1)
(115)
6,442
(217) $ 22,985
- 93 -
1 $
-
-
1
-
2
4
8 $
- $
-
3
-
-
1
4 $
(24) $
-
-
(2)
-
(416)
(32)
4,954
-
-
80
-
5,683
2,574
(474) $ 13,291
- $
-
(140)
-
-
(6)
(146) $
-
-
4,683
-
-
780
5,463
1 $
1
-
3
-
4
7
16 $
3 $
4
7
-
1
5
20 $
4,954
(24) $
2,521
(20)
-
-
2,567
(4)
-
-
12,657
(461)
(110)
10,645
(619) $ 33,344
7,063
(58)
3,775
(7)
8,892
(176)
-
-
1,496
(1)
(121)
7,222
(363) $ 28,448
(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, 2019
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
4 $
5
1
3
10
10
2
30 $
1 $
1
2
6
-
2
6
17 $
(30) $ 16,820
5,213
(76)
786
(23)
5,211
(7)
10,709
(77)
15,791
(67)
3,818
(7)
(211) $ 53,135
982
(8) $
3,027
(4)
2,974
(29)
11,091
(115)
-
-
4,907
(29)
(49)
9,396
(226) $ 31,395
- $
26
-
1
4
10
5
20 $
3 $
-
-
-
1
-
2
3 $
-
- $
14,206
(526)
-
-
594
(12)
2,543
(11)
10,034
(503)
(36)
3,959
(562) $ 17,130
(27) $
-
-
-
(3)
-
(4)
(7) $
2,970
-
-
-
198
-
1,132
1,330
4 $
31
1
4
14
20
7
50 $
4 $
1
2
6
1
2
8
20 $
(30) $
(602)
(23)
(19)
(88)
(570)
(43)
(773) $
(35) $
(4)
(29)
(115)
(3)
(29)
(53)
(233) $
Fair
Value
16,820
19,419
786
5,805
13,252
25,825
7,777
70,265
3,952
3,027
2,974
11,091
198
4,907
10,528
32,725
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 investment securities within the portfolio as of December 31, 2020 represents OTTI. There were a
total of eight securities classified as available-for-sale (aggregate amortized historical cost of $13.8 million, unrealized aggregate loss of $474,000, or -3.4%) and four
securities classified as held-to-maturity (aggregate amortized historical cost of $5.6 million, unrealized aggregate loss of $146,000, or -2.6%) that were in an
unrealized loss position for 12 months or longer at December 31, 2020.
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 expected accelerated prepayments and/or residual fixed income securities market dislocations stemming from the pandemic. In
substantially all cases, price improvement in future months is expected as the issuances approach maturity. The significant declines in general interest rates during
2020, has supported substantial price improvement across the entirety of the investment portfolio since March of 2020 and this trend continued through year end 2020.
This trend favorably affected market values of the majority of the securities listed below.
Of the total of 12 securities in an unrealized loss position for 12 months or more at December 31, 2020, three securities, representing 57.2% 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 GSE’s and consist of mortgage-backed securities,
collateralized mortgage obligations and direct agency financings. These positions in US government agency and GSE’s are deemed to have no credit impairment,
thus, the disclosed unrealized losses relate primarily to changes in prepayment assumptions related to significantly lower general interest rates resulting from the
economic effects of the pandemic.
- 94 -
In addition to these three securities, the Company held the following nine non-government-issued/backed securities that were in an unrealized loss position for 12 or
more months at December 31, 2020:
•
•
•
•
•
•
One privately-issued asset-backed security, collateralized by small business loans and categorized as available-for-sale, with an amortized historical cost of
$82,000 and an aggregate market value of $80,000 (unrealized loss of $2,000 or -2.2%). This security maintains a credit rating established by one or more
NRSRO above the minimum level required to be considered as investment grade and therefore, no credit-related OTTI is deemed to be present.
Four privately-issued collateralized mortgage obligation securities, collateralized by residential and commercial mortgage loans and categorized as
available-for-sale, with an aggregate amortized historical cost of $2.6 million and an aggregate market value of $2.6 million (unrealized aggregate loss of
$32,000 or -1.2%). These securities were not rated at the time of their issuances by any NRSRO but each security remains significantly collateralized
through subordination and other credit enhancements. Therefore, no credit-related OTTI is deemed to be present.
One privately-issued asset-backed security, categorized as held-to-maturity and collateralized by small business loans, with an aggregate amortized
historical cost of $955,000 and a market value of $938,000 (unrealized loss of $17,000 or -1.8%). This security was not rated at the time of its issuance by
any NRSRO but remains significantly collateralized through subordination. Therefore, no credit-related OTTI is deemed to be present.
One privately-issued asset-backed security, categorized as held-to-maturity and collateralized by private-issue student loans, with an aggregate amortized
historical cost of $1.9 million and an aggregate market value of $1.8 million (unrealized loss of $122,000 or -6.3%). This security was unrated at issuance
but remains sufficiently collateralized through subordination. Therefore, no credit-related OTTI is deemed to be present.
One privately-issued asset-backed security, categorized as held-to-maturity and collateralized by federally-insured student loans, with an aggregate
amortized historical cost of $1.9 million and an aggregate market value of $1.9 million (unrealized loss of $1,000 or -0.1%). This security maintains a
credit rating established by one or more NRSRO above the minimum level required to be considered as investment grade and therefore, no credit-related
OTTI is deemed to be present.
One privately-issued collateralized mortgage obligation security, collateralized by residential mortgage loans and categorized as held-to-maturity, with an
aggregate amortized historical cost of $786,000 and a market value of $780,000 (unrealized loss of $6,000 or -0.8%). This security maintains a credit rating
established by one or more NRSRO above the minimum level required to be considered as investment grade and therefore, no credit-related OTTI is
deemed to be present.
All other securities with market values less than their amortized historical costs for twelve or more months are issued by United States agencies or government
sponsored enterprises and consist of mortgage-backed securities, collateralized mortgage obligations and direct agency financings. These positions in US government
agency and government-sponsored enterprises are deemed to have no credit impairment, thus, the disclosed unrealized losses relate directly to changes in interest rates
subsequent to the acquisition of the individual securities. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be
required to sell these securities prior to the recovery of the amortized cost.
Proceeds of $29.3 million and $103.0 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 losses on investments
$
$
2020
1,107 $
(31)
1,076 $
2019
707
(378)
329
As of December 31, 2020 and December 31, 2019, securities with a fair value of $96.4 million and $92.4 million, respectively, were pledged to collateralize certain
municipal deposit relationships. As of the same dates, securities with a fair value of $13.2 million and $21.3 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.
- 95 -
NOTE 5: LOANS
Major classifications of loans are as follows:
(In thousands)
Residential mortgage loans:
1-4 family first-lien residential mortgages
Construction
Loans held-for-sale (1)
Total residential mortgage loans
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Paycheck Protection Program loans
Tax exempt loans
Total commercial loans
Consumer loans:
Home equity and junior liens
Other consumer
Total consumer loans
Total loans
Net deferred loan (fees) costs
Less allowance for loan losses
Loans receivable, net
December 31,
2020
December 31,
2019
$
$
227,185 $
6,681
1,526
235,392
286,271
49,103
78,629
60,643
7,166
481,812
38,624
70,905
109,529
826,733
(1,238)
(12,777)
812,718 $
209,559
3,963
35,790
249,312
254,257
58,617
82,092
-
8,067
403,033
46,389
82,607
128,996
781,341
110
(8,669)
772,782
(1) Based on ASC 948, Mortgage Banking, loans shall be classified as held-for-sale once a decision has been made to sell the loans and shall be transferred to the
held-for-sale category at lower of cost or fair value. At December 31, 2020, the loans under contract to be sold had a principal balance of $1.5 million. These
loans were transferred at their amortized cost of $1.5 million as of December 31, 2020, as the fair value of these loans was greater than the amortized cost. At
December 31, 2019, the loans under contract to be sold had a principal balance of $35.8 million. These loans were transferred at their amortized cost of $35.9
million as of December 31, 2019, as the fair value of these loans was greater than the amortized cost.
- 96 -
Although the Bank may sometimes purchase or fund loan participation interests outside of its primary market areas, the Bank generally originates residential
mortgage, commercial, and consumer loans largely to customers throughout Oswego and Onondaga counties. Although the Bank has a diversified loan portfolio, a
substantial portion of its borrowers’ abilities to honor their loan contracts is dependent upon the counties’ employment and economic conditions.
As part of the Company’s overall balance sheet management strategies and the management’s ongoing efforts to profitably deploy its increased capital position
following the equity sales transactions completed in May 2019, the Bank acquired eleven diverse pools of loans, originated by unrelated third parties, in six separate
transactions during 2019 and two separate transactions during 2020. The purchase of participations in loans that are originated by third parties only occurs after the
completion of thorough pre-acquisition due diligence. Loans in which the Company acquires a participating interest are determined to meet, in all material respects,
the Company’s internal underwriting policies, including credit and collateral suitability thresholds, prior to acquisition. In addition, the financial condition of the
originating entity, which are generally retained as the ongoing loan servicing provider for participations acquired by the Bank, are analyzed prior to the acquisition of
the participating interests and monitored on a regular basis thereafter for the life of those interests.
(In thousands, except number of loans)
Purchased residential real estate loans
Original Balance
Current Balance
Unamortized Premium
Percent Owned
Number of Loans
Maturity range
Cumulative net charge-offs
Purchased other commercial and industrial loans
Original Balance
Current Balance
Unamortized Premium
Percent Owned
Number of Loans
Maturity range
Cumulative net charge-offs
Purchased home equity lines of credit:
Original Balance
Current Balance
Unamortized Premium
Percent Owned
Number of Loans
Maturity range
Cumulative net charge-offs
Purchased automobile loans:
Original Balance
Current Balance
Unamortized Premium
Percent Owned
Number of Loans
Maturity range
Cumulative net charge-offs
December 31,
2020
December 31,
2019
$
$
4,300
4,300
273
100%
51
17-25 years
-
2,100
2,100
135
100%
25
22-24 years
-
6,800
5,500
-
100%
39
5-9 years
-
21,900
13,900
309
100%
275
3-29 years
-
50,400
17,000
602
90%
1,257
0-6 years
230
6,800
6,600
-
100%
43
6-10 years
-
21,900
20,100
390
100%
376
4-30 years
-
50,400
27,200
930
90%
1,657
0-6 years
196
- 97 -
Purchased unsecured consumer loan pool 1:
Original Balance
Current Balance
Unamortized Premium
Percent Owned
Number of Loans
Maturity range
Cumulative net charge-offs
Purchased unsecured consumer loan pool 2:
Original Balance
Current Balance
Unamortized Premium
Percent Owned
Number of Loans
Maturity range
Cumulative net charge-offs
Purchased unsecured consumer loan pool 3:
Original Balance
Current Balance
Unamortized Premium
Percent Owned
Number of Loans
Maturity range
Cumulative net charge-offs
Purchased unsecured consumer loan pool 4:
Original Balance
Current Balance
Unamortized Discount
Percent Owned
Number of Loans
Maturity range
Cumulative net charge-offs
5,400
3,600
-
100%
76
3-6 years
-
26,600
15,400
63
59%
2,246
2-4 years
-
10,300
5,500
138
100%
2,958
0-6 years
-
14,500
14,500
2,124
68%
619
25 years
-
5,400
5,000
-
100%
87
4-7 years
-
26,600
25,800
114
59%
2,768
3-5 years
-
10,300
10,300
245
100%
4,259
0-7 years
-
-
-
-
-
-
-
-
As of December 31, 2020 and December 31, 2019, residential mortgage loans with a carrying value of $115.6 million and $136.9 million, respectively, have been
pledged by the Company to the Federal Home Loan Bank of New York (“FHLBNY”) under a blanket collateral agreement to secure the Company’s line of credit and
term borrowings.
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 also a means of managing risk associated with fluctuations in economic conditions. Homogenous pools of purchased loans are subject to substantial prepurchase
analyses led by a team of the Bank’s senior executives and credit analysts. In each case, the Bank’s analytical processes consider the types of loans being evaluated,
the underwriting criteria employed by the originating entity, the historical performance of such loans, especially in the most recent deeply recessionary environments,
the collateral enhancements and other credit loss mitigation factors offered by the seller and the capabilities and financial stability of the servicing entities
involved. From a credit risk perspective, these loan pools also benefit from broad diversification, including wide geographic dispersion, the readily-verifiable
historical performance of similar loans issued by the originators, as well as the overall experience and skill of the underwriters and servicing entities involved as
counterparties to the Bank in these transactions. The performance of all purchased loan pools are monitored regularly from detailed reports and remittance
reconciliations provided at least monthly by the servicing entities.
- 98 -
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. First and second lien residential mortgages, acquired via purchase are impacted by general
economic conditions, unemployment rates in the general areas in which the loan collateral is located, real estate values in those areas 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 68% of the portfolio in 2020, similar to the composition in
2019, where such loans represented 70% 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.
4.
5.
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.
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
- 99 -
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.
6.
7.
8.
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.
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
Loans held-for-sale
Total residential mortgage loans
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Paycheck Protection Program loans
Tax exempt loans
Total commercial loans
Consumer loans:
Home equity and junior liens
Other consumer
Total consumer loans
Total loans
As of December 31, 2020
Special
Mention
1,151 $
-
-
1,151
9,541
5,132
4,770
-
-
19,443
54
104
158
20,752 $
Substandard
Doubtful
Total
3,196 $
-
-
3,196
8,615
3,154
8,153
-
-
19,922
411
218
629
23,747 $
452 $
-
-
452
379
84
265
-
-
728
233
81
314
1,494 $
227,185
6,681
1,526
235,392
286,271
49,103
78,629
60,643
7,166
481,812
38,624
70,905
109,529
826,733
$
$
Pass
222,386 $
6,681
1,526
230,593
267,736
40,733
65,441
60,643
7,166
441,719
37,926
70,502
108,428
780,740 $
- 100 -
(In thousands)
Residential mortgage loans:
1-4 family first-lien residential mortgages
Construction
Loans held-for-sale
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
Nonaccrual and Past Due Loans
As of December 31, 2019
Pass
205,554 $
3,963
35,790
245,307
238,288
50,396
72,653
8,067
369,404
45,414
82,252
127,666
742,377 $
$
$
Special
Mention
1,093 $
-
-
1,093
12,473
7,945
8,473
-
28,891
191
167
358
30,342 $
Substandard
Doubtful
Total
1,731 $
-
-
1,731
3,194
276
923
-
4,393
477
188
665
6,789 $
1,181 $
-
-
1,181
302
-
43
-
345
307
-
307
1,833 $
209,559
3,963
35,790
249,312
254,257
58,617
82,092
8,067
403,033
46,389
82,607
128,996
781,341
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
Loans held-for-sale
Total residential mortgage loans
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Paycheck Protection Program loans
Tax exempt loans
Total commercial loans
Consumer loans:
Home equity and junior liens
Other consumer
Total consumer loans
Total loans
As of December 31, 2020
30-59 Days
Past Due
and Accruing
60-89 Days
Past Due
and Accruing
90 Days
and
Over
Total
Past Due
Current
Total Loans
Receivable
$
$
1,250 $
-
-
1,250
480
734
441
170
-
1,825
248
443
691
3,766 $
- 101 -
570 $
-
-
570
913
1,870
1,717
-
-
4,500
78
252
330
5,400 $
1,098 $
-
-
1,098
2,511
194
1,691
-
-
4,396
473
187
660
6,154 $
2,918 $
-
-
2,918
224,267 $
6,681
1,526
232,474
3,904
2,798
3,849
170
-
10,721
282,367
46,305
74,780
60,473
7,166
471,091
799
882
1,681
15,320 $
37,825
70,023
107,848
811,413 $
227,185
6,681
1,526
235,392
286,271
49,103
78,629
60,643
7,166
481,812
38,624
70,905
109,529
826,733
(In thousands)
Residential mortgage loans:
1-4 family first-lien residential mortgages
Construction
Loans held-for-sale
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, 2019
30-59 Days
Past Due
and Accruing
60-89 Days
Past Due
and Accruing
90 Days
and
Over
Total
Past Due
Current
Total Loans
Receivable
$
$
947 $
-
-
947
953
4,464
2,747
-
8,164
315
335
650
9,761 $
744 $
-
-
744
100
25
315
-
440
130
50
180
1,364 $
1,613 $
-
-
1,613
2,271
68
591
-
2,930
480
151
631
5,174 $
3,304 $
-
-
3,304
206,255 $
3,963
35,790
246,008
3,324
4,557
3,653
-
11,534
250,933
54,060
78,439
8,067
391,499
925
536
1,461
16,299 $
45,464
82,071
127,535
765,042 $
209,559
3,963
35,790
249,312
254,257
58,617
82,092
8,067
403,033
46,389
82,607
128,996
781,341
Year-end nonaccrual loans, segregated by class of loan, were as follows:
(In thousands)
Residential mortgage loans:
1-4 family first-lien residential mortgages
Total residential mortgage loans
Commercial loans:
Real estate
Lines of credit
Other commercial and industrial
Total commercial loans
Consumer loans:
Home equity and junior liens
Other consumer
Total consumer loans
Total nonaccrual loans
December 31,
2020
December 31,
2019
$
$
2,608 $
2,608
11,286
194
6,498
17,978
473
274
747
21,333 $
1,613
1,613
2,343
68
591
3,002
480
151
631
5,246
There were no loans past due ninety days or more and still accruing interest at December 31, 2020 or 2019.
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.
- 102 -
The table below details loans that had been modified as TDRs for the year ended December 31, 2020.
(In thousands)
Commercial real estate loans
Commercial and industrial loans
For the year ended December 31, 2020
Pre-modification
outstanding
recorded
investment
Post-modification
outstanding
recorded
investment
Additional
provision
for loan
losses
Number of loans
1 $
2
1,234 $
397
1,234 $
427
-
129
The TDR's evaluated for impairment for the year ended December 31, 2020 have been classified as TDRs due to economic concessions granted, which include
reductions in the stated interest rates or an extended maturity date that will result in a delay in payment from the original contractual maturity.
The table below details loans that have been modified as TDRs for the year ended December 31, 2019.
(In thousands)
Residential real estate loans
For the year ended December 31, 2019
Pre-modification
outstanding
recorded
investment
Post-modification
outstanding
recorded
investment
Additional
provision
for loan
losses
Number of loans
1 $
205 $
250 $
-
The TDR evaluated for impairment for the year ended December 31, 2019 has been classified as a TDR due to economic concessions granted, which consisted of
additional funds advanced without associated increases in collateral and an extended maturity date that will result in a delay in payment from the original contractual
maturity.
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, 2020, which had subsequently defaulted during the year
ended December 31, 2020.
The Company had no loans that had been modified as TDRs during the twelve months prior to December 31, 2019, which had subsequently defaulted during the year
ended December 31, 2019.
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.
- 103 -
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
Other consumer
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
Other consumer
Total:
1-4 family first-lien residential mortgages
Commercial real estate
Commercial lines of credit
Other commercial and industrial
Home equity and junior liens
Other consumer
Totals
December 31, 2020
December 31, 2019
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
$
665 $
11,053
-
5,114
75
81
665 $
11,136
-
5,132
75
81
1,182
1,729
925
1,864
142
-
1,847
12,782
925
6,978
217
81
22,830 $
1,182
1,729
925
1,864
142
-
1,847
12,865
925
6,996
217
81
22,931 $
- 104 -
$
- $
-
-
-
-
-
205
231
925
1,278
142
-
205
231
925
1,278
142
-
2,781 $
1,027 $
3,996
86
69
40
55
584
450
98
866
180
36
1,611
4,446
184
935
220
91
7,487 $
1,027 $
4,067
86
77
40
55
584
450
98
866
180
36
1,611
4,517
184
943
220
91
7,566 $
-
-
-
-
-
-
97
78
98
406
150
1
97
78
98
406
150
1
830
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
Other consumer
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
Other consumer
Total
$
$
- 105 -
2020
1,647
6,327
360
2,448
219
86
11,087
2020
75
360
67
191
6
6
705
$
$
$
$
2019
1,622
3,868
295
1,015
220
76
7,096
2019
62
190
16
66
11
7
352
NOTE 6: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 2020 and 2019 and information pertaining to the allocation of the allowance for loan losses
and balances of the allowance for loan losses and loans receivable based on individual and collective impairment evaluation by loan portfolio class at the indicated
dates are summarized in the tables below. An allocation of a portion of the allowance to a given portfolio class does not limit the Company’s ability to absorb losses
in another portfolio class.
(In thousands)
Allowance for loan losses:
Beginning Balance
Charge-offs
Recoveries
Provisions (credits)
Ending balance
Ending balance: related to loans
individually evaluated for impairment
Ending balance: related to loans
collectively evaluated for impairment
Loans receivables:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
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
$
$
$
$
580 $
(125)
2
474
931 $
205 $
726 $
December 31, 2020
Construction
Commercial
real estate
Commercial
lines of credit
Other
commercial
and industrial
Paycheck
Protection
Program
- $
-
-
-
- $
4,010 $
-
-
766
4,776 $
1,195 $
(101)
4
572
1,670 $
1,645 $
(121)
-
1,468
2,992 $
- $
231 $
925 $
1,278 $
- $
4,545 $
745 $
1,714 $
-
-
-
-
-
-
-
$
227,185 $
6,681 $
286,271 $
49,103 $
78,629 $
60,643
$
$
1,847 $
- $
12,782 $
925 $
6,978 $
-
225,338 $
6,681 $
273,489 $
48,178 $
71,651 $
60,643
Tax exempt
Home equity
and junior liens
Other
consumer
Unallocated (1)
553 $
(28)
29
185
739 $
413 $
(325)
66
969
1,123 $
272 $
-
-
273
545 $
Total
8,669
(700)
101
4,707
12,777
142 $
- $
- $
2,781
597 $
1,123 $
545 $
9,996
1 $
-
-
-
1 $
- $
1 $
7,166 $
38,624 $
70,905 $
1,526 $
826,733
- $
217 $
81 $
- $
22,830
7,166 $
38,407 $
70,824 $
1,526 $
803,903
$
$
$
$
$
$
$
(1) The ending balance of the loans receivable for the unallocated portion of the allowance includes loans held-for-sale. At December 31, 2020, the Bank had loans
held-for-sale with a principal balance of $1.5 million. These loans were still part of the portfolio as of December 31, 2020. Based on ASC 948, Mortgage
Banking, loans shall be classified as held-for-sale once a decision has been made to sell the loans and shall be transferred to the held-for-sale category at lower of
cost or fair value.
- 106 -
(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
766 $
(11)
2
(177)
580 $
97 $
483 $
December 31, 2019
Construction
Commercial
real estate
Commercial
lines of credit
Other
commercial
and industrial
- $
-
-
-
- $
- $
- $
3,578 $
-
-
432
4,010 $
730 $
(136)
-
601
1,195 $
1,285
(158)
1
517
1,645
78 $
98 $
406
3,932 $
1,097 $
1,239
209,559 $
3,963 $
254,257 $
58,617 $
82,092
1,611 $
- $
4,446 $
184 $
935
207,948 $
3,963 $
249,811 $
58,433 $
81,157
Tax exempt
Home equity
and junior liens
Other
consumer
Unallocated (1)
409 $
(7)
-
151
553 $
385 $
(354)
60
322
413 $
152 $
-
-
120
272 $
150 $
1 $
- $
830
403 $
412 $
272 $
7,839
Total
7,306
(666)
63
1,966
8,669
1 $
-
-
-
1 $
- $
1 $
8,067 $
46,389 $
82,607 $
35,790 $
781,341
- $
220 $
91 $
- $
7,487
8,067 $
46,169 $
82,516 $
35,790 $
773,854
(1)
The ending balance of the loans receivable for the unallocated portion of the allowance includes loans held-for-sale. At December 31, 2019, the Bank had loans held-for-sale
with a principal balance of $35.8 million. These loans were still part of the portfolio as of December 31, 2019. Based on ASC 948, Mortgage Banking, loans shall be
classified as held-for-sale once a decision has been made to sell the loans and shall be transferred to the held-for-sale category at lower of cost or fair value.
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.
- 107 -
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. As a result of the COVID-19 pandemic, the Company’s management extensively
reviewed a broad array of econometric projections and the potential effect of changes in those projections on anticipated loan performance. As a result, certain
qualitative factors were substantially modified during 2020 in order to determine the adequacy of the allowance for loan losses during the year and at December 31,
2020.
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
Other
Total
$
$
$
$
$
$
$
$
1-4 family
first-lien
residential
mortgage
205 $
88
638
931 $
December 31, 2020
Construction
Commercial
real estate
Commercial
lines of credit
- $
-
-
- $
231 $
80
4,465
4,776 $
925 $
92
653
1,670 $
Tax exempt
Home equity
and junior liens
Other
consumer
Unallocated
- $
-
1
-
1 $
142 $
325
272
-
739 $
- $
863
260
-
1,123 $
December 31, 2019
- $
-
-
545
545 $
1-4 family
first-lien
residential
mortgage
97 $
43
440
580 $
Construction
Commercial
real estate
Commercial
lines of credit
- $
-
-
- $
98 $
106
991
1,195 $
Other
commercial
and industrial
1,278
56
1,658
2,992
Total
2,781
1,504
7,947
545
12,777
Other
commercial
and industrial
406
34
1,205
1,645
78 $
98
3,834
4,010 $
$
Other
consumer
1
167
245
-
413 $
Unallocated
- $
-
-
272
272 $
Total
830
533
7,034
272
8,669
Tax exempt
Home equity
and junior liens
- $
-
1
-
1 $
150 $
85
318
-
553 $
- 108 -
NOTE 7: SERVICING
Loans serviced for others are not included in the accompanying consolidated statements of condition. At December 31, 2020 and 2019, the Bank serviced 501 and
195 residential mortgage loans for others, respectively. The unpaid principal balances of mortgage loans serviced for others were $52.9 million and $11.8 million at
December 31, 2020 and 2019, respectively. The balance of capitalized servicing rights included in other assets at December 31, 2020 and 2019, was $373,000 and
$19,000, 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
$
$
$
2020
407 $
54
2019
16
13
2020
2,063 $
21,794
17,364
500
41,721
19,457
22,264 $
2019
2,268
17,673
15,936
4,575
40,452
17,753
22,699
Depreciation expense in 2020 and 2019 was $1.7 million and $1.5 million, respectively.
NOTE 9: FORECLOSED REAL ESTATE
The Company is required to disclose the carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession of the
property at each reporting period. The Company had no foreclosed residential real estate at December 31, 2020 and 2019. At December 31, 2020 and 2019, the
Company reported $182,000 and $341,000, 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, 2020, $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.
In 2020, the Company retained expert, independent consultants to evaluate the Company’s recorded goodwill for impairment. The Company is permitted to assess
market-based, prospective analyses and other 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 assessments made by management, with input from the retained consultants, it was determined that the carrying value of
goodwill in the amount of $4.5 million is not impaired as of December 31, 2020.
The identifiable intangible asset of $133,000 as of December 31, 2020 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 4.7 years.
- 109 -
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,
2020
243 $
(110)
133 $
2019
243
(94)
149
$
$
The estimated amortization expense for each of the five succeeding years ended December 31, is as follows:
$
$
16
16
16
16
16
53
133
(In thousands)
2021
2022
2023
2024
2025
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, 2020, the scheduled maturities of time deposits are as follows:
(In thousands)
Year of Maturity:
2021
2022
2023
2024
2025
Thereafter
Total
$
$
2020
103,093 $
296,824
100,226
15,650
227,970
83,129
162,057
6,958
995,907 $
$
$
- 110 -
2019
81,926
301,193
120,450
14,388
185,402
64,533
107,501
6,500
881,893
334,868
9,078
3,906
2,719
44,945
1,534
397,050
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 and through other unaffiliated third-party financial institutions.
(In thousands)
Savings accounts
Time accounts
Time accounts of $250,000 or more
Money management accounts
MMDA accounts
Demand deposit interest-bearing
Demand deposit noninterest-bearing
Mortgage escrow funds
Total Deposits
NOTE 12: BORROWED FUNDS
Non-Brokered
Brokered
2020
103,093 $
126,851
100,226
15,650
227,970
83,129
162,057
6,958
825,934 $
- $
169,973
-
-
-
-
-
-
169,973 $
$
$
At December 31,
Total
103,093
296,824
100,226
15,650
227,970
83,129
162,057
6,958
995,907
$
$
Non-Brokered
Brokered
2019
81,926 $
190,685
94,455
14,388
185,356
64,533
107,501
6,500
745,344 $
- $
110,508
25,995
-
46
-
-
-
136,549 $
Total
81,926
301,193
120,450
14,388
185,402
64,533
107,501
6,500
881,893
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
2020
4,020 $
4,020 $
78,030 $
78,030 $
2019
25,138
25,138
67,987
67,987
$
$
$
$
The principal balances, interest rates and maturities of the outstanding long-term borrowings, all of which are at a fixed rate, at December 31, 2020 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
At December 31, 2020, scheduled repayments of long-term debt are as follows:
(In thousands)
2021
2022
2023
2024
2025
Total
Principal
Rates
$
$
$
25,969
18,227
33,834
78,030
78,030
1.74 - 3.10%
0.27 - 2.55%
0.34 - 3.17%
$
$
25,969
18,227
9,506
11,422
12,907
78,030
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
$115.6 million and FHLB stock with a carrying value of $4.4 million have been pledged by the Company under a blanket collateral agreement to secure the
Company’s borrowings at December 31, 2020. 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 $13.2 million line of credit available at December 31, 2020 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
- 111 -
$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 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 $124,000 and $213,000 in interest expense related to this issuance in 2020 and 2019, 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, 2020 and
2019. 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 (the 2015 Subordinated Loan) with an unrelated third party that is
scheduled to mature on October 1, 2025. The Company has the right to prepay the 2015 Subordinated Loan on the first day of any calendar quarter after October 15,
2020 without penalty. The annual interest rate charged to the Company will be 6.25% through the maturity date of the 2015 Subordinated Loan. The 2015
Subordinated Loan is senior in the Company’s credit repayment hierarchy only to the Company’s common equity and preferred stock 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 were amortized over
the life of the 2015 Subordinated Loan through its first call date using the effective interest method. The effective cost of funds related to this transaction was 6.44%
calculated under this method through October 15, 2020 and is and will be 6.25% thereafter until the stated maturity date. Interest expense, related to this borrowing,
of $650,000 and $650,000 was recorded in the years ended December 31, 2020 and 2019, respectively.
On October 14, 2020, the Company executed a private placement of $25.0 million of its 5.50% Fixed to Floating Rate non-amortizing Subordinated Loan (the “2020
Subordinated Loan”) to certain qualified institutional buyers and accredited institutional investors. The 2020 Subordinated Loan has a maturity date of October 15,
2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.50% per annum until October 15, 2025. Commencing on that date, the interest rate
applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three month Secured Overnight
Financing Rate (SOFR) plus 532 basis points, payable quarterly until maturity. The Company may redeem the 2020 Subordinated Loan at par, in whole or in part, at
its option, any time after October 15, 2025 (the first redemption date). The 2020 Subordinated Loan is senior in the Company’s credit repayment hierarchy only to the
Company’s common equity and preferred stock and, and any future senior indebtedness and is intended to qualify as Tier 2 capital for regulatory capital purposes for
the Company. The Company paid $783,000 in origination and legal fees as part of this transaction. These fees will be amortized over the life of the 2020
Subordinated Loan through its first redemption date using the effective interest method, giving rise to an effective cost of funds of 6.22% from the issuance date
calculated under this method. Accordingly, interest expense of $327,000 was recorded in the year ended December 31, 2020 related to this transaction.
The composition of subordinated loans at December 31 is as follows:
(In thousands)
Subordinated loans:
Junior subordinated debenture
Subordinated loan
Total subordinated loans
2020
5,155 $
34,245
39,400 $
$
$
- 112 -
2019
5,155
9,973
15,128
The principal balances, interest rates and maturities of the subordinated loans at December 31, 2020 are as follows:
Term
(Dollars in thousands)
Subordinated loans:
Due within 5 years
Due within 10 years
Due within 17 years
Total subordinated loans
At December 31, 2020, scheduled repayments of the subordinated loans:
Principal
Rates
$
$
10,000
24,245
5,155
39,400
6.44%
6.22%
3-Month Libor + 1.65%
(In thousands)
2021
2022
2023
2024
2025
Thereafter
Total
$
$
-
-
-
-
10,000
29,400
39,400
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 loss (gain)
Benefits paid
Benefit obligations at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Benefits paid
Plan participants' contribution
Employer contributions
Fair value of plan assets at end of year
Funded (unfunded) status - asset (liability)
Pension Benefits
Postretirement Benefits
2020
2019
2020
2019
$
11,892 $
10,095 $
-
466
-
873
(264)
12,967
16,985
2,553
(264)
-
-
19,274
6,307 $
-
494
-
1,558
(255)
11,892
14,522
2,718
(255)
-
-
16,985
5,093 $
$
414 $
-
16
9
(25)
(45)
369
-
-
(45)
9
36
-
(369) $
454
-
22
8
(27)
(43)
414
-
-
(43)
8
35
-
(414)
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 within
other liabilities on the statement of condition.
- 113 -
Amounts recognized in accumulated other comprehensive loss as of December 31 are as follows:
(In thousands)
Net loss
Tax Effect
Pension Benefits
Postretirement Benefits
$
$
2020
2,743 $
716
2,027 $
2019
3,557 $
929
2,628 $
2020
87 $
23
64 $
2019
117
31
86
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, 2020 and December 31, 2019. 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 3.45% at December 31, 2020.
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 3.45% at December 31, 2020.
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 $13.0 million and $11.9 million at December 31, 2020 and 2019, respectively. The
postretirement plan had an accumulated benefit obligation of $369,000 and $414,000 at December 31, 2020 and 2019, 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
2020
3.45%
-
2019
3.97%
-
Postretirement Benefits
2020
3.45%
-
2019
3.97%
-
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 4.50% for 2021, gradually decreasing to 4.20% in 2024 and remain
at that level thereafter.
The composition of the net periodic benefit plan (benefit) 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
Amortization of unrecognized past service liability
Net periodic benefit plan (benefit) cost
Pension Benefits
Postretirement Benefits
$
$
2020
- $
466
(1,094)
-
228
-
(400) $
2019
- $
494
(934)
-
328
-
(112) $
2020
- $
16
-
-
10
(5)
21 $
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
2020
3.45%
6.00%
-
2019
3.97%
6.50%
-
Postretirement Benefits
2020
3.45%
-
-
- 114 -
2019
-
22
-
-
12
(5)
29
2019
3.97%
-
-
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 6.0% expected long-term rate of return in
2020 and a 6.0% expected long-term rate of return in 2021 reflecting current economic conditions and expected rates of return. Based on the $19.3 million fair value
of plan assets at December 31, 2020, each 50 basis point decrease in the expected long-term rate of return would reduce after tax net income at 2021 expected
marginal tax rate of 26.1% by approximately $71,000.
The estimated net actuarial loss that will be amortized from accumulated other comprehensive loss into net periodic benefit plan income during 2021 is $101,000. The
estimated amortization of the unrecognized transition obligation and actuarial loss for the postretirement health plan in 2021 is $9,000. The expected net periodic
benefit plan benefit for 2021 is estimated to be $588,000 for both retirement plans in aggregate.
Plan assets are invested in three diversified investment portfolios of the Pentegra Retirement Trust (the “Trust”, formerly known as RSI Retirement Trust), a private
placement investment fund. 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 Total Return approach which seeks to fund the current and future liabilities of
the Plan via long-term growth in assets.
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 risks 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. The
ALT Strategy is designed to add diversification via the addition of relatively low correlation assets. Risk/volatility is further managed by the distinct investment
objectives of each of the Trust’s Portfolios.
- 115 -
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
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
Cash Equivalents-Money market*
Total
At December 31, 2020
Level 1
Level 2
Level 3
Total Fair
Value
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
39
39 $
1,830 $
1,813
1,194
356
498
403
261
684
268
2,543
9,850
2,497
3,746
2,968
9,211
174
19,235 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
1,830
1,813
1,194
356
498
403
261
684
268
2,543
9,850
2,497
3,746
2,968
9,211
213
19,274
At December 31, 2019
Level 1
Level 2
Level 3
Total Fair
Value
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
48
48 $
1,432 $
1,470
1,075
307
328
314
220
466
211
1,733
7,556
2,356
3,708
3,084
9,148
233
16,937 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
1,432
1,470
1,075
307
328
314
220
466
211
1,733
7,556
2,356
3,708
3,084
9,148
281
16,985
$
$
$
$
*Includes cash equivalents investments in equity and fixed income strategies
a)
b)
c)
d)
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.
- 116 -
e)
f)
g)
h)
i)
j)
k)
l)
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 small capitalization 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 invests primarily in medium to large non-US companies in developed and emerging markets. Under normal circumstances, at least 80% of
total assets will be invested in equity securities, including common stocks, preferred stocks, and convertible securities.
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.
For the fiscal year ending December 31, 2021, the Company expects to contribute approximately $36,000 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:
2021
2022
2023
2024
2025
Thereafter
Pension
Benefits
Postretirement
Benefits
Total
$
357 $
397
472
491
552
3,374
36 $
23
23
22
22
101
393
420
495
513
574
3,475
The Company also offers a 401(k) plan to its employees. Contributions to this plan by the Company were $395,000 and $393,000 for 2020 and 2019, respectively. In
addition, the Company made $293,000 and $291,000 of safe harbor contributions to the plan in 2020 and 2019, 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, 2020
and 2019, other liabilities include approximately $3.0 million and $2.8 million, respectively, relating to deferred compensation. Deferred compensation expense for
the years ended December 31, 2020 and 2019 amounted to approximately $359,000 and $349,000, respectively.
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, 2020 and 2019, the cash surrender values of these policies were $17.9 million and
$17.4 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
- 117 -
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, 2020 and 2019, other liabilities included $928,000 and $836,000, 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 vested ratably over five
years (20% per year for each year of the participant’s service with the Company) with an expiration date 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 vested ratably over five years (20% per year for each year of the participant’s service with the Company) with an expiration date 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 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 vest ratably over five years (20% per year for each year of the participant’s service with the Company) and will expire ten years from the date of
the grant, or April 2026. The fair value of each option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes
model 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 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;
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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 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 8.5 years: cash
dividend yield of 1.55%. Based upon these assumptions, the weighted average fair value of options granted was $3.59.
In September 2020, the board of directors of the Company approved the grant of 3,000 stock option awards to one officer. The awards vest ratably over three years
(approximately 33.3% 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 September
2030. 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 rate of 0.35%; volatility factors of the expected market price of the Company’s common stock of 0.21; weighted
average expected lives of the options of 6.0 years: cash dividend yield of 2.46%. Based upon these assumptions, the weighted average fair value of options granted
was $1.32.
In October 2020, the board of directors of the Company approved the grant of 9,000 stock option awards in total to two senior officers and four officers. The awards
vest ratably over three years (approximately 33.3% 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 October 2030. 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 rate of 0.45%; volatility factors of the expected market price of the Company’s common stock of
0.22; weighted average expected lives of the options of 6.0 years: cash dividend yield of 2.31%. Based upon these assumptions, the weighted average fair value of
options granted was $1.51.
In October 2020, the board of directors of the Company approved the grant of 39,668 stock option awards to one senior officer. The awards were split between
incentive stock option awards and non-qualified stock option awards as the result of the value of the stock option awards vesting each year. The Black-Scholes model,
for the 26,633 incentive stock option awards, used the following weighted average assumptions: risk-free rate of 0.45%; volatility factors of the expected market price
of the Company’s common stock of 0.25; weighted average expected lives of the options of 6.0 years: cash dividend yield of 2.31%. The Black-Scholes model, for the
13,035 non-qualified stock option awards, used the following weighted average assumptions: risk-free rate of 0.44%; volatility factors of the expected market price of
the Company’s common stock of 0.26; weighted average expected lives of the options of 5.9 years: cash dividend yield of 2.31%. Based upon these assumptions, the
weighted average fair value of the incentive stock options and the non-qualified stock options granted were $1.83 and $1.85, respectively.
Activity in the stock option plans is as follows:
Options Outstanding
Shares Exercisable
(Shares in thousands)
Outstanding at December 31, 2018
Granted
Newly vested
Exercised
Expired
Outstanding at December 31, 2019
Granted
Newly vested
Exercised
Expired
Outstanding at December 31, 2020
$
Number of
Shares
325
-
-
(21)
(1)
$
$
303
52
-
(34)
(1)
$
320
Weighted Average
Exercise Price
10.50
-
-
-
11.35
10.51
10.33
-
-
11.35
10.89
Number of
Shares
153
-
59
(21)
-
191
-
47
(34)
-
204
$
Weighted Average
Exercise Price
9.65
-
11.10
-
-
10.04
-
11.22
-
-
10.91
$
$
$
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
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value of the Company’s stock. At December 31, 2020, the intrinsic value of the stock options was $190,000. At December 31, 2019, the intrinsic value of the stock
options was $1.0 million.
At December 31, 2020, the average remaining contractual life of outstanding options and shares exercisable were 5.9 years and 5.1 years, respectively.
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 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 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.
In September 2020, the board of directors of the Company approved the grant of 1,000 restricted stock units to one officer. The units vest ratably over three years
(approximately 33.3% per year for each year of the participant’s service with the Company).
In October 2020, the board of directors of the Company approved the grant of 17,801 restricted stock units to three senior officers and four officers. The units vest
ratably over three years (approximately 33.3% per year for each year of the participant’s service with the Company).
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 $300,000 and $291,000 in 2020 and 2019, respectively, and is expected to record $250,000, $185,000 and $109,000
in 2021 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, 2020 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 $294,000 and $369,000 in compensation expense in 2020
and 2019, respectively, including $24,000 and $30,000 for dividends on unallocated shares in these same time periods. At December 31, 2020, there were 91,659
unearned ESOP shares with a fair value of $1.1 million.
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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
$
$
$
$
2020
2,600 $
(1,305)
1,295 $
2020
1,093 $
202
1,295 $
The components of the net deferred tax asset (liability), 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
Cash flow hedges
Other
Total
Liabilities:
Prepaid pension
Investment securities
Depreciation
Accretion
Intangible assets
Mortgage servicing rights
Prepaid expenses and transaction fees
Loan origination fees
Total
Less: deferred tax asset valuation allowance
Net deferred tax asset (liability)
2020
1,063 $
3,339
96
25
-
324
6
108
-
342
702
6,005
(1,648)
(296)
(1,860)
(164)
(1,004)
(98)
(115)
-
(5,185)
820
-
820 $
$
$
2019
1,181
(16)
1,165
2019
1,244
(79)
1,165
2019
970
2,266
108
22
77
-
14
101
22
-
587
4,167
(1,331)
-
(1,667)
(118)
(1,004)
(5)
(103)
(29)
(4,257)
(90)
(136)
(226)
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
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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.
Banking corporations operating in New York State are taxed under the New York State General Business Corporation Franchise Tax provisions. Under this New
York 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. Effective in January 2018, the Company adopted a modification methodology that
at the time was newly made available under the New York State tax code, affecting how the Company’s state income tax liability is computed. Under this adopted
methodology, management determined in the first quarter of 2019, it was unlikely that the Company would pay income taxes to New York State in future periods and
therefore in the quarter ended March 31, 2019, the Company established, through a charge to earnings, a valuation allowance in the amount of $136,000 in order to
reserve against deferred tax assets related to New York State income taxes. This valuation allowance against the value of those deferred tax assets was established to
reduce the net deferred tax asset related to New York State income taxes to $-0-. Management is continuously monitoring its future tax consequences to determine if
the Company’s deferred taxes are properly stated. In the first quarter of 2020, consistent with policy, management reviewed all facts and circumstances related to its
deferred taxes and determined that based on the expected filings of future New York State tax returns, the valuation allowance created in 2019 was no longer needed.
Therefore management elected to eliminate its New York State net deferred tax asset valuation allowance during the quarter ended March 31, 2020.
In the first quarter of 2021, the Company filed amended New York State tax returns for 2015 through 2017 (the “carryback years”). The returns were amended from
their original filings in order to file carryback claims utilizing New York State net operating losses generated under New York State tax law in 2018. As a result, the
Company expects to receive $316,000 in tax refunds from New York State for taxes previously paid in the carryback years. This anticipated refund has been applied
to the effective tax rate of the Company in 2020 in accordance with GAAP.
In 2020, the Company’s effective tax rate was 15.9%, as compared to 21.4% in 2019. 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
NYS net operating loss carryback filing receivable, net of federal benefit
Other
Effective income tax rate - Pathfinder Bancorp, Inc.
Minority interest
Effective income tax rate
- 122 -
2020
21.0 %
2.0
(0.9)
(1.1)
(1.6)
(3.8)
(0.1)
15.5 %
0.4
15.9 %
2019
21.0 %
(1.5)
(0.9)
(1.7)
2.5
-
1.9
21.3 %
0.1
21.4 %
NOTE 18: COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the consolidated statement of condition. The contractual amount of those commitments to extend credit reflects the extent of
involvement the Company has in this particular class of financial instrument. The Company’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit is represented by the contractual amount of the instrument. The Company uses the same credit policies in
making commitments as it does for on-balance sheet instruments.
At December 31, 2020 and 2019, 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
2020
58,217 $
102,404
6,103
2,450
2019
47,606
81,038
3,214
2,082
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, 2020 with variable interest rates and fixed interest rates amounted to approximately $149.6 million and $19.6 million,
respectively. 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.
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 $17.8 million as of December 31, 2020. 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, 2020, December 31, 2019 or December 31, 2018.
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, 2020, 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 levels of the following capital to risk-
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weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. The capital conservation buffer requirement is now fully implemented at 2.5% of
risk-weighted assets. At December 31, 2020, the Bank exceeded all regulatory required minimum capital ratios, including the capital buffer requirements.
As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies developed a “Community Bank Leverage Ratio”
(the ratio of a bank's tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank”
that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well
capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution's risk profile when evaluating whether it
qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies have set the Community Bank Leverage Ratio at
9%. Pursuant to the CARES Act, the federal banking agencies issued final rules to set the Community Bank Leverage Ratio at 8% beginning in the second quarter of
2020 through the end of 2020. Beginning in 2021, the Community Bank Leverage Ratio will increase to 8.5% for the calendar year. Community banks will have until
January 1, 2022, before the Community Bank Leverage Ratio requirement will return to 9%. A financial institution can elect to be subject to this new definition. The
new rule took effect on January 1, 2020. The Bank did not elect to become subject to the Community Bank Leverage Ratio.
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, 2020, 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 levels of the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. The
capital conservation buffer requirement is now fully implemented at 2.5% of risk-weighted assets. At December 31, 2020, the Bank exceeded all regulatory required
minimum capital ratios, including the capital buffer requirements.
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The Bank’s actual capital amounts and ratios as of December 31, 2020 and 2019 are presented in the following table.
(Dollars in thousands)
As of December 31, 2020:
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, 2019:
Total Core Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Tier 1 Common Equity (to Risk-Weighted Assets)
Tier 1 Capital (to Assets)
Minimum For
Capital Adequacy
Purposes
Minimum To Be
"Well-Capitalized"
Under Prompt
Corrective Provisions
Minimum for
Capital Adequacy
With Buffer
Actual
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 115,289
$ 104,287
$ 104,287
$ 104,287
13.13% $ 70,270
11.87% $ 52,703
11.87% $ 39,527
8.63% $ 48,314
8.00% $ 87,838
6.00% $ 70,270
4.50% $ 57,095
4.00% $ 60,392
10.00% $ 92,230
8.00% $ 74,662
6.50% $ 61,487
5.00% $ 60,392
10.50%
8.50%
7.00%
5.00%
$ 95,093
$ 86,424
$ 86,424
$ 86,424
12.28% $ 61,934
11.16% $ 46,451
11.16% $ 34,838
8.20% $ 42,175
8.00% $ 77,418
6.00% $ 61,934
4.50% $ 50,322
4.00% $ 52,719
10.00% $ 81,289
8.00% $ 65,805
6.50% $ 54,192
5.00% $ 52,719
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, 2020, 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 Federal Reserve Board regulations require banks to maintain non-interest-earning reserves on deposit at the Federal Reserve Bank (“FRB”), against their
transaction accounts (primarily negotiable order of withdrawal (“NOW”) and regular checking accounts). In March 2020, due to a change in in its approach to
monetary policy due to the COVID-19 pandemic, the Federal Reserve Board announced an interim rule to amend Regulation D requirements and reduce reserve
requirement ratios to zero. The Federal Reserve Board has indicated that it has no plans to re-impose reserve requirements, but may do so in the future. At December
31, 2019, the Bank held sufficient cash on hand to fully offset its reserve requirement and was therefore not required to maintain any additional reserve balances at the
FRB.
NOTE 21: INTEREST RATE DERIVATIVE
The Company is exposed to certain risks from both its business operations and economic conditions. The Company principally manages its exposures to a wide
variety of business and operational risks through the management of its core business activities. As part of the Company’s overall risk management processes, the
Company manages its economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of certain balance
sheet assets and liabilities. In the normal course of business, the Company also uses derivative financial instruments as an additional risk management tool. Financial
derivatives are recorded at fair value as other assets.
Among the array of interest rate derivative transactions potentially available to the Company are interest rate swaps. The Company uses interest rate swaps as part of
its interest rate risk management strategy. Interest rate swaps, designated as fair value hedges, involve the receipt of variable amounts from a counterparty in
exchange for the Company making fixed payments over the life of the agreements without the exchange of the underlying notional amount. The gain or loss on the
derivative as well as the offsetting gain of loss on the hedged item attributable to the hedged risk are recognized in earnings. The Company entered into a pay-
fixed/receive variable interest rate swap with a notional amount of $9.2 million in April 2019, which was designated as a fair value hedge associated with specific
pools within the Company’s fixed-rate consumer loan portfolio.
As of December 31, 2020 and 2019, the following amounts were recorded on the balance sheet related to the cumulative basis adjustments for fair value hedges:
- 125 -
Carrying Amount of the
Hedged Assets at
December 31, 2020
Cumulative Amount of Fair
Value Hedging Adjustment
Included in The Carrying
Amount of the Hedged
Assets at December 31,
2020
Carrying Amount of the
Hedged Assets at
December 31, 2019
Cumulative Amount of Fair
Value Hedging Adjustment
Included in The Carrying
Amount of the Hedged
Assets at December 31,
2019
(In thousands)
Line item on the balance sheet in which the hedged item is included:
Loans receivable (1)
12,944
$
$
53 $
19,254 $
75
(1) These amounts include the amortized cost basis of the closed portfolio used to designate the hedging relationship in which the hedged item is the remaining
amortized cost of the last layer expected to be remaining at the end of the hedging relationship. At December 31, 2020 and December 31, 2019, the amortized
cost of the basis of the closed portfolio used in the hedging relationship was $12.9 million and $19.3 million, the cumulative basis adjustment associated with the
hedging relationship was $53,000 and $75,000, and the amount of the designated hedged item was $9.2 million and $9.2 million, respectively.
At December 31, 2020 and December 31, 2019, the fair value of the derivative resulted in a net liability position of $55,000 and $92,000 under the agreement,
recorded by the Company in other liabilities. The Company’s participation in the swap contract reduced total loan interest income, recognized in consolidated
earnings, by $305,000 and $10,000 for years ended December 31, 2020 and December 31, 2019, respectively.
In February 2020, the Company entered into an interest rate cap contract in the notional amount of $40.0 million, intended to reduce the Company’s exposure to
potential rising interest rates. This contractual agreement has been designated as a cash flow hedge with changes in the fair value of the contract, net of changes in the
fair value of the designated hedged liability (certain short-term certificates of deposit with rates of interest that are highly correlated to the 3-month LIBOR index)
being accounted for through other comprehensive income. The term of the cap contract will commence on May 1, 2020 and expire on May 1, 2023. The Company
paid $228,000 in a one-time premium for the cap contract and has no further contractual obligations to the counterparty over the three-year life of the contract. The
premium will be amortized ratably over the contractual term of the cap contract with an annual average cost to the Company of approximately 19 basis points relative
to the notional amount. The Company will potentially benefit during the term of this cap contract, in the manner described above, for the period of time that the 3-
month LIBOR index exceeds 1.85% (the strike price). The cap contract had an immaterial affect on recorded interest expense in the year ended December 31, 2020.
In March 2020, the Company entered into an interest rate swap contract in the notional amount of $40.0 million, intended to reduce the Company’s exposure to
potential rising interest rates. This contractual agreement has been designated as a cash flow hedge with changes in the fair value of the contract, net of changes in the
fair value of the designated hedged liability (certain short-term certificates of deposit with rates of interest that are highly correlated to the 3-month LIBOR index)
being accounted for through other comprehensive income. The term of the swap contract will commence on May 15, 2020 and expire on May 15, 2023. Under the
terms of the swap contract, the Company will be obligated to pay the contractual counterparty an annual rate of 1.39% (the strike price) times the notional amount of
the contract. Simultaneously, for the duration of the swap contract, the counterparty will be obligated to pay the Company the annual rate of the 3-month LIBOR
index, as determined each calendar quarter, times the notional contractual amount. The swap contract had no effect on recorded interest expense in the year ended
December 31, 2020.
(In thousands)
Cash flow hedges:
Total unamortized premium
Fair market value adjustment interest rate cap
Total unamortized cap
Fair market value adjustment interest rate swap
Total loss in comprehensive income
December 31, 2020
December 31, 2019
$
$
204 $
(197)
7
(1,111)
(1,308) $
-
-
-
-
-
The amounts of hedge ineffectiveness, recognized during the year ended December 31 2020, for cash flow hedges were not material to the Company’s consolidated
results of operations. The Company had no cash flow hedges at December 31, 2019. Some or the entire amount included in accumulated other comprehensive loss
would be reclassified into current earnings should a portion of, or the entire hedge no longer be considered effective, but at this time, management expects the hedge
to remain fully effective during the remaining term of the swap. The changes in the fair values of the interest rate hedging agreements and the hedged items primarily
result from the effects of changing interest rates and spreads.
- 126 -
(In thousands)
Balance as of December 31:
Amount of losses recognized in other comprehensive income
Losses in other comprehensive income:
For the year ended,
December 31, 2020
$
$
- $
(1,308)
(1,308) $
December 31, 2019
-
-
-
From time to time, the Company purchases high credit-quality securities with long maturity dates. In order to reduce the Company's exposure to potential declines in
the fair value of such securities, particularly in a rising interest rate environment, the Company has elected to enter into fixed-pay, receive floating rate interest rate
swap contracts, designated as fair value hedges. At December 31, 2020, the maturity dates of these swaps are matched exactly to the first call date of seven hedged
securities. During 2020, the Company entered into five swap contracts of this type with a total notional amount of $16.3 million. The objective of the hedges is to
protect the hedged securities of the Bank against changes in fair value due to changes in the benchmark interest rate. Changes in the fair value of the interest rate swap
are expected to be “perfectly effective” in offsetting changes in the fair value of the hedged item attributable to changes in the LIBOR swap rate, the designated
benchmark interest rate. The following table details the changes in the fair value of the hedged securities and the corresponding fair value hedges at December 31,
2020 and 2019:
Carrying Amount of the
Hedged Assets at
December 31, 2020
Cumulative Amount of
Fair Value Hedging
Adjustment Included in
The Carrying Amount of
the Hedged Assets at
December 31, 2020
Carrying Amount of the
Hedged Assets at
December 31, 2019
Cumulative Amount of Fair
Value Hedging Adjustment
Included in The Carrying
Amount of the Hedged
Assets at December 31, 2019
(In thousands)
Line item on the balance sheet in which the hedged item is included:
Available-for-sale securities (1)
$
17,055
$
(191) $
- $
-
(1) These amounts include the amortized cost basis of the hedged securities used to designate the hedging relationship in which the hedged item is the remaining
amortized cost of the last layer expected to be remaining at the end of the hedging relationship. At December 31, 2020, the amortized cost basis of the hedged
securities used in the hedging relationship was $17.1 million, the cumulative basis adjustment associated with the hedging relationship reduced the basis of the hedged
assets by $191,000, and the amount of the designated hedged item was $16.3 million. The Company did not have this derivative agreement in place at December 31,
2019.
At December 31, 2020, the fair value of the derivative resulted in a net asset position of $191,000 under the agreement recorded by the Company in other assets. The
fair value hedge had an immaterial effect on recorded interest income for the year ended December 31, 2020.
The Company manages its potential credit exposure on interest rate swap transactions by entering into a bilateral credit support agreements with each
counterparty. These agreements require collateralization of credit exposures beyond specified minimum threshold amounts. The Company posted cash in escrow of
$1.6 million under collateral arrangements to satisfy collateral requirements associated with the interest rate swap contract.
- 127 -
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.
The Company holds one corporate investment security with an aggregate amortized historical cost of $2.6 million and an aggregate fair market value of $2.7 million
as of December 31, 2020. This security has a valuation that is determined using published net asset values (NAV) derived by an analysis of the security’s underlying
assets. This security is comprised primarily of broadly-diversified real estate and adjustable-rate senior secured business loans and are traded in secondary markets on
an infrequent basis. While these securities are redeemable at least annually through tender offers made by their respective issuers, the liquidation value of the
securities may be below their stated NAVs and also subject to restrictions as to the amount of securities that can be redeemed at any single scheduled redemption. The
Company anticipates that these securities will be redeemed by their respective issuers on indeterminate future dates as a consequence of the ultimate liquidation
strategies employed by the management of these investments.
The Company holds two equity security investments, with an aggregate value of $1.9 million at December 31, 2020, valued utilizing readily available market pricing
(Level 1) observed from active trading on major national stock exchanges.
Interest rate derivatives: The fair value of the interest rate derivatives, characterized as either fair value or cash flow hedges, are calculated based on a discounted cash
flow model. All future floating rate cash flows are projected and both floating rate and fixed rate cash flows are discounted to the valuation date. The benchmark
interest rate curve utilized for projecting cash flows and applying appropriate discount rates is built by obtaining publicly available third party market quotes for
various swap maturity terms.
Impaired loans: Impaired loans are those loans in which the Company has measured impairment based on the fair value of the loan’s collateral or the discounted value
of expected future cash flows. Fair value is generally determined based upon market value evaluations by third parties of the properties and/or estimates by
management of working capital collateral or discounted cash flows based upon expected proceeds. These appraisals may include up to three approaches to value: the
sales comparison approach, the income approach (for income-producing property), and the cost approach. Management modifies the appraised values, if needed, to
take into account recent developments in the market or other factors, such as, changes in absorption rates or market conditions from the time of valuation and
anticipated sales values considering management’s plans for disposition. Such modifications to the appraised values could result in lower valuations of such
collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation
hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan
losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.
- 128 -
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
Corporate measured at NAV
Total available-for-sale securities
Marketable equity securities
Interest rate swap derivative fair value hedge
Interest rate swap derivative cash flow hedge
(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
Corporate measured at NAV
Total available-for-sale securities
Marketable equity securities
December 31, 2020
Level 1
Level 2
Level 3
- $
-
-
-
-
-
-
-
-
- $
6,416 $
23,753
9,943
8,607
25,211
26,464
24,936
125,330
-
125,330 $
Total Fair
Value
6,416
23,753
9,943
8,607
25,211
26,464
24,936
125,330
2,725
128,055
- $
-
-
-
-
-
-
-
-
- $
1,850 $
- $
- $
1,850
- $
(244) $
- $
(244)
- $
(1,308) $
- $
(1,308)
December 31, 2019
Level 1
Level 2
Level 3
-
-
-
-
-
-
-
-
-
-
$
$
16,820
1,736
7,631
13,232
18,980
30,785
16,821
106,005
-
106,005
$
$
-
-
-
-
-
-
-
-
-
-
$
$
Total Fair
Value
16,820
1,736
7,631
13,232
18,980
30,785
16,821
106,005
4,923
110,928
-
$
534
$
-
$
534
$
$
$
$
$
$
$
$
- 129 -
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
(In thousands)
Impaired loans
December 31, 2020
$
$
Level 1
-
$
Level 2
-
$
Level 3
14,701
$
December 31, 2019
Level 1
-
$
Level 2
-
$
Level 3
3,105
$
Total Fair
Value
14,701
Total Fair
Value
3,105
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, 2020
Impaired loans
At December 31, 2019
Impaired loans
Valuation
Techniques
Appraisal of collateral
(Sales Approach)
Discounted Cash Flow
Valuation
Techniques
Appraisal of collateral
(Sales Approach)
Discounted Cash Flow
Quantitative Information about Level 3 Fair Value Measurements
Unobservable
Input
Appraisal Adjustments
Costs to Sell
Quantitative Information about Level 3 Fair Value Measurements
Unobservable
Input
Appraisal Adjustments
Costs to Sell
Range
(Weighted Avg.)
5% - 25% (18%)
7% - 13% (12%)
Range
(Weighted Avg.)
5% - 20% (9%)
7% - 13% (11%)
The Company held two equity security investments, with fair values determined using Level 1 inputs at December 31, 2020. During the second quarter of 2020, one
of the two investments, previously structured as an investment in a loan pool aggregator and accounted for at its net asset value, was substantially restructured by the
issuing business entity, converted to an equity security and listed on a major national stock exchange. The fair value of that investment, previously accounted for at
net asset value prior to the listing date, was $1.2 million at December 31, 2020. The fair value of this investment, determined at its stated net asset value at December
31, 2019 was $2.1 million. Also, during the second quarter of 2020, the entity issuing the Company’s other equity investment, whose fair value was previously
determined using Level 2 inputs, was acquired by another financial institution that is actively listed on a public stock exchange. Immediately subsequent to this
acquisition transaction, the fair value of this security was able to be determined using Level 1 inputs. The fair value of this investment was $682,000 and $534,000 at
December 31, 2020 and December 31, 2019, respectively. Net changes in the fair value of these equity securities, whose fair valuations at each measurement date are
now determined using Level 1 inputs, are accounted for as additions or subtractions to income, net of tax effects, in the period incurred.
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.
- 130 -
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have
realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends, and have not been re-
evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments
subsequent to the respective reporting dates may be different than the amounts reported at each period-end.
FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the financial assets and liabilities were valued at a price that represents the Company’s exit price
or the price at which these instruments would be sold or transferred.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited
portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons
between the Company’s disclosures and those of other companies may not be meaningful. The Company, in estimating its fair value disclosures for financial
instruments, used the following methods and assumptions:
Cash and cash equivalents – The carrying amounts of these assets approximate their fair value and are classified as Level 1.
Federal Home Loan Bank stock – The carrying amount of these assets approximates their fair value and are classified as Level 2.
Net loans – For variable-rate loans that re-price frequently, fair value is based on carrying amounts. The fair value of other loans (for example, fixed-rate commercial
real estate loans, mortgage loans, and commercial and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered
in the market for loans with similar terms to borrowers of similar credit quality. Loan value estimates include judgments based on expected prepayment rates. The
measurement of the fair value of loans, including impaired loans, is classified within Level 3 of the fair value hierarchy.
Accrued interest receivable and payable – The carrying amount of these assets approximates their fair value and are classified as Level 1.
Deposits – The fair values disclosed for demand deposits (e.g., interest-bearing and noninterest-bearing checking, passbook savings and certain types of money
management accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) and are classified within Level 1
of the fair value hierarchy. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently
being offered in the market on certificates of deposits to a schedule of aggregated expected monthly maturities on time deposits. Measurements of the fair value of
time deposits are classified within Level 2 of the fair value hierarchy.
Borrowings – Fixed/variable term “bullet” structures are valued using a replacement cost of funds approach. These borrowings are discounted to the FHLBNY
advance curve. Option structured borrowings’ fair values are determined by the FHLB for borrowings that include a call or conversion option. If market pricing is
not available from this source, current market indications from the FHLBNY are obtained and the borrowings are discounted to the FHLBNY advance curve less an
appropriate spread to adjust for the option. These measurements are classified as Level 2 within the fair value hierarchy.
Subordinated loans – The Company secures quotes from its pricing service based on a discounted cash flow methodology or utilizes observations of recent highly-
similar transactions which result in a Level 2 classification.
- 131 -
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 - 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
Interest rate swap derivative fair value hedges
Interest rate swap derivative cash flow hedges
Fair Value
Hierarchy
December 31, 2020
Carrying
Amounts
Estimated
Fair Values
December 31, 2019
Carrying
Amounts
Estimated
Fair Values
1
2
NAV
1
2
2
2
3
1
1
2
2
2
2
2
2
$
$
$
$
43,464
125,330
2,725
1,850
-
171,224
4,390
812,718
4,549
598,683
397,224
82,050
39,400
193
244
1,308
$
$
43,464
125,330
2,725
1,850
-
174,935
4,390
816,626
4,549
598,683
398,863
84,065
39,416
193
244
1,308
$
$
20,160
106,005
4,923
-
534
122,988
4,834
772,782
3,712
460,293
421,600
93,125
15,128
396
92
-
20,160
106,005
4,923
-
534
124,148
4,834
767,654
3,712
460,293
422,409
93,643
14,921
396
92
-
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
2020
2019
$
$
$
$
26,213 $
682
106,986
155
3,975
138,011 $
889 $
39,400
97,722
138,011 $
14,514
534
88,372
155
3,193
106,768
971
15,128
90,669
106,768
- 132 -
Statements of Income
(In thousands)
Income
Dividends from non-bank subsidiary
Dividends from marketable equity security
Gains on marketable equity securities
Operating, net
Total income
Expenses
Interest
Operating, net
Total expenses
Loss before taxes and equity in undistributed net
income of subsidiaries
Tax benefit
Loss before equity in undistributed net income of subsidiaries
Equity in undistributed net income of subsidiaries
Net income
Statements of Cash Flows
(In thousands)
Operating Activities
Net Income
Equity in undistributed net income of subsidiaries
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
Capital contributed to wholly-owned bank subsidiary
Purchase of premises and equipment
Net cash flows from investing activities
Financing activities
Proceeds from exercise of stock options
Proceeds from subordinated debt offering
Issuance costs of subordinated loan
Net proceeds from common stock private placement
Net proceeds from preferred stock private placement
Cash dividends paid to common shareholders
Cash dividends paid to preferred shareholders
Cash dividends paid on warrants
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
2020
2019
3 $
13
413
107
536
1,100
629
1,729
(1,193)
261
(932)
7,882
6,950 $
6
-
81
79
166
863
337
1,200
(1,034)
235
799
5,075
4,276
2020
2019
6,950 $
(7,882)
570
55
(166)
(473)
(10,000)
(824)
(10,824)
223
25,000
(783)
-
-
(1,137)
(277)
(30)
22,996
11,699
14,514
26,213 $
4,276
(5,075)
630
34
(1,256)
(1,391)
(5,700)
-
(5,700)
218
-
4,199
15,370
(1,091)
(139)
(15)
18,542
11,451
3,063
14,514
$
$
$
$
- 133 -
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”). None of the related party loans were classified as nonaccrual, past due, restructured, or potential problem loans at December 31, 2020 or 2019.
The following represents the activity associated with loans to related parties during the year ended December 31, 2020:
(In thousands)
Balance at the beginning of the year
Originations and related party additions
Principal payments and related party removals
Balance at the end of the year
$
$
$
2020
19,301
4,899
(1,990)
$
22,210
2019
16,480
6,910
(4,089)
19,301
Deposit accounts of each related party at December 31, 2020 and December 31, 2019 were $12.5 million and $7.0 million, respectively.
In December 2020, the Bank sold a parcel of property and an existing dwelling, that was in the process of being developed into a new branch location, to a limited
liability corporation (“LLC”) co-owned by a member of its board of directors. The purchase price of the property was $612,000. The property will continue to be
developed by the LLC up to a total project cost of $2.8 million. All development costs over $2.8 million, which are expected to be partially offset by available tax
credits, will be the responsibility of the Bank and treated in the future as leasehold improvements. In January of 2021, the Bank entered into a lease agreement with
the LLC to lease the entire building located at the site in Syracuse, New York and an adjacent property. Once these sites are developed, the Bank intends to operate
the building as a full-service branch banking facility. The term of this lease shall be for a period of thirty-two years and sixty days commencing on February 1,
2021. The Bank will pay the landlord, as total rent for the first twelve months of the lease, the annual sum of $201,000. After the first anniversary of the lease, and
for every 12 month period following until the end of the lease term, the Bank will pay the landlord, as total rent, the annual sum of $262,000.
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 4,709,238 and 4,531,383 shares outstanding at December 31, 2019 and December 31,
2020, 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
- 134 -
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.
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
Ending balance
(In thousands)
Beginning balance
Other comprehensive income before
reclassifications
Amounts reclassified from AOCI
Ending balance
Retirement
Plans
(2,717)
451
173
(2,093)
$
$
$
$
For the years ended December 31, 2020
Unrealized Gains
and Losses on
Available-for-
Sale Securities
Unrealized
Losses on
Derivatives
and Hedging
Activities
Unrealized Loss
on Securities
Transferred to
Held-to-
Maturity
(216) $
1,737
(684)
837 $
- $
(966)
-
(966) $
For the years ended December 31, 2019
(38) $
24
-
(14)
$
Retirement
Plans
(3,152)
188
247
(2,717)
$
$
$
$
Unrealized Gains
and Losses on
Available-for-
Sale Securities
(2,832) $
2,859
(243)
(216) $
Unrealized
Losses on
Derivatives
and Hedging
Activities
Unrealized Loss
on Securities
Transferred to
Held-to-
Maturity
- $
-
-
- $
(58) $
20
-
(38)
$
Total
(2,971)
1,246
(511)
(2,236)
Total
(6,042)
3,067
4
(2,971)
The following table presents the amounts reclassified out of each component of AOCI for the indicated annual period:
(In thousands)
Details about AOCI1 components
Retirement plan items
Retirement plan net losses
recognized in plan expenses2
Available-for-sale securities
Realized gain on sale of securities
(1)
(2)
Amounts in parentheses indicates debits in net income.
These items are included in net periodic pension cost.
See Note 14 for additional information.
For the years ended
December 31, 2020
December 31, 2019
Affected Line Item in the Statement
of Income
(335)
88
(247)
Salaries and employee benefits
Provision for income taxes
Net Income
Net gains on sales and redemptions of investment
securities
Provision for income taxes
Net Income
329
(86)
243
$
$
$
$
(234) $
61
(173) $
926 $
(242)
684 $
- 135 -
NOTE 27: NONINTEREST INCOME
The Company has included the following table regarding the Company’s noninterest income for the periods presented.
(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 gains on sales and redemptions of investment securities
Losses (gains) on marketable equity securities
Other miscellaneous income
Total noninterest income
For the years ended
December 31, 2020
December 31, 2019
$
$
871
373
151
1,395
925
303
213
235
1,676
-
771
70
841
361
1,179
1,540
5,452
460
1,076
(629)
126
6,485
$
$
1,122
179
90
1,391
828
267
226
195
1,516
657
80
737
211
64
275
3,919
462
329
81
126
4,917
The following is a discussion of key revenues within the scope of the new revenue guidance:
•
•
•
•
Service fees – Revenue is earned through insufficient funds fees, customer initiated activities or passage of time for deposit related fees, and ATM service
fees. Transaction-based fees are recognized at the time the transaction is executed, which is the same time the Company’s performance obligation is
satisfied. Account maintenance fees are earned over the course of the month as the monthly maintenance performance obligation to the customer is
satisfied.
Fee income – Revenue is earned through commissions on insurance and securities sales, ATM surcharge fees, and banking house rents collected. The
Company earns investment advisory fee income by providing investment management services to customers under investment management contracts. As
the direction of investment management accounts is provided over time, the performance obligation to investment management customers is satisfied over
time, and therefore, revenue is recognized over time.
Card income – Card income consists of interchange fees from consumer debit card networks and other related services. Interchange rates are set by the
card networks. Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur.
Mortgage fee income and realized gain on sale of loans and foreclosed real estate – Revenue from mortgage fee income and realized gain on sale of loans
and foreclosed real estate is earned through the origination of residential and commercial mortgage loans, sales of one-to-four family residential mortgage
loans, sales of government guarantees portions of SBA loans, and sales of foreclosed real estate, and is earned as the transaction occurs.
- 136 -
NOTE 28: LEASES
The Company has operating and finance leases for certain banking offices and land under noncancelable agreements. Our leases have remaining lease terms that vary
from less than one year up to 30 years, some of which include options to extend the leases for various renewal periods. All options to renew are included in the
current lease term when we believe it is reasonably certain that the renewal options will be exercised.
The components of lease expense are as follows:
(In thousands)
Operating lease cost
Finance lease cost
Supplemental cash flow information related to leases was as follows:
(In thousands)
Cash paid for amount included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Supplemental balance sheet information related to leases was as follows:
(In thousands, except lease term and discount rate)
Operating Leases:
Operating lease right-of-use assets
Operating lease liabilities
Finance Leases:
Financial Liability
Weighted Average Remaining Lease Term:
Operating Leases
Finance Leases
Weighted Average Discount Rate:
Operating Leases
Finance Leases
Maturities of lease liabilities were as follows:
Years Ending December 31,
(In thousands)
2021
2022
2023
2024
2025
Thereafter
Total minimum lease payments
$
$
$
$
$
For the years ended
December 31, 2020
241
80
$
December 31, 2019
240
51
For the years ended
December 31, 2020
December 31, 2019
$
221
80
71
215
51
46
December 31, 2020
December 31, 2019
2,240
2,525
$
$
587
$
2,386
2,650
578
19.08 years
28.42 years
19.58 years
29.42 years
3.73%
13.75%
3.71%
13.75%
$
$
99
99
110
118
126
2,560
3,112
The Company owns certain properties that it leases to unaffiliated third parties at market rates. Lease rental income was $235,000 and $195,000 for the years ended
December 31, 2020 and 2019, respectively. All lease agreements are accounted for as operating leases.
- 137 -
NOTE 29: COVID-19
In early January 2020, the World Health Organization issued an alert that a novel coronavirus outbreak was emanating from Wuhan, Hubei Province in China. Over
the course of the next several weeks, the outbreak continued to spread to various regions of the world, prompting the World Health Organization to declare COVID-19
a global pandemic on March 11, 2020. In the United States, by the end of March 2020, the rapid spread of the COVID-19 virus invoked various Federal and New
York State authorities to make emergency declarations and issue executive orders to limit the spread of the disease. Measures included restrictions on international
and domestic travel, limitations on public gatherings, implementation of social distancing and sanitization protocols, school closings, orders to shelter in place and
mandates to close all non-essential businesses to the public. To widely varying degrees, largely dependent upon the level of regional and national outbreaks and the
resultant levels of strain on available medical resources, these very substantial mandated curtailments of social and economic activity had been relaxed globally in the
third and fourth quarters of 2020. However, the number of reported positive cases (partly due to increased testing) in the United States have continued to be at high
levels as of the date of this filing and new strains of the virus, potentially more contagious and more virulent have been reported in many parts of the world, including
in the United States. Further, there still are virtually no localities within the United States that have completely returned to substantively normal business and social
activities at the time of this filing.
As a result of the initial and continuing outbreak, and governmental responses thereto, the spread of the coronavirus has caused us to modify our business practices,
including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. The Company has many
employees working remotely and has significantly reduced physical customer contact with employees and other customers. Initially, branch activities were limited to
drive-thru transactions whenever possible, teleconferencing and in-branch “appointments only” services. The Bank’s branches are now fully accessible to the public
but remain in strict compliance with all applicable social distancing and sanitization guidelines. Since the start of the pandemic, transactional volume has also
increased through the Bank’s telephone, mobile and internet banking channels. We will take further actions, focused on safety, as may be required by government
authorities or that we determine to be in the best interests of our employees, customers and business partners.
Concerns about the spread of the disease and its anticipated negative impact on economic activity, severely disrupted both domestic and international financial
markets prompting the world’s central banks to inject significant amounts of monetary stimulus into their respective economies. In the United States, the Federal
Reserve System’s Federal Open Market Committee, swiftly cut the target Federal Funds rate to a range of 0% to 0.25%, where it remains as of the date of this
filing. The reductions in the Fed funds target rate included a 50 basis point reduction in the target federal funds rate on March 3, 2020 and an additional 100 basis
point reduction on March 15, 2020. In addition, the Federal Reserve initiated various market support programs to ease the stress on financial markets. This significant
reduction in short-term interest rates has reduced, and will continue to reduce, the Bank’s cost of funds and interest earning-asset yields. The long-term effects of the
current interest rate environment, resulting from government and central bank responses to the pandemic, on the Bank’s net interest margin cannot be predicted with
certainty at this time.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on March 27, 2020, provided financial assistance in various forms to both
businesses and consumers, including the establishment and funding of the Paycheck Protection Program (“PPP”). In addition, the CARES Act also created many
directives affecting the operations of financial services providers, such as the Company, including a forbearance program for federally-backed mortgage loans and
protections for borrowers from negative credit reporting due to loan accommodations related to the national emergency. The banking regulatory agencies have
likewise issued guidance encouraging financial institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations
because of the effects of COVID-19. The Company has worked to assist its business and consumer customers affected by COVID-19.
On December 27, 2020, following passage by the United States Congress, President Donald J. Trump signed into law the Consolidated Appropriations Act, 2021
which included the Coronavirus Response and Relief Supplemental Appropriations Act (“CRRSAA”). The intent of this legislation was to provide another round of
Economic Impact Payments to eligible individuals and families, renew the PPP to support small businesses and their employees, ensure needed access to
unemployment benefits for Americans who have lost their jobs due to COVID-19, and provide additional funding for schools, vaccine distribution, and other
important sectors of the economy. While CRRSSA is expected to benefit the economic recovery and be supportive of the Company’s business activities, the effect of
this legislation on the operations of the Company cannot be determined with certainty at this time.
The Bank participated in the PPP funded by the U.S. Treasury Department and administered by the U.S. SBA pursuant to the CARES Act and subsequent
legislation. PPP loans have an interest rate of 1.0% and a two-year or five-year loan term to maturity. The SBA guarantees 100% of the PPP loans made to eligible
borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the
PPP so long as employee and compensation levels of the business are maintained and the loan proceeds are used for qualifying expenses. Through December 31,
2020, the Bank has received approval from the SBA for 699 loans totaling approximately $75.3 million through this program. The program was extended at least
through the first quarter of 2021. The Bank is participating in the second round of PPP. The Bank is now also assisting
- 138 -
borrowers with the loan forgiveness phase of the process. As of this filing, the Company has submitted 312 loans totaling approximately $33.7 million to the SBA for
forgiveness. The Bank collected $2.3 million in fees associated with PPP lending activities during 2020 and recognized $1.1 million of those fees as interest income
during the year. Accordingly, $1.2 million in deferred fee income was subtracted from the carrying value of the PPP loans held in portfolio at December 31, 2020 and
will be recognized in future periods.
Borrowers that were delinquent in their payments to the Bank, prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case by
case basis for troubled debt restructure classification and non-performing loan status. In the instances where the Company granted a payment deferral to a delinquent
borrower because of COVID-19, the borrower’s delinquency status was frozen as of February 29, 2020, and their loans will continue to be reported as delinquent
during the deferment period based on their delinquency status as of that date. The long-term collectability of deferred loan payments will depend on many factors,
including the future progression of the pandemic, potential medical breakthroughs in therapeutic treatments and/or vaccines, the pace of vaccine distributions, further
economic stimulus from government authorities, the rate at which governmental restrictions on business activities are relaxed and the adequacy and sustainability of
other sources of repayment such as loan collateral. Consistent with industry regulatory guidance, borrowers that were granted COVID-19 related deferrals but were
otherwise current on loan payments will continue to have their loans reported as current loans during the agreed upon deferral period(s), accrue interest and not be
accounted for as troubled debt restructurings.
Through December 31, 2020, the Bank granted payment deferral requests for an initial period of 90 days on 618 loans representing approximately $137.4 million of
existing loan balances. Upon the receipt of borrower requests, additional 90 day deferral periods were generally granted. Of these granted deferrals, 303 loans,
totaling $24.0 million, were residential mortgage or consumer loans. At December 31, 2020, 265 residential and consumer loans, totaling $21.3 million, have been
returned to non-deferral status. Of these granted deferrals, 315 loans, totaling $113.3 million, were commercial real estate or other commercial and industrial loans.
At December 31, 2020, 291 commercial real estate or other commercial and industrial loans, totaling $98.9 million, have been returned to non-deferral status.
Therefore, at December 31, 2020, 38 residential mortgage and consumer loans, totaling $2.7 million and 24 commercial real estate and other commercial and
industrial loans, totaling $14.4 million remained in deferral status. These loans still in deferral status therefore totaled $17.1 million and represented 2.1% of all loans
outstanding at December 31, 2020. After consultations with certain of these commercial loan borrowers, 11 loans, representing $8.3 million, have been granted an
additional 90 day deferral period beyond 180 days as of December 31, 2020. These loans are included in the $17.1 million in loans still in deferred status at December
31, 2020. On an extremely limited basis, additional deferral periods will potentially be granted subject to further analysis and discussion with specific borrowers. To
the extent that such modifications meet the criteria previously described they have not been classified as troubled debt restructurings nor classified as nonperforming
at December 31, 2020. Loans not granted additional deferral periods have been, and will continue to be, categorized as nonaccrual loans if the borrowers fail to make
the first scheduled payment following the end of the deferral period.
The future performance of the Company’s loan portfolios with respect to credit losses will be highly dependent upon the course and duration, both nationally and
within the Company’s market area, of the public health and economic factors related to the pandemic, as well as the concentrations in the Company’s loan portfolio.
Concentrations of loans within a portfolio that are made to a singular borrower, to a related group of borrowers, or to a limited number of industries, are generally
considered to be additional risk factors in estimating future credit losses. Therefore, the Company monitors all of its credit relationships to ensure that the total loan
amounts extended to one borrower, or to a related group of borrowers, does not exceed the maximum permissible levels defined by applicable regulation or the
Company’s generally more restrictive internal policy limits.
Loans to a single borrower, or to a related group of borrowers, are referred to as related credits. Total related credits encompass all related or affiliated borrower loan
balances, including available unused lines of credit, for both personal and business loans. At December 31, 2020, the Company had 28 total related credit
relationships, comprised of 265 individual loans, with outstanding balances in excess of $5.0 million. These total related credits ranged from $5.0 million to $14.5
million at December 31, 2020 with aggregate balances of $234.5 million. Of the $234.5 million in total related credits, $216.1 million was secured by various
collateral assets, primarily commercial real estate, $9.2 million was unsecured, and $9.1 million were PPP loans.
- 139 -
In addition, the future credit-related performance of a loan portfolio generally depends upon the types of loans within the portfolio, concentrations by type of loan and
the quality of the collateral securing the loans. The following table details the Company's loan portfolio by collateral type within major categories as of December 31,
2020:
(Dollars in thousands)
Residential Mortgage Loans
Commercial Real Estate:
Mixed Use
Multi-Family Residential
Hotels and Motels
Office
Retail
1-4 Family Residential
Automobile Dealership
Warehouse
Recreation/ Golf Course/
Marina
Skilled Nursing Facility
Manufacturing/Industrial
Restaurant
Automobile Repair
Not-For-Profit & Community
Service Real Estate
Hospitals
Land
All Other
Total Commercial Real
Estate Loans
Commercial and Industrial:
Secured Term Loans
Unsecured Term Loans
Secured Lines of Credit
Unsecured Lines of Credit
Total Commercial and
Industrial Loans
Tax Exempt Loans
Paycheck Protection Loans
Consumer:
Home Equity Lines of Credit
Vehicle
Consumer Secured
Consumer Unsecured
All Others
Total Consumer Loans
Net deferred loan fees
Unallocated allowance for
loan losses
Total Loans
Balance
Number
of Loans
Average
Loan
Balance
$
235,392
2,154
$
109
$
Minimum/
Maximum
Loan Balance
- $
0
Allowance
for Loan
Losses
Percent
of
Total
Loans
1,546 $
931
29%
$
48,828
46,394
35,434
31,467
21,692
18,518
16,430
11,706
11,624
10,661
7,511
6,321
4,762
3,323
3,182
2,412
6,006
$
53
59
10
61
44
151
10
15
15
2
15
23
10
3
2
4
31
$
286,271
508
$
60,934
17,695
38,938
10,165
$
127,732
$
368
122
266
134
890
921
786
3,543
516
493
123
1,643
780
775
5,331
501
275
476
1,108
1,591
603
194
564
166
145
146
76
144
$
$
$
38,624
26,265
18,131
24,074
2,435
109,529
$
1,022
1,750
694
5,608
961
10,035
(1,238)
-
-
825,495
$
-
14,210
$
- 140 -
38
15
26
4
3
11
-
-
58
$
49
26
340
9
34
-
169
0
26
3,800
93
46
60
107
77
72
16
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7,433 $
6,275
11,500
4,851
5,155
1,236
6,792
2,728
3,150
6,861
1,418
1,271
2,332
1,638
3,105
2,000
745
815
774
591
525
362
309
274
195
194
178
125
105
80
56
53
40
100
6%
6%
4%
3%
3%
2%
2%
1%
1%
1%
1%
1%
1%
1%
1%
0%
1%
$
-
1
-
-
- $
-
-
-
4,735 $
2,244
5,000
2,783
0
0
21
0
0
- $
-
-
-
-
336 $
357
131
109
498
4,776
35%
1,294
376
2,373
619
4,662
1
-
739
416
287
381
39
1,862
-
7%
2%
5%
1%
15%
1%
7%
5%
3%
2%
3%
0%
13%
-
545
12,777
$
-
100%
7,166
24
$
299
$
6
- $
2,251 $
60,643
599
$
101
$
0
- $
3,001 $
NOTE 30: SUBSEQUENT EVENTS
On March 29, 2021, the Company announced that its Board of Directors had declared a cash dividend of $0.07 per common and preferred share, and a cash dividend
of $0.07 per notional share for the issued Warrant. The dividend will be payable on May 7, 2021 to shareholders of record on April 15, 2021.
In first quarter of 2021, the Company exercised its existing contractual option and issued a Notice of Redemption (“NOR”) to the holders of the 2015 Subordinated
Loan, which was scheduled to mature on October 1, 2025. With the issuance of this NOR, the Company is now obligated to redeem the $10.0 million 2015
Subordinated Loan, plus accrued interest, on April 1, 2021. The Company plans to use components of its existing liquidity position to redeem this borrowing. The
redemption of this borrowing will prospectively reduce the Company’s interest expense by $625,000 per year.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) (the Company’s principal executive
officer and principal financial officer), management conducted an evaluation (the “Evaluation”) of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2020. The term “disclosure controls and
procedures,” under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s
rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed
by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive
officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
In connection with the filing of the Annual Report on Form 10-K as of December 31, 2020, our CEO and CFO concluded that the design and operation of our
disclosure controls and procedures were not effective at December 31, 2020, at the reasonable assurance level, due to the material weakness described in “Item 8 –
Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. The material weakness in internal control creates a reasonable possibility that a
material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis.
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
Other than the changes described under “Management’s Report on Internal Control over Financial Reporting,” there were no changes made in our internal controls
during the year ended December 31, 2020 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
ITEM 9B: OTHER INFORMATION
None.
- 141 -
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 “Delinquent Section 16(a) Reports”.
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, 2020.
Name
Thomas W. Schneider
James A. Dowd, CPA
Ronald Tascarella
Walter F. Rusnak, CPA
Daniel R. Phillips
William O’Brien
Calvin L. Corriders
Age
59
53
62
67
56
55
58
Positions Held With the Company
President and Chief Executive Officer
Executive Vice President, Chief Operating Officer
Executive Vice President, Chief Banking Officer
Senior Vice President, Chief Financial Officer
Senior Vice President, Chief Information Officer
Senior Vice President, Chief Risk Officer and Corporate Secretary
Regional President, Syracuse Market
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".
- 142 -
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, 2020 and 2019, 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 included
(b)
3.1
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)
3.3
3.4
Articles Supplementary to the Articles of Incorporation of Pathfinder Bancorp, Inc. designating the Company’s Series B Convertible Perpetual
Preferred Stock, par value $0.01 per share (Incorporated herein by reference to Exhibit 3.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K,
file no. 001-36695, filed on May 9, 2019)
Amendment to the Articles Supplementary to the Articles of Incorporation of Pathfinder Bancorp, Inc. designating the Series B Convertible Perpetual
Preferred Stock, $0.01 par value per share (Incorporated by reference to Exhibit 3.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file
no. 001-36695, filed on November 17, 2020)
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)
4.4
4.5
4.6
4.7
10.1
Warrant Agreement, by and between Pathfinder Bancorp, Inc. and Castle Creek Capital Partners VII, L.P., dated May 8, 2019 (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 May 9, 2019)
Description of Common Stock (Incorporated herein by reference to Exhibit 4.5 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2019 file no 000-36695, filed on March 23, 2020)
Indenture, dated as of October 14, 2020, by and between Pathfinder Bancorp, Inc. and UMB Bank, National Association, as trustee (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 15, 2020)
Form of 5.50% Fixed-to-Floating Rate Subordinated Note due 2030 of Pathfinder Bancorp, Inc. (included in Exhibit 4.6)
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
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)
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10.4
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)
10.6
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)
10.7
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)
10.8
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)
10.9
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)
10.10
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)
10.11
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.
10.12
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).
10.13
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.
10.14
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.
10.15
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.
10.16
10.17
10.18
10.19
10.20
Securities Purchase Agreement, by and between Pathfinder Bancorp, Inc. and the Purchasers Identified on the Signature Pages Thereto, dated May 8,
2019 (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 May 9,
2019)
Registration Rights Agreement, by and between Pathfinder Bancorp, Inc. and Castle Creek Capital Partners VII, L.P., dated May 8, 2019
(Incorporated herein by reference to Exhibit 10.2 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on May 9,
2019)
Form of Subordinated Note Purchase Agreement, dated as of October 14, 2020, by and between Pathfinder Bancorp, Inc. and the Several Purchasers
(Incorporated by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on October 15, 2020)
Form of Registration Rights Agreement, dated as of October 14, 2020, by and between Pathfinder Bancorp, Inc. and the Several Purchasers
(Incorporated by reference to Exhibit 10.2 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on October 15, 2020)
Exchange Agreement, dated as of November 13, 2020, by and between Pathfinder Bancorp, Inc. and Castle Creek Capital Partners VII, LP.
(Incorporated by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no. 001-36695, filed on November 17,
2020)
- 144 -
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, 2020 and 2019, (ii) the
Consolidated Statements of Income for the years ended December 31, 2020 and 2019, (iii) the Consolidated Statements of Comprehensive Income for
the years ended December 31, 2020 and 2019, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31,
2020 and 2019, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019, and (vi) the Notes to the
Consolidated Financial Statements
ITEM 16: FORM 10-K SUMMARY
None.
- 145 -
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date:
March 30, 2021
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 30, 2021
By: /s/ Lloyd Stemple
Lloyd Stemple, Director
Date: March 30, 2021
By: /s/ John P. Funiciello
John Funiciello, Director
Date: March 30, 2021
By: /s/ David A. Ayoub
David A. Ayoub, Director
Date: March 30, 2021
By: /s/ George P. Joyce
George P. Joyce, Director
Date: March 30, 2021
By: /s/ Adam C. Gagas
Adam C. Gagas, Director
Date: March 30, 2021
By: /s/ Walter F. Rusnak
Walter F. Rusnak, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date:
March 30, 2021
By: /s/ Lisa A. Kimball
Lisa A. Kimball, First Vice President and
Controller (Principal Accounting Officer)
Date:
March 30, 2021
By: /s/ William A. Barclay
William A. Barclay, Director
Date:
March 30, 2021
By: /s/ Chris R. Burritt
Chris R. Burritt, Director
Date:
March 30, 2021
By: /s/ John F. Sharkey
John F. Sharkey, Director
Date:
March 30, 2021
By: /s/ Melanie Littlejohn
Date:
Melanie Littlejohn, Director
March 30, 2021
- 146 -
EXHIBIT 21: SUBSIDIARIES OF THE REGISTRANT
Name
Pathfinder Bank
Pathfinder Statutory Trust II
Whispering Oaks Development Corp.
Pathfinder Risk Management Company Inc.
FitzGibbons Agency, LLC (1)
State of Incorporation
New York (direct)
Delaware (direct)
New York (indirect)
New York (indirect)
New York (indirect)
(1)
Pathfinder Bancorp, Inc. indirectly owns 51% of FitzGibbons Agency, LLC
The Company has evaluated the activities relating to its strategic business units. The controlling interest in the FitzGibbons Agency is dissimilar in nature and
management when compared to the Company’s other strategic business units which are judged to be similar in nature and management. The Company has determined
that the FitzGibbons Agency is below the reporting threshold in size in accordance with Accounting Standards Codification 280. Accordingly, the Company has
determined it has no reportable segments.
EXHIBIT 23: CONSENT OF BONADIO & CO., LLP
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Pathfinder Bancorp, Inc.
Oswego, New York
We consent to the incorporation by reference in the registration statements on Forms S-8 (No. 333-202081 and 333-224388) of our report dated March 30, 2021 of
Pathfinder Bancorp, Inc. relating to the consolidated financial statements, which report appears in this Annual Report on Form 10-K.
/s/ Bonadio & Co., LLP
Bonadio & Co., LLP
Pittsford, New York
March 30, 2021
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 30, 2021
/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 30, 2021
/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, 2020 and that to the best of his knowledge:
1.
2.
the report fully complies with the requirements of Sections 13(a) of the Securities Exchange Act of 1934; and
the information contained in the report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company.
The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended by Section 906 of the Sarbanes-
Oxley Act of 2002.
March 30, 2021
March 30, 2021
/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