ANNUAL REPORT
2021
OUR PURPOSE
To be the Local Bank Our Community Trusts.
LOCAL
We have proudly served Central New York for over
150 years. Like our customers, we live, work and
play here. That fact not only allows us to know our
customers better, but gives our customers access to
decision makers right here in Central New York.
COMMUNITY
Our success is intertwined with the
success of the communities we serve.
For that reason, and because it is the right
thing to do, we invest our resources, time,
and talents in those communities.
TRUST
Because we want to serve our local communities for another 150 years, we must earn the trust
of our customers every day. We do that by being ethical, capable, honest, reliable and responsive.
We do not sell products and services to our customers. We listen, and inquire, to determine our
customers’ needs. Then, with the help of a team of trusted advisors, we develop a program of
services and products to uniquely satisfy those needs.
OUR VISIONOUR VISIONOUR VISION 2021 2020 2019 2018 2017
Year End (In thousands except per share amounts)
Total assets
Investment securities available-for-sale
Investment securities held-to-maturity
Loans receivable, net
Deposits
Borrowings and subordinated debt
Shareholders’ equity
$ 1,285,177
190,598
160,923
819,524
1,055,346
106,661
110,633
$ 1,227,443
128,261
171,224
812,718
995,907
121,450
97,722
$ 1,093,807
111,134
122,988
772,782
881,893
108,253
90,669
$ 933,115
177,664
53,908
612,964
727,060
133,628
64,459
$ 881,257
171,138
66,196
573,705
723,603
88,947
62,144
$ 23,123
4,085
3,559
489
37
-
20,621
473
29,413
6,290
1,769
3,491
$ 0.86
0.83
14.44
13.34
0.215
$ 38,295
6,231
5,298
$ 31,643
6,485
4,859
$ 28,230
4,917
4,443
419
313
201
26,621
874
45,827
7,532
1,022
12,407
447
1,179
-
24,381
699
42,507
10,864
4,707
6,950
410
64
-
25,309
421
41,758
13,528
1,966
4,276
$ 2.07
2.07
18.43
17.66
0.280
$ 1.17
1.17
17.56
16.53
0.240
$ 0.80
0.80
15.94
14.95
0.240
$ 25,766
3,835
4,029
(244)
50
-
23,057
492
34,810
9,044
1,497
4,031
$ 0.97
0.94
14.72
13.65
0.240
%
0.98
11.91
12.50
11.91
8.26
8.58
16.17
3.06
3.21
124.61
0.49
2.18
63.07
%
0.60
7.43
7.82
8.92
8.02
7.94
20.39
2.68
2.88
%
0.43
5.34
5.67
6.02
7.97
8.27
30.21
2.73
2.98
%
0.45
6.33
6.84
6.33
7.09
6.88
24.93
2.85
3.02
%
0.42
5.69
6.16
5.69
7.47
7.01
25.21
2.83
2.97
120.49
116.84
116.52
116.05
0.56
2.15
68.71
0.49
2.56
78.75
0.43
2.62
79.04
0.50
2.57
79.06
%
1.00
0.65
1.55
155.99
%
2.58
1.74
1.55
59.89
%
0.67
0.49
1.11
165.25
%
0.35
0.36
1.18
340.13
%
0.84
0.61
1.23
145.61
%
15.19
13.94
9.52
13.94
%
13.13
11.87
8.63
11.87
%
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
161
11
176
11
157
11
160
10
140
For the Year (In thousands)
Net interest income
Noninterest income
Core noninterest income (a)
Net gains/(losses) on sales and redemptions
of investment securities
Net gains on sales of loans and foreclosed
real estate
Net gains on sales of premises and equipment
Noninterest expense (b)
Regulatory assessments
Interest income
Interest expense
Provision for loan losses
Net income attributable to the Company
Per Share
Net income (basic)
Net income (diluted)
Book value per common share
Tangible book value per common share (c)
Cash dividends declared
Performance Ratios
Return on average assets
Return on average equity
Return on average tangible equity (c)
Return on average common equity
Average equity to average assets
Equity to total assets at end of period
Dividend payout ratio
Net interest rate spread
Net interest margin
Average interest-earning assets to average
interest-bearing liabilities
Noninterest income to average assets
Noninterest expense to average assets
Efficiency ratio (d)
Asset Quality Ratios
Nonperforming loans as a percent of total loans
Nonperforming assets as a percent of total assets
Allowance for loan losses to loans receivable
Allowance for loan losses as a percent of
nonperforming loans
Regulatory Capital Ratios (Bank Only)
Total Core 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
(a) Exclusive of net gains/(losses) on sales and redemptions of investment securities, net gains on sales
of loans and foreclosed real estate and net gains on sales of premises and equipment.
(b) Exclusive of regulatory assessments.
(c) Tangible equity excludes intangible assets. See Selected Financial Data within Item 7 MD&A Section of Annual Report
on Form 10K for a reconciliation of the non-GAAP financial measures.
(d) The efficiency ratio is calculated as noninterest expense divided by the sum of net interest income
and noninterest income, excluding net gains/(losses) on sales and redemptions of investment securities, net gains
on sales of loans and foreclosed real estate and net gains on sales of premises and equipment.
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LETTER TO SHAREHOLDERS
We are proud to present our Annual Report for 2021. In 2021,
Pathfinder Bancorp delivered record earnings for shareholders
and exceptional service to our customers and communities amid
another challenging year, as we continued to make meaningful
progress toward the attainment of our strategic objectives. With
strong asset quality, an improved funding mix and a team ready and
eager to act on opportunities within our Central New York markets,
our Company is well-positioned for growth in 2022 and beyond.
While a retrospective of prior results is not as important as what
we do going forward, it does demonstrate:
The effectiveness and strength of the business model, the
market we operate in, and the governance and management
of our Company.
•
Our ability to successfully adapt to changing market
conditions.
•
In the following, we hope that both a retrospective view of
the prior year and a prospective analysis of opportunities and
challenges going forward provides confidence, to those who
have invested and placed their capital at risk, that forward
return opportunities are substantive and attainable.
HIGHLIGHTS
• Record Earnings – net income of $12.4 million, return on average
assets of 0.98%, and return on tangible equity of 12.50%.
• Earnings per share of $2.07, an increase of $.90 over 2020.
Tangible Book Value accretion of $1.13 to $17.66 from
$16.53 in 2020. .....................................................................................
• Steady, consistent growth of revenue relative to expense
since our capital raise in May 2019, resulting in an efficiency
•
ratio of 63.07% in 2021.
• Focus on core deposit growth to fund loan growth leading to
a growth of $135.5 million, or 22.6% in non-maturity deposits.
The core deposit initiatives and operating expense management
strategies have largely been successful. Growth in non-interest
income has been muted by downward pricing shifts in overdraft
activity and pricing, offset by growing interchange fee income,
as our debit card customer use grows with our checking account
customer base.
MANAGING INTEREST EXPENSE
During 2021, we continued to make progress on lowering our cost
of funds and interest rate sensitivity. We also took strategic steps
to reduce our interest expenses moving forward. In April 2021, the
Bank redeemed $10.0 million of existing subordinated debt which
reduced our interest expense by $625,000 annually.
Total deposits increased by $59.4 million, or 6.0%, to $1.06 billion
at December 31, 2021, compared to $995.9 million at year end
2020, while our funding costs improved by 44 basis points to
0.56% for the full year 2021. Full year 2021 net interest margin
of 3.21% was up 33 basis points from 2.88% for the twelve
months ended December 31, 2020.
We have diligently managed our deposit mix, reducing our
reliance on time deposits and shifting towards non-maturity
deposits as interest rates begin to rise. Noninterest-bearing deposits
totaled $191.9 million at year end 2021, an increase of $29.8
million, or 18.4%, from one year prior, driven by continued growth
in business banking relationships due in part to our participation
in the Paycheck Protection Program (“PPP”). This program
allowed our Bank to establish deposit accounts with more
of our existing customers and create new relationships with
more than 1,100 customers who turned to Pathfinder for help
accessing this important funding for their small businesses.
These noninterest-bearing deposits, which helped us to bring
down our overall funding costs, made up approximately 18.2% of
total deposits at year end, compared to 16.3% at December 31,
2020 and 11.8% at June 30, 2019 at the outset of our strategic
plan implementation.
At the same time, we were allowing higher-rate time deposits to
roll off our balance sheet. At year end 2021, time deposits of
$321.0 million made up 30.4% of total deposits, down from
39.9% one year prior and 46.1% in mid-2019. The rate paid on
overall time deposits also decreased significantly in 2021 and
supported continued improvement in our overall funding costs,
as our average cost of total interest-bearing liabilities decreased
by 40 basis points to 0.79%.
The past two years have been largely driven by federal and state
government responses to the COVID-19 pandemic. The enactment
of various fiscal and monetary responses to the economic consequences
of the health response provided us the ability to stave off adverse
credit consequences, serve our customers and expand our presence
in our markets, while implementing our strategies to enhance
profitability and shareholder return.
OUR CORE STRATEGIES REMAIN:
1. Improving our deposit mix by focusing on non-maturity deposits.
2. Enhancing non-interest income by keeping pace with market pricing.
3. Managing non-interest expense to enhance efficiency.
While the PPP has continued to positively impact our deposit
balances, the bulk of its contributions to loan growth were seen in
2020, and we saw many of these loans forgiven over the course
of 2021, as had been expected. Even with the significant reduction
in PPP-related loans, total loans increased by $7.0 million, or 0.8%,
during 2021 to $832.5 million.
As a result of these developments, net interest income on loans and
other interest earning assets for 2021 increased by a robust 21.0%
to $38.3 million compared to the prior year.
ENHANCING FEE INCOME
Complementing our double-digit net interest income growth was
solid noninterest income generation of $6.2 million for the year.
This compares to noninterest income of $6.5 million for 2020,
when the company recorded higher net gains on sales and
redemptions of investment securities, as well as on the sales of
loans and foreclosed real estate. Importantly, excluding these types
of gains or losses, noninterest income grew by 9.0% to $5.3 million.
Together, noninterest income and net interest income strength
resulted in double-digit annual revenue expansion for the year to
$44.5 million, a $6.4 million increase from 2020.
DRIVING OPERATING LEVERAGE THROUGH
PRUDENT EXPENSE CONTROL
Our 16.8% revenue growth’s contribution to our bottom line was
further enhanced by our effective management of expenses, which
we limited to an annual rate of 9.6%. This is driving the enhanced
operating leverage that our strategic plan is intended to accomplish
and, given the softer-than-typical expenses we recorded in 2020
amid the pandemic-induced operating environment, is all the
more noteworthy. In fact, compared to 2019, what we would
consider a more typical year, 2021 noninterest expenses increased
by 6.9%, which represents an annual compounded rate of increase
of only 3.4%.
Prudent expense management is of the utmost priority as we look
forward. As we look ahead to 2022 and beyond, we are focused on
both responsible expense control and responsible investments in
our team and our business for the future. We will not be immune to
the inflationary and labor market pressures that the industry and
country are facing and do expect increased expenses in 2022, but
we remain keenly focused on growing revenue at a greater rate.
ASSET QUALITY STRENGTH
Our asset quality metrics remained strong and stable during 2021,
with net loan charge-offs to average loans of 0.12%, compared
to 0.08% for 2020, and nonperforming loans to total loans of
1.00%, compared to 2.58% for the prior year. Our effective credit
management and the improving economic conditions in our region
resulted in a lower provision for loan losses in 2021 of $1.0 million,
compared to $4.7 million in 2020.
At year end, our allowance for loan losses to nonperforming loans
ratio stood at approximately 156%, leaving us solidly positioned to
handle any potential credit issues in the current environment.
2022 AND FORWARD
The forward headwinds of inflation, combined with continued
supply-side pressure from the pandemic and the Eastern European
conflict, will require careful, adaptive management to maintain
growth and profitability trends. ...............................................................
We believe the stable, steady growth of our market and our
trusted brand will allow us to balance risk management with loan
and deposit growth to meet the margin and cost challenges
that seem evident in 2022 and 2023.............
MODEL
Our business model remains rooted in our Vision Statement.
The model is a traditional community bank approach. The ability
to know our market, with all decision-makers residing in the market
and deeply engaged in our community, provides us the ability
to continue to make differentiated decisions using qualitative
facts to enhance quantitative data. ................................................
These differentiated, local-based decisions are our value proposition.
We are able to build trust within our communities as well as
an ever-expanding source of referral and character references.
This classic community banking model is a scarce resource sought
and needed by larger portions of the business and consumer
market..........................................................................................
A classic community banking model does not mean a lack of
strategic focus and implementation of digital banking channels.
We have, and will continue to make capital investments in
digital channels and platforms to maintain our competitive ability to
provide customers with secure and convenient services delivered
in the manner in which they choose............................
MARKET
The Central New York area continues to experience strong
revitalization within its cities, diversification of its economy and
entrepreneurial activities, and a diverse demographic, attracting
outside investment in manufacturing, technology, and logistics.
A particularly attractive aspect of the Central New York market
is the strong alignment between the government, business,
economic development, non-profit, and academic sectors, supported
by knowledgeable leadership within the market. While the
region has robust diversity of demographics and views, there
is a shared vision and desire to achieve inclusive economic
expansion and diversity within our community’s leadership.
This alignment and shared vision significantly reduces the costs
of friction between community leadership that we often see at
the national level.
SUMMARY
Performance in 2021 benefited from headwinds created by monetary
and fiscal policy response to the COVID-19 pandemic. These same
forces will result in policy response to the resultant inflation.
Supply channel disruption, resulting in higher prices and higher
labor costs, will create headwinds for performance over the next
two years.........................................................................................................
..
We believe that our balance sheet, board and management, dedicated
staff, business model, and market position in our Company and
Bank will meet these challenges and execute on our opportunities.
We will continue to grow the value of your franchise in a risk-
controlled manner consistent with our fiduciary responsibilities.
...............................................................................................................................
We thank you for your confidence and ownership in our Company.
MARKET OPPORTUNITIES
Our market growth opportunities exist both in the revitalization
of cities in CNY, primarily, for us, Syracuse, Utica and Oswego;
and in our brand strength in the CNY market spurred by our
local presence, as engaged community leaders capable of
differentiated decision making..................................................................
The FDIC Summary of Deposit information gathered from each
bank at June 30th of every year provides the best proxy for
the local market......................................................... ............................
While the Oswego County market serves as a stable base for
our loan and deposit growth opportunities, the Onondaga County
market has provided significant growth opportunities. The
accompanying market share chart demonstrate both our growing
presence within Onondaga County and the opportunity for
further penetration.
During the second quarter of 2022, we expect to open a new
branch in the City of Syracuse. Located in the Southwest
Corridor of the City, this new location will help us grow our
client base and strengthen our business as we seek to gain
market share in Onondaga County. It also fulfills a strong need
within one of the City’s underserved neighborhoods by providing
access to community banking services.
We recognize that this new branch comes at a time when many
banks are abandoning branches in favor of digital banking.
As a community bank, Pathfinder knows that our customers’
value access to in-market lenders who live and work in their
communities, and that personal touch helps us grow our
referral network and business. We also understand that our
customers value the right mix of both convenient in-person
service and technology designed to help them bank when and
where they want. Over the past year, we have continued to
invest in the right technology to enhance the digital experience
for our customers and we are committed to continuous improvement
on this front. We continue to see strong growth in the utilization
of our digital banking platform and have made significant
enhancements to improve efficiency for our customers. In
addition, we have continued to enhance our online business
banking capabilities, as we seek to help our business customers
manage their deposit and treasury management needs. Looking
ahead, we are committed to continually assessing and improving
our digital platforms as a complement to the strength of our local
branch network.
FINANCIAL REVIEW
2021
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2021
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
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)
PBHC
Name of each exchange on which registered
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
☐
☒
☐
Accelerated filer
Smaller reporting company
☐
☒
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, 2021, as reported by the NASDAQ Capital Market ($15.97), was approximately $52.2 million.
As of March 24, 2022, there were 4,603,187 shares outstanding of the Registrant’s voting common stock and 1,380,283 shares of the Registrant’s Series A nonvoting
common stock
DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for the 2022 Annual Meeting of Shareholders of the Registrant (Part III).
Auditor Location: Pittsford, NY, United States
Auditor Firm Id: 1884
Auditor Name: Bonadio & Co., LLP
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2021
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
Reserved
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
Page
4
28
28
29
30
30
30
30
31
63
64
142
142
143
143
143
143
144
144
145
147
- 2 -
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, inflation 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.
A further progression of the outbreak of Coronavirus Disease 2019 (“COVID-19”), and related economic disruptions that may be
caused directly or indirectly as a result of new or resurgent outbreaks, 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 future
duration and severity of any business or economic limitations that might result from new or resurgent outbreaks cannot be
predicted with certainty.
The spread of new or resurgent outbreaks could cause significant disruptions in the U.S. economy and could potentially 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. The Company could therefore experience a
material adverse effect on its business, financial condition, results of operations and cash flows as a result of a new or resurgent
outbreaks.
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
that they are made, and the Company undertakes no obligation to update any statement in light of new information or future
events.
- 3 -
ITEM 1: BUSINESS
GENERAL
Pathfinder Bancorp, Inc.
Pathfinder Bancorp, Inc. (the "Company") is a Maryland corporation incorporated in 2014 and 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, 2021 and 2020, 5,983,467 and 4,531,383 shares of Company common stock were outstanding, respectively. The
Company had -0- and 1,380,283 shares of Series B convertible perpetual preferred stock outstanding at December 31, 2021 and 2020,
respectively.
Following shareholder approval obtained on June 4, 2021, the Company converted 1,380,283, or 100%, of its previously-outstanding
shares of Series B Convertible Perpetual Preferred Stock to an equal number of newly-created Series A Non-Voting Common Stock.
Neither the previously-issued Series B Convertible Perpetual Preferred Stock, nor the newly-issued Series A Non-Voting Common
Stock had, or will have, dividend or liquidation preference over the Company’s existing Voting Common Stock. Holders of the new
Series A Non-Voting Common Stock will be entitled to receive dividends, if and when declared by the Company’s Board of Directors,
in the same per share amount as paid on the Company’s Voting Common Stock.
At December 31, 2021, the Company had total consolidated assets of $1.29 billion, total deposits of $1.06 billion and shareholders'
equity of $110.3 million plus a noncontrolling interest of $346,000, 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, 2021, 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 gain of $162,000 in 2021.
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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 $1.0 million in annual revenues. The activities of Pathfinder Risk Management
Company, Inc. resulted in pre-tax income of $209,000 in 2021. The Company’s 51% controlling interest in this entity resulted in
income of $107,000 for the Company on a consolidated basis in 2021.
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.” Given the challenges that COVID-19 has introduced to our
communities, this mission has become even more critical.
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, recognition programs, 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, 2021, we employed 173 team members, of which 157 were full-time, 14 were part-time, and 2 were interns. As
COVID-19 restrictions were reduced and our lobbies opened back up to the public the need for temporary staff reduced. The 14 team
members that were hired on a temporary basis related to COVID-19, were offered positions as Customer Service Representatives and
were trained through our intensive two-week “teller training” program. Our staff is comprised of approximately 74% women.
At December 31, 2021, approximately 43% of our staff was 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 2021, we hired 22 employees, of which four were specifically hired, on a temporary basis,
and two were interns. Our voluntary turnover rates for the previous four years are as follows:
Year
2021
2020
2019
Voluntary Turnover %
24.2%
13.2%
18.8%
Diversity and Inclusion
An inclusive open-minded community that engages excellence and embraces diversity is fundamental to supporting the Pathfinder
Bank vision to be a local bank that the community trusts. The communities in which we serve include persons of various race,
ethnicity, gender, sexual orientation, socio-economic status, age, physical and cognitive ability, religion and political belief. We are
committed to valuing and sharing the strength of our differences in a safe and positive environment.
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Our primary goal is to attract and cultivate a dynamic and cultural sensitivity that exemplifies, promotes and celebrates diversity. This
definition of diversity includes recognition and appreciation of the uniqueness of each individual. 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 continue our efforts through our Diversity, Equity and Inclusion Committee made up of
several employee representatives from areas located throughout our market footprint. We collaborate with local business partners to
better our understanding and position ourselves to improve and fulfill our commitment to diversity and inclusion. 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.
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 2021, the population of our workforce was as follows:
Ethnicity
American Indian or Alaska Native
Asian
Black or African American
Hispanic or Latino
Two or more races (Not Hispanic or Latino)
White
Age Demographics
Total
Age Range
18-25
26-35
36-45
46-55
56-65
Over 65
Grand Total
Percentage of
Workforce
0.6
2.3
0.6
1.2
1.2
94.1
%
%
%
%
%
%
34
42
41
18
32
6
173
Compensation and Benefits
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, identity theft protection, telemedicine service, and an employee assistance program, including mental health services.
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.
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Health and Safety
The safety, health and wellness of our team members is a top priority. The COVID-19 pandemic continues to present unique
challenges with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability
of our management and staff, we continue to be able to (1) effectively work 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, 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.
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, 2021, over 35% 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 $172,700 in Onondaga County and $121,100 in
Oswego County at the end of 2021. 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
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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.
As of June 30, 2021, based on the most recently-available FDIC data, we had the largest market share in Oswego County, representing
45.0% of all deposits, and we additionally held 1.9% of all deposits in Onondaga County. In addition, when combining both Oswego
and Onondaga Counties, we have the fifth largest market share of twenty one 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.
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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
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. The Paycheck Protection Program ended in May
2021. Through December 31, 2021, the Bank received approval from the SBA for 1,177 loans totaling approximately $111.7 million
through this program. The Bank is now also assisting borrowers with the loan forgiveness phase of the process. As of this filing, the
Company has submitted 932 loans totaling approximately $92.3 million to the SBA for forgiveness, with 256 totaling $19.3 million
remaining.
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, 2021, was generally
$548,250 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 prior to 2020 and to a substantially more significant
degree in 2020 and 2021. The increase in residential mortgage sales in 2020 and 2021 was directly related to significant increases in
the volume of 20- and 30-year mortgage loans originated by the Bank in those years. 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.
- 9 -
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.
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.
- 10 -
Home equity loans and junior liens secured by junior mortgages have greater risk than one-to-four family residential mortgage loans
secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of
foreclosure, after repayment of the senior mortgages, if applicable. When customers default on their loans, we attempt to work out the
relationship in order to avoid foreclosure because the value of the collateral may not be sufficient to compensate us for the amount of
the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Moreover, decreases in real
estate values could adversely affect our ability to fully recover the loan balance in the event of a default.
Consumer Loans
We are authorized to make loans for a variety of personal and consumer purposes and our consumer loan portfolio consists primarily
of automobile, recreational vehicles and unsecured personal loans, as well as unsecured lines of credit and loans secured by deposit
accounts. Our procedure for underwriting consumer loans includes an assessment of the applicant’s credit history and ability to meet
existing obligations and payments for the proposed loan, as well as an evaluation of the value of the collateral security, if any.
Consumer loans generally entail greater credit-related risk than one-to-four family residential mortgage loans, particularly in the case
of loans that are unsecured or are secured by assets that tend to depreciate in value, such as automobiles. As a result, consumer loan
collections are primarily dependent on the borrower’s continuing financial stability and thus are more likely to 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
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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.
At December 31, 2021 the Bank held fifteen pools of loans originated by eleven unaffiliated third-party lenders with an aggregate
amortized historical cost of $128.5 million. Of this total, $92.2 million in aggregate amortized historical cost relates to six loan pools
acquired either in the fourth quarter of 2020 or during 2021, $34.8 million in aggregate amortized historical cost relates to seven loan
pools acquired in 2019, and $1.5 million in aggregate amortized historical cost relates to two loan pools acquired prior to 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, 2021, the Bank held $44.1 million (three
pools), $8.8 million (three pools), $8.4 million (one pool), and $4.1 million (one pool), in purchased pooled loans secured by
consumer installment contracts, automobiles, home equity lines of credit and residential real estate, respectively. The Bank also held
$16.4 million (two pools) in purchased secured commercial lines of credit. In addition, the Bank held $42.8 million (four pools) in
purchased unsecured consumer loans and $3.9 million (one pool) in commercial installment loans at December 31, 2021. 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, 2021 and December 31, 2020, 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.
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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 $19.7 million at December 31, 2021, on an unsecured basis, and an additional amount equal to 10% of
unimpaired capital and unimpaired surplus, which was $13.1 million at December 31, 2021, if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but not real estate), subject to exceptions.
Additionally, our internal loan policies limit the total related credit to be extended to any one borrower (after application of the rules
of attribution), with respect to any and all loans with the Bank to 10% of tier 1 and 2 capital, subject to certain exceptions. The
indebtedness includes all credit exposure whether direct or contingent, used or unused.
ASSET QUALITY
Loan Delinquencies and Collection Procedures
When a loan becomes delinquent, we make attempts to contact the borrower to determine the cause of the delayed payments and seek
a solution to permit the loan to be brought current within a reasonable period of time. The outcome can vary with each individual
borrower. In the case of mortgage loans and consumer loans, a late notice is sent 15 days after an account becomes delinquent. If
delinquency persists, notices are sent at the 30 day delinquency mark, the 45 day delinquency mark and the 60 day delinquency mark.
We also attempt to establish telephone contact with the borrower early on in the process. In the case of residential mortgage loans,
included in every late notice is a letter that includes information regarding home-ownership counseling. As part of a workout
agreement, we will accept partial payments during the month in order to bring the account current. If attempts to reach an agreement
are unsuccessful and the customer is unable to comply with the terms of the workout agreement, we will review the account to
determine if foreclosure is warranted, in which case, consistent with New York law, we send a 90 day notice of foreclosure and then a
30 day notice before legal proceedings are commenced. A consumer final demand letter is sent in the case of a consumer loan. In the
case of commercial loans and commercial mortgage loans, we follow a similar notification practice with the exception of the
previously mentioned information on home-ownership counseling. In addition, commercial loans do not require 90 day notices of
foreclosure. Generally, commercial borrowers only receive 10 day notices before legal proceedings can be commenced. Commercial
loans may experience longer workout times that may trigger a need for a loan modification that could meet the requirements of a
troubled debt restructured loan.
Impaired Loans, Non-performing Loans and Troubled Debt Restructurings
The policy of the Bank is to provide a continuous assessment of the quality of its loan portfolio through the maintenance of an internal
and external loan review process. The process incorporates a loan risk grading system designed to recognize degrees of risk on
individual commercial and mortgage loans in the portfolio. Management is responsible for monitoring of asset quality and risk grade
designations, which are communicated to the board on a regular basis.
We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or
management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A
loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed
on non-accrual status, unpaid interest credited to income is reversed. Interest received on non-accrual loans generally is applied
against principal or interest if it is recognized on the cash basis method. Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, generally for a
minimum of six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
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
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Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair
value of the collateral adjusted for market conditions and selling expenses as compared to the loan carrying value.
Troubled Debt Restructurings (“TDR”)
TDRs are loan restructurings in which we, for economic or legal reasons related to an existing borrower’s financial difficulties, grant a
concession to the debtor that we would not otherwise consider. Typically, a troubled debt restructuring involves a modification of
terms of debt, such as reduction of the stated interest rate for the remaining original life of the debt, extension of the maturity date at a
stated interest rate lower than the current market rate for new debt with similar risk, reduction of the face amount of the debt, or
reduction of accrued interest. We consider modifications only after analyzing the borrower’s current repayment capacity, evaluating
the strength of any guarantors based on documented current financial information, and assessing the current value of any collateral
pledged. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the
borrower and that is in our best interests. Some examples of residential TDRs include restructures encouraged by the Federal
Government’s HAMP and HARP Programs, in which we have participated.
Loans on non-accrual status at the date of modification are initially classified as non-accrual troubled debt restructurings. Our policy
provides that troubled debt restructured loans are returned to accrual status after a period of satisfactory and reasonable future payment
performance under the terms of the restructuring. Satisfactory payment performance is generally no less than six consecutive months
of timely payments and demonstrated ability to continue to repay.
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
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the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of
additional general or specific allowances.
In connection with the filing of our periodic regulatory reports and in accordance with our classification of assets policy, we
continuously assess the quality of our loan portfolio and we regularly review the loans in our loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of
emerging financial weaknesses even though the loan is currently performing in accordance with its terms, or delinquency status, or if
the loan possesses weaknesses although currently performing. Management reviews the status of our loan portfolio delinquencies, by
loan types, with the full board of directors on a monthly basis. Individual classified loan relationships are discussed as warranted. If a
loan deteriorates in asset quality, the classification is changed to “special mention,” “substandard,” “doubtful” or “loss” depending on
the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified
“substandard.”
We also employ a risk grading system for our loans to help assure that we are not taking unnecessary and/or unmanageable risk. The
primary objective of the loan risk grading system is to establish a method of assessing credit risk to further enable management to
measure loan portfolio quality and the adequacy of the allowance for loan losses. Further, we contract with an external loan review
firm to complete a credit risk assessment of the loan portfolio on a regular basis to help determine the current level and direction of
our credit risk. The external loan review firm communicates the results of their findings to the Executive Loan Committee in writing
and by periodically attending the Executive Loan Committee meetings. Any material issues discovered in an external loan review are
also communicated immediately to the President of the Bank. See Note 5 to the consolidated financial statements for further details
on the Company’s credit quality indicators that define our risk grading system.
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the date of the statement
of condition and it is recorded as a reduction of loans. The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance.
The allowance is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be
uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All or
part of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all
or part of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than 120 days
past due on a contractual basis, unless productive collection efforts are providing results. Consumer loans may be charged off earlier
in the event of bankruptcy, or if there is an amount that is deemed uncollectible. No portion of the allowance for loan losses is
restricted to any individual loan type and the entire allowance is available to absorb any and all loan losses.
The allowance is based on three major components which are: (i) specific components for impaired loans, (ii) recent historical losses
and several qualitative factors applied to a general pool of loans, and (iii) an unallocated component.
The first component is the specific allowance that relates to loans that are classified as impaired. For these loans, an allowance is
established when the discounted cash flows or collateral value of the impaired loan are lower than the carrying value of the loan. A
loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the
scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impairment is
measured by either the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value
of the underlying collateral if the loan is collateral dependent. The majority of our loans utilize the fair value of the underlying
collateral. Factors considered by management in determining impairment include payment status, collateral value and the probability
of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines the significance of payment delays and shortfalls on a
case-by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and
reason for the delay, the borrower’s prior payment record and the amount of shortfall in relation to what is owed.
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
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qualitative factors, applied to each product class, make the evaluation inherently subjective, as it requires material estimates that may
be susceptible to significant revision as more information becomes available.
The third component may consist of an unallocated allowance which is maintained to cover uncertainties that could affect
management’s estimate of probable losses. The unallocated component of the allowance, when present, reflects an additional margin
for potential imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses
in the portfolio. This component would typically be appropriate in times of significant economic dislocations or uncertainties in
either, or both, the local and national economies. The unallocated allowance generally comprises less than 10% of the total allowance
for loan losses and can be as little as 0% of total allowance.
When a loan is determined to be impaired, we will reevaluate the collateral which secures the loan. For real estate loans, we will
obtain a new appraisal or broker’s opinion, whichever is considered to provide the most accurate value in the event of sale. An
evaluation of equipment held as collateral will be obtained from an independent firm able to provide such an evaluation. Collateral
will be inspected not less than annually for all impaired loans and will be reevaluated not less than every two years. Appraised values
are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The
discounts also include estimated costs to sell the property. For commercial and industrial loans secured by non-real estate collateral,
such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial
statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources
are generally discounted based on the age of the financial information or the quality of the assets.
Large groups of homogeneous loans, 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.
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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
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, 2021 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, 2021, 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.
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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.
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, 2021 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, 2021, 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, IntraFi
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, 2021, 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.
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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, 2021, 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.
Subordinated Debt
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 Federal Rerserve. 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.
The United Kingdom’s Financial Conduct Authority (“FCA”), the organization responsible for regulating LIBOR, ceased 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, had been charged with developing an alternative rate that replaced LIBOR in the United States (U.S.
dollar-denominated LIBOR). The ARRC 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 has currently
replaced LIBOR in the substantial majority of contracts in which LIBOR was used. 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 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, 2021 and 2020. 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 was 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, 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 6.25% until the stated maturity date.
On April 1, 2021 the Company redeemed its $10.0 million non-amortizing subordinated loan that was scheduled to mature on October
1, 2025. The Company has had the right to prepay the Subordinated Loan at any time after October 15, 2020 without penalty. The
terms of the Subordinated Loan required fixed interest payments at an annual interest rate of 6.25% after February 29, 2016 until the
Loan’s scheduled maturity date. The redemption of this $10.0 million component of the Company’s outstanding subordinated debt
will prospectively reduce interest expense after April 1, 2021 by $625,000 annually. Interest expense, related to this borrowing, of
$156,000 and $650,000 was recorded in the years ended December 31, 2021 and 2020, respectively.
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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, 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 related to this transaction of $1.5 million and $327,000 was recorded in
the years ended December 31, 2021 and 2020, respectively
SUPERVISION AND REGULATION
General
Pathfinder Bank is a New York-chartered commercial bank and the Company is a Maryland corporation and a registered bank holding
company. The Bank’s deposits are insured up to applicable limits by the FDIC. The Bank is subject to extensive regulation by
NYSDFS, as its chartering agency, and by the FDIC, its primary federal regulator and deposit insurer. The Bank is required to file
reports with, and is periodically examined by, the FDIC and the NYSDFS concerning its activities and financial condition and must
obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of
other financial institutions. As a registered bank holding company, the Company is regulated by the Federal Reserve Board.
The regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of depositors and the deposit insurance funds, rather than for the protection of shareholders and
creditors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies concerning the establishment of deposit insurance assessment fees,
classification of assets and establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the New York State legislature, the NYSDFS, the FDIC, the Federal Reserve Board or the
United States Congress, could have a material adverse impact on the financial condition and results of operations of the Company and
the Bank.
Set forth below is a summary of certain material statutory and regulatory requirements applicable to the Company and the Bank. The
summary is not intended to be a complete description of such statutes and regulations and their effects on the Company and the Bank.
The 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 ratio was increased to 9.5% for 2021 and will revert to 9.0% thereafter;
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. The program stopped taking new loan applications in May 2021; 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-
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day period beginning March 18, 2020, which period has subsequently been extended several times by federal mortgage-
backing agencies.
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 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.
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New York State Community Reinvestment Regulation
Pathfinder Bank is also subject to provisions of the New York State Banking Law which imposes continuing and affirmative
obligations upon banking institutions organized in New York State to serve the credit needs of its local community (“NYCRA”) which
are substantially similar to those imposed by the Federal Community Reinvestment Act (“CRA”). Pursuant to the NYCRA, a bank
must file copies of all federal CRA reports with the NYSDFS. The NYCRA requires the NYSDFS to make a written assessment of a
bank’s compliance with the NYCRA every 24 to 36 months, utilizing a four-tiered rating system and make such assessment available
to the public. The NYCRA also requires the Superintendent to consider a bank’s NYCRA rating when reviewing a bank’s application
to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices or automated teller
machines, and provides that such assessment may serve as a basis for the denial of any such application. Pathfinder Bank’s NYCRA
most recent rating, dated December 31, 2018, 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.
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 increased 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.
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The FDIC is also authorized to permit state banks to engage in state authorized activities or investments not permissible for national
banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is determined that such
activities or investments do not pose a significant risk to the FDIC insurance fund. The FDIC has adopted regulations governing the
procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999
specified that a state bank may control a subsidiary that engages in activities as principal that would only be permitted for a national
bank to conduct in a “financial subsidiary,” if a bank meets specified conditions and deducts its investment in the subsidiary for
regulatory capital purposes.
Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt
corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five
capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital
ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is
“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater,
a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a
total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a
common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based
capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common
equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity
(as defined in the regulations) to total assets that is equal to or less than 2.0%.
“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to
submit a capital restoration plan. A bank’s compliance with such a plan must be guaranteed by any company that controls the
undercapitalized institution in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the
amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is
treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number
of additional measures, including, but not limited to, a required sale of sufficient voting stock to become adequately capitalized, a
requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or officers and
restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding
company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the
appointment of a receiver or conservator within 270 days after being designated “critically undercapitalized.”
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.
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In addition, extensions of credit in excess of certain limits must be approved by Pathfinder Bank’s board of directors. Extensions of
credit to executive officers are subject to additional limits based on the type of extension involved.
Enforcement. The FDIC has extensive enforcement authority over insured state banks, including Pathfinder Bank. That enforcement
authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors
and officers. In general, enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound
practices. The FDIC also has authority under federal law to appoint a conservator or receiver for an insured bank under certain
circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member
bank if the bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which
the institution became “critically undercapitalized.”
Federal Insurance of Deposit Accounts. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for
banks, savings institutions and credit unions to $250,000 per depositor.
The FDIC assesses insured depository institutions to maintain its Deposit Insurance Fund. Under the FDIC’s risk-based assessment
system, institutions deemed less risky pay lower assessments. Assessments for institutions of less than $10 billion of assets are now
based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure of an
institution’s failure within three years.
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 eleven
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, 2021, Pathfinder Bank was in
compliance with this requirement.
Other Regulations
Interest and other charges collected or contracted for by Pathfinder Bank are subject to state usury laws and federal laws concerning
interest rates. Pathfinder Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:
•
•
•
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one-to-four family residential real
estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account
practices, and prohibiting certain practices that increase the cost of settlement services;
The TILA-RESPA Integrated Disclosure Rule, commonly known as the TRID rule. This rule amended the Truth in
Lending Act and the Real Estate Settlement Procedures Act to integrate several consumer disclosures for mortgage loans;
- 24 -
•
•
•
•
•
•
•
•
•
•
•
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.”
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.
- 25 -
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.
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.
- 26 -
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 2018 through 2021. 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, 2021, 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, 2021 our total federal pre-base year bad debt
reserve was approximately $1.3 million.
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.
- 27 -
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 for companies with a Business
Income Base up to $5 million, or 7.25% for companies with a Business Income Base greater than $5 million, 0.025% and 0.1875% of
average Business Capital for 2020 and 2021, respectively, 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.
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 received $316,000 in tax refunds from New York State
for taxes previously paid in the carryback years. This 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 located in Onondaga County and one limited purpose office
located 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, 2021. The
aggregate net book value of the Bank's premises and equipment was $21.7 million at December 31, 2021. 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
Owned (1)
1978
1994
2002
Owned
Owned
Owned
2003
Owned (2)
2005
2011
Owned
Owned
2014
Leased (3)
2018
Leased (4)
2017
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 $37,000.
(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 $74,000.
(5) The premises are leased with an annual rent of $16,000.
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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, 2021.
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 322 shareholders of record (excluding the number of persons or entities holding stock in street name through various
brokerage firms) as of March 22, 2022.
The Company did not repurchase any shares of its common stock during the fourth quarter of 2021.
Equity Compensation Plan Information
The following table provides information as of December 31, 2021 with respect to shares of common stock that may be issued under
the Company’s existing equity compensation plans.
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
264,270
$
N/A
10.98
N/A
4,382
N/A
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans
not approved by stockholders
Dividends and Dividend History
The Company (and its predecessor) has historically paid regular quarterly cash dividends on its common stock. The board of directors
presently intends to continue the payment of regular quarterly cash dividends, subject to the need for those funds for debt service and
other purposes. Payment of dividends on the common stock is subject to determination and declaration by the board of directors and
will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, Pathfinder
Bank and its subsidiaries’ results of operations and financial condition, tax considerations, and general economic conditions. More
details are included within the section titled Regulation and Supervision.
ITEM 6: RESERVED
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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 5,983,467 and 4,531,383 shares outstanding at December 31, 2021 and December
31, 2020, 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.
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 was 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.
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,
- 31 -
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
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.
Pursuant to Nasdaq rules, Castle Creek could 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 was required to 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 was required to 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 were 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 was payable at the same time on the Series B Preferred Stock. The Series B Preferred
Stock would 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 had no voting rights except as was required by law.
The Series B Preferred Stock was not 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, and regulatory approval if Castle Creek’s
ownership of Common Stock would exceed 9.9%. At December 31, 2021, Castle Creek owned approximately 8.9% of the
Company’s common voting 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.
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.
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 Voting 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 Voting 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, 2021, 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
Series B Preferred Stock. The Company received no cash proceeds as a result of the exchange. In addition, the Company did not pay
any commission or remuneration for the solicitation of the exchange
- 32 -
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.
On June 4, 2021, shareholders of the Company approved an amendment to the Company’s Articles of Incorporation to authorize Non-
Voting Common Stock, and to eliminate the Exchange Cap. On June 9, 2021, the Company filed Articles Supplementary to the
Articles of Incorporation of the Company (the “Articles Supplementary”) with the Maryland State Department of Assessments and
Taxation creating a Class A Non-Voting Common Stock, par value $0.01 per share (“Non-Voting Common Stock”). The Articles
Supplementary authorized 1,505,283 shares of the Non-Voting Common Stock which Castle Creek received in exchange for the
Company’s outstanding Series B Preferred Stock on a one for one basis and allowed for the issuance of 125,000 shares of Non-Voting
Common Stock that may be issued upon the exercise of the Warrant.
The preferences, limitations, powers and relative rights of the Non-Voting Common Stock are set forth in the Articles Supplementary,
a summary of which follows:
Ranking: The Non-Voting Common Stock will rank, as to the payment of dividends and distribution of assets upon dissolution,
liquidation or winding up of the Company, (i) pari passu with the Company’s Common Stock, and (ii) subordinate and junior to all
other securities of the Company which, by their respective terms, are senior to the Non-Voting Common Stock or the Company’s
Common Stock.
Dividend Rights: Holders of the Non-Voting Common Stock will be entitled to receive dividends when, as and if declared by the
Company’s Board of Directors, in the same per share amount as paid on Company’s Common Stock. No dividends will be payable on
the Company’s Common Stock unless a dividend identical to that paid on the Company’s Common Stock is payable at the same time
on the Non-Voting Common Stock in an amount per share equal to the product of (i) the per share dividend declared and paid in
respect of each share of the Company’s Common Stock and (ii) the number of shares of the Company’s Common Stock into which
such share of Non-Voting Common Stock is then convertible (without regard to limitations on conversion of such Non-Voting
Common Stock); provided that if any stock dividend is declared on the Company’s Common Stock, the holders of Non-Voting
Common Stock will be entitled to receive such dividend payable in shares of Non-Voting Common Stock.
Voting: The holders of shares of Non-Voting Common Stock have no voting rights, except as may be required by Maryland law and
as set forth in the Articles Supplementary. So long as any shares of Non-Voting Common Stock are issued and outstanding, the
Company will not (including by means of merger, consolidation or otherwise) without obtaining the approval of the holders of a
majority of the issued and outstanding shares of Non-Voting Common Stock:
•
•
•
alter or change the rights, preferences, privileges or restrictions provided for the benefit of the holders of the Non-Voting
Common Stock so as to affect them adversely;
increase or decrease the authorized number of shares of Non-Voting Common Stock; or
enter into any agreement, merger or business combination, or engage in any other transaction, or take any action that
would have the effect of adversely changing any preference or any relative or other right provided for the benefit of the
holders of the Non-Voting Common Stock.
Redemption and Repurchase: The Non-Voting Common Stock is not redeemable by the Company or the holder. However, in the
event that the Company offers to repurchase shares of the Company’s Common Stock, the Company must offer to repurchase shares
of the Non-Voting Common Stock pro rata based upon the number of shares of the Company’s Common Stock such holders would be
entitled to receive if such shares were converted into shares of the Company’s Common Stock immediately prior to such repurchase.
Conversion: Each share of Non-Voting Common Stock will be convertible into one share of the Company’s Common Stock (i) at any
time and from time to time at the request of the holder thereof or at the written request of the Company; provided that upon such
conversion, the holder, together with all affiliates of the holder, will not own or control in the aggregate more than 9.9% of the
Company’s Common Stock (or of any class of the Company’s voting securities), excluding for the purpose of this calculation any
reduction in the ownership resulting from transfers by such holder of voting securities (which, for the avoidance of doubt, does not
included the Non-Voting Common Stock); or (ii) automatically, without any further action of the part of the holder, on the date that
the holder transfers such share of Non-Voting Common Stock to a non-affiliate of the holder in a permissible transfer.
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
- 33 -
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 - and with
greater flexibility in many cases - than our market 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 was, and remains, to better position the Company to compete in our
marketplace for these types of deposits in future periods. During 2021, the Bank recorded an increase in combined
business and consumer nonmaturity deposits of $81.3 million, or 18.6%. 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, some of which is
considered to be transitory, 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 to
an experienced real estate developer in the fourth quarter of 2020. The intent of the sale was to access the purchaser’s
greater ability to utilize certain available tax credits that are more beneficial to the purchaser than they would be to the
Company, if the Company accessed those credits directly. Management believes that the benefits of the more-fully-
utilized tax credits have been passed through to the Company under the terms of a negotiated lease agreement with the
property’s purchaser acting as the lessor. We have substantially completed the planned renovation work on the acquired
facility and expect to open our new Southwest Syracuse branch office by the second quarter of 2022. 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
- 34 -
•
•
•
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 2021 and have
yielded the expected financial benefits and are expected to continue to do so in future periods. In recent years, we have
also sought to increase the breadth 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.
Investing in our 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 its rate of revenue growth and to thereby increase the Company’s 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 2021 and 2020, and that will continue to reduce the rate of
growth in operating expenses in 2022 and beyond. In 2021, the Company’s efficiency ratio was 63.1%, a 5.6% decline
from the 68.7% efficiency ratio in 2020, 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 $25.0 million in non-amortizing
subordinated debt. In April 2021, the Company retired the subordinated debt that it had issued in October 2015, thereby
reducing its outstanding balance of Subordinated Loans from $39.4 million at December 31, 2020 to $29.6 million at
December 31, 2021. Since 2014, we have therefore 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 $724.2 million, or 129.1%, to
$1.23 billion at December 31, 2021. 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.
COVID-19 Response
In early January 2020, the World Health Organization (the “WHO”) 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 capacity constraints on available
medical resources, these very substantial mandated curtailments of social and economic activity were relaxed globally in the third and
fourth quarters of 2020. However, within various time periods during 2021 that extended into early 2022, the number of reported
positive cases in the United States spiked to very high levels due to the emergence of new variants of the virus. At the date of this
filing, the majority of the United States, including the areas in which the Company has its operations, has returned to substantively
normal business and social activities.
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 were made fully accessible to the public
in the early fall of 2020, but remained 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.
- 35 -
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 remained as of December 31, 2021. 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 also issued
guidance encouraging financial institutions to work prudently with borrowers who were, or were potentially, unable to meet their
contractual payment obligations because of the effects of COVID-19. The Company worked throughout the pandemic to assist its
business and consumer customers affected by COVID-19.
The Bank participated in all phases of 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 the end of the
program in the early spring of 2021, the Bank received approval from the SBA for 1,120 loans totaling approximately $109.8 million
through this program. The Bank is now also assisting borrowers with the loan forgiveness phase of the process. As of this filing, the
Company has submitted 864 loans totaling approximately $90.5 million to the SBA for forgiveness. The Bank received $4.0 million in
fees from the SBA associated with PPP lending activities during 2020 and 2021 and recognized $2.2 million and $900,000 of those
fees in 2021 and 2020, respectively. Accordingly, $3.1 million in deferred fee income on a cumulative basis was subtracted from the
carrying value of the PPP loans held in portfolio and the remaining $912,000 in deferred collected fees will be recognized in future
periods.
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. 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. 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 were granted subject to further analysis and discussion with specific borrowers. To the extent that such
modifications met the criteria previously described these loans were not classified as troubled debt restructurings nor classified as
nonperforming at December 31, 2020. Loans not granted additional deferral periods were categorized as nonaccrual loans if the
borrowers failed to make the first scheduled payment following the end of the deferral period, or became seriously delinquent
thereafter. During the course of 2021, all deferred loans were either returned to accrual status or appropriately characterized as
nonaccrual as dictated by their repayment activities. Therefore, the Company had no loans in deferral status at December 31, 2021.
- 36 -
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
(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
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
2021
For the years ended December 31,
2020
2019
2018
$ 1,285,177
190,598
160,923
819,524
1,055,346
106,661
110,633
$ 1,227,443
128,261
171,224
812,718
995,907
121,450
97,722
$ 1,093,807
111,134
122,988
772,782
881,893
108,253
90,669
$
$
$
$
$
$
$
$
45,827
7,532
38,295
1,022
37,273
6,231
27,495
16,009
3,499
103
12,407
97
35
2,699
9,576
2.07
2.07
18.43
17.66
0.280
$
$
$
$
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
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
0.98 %
11.91
8.26
8.58
3.06
3.21
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
124.61
2.18
63.07
16.17
11.91
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
2017
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
0.42 %
5.69
7.47
7.01
2.83
2.97
116.05
2.57
79.06
25.21
5.69
- 37 -
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
2021
2020
2019
2018
2017
For the years ended December 31,
1.00 %
0.65
1.57
155.99
2.58 %
1.74
1.55
59.89
0.67 %
0.49
1.11
165.25
0.35 %
0.36
1.18
340.13
0.84 %
0.61
1.23
145.61
15.19 %
13.94
9.52
13.94
13.13 %
11.87
8.63
11.87
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
161
11
176
11
157
11
160
10
140
(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.
- 38 -
(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
Tangible common equity
Tangible book value per common share
Tangible 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
For the years ended December 31,
2021
2020
2019
2018
2017
$ 110,287
-
5,983
18.43
$
$ 110,287
4,536
117
$ 105,634
$ 105,634
5,983
17.66
$
27,495
38,295
6,231
$
$
$
$
$
$
$
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
$
$
$
$
$
$
$
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
551
382
43,593
$
63.07 %
2,255
(629)
36,502
$
68.71 %
393
81
32,673
$
78.75 %
(132)
(62)
29,795
$
79.04 %
526
-
26,682
79.06 %
$
1,548
9,576
16.17 %
$
1,102
5,405
20.39 %
$
1,081
3,578
30.21 %
$
1,005
4,031
24.93 %
880
3,491
25.21 %
$
$
$
$
12,407
104,131
-
$ 104,131
$
$
$
$
6,950
93,586
15,709
77,877
4,276
80,136
9,074
71,062
4,031
63,667
-
63,667
$
11.91 %
$
8.92 %
$
6.02 %
$
6.33 %
3,491
61,383
-
61,383
5.69 %
- 39 -
(In thousands, except per share amounts)
Regulatory Capital Ratios (Bank Only)
Total capital (to risk-weighted assets)
Total equity (GAAP)
Goodwill
Intangible assets
Addback: Accumulated other comprehensive income
Total Tier 1 Capital
Allowance for loan and lease losses
Unrealized Gain on available-for-sale securities
Total Tier 2 Capital
Total Tier 1 plus Tier 2 Capital (numerator)
Risk-weighted assets (denominator)
Total core capital to risk-weighted assets
Tier 1 capital (to risk-weighted assets)
Total Tier 1 capital (numerator)
Risk-weighted assets (denominator)
Total capital to risk-weighted assets
Tier 1 capital (to adjusted assets)
Total Tier 1 capital (numerator)
Total average assets
Goodwill
Intangible assets
Adjusted assets (denominator)
Total capital to adjusted assets
Tier 1 Common Equity (to risk-weighted assets)
Total Tier 1 capital (numerator)
Risk-weighted assets (denominator)
Total Tier 1 Common Equity to risk-weighted assets
Paycheck Protection Program (“PPP”)
For the years ended December 31,
2021
2020
2019
2018
2017
$ 121,896
(4,536)
(117)
1,268
$ 118,511
10,655
-
$
10,655
$ 129,166
850,157
$ 106,720
(4,536)
(133)
2,236
$ 104,287
11,002
-
$
11,002
$ 115,289
878,380
$
$
$
$
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
15.19 %
13.13 %
12.28 %
13.69 %
13.97 %
$ 118,511
850,157
$ 104,287
878,380
$
86,424
774,177
75,871
$
607,414
71,114
$
559,161
13.94 %
11.87 %
11.16 %
12.49 %
12.72 %
$ 118,511
1,249,752
(4,536)
(117)
$1,245,099
$ 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
9.52 %
8.63 %
8.20 %
8.31 %
8.16 %
$ 118,511
850,157
$ 104,287
878,380
$
86,424
774,177
75,871
$
607,414
71,114
$
559,161
13.94 %
11.87 %
11.16 %
12.49 %
12.72 %
The Bank participated in all rounds of the PPP funded by the U.S. Treasury Department and administered by the 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. The PPP ended in May
2021. Information related to the Company’s PPP loans are included in the following tables:
Unaudited
(In thousands, except number of loans)
Number of PPP loans originated in the period
Funded balance of PPP loans originated in the period
Number of PPP loans forgiven in the period
Average balance of PPP loans in the period
Balance of PPP loans forgiven in the period
Deferred PPP fee income recognized in the period
(In thousands, except number of loans)
Unearned PPP deferred fee income at end of period
(In thousands, except number of loans)
Total PPP loans originated since inception
Total PPP loans forgiven since inception
Total PPP loans remaining at December 31, 2021
$
$
$
$
$
For the years ended
December 31, 2021
December 31, 2020
478
36,369
796
75,538
77,054
2,150
$
$
$
..$
699
75,352
136
91,328
15,279
938
December 31, 2021
716 .. $
December 31, 2020
1,216
Number
Balance
1,177
$
932
$
256 .. $
111,721
92,333
19,338
- 40 -
CRITICAL ACCOUNTING ESTIMATES
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, 2021, the Bank’s position in impaired loans consisted of 56 loans totaling $11.3 million. Of these
loans, 18 loans, totaling $2.3 million, were valued using the present value of future cash flows method; and 38 loans, totaling $9.0
million, were valued based on a collateral analysis. For all other loans, the Company uses the general allocation methodology that
establishes an allowance to estimate the probable incurred loss for each risk-rating category. Note 1 to the consolidated financial
statements describes the methodology used to determine the allowance for loan losses and a discussion of the factors driving changes
in the amount of the allowance for loan losses is included in this report.
Deferred Income Tax Assets and Liabilities. Deferred income tax assets and liabilities are determined using the liability method.
Under this method, the net deferred tax asset or liability is recognized for the future tax consequences. This is attributable to the
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as
net operating and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities from 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.
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.
- 41 -
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 2021 evaluation, management has determined that the carrying value of goodwill is not impaired as of December 31,
2021. The evaluation approach is described in Note 10 of the consolidated financial statements contained herein.
Estimation of Fair Value. The estimation of fair value is significant to several of our assets; including investment securities
available-for-sale, interest rate derivative (discussed in detail in Note 22 of the consolidated financial statements), intangible assets,
foreclosed real estate, and the value of loan collateral when valuing loans. These are all recorded at either fair value, or the lower of
cost or fair value. Fair values are determined based on third party sources, when available. Furthermore, accounting principles
generally accepted in the United States require disclosure of the fair value of financial instruments as a part of the notes to the
consolidated financial statements. Fair values on our available-for-sale securities may be influenced by a number of factors; including
market interest rates, prepayment speeds, discount rates, and the shape of yield curves.
Fair values for securities available-for-sale are obtained from an independent third party pricing service. Where available, fair values
are based on quoted prices on a nationally recognized securities exchange. If quoted prices are not available, fair values are measured
using quoted market prices for similar benchmark securities. Management made no adjustments to the fair value quotes that were
provided by the pricing source. The fair values of foreclosed real estate and the underlying collateral value of impaired loans are
typically determined based on evaluations by third parties, less estimated costs to sell. When necessary, appraisals are updated to
reflect changes in market conditions.
RECENT EVENTS
On December 20, 2021, the Company announced that its Board of Directors had declared a cash dividend of $0.07 per share on the
Company’s voting common and non-voting common stock, and a cash dividend of $0.07 per notional share for the issued Warrant
relating to the fiscal quarter ending December 31, 2021. The dividend was payable on February 4, 2022 to shareholders of record on
January 14, 2022.
EXECUTIVE SUMMARY AND RESULTS OF OPERATIONS
The Company reported net income of $12.4 million for 2021, an increase of $5.5 million, or 78.5%, as compared to net income of $7.0
million for 2020. Net income increased during 2021, as compared to the previous year, due to an increase in net interest income
before the provision for loan losses of $6.7 million, combined with a $3.4 million decrease in provision for loan losses. These
increases were offset by a decrease in noninterest income of $254,000, an increase in noninterest expenses for the year ended
December 31, 2021 of $2.4 million and an increase in income tax expense of $2.2 million. Basic and diluted earnings per share in
2021 were both $2.07 per share, as compared to $1.17 per share in 2020. Return on average assets increased 38 basis points to 0.98%
in 2021 from 0.60% in 2020. Return on average equity increased 448 basis points to 11.91% in 2021 as compared to 7.43% in 2020.
The increase in return on average assets in 2021, as compared to the previous year, was primarily due to the increase in net income
outpacing average asset growth. Average assets increased in 2021 by $94.2 million, or 8.1%, as the Company grew its total average
assets from $1.23 billion for the year ended December 31, 2020 to $1.29 billion for the year ended December 31, 2021. The increase
in return on average equity in 2021, as compared to the previous year, was primarily due to the increase in net income outpacing the
growth in equity.
- 42 -
Net interest income, before provision for loan losses, increased $6.7 million, or 21.0%, to $38.3 million in 2021 on average interest
earning assets of $1.19 billion as compared to net interest income before provision for loan losses of $31.6 million in 2020 on average
interest earning assets of $1.10 billion. Interest and dividend income increased $3.3 million in 2021 to $45.8 million, as compared to
interest and dividend income of $42.5 million in 2020. The aggregate increase in the average balance of interest-earning assets of
$92.6 million was partially offset by a decrease of two basis points in the overall average yield earned on those assets. The $3.3
million increase in interest and dividend income was further enhanced by a decrease in interest expense of $3.3 million due to a
decrease in the average rate paid on interest-bearing liabilities of 40 basis points in 2021 as compared to 2020, partially offset by an
increase in the average balance of interest-bearing liabilities of $44.1 million.
The Company recorded a provision for loan losses of $1.0 million in 2021 as compared to $4.7 million in the prior year. The $3.7
million year-over-year decrease in provision for loan losses was primarily due to continuing improvements in nonaccrual loans and
general economic conditions. Additionally, the provision for loan losses in 2021 reflected a decrease in nonperforming loans of $13.0
million at December 31, 2021, as compared to December 31, 2020. These factors were partially offset within the provision calculation
during 2021 by an increase in outstanding loan balances, excluding PPP loans, of $6.8 million, or 1.0%, in 2021 as compared to 2020.
The Company recorded $1.0 million in net charge-offs in 2021 as compared to $599,000 in net charge-offs in 2020. The ratio of net
charge-offs to average loans therefore increased to 0.12% in 2021 from 0.08% in 2020.
Noninterest income was $6.2 million in 2021, a decrease of $254,000, or 3.9%, from $6.5 million in 2020. This decrease was
primarily the result of an $867,000 decrease in net gains on the sales of loans and foreclosed real estate, and a $1.0 million decrease in
net gains on sales and redemptions of investment securities. The decreased 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, which did not recur in 2021. The decrease in the net gains on sales of loans
in 2021 was also the result of decreased 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 current 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. Additionally, an increase of $1.0 million was realized on
marketable equitable securities when compared to 2020. Also contributing to the decrease in noninterest income was a decrease in
loan servicing fees of $115,000. All other categories of noninterest income increased in aggregate when compared to 2020. The net
increase in these categories of noninterest income was in part due to the Company’s increased strategic focus on improving recurring
noninterest income. Overall increases in noninterest income occurred in 2021, as compared to the previous year, as a result of a return
to more normalized customer activity levels in 2021, especially in comparison to the second and third quarters of 2020. In addition,
the Bank decreased the levels of customer fee waivers and forbearances during 2021 that were more routinely granted in 2020 as part
of the Bank’s response to the local economic effects 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 $677,000 and $682,000 at December 31,
2021 and December 31, 2020, respectively, and has the ability to hold the investment indefinitely.
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 believed were technical factors related
to the listing itself, and the almost universal pricing pressure on publicly-traded assets of this type in the then-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 2020 in the amount 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 investment’s fair market value subsequently appreciated significantly in the
second half of 2020 and during the period of time the Bank held the investment in 2021. In August 2021, the investment, including all
interest and dividends received from its issuer since its initial purchase date had substantially reached a breakeven position on a cash
flow basis and was sold in its entirety. In 2021, dividend income related to this investment and the net improvement in the fair market
value of this investment, recognized through earnings, were $78,000 and $387,000, respectively. After June 30, 2020, through
December 31, 2020, dividend income related to this investment and the net change in the fair market value of this investment,
recognized through earnings, were $78,000 and $250,000, respectively.
- 43 -
Noninterest expense increased $2.4 million, or 9.6%, to $27.5 million in 2021 from $25.1 million in 2020. The year-over-year
increase in noninterest expense was driven by increases in most categories except foreclosed real estate. The Company experienced
material declines in substantially all forms of noninterest expenses following the inception of the COVID-19 pandemic which began in
March 2020. Accordingly, the Company progressively returned to less restricted operations and noninterest expenses have returned to
the levels considered by its management to be prudent for the effective long-term management of the Company. The increase in
noninterest expense was primarily driven by an increase of $916,000 in salaries and employee benefits expenses, a $417,000 increase
in professional and other services, a $257,000 increase in advertising, a $218,000 increase in audits and exams expense, a $159,000
increase in data processing expense, a $143,000 increase in FDIC assessments, a $108,000 increase in building and occupancy
expense, and a $82,000 and $66,000 increase in insurance agency expense and other expenses, respectively. The increase in net
salaries expense was partially the result of increased PPP loan originations in 2020 and the deferral of employee-related expenses in
2020 related to those originations. The increases in professional and other services fees, and audits and exams expense were primarily
related to the Bank’s increased internal controls testing under FDICIA requirements for institutions with assets greater than $1 billion
and additional expenses for the Company as a result of the COVID-19 pandemic. Building and occupancy costs increased as a result
of an increase in maintenance costs and depreciation expense of $79,000 and $48,000, 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. Data processing costs increased due to increases in internet banking costs and processing costs. These
increases are consistent with the Company’s customer and operational growth. The FDIC assessment increased as a result of an
increase in the average balance of deposits, including an increase in the average balance of brokered time deposits. Insurance agency
expense increased as a result of a general increases in personnel costs and other administrative costs related to the Agency.
Total assets were $1.29 billion at December 31, 2021 as compared to $1.23 billion at December 31, 2020. The increase in total assets
of $57.7 million, or 4.7%, was the result of the increase in investment securities of $50.7 million, a $7.0 million increase in loans and
a $5.6 million increase in bank owned life insurance. All other assets, excluding cash and cash equivalents, increased by a net $1.0
million. Cash and cash equivalents decreased by $6.3 million. The increase in total assets in 2021 was funded largely by a $59.4
million increase in deposits, specifically a $71.6 million increase in customer deposits, offset by a $12.2 million decrease in brokered
deposits.
Net loan charge-offs to average loans were 0.12% for 2021, as compared to 0.08% for 2020. Nonperforming loans to total loans were
1.00% at December 31, 2021, down 158 basis points compared to 2.58% at December 31, 2020. The allowance for loan losses to non-
performing loans at December 31, 2021 was 155.99%, compared with 59.89% at December 31, 2020. Total nonperforming loans
decreased $13.0 million, or 61%, between December 31, 2020 and December 31, 2021, driven by decreases of $11.6 million and $1.7
million in nonperforming commercial and commercial real estate loans and residential real estate loans respectively, partially offset by
an increase of $357,000 in consumer loans. The decrease in nonperforming commercial and commercial real estate loans in 2021 was
primarily due to the return of two commercial loan relationships, comprised of two individual loans, with aggregate outstanding loan
balances of $12.0 million, to accrual status during the year. These loans were initially placed in nonaccrual status in 2020. These
relationships, which included loans secured by third-party pledges and/or business assets, as well as loans collateralized by
commercial real estate were making all required payments, as agreed, at December 31, 2021.
Pursuant to the CARES Act and subsequent legislation, financial institutions had 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 allowed 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 could 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 in 2020. Management monitored 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, 2021. Overall the ratio of the
allowance for loan losses to year end loans remained stable at 1.57% and 1.55% for December 31, 2021 and December 31, 2020,
respectively.
Total past due loans measured as a percent of total loans, increased from 1.85% at December 31, 2020 to 2.14% at December 31,
2021, primarily due to an increase of $2.8 million in past due commercial loans and a $317,000 increase in past due consumer loans,
partially offset by a $650,000 decrease in past due residential loans. The level of nonperforming loans decreased in aggregate by
$13.0 million led by a decrease of $11.6 million in nonperforming commercial loans, a $1.7 million decrease in nonperforming
residential loans, and partially offset by a $357,000 increase in nonperforming consumer loans. Commensurate with the decrease in
nonperforming loans to year end loans, the ratio of nonperforming assets to total assets decreased to 0.99% at December 31, 2021
from 2.58% at December 31, 2020.
The Company’s shareholders’ equity increased $12.8 million, or 13.2%, to $110.3 million at December 31, 2021 from $97.5 million at
December 31, 2020. This increase was primarily due to a $10.7 million increase in retained earnings, a $968,000 increase in
comprehensive income, a $1.0 million increase in additional paid in capital and a $180,000 increase in ESOP shares earned.
Comprehensive income increased primarily as the result of a reduction in the losses on derivatives and hedging activities and
- 44 -
unrealized gains on retirement plans, partially offset by the unrealized losses on available for sale securities during 2021. The increase
in retained earnings resulted from $12.5 million in net income recorded in 2021. Partially offsetting this increase in retained earnings
were $1.3 million for cash dividends declared on our voting common stock, $290,000 for cash dividends on our non-voting common
stock, $97,000 for cash dividends declared on our former preferred stock, and $35,000 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 $6.7 million, or 21.0%, to $38.3 million in 2021 as compared to $31.6
million in the previous year. Our net interest margin for the year ended December 31, 2021 increased to 3.21% from 2.88% for the
comparable prior year. The increase in net interest income was primarily due to a $3.3 million, or 7.8%, increase in interest and
dividend income in 2021 to $45.8 million primarily as a result of the $92.6 million, or 8.4%, increase in the average balance of interest
earning assets (due primarily to loan growth), partially offset by a two basis point decrease in the average yield earned on those assets.
This increase in net interest income was additionally enhanced by a decrease in interest expense of $3.3 million, or 30.7%, during
2021, 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 40 basis points in 2021 as compared to 2020, partially offset by an increase in the balance of average
interest-bearing liabilities of $44.1 million.
- 45 -
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 gains (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
For the years ended December 31,
2021
2020
Interest
37,026
8,576
216
9
45,827
Average
Balance
$ 833,308 $
313,392
16,191
28,765
1,191,656
82,130
(13,992)
1,482
$ 1,261,276
Average
Yield /
Cost
Average
Balance
Interest
Average
Yield /
Cost
4.44% $ 797,099 $
2.74%
1.33%
256,590
8,992
35,421
6,848
159
0.03%
3.85%
36,366
1,099,047
79
42,507
4.44%
2.67%
1.77%
0.22%
3.87%
79,024
(10,584)
(447)
$ 1,167,040
$
93,950 $
15,916
245,329
122,275
366,724
32,736
79,362
956,292
286
17
990
159
3,262
1,790
1,028
7,532
0.30% $
0.11%
0.40%
0.13%
0.89%
5.47%
1.30%
0.79%
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%
189,434
11,419
1,157,145
104,131
$ 1,261,276
148,739
12,558
1,073,454
93,586
$ 1,167,040
$
38,295
$
31,643
3.06%
3.21%
124.61%
2.68%
2.88%
120.49%
- 46 -
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,
2021 vs 2020
Increase/(Decrease) Due to
2020 vs. 2019
Increase/(Decrease) Due to
Volume
Rate
Total
Increase
(Decrease)
Volume
Rate
Total
Increase
(Decrease)
1,609 $
1,550
103
(14)
3,248
33
0
198
30
(598)
673
(41)
295
2,953 $
(4) $
178
(46)
(56)
72
94
(1)
(589)
32
(2,597)
16
(582)
(3,627)
3,699 $
1,605
1,728
57
(70)
3,320
127
(1)
(391)
62
(3,195)
689
(623)
(3,332)
6,652
$
$
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
(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 $3.3 million, or 7.8%, to $45.8 million in 2021 as compared to $42.5 million in 2020 due
principally to the $92.6 million, or 8.4%, increase in average interest-earning assets. The average balance of loans increased $36.2
million, or 4.5%, in 2021, as compared to the previous year. This increase reflected the Company’s continued success in its expansion
within the greater Syracuse market and the Company’s continued participation in the PPP loan program during 2021. The average
yield earned on loans in 2021 remained consistent with 2020 levels at 4.44%. The $36.2 million increase in the average balance of
loans in 2021 therefore resulted in a $1.6 million increase in loan income recorded in 2021 as compared to 2020. The average balance
of PPP loans outstanding in 2021 was $75.5 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%. The average balance of taxable investment securities increased $56.8
million, or 22.1%, when compared to the prior year. This increase in investment securities was partially the result of increases in
government and agency securities which are pledged as collateral for municipal deposits. The increase in the average balance of
taxable investment securities resulted in $1.6 million of income recorded in 2021, as compared to 2020. The average yields earned on
taxable investment securities increased seven basis points to 2.74% in 2021 as compared to 2.67% in 2020, accounting for an increase
in interest income of $178,000 in 2021.
- 47 -
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 $3.3 million, or 30.7%, to $7.5 million in 2021, as compared to $10.9 million in the previous year. The
decrease in interest expense was primarily the result of a decrease in interest paid on time deposits of $3.2 million. Decreases between
2021 and 2020 were recorded in average rates paid on time deposits of 69 basis points. The decrease in the average rates paid on those
deposits reflected the general decline in market interest rates during 2021. Partially offsetting the reduction in interest expense on
deposits was an increase of $33.9 million, or 4.2%, in the average balance of interest-bearing deposits in 2021 as compared to the
previous year. Further contributing to the decrease in interest expense was a $623,000 decrease in borrowings expense, which also
was attributable to a general decline in market interest rates during 2021. These decreases in borrowed funds expense were partially
offset by a $689,000 increase in subordinated debt 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 redeemed 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 $1.0 million in 2021 as compared to $4.7 million in the prior year. The $3.7
million year-over-year decrease in provision for loan losses was primarily due to continuing reductions during 2021 in the level of
nonaccrual loans held by the Bank, as well as observed improvements in both local and national economic conditions corresponding
with the general diminution of the effects of the pandemic in 2021. The provision for loan losses in 2021 reflected a decrease in
nonperforming loans of $13.0 million at December 31, 2021 as compared to December 31, 2020. The Company recorded $1.0 million
in net charge-offs in 2021 as compared to $599,000 in net charge-offs in 2020. The ratio of net charge-offs to average loans therefore
increased to 0.12% in 2021 from 0.08% in 2020.
Nonperforming loans to total loans were 1.00% at December 31, 2021, down 158 basis points compared to 2.58% at December 31,
2020. The allowance for loan losses to non-performing loans at December 31, 2021 was 155.99%, compared with 59.89% at
December 31, 2020. Total nonperforming loans decreased $13.0 million, or 61%, between December 31, 2020 and December 31,
2021, driven by decreases of $11.6 million and $1.7 million in nonperforming commercial and commercial real estate loans and
residential real estate loans respectively, partially offset by an increase of $357,000 in consumer loans. The decrease in nonperforming
commercial and commercial real estate loans in 2021 was primarily due to the return of two commercial loan relationships, comprised
of two individual loans, with aggregate outstanding loan balances of $12.0 million, to accrual status during the year. These loans were
initially placed in nonaccrual status in 2020. These relationships, which included loans secured by third-party pledges and/or business
assets, as well as loans collateralized by commercial real estate were making all required payments, as agreed, at December 31, 2021.
- 48 -
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
Net gains on sale of premises and equipment
Gains (losses) on marketable equity securities
Total noninterest income
Years Ended December 31,
2021
1,464 $
559
246
923
1,048
1,058
5,298
37
313
201
382
6,231 $
2020
1,395 $
460
361
771
955
917
4,859
1,076
1,179
-
(629)
6,485 $
Change
69
99
(115)
152
93
141
439
(1,039)
(866)
201
1,011
(254)
4.9%
21.5%
-31.9%
19.7%
9.7%
15.4%
9.0%
-96.6%
-73.5%
>100. %
-160.7%
-3.9%
$
$
Noninterest income for the year ended December 31, 2021 decreased $254,000, or 3.9%, to $6.2 million from $6.5 million for the year
ended December 31, 2020. Noninterest income before gains (losses) on the sales and redemptions of investment securities, gains
(losses) on marketable equity securities, gains on the sale of loans and foreclosed real estate and gains on sale of premises and
equipment, increased $439,000, or 9.0%, to $5.3 million in 2021 as compared to $4.9 million in 2020. This $439,000 increase in 2021
as compared with the previous year, was primarily due to increases in debit card interchange fees, other charges, commissions and
fees and earnings and gain on bank owned life insurance of $152,000, $141,000, and $99,000, respectively, partially offset by a
decrease in loan servicing fees of $115,000. The increase in debit card interchange was due to an increase in the number of consumer
checking accounts and generally increased consumer spending activity following the lessening or outright elimination of the most
severe restrictions related to the pandemic in 2021. The $141,000 increase in other charges, commissions and fees in 2021, as
compared to the previous year, was primarily due to an increase of investment services revenue of $97,000. The $99,000 increase in
the gain on bank owned life insurance was primarily due to an increase in the average balance of bank owned life insurance held from
$17.8 million held in 2020 to $22.0 million held in 2021. The $115,000 year over year decease in loan servicing fees was primarily
due to reduced loan prepayment fee collections in 2021, as compared to the previous year. Fee collections of this type are generally
related to commercial mortgage and commercial real estate loan activity and will vary from year to year based on a number of factors
including the level of fee waivers and other concessions offered to customers as a part of refinancing negotiations.
In comparing the year ended December 31, 2021 to the previous year, net gains on the sales of loans and foreclosed real estate
decreased $866,000 and net gains on the sales and redemptions of investment securities decreased $1.0 million. The decrease in gains
on the sales of loans and foreclosed real estate was primarily the result of the January 2020 sale of $35.9 million in seasoned,
conforming residential mortgage loans that resulted in the recognition of a gain of $659,000. There were no similar sales of seasoned
portfolio loans in 2021. Additionally, the decrease in the net gains on sale of loans in 2021 was also the result of fewer sales of newly-
originated 1-4 family residential mortgages into the secondary market than in the previous year due to a modest decrease in loan
application volume and certain changes made to the Bank’s product mix. The changes in product mix were primarily related to a
higher percentage of construction-to permanent financing loans that were retained in portfolio during 2021 than in the previous year.
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.
- 49 -
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 believed were technical factors
related to the listing itself, and the almost universal pricing pressure on publicly-traded assets of his type in the then-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 2020 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 investment’s fair market value subsequently appreciated significantly in the second half of
2020 and during the period of time the Bank held the investment in 2021. In August 2021, the investment, including all interest and
dividends received from its issuer since its initial purchase date had substantially reached a breakeven position on a cash flow basis
and was sold in its entirety. In 2021, dividend income related to this investment and the net change in the fair market value of this
investment, recognized through earnings, were $78,000 and $387,000, respectively. After June 30, 2020, through December 31, 2020,
dividend income related to this investment and the net change in the fair market value of this investment, recognized through earnings,
were $78,000 and $250,000, respectively. The decrease in net gains on sales and redemptions of investment securities was primarily
due to investment securities sales in 2020 which 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.
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,
2021
14,384 $
3,121
2,555
1,627
1,198
874
725
825
220
46
1,920
27,495 $
2020
13,468 $
3,013
2,396
1,210
941
699
507
743
199
50
1,854
25,080 $
$
$
Change
916
108
59
417
257
175
218
82
21
(4)
66
2,415
6.8%
3.6%
6.6%
34.5%
27.3%
25.0%
43.0%
11.0%
10.6%
-8.0%
3.6%
9.6%
Noninterest expense increased $2.4 million, or 9.6%, to $27.5 million in 2021 from $25.1 million in 2020. The year-over-year
increase in noninterest expense was principally driven by increases in most categories of noninterest expense. The Company
experienced material declines in substantially all forms of noninterest expenses following the inception of the COVID-19 pandemic
which began in March 2020. Accordingly, the Company progressively returned to less restricted operations and noninterest expenses
have returned to the levels considered by its management to be prudent for the effective long-term management of the Company.
The increase in noninterest expense was primarily driven by an increase of $916,000 in personnel expenses, a $417,000 increase in
professional and other services, a $257,000 increase in advertising, a $218,000 increase in audits and exams expense, a $159,000
increase in data processing expense, a $143,000 increase in FDIC assessments, a $108,000 increase in building and occupancy
expense, and a $82,000 and $66,000 increase in insurance agency expense and other expenses, respectively. The increase in net
salaries expense was partially the result of increased PPP loan originations in 2020 and the deferral of employee-related expenses in
2020 related to those originations. The increases in professional and other services fees, and audits and exams expense were primarily
related to the Bank’s increased internal controls testing under FDICIA requirements for institutions with assets greater than $1 billion
and additional expenses for the Company as a result of the COVID-19 pandemic. Building and occupancy costs increased as a result
of an increase in maintenance costs and depreciation expense of $79,000 and $48,000, 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. Data processing costs increased due to increases in internet banking costs and processing costs. These
increases are consistent with the Company’s customer and operational growth. The FDIC assessment increased as a result of an
increase in the average balance of deposits, including an increase in the average balance of brokered time deposits. Insurance agency
expense increased as a result of a general increases in personnel costs and other administrative costs related to the Agency.
- 50 -
Income Tax Expense
The Company reported income tax expense of $3.5 million in 2021 and $1.3 million in 2020, an increase of $2.2 million when
compared to the previous year. This increase was the result of the increase in pretax net income of $7.7 million, combined with an
increase in the effective tax rate in 2021, as described below.
The Company’s effective tax rate was 22.4% in 2021, as compared to 15.9% in 2020. The Company’s effective tax rate in 2021 was
increased from the federal statutory income tax rate of 21.0% primarily due to the effects of New York State taxation, net of federal
tax benefit, partially offset by the 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 15.9% in 2020. 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.
During 2021, the Company disposed of an equity security investment that resulted in a capital loss. Under current IRS law, capital
losses are allowed to be carried back for a period of three years and carried forward five years. The allowable portion that can be
carried back will result in an approximate tax benefit of $56,000. The Company believes that forecasted future capital gains make it
likely that such capital losses will not be utilized in future periods, therefore, a valuation allowance has been provided on these capital
losses.
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 received $316,000 in tax refunds from New York State
for taxes previously paid in the carryback years. This refund has been applied to the effective tax rate of the Company in 2020 in
accordance with GAAP. The recognition of this 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, 2021 were both $2.07, as compared to basic and diluted
earnings per share of $1.17 for the year ended December 31, 2020. 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 $1.29 billion at December 31, 2021 as compared to $1.23 billion at December 31, 2020. The increase in total assets
of $57.7 million, or 4.7%, was the result of the increase in investment securities of $50.7 million, a $6.8 million increase in loans,
principally commercial loans, and a $5.6 million increase in bank owned life insurance. All other assets, excluding cash and cash
equivalents, increased by a net $1.0 million. Cash and cash equivalents decreased by $6.3 million. The increase in total assets in 2021
was funded largely by a $59.4 million increase in deposits to $1.1 billion at December 31, 2021 and a $71.6 million increase in
customer deposits, offset by a $12.2 million decrease in brokered deposits.
- 51 -
Investment Securities
The investment portfolio represented 27.2% of the Company’s average interest earning assets in 2021 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, 2021, available-for-sale investment securities increased 48.6% to $190.6 million and held-to-maturity investment
securities decreased 6.0% to $160.9 million as compared to December 31, 2020. 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:
Available-for-Sale
Held-to-Maturity
2021
2020
2019
2021
2020
2019
$
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
$
32,273 $
39,199
14,127
13,613
22,164
12,285
56,731
206
190,598 $
$
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 $
- $
14,790
46,290
14,636
9,740
11,362
64,105
-
160,923 $
1,000 $
16,482
36,441
18,414
11,807
24,482
62,598
-
171,224 $
1,998
8,534
25,779
23,099
13,715
19,607
30,256
-
122,988
- 52 -
The following table sets forth the scheduled maturities, amortized cost, fair values and average yields for the Company's investment
securities at December 31, 2021. 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
More Than One
to Five Years
More Than Five
to Ten Years
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
$
$
$
$
$
$
$
-
-
5,886
-
5,886
17
2,658
1,447
4,122
$
-
-
0.95%
-
0.95% $
1.99% $
1.12%
3.11%
3.11% $
-
-
4,546
278
4,824
3,723
-
13,885
17,608
$
-
-
3.12%
4.75%
3.21% $
1.28% $
-
2.61%
2.33% $
32,669
-
2,215
-
34,884
-
2,324
7,481
9,805
206
206
10,214
0.53% $
0.53% $
1.81% $
-
-
22,432
$
-
$
-
2.52% $
-
-
44,689
1.32%
-
4.21%
-
1.50%
-
1.99%
1.77%
0.47%
-
-
1.28%
More Than Ten Years
Total Investment Securities
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
Fair
Value
$
$
$
$
$
$
$
-
37,861
957
13,414
52,232
18,741
7,676
34,035
60,452
-
$
2.06%
5.05%
1.53%
1.89% $
1.32% $
1.97%
2.38%
2.00% $
32,669 $
37,861
13,604
13,692
97,826 $
22,481 $
12,658
56,848
91,987 $
32,273
39,199
14,127
13,613
99,212
22,164
12,285
56,731
91,180
-
-
112,684
$
-
-
$
1.95% $
206 $
206 $
190,019 $
206
206
190,598
1.32%
2.06%
3.33%
3.14%
2.15%
1.53%
1.69%
2.47%
2.14%
0.53%
0.53%
2.14%
- 53 -
HELD-TO-MATURITY
(Dollars in thousands)
Debt investment securities:
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
More Than One
to Five Years
More Than Five
to Ten Years
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
-
2,817
-
2,817
-
3.79%
-
0.00% $
1,797
6,937
234
8,968
3.08%
3.34%
4.03%
3.31% $
4,893
34,798
4,145
43,836
2.50%
4.59%
2.70%
4.18%
-
-
$
2,881
3.78% $
-
-
1,486
3.18%
2,491
3.40%
3,214
2.40%
17,066
18,552
21,369
4.07%
0.25% $
0.22% $
18,060
23,432
32,400
3.58%
3.59% $
3.51% $
1,984
5,198
49,034
3.65%
2.88%
4.04%
$
$
$
$
(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
More Than Ten Years
Total Investment Securities
Amortized
Cost
Annualized
Weighted
Avg Yield
Amortized
Cost
Annualized
Weighted
Avg Yield
Fair
Value
$
$
$
$
$
-
8,101
1,738
10,257
20,096
6,859
4,171
26,994
38,024
58,120
$
-
2.34%
3.74%
2.32%
2.45% $
2.38% $
2.57%
2.32%
2.36% $
2.39% $
- $
14,791
46,290
14,636
75,717 $
-
15,066
47,440
14,515
77,021
9,740 $
11,362
64,104
85,206 $
160,923 $
9,999
11,720
64,065
85,784
162,805
-
2.64%
3.87%
3.02%
3.47%
3.08%
2.89%
3.41%
3.30%
3.38%
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 69.9% of the Company’s average interest earning assets in 2021 and account for the greatest
portion of total interest income. At December 31, 2021, the Company has the largest portion of its loan portfolio in commercial loan
products that represented 53.3% 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 29.7% of total loans at December 31, 2021. The consumer loan products represents 17.0%
of total loans at December 31, 2021. 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.
- 54 -
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
December 31,
2019
2021
2020
513
0.1%
1,526
2017
38.2%
$246,344 29.6% $233,094 28.2% $212,663 27.2% $238,894 38.5% $221,623
0.0%
-
33.2%
287,279 34.5% 286,066 34.7% 254,781 32.6% 212,622 34.3% 192,540
19.2%
156,167 18.8% 194,963 23.6% 148,776 19.0% 116,914 18.8% 111,786
4.5%
4.3% 26,235
32,048
3.8% 38,941
110,108 13.2% 70,905
4.9%
4.1% 28,647
$832,459 100.0% $825,495 100.0% $781,451 100.0% $620,270 100.0% $580,831 100.0%
4.7% 46,688
6.0% 26,416
8.6% 82,607 10.6% 25,424
0.2% 35,936
4.6%
0.0%
2018
-
The following table shows the amount of loans outstanding, including net deferred costs, as of December 31, 2021 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 > 5
Years to
Fifteen
Years
Due Over
Fifteen
Years
Total
$
93,317 $ 174,026 $
3,201
1,404
94,721 177,227
52,124
97,599
1,832
15,539
20,955
26,752
19,671 $
265 $ 287,279
70,665 171,587 246,857
90,336 171,852 534,136
- 156,167
6,444
4,612
10,065
32,048
54,851 110,108
7,550
$ 234,611 $ 252,138 $ 114,395 $ 231,315 $ 832,459
The following table sets forth fixed- and adjustable-rate loans at December 31, 2021 that are contractually due after December 31,
2022:
(In thousands)
Interest rates:
Fixed
Variable
Total loans
Due After
One Year
$
$
366,780
231,068
597,848
Total loans receivable, including net deferred costs, increased $7.0 million, or 0.8%, to $832.5 million at December 31, 2021 when
compared to $825.5 million at December 31, 2020, due to increases in consumer loans and residential mortgage loans of $32.3 million
and $11.9 million, respectively. These increases were offset by a decrease in commercial loans of $37.2 million. The increase in
consumer loans was primarily due to the purchase of two secured consumer installment loan pools of $22.3 million and $24.9 million
during 2021. The increase in residential mortgage loans was primarily the result of increased home sales in 2021. The Company does
not originate sub-prime, Alt-A, negative amortizing or other higher risk structured residential mortgages. 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. Commercial loans decreased primarily due to decreases of $41.3 million in PPP loans and $9.5 million
in other commercial and industrial, offset by increases in commercial lines of credit of $12.8 million. The decrease in commercial
loans was primarily due to the forgiveness of $41.3 million of PPP loans during the year.
- 55 -
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
2021
2020
December 31,
2019
2018
2017
6,297
1,104
891
8,292
8,292
-
8,292
$
$
17,978
747
2,608
21,333
21,333
-
21,333
$
$
3,002
631
1,613
5,246
5,246
88
5,334
$
$
830
142
1,176
2,148
2,148
1,173
3,321
$
$
2,443
363
2,088
4,894
4,894
468
5,362
3,605
$
3,554
$
2,008
$
2,574
$
2,539
$
$
$
Nonperforming loans to total loans
Nonperforming assets to total assets
1.00%
0.65%
2.58%
1.74%
0.67%
0.49%
0.35%
0.36%
0.84%
0.61%
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 had 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 allowed 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 could 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 in 2020. Management monitored 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, 2021. The ratio of the
allowance for loan losses to year end loans was 1.57% and 1.55% for December 31, 2021 and December 31, 2020, respectively.
Total nonperforming loans decreased $13.0 million, or 61%, between December 31, 2020 and December 31, 2021, driven by
decreases of $11.6 million and $1.7 million in nonperforming commercial and commercial real estate loans and residential real estate
loans respectively, partially offset by an increase of $357,000 in consumer loans. The decrease in nonperforming commercial and
commercial real estate loans in 2021 was primarily due to the return of two commercial loan relationships, comprised of two
individual loans, with aggregate outstanding loan balances of $12.0 million, to accrual status during the year. These loans were
initially placed in nonaccrual status in 2020. These relationships, which included loans secured by third-party pledges and/or business
assets, as well as loans collateralized by commercial real estate were making all required payments, as agreed, at December 31, 2021.
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, 2021. 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 $12.9 million at December 31, 2021, 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.
There were no Foreclosed Real Estate (“FRE”) balances at December 31, 2021 or December 31, 2020.
- 56 -
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 $592,000 and $685,000
would have been recorded for the years ended December 31, 2021 and December 31, 2020, respectively.
The measurement of impaired loans is based upon the fair value of the collateral or the present value of future cash flows discounted
at the historical effective interest rate for impaired loans when the receipt of contractual principal and interest is probable. At
December 31, 2021 and December 31, 2020, the Company had $11.4 million and $22.8 million in loans, which were deemed to be
impaired, having specific reserves of $1.9 million and $2.8 million, respectively. The $11.5 million year-over-year decrease in
impaired loans was principally due to decreases of $5.6 million, $4.8 million, $772,000, $642,000 and $81,000 in impaired
commercial real estate loans, other commercial and industrial loans, commercial lines of credit, residential loans and other consumer
loans, respectively. Home equity and junior liens increased $415,000 when compared to 2020.
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, 2021. 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
$2.3 million to $43.6 million at December 31, 2021, compared to $45.9 million at December 31, 2020. 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 $3.2 million decrease in potential problem residential loans and a $1.6 million decrease in
potential problem commercial and industrial loans. These decreases were partially offset by increase in potential problem commercial
real estate loans of $2.5. The decrease in potential problem commercial and industrial loans and residential loans 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 $43.7 million at December 31, 2021, comprised of special mention,
substandard and doubtful loans of $18.3 million, $23.8 million and $1.6 million, respectively. 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. Special mention loans decreased $2.5 million, partially offset by increases
in doubtful loans of $123,000 and substandard loans of $59,000 at December 31, 2021 as compared to December 31, 2020. The
decrease in loans classified as substandard was primarily due to a $15.5 million increase in commercial loans in 2020, 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 increased to 2.14% at December 31, 2021 as compared to 1.85% at December 31, 2020. This increase was due to
an increase of $2.8 million in past due commercial loans and a $317,000 increase in past due consumer loans, partially offset by a
$650,000 decrease in past due residential loans. At December 31, 2021, there were $17.9 million in loans past due including $5.2
million, $4.6 million and $8.0 million in loans 30-59 days, 60-89 days, and 90 days and over past due, respectively. 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.
The increase of $2.5 million in total loans past due at December 31, 2021, as compared to December 31, 2020, was primarily due to an
increase of $1.9 million in loans 90 days and over past due and a $1.5 million increase in 30-59 days past due, partially offset by a
$783,000 decrease in loans 60-89 days past due. The increase in loans 30-59 days past due was primarily due to an increase of $1.9
million in commercial loans. At December 31, 2021, there were 13 loans with an outstanding aggregate balance of $5.2 million that
were 30-59 days past due, while at December 31, 2020, there were 13 loans with an outstanding aggregate balance of $1.8 million.
The decrease in loans 60-89 days past due was primarily due to a decrease of $605,000 in commercial loans. The increase in loans 90
days and over past due was primarily due to an increase of $1.6 million in delinquent commercial loans.
The ratio of the allowance to loan losses to year end loans was 1.57% and 1.55% for December 31, 2021 and December 31, 2020,
respectively.
- 57 -
Loans purchased outside of the Bank’s general market area are subject to substantial pre-purchase due diligence. Homogenous pools
of purchased loans are subject to pre-purchase 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 offered 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.
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, 2021, the Bank’s
position in impaired loans consisted of 56 loans totaling $11.4 million. Of these loans, 18 loans, totaling $2.3 million, were valued
using the present value of future cash flows method; and 38 loans, totaling $9.0 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. 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, 2021 and 2020 was $12.9 million and $12.8 million respectively, or 1.57% of total
year end loans. The Company recorded $1.0 million in net charge-offs in 2021 as compared to $599,000 in net charge-offs in 2020.
The ratio of net charge-offs to average loans increased to 0.12% in 2021 from 0.08% in 2020.
For further discussion of our allowance for loan losses procedures, please see “Business-Allowance for Loan Losses” and Note 6 to
the consolidated financial statements contained in this Annual Report on Form 10-K.
- 58 -
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.
2021
2020
2019
2018
2017
(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
$
872
5,308
3,701
774
1,297
983
12,935
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
Percent of
Loans to
Total Loans
Allocation
of the
Allowance
Percent of
Loans to
Total Loans
29.6% $
34.5%
18.8%
3.8%
13.2%
0.1%
100.0% $
931
4,776
4,663
739
1,123
545
12,777
28.2% $
34.7%
23.6%
4.7%
8.6%
0.18%
100.0% $
580
4,010
2,841
553
413
272
8,669
27.2% $
32.6%
19.0%
6.0%
10.6%
0
100.0% $
766
3,578
2,016
409
385
152
7,306
38.5% $
34.3%
18.8%
4.3%
4.1%
-
100.0% $
865
3,589
1,950
514
208
-
7,126
38.2%
33.2%
19.2%
4.5%
4.9%
-
100.0%
(1)
Includes loans held-for-sale at December 31, 2021, 2020 and 2019. There were no loans classified as held for sale at December
31, 2018 and 2017.
The following table sets forth the allowance for loan losses for the years indicated:
(Dollars In thousands)
Balance at beginning of year
Provisions charged to operating expenses
Recoveries of loans previously charged-off:
$
2021
12,777 $
1,022
2020
8,669 $
4,707
2019
7,306 $
1,966
2018
7,126 $
1,497
2017
6,247
1,769
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
70
88
-
158
(764)
(240)
(20)
(1,024)
(866)
12,935 $
4
95
2
101
(222)
(353)
(125)
(700)
(599)
12,777 $
1
60
2
63
(294)
(361)
(11)
(666)
(603)
8,669 $
66
58
21
145
(952)
(265)
(245)
(1,462)
(1,317)
7,306 $
$
The following table sets forth the loan net charge-off ratios for the years indicated:
Allowance for loan losses to year-end loans
Allowance for loan losses to nonperforming loans
Nonaccrual Loans to total loans
Allowance for loan losses to nonaccrual loans
Net charge-offs to average loans outstanding
Commercial real estate and loans
Consumer and home equity
Residential real estate
Total charged-off
Bank Owned Life Insurance
2021
1.57%
155.99%
1.00%
155.99%
0.15%
0.13%
0.01%
0.10%
15
46
13
74
(587)
(211)
(166)
(964)
(890)
7,126
2020
1.55%
59.89%
2.58%
59.89%
0.07%
0.04%
0.06%
0.08%
The Company held $23.4 million and $17.9 million in bank owned life insurance at December 31, 2021 and 2020, respectively. Bank
owned life insurance increased $5.5 million, or 31.1%, to $23.4 million at December 31, 2021, as compared to December 31, 2020.
The increase was primarily due to the $5.0 million purchase in additional life insurance and an increase in the cash value of the
policies recorded as income in 2021.
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 $74.6 million, or
- 59 -
7.8%, in 2021. For the year ended December 31, 2021, 64.5% of the Company's average deposit base of $1.0 billion 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, 2021, business deposits, consumer deposits, and municipal deposits increased $33.9 million, $23.9 million and $13.8
million, respectively, when compared to December 31, 2020. The increase in business deposits was primarily from activities related
to PPP loans. Noninterest-bearing deposits, which are primarily demand deposits, were $191.9 million at year end, compared with
$162.1 million on December 31, 2020. 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 first quarter of 2021.
The increase in consumer deposits during the year ended December 31, 2021 reflected the Bank’s increased market penetration among
non-business customers, particularly in Onondaga County, and the effects of federal and state stimulus payments to consumers during
the pandemic, partially offset by decreased brokered deposit acceptances and the resultant decrease in the average balance of brokered
deposits accepted by the Bank in 2021, as compared to 2020. The increase in municipal deposits in 2021, as compared to the previous
year, resulted from transitory factors among a small number of the Bank’s largest municipal depositors.
Total deposits of $1.06 billion at December 31, 2021 consisted in part of $158.0 million in brokered money market and certificates of
deposit accounts. Brokered deposits represented 15.0% of all deposits at December 31, 2021. 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.
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 in excess of $250,000
Money management accounts
MMDA accounts
Demand deposit interest-bearing
Demand deposit noninterest-bearing
Mortgage escrow funds
Total Deposits
2021
$ 131,176
253,564
67,450
16,124
256,963
130,816
191,858
7,395
$ 1,055,346
December 31,
2020
12.4% $ 103,093
305,074
24.0%
91,976
6.4%
15,650
1.5%
227,970
24.3%
83,129
12.4%
162,057
18.2%
6,958
0.7%
100.0% $ 995,907
2019
81,926
328,188
93,455
14,388
185,402
64,533
107,501
6,500
100.0% $ 881,893
10.4% $
30.6%
9.2%
1.6%
22.9%
8.3%
16.3%
0.7%
9.3%
37.2%
10.6%
1.6%
21.0%
7.3%
12.2%
0.7%
100.0%
At December 31, 2021, time deposit accounts in excess of $250,000 totaled $67.5 million, or 21.01% of time deposits and 6.4% of
total deposits. At December 31, 2020, these deposits totaled $92 million, or 23.2% of time deposits and 9.2% of total deposits.
The following table indicates the amount of the Company’s time deposit accounts in excess of $250,000 by time remaining until
maturity as of December 31, 2021:
(In thousands)
Remaining Maturity:
Three months or less
Three through six months
Six through twelve months
Over twelve months
Total
Borrowings
$
$
15,077
14,419
17,640
20,314
67,450
Borrowings are comprised primarily of advances and overnight borrowings at the FHLBNY.
- 60 -
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
$
2021
12,500
3,677
12,500
$
0.28%
1.28%
$
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
Subordinated Loans
$
2021
85,125
75,724
64,598
$
1.34%
1.12%
2020
83,299
72,430
78,030
$
2.08%
1.60%
2019
39,038
14,835
25,138
2.54%
1.80%
2019
70,514
64,011
67,987
2.46%
2.52%
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 Federal Reserve. 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 $94,000 and
$124,000 in interest expense related to this issuance in 2021 and 2020, respectively. The Company guarantees all of these securities.
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,
was charged with developing an alternative rate that will replace USD LIBOR. The ARRC subsequently identified the Secured
Overnight Financing Rate (“SOFR”) as the rate that represents best practice for use in USD LIBOR derivatives and other financial
contracts. U.S. banking regulators 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 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 Condition at
December 31, 2021 and 2020. 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 was scheduled to mature on October 1, 2025. The Company had the right to prepay the 2015 Subordinated
Loan on the first day of any calendar quarter after October 15, 2020 without penalty. The effective annual interest rate charged to the
Company was be 6.25% through the maturity date of the 2015 Subordinated Loan. 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 was subsequently 6.25% until the stated maturity or redemption date. In the 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 redeemed the
$10.0 million 2015 Subordinated Loan, plus accrued interest on April 1, 2021. Interest expense, related to this borrowing, of
$156,000 and $650,000 was recorded in the years ended December 31, 2021 and 2020, respectively.
- 61 -
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, 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 $1.5 million was recorded in the year ended December 31, 2021
related to this transaction.
Capital
The Company’s shareholders’ equity increased $12.8 million, or 13.2%, to $110.3 million at December 31, 2021 from $97.5 million at
December 31, 2020. This increase was primarily due to a $10.7 million increase in retained earnings, a $968,000 increase in
comprehensive income, a $1.0 million increase in additional paid in capital and a $180,000 increase in ESOP shares earned.
Comprehensive income increased primarily as the result of reduced losses on derivatives and hedging activities, partially offset by the
unrealized losses on available for sale securities during 2021. The increase in retained earnings resulted from $12.4 million in net
income recorded in 2021. Partially offsetting this increase in retained earnings were $1.3 million for cash dividends declared on our
voting common stock, $290,000 for cash dividends declared on our non-voting common stock, $97,000 for cash dividends declared on
our preferred stock, and $35,000 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, 2021, 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, 2021, 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 specified 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, 2021, the Bank exceeded all
current regulatory required minimum capital ratios, including the capital buffer requirements.
- 62 -
LIQUIDITY
Liquidity management involves the Company’s ability to generate cash or otherwise obtain funds at reasonable rates to support asset
growth, meet deposit withdrawals, maintain reserve requirements, and otherwise operate the Company on an ongoing basis. The
Company's primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans and maturities of investment
securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments
on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions and competition. The Company manages the pricing of deposits to maintain a desired deposit balance. In
addition, the Company invests excess funds in short-term interest-earning and other assets, which provide liquidity to meet lending
requirements.
The Company's liquidity has been enhanced by its ability to borrow from the FHLBNY, whose competitive advance programs and
lines of credit provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in deposits in the
future could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could include, but are
not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment
securities, 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, 2021, cash and cash equivalents decreased by $6.3 million. The Company reported net cash flows
from financing activities of $43.5 million generated principally by increased customer deposit balances of $71.6 million and an $8.5
million increase in short term borrowings, offset by a decrease in net proceeds from long-term borrowings of $13.4 million, a $10.0
million subordinated loan redemption and an aggregate decrease in net cash of all other financing sources, including dividends paid to
common and preferred shareholders, and the holder of the Warrant of $1.6 million. Additionally, $20.1 million was provided through
operating activities generated principally by net income. These cash flows were primarily invested in: $200.4 million in purchases of
investment securities in 2021, and $9.6 million net increases in loans outstanding.
Certificates of deposit due within one year of December 31, 2021 totaled $185.9 million, representing 57.9% of certificates of deposit
at December 31, 2021, a decrease from 84.3% at December 31, 2020. 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, 2021 and 2020, the Company had cash and cash equivalents of $37.1 million and $43.5 million,
respectively.
The Bank has a number of existing credit facilities available to it. At December 31, 2021, total credit available under the existing lines
of credit was approximately $147.6 million at FHLBNY, the FRB, and two other correspondent banks. At December 31, 2021, the
Company had $77.1 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 $70.5 million available.
The Asset Liability Management Committee of the Company is responsible for implementing the policies and guidelines for the
maintenance of prudent levels of liquidity. As of December 31, 2021, 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, 2021, the Bank had $245.2 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, 2021 and 2020
Consolidated Statements of Income – Years ended December 31, 2021 and 2020
Consolidated Statements of Comprehensive Income – Years ended December 31, 2021 and 2020
Consolidated Statements of Changes in Shareholders’ Equity – Years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows – Years ended December 31, 2021 and 2020
Notes to Consolidated Financial Statements
Page
65
67
69
70
71
72
73
75
- 64 -
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, 2021. 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, 2021, our CEO and CFO concluded that the
Company’s internal control over financial reporting was effective as of December 31, 2021 at a reasonable assurance level.
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.
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
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, 2021, management has determined that there were no material weaknesses in the
Company’s internal controls over financial reporting.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding
internal control over financial reporting. 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.
- 65 -
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, 2021 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 25, 2022
/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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and
the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, 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 $12.9 million at December 31, 2021, 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.
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
- 67 -
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 $819.5 million at December 31, 2021. 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 2021, the Company recognized $37.0
million in interest income associated with loans.
Auditing loans resulted in complexities due to the material weaknesses that existed for a portion of the year in the Company’s
internal control over financial reporting. This material weakness related 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. 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.
/s/ BONADIO & CO., LLP
Bonadio & Co., LLP
Pittsford, New York
March 25, 2022
- 68 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Condition
(In thousands, except share and per share data)
ASSETS:
December 31,
2021
December 31,
2020
Cash and due from banks (including restricted balances of $1,600 and $1,600 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 $162,805 and $174,935, 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
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 shares authorized; 0 and
1,380,283 shares issued and outstanding, respectively
Voting common stock, par value $0.01; 25,000,000 authorized shares; 4,603,184 and 4,531,383 shares issued
and outstanding, respectively
Non-Voting common stock, par value $0.01; 1,505,283 authorized shares; 1,380,283 and 0 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 -
$
$
$
13,856 $
23,293
37,149
190,598
160,923
677
4,189
831,946
513
12,935
819,524
21,659
2,136
4,520
117
4,536
23,423
15,726
1,285,177 $
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
863,488 $
191,858
1,055,346
12,500
64,598
29,563
106
2,440
9,991
1,174,544
833,850
162,057
995,907
4,020
78,030
39,400
193
2,525
9,646
1,129,721
-
46
14
45
14
51,044
60,946
(1,268)
(495)
110,287
346
110,633
1,285,177 $
-
50,024
50,284
(2,236)
(675)
97,456
266
97,722
1,227,443
Pathfinder Bancorp, Inc.
Consolidated Statements of Income
(In thousands, except per share data)
Interest and dividend income:
Loans, including fees
Debt securities:
Taxable
Tax-exempt
Dividends
Federal funds sold and interest earning deposits
Total interest and dividend income
Interest expense:
Interest on deposits
Interest on short-term borrowings
Interest on long-term borrowings
Interest on subordinated loans
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Earnings and gain on bank owned life insurance
Loan servicing fees
Net gains on sales and redemptions of investment securities
Gains (losses) on marketable equity securities
Net gains on sales of loans and foreclosed real estate
Net gains on sales of premises and equipment
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.
Voting Earnings per common share - basic
Voting Earnings per common share - diluted
Series A Non-Voting Earnings per common share - basic
Series A Non-Voting Earnings per common share - diluted
Dividends per common share (Voting and Series A Non-Voting)
For the years ended
December 31, 2021
December 31, 2020
$
37,026
$
8,312
171
309
9
45,827
4,714
10
1,018
1,790
7,532
38,295
1,022
37,273
1,464
559
246
37
382
313
201
923
1,048
1,058
6,231
14,384
3,121
2,555
1,627
1,198
874
725
825
220
46
1,920
27,495
16,009
3,499
12,510
103
12,407
2.07
2.07
2.07
2.07
0.28
$
$
$
$
$
$
$
$
$
$
$
$
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
1.17
1.17
-
-
0.24
The accompanying notes are an integral part of the consolidated financial statements.
- 70 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Comprehensive Income
For the years ended
(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 (losses) 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 gains (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 losses (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
December 31, 2021
$
12,510 $
December 31, 2020
7,046
105
818
923
(535)
(19)
(554)
921
921
21
1,311
(343)
968
13,478 $
103 $
13,375 $
(27) $
(215)
140
5
(241)
(5)
(343) $
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)
$
$
$
$
$
(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, 2021 and December 31, 2020
Non-
Voting
Common
Stock
- $
Stock
45 $
Additional
Paid in
Retained
Capital
Earnings
50,024 $ 50,284 $
12,407
14
-
Preferred
Common
Stock
14 $
$
(14)
Accumulated
Other Com-
prehensive
Unearned
Non-
controlling
Loss
(2,236) $
ESOP
(675) $
Interest
Total
266 $ 97,722
103 12,510
-
-
968
-
-
-
-
-
180
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
968
376
-
241
551
-
(1,258)
-
-
-
(290)
(97)
(35)
-
-
(1,268) $
-
-
(495) $
-
32
(55)
(55)
346 $110,633
-
-
-
-
-
-
-
196
-
241
550
-
(1,258)
(290)
(97)
(35)
(65)
-
-
-
33
-
51,044 $ 60,946 $
49,362 $ 44,839 $
6,950
-
(2,971) $
-
(855) $
-
235 $ 90,669
7,046
96
-
-
735
-
-
735
-
90
-
300
223
-
-
-
-
-
-
(1,102)
-
(291)
-
7
(30)
-
-
-
-
-
-
-
-
-
-
-
180
-
-
-
-
-
-
-
-
-
-
-
-
-
270
-
300
223
-
(1,102)
-
(291)
-
(7)
(30)
-
-
-
-
-
-
-
-
-
-
-
-
14 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1
-
-
-
-
-
-
46 $
47 $
-
-
-
-
-
-
-
-
-
-
-
-
- $
12 $
-
-
-
2
-
-
-
-
-
-
-
-
(2)
-
-
-
-
-
-
-
-
-
-
14 $
-
-
45 $
-
-
- $
42
-
(82)
-
50,024 $ 50,284 $
-
-
(2,236) $
-
-
(675) $
-
40
(98)
(98)
266 $ 97,722
(In thousands, except share and per share
data)
Balance, January 1, 2021
Net income
Conversion of Preferred stock to Non-
Voting common stock
Other comprehensive income, net of
tax
ESOP shares earned (24,442 shares)
Restricted stock units (19,369 shares)
Stock based compensation
Stock options exercised
Common stock dividends declared
($0.28 per share)
Non-Voting common stock dividends
declared ($0.21 per share)
Preferred stock dividends declared
($0.07 per share)
Warrant dividends declared ($0.28 per
share)
Cumulative effect of affiliate capital
allocation
Distributions from affiliates
Balance, December 31, 2021
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
$
(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 was the only stockholder of the Series B Preferred Shares.
The Company received no cash proceeds as a result of the exchange.
The accompanying notes are an integral part of the consolidated financial statements.
- 72 -
Pathfinder Bancorp, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31,
(In thousands)
OPERATING ACTIVITIES
Net income attributable to Pathfinder Bancorp, Inc.
Adjustments to reconcile net income to net cash flows from operating activities:
2021
$
12,407
$
Provision for loan losses
Deferred income expense (benefit) tax
Amortization of operating leases
Proceeds from sales of loans
Originations of loans held-for-sale
Realized losses (gains) on sales, redemptions and calls of:
Real estate acquired through foreclosure
Loans
Available-for-sale investment securities
Held-to-maturity investment securities
Premises and equipment
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
Payment of executive deferred compensation and SERP contracts, expensed in prior
periods
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
Marketable equity securities
Purchase of bank owned life insurance
Proceeds from sales of premises and equipment
Net change in loans
Purchase of premises and equipment
Net cash flows from investing activities
FINANCING ACTIVITIES
Net change in demand deposits, NOW accounts, savings accounts, money
management deposit accounts, MMDA accounts and escrow deposits
Net change in time deposits
Net change in brokered deposits
Net change in short-term borrowings
- 73 -
1,022
481
19
9,224
(7,898)
-
(313)
(19)
(18)
(201)
(382)
1,787
(5)
1,820
163
(559)
2,418
16
617
29
(571)
117
20,154
(156,548)
(43,914)
(6,665)
6,866
52,202
50,155
38,243
3,784
-
1,555
(5,000)
231
(9,648)
(1,212)
(69,951)
95,431
(23,824)
(12,168)
8,480
2020
6,950
4,707
(1,305)
20
50,914
(15,321)
14
(1,193)
(1,042)
(34)
-
629
1,696
(354)
786
55
(460)
2,104
16
570
(837)
-
(1,354)
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)
138,651
(58,061)
33,424
(21,118)
Payments on long-term borrowings
Proceeds from long-term borrowings
Proceeds from exercise of stock options
Proceeds from subordinated loan
Payments on subordinated loan
Issuance costs of subordinated loan
Cash dividends paid to common voting shareholders
Cash dividends paid to common non-voting shareholders
Cash dividends paid to preferred shareholders
Cash dividends paid on warrants
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.
(25,969)
12,537
551
-
(10,000)
-
(1,227)
(194)
(180)
(35)
80
43,482
(6,315)
43,464
37,149
$
$
7,439
2,460
-
1,600
(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
$
$
- 74 -
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. On April 1, 2021, the Company redeemed its $10.0 million non-
amortizing subordinated loan.
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.
- 75 -
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
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.
- 76 -
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 modified in order to determine the adequacy of the allowance for loan losses during the year and
at December 31, 2021 and 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 TDRs at
December 31, 2021, as a result of the application of the provisions of the CARES Act.
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.
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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 certain 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.
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.
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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
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
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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 instruments 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 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 gain (loss) on securities transferred to held-to-maturity
Accumulated other comprehensive loss
Reclassifications
As of December 31,
2021
(1,907) $
495
(1,412)
579
(151)
428
(388)
102
(286)
(2)
4
2
(1,268) $
2020
(2,832)
739
(2,093)
1,133
(296)
837
(1,308)
342
(966)
(22)
8
(14)
(2,236)
$
$
Certain amounts in the 2020 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 2021 and standards not yet adopted as of December 31, 2021, but could have an impact on the Company's consolidated
financial statements upon adoption.
Standard
Description
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 FASB issued 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
Effect on Consolidated
Financial Statements
The adoption of this ASU had no
material impact to the Company's
consolidated statements of
condition or income.
Required Date
of
Implementation
The amendments in
this ASU were
effective for fiscal
years beginning
after December 15,
2020, for public
business entities.
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
• 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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Standard
Description
Required Date
of
Implementation
The amendments in
Effect on Consolidated
Financial Statements
The adoption of this ASU had no
this ASU were
effective for fiscal
years beginning
after December 15,
2020, for public
business entities.
material impact to the
Company’s consolidated
statements of condition or
income.
Income Taxes (ASU
2019-12-
Simplifying the
Accounting for
Income Taxes)
The FASB Board issued 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.
Standard
Description
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.
Required Date
of
Implementation
For public business
Effect on Consolidated
Financial Statements
The adoption of this ASU had no
material impact to the
Company’s consolidated
statements of condition or
income.
entities, the
amendments in this
ASU were effective
for fiscal years, and
interim periods
within those fiscal
years, beginning
after December 15,
2020.
- 83 -
Standard
Description
Required Date
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.
Effect on Consolidated
Financial Statements
of
Implementation
The amendments in
The amendments for contract
this Update are
effective for all
entities as of March
12, 2020 through
December 31,
2022.
modifications could 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 adoption of this ASU
has had and is not expected to
have any material impact to the
Company’s consolidated
statements of condition or
income.
This ASU requires additional
disclosures to be provided in all
reporting periods for which
financial statements are
presented, but otherwise does not
affect the Company's reported
statements of financial condition
or results of operations.
Effect on Consolidated
Financial Statements
of
Implementation
The amendments in
The adoption of this ASU had no
this ASU are
effective
immediately for all
entities.
material impact to the
Company’s consolidated
statements of condition or
income.
Standard
Description
Required Date
of
Implementation
Effect on Consolidated
Financial Statements
1. No. 2021-06 |
Presentation of
Financial
Statements (Topic
205), Financial
Services—
Depository and
Lending (Topic
942), and Financial
Services—
Investment
Companies (Topic
946)
This ASU is
effective
immediately for all
applicable entities.
This ASU requires applicable entities to disclose, as of each balance sheet
date, in a footnote to the financial statements, the aggregate dollar amount of
loans (exclusive of loans to any such persons which in the aggregate do not
exceed $60,000 during the latest year) made by the registrant or any of its
subsidiaries to directors, executive officers, or principal holders of equity
securities of the registrant or any of its significant subsidiaries, or to any
associate of such persons. For the latest fiscal year, an analysis of activity with
respect to such aggregate loans to related parties should also be provided. The
analysis should include the aggregate amount at the beginning of the period,
new loans, repayments, and other changes. This disclosure need not be
furnished when the aggregate amount of such loans at the balance sheet date
(or with respect to the latest fiscal year, the maximum amount outstanding
during the period) does not exceed five percent of stockholders equity as of
that date. This ASU also requires depository and lending institutions to
disclose if a significant portion of the aggregate amount of loans outstanding
to related parties at the end of the fiscal year relates to loans that are disclosed
as nonaccrual, past due, nonaccrual, or troubled debt restructurings in the
consolidated financial statements along with such other information necessary
to an understanding of the effects of the transactions on the financial
statements. This ASU further requires depository and lending institutions to
disclose if any loans were not made in the ordinary course of business during
any period for which a statement of comprehensive income is required to be
filed.
Standard
Description
Required Date
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 discontinuing 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.
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Standards Not Yet Adopted as of December 31, 2021
Standard
Description
Required Date
of
Implementation
Effect on Consolidated
Financial Statements
Measurement of
Credit Losses on
Financial
Instruments (ASU
2016-13: Financial
Instruments—Credit
Losses [Topic 326]:
Measurement of
Credit Losses on
Financial
Instruments)
January 1, 2023
(early adoption
permitted as of
January 1, 2019)
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.
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
evaluating the preliminary output
from models that have been
developed during this evaluative
phase. In addition, future levels
of allowances will 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. The
amount of any change in the
allowance for credit losses
resulting from the new guidance
will 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 adopts
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.
- 85 -
Standard
Description
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
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.
- 86 -
Required Date
of
Implementation
January 1, 2023
(early adoption
permitted as of
January 1, 2019)
Effect on Consolidated
Financial Statements
The Company is assessing the
new guidance to determine what
modifications to existing credit
estimation processes may be
required. The new guidance is
complex and management is still
evaluating the preliminary output
from models that have been
developed during this evaluative
phase. In addition, future levels
of allowances will also reflect
new requirements to include
estimated credit losses on
investment securities classified
as held-to-maturity, if any. The
Company has formed an
Implementation Committee,
whose membership includes
representatives of senior
management, to develop plans
that will encompass: (1) internal
methodology changes (2) data
collection and management
activities, (3) internal
communication requirements,
and (4) estimation of the
projected impact of this
guidance. It has been generally
assumed that the conversion
from the incurred loss model,
required under current GAAP, to
the 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.
Standard
Description
Required Date
of
Implementation
The amendments in
Effect on Consolidated
Financial Statements
The adoption of this ASU is
expected to have no material
impact to the Company's
consolidated statements of
condition or income as the
Company does not have any
freestanding equities with a
written call option.
Earnings Per Share,
Debt Modifications
and
Extinguishments,
Stock
Compensation, and
Derivatives and
Hedging- Contacts
in Entity's own
Equity (ASU 2021-
04)
The amendments in this Update affect all entities that issue freestanding
written call options that are classified in equity. Specifically, the amendments
affect those entities when a freestanding equity-classified written call option is
modified or exchanged and remains equity classified after the modification or
exchange. The amendments that relate to the recognition and measurement of
EPS for certain modifications or exchanges of freestanding equity-classified
written call options affect entities that present EPS in accordance with the
guidance in Topic 260, Earnings Per Share. The amendments in this Update
do not apply to modifications or exchanges of financial instruments that are
within the scope of another Topic. That is, accounting for those instruments
continues to be subject to the requirements in other Topics. The amendments
in this Update do not affect a holder‘s accounting for freestanding call options.
this Update are
effective for all
entities for fiscal
years beginning
after December 15,
2021, including
interim periods
within those fiscal
years. An entity
should apply the
amendments
prospectively to
modifications or
exchanges
occurring on or
after the effective
date of the
amendments. Early
adoption is
permitted for all
entities, including
adoption in an
interim period. If
an entity elects to
early adopt the
amendments in this
Update in an
interim period, the
guidance should be
applied as of the
beginning of the
fiscal year that
includes that
interim period.
- 87 -
Effect on Consolidated
Financial Statements
The adoption of this ASU is
currently not expected to have a
material impact to the
Company's consolidated
statements of condition or
income.
of
Implementation
The amendments in
this Update amend
Topic 842, which
has different
effective dates for
public business
entities and most
entities other than
public business
entities. The
amendments are
effective for fiscal
years beginning
after December 15,
2021, for all
entities, and interim
periods within
those fiscal years
for public business
entities and interim
periods within
fiscal years
beginning after
December 15,
2022, for all other
entities.
Standard
Description
Required Date
Leases- Topic 842
(ASU 2021-05)
The amendments in this Update affect lessors with lease contracts that (1)
have variable lease payments that do not depend on a reference index or a rate
and (2) would have resulted in the recognition of a selling loss at lease
commencement if classified as sales-type or direct financing. The amendment
requires that a lessor determine whether a lease should be classified as a sales-
type lease or a direct financing lease at lease commencement on the basis of
specified classification criteria (see paragraphs 842-10-25-2 through 25-3).
Under ASC 842, a lessor is not permitted to estimate most variable payments
and must exclude variable payments that are not estimated and do not depend
on a reference index or a rate from the lease receivable. Subsequently, those
excluded variable payments are recognized entirely as lease income when the
changes in facts and circumstances on which those variable payments are
based occur. Consequently, the net investment in the lease for a sales-type
lease or a direct financing lease with variable payments of a certain magnitude
that do not depend on a reference index or a rate may be less than the carrying
amount of the underlying asset derecognized at lease commencement. As a
result, the lessor recognizes a selling loss at lease commencement (hereinafter
referred to as a day-one loss) even if the lessor expects the arrangement to be
profitable overall. The amendments in this Update address stakeholders'
concerns by amending the lease classification requirements for lessors to align
them with practice under ASC 840. Lessors should classify and account for a
lease with variable lease payments that do not depend on a reference index or
a rate as an operating lease if both of the following criteria are met: (1) The
lease would have been classified as a sales-type lease or a direct financing
lease in accordance with the classification criteria in paragraphs 842-10-25-2
through 25-3 and (2) The lessor would have otherwise recognized a day-one
loss. When a lease is classified as operating, the lessor does not recognize a
net investment in the lease, does not derecognize the underlying asset, and,
therefore, does not recognize a selling profit or loss. The leased asset
continues to be subject to the measurement and impairment requirements
under other applicable GAAP before and after the lease transaction.
- 88 -
Standard
Description
Required Date
of
Implementation
Effect on Consolidated
Financial Statements
On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-
The Company is assessing the
Financial
Instruments—Credit
Losses (ASU 2019-
11- Codification
Improvements to
Topic 326)
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.
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.
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.
- 89 -
Standard
Description
Required Date
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)
Effect on Consolidated
Financial Statements
of
Implementation
The amendments in
The amendments reduce the number of accounting models for convertible debt
The amendments can be applied
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.
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.
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.
- 90 -
NOTE 3: EARNINGS PER SHARE
Following shareholder approval received on June 4, 2021, the Company converted 1,380,283 shares of its Series B Convertible
Perpetual Preferred Stock to an equal number of shares of its newly-created Series A Non-Voting Common Stock. The conversion,
which was effective on June 28, 2021, represented 100% of the Company's Convertible Perpetual Preferred Stock outstanding at the
time of the conversion and retired the Convertible Perpetual Preferred Stock in perpetuity.
The Company has voting common stock, non-voting common stock and a warrant that are all eligible to participate in dividends equal
to the voting common stock dividends on a per share basis. Securities that participate in dividends, such as the Company’s non-voting
common stock and warrant, are considered “participating securities.” The Company calculates net income available to voting
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 -0- and 175,996 for the years ended 2021
and 2020, 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
Series A Non-Voting Common Stock dividends
Warrant dividends
Undistributed earnings allocated to participating securities
Net income available to common shareholders- Voting
Net income attributable to Pathfinder Bancorp, Inc.
Convertible preferred stock dividends
Voting Common Stock dividends
Warrant dividends
Undistributed earnings allocated to participating securities
Net income available to common shareholders- Series A Non-Voting
Basic weighted average common shares outstanding- Voting
Basic weighted average common shares outstanding- Series A Non-Voting
Diluted weighted average common shares outstanding- Voting
Diluted weighted average common shares outstanding- Series A Non-Voting
Basic earnings per common share- Voting
Basic earnings per common share- Series A Non-Voting
Diluted earnings per common share- Voting
Diluted earnings per common share- Series A Non-Voting
$
$
$
$
$
$
$
$
- 91 -
$
Years Ended
December 31,
2021
12,407
180
206
35
2,699
9,287
$
12,407
180
1,258
35
9,392
1,542
4,478
745
4,478
745
2.07
2.07
2.07
2.07
$
$
$
$
$
$
2020
6,950
291
-
30
1,224
5,405
-
-
-
-
-
-
4,608
-
4,608
-
1.17
-
1.17
-
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
December 31, 2021
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Estimated
Fair
Value
$
$
$
$
32,669 $
37,860
13,603
13,693
22,482
12,658
56,848
189,813
206
206
190,019 $
- $
14,790
46,290
14,636
9,740
11,362
64,105
160,923 $
$
17
1,383
562
9
148
30
285
2,434
-
-
2,434 $
$
-
416
1,252
67
277
367
222
2,601 $
(413) $
(44)
(38)
(89)
(466)
(403)
(402)
(1,855)
-
-
(1,855) $
- $
(140)
(102)
(188)
(18)
(9)
(262)
(719) $
32,273
39,199
14,127
13,613
22,164
12,285
56,731
190,392
206
206
190,598
-
15,066
47,440
14,515
9,999
11,720
64,065
162,805
- 92 -
(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
December 31, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
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 $
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
A substantial percentage 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, 2021, the
Company also held a total of 68 private-label mortgage-backed securities or collateralized mortgage obligations with an aggregate
book balance of $120.9 million and 20 private-label asset backed securities collateralized by consumer loans with an aggregate book
balance of $28.3 million. At December 31, 2020, the Company 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. 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.
- 93 -
The amortized cost and estimated fair value of debt investments at December 31, 2021 by contractual maturity are shown below.
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or
without penalties.
Available-for-Sale
Held-to-Maturity
(In thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Sub-total
Residential mortgage-backed - US agency
Collateralized mortgage obligations - US agency
Collateralized mortgage obligations - Private label
Totals
$
Amortized
Cost
5,886 $
4,824
34,884
52,231
97,825
22,482
12,658
56,848
189,813 $
$
Estimated
Fair Value
Amortized
Cost
2,817 $
8,967
43,836
20,096
75,716
9,740
11,362
64,105
160,923 $
Estimated
Fair Value
2,865
9,349
44,764
20,043
77,021
9,999
11,720
64,065
162,805
6,294 $
4,920
34,512
53,486
99,212
22,164
12,285
56,731
$
190,392
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, 2021
Twelve Months or More
Total
Number of
Individual
Securities
Unrealized
Losses
Number of
Fair Individual
Value Securities
Unrealized
Losses
Number of
Fair Individual
Value Securities
Unrealized
Losses
Fair
Value
3 $
3
2
5
3
3
18
37 $
4 $
9
2
1
-
6
22 $
(413) $ 31,195
4,847
(44)
(5)
1,162
(89) 11,206
(466) 13,090
(126)
6,504
(388) 38,816
(1,531) $106,820
(28) $
(102)
(130)
(18)
-
2,013
7,636
2,974
1,941
-
(163) 13,070
(441) $ 27,634
- $
-
1
-
-
2
2
5 $
2 $
-
2
-
1
3
8 $
- $
-
(33)
-
-
-
-
722
-
-
(277) 2,204
(14) 1,539
(324) $ 4,465
-
(112) $ 3,988
-
(58) 1,610
-
-
(9) 1,109
(99) 3,820
(278) $10,527
3 $
3
3
5
3
5
20
42 $
6 $
9
4
1
1
9
30 $
(413) $ 31,195
4,847
(44)
(38)
1,884
(89) 11,206
(466) 13,090
(403)
8,708
(402) 40,355
(1,855) $111,285
(140)
(102)
(188)
(18)
(9)
6,001
7,636
4,584
1,941
1,109
(262) 16,890
(719) $ 38,161
- 94 -
(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 $
- $
-
(20) 2,521
-
-
(2) 2,487
-
-
(45) 6,974
(78) 8,071
(145) $20,053
(58) $ 7,063
(7) 3,775
(36) 4,209
-
-
(1) 1,496
(115) 6,442
(217) $22,985
1 $
-
-
1
-
2
4
8 $
- $
-
3
-
-
1
4 $
-
-
(2)
-
(24) $ 4,954
-
-
80
-
(416) 5,683
(32) 2,574
(474) $13,291
- $
-
-
-
(140) 4,683
-
-
780
(146) $ 5,463
-
-
(6)
1 $
1
-
3
-
4
7
16 $
3 $
4
7
-
1
5
20 $
(24) $ 4,954
(20) 2,521
-
-
(4) 2,567
-
-
(461) 12,657
(110) 10,645
(619) $33,344
(58) $ 7,063
(7) 3,775
(176) 8,892
-
-
(1) 1,496
(121) 7,222
(363) $28,448
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, 2021
represents OTTI. There were a total of five securities classified as available-for-sale (aggregate amortized historical cost of $4.8
million, unrealized aggregate loss of $324,000, or -6.7%) and eight securities classified as held-to-maturity (aggregate amortized
historical cost of $10.8 million, unrealized aggregate loss of $278,000, or -2.6%) that were in an unrealized loss position for 12
months or longer at December 31, 2021.
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 fluctuations in general interest rates or changes in expected
prepayments. In substantially all cases, price improvement in future months is expected as the issuances approach maturity. Of the
total of 13 securities in an unrealized loss position for 12 months or more at December 31, 2021, three securities, with aggregate
amortized cost balances of $3.6 million and representing 23.1% of the unamortized cost of the total securities in an unrealized loss
position for 12 months or more, are issued by United States agencies and consist of a collateralized mortgage obligation. These
positions in US government agency 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.
In addition to these three securities, the Company held the following ten non-government-issued/backed securities that were in an
unrealized loss position for 12 or more months at December 31, 2021:
• One corporate bond, categorized as available for sale, with an amortized historical cost of $755,000 (unrealized
loss of $33,000, or 4.59%). 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.
Two privately-issued mortgage-backed securities, categorized as available-for-sale, and collateralized by
various forms of commercial mortgages, with an aggregate amortized historical cost of $1.6 million (unrealized
aggregate loss of $14,000, or 0.92%). These securities were not rated at the time of their issuances by any
NRSRO but each remains significantly collateralized through subordination and other credit enhancements.
•
- 95 -
•
Therefore, no credit-related OTTI is deemed to be present
Two securities, categorized as issued by unrelated state and/or political subdivisions (generally referred to as
“municipal’ securities), categorized as held-to-maturity, with an aggregate amortized historical cost of $4.1
million (unrealized loss of $112,000, or 2.80%). These securities each 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 asset-backed security, categorized as held-to-maturity, and collateralized by small business
loans with an amortized historical cost of $157,000 (unrealized loss of less than $2,000, or -0.92%). This
security was not rated at the time of its issuances by any NRSRO but 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, collateralized by private-issue student loans and categorized as
held-to-maturity, with an amortized historical cost of $1.5 million and a market value of $1.5 million
(unrealized loss of $56,000 or -3.75%). This security was unrated at issuance but remains sufficiently
collateralized through subordination. Therefore, no credit-related OTTI is deemed to be present.
Three privately-issued collateralized mortgage obligation securities, collateralized by commercial mortgage
loans and categorized as held-to-maturity, with an aggregate amortized historical cost of $3.9 million and an
aggregate market value of $3.8 million (unrealized aggregate loss of $99,000, or -2.59%). These securities each
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 $42.0 million and $29.3 million, respectively on sales and redemptions of securities for the years ended December 31,
2021 and 2020 resulted in gross realized gains (losses) detailed below:
(In thousands)
Realized gains on investments
Realized losses on investments
$
$
2021
120 $
(83)
37 $
2020
1,107
(31)
1,076
As of December 31, 2021 and December 31, 2020, securities with a fair value of $103.2 million and $96.4 million, respectively, were
pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of $9.4 million and
$13.2 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.
- 96 -
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
Less allowance for loan losses
Loans receivable, net
December 31,
2021
December 31,
2020
$
240,434 $
6,329
513
247,276
288,450
61,884
69,135
19,338
5,811
444,618
31,737
110,108
141,845
833,739
(1,280)
(12,935)
819,524
$
$
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
(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, 2021, the loans
under contract to be sold had a principal balance of $513,000. These loans were transferred at their amortized cost of
$513,000 as of December 31, 2021, as the fair value of these loans was greater than the amortized cost. 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.
- 97 -
Paycheck Protection Program (“PPP”)
The Bank participated in all rounds of 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. The PPP ended in May
2021. Information related to the Company’s PPP loans are included in the following tables:
Unaudited
(In thousands, except number of loans)
Number of PPP loans originated in the period
Funded balance of PPP loans originated in the period
Number of PPP loans forgiven in the period
Average balance of PPP loans in the period
Balance of PPP loans forgiven in the period
Deferred PPP fee income recognized in the period
(In thousands, except number of loans)
Unearned PPP deferred fee income at end of period
(In thousands, except number of loans)
Total PPP loans originated since inception
Total PPP loans forgiven since inception
Total PPP loans remaining at December 31, 2021
$
$
$
$
$
For the years ended
December 31, 2021
December 31, 2020
478
36,369
796
75,538
77,054
2,150
$
$
$
$
699
75,352
136
91,328
15,279
938
December 31, 2021
716
$
December 31, 2020
1,216
Number
Balance
1,177
932
256
$
$
$
111,721
92,333
19,338
The Bank received $4.0 million in fees from the SBA associated with PPP lending activities during 2020 and 2021 and recognized
$2.2 million and $900,000 of those fees in 2021 and 2020, respectively. Accordingly, $3.1 million in deferred fee income on a
cumulative basis was subtracted from the carrying value of the PPP loans held in portfolio and the remaining $912,000 in deferred
collected fees will be recognized in future periods.
CARES Act Section 4013 Loan Deferrals
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. Consistent with industry regulatory guidance, borrowers that were granted COVID-19 related deferrals but
were otherwise current on loan payments continued 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. 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, had 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, had 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, were 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 were
granted subject to further analysis and discussion with specific borrowers. To the extent that such modifications met the criteria
previously described these loans were not classified as troubled debt restructurings nor classified as nonperforming at December 31,
2020. Loans not granted additional deferral periods were categorized as nonaccrual loans if the borrowers failed to make the first
scheduled payment following the end of the deferral period, or became seriously delinquent thereafter. During the course of 2021, all
deferred loans were either returned to accrual status or appropriately characterized as nonaccrual as dictated by their repayment
activities. Therefore, the Company had no loans in deferral status at December 31, 2021.
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.
- 98 -
In 2019, the Bank acquired eleven diverse pools of loans, originated by unrelated third parties. There were four new pools added in
2021.
The following table summarizes the positions, held by the Bank in purchased loans at year end:
(In thousands, except number of loans)
December 31, 2021
Residential real estate loans
Residential real estate loans
Other commercial and industrial loans
Commercial Line of Credit 1
Commercial Line of Credit 2
Home equity lines of credit
Automobile loans
Unsecured consumer loan pool 1
Unsecured consumer loan pool 2
Unsecured consumer loans pool 3
Unsecured consumer loans pool 4
Unsecured consumer loans pool 5
Unsecured consumer loans pool 6
Original
Balance
4,300
21,300
6,800
11,600
10,500
21,900
50,400
5,400
26,600
10,300
14,500
24,400
22,200
Current
Balance
4,100
21,400
3,900
7,100
9,300
8,400
8,800
2,600
6,300
2,200
12,600
19,700
22,100
Unamortized
Premium
257
3,642
26
35
243
301
30
74
1,776
583
2,785
Percent
Owned
Number of
Loans
Maturity
Range
17-23 Years
51
19-25 years
900
4-8 years
33
0-1 year
1
0-1 year
1
2-28 years
187
0-5 years
855
3-5 years
66
1-3 years
1,438
0-6 years
1,356
15 years
563
756
Over 15 years
564 Over 15 years
100%
62%
100%
5%
28%
100%
90%
100%
59%
100%
68%
100%
100%
(In thousands, except number of loans)
December 31, 2020
Cumulative
net charge-
offs
-
-
-
-
-
-
239
-
42
296
-
-
-
Cumulative
net charge-
offs
Percent
Owned
Number of
Loans
Original
Balance
4,300
$
6,800
21,900
50,400
5,400
26,600
10,300
14,500
Current
Balance
4,300
$
5,500
13,900
17,000
3,600
15,400
5,500
14,500
Unamortized
Premium
273
-
309
602
-
63
138
2,124
$
Residential real estate loans
-
Other commercial and industrial loans
-
Home equity lines of credit
-
Automobile loans
230
Unsecured consumer loan pool 1
-
Unsecured consumer loan pool 2
-
Unsecured consumer loans pool 3
-
-
Unsecured consumer loans pool 4
As of December 31, 2021 and December 31, 2020, residential mortgage loans with a carrying value of $123.2 million and $115.6
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.
100%
100%
100%
90%
100%
59%
100%
68%
51
39
275
1,257
76
2,246
2,958
619
Maturity
Range
17-25 years
5-9 years
3-29 years
0-6 years
3-6 years
2-4 years
0-6 years
25 years
- 99 -
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, comprised 68% of the total loans
held in the portfolio in 2021 and 2020, respectively. 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
- 100 -
6.
7.
8.
accorded this classification have potential weaknesses which may, if not checked or corrected, weaken the company’s
assets, inadequately protect the Bank’s position or effect the orderly, scheduled reduction of the debt at some future time.
Substandard: The relationship is inadequately protected by the current net worth and cash flow capacity of the borrower,
guarantor/endorser, or of the collateral pledged. Assets have a well-defined weakness or weaknesses that jeopardize the
orderly liquidation of the debt. The relationship shows deteriorating trends or other deficient areas. The loan may be
nonperforming and expected to remain so for the foreseeable future. Relationship balances may be adequately secured by
asset value; however a deteriorated financial condition may necessitate collateral liquidation to effect repayment. This
would also include any relationship with an unacceptable financial condition requiring excessive attention of the officer
due to the nature of the credit risk or lack of borrower cooperation.
Doubtful: The relationship has all the weaknesses inherent in a credit graded 5 with the added characteristic that the
weaknesses make collection on the basis of currently existing facts, conditions and value, highly questionable or
improbable. The possibility of some loss is extremely high, however its classification as an anticipated loss is deferred
until a more exact determination of the extent of loss is determined. Loans in this category must be on nonaccrual.
Loss: Loans are considered uncollectible and of such little value that continuance as bankable assets is not warranted. It is
not practicable or desirable to defer writing off this basically worthless asset even though partial recovery may be possible
in the future.
For Residential Mortgage and Consumer Loans:
Residential mortgage and consumer loans are assigned a “Pass” rating unless the loan has demonstrated signs of weakness as indicated
by the ratings below.
5.
6.
7.
Special Mention: All loans sixty days past due are classified Special Mention. The loan is not upgraded until it has been
current for six consecutive months.
Substandard: All loans 90 days past due are classified Substandard. The loan is not upgraded until it has been current for
six consecutive months.
Doubtful: The relationship has all the weaknesses inherent in a credit graded 5 with the added characteristic that the
weaknesses make collection on the basis of currently existing facts, conditions and value, highly questionable or
improbable. The possibility of some loss is extremely high.
The risk ratings for classified loans are evaluated at least quarterly for commercial loans or when credit deficiencies arise, such as
delinquent loan payments, for commercial, residential mortgage or consumer loans. See further discussion of risk ratings in Note 1.
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, 2021
Special
Mention
Pass
Substandard
Doubtful
Total
269 $
-
-
269
9,879
4,036
3,907
-
-
17,822
133
44
177
18,268 $
811 $
-
-
811
10,604
3,387
8,321
-
-
22,312
606
77
683
23,806 $
531 $
-
-
531
579
53
188
-
-
820
258
8
266
1,617 $
240,434
6,329
513
247,276
288,450
61,884
69,135
19,338
5,811
444,618
31,737
110,108
141,845
833,739
$
$
238,823 $
6,329
513
245,665
267,388
54,408
56,719
19,338
5,811
403,664
30,740
109,979
140,719
790,048 $
- 101 -
(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
Nonaccrual and Past Due Loans
As of December 31, 2020
Special
Mention
Pass
Substandard
Doubtful
Total
$
$
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 $
1,151 $
-
-
1,151
9,541
5,132
4,770
-
-
19,443
54
104
158
20,752 $
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
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:
As of December 31, 2021
(In thousands)
Residential mortgage loans:
30-59 Days 60-89 Days 90 Days
and
Past Due
and Accruing and Accruing
Past Due
Total Loans
Over Past Due Current Receivable
Total
1-4 family first-lien residential mortgages
Construction
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
$
960 $
-
-
960
1,735
156
1,799
-
-
3,691
17
571
588
5,239 $
416 $
-
-
416
891 $
-
-
891
2,268 $ 238,166 $
6,329
513
2,268 245,008
-
-
240,434
6,329
513
247,276
1,029
1,180
1,686
-
-
3,895
4,379
576
1,056
-
-
6,011
7,143 281,307
59,971
1,913
64,594
4,541
19,338
-
5,811
-
13,597 431,021
288,450
61,884
69,135
19,338
5,811
444,618
49
257
306
4,617 $
317
31,420
251
1,680 108,428
852
1,103
1,998 139,847
8,006 $ 17,862 $ 815,877 $
31,737
110,108
141,845
833,739
- 102 -
(In thousands)
Residential mortgage loans:
As of December 31, 2020
30-59 Days 60-89 Days 90 Days
and
Past Due
and Accruing and Accruing
Past Due
Total Loans
Over Past Due Current Receivable
Total
1-4 family first-lien residential mortgages
Construction
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
$
1,250 $
-
-
1,250
480
734
441
170
-
1,825
248
443
691
3,766 $
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
570 $
-
-
570
1,098 $
-
-
1,098
2,918 $ 224,267 $
6,681
1,526
2,918 232,474
-
-
227,185
6,681
1,526
235,392
913
1,870
1,717
-
-
4,500
78
252
330
5,400 $
2,511
194
1,691
-
-
4,396
3,904 282,367
46,305
2,798
74,780
3,849
60,473
170
7,166
-
10,721 471,091
799
882
473
187
660
37,825
70,023
1,681 107,848
6,154 $ 15,320 $ 811,413 $
286,271
49,103
78,629
60,643
7,166
481,812
38,624
70,905
109,529
826,733
December 31,
2021
December 31,
2020
$
$
891 $
891
4,407
629
1,261
6,297
252
852
1,104
8,292 $
2,608
2,608
11,286
194
6,498
17,978
473
274
747
21,333
There were no loans past due ninety days or more and still accruing interest at December 31, 2021 or 2020.
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.
- 103 -
The table below details loans that had been modified as TDRs for the year ended December 31, 2021.
(In thousands)
Commercial real estate loans
Commercial and industrial loans
Residential mortgages
Consumer loans
For the year ended December 31, 2021
Post-modification
outstanding
recorded
investment
Pre-modification
outstanding
recorded
investment
Additional
provision
for loan
losses
Number of
loans
1 $
1
3
1
675 $
200
453
443
675 $
675
459
504
-
-
-
-
The TDR's evaluated for impairment for the year ended December 31, 2021 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. One loan has been granted four deferrals and based on the known history of the
borrower, Management has determined this loan to be a TDR.
The table below details loans that have 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
Post-modification
outstanding
recorded
investment
Pre-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 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, 2021, which had
subsequently defaulted during the year ended December 31, 2021.
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.
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.
- 104 -
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, 2021
December 31, 2020
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
$
666 $
4,708
100
357
93
-
539
2,450
53
1,852
539
-
666 $
4,801
104
396
93
-
539
2,450
53
1,852
539
-
- $
-
-
-
-
-
665 $
11,053
-
5,114
75
81
665 $
11,136
-
5,132
75
81
90
300
53
1,318
114
-
1,182
1,729
925
1,864
142
-
1,182
1,729
925
1,864
142
-
1,205
7,158
153
2,209
632
-
11,357 $
1,205
7,251
157
2,248
632
-
11,493 $
90
300
53
1,318
114
-
1,875 $
1,847
12,782
925
6,978
217
81
22,830 $
1,847
12,865
925
6,996
217
81
22,931 $
$
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
$
$
2021
1,439
9,538
640
5,041
516
50
17,224
$
$
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
$
$
2021
62
285
10
180
6
-
543
$
$
- 105 -
-
-
-
-
-
-
205
231
925
1,278
142
-
205
231
925
1,278
142
-
2,781
2020
1,647
6,327
360
2,448
219
86
11,087
2020
75
360
67
191
6
6
705
NOTE 6: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 2021 and 2020 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
December 31, 2021
1-4 family
first-lien
residential
mortgage
Construction
Commercial
real estate
Commercial
lines of credit
Other
commercial
and industrial
Paycheck
Protection
Program
$
$
$
$
931 $
(20)
-
(39)
872 $
90 $
- $
-
-
-
- $
- $
4,776 $
(7)
-
539
5,308 $
1,670 $
(50)
69
(754)
935 $
2,992 $
(707)
1
476
2,762 $
300 $
53 $
1,318 $
782 $
- $
5,008 $
882 $
1,444 $
-
-
-
-
-
-
-
$ 240,434 $
6,329 $
288,450 $
61,884 $
69,135 $
19,338
$
1,205 $
- $
7,158 $
153 $
2,209 $
-
$ 239,229 $
6,329 $
281,292 $
61,731 $
66,926 $
19,338
Tax exempt
Home equity
and junior liens
Other
consumer
Unallocated (1)
Total
$
$
$
$
$
$
$
1 $
-
-
2
3 $
- $
3 $
739 $
-
-
35
774 $
1,123 $
(240)
88
326
1,297 $
545 $
-
-
438
983 $
12,777
(1,024)
158
1,022
12,935
114 $
- $
- $
1,875
660 $
1,297 $
983 $
11,060
5,811 $
31,737 $
110,108 $
513 $
833,739
- $
632 $
- $
- $
11,357
5,811 $
31,105 $
110,108 $
513 $
822,382
(1) The ending balance of the loans receivable for the unallocated portion of the allowance includes loans held-for-sale. At
December 31, 2021, the Bank had loans held-for-sale with a principal balance of $513,000. These loans were still part of the
portfolio as of December 31, 2021. 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 (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
December 31, 2020
1-4 family
first-lien
residential
mortgage
Construction
Commercial
real estate
Commercial
lines of credit
Other
commercial
and industrial
Paycheck
Protection
Program
$
$
$
$
580 $
(125)
2
474
931 $
205 $
726 $
- $
-
-
-
- $
- $
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)
Total
$
$
$
$
$
$
$
1 $
-
-
-
1 $
- $
1 $
553 $
(28)
29
185
739 $
413 $
(325)
66
969
1,123 $
272 $
-
-
273
545 $
8,669
(700)
101
4,707
12,777
142 $
- $
- $
2,781
597 $
1,123 $
545 $
9,996
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.
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 2021 in order to determine the
adequacy of the allowance for loan losses during the year and at December 31, 2021.
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
$
$
$
$
$
$
$
$
December 31, 2021
1-4 family
first-lien
residential
mortgage
Construction
Commercial
real estate
Commercial
lines of credit
90 $
82
700
872 $
- $
-
-
- $
300 $
2
5,006
5,308 $
Other
commercial
and industrial
1,319
227
1,217
2,762
53 $
25
857
935 $
Tax exempt
Home equity
and junior liens
Other
consumer
Unallocated
- $
-
3
-
3 $
114 $
324
336
-
774 $
- $
1,028
269
-
1,297 $
December 31, 2020
- $
-
-
983
983 $
Total
1,876
1,688
8,388
983
12,935
1-4 family
first-lien
residential
mortgage
Construction
Commercial
real estate
Commercial
lines of credit
205 $
88
638
931 $
- $
-
-
- $
231 $
80
4,465
4,776 $
Other
commercial
and industrial
1,278
56
1,658
2,992
925 $
92
653
1,670 $
Tax exempt
Home equity
and junior liens
- $
-
1
-
1 $
142 $
325
272
-
739 $
Other
Unallocated
consumer
-
$
863
260
-
1,123 $
- $
-
-
545
545 $
Total
2,781
1,504
7,947
545
12,777
- 108 -
NOTE 7: SERVICING
Loans serviced for others are not included in the accompanying consolidated statements of condition. At December 31, 2021 and
2020, the Bank serviced 493 and 501 residential mortgage loans for others, respectively. The unpaid principal balances of mortgage
loans serviced for others were $51.1 million and $52.9 million at December 31, 2021 and 2020, respectively. The balance of
capitalized servicing rights included in other assets at December 31, 2021 and 2020, was $379,000 and $373,000, 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
$
$
$
2021
72 $
69
2020
407
54
2021
2,434 $
23,000
16,861
548
42,843
21,184
21,659 $
2020
2,454
21,403
17,364
500
41,721
19,457
22,264
Depreciation expense in 2021 and 2020 was $1.8 million and $1.7 million, respectively.
NOTE 9: FORECLOSED REAL ESTATE
The Company had no foreclosed real estate at December 31, 2021 and 2020.
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, 2021, $3.8 million of this amount was due to
prior periods acquisitions of bank branches and $696,000, initially and currently classified as an identifiable intangible asset, 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 recorded goodwill for impairment. The Company
updated those evaluations using internal modeling processes for the year ended December 31, 2021. 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 prior 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, 2021.
The identifiable intangible asset of $117,000 as of December 31, 2021 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 4.2 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,
2021
243 $
(126)
117 $
2020
243
(110)
133
$
$
The estimated amortization expense for each of the five succeeding years ended December 31, is as follows:
(In thousands)
2022
2023
2024
2025
2026
Thereafter
Total
$
$
16
16
16
16
16
37
117
NOTE 11: DEPOSITS
A summary of deposits at December 31 is as follows:
(In thousands)
Savings accounts
Time accounts
Time accounts in excess of $250,000
Money management accounts
MMDA accounts
Demand deposit interest-bearing
Demand deposit noninterest-bearing
Mortgage escrow funds
Total Deposits
2021
131,176 $
253,564
67,450
16,124
256,963
130,816
191,858
7,395
1,055,346 $
$
$
At December 31, 2021, the scheduled maturities of time deposits are as follows:
(In thousands)
Year of Maturity:
2022
2023
2024
2025
2026
Thereafter
Total
$
$
- 110 -
2020
103,093
305,074
91,976
15,650
227,970
83,129
162,057
6,958
995,907
185,868
39,503
6,212
65,288
21,763
2,380
321,014
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 IntraFi 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
2021
At December 31,
Non-Brokered
$
Brokered
Non-Brokered
$
131,176
135,804
67,450
16,124
256,963
90,771
191,858
7,395
897,541 $
$
117,760
Total
131,176
253,564
67,450
16,124
256,963
130,816
191,858
7,395
157,805 $ 1,055,346
40,045
$
$
2020
Brokered
103,093 $
135,101
91,976
15,650
227,970
83,129
162,057
6,958
825,934 $
- $
169,973
-
-
-
-
-
-
169,973 $
Total
103,093
305,074
91,976
15,650
227,970
83,129
162,057
6,958
995,907
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
2021
12,500 $
12,500 $
2020
4,020
4,020
64,598 $
64,598 $
78,030
78,030
$
$
$
$
The principal balances, interest rates and maturities of the outstanding long-term borrowings, all of which are at a fixed rate, at
December 31, 2021 are as follows:
Term
(Dollars in thousands)
Advances with FHLB
Due within 1 year
Due within 2 years
Due within 10 years
Total advances with FHLB
Total long-term fixed rate borrowings
Principal
Rates
$
$
$
0.27 - 2.55%
0.34 - 3.17%
0.39-1.23%
18,227
12,006
34,365
64,598
64,598
At December 31, 2021, scheduled repayments of long-term debt are as follows:
(In thousands)
2022
2023
2024
2025
2026
Total
$
$
18,227
12,006
15,413
17,252
1,700
64,598
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 $123.2 million and FHLB stock with a carrying value of $4.2 million have been pledged by the
Company under a blanket collateral agreement to secure the Company’s borrowings at December 31, 2021. 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 $9.4 million line of credit available at December 31, 2021 with the Federal Reserve Bank of New
York through its Discount Window and has pledged various corporate and municipal securities against the line. The Company has
$15.0 million in lines of credit available with two other correspondent banks. $10.0 million of that line of credit is available on an
- 111 -
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
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 investors. The 2020 Subordinated Loan has a
maturity date of October 15, 2030 and initially bears 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 related to this indebtedness of $1.5 million and $327,000 was recorded in
the years ended December 31, 2021 and December 31, 2020, respectively.
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 $94,000 and $124,000 in interest expense related to this
issuance in 2021 and 2020, 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, 2021 and 2020. 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 was scheduled to mature on October 1, 2025. The Company had 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
was 6.25% through the maturity date of the 2015 Subordinated Loan. The 2015 Subordinated Loan was senior in the Company’s
credit repayment hierarchy only to the Company’s common equity and preferred stock and, as a result, qualified 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 was 6.25%
until the stated maturity date. On April 1, 2021 the Company redeemed this $10.0 million non-amortizing subordinated loan. The
terms of the Subordinated Loan required fixed interest payments at an annual interest rate of 6.25% after February 29, 2016 until the
Loan’s scheduled maturity date. Interest expense, related to this borrowing, of $156,000 and $650,000 was recorded in the years
ended December 31, 2021 and 2020, respectively.
The composition of subordinated loans at December 31 is as follows:
(In thousands)
Subordinated loans:
Junior subordinated debenture
Subordinated loans
Deferred Financing Charges
Total subordinated loans
2021
5,155 $
25,000 $
(592)
29,563 $
$
$
$
2020
5,155
35,000
(755)
39,400
- 112 -
The principal balances, interest rates and maturities of the subordinated loans at December 31, 2021 are as follows:
Term
(Dollars in thousands)
Subordinated loans:
Due within 9 years
Due within 16 years
Total subordinated loans
Principal
Rates
$
$
25,000
5,155
30,155
5.5%
3-Month Libor + 1.65%
At December 31, 2021, scheduled repayments of the subordinated loans:
(In thousands)
2022
2023
2024
2025
Thereafter
Total
$
$
-
-
-
25,000
5,155
30,155
- 113 -
NOTE 14: EMPLOYEE BENEFITS AND DEFERRED COMPENSATION AND SUPPLEMENTAL RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan covering substantially all employees. The plan provides defined
benefits based on years of service and final average salary. On May 14, 2012, the Company informed its employees of its decision to
freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the
maintenance of a defined benefit plan. The plan was frozen on June 30, 2012. Compensation earned by employees up to June 30,
2012 is used for purposes of calculating benefits under the plan but there will be no future benefit accruals after this date. Participants
as of June 30, 2012 will continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work. In
addition, the Company provides certain health and life insurance benefits for a limited number of eligible retired employees. The
healthcare plan is contributory with participants’ contributions adjusted annually; the life insurance plan is noncontributory.
Employees with less than 14 years of service as of January 1, 1995, are not eligible for the health and life insurance retirement
benefits.
The following tables set forth the changes in the plans’ benefit obligations, fair value of plan assets and the plans’ funded status as of
December 31:
(In thousands)
Change in benefit obligations:
Benefit obligations at beginning of year
Service cost
Interest cost
Plan participants' contribution
Actuarial (gain) loss
Benefits paid
Benefit obligations at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Benefits paid
Plan participants' contribution
Employer contributions
Fair value of plan assets at end of year
Funded (unfunded) status - asset (liability)
Pension Benefits
Postretirement Benefits
2021
2020
2021
2020
$
$
12,967 $
-
441
-
(389)
(299)
12,720
19,274
1,556
(299)
-
-
20,531
7,811 $
11,892 $
-
466
-
873
(264)
12,967
16,985
2,553
(264)
-
-
19,274
6,307 $
369 $
-
12
8
(19)
(45)
325
-
-
(45)
8
37
-
(325) $
414
-
16
9
(25)
(45)
369
-
-
(45)
9
36
-
(369)
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.
Amounts recognized in accumulated other comprehensive loss as of December 31 are as follows:
(In thousands)
Net loss
Tax Effect
Pension Benefits
Postretirement Benefits
2021
1,843 $
480
1,363 $
2020
2,743 $
716
2,027 $
2021
64 $
15
49 $
2020
87
23
64
$
$
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, 2021 and
December 31, 2020. The following points address the approach taken.
1.
2.
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 3.71% at December 31, 2021.
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 3.71% at December 31, 2021.
- 114 -
3.
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 $12.7 million and $13.0 million at December 31, 2021
and 2020, respectively. The postretirement plan had an accumulated benefit obligation of $325,000 and $369,000 at December 31,
2021 and 2020, respectively.
The significant assumptions used in determining the benefit obligations as of December 31, are as follows:
Weighted average discount rate
Rate of increase in future compensation levels
Pension Benefits
Postretirement Benefits
2021
3.71%
-
2020
3.45%
-
2021
3.71%
-
2020
3.45%
-
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 2025 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
2021
- $
441
(1,146)
-
101
-
(604) $
2020
- $
466
(1,094)
-
228
-
(400) $
$
$
2021
- $
12
-
-
9
(5)
16 $
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
Postretirement Benefits
2021
3.71%
5.25%
-
2020
3.45%
6.00%
-
2021
3.71%
-
-
2020
3.45%
-
-
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% to 8.0% and 3.0% to 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 5.25% expected long-term rate
of return in 2021 and a 5.25% expected long-term rate of return in 2022 reflecting current economic conditions and expected rates of
return. Based on the $20.5 million fair value of plan assets at December 31, 2021, each 50 basis point decrease in the expected long-
term rate of return would reduce after tax net income at 2022 expected state and federal combined statutory tax rate of 26.1% by
approximately $76,000.
The estimated net actuarial loss that will be amortized from accumulated other comprehensive loss into net periodic benefit plan
income during 2022 is $0. The estimated amortization of the unrecognized transition obligation and actuarial loss for the
postretirement health plan in 2022 is $7,000. The expected net periodic benefit plan benefit for 2022 is estimated to be $589,000 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.
- 115 -
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.
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
At December 31, 2021
Level 1
Level 2
Level 3
Total Fair
Value
$
$
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
49
49 $
1,763 $
1,946
1,234
475
442
398
222
533
332
2,651
9,996
2,380
4,249
3,521
10,150
336
20,482 $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
1,763
1,946
1,234
475
442
398
222
533
332
2,651
9,996
2,380
4,249
3,521
10,150
385
20,531
- 116 -
(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
*Includes cash equivalents investments in equity and fixed income strategies
a) This category contains large-cap stocks with above-average yield. The portfolio typically holds between 60 and 70 stocks.
b) This category seeks long-term capital appreciation by investing primarily in large growth companies based in the U.S.
c) This fund tracks the performance of the S&P 500 index by purchasing the securities represented in the index in
approximately the same weightings as the index.
d) This category employs an indexing investment approach designed to track the performance of the CRSP US Mid-Cap Value
Index.
e) This category employs an indexing investment approach designed to track the performance of the CRSP US Mid-Cap
Growth Index.
f) This category seeks to track the performance of the S&P Midcap 400 Index.
g) This category consists of a selection of investments based on the Russell 2000 Value Index.
h) This category consists of a 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.
i) 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.
j) 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.
k) This category currently includes equal investments in three mutual funds, two of which usually hold at least 80% of fund
assets in investment grade fixed income securities, seeking to outperform the Barclays US Aggregate Bond Index while
maintaining a similar duration to that index. The third fund targets investments of 50% or more in mortgage-backed
securities guaranteed by the US government and its agencies.
l) This category consists mostly of a fund which seeks to track the Barclays Capital US Corporate A or Better 5-20 Year,
Bullets only Index, along with a diversified mutual fund holding fixed income securities rated A or better.
m) This category consists of a fund that seeks to approximate the performance of the Barclays Capital US Corporate A or
Better, 20+ Year Bullets Only Index over the long term.
- 117 -
For the fiscal year ending December 31, 2022, 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:
2022
2023
2024
2025
2026
Thereafter
Pension
Benefits
Postretirement
Benefits
Total
$
397 $
471
501
563
628
3,566
36 $
24
23
22
21
113
433
495
524
585
649
3,679
The Company also offers a 401(k) plan to its employees. Contributions to this plan by the Company were $414,000 and $395,000 for
2021 and 2020, respectively. In addition, the Company made $314,000 and $293,000 of safe harbor contributions to the plan in 2021
and 2020, 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, 2021 and 2020, other liabilities include approximately $3.0 million and
$3.0 million, respectively, relating to deferred compensation. Deferred compensation expense for the years ended December 31, 2021
and 2020 amounted to approximately $349,000 and $359,000, 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, 2021 and 2020, the
cash surrender values of these policies were $23.4 million and $17.9 million, respectively.
The Bank adopted a Defined Contribution Supplemental Executive Retirement Plan (the “SERP”), effective January 1, 2014. The
SERP benefits certain key senior executives of the Bank who are selected by the Board to participate, including our named executive
officers. The SERP is intended to provide a benefit from the Bank upon retirement, death, disability or voluntary or involuntary
termination of service (other than “for cause”), subject to the requirements of Section 409A of the Internal Revenue Code.
Accordingly, the SERP obligates the Bank to make a contribution to each executive’s account on the last business day of each
calendar year. In addition, the Bank, may, but is not required to, make additional discretionary contributions to the executive’s
accounts from time to time. All executives currently participating in the plan, including the named executive officers, are fully vested
in the Bank’s contribution to the plan. In the event the executive is terminated involuntarily or resigns for good reason within 24
months following a change in control, the Bank is required to make additional annual contributions the lesser of: (1) three years or (2)
the number of years remaining until the executive’s benefit age, subject to potential reduction to avoid an excess parachute payment
under Code Section 280G. In the event of the executive’s death, disability or termination within 24 months after a change in control,
the executive’s account will be paid in a lump sum to the executive or his beneficiary, as applicable. In the event the executive is
entitled to a benefit from the SERP due to retirement or other termination of employment, the benefit will be paid either in a lump sum
or in 10 annual installments as detailed in his or her participant agreement. At December 31, 2021 and 2020, other liabilities included
$578,000 and $928,000, 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.
- 118 -
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;
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
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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 in accordance with applicable tax
regulations that required that allocation of stock option distributions due to the aggregate value of the stock option awards vesting each
year. 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 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, 2019
Granted
Newly vested
Exercised
Expired
Outstanding at December 31, 2020
Granted
Newly vested
Exercised
Expired
Outstanding at December 31, 2021
Number of
Shares
303
52
-
(34)
(1)
$
$
320
-
-
(53)
(3)
$
264
Weighted
Average
Exercise Price
10.51
$
10.33
-
-
11.35
10.89
-
-
-
9.48
10.98
Number of
Shares
191
-
47
(34)
-
204
-
59
(53)
-
210
Weighted
Average
Exercise Price
10.04
$
-
11.22
-
-
10.91
-
10.97
-
-
11.05
$
$
$
The aggregate intrinsic value of a stock option represents the total pre-tax intrinsic value (the amount by which the current market
value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all
option holders exercised their options prior to the expiration date. The intrinsic value can change based on fluctuations in the market
value of the Company’s stock. At December 31, 2021, the intrinsic value of the stock options was $1.6 million. At December 31,
2020, the intrinsic value of the stock options was $190,000 .
At December 31, 2021, the average remaining contractual life of outstanding options and shares exercisable were 5.1 years and 5.9
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
- 120 -
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 $241,000 and $300,000 in 2021 and 2020,
respectively, and is expected to record $185,315, and $108,893 in 2022 and 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, 2021 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 $397,000 and $294,000 in compensation expense in
2021 and 2020, respectively, including $21,000 and $24,000 for dividends on unallocated shares in these same time periods. At
December 31, 2021, there were 67,217 unearned ESOP shares with a fair value of $1.2 million.
NOTE 17: INCOME TAXES
The provision for income taxes for the years ended December 31, is as follows:
(In thousands)
Current
Deferred
$
$
2021
3,018 $
481
3,499 $
2020
2,600
(1,305)
1,295
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The provision for income taxes includes the following
(In thousands)
Federal Income Tax
State Tax
$
$
2021
3,273 $
226
3,499 $
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
Loan origination fees
Held-to-maturity securities
Stock-based compensation
Capital loss carryover
Cash flow hedges
Other
Total
Liabilities:
Prepaid pension
Investment securities
Depreciation
Accretion
Intangible assets
Mortgage servicing rights
Prepaid expenses and transaction fees
Total
Less: deferred tax asset valuation allowance
Net deferred tax (liability) asset
$
2021
983 $
3,381
85
19
335
-
80
149
138
319
5,489
(2,041)
(151)
(1,902)
(124)
(1,004)
(99)
(91)
(5,412)
77
(80)
(3) $
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
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. On the basis of this evaluation, as of December
31, 2021, a valuation allowance of $80,000 has been recorded to recognize only the portion of the deferred tax asset that is more likely
than not to be realized. The amount of the deferred tax asset considered realizable, could be adjusted if estimates of future taxable
income during the carryforward period are reduced or increased.
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.
During 2021, the Company disposed of an equity security investment that resulted in a capital loss. Under current IRS law, capital
losses are allowed to be carried back for a period of three years and carried forward five years. The allowable portion that can be
carried back will result in an approximate tax benefit of $56,000. The Company believes that forecasted future capital gains make it
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likely that such capital losses will not be utilized in future periods, therefore, a valuation allowance has been provided on these capital
losses at December 31, 2021.
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 received $316,000 in tax refunds from New York State
for taxes previously paid in the carryback years. This refund was applied to the effective tax rate of the Company in 2020 in
accordance with GAAP.
In 2021, the Company’s effective tax rate was 22.4%, as compared to 15.9% in 2020. 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
2021
21.0 %
1.2
(0.6)
(0.7)
0.5
-
0.5
21.9 %
0.5
22.4 %
2020
21.0 %
2.0
(0.9)
(1.1)
(1.6)
(3.8)
(0.1)
15.5 %
0.4
15.9 %
- 123 -
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, 2021 and 2020, 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
2021
93,364 $
136,749
12,308
2,735
2020
58,217
102,404
6,103
2,450
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, 2021 with variable interest rates and fixed interest rates were to approximately $222.2
million and $22.9 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, regulatory matters, regulations and policies
limit the circumstances under which the Bank may pay dividends. The amount of retained earnings legally available under these
regulations approximated $27.4 million as of December 31, 2021. 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, 2021, December 31, 2020 or December 31, 2019.
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, 2021, 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%.
- 124 -
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-
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, 2021, 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 had 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. In 2021, the Community Bank Leverage Ratio
increased to 8.5% for the calendar year. Community banks had until January 1, 2022, before the Community Bank Leverage Ratio
requirement returned 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, 2021, 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, 2021, the Bank
exceeded all regulatory required minimum capital ratios, including the capital buffer requirements.
- 125 -
The Bank’s actual capital amounts and ratios as of December 31, 2021 and 2020 are presented in the following table.
(Dollars in thousands)
As of December 31, 2021:
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, 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)
Minimum For
Capital
Adequacy
Purposes
Amount
Ratio
Minimum To Be
"Well-Capitalized"
Under Prompt
Corrective
Provisions
Amount Ratio
Minimum for
Capital Adequacy
With Buffer
Amount Ratio
Actual
Amount Ratio
$129,166
$118,511
$118,511
$118,511
15.19% $68,013
13.94% $51,009
13.94% $38,257
9.52% $49,804
8.00% $85,016
6.00% $68,013
4.50% $55,260
4.00% $62,255
10.00% $89,266
8.00% $72,263
6.50% $59,511
5.00% $62,255
10.50%
8.50%
7.00%
5.00%
$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%
The Company’s goal is to maintain a strong capital position, consistent with the risk profile of its subsidiary bank that supports growth
and expansion activities while at the same time exceeding regulatory standards. At December 31, 2021, 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.
NOTE 21: INTEREST RATE DERIVATIVE
The Company is exposed to certain risks from both its business operations and changes in economic conditions. As part of managing
interest rate risk, the Company enters into standardized interest rate derivative contracts (designated as hedging agreements) to modify
the repricing characteristics of certain portions of the Company’s portfolios of earning assets and interest-bearing liabilities. The
Company designates interest rate hedging agreements utilized in the management of interest rate risk as either fair value hedges or
cash flow hedges. Interest rate hedging agreements are generally entered into with counterparties that meet established credit standards
and the agreements contain master netting, collateral and/or settlement provisions protecting the at-risk party. Based on adherence to
the Company’s credit standards and the presence of the netting, collateral or settlement provisions, the Company believes that the
credit risk inherent in these contracts was not material at December 31, 2021. Interest rate hedging agreements are recorded at fair
value as other assets or liabilities. The Company had no material derivative contracts not designated as hedging agreements at
December 31, 2021 or December 31, 2020.
As a result of interest rate fluctuations, fixed-rate assets and liabilities will appreciate or depreciate in fair value. When effectively
hedged, this appreciation or depreciation will generally be offset by changes in the fair value of derivative instruments that are linked
to the hedged assets and liabilities. This strategy is referred to as a fair value hedge. In a fair value hedge, the fair value of the
derivative (the interest rate hedging agreement) and changes in the fair value of the hedged item are recorded in the Company’s
Consolidated Statements of Condition with the corresponding gain or loss recognized in current earnings. The difference between
changes in the fair value of the interest rate hedging agreements and the hedged items represents hedge ineffectiveness and is recorded
as an adjustment to the interest income or interest expense of the respective hedged item.
Cash flows related to floating rate assets and liabilities will fluctuate with changes in underlying rate indices. When effectively
hedged, the increases or decreases in cash flows related to the floating-rate asset or liability will generally be offset by changes in cash
flows of the derivative instruments designated as a hedge. This strategy is referred to as a cash flow hedge. In a cash flow hedge, the
effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently
reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the derivative’s gain or loss on
cash flow hedges is accounted for similar to that associated with fair value hedges.
Among the array of interest rate hedging contracts, potentially available to the Company, are interest rate swap and interest rate cap
(or floor) contracts. The Company uses interest rate swaps, cap or floor contracts as part of its interest rate risk management strategy.
Interest rate swaps involve the receipt of variable (or fixed) amounts from a counterparty in exchange for the Company making fixed
(or variable) payments over the life of the agreements without the exchange of the underlying notional amount. An interest rate cap is
- 126 -
a type of interest rate derivative in which the buyer receives payments at the end of each contractual period in which the index interest
rate exceeds the contractually agreed upon strike price rate. The purchaser of a cap contract will continue to benefit from any rise in
interest rates above the strike price. Similarly, an interest rate floor is a derivative contract in which the buyer receives payments at the
end of each period in which the interest rate is below the agreed strike price. The purchaser of a floor contract will continue to benefit
from any rise in interest rates above the strike price.
As of December 31, 2021 and 2020, the following amounts were recorded on the Consolidated Statements of Condition related to the
cumulative basis adjustments for fair value hedges:
Carrying Amount of
the Hedged Assets at
December 31, 2021
(In thousands)
Line item on the balance sheet in which the hedged item is included:
Loans receivable (1)
$
Available-for-sale securities (2)
$
$
Loans receivable (3)
-
61,808
41,651
$
$
$
Cumulative Amount
of Fair Value
Hedging Adjustment
Included in the
Carrying Amount of
the Hedged Assets at
December 31, 2021
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, 2020
-
(1,308)
(152)
$
$
$
12,944
17,055
-
$
$
$
53
(191)
-
(1)
(2)
(3)
These amounts include the amortized historical cost basis of a specific loan pool designated as the underlying asset for the hedging
relationship in which the hedged item is the underlying asset's amortized cost (last layer) projected to be remaining at the end of the
contractual term of the hedging instrument. The hedging instrument matured in April of 2021 and is no longer a component of the
Company's Consolidated Statement of Condition at December 31, 2021. The amount of the designated hedged item was $9.2 million and
the fair value of the hedging instrument resulted in a net liability position of $53,000, recorded by the Company in other liabilities at
December 31, 2020. The Company’s participation in the fair value hedge had an immaterial effect on recorded interest income for the three
and twelve months ended December 31, 2021 and 2020.
These amounts represent the amortized cost basis of specifically identified municipal securities designated as the underlying assets for the
hedging relationship. The notional amount of the designated hedge was $52.0 million and $16.3 million at December 31, 2021 and
December 31, 2020, respectively. The fair value of the derivative recorded in other assets resulted in a net asset position of $1.3 million
and $191,000 at December 31, 2021 and December 31, 2020, respectively. at December 31, 2020. The Company’s participation in the
fair value hedge had an immaterial effect on recorded interest income for the three and twelve months ended December 31, 2021 and 2020.
These amounts include the amortized cost of a specific loan pool designated as the underlying asset for the hedging relationship in which
the hedged item is the underlying asset's amortized cost projected to be remaining at the end of the contractual term of the hedging
instrument. The amount of the designated hedged item was $20.5 million at December 31, 2021. The Company did not have this
derivative agreement in place at December 31, 2020. At December 31, 2021, the fair value of the derivative resulted in a net asset position
of $152,000, recorded in other assets. The Company’s participation in the fair value hedge had an immaterial effect on recorded interest
income for the three and twelve months ended December 31, 2021 and 2020.
In February 2020, the Company entered into an interest rate cap contract, designated as a cash flow hedging transaction at its
inception, in the notional amount of $40.0 million, intended to reduce the Company’s exposure to potential rises in short-term interest
rates above the contractual level. The Company paid $228,000 in a one-time premium for the cap contract and has no further
contractual obligations to the contractual counterparty over the remaining life of the contract. The premium was expected to be
amortized ratably over the contractual term of the cap contract, which matures in February 2023. In September of 2021, the Company
determined that the specific underlying funding stream, for which the interest rate cap was originally intended to hedge, was no longer
going to be a continuing component of the Bank’s overall funding strategies. Therefore, although the cap contract continues to remain
in force, it will no longer be considered to be a hedge against any specific funding liability. Therefore under ASC 815, the Company
has determined to re-designate the cap as a free-standing derivative and mark the fair value of the cap to market during each reporting
period through earnings until the cap’s contractual maturity date. The changes in the expected future funding requirements of the
Company occurred primarily as a result of the unprecedented, and previously unpredictable, measures undertaken by central banking
authorities in response to the COVID-19 pandemic. The re-designation of the interest rate cap contract to a free-standing derivative
resulted in the recognition of a $157,000 increase in interest expense in the third quarter of 2021. As a free-standing derivative, future
changes in the fair value of this Cap contract, until its maturity date, will be recognized through earnings as an adjustment to interest
expense.
In March 2020, the Bank entered into an interest rate swap contract with an unaffiliated counterparty that will expire in March 2023.
The contract was designated as a cash flow hedging transaction at its inception. The notional amount of the swap was and remains
$40.0 million and the Bank will pay a fixed rate of 1.39% to the counterparty and receive a variable payment equivalent to the
published three-month LIBOR index rate to be paid by the swap counterparty through the expiration date of the contract. The hedged
instrument is a planned series of 90-day revolving borrowings totaling $40.0 million that will be obtained in the brokered certificate of
deposit market.
- 127 -
The following table shows the pre-tax losses of the Company’s derivatives designated as cash flow hedges in other comprehensive
income at December 31:
(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
(In thousands)
Balance as of December 31:
Amount of gains (losses) recognized in other
comprehensive income
Losses in other comprehensive income:
2021
- $
-
-
(387)
(387) $
2020
204
(197)
7
(1,111)
(1,308)
For the years ended
December 31, 2021
(1,308) $
921
(387) $
December 31, 2020
-
(1,308)
(1,308)
$
$
$
$
The amounts of hedge ineffectiveness, recognized during the year ended December 31, 2021, and December 31, 2020, for cash flow
hedges were not material to the Company’s Consolidated Statements of Income. A portion of, 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. Management believes that the hedges will remain fully effective during the remaining term of the respective
hedging contracts. The changes in the fair values of the interest rate hedging agreements primarily result from the effects of changing
index interest rates and the reduction of the time each quarter between the measurement date and the contractual maturity date of the
hedging instrument.
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 an interest earning escrow account in the amount of $1.6 million under collateral
arrangements to satisfy collateral requirements associated with the interest rate swap contract.`
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
- 128 -
independent third party pricing service. Level 3 securities are assets whose fair value cannot be determined by using observable
measures, such as market prices or pricing models. Level 3 assets are typically very illiquid, and fair values can only be calculated
using estimates or risk-adjusted value ranges. Management applies known factors, such as currently applicable discount rates, to the
valuation of those investments in order to determine fair value at the reporting date.
The Company holds two corporate investment securities with an aggregate amortized historical cost of $4.1 million and an aggregate
fair market value of $4.5 million as of December 31, 2021. The securities had a valuation that is determined using published net asset
values (NAV) derived by an analysis of the security’s underlying assets. The securities are comprised primarily of broadly-diversified
real estate loans and are traded in secondary markets on an infrequent basis. While these securities are redeemable 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 one equity security investment, with an aggregate value of $677,000 at December 31, 2021, 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.
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
December 31, 2021
Level 1
Level 2
Level 3
Total Fair
Value
32,273
39,199
9,630
13,613
22,164
12,285
56,731
185,895
4,497
190,392
- $
-
-
-
-
-
-
-
-
- $
- $
-
-
-
-
-
-
-
-
- $
32,273 $
39,199
9,630
13,613
22,164
12,285
56,731
185,895
-
185,895 $
677 $
- $
- $
677
- $
(152) $
- $
(152)
- $
(387) $
- $
(387)
$
$
$
$
$
- 129 -
(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
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)
$
$
$
$
$
- 130 -
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, 2021
Level 1
-
$
Level 2
-
$
Level 3
4,182
$
December 31, 2020
Level 1
-
$
Level 2
-
$
Level 3
14,701
$
$
$
Total Fair
Value
4,182
Total Fair
Value
14,701
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for
which Level 3 inputs were used to determine fair value.
Valuation
Techniques
Quantitative Information about Level 3 Fair Value Measurements
Unobservable
Input
At December 31, 2021
Impaired loans
Appraisal of collateral
(Sales Approach)
Discounted Cash Flow
Appraisal Adjustments
Costs to Sell
Valuation
Techniques
Quantitative Information about Level 3 Fair Value Measurements
Unobservable
Input
At December 31, 2020
Impaired loans
Appraisal of collateral
(Sales Approach)
Discounted Cash Flow
Appraisal Adjustments
Costs to Sell
Range
(Weighted Avg.)
5% - 30% (15%)
7% - 14% (10%)
Range
(Weighted Avg.)
5% - 25% (18%)
7% - 13% (12%)
The Company held one equity security investment, with a fair value of $677,000, determined using Level 1 inputs at December 31,
2021. At December 31, 2020, the Company held two equity security investments with a fair value of $1.9 million.
Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated statement
of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the
instrument.
The Company has various processes and controls in place to ensure that fair value is reasonably estimated. The Company performs
due diligence procedures over third-party pricing service providers in order to support their use in the valuation process.
While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair
value at the reporting date.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent
weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not
necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair
value amounts have been measured as of their respective period-ends, and have not been re-evaluated or updated for purposes of these
financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent
to the respective reporting dates may be different than the amounts reported at each period-end.
FASB ASC Topic 820 for Fair Value Measurements and Disclosures, the financial assets and liabilities were valued at a price that
represents the Company’s exit price or the price at which these instruments would be sold or transferred.
- 131 -
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 structures are valued using a replacement cost of funds approach. These borrowings are discounted
to the FHLBNY advance curve. Option structured borrowings’ fair values are determined by the FHLB for borrowings that include a
call or conversion option. If market pricing is not available from this source, current market indications from the FHLBNY are
obtained and the borrowings are discounted to the FHLBNY advance curve less an appropriate spread to adjust for the option. These
measurements are classified as Level 2 within the fair value hierarchy.
Subordinated loans – The Company secures quotes from its pricing service based on a discounted cash flow methodology or utilizes
observations of recent highly-similar transactions which result in a Level 2 classification.
The carrying amounts and fair values of the Company’s financial instruments as of December 31 are presented in the following table:
(In thousands)
Financial assets:
Cash and cash equivalents
Investment securities - available-for-sale
Investment securities - available-for-sale
Investment securities - marketable equity
Investment securities - held-to-maturity
Federal Home Loan Bank stock
Net loans
Accrued interest receivable
Interest rate swap derivative fair value hedges
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, 2021
Carrying
Amounts
Estimated
Fair Values
December 31, 2020
Carrying
Amounts
Estimated
Fair Values
1
2
NAV
1
2
2
3
1
2
1
2
2
2
2
2
2
$
$
$
$
37,149
185,895
4,497
677
160,923
4,189
819,524
4,520
1,308
694,089
361,257
77,098
29,563
106
152
387
$
$
37,149
185,895
4,497
677
162,805
4,189
819,721
4,520
1,308
694,089
360,680
76,957
30,627
106
152
387
$
$
43,464
125,330
2,725
1,850
171,224
4,390
812,718
4,549
191
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
191
598,683
398,863
84,065
39,416
193
244
1,308
- 132 -
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
Statements of Income
(In thousands)
Income
Dividends from non-bank subsidiary
Dividends from marketable equity security
Gain (loss) 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
2021
2020
13,633 $
677
122,241
155
4,216
140,922 $
722 $
29,564
110,636
140,922 $
26,213
682
106,986
155
3,975
138,011
889
39,400
97,722
138,011
2021
2020
3 $
20
(5)
116
134
1,790
705
2,495
(2,361)
527
(1,834)
14,241
12,407 $
3
13
413
107
536
1,100
629
1,729
(1,193)
261
(932)
7,882
6,950
$
$
$
$
$
$
- 133 -
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
Payments on redemption of subordinated debt
Issuance costs of subordinated loan
Cash dividends paid to common shareholders
Cash dividends paid to non-voting 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
2021
2020
$
$
12,407 $
(14,241)
617
163
(298)
(1,352)
-
(143)
(143)
551
-
(10,000)
-
(1,227)
(194)
(180)
(35)
(11,085)
(12,580)
26,213
13,633 $
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
- 134 -
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, 2021 or 2020.
The following represents the activity associated with loans to related parties during the year ended December 31, 2021:
(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
$
$
$
2021
22,445
8,007
(8,025)
$
22,427
2020
19,301
5,134
(1,990)
22,445
Deposit accounts of each related party at December 31, 2021 and December 31, 2020 were $18.4 million and $12.5 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 5,983,467 and 4,531,383 common shares
outstanding at December 31, 2021 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
parallel liquidation account to support the Company’s liquidation account in the event the Company does not have sufficient assets to
- 135 -
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
For the years ended December 31, 2021
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
$
$
837 $
(966) $
(14) $
(395)
(14)
428 $
680
-
(286) $
16
-
2
$
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) $
(38) $
24
-
(14)
$
Retirement
Plans
(2,093)
$
603
78
(1,412)
$
Retirement
Plans
(2,717)
$
451
173
(2,093)
$
Total
(2,236)
904
64
(1,268)
Total
(2,971)
1,246
(511)
(2,236)
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) Amounts in parentheses indicates debits in net income.
(2)
These items are included in net periodic pension cost.
See Note 14 for additional information.
For the years ended
December 31, 2021 December 31, 2020
Affected Line Item in the Statement
of Income
(234)
61
(173)
Salaries and employee benefits
Provision for income taxes
Net Income
926
(242)
684
Net gains on sales and redemptions of
investment securities
Provision for income taxes
Net Income
$
$
$
$
(105) $
27
(78) $
19 $
(5)
14 $
- 136 -
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
Gains (losses) on marketable equity securities
Gain on sales of premises and equipment
Other miscellaneous income
Total noninterest income
For the years ended
December 31, 2021
December 31, 2020
$
$
888
393
183
1,464
1,048
399
227
243
1,917
-
923
73
996
246
313
559
4,936
559
37
382
201
116
6,231
$
$
871
373
151
1,395
955
303
213
235
1,676
-
771
70
841
361
1,179
1,540
5,452
460
1,076
(629)
-
96
6,485
The following is a discussion of key revenues within the scope of ASC 606:
•
•
•
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.
- 137 -
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)
2022
2023
2024
2025
2026
Thereafter
Total minimum lease payments
For the years ended
$
December 31, 2021
226
81
December 31, 2020
241
$
80
For the years ended
December 31, 2021
December 31, 2020
$
$
207
81
72
221
80
71
December 31, 2021
December 31, 2020
$
$
$
$
$
$
2,136
2,440
596
18
27
2,240
2,525
587
19.08 years
28.42 years
3.73%
13.75%
3.73%
13.75%
$
$
115
118
118
126
133
2,427
3,037
The Company owns certain properties that it leases to unaffiliated third parties at market rates. Lease rental income was $235,000 and
$235,000 for the years ended December 31, 2021 and 2020, respectively. All lease agreements are accounted for as operating leases.
- 138 -
NOTE 29: COVID-19
In early January 2020, the World Health Organization (the “WHO”) 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 WHO 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 capacity constraints on available medical resources, these very
substantial mandated curtailments of social and economic activity were relaxed globally in the third and fourth quarters of 2020.
However, within various time periods during 2021 that extended into early 2022, the number of reported positive cases in the United
States spiked to very high levels due to the emergence of new variants of the virus. At the date of this filing, the majority of the
United States, including the areas in which the Company has its operations, have returned to substantively normal business and social
activities.
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 were made fully accessible to the public
in the early fall of 2020, but remained 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 remained as of December 31, 2021. 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 also issued
guidance encouraging financial institutions to work prudently with borrowers who were, or were potentially, unable to meet their
contractual payment obligations because of the effects of COVID-19. The Company worked throughout the pandemic to assist its
business and consumer customers affected by COVID-19.
The Bank participated in all phases of 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 the end of the
program in the early spring of 2021, the Company received approval from the SBA for 1,120 loans totaling approximately $109.8
million through this program. The Bank is now also assisting borrowers with the loan forgiveness phase of the process. As of
December 31, 2021, the Company has submitted 864 loans totaling approximately $90.5 million to the SBA for forgiveness. The Bank
received $4.0 million in fees from the SBA associated with PPP lending activities during 2020 and 2021 and recognized $2.2 million
and $900,000 of those fees in 2021 and 2020, respectively. Accordingly, $3.1 million in deferred fee income on a cumulative basis
was subtracted from the carrying value of the PPP loans held in portfolio and the remaining $912,000 in deferred collected fees will be
recognized in future periods.
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. Consistent with industry regulatory guidance, borrowers that were granted COVID-19 related deferrals but
were otherwise current on loan payments continued to have their loans reported as current loans during the agreed upon deferral
- 139 -
period(s), accrue interest and not be accounted for as troubled debt restructurings. 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, had 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, had 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, were 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 were
granted subject to further analysis and discussion with specific borrowers. To the extent that such modifications met the criteria
previously described these loans were not classified as troubled debt restructurings nor classified as nonperforming at December 31,
2020. Loans not granted additional deferral periods were categorized as nonaccrual loans if the borrowers failed to make the first
scheduled payment following the end of the deferral period, or became seriously delinquent thereafter. During the course of 2021, all
deferred loans were either returned to accrual status or appropriately characterized as nonaccrual as dictated by their repayment
activities. Therefore, the Company had no loans in deferral status at December 31, 2021.
- 140 -
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, 2021:
Balance
247,276 #
Number
of Loans
2,109
Average
Loan
Balance
117
$
Minimum/
Maximum
Loan Balance
Allowance
for Loan
Losses
Percent
of
Total
Loans
$
0 - $
1,522 $
872
30%
$
$
(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
Skilled Nursing Facility
Recreation/ Golf Course/
Marina
Warehouse
Manufacturing/Industrial
Restaurant
Automobile Repair
Hospitals
Not-For-Profit & Community Service Real
Estate
Land
All Other
Total Commercial Real Estate Loans
$
42,798
40,992
35,398
37,886
26,600
19,658
15,072
11,893
13,423
8,463
6,296
6,339
4,528
4,086
3,360
5,624
6,034
288,450
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
$
56,437
12,698
54,716
7,168
$
131,019
$
$
$
$
5,811
19,338
31,738
18,629
80,466
9,013
1,999
141,845
(1,280)
-
(12,935)
819,524
$
-
12,786
- 141 -
55
58
10
68
50
156
8
2
14
14
17
24
12
3
3
8
29
531
369
105
266
146
886
20
256
902
1,337
4,205
1,795
745
8,984
$
$
$
$
$
$
$
$
$
778
707
3,540
557
532
126
1,884
5,947
959
605
370
264
377
1,362
1,120
703
208
543
153
121
206
49
148
291
76
35
14
19
5
3
16
-
-
64
$
28 - $
21 -
315 -
1 -
29 -
0 -
161 -
3,800 -
6,185 $
6,209
11,500
4,744
5,028
1,363
6,589
8,092
13 -
67 -
54 -
39 -
36 -
75 -
103 -
63 -
14 -
3,150
2,599
1,378
1,188
2,244
3,105
1,719
2,287
734
$
- - $
- -
- -
- -
4,485 $
920
4,813
1,600
788
754
651
697
489
362
277
219
247
156
116
117
83
75
62
103
111
5,308
1,593
358
1,544
202
$
3,698
3 - $
2,248 $
0 - $
870 $
3
-
- - $
0 -
18 -
- -
- -
504 $
436
107
90
57
$
774
219
948
106
24
2,071
-
$
$
$
$
5%
5%
4%
5%
3%
2%
2%
1%
2%
1%
1%
1%
1%
0%
0%
1%
1%
35%
7%
2%
7%
90%
16%
1%
2%
4%
2%
10%
1%
0%
17%
-
983
12,935
$
-
100%
NOTE 30: SUBSEQUENT EVENTS
On March 25, 2022, the Company announced that its Board of Directors had declared a cash dividend of $0.09 per common share, and
a cash dividend of $0.09 per notional share for the issued Warrant. The dividend will be payable on May 6, 2022 to shareholders of
record on April 22, 2022.
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, 2021. 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, 2021, our CEO and CFO concluded that the
design and operation of our disclosure controls and procedures were effective at December 31, 2021.
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. The control deficiencies created a reasonable possibility that a material
misstatement to the consolidated financial statements would not be prevented or detected on a timely basis. Specifically, 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 related to loan authorization,
disbursement and file maintenance controls.
Disclosure Controls and Procedures
During 2021, we evaluated, under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-
15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Management necessarily applied its judgment in
assessing the costs and benefits of those controls and procedures, which by their nature, can provide only reasonable assurance about
management’s control objectives. It should be noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and we cannot make absolute assurances that any design will succeed in achieving
its stated goals under all potential future conditions, regardless of how remote. Based upon this evaluation, our Chief Executive
Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective and operating to provide
reasonable assurance that we record, process, summarize, and report the information we are required to disclose in the reports that we
file or submit under the Exchange Act within the time periods specified in the rules and forms of the SEC, and to provide reasonable
assurance that we accumulate and communicate such information to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions about required disclosure.
Remediation of Material Weakness
To address the previously reported material weakness in internal control over financial reporting described in Part II, Item 9A of our
2020 Form 10-K, we designed and implemented new controls, enhanced existing controls, increased dedicated personnel, improved
reporting processes, and enhanced the use of related supporting technology. Based on the actions taken, as well as the evaluation of
the design and operating effectiveness of the new controls, we determined that the material weakness has been remediated as of
December 31, 2021
- 142 -
During the fourth quarter of 2021, we completed the testing of the adopted changes to our internal control over financial reporting
related to our remediation efforts described above that materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Other than as described above, we did not make any additional changes in internal control over financial reporting during the year
ended December 31, 2021 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
ITEM 9B: OTHER INFORMATION
None.
ITEM 9C: DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(a)
(b)
(c)
(d)
Information concerning the directors of the Company is incorporated herein by reference to Proposal 1 of the Company’s
Proxy Statement for the Annual Meeting of Shareholders.
Information concerning the officers and directors compliance with Section 16(a) of the Securities Exchange Act is
incorporated herein by reference to the Company’s Proxy Statement for the Annual Meeting of Shareholders under the
caption “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”.
(e)
Set forth below is information concerning the Executive Officers of the Company at December 31, 2021.
Name
Thomas W. Schneider
James A. Dowd, CPA
Ronald Tascarella
Walter F. Rusnak, CPA, CGMA
Daniel R. Phillips
William O’Brien
Calvin L. Corriders
Age
60
54
63
68
57
56
59
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 and Controller
Senior Vice President, Chief Information Officer
Senior Vice President, Chief Risk Officer and Corporate Secretary
Regional President, Syracuse Market/HR Director
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."
- 143 -
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".
- 144 -
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
(a)(2)
(b)
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3
Financial Statements - The Company’s consolidated financial statements, for the years ended December 31, 2021 and
2020, together with the Report of Independent Registered Public Accounting Firm are filed as part of this Form 10-K
report. See “Item 8: Financial Statements and Supplementary Data.”
Financial Statement Schedules - All financial statement schedules have been omitted as the required information is
inapplicable or has been included in “Item 7: Management Discussion and Analysis.”
Exhibits
Articles of Incorporation of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.1 to Pathfinder
Bancorp, Inc.’s Registration Statement on Form S-1, file no. 333-196676, originally filed on June 11, 2014)
Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.2 to Pathfinder Bancorp, Inc.’s
Registration Statement on Form S-1, file no. 333-196676, filed on June 11, 2014)
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)
Articles Supplementary to the Articles of Incorporation of Pathfinder Bancorp, Inc. creating Class A Non-Voting
Common Stock, par value $0.01 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 June 10, 2021)
Form of Stock Certificate of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 4 to Pathfinder
Bancorp, Inc.’s Registration Statement on Form S-1, file no. 333-196676, filed on June 11, 2014)
Indenture between Pathfinder Bancorp, Inc., a federal corporation, and Wilmington Trust Company, as trustee, dated
March 22, 2007 (Incorporated herein by reference to Exhibit 4.1 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-
K, file no. 001-36695, filed on October 22, 2014)
Supplemental Indenture between Pathfinder Bancorp, Inc. and Wilmington Trust Company, as trustee, dated October 16,
2014 (Incorporated herein by reference to Exhibit 4.2 to Pathfinder Bancorp, Inc.’s Current Report on Form 8-K, file no.
001-36695, filed on October 22, 2014)
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)
2003 Trustee Deferred Fee Plan (Incorporated herein by reference to Exhibit 10.4 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008 file no. 000-23601, filed on March 27, 2009)
Employment Agreement between Pathfinder Bank and Thomas W. Schneider, President and Chief Executive Officer
(Incorporated by reference to Exhibit 10.5 to Pathfinder Bancorp, Inc.'s Annual Report on Form 10-K for the year ended
- 145 -
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
December 31, 2008, file no. 000-23601, filed on March 27, 2009)
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and Thomas W. Schneider effective
February 24, 2014 (Incorporated by reference to Exhibit 10.13 to Pathfinder Bancorp, Inc.’s Current Report Form 8-K,
file no. 000-23601, filed on February 25, 2014)
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and James A. Dowd effective February
24, 2014 (Incorporated by reference to Exhibit 10.15 to Pathfinder Bancorp, Inc.’s Current Report Form 8-K, file no.
000-23601, filed on February 25, 2014)
Amended and Restated Declaration of Trust among Pathfinder Bancorp, Inc., a federal corporation, as Sponsor,
Wilmington Trust Company, as Delaware and Institutional Trustee, and the administrative trustees of the Pathfinder
Statutory Trust II (Incorporated herein by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.’s Current Report on Form
8-K, file no. 001-36695, filed on October 22, 2014)
Amendment two to the Trustee Deferral Fee Plan (Incorporated by reference to Exhibit 10.17 to Pathfinder Bancorp,
Inc.’s Annual Report on Form 10-K, file no. 001-36695, filed on March 18, 2015)
Amendment one to the Executive Deferral Compensation Plan (Incorporated by reference to Exhibit 10.18 to Pathfinder
Bancorp, Inc.’s Annual Report on Form 10-K, file no. 001-36695, filed on March 18, 2015)
Amendment one to the Supplemental Executive Retirement Plan (Incorporated by reference to Exhibit 10.19 to
Pathfinder Bancorp, Inc.’s Annual Report on Form 10-K, file no. 001-36695, filed on March 18, 2015)
Subordinated Loan Agreement (Incorporated herein by reference to Pathfinder Bancorp, Inc.’s Current Report on Form
8-K, file no. 001-36695, filed on October 19, 2015)
2016 Pathfinder Bancorp, Inc. Equity Incentive Plan (Incorporated by reference to Appendix A to Pathfinder Bancorp,
Inc.’s Proxy Statement, file no. 001-36695, filed on March 29, 2016.
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and Ronald Tascarella effective February
24, 2014 (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).
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.
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.
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.
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
- 146 -
Form 8-K, file no. 001-36695, filed on November 17, 2020)
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, 2021 and 2020, (ii) the Consolidated Statements of Income for the years ended December 31, 2021 and
2020, (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2021 and 2020,
(iv) the Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021 and 2020,
(v) the Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020, and (vi) the Notes to
the Consolidated Financial Statements
Cover Page Interactive Data File (embedded within the Inline XBRL document)
14
21
23
31.1
31.2
32
101
104
ITEM 16: FORM 10-K SUMMARY
None.
- 147 -
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 25, 2022
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 25, 2022
By:
/s/ Walter F. Rusnak
Walter F. Rusnak, Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 25, 2022
By:
/s/ Lloyd Stemple
Lloyd Stemple, Director
Date: March 25, 2022
By:
/s/ John P. Funiciello
John Funiciello, Director
Date: March 25, 2022
By:
/s/ David A. Ayoub
David A. Ayoub, Director
Date: March 25, 2022
By:
/s/ Adam C. Gagas
Adam C. Gagas, Director
Date: March 25, 2022
By:
/s/ William A. Barclay
William A. Barclay, Director
Date: March 25, 2022
By:
/s/ Chris R. Burritt
Chris R. Burritt, Director
Date: March 25, 2022
By:
/s/ John F. Sharkey
John F. Sharkey, Director
Date: March 25, 2022
By:
/s/ Melanie Littlejohn
Melanie Littlejohn, Director
Date: March 25, 2022
- 148 -
April 8, 2022
Dear Shareholder:
We cordially invite you to attend the Annual Meeting of Shareholders of Pathfinder Bancorp, Inc. The Annual Meeting will be held
at 10:00 a.m., Eastern Time, on May 13, 2022. We are pleased that this year’s Annual Meeting will be conducted solely online via
live webcast. There is no physical location for the Annual Meeting. You will be able to attend and participate in the Annual Meeting
online, vote your shares electronically and submit your questions prior
the meeting by visiting:
www.meetnow.global/MY9FFMD. There is no password requirement for this meeting. Please note that this virtual meeting service
is not supported by Internet Explorer.
to and during
The enclosed Notice of Annual Meeting and Proxy Statement describe the formal business to be transacted. During the Annual
Meeting, we will also report on our operations. Directors and officers, as well as a representative of our independent registered public
accounting firm, will be present to respond to questions that shareholders may properly present.
The Annual Meeting is being held so that shareholders may consider the election of six directors and the appointment of Bonadio &
Co., LLP, as our independent registered public accounting firm for the year ending December 31, 2022.
For the reasons set forth in the Proxy Statement, the Board of Directors unanimously recommends a vote “FOR” the election of the
nominated directors and “FOR” the ratification of the appointment of Bonadio & Co., LLP as our independent registered public
accounting firm for the year ending December 31, 2022.
On behalf of the Board of Directors, we urge you to sign, date and return the enclosed proxy card as soon as possible, or vote by
telephone or internet as directed on our Proxy Card enclosed, even if you currently plan to attend the Annual Meeting. This will not
prevent you from voting at the Annual Meeting, but will assure that your vote is counted if you are unable to attend the meeting. Your
vote is important, regardless of the number of shares that you own.
Sincerely,
Thomas W. Schneider
President and Chief Executive Officer
Pathfinder Bancorp, Inc.
214 West First Street
Oswego, New York 13126
(315) 343-0057
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS – May 13, 2022
Notice is hereby given that the Annual Meeting of Pathfinder Bancorp, Inc. will be held at 10:00 a.m., Eastern Time, on May 13, 2022.
This year’s Annual Meeting will be conducted solely online via live webcast. There is no physical location for the Annual Meeting.
You will be able to attend and participate in the Annual Meeting online, vote your shares electronically and submit your questions
prior to and during the meeting by visiting: www.meetnow.global/MY9FFMD. There is no password requirement for this meeting.
Please note that this virtual meeting service is not supported by Internet Explorer. Details regarding how to participate in the meeting
online are more fully described in the accompanying proxy statement.
A Proxy Card and a Proxy Statement for the Annual Meeting are enclosed.
The Annual Meeting is for the purpose of considering and acting upon:
(1) The election of six directors; and
(2) The ratification of the appointment of Bonadio & Co., LLP as our independent registered public accounting firm
for the year ending December 31, 2022; and
such other matters as may properly come before the Annual Meeting, or any adjournments thereof. The Board of Directors is not
aware of any other business to come before the Annual Meeting.
Any action may be taken on the foregoing proposals at the Annual Meeting on the date specified above, or on any date or dates to
which the Annual Meeting may be adjourned. Shareholders of record at the close of business on March 24, 2022 are the shareholders
entitled to vote at the Annual Meeting, and any adjournments thereof.
EACH SHAREHOLDER, WHETHER HE OR SHE PLANS TO ATTEND THE ANNUAL MEETING, IS REQUESTED TO SIGN, DATE AND
RETURN THE ENCLOSED PROXY CARD WITHOUT DELAY IN THE ENCLOSED POSTAGE-PAID ENVELOPE OR VOTE BY
TELEPHONE OR INTERNET AS DIRECTED ON OUR PROXY CARD ENCLOSED. ANY PROXY GIVEN BY THE SHAREHOLDER MAY
BE REVOKED AT ANY TIME BEFORE IT IS EXERCISED. A PROXY MAY BE REVOKED BY FILING WITH OUR CORPORATE
SECRETARY A WRITTEN REVOCATION OR A DULY EXECUTED PROXY BEARING A LATER DATE. ANY SHAREHOLDER
PRESENT AT THE ANNUAL MEETING MAY REVOKE HIS OR HER PROXY AND VOTE ELECTRONICALLY ON EACH MATTER
BROUGHT BEFORE THE ANNUAL MEETING. HOWEVER, IF YOU ARE A SHAREHOLDER WHOSE SHARES ARE NOT REGISTERED
IN YOUR OWN NAME, YOU WILL NEED TO REGISTER IN ADVANCE TO ATTEND THE ANNUAL MEETING VIRTUALLY ON THE
INTERNET. OUR PROXY STATEMENT, ANNUAL REPORT TO SHAREHOLDERS AND PROXY CARD ARE AVAILABLE ON THE
INTERNET AT WWW.PATHFINDERBANK.COM/ANNUALMEETING.
By Order of the Board of Directors
April 8, 2022
William O’Brien, Secretary
IMPORTANT: A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED STATES.
TABLE OF CONTENTS
Leadership Structure and Risk Oversight Rule of the Board of Directors
Independence and Diversity of Directors
Security Ownership of Certain Beneficial Owners and Management
Transactions with Certain Related Persons
Proxy Solicitation Costs
Revocation of Proxies
Conduct of Meeting
Information about this Proxy Statement and the Annual Meeting
A. Date, Time and Place
B. Voting Securities and Principal Holders Thereof
C.
D.
E.
F. Attendance of Directors at the Annual Meeting
G. Other Matters
H.
Smaller Reporting Company
Our Governance and Beneficial Ownership
A.
B.
C.
D. Delinquent Section 16(a) Reports
E.
F. Anti-Hedging Policy
G.
Code of Ethics
H.
Shareholder Communications
Meetings and Committees of the Board of Directors
A. Nominating/Governance Committee
B.
C. Audit Committee
D. Asset/Liability Committee (ALCO)
E.
Executive/Loan Committee
F. Other Committees
Compensation Disclosure
A.
B.
C. Directors’ Compensation
Proposal 1 – Election of Directors
A.
Composition of our Board
B. Nominees
C.
Continuing Directors
D.
Executive Officers who are not Directors
Proposal 2– Ratification of Appointment of Auditors
A. Audit and Related Fees for 2021
B. Audit Committee Report
Next Year
Executive Compensation
Compensation of our Named Executive Officers
Compensation Committee
I.
II.
III.
IV
V.
VI.
VII.
PAGE #
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5
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6
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9
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10
10
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12
13
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13
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Pathfinder Bancorp, Inc.
214 West First Street
Oswego, New York 13126
(315) 343-0057
I.
INFORMATION ABOUT THIS PROXY STATEMENT AND THE ANNUAL MEETING
A. DATE, TIME AND PLACE
This proxy statement is furnished in connection with the solicitation of proxies on behalf of the Board of Directors of Pathfinder
Bancorp, Inc. (the “Company”) to be used at our Annual Meeting of Shareholders (the “Annual Meeting”), which will be held
on May 13, 2022 at 10:00 a.m., Eastern Time, and all adjournments of the Annual Meeting. The accompanying notice of Annual
Meeting and this proxy statement are first being mailed to shareholders on or about April 8, 2022.
The Annual Meeting will be a completely virtual meeting of shareholders, which will be conducted exclusively by webcast.
You are entitled to participate in the Annual Meeting only if you were a shareholder of the Company as of the close of business
on March 24, 2022 (the “Record Date”), or if you hold a valid proxy for the Annual Meeting. No physical meeting will be held.
If you are unable to access the virtual meeting and need assistance finding a place to access the Annual Meeting on the internet,
please contact the Company at 315-207-8039 prior to May 10, 2022.
You will be able to attend the Annual Meeting online and submit your questions during the meeting by visiting
www.meetnow.global/MY9FFMD. There is no password requirement for this meeting. Please note that this virtual meeting
service is not supported by Internet Explorer. You also will be able to vote your shares online by attending the Annual Meeting
by webcast. To participate in the Annual Meeting, you will need to review the information included on your proxy card or on
the instructions that accompanied your proxy materials. The online meeting will begin promptly at 10:00 a.m. Eastern
Time. We encourage you to access the meeting prior to the start time leaving ample time for the check in. Please follow
the registration instructions as outlined in this proxy statement.
B. VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Holders of record of our common stock, par value $0.01 per share, as of the close of business on the Record Date, are entitled
to one vote for each share they own. As of the Record Date, we had 4,603,184 shares of voting common stock outstanding.
The presence at the Annual Meeting or by proxy of a majority of the outstanding shares of voting common stock entitled to
vote is necessary to constitute a quorum at the Annual Meeting. If a shareholder holds shares in street name (i.e., the shares are
held in a stock brokerage account or by a bank, trust, or other institution) and does not provide voting instructions to the holder
of the account for non-discretionary voting items such as the election of directors, such shares will be considered “Broker non-
votes.” Broker non-votes and proxies marked “abstain” will be counted for purposes of determining that a quorum is present,
but will not be considered as votes cast as to the matters to be considered.
As to the election of directors, shareholders may cast their votes “For” or “Withhold.” As to the ratification of our independent
registered public-accounting firm, shareholders may cast their votes “For,” “Against” or “Abstain.
Directors are elected by a plurality of votes cast, without regard to either broker non-votes, or proxies as to which the authority
to vote for the nominees being proposed is withheld. The affirmative vote of holders of a majority of the total votes cast at the
Annual Meeting or by proxy, without regard to broker non-votes or proxies as to which shareholders abstain, is required for
the ratification of Bonadio & Co., LLP as our independent registered public accounting firm (the “Auditors”) for the year
ending December 31, 2022.
In accordance with the provisions of our Articles of Incorporation, record holders of common stock who beneficially own in
excess of 10% of the outstanding shares of our voting common stock (the “Limit”) are not entitled to any vote with respect to
the shares held in excess of the Limit unless approved by our Board of Directors. Our Articles of Incorporation authorize the
Board of Directors (i) to make all determinations necessary to implement and apply the Limit, including determining whether
4
persons or entities are acting in concert, and (ii) to demand that any person who is reasonably believed to beneficially own
stock in excess of the Limit supply information to us to enable the Board of Directors to implement and apply the Limit.
However, pursuant to our Articles of Incorporation, our employee stock ownership plan will not be deemed to beneficially own
any “over the limit Company stock” held under such plan. Castle Creek Capital Partners VII, L.P. has been approved by the
Board of Directors to vote shares held in excess of the Limit.
If you participate in the Pathfinder Bank (“Pathfinder Bank” or the “Bank”) Employee Stock Ownership Plan (the “ESOP”),
you will receive a voting instruction card so that you may direct the trustee to vote on your behalf under the plan. Under the
terms of the ESOP, the ESOP trustee votes all shares held by the ESOP, but each ESOP participant may direct the trustee how
to vote the shares of voting common stock allocated to his or her account. The ESOP trustee, subject to the exercise of its
fiduciary responsibilities, will vote all unallocated shares of Pathfinder Bancorp, Inc. common stock held by the ESOP and
allocated shares for which no voting instructions are received in the same proportion as shares for which it has received timely
voting instructions. The deadline for returning your ESOP voting instructions is May 4, 2022.
If you are a registered shareholder (i.e., you hold your shares through our transfer agent, Computershare), you do not need to
register to attend the Annual Meeting virtually on the Internet. Please follow the instructions on the proxy card that you
received.
If you hold your shares through an intermediary, such as a bank or broker, you must register in advance to attend the Annual
Meeting virtually on the Internet.
To register to attend the Annual Meeting online by webcast you must submit proof of your proxy power (legal proxy)
reflecting your Company holdings along with your name and email address to Computershare. Requests for registration must
be labeled as “Legal Proxy” and be received no later than 5:00 p.m., Eastern Time, on May 11, 2022.
You will receive a confirmation of your registration by email after we receive your registration materials. Requests for
registration should be directed to us at the following:
•
•
the email from your broker, or attach an
By email - Forward
legalproxy@computershare.com
By mail:
Computershare
Pathfinder Bancorp, Inc. Legal Proxy
P.O. Box 43001
Providence, RI 02940-3001
image of your
legal proxy,
to
C. PROXY SOLICITATION COSTS
The Company will pay all costs relating to the solicitation of proxies. Proxies may be solicited by officers, directors, and staff
members of the Company personally, by mail, by telephone, or by other electronic means. The Company will also reimburse
brokers, custodians, nominees, and fiduciaries for reasonable expenses in forwarding proxy materials to beneficial owners of
the Company’s stock.
D. REVOCATION OF PROXIES
Shareholders who sign the proxies we are soliciting will retain the right to revoke them in the manner described below. Unless
so revoked, the shares represented by such proxies will be voted at the Annual Meeting and all adjournments thereof. Proxies
solicited on behalf of the Board of Directors will be voted in accordance with the directions given thereon. Where no
instructions are indicated, validly executed proxies will be voted in favor of all proposals. If any other matters are properly
brought before the Annual Meeting, the persons named in the accompanying proxy will vote the shares as directed by a majority
of the Board of Directors in attendance at the Annual Meeting. We know of no additional matters that will be presented for
consideration at the Annual Meeting.
Proxies may be revoked by sending written notice of revocation to our Secretary, at the address shown above, by delivering to
us a duly executed proxy bearing a later date or by attending the Annual Meeting and voting. The presence at the Annual
Meeting of any shareholder who had returned a proxy will not revoke the proxy unless the shareholder votes electronically at
5
the Annual Meeting or delivers a written revocation to our Secretary prior to the voting of the proxy. If you are a shareholder
whose shares are not registered in your name, you must register in advance following the instructions described above.
E. CONDUCT OF MEETING
In accordance with our bylaws, and by action of the Board of Directors, the Chair of the Board will preside over the Annual
Meeting. The Chair of the Board has broad authority to ensure the orderly conduct of the meeting. This includes discretion to
recognize shareholders who have questions, and the right to determine the extent of discussion on each item of business. Rules
governing the conduct of the meeting have been established and will be available at the meeting along with the agenda of the
matters to be considered at the Annual Meeting.
F. ATTENDANCE OF DIRECTORS AT THE ANNUAL MEETING
The Company does not have a policy regarding the attendance of Board members at the Annual Meeting, although all are
encouraged to attend. Eight directors attended the 2021 Annual Meeting.
G. OTHER MATTERS
The Board of Directors is not aware of any business to come before the Annual Meeting other than the matters described in
this Proxy Statement. However, if any matters should properly come before the Annual Meeting, it is intended that holders of
the proxies will act as directed by a majority of the Board of Directors, except for matters related to the conduct of the Annual
Meeting, as to which they shall act in accordance with their best judgment. The Board of Directors intends to exercise its
discretionary authority to the fullest extent permitted under Maryland Law and the Securities Exchange Act of 1934.
H. SMALLER REPORTING COMPANY
The Company has elected to prepare this Proxy Statement and other annual and periodic reports as a “Smaller Reporting
Company” consistent with rules of the Securities and Exchange Commission.
II.
OUR GOVERNANCE AND BENEFICIAL OWNERSHIP
A. LEADERSHIP STRUCTURE AND RISK OVERSIGHT ROLE OF THE BOARD OF DIRECTORS
Our Board has a separate person serve as Chief Executive Officer (“CEO”) and Chair of the Board and has functioned in that
manner since the year 2000. Mr. Burritt, our Chair, is an independent director as defined by NASDAQ’s listing requirements.
The Company has spent significant time evaluating its leadership structure and has determined that, under the present
circumstances, separating the Chair and CEO positions is appropriate. We believe this separation allows our Board to
concentrate on policy and strategy and our CEO the time to concentrate on executing such strategy. Additionally, we believe
this structure is most appropriate given the Board’s role in monitoring the Company’s execution of its business plan and the
risk elements associated with such execution.
The primary risks facing the Bank, as the operating subsidiary of the Company, are interest rate risk, liquidity risk, investment
risk, credit risk, risks associated with inadequate allowance for loan losses, cyber security risks, competitive risks and regulatory
risks. While the full Board is actively engaged in monitoring all of the noted risks, we have further assigned specific
responsibilities to Board Committees for detailed review. The Asset/Liability Committee, with the assistance of professional
consultants, monitors interest rate risk, investment risk and liquidity risk. The Executive/Loan Committee, with the assistance
of a professional loan review consultant, monitors the credit risks and risks associated with allowance for loan losses. The
Technology Steering Committee, with the assistance of professional experts, monitors and responds to cyber risks. In addition,
we purchase internet liability and other insurance to protect us against cyber security risks. The Audit/Compliance Committee
monitors regulatory risks. Every member of our Board engages in continuing education in an effort to monitor Enterprise Risk
Management issues so that they can effectively engage in their oversight role.
B.
INDEPENDENCE AND DIVERSITY OF DIRECTORS
Our common stock is listed on the NASDAQ Capital Market. The Board of Directors has determined that all of its directors,
with the exception of Mr. Schneider and Mr. Funiciello, are “independent” pursuant to NASDAQ’s listing requirements. In
6
evaluating the independence of our independent directors, we considered the following transactions between us and our
independent directors during 2021 that are not required to be disclosed under “Transactions with Certain Related Persons:”
•
•
The law firm of which our Director William A. Barclay is a partner, was paid for real estate loan closings by
borrowers and other legal matters in the amount of $38,445.
The firm of which our Director David A. Ayoub is a partner, was paid $43,293 in fees associated with their
assistance in the preparation of application forms for the Paycheck Protection Program, including referrals made to
Pathfinder Bank.
Our Board of Directors has determined that these transactions did not impair the independence of the named directors. Our
independent directors hold executive sessions no less than twice a year.
Although the Nominating Committee does not have a formal policy with regard to the consideration of diversity in identifying
a director nominee, diversity is considered in our review of candidates. The Nominating Committee hopes to continue to
diversify our Board membership. As considered by our Board, diversity includes not only gender and ethnicity, but the various
perspectives that come from having differing viewpoints, geographic and cultural backgrounds, and life experiences.
C. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Persons and groups who beneficially own in excess of 5% of the Company's voting common stock are required to file Schedule
13G or Schedule 13D reports with the Securities and Exchange Commission (the “SEC”) regarding such ownership. The
following table sets forth, as of the date of the most recent reports, the shares of voting common stock beneficially owned by
each person or entity that was the beneficial owner of more than 5% of our outstanding shares of voting common stock. None
of the shares beneficially owned by directors, executive officers or nominees to the board of directors have been pledged as
security or collateral for any loans.
The following table represents the ownership of our Schedule 13D and 13G filers as of the Record Date:
Amount Beneficially
Owned
409,908
Percentage of Shares of
Voting Common Stock
Outstanding
8.9%
405,383
8.8%
251,746
5.5%
Name and Address of Beneficial Owners
Castlecreek Capital Partners VII, LP (1)
Castlecreek Capital VII LLC
6051 El Tordo
PO Box 1329
Rancho Santa Fe, CA 92067
Pathfinder Bank Employee Stock Ownership Plan Trust (2)
c/o Pentegra Services, Inc.
2 Enterprise Drive, Suite 408
Shelton, CT 06484
Minerva Advisors, LLC (3)
Minerva Group, LP
Minerva GP, LP
Minerva GP, Inc.
David P. Cohen
50 Monument Road, Suite 201
Bala Cynwyd, PA 19004
(1)
(2)
Based on information reported on a Schedule 13D/A filed with the Securities and Exchange Commission
on November 17, 2020, Castle Creek Capital Partners VII, LP and Castle Creek Capital VII, LLC reported
shared voting power for 409,908 shares of our voting common stock and shared dispositive power over
409,908 shares of our voting common stock.
Based on information reported on a Schedule 13G/A filed with the Securities and Exchange Commission
on February 11, 2022, Pentegra Trust Company, the trustee for the Pathfinder Bank Employee Stock
Ownership Plan, reported sole voting power for 72,366 shares of our voting common stock, shared voting
power for 333,017 shares of our voting common stock, sole dispositive power over 376,886 shares of our
voting common stock and shared dispositive power over 28,497 shares of our voting common stock.
7
(3)
Based on information reported on a Schedule 13G/A filed with the Securities and Exchange Commission on
February 14, 2022, Minerva Advisors, LLC, Minerva Group, LP, Minerva GP, LP, Minerva GP, Inc., and
David P. Cohen reported sole dispositive and voting power with respect to 204,250 shares of our voting
common stock and Minerva Advisors, LLC and David P. Cohen reported shared dispositive and voting power
with respect to 47,496 shares of our voting common stock.
The following table sets forth as of the Record Date, the shares of common stock beneficially owned by directors, executive
officers and other management for whom we file Section 16 reports.
Name and Address of Beneficial Owners
Directors and Executive Officers (3)
Number of
Shares Owned
and Nature of
Beneficial
Ownership (1)
#
Number of
Unexercised
Stock Options
which are
included in
Beneficial
Ownership (2)
#
Percentage of
Shares of
Voting
Common Stock
Outstanding
David A. Ayoub (4)
William A. Barclay (5)
Chris R. Burritt (6)
John P. Funiciello (7)
Adam C. Gagas (8)
Melanie Littlejohn (9)
John F. Sharkey, III (10)
Lloyd "Buddy" Stemple (11)
Thomas W. Schneider (12)
James A. Dowd (13)
Ronald Tascarella (14)
Daniel R. Phillips (15)
Calvin L. Corriders (16)
Walter F. Rusnak (17)
William O'Brien (18)
All Directors and Executive Officers as a Group (15 persons)
Section 16 Filers
Robert G. Butkowski
Ronald G. Tascarella
39,948
90,750
56,691
45,537
201,052
12,302
51,538
71,570
94,114
67,863
99,219
60,646
49,477
76,495
32,397
1,049,599
17,023
8,787
8,787
8,787
17,023
8,787
-
-
21,407
13,556
13,556
33,793
17,055
13,222
17,055
198,838
%
0.9
2.0
1.2
1.0
4.4
0.3
1.1
1.6
2.0
1.5
2.2
1.3
1.1
1.7
0.7
22.8
27,075
22,844
3,136
3,609
0.6
0.5
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
A person is deemed to be the beneficial owner, for purposes of this table, of any shares of voting common
stock if he has shared voting or investment power with respect to such security, or has a right to acquire
beneficial ownership at any time within 60 days from the Record Date. As used herein, “voting power” is the
power to vote or direct the voting of shares and “investment power” is the power to dispose or direct the
disposition of shares. This table includes all shares held directly, as well as by spouses and minor children,
in trust and other indirect ownership, over which shares the named individuals effectively exercise sole or
shared voting and investment power. Unless otherwise indicated, the named individual has sole voting and
investment power. ESOP shares allocated to the officers are also included within their respective totals.
These options are exercisable within 60 days of the Record Date. They cannot be voted until exercised.
The mailing address for each person listed is 214 West First Street, Oswego, New York 13126.
Mr. Ayoub’s shares include 17,763 in a 401(k) plan and 1,647 in an IRA.
Mr. Barclay has sole voting and investment power over 19,987 shares and shared investment and voting power
over 61,976 shares.
Mr. Burritt’s shares include 25,000 in an IRA.
Mr. Funiciello’s shares include 5,000 in an IRA.
Mr. Gagas’s shares include 14,300 in an IRA. He has sole voting and investment power over 34,365 shares
and shared investment and voting power over 149,664 shares.
Ms. Littlejohn has sole voting and investment power over 3,515 shares.
Mr. Sharkey’s shares include 20,000 in an IRA.
Mr. Stemple has sole voting and investment power over 69,070 shares and shared investment and voting
power over 2,500 shares.
8
(12)
(13)
(14)
(15)
(16)
(17)
(18)
Mr. Schneider’s shares include 23,362 in Pathfinder Bank’s 401(k) plan and 19,233 in Pathfinder Bank’s
ESOP. He also has 2,259 restricted stock units that will vest within 60 days of the record date.
Mr. Dowd’s shares include 16,607 in Pathfinder Bank’s 401(k) plan and 18,055 in Pathfinder Bank’s ESOP.
He also has 1,054 restricted stock units that will vest within 60 days of the record date.
Mr. Tascarella’s shares include 20,292 in Pathfinder Bank’s 401(k) plan and 7,821 in Pathfinder Bank’s
ESOP. He has sole voting and investment power over 79,611 shares and shared investment and voting power
over 5,000 shares. He also has 1,054 restricted stock units that will vest within 60 days of the record date.
Mr. Phillip’s shares include 6,021 in Pathfinder Bank’s 401(k) plan and 11,510 in Pathfinder Bank’s ESOP.
He also has 1,054 restricted stock units that will vest within 60 days of the record date.
Mr. Corrider’s shares include 15,974 in Pathfinder Bank’s 401(k) plan and 5,695 in Pathfinder Bank’s ESOP.
Mr. Rusnak’s shares include 25,000 in an IRA and 3,133 in Pathfinder Bank’s ESOP.
Mr. O’Brien’s shares include 3,255 in Pathfinder Bank’s 401(k) plan and 7,201 in Pathfinder Bank’s ESOP.
D. DELINQUENT SECTION 16(a) REPORTS
Our common stock is registered with the SEC pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Exchange
Act”). Our executive officers and directors and beneficial owners of greater than 10% of our common stock (“10% beneficial
owners”) are required to file reports on Forms 3, 4 and 5 with the SEC disclosing beneficial ownership and changes in beneficial
ownership of the common stock. SEC rules require disclosure in our Proxy Statement and Annual Report on Form 10-K of the
failure of an executive officer, director or 10% beneficial owner of our common stock to file a Form 3, 4, or 5 on a timely basis.
Thomas Schneider filed one late Form 4 reporting four transactions that occurred over a four day period.
E. TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Sarbanes-Oxley Act of 2002 generally prohibits an issuer from (i) extending or maintaining credit; (ii) arranging for the
extension of credit; or (iii) renewing an extension of credit in the form of a personal loan for an officer or director. There are
several exceptions to this general prohibition, however, one of which is applicable to us. This prohibition does not apply to
loans made by a depository institution that is insured by the FDIC and is subject to the insider lending restrictions of the Federal
Reserve Act. Regulations permit executive officers and directors to receive the same loan terms through programs that are
widely available to other employees, as long as the executive officer or director is not given preferential treatment compared
to the other participating employees. The Bank currently has loans to each of the following officers and/or directors or their
immediate families: David Ayoub, Chris Burritt, James Dowd, John Funiciello, William O’Brien, Daniel Phillips, Thomas
Schneider, John Sharkey III, Lloyd Stemple and Ronald Tascarella.
After one year of service at the Bank, full-time employees and directors are entitled to receive a primary residence mortgage
loan at an interest rate of 0.25% below market, consistent with applicable laws and regulations. Until 2021, the rate was at
0.50% below market.
The chart below lists the executive officers and directors who participated in the employee mortgage loan program during the
years ended December 31, 2021 and 2020 and certain information with respect to their loans. No other directors or executive
officers participated in the employee mortgage loan program during the years ended December 31, 2021 and 2020.
Name
Thomas Schneider
Thomas Schneider
James Dowd
James Dowd
James Dowd
Lloyd Stemple
William O'Brien
Daniel Phillips
Largest Aggregate
Balance 01/01/20
to 12/31/21
$
Interest
Rate
%
Non-
Employee
Interest Rate
%
Principal
Balance
12/31/2021
$
Principal Paid
01/01/2020 to
12/31/2021
$
Interest Paid
01/01/20 to
12/31/2021
$
151,364
244,000
69,804
147,000
208,000
148,063
127,178
60,435
5.250
2.700
2.625
2.250
2.125
2.750
2.500
3.625
5.750
2.950
3.125
2.500
2.375
3.250
3.000
4.125
-
240,466
-
-
208,000
110,593
94,583
-
151,364
3,534
68,904
147,000
-
37,470
32,596
60,435
9,965
4,782
1,168
4,014
189
7,165
5,816
1,059
Other than the loans noted in the above table, all other loans made to directors or executive officers:
• were made in the ordinary course of business;
• were made on substantially the same terms, including interest rates and collateral, as those prevailing at the
time for comparable loans with persons not related to the Company; and
9
•
did not involve more than normal risk of collectability or present other unfavorable features.
All transactions between us and our executive officers, directors, holders of 10% or more of the shares of the Company’s
common stock and affiliates thereof, must be approved by a majority of our independent outside directors not having any
interest in the transaction, pursuant to our Code of Ethics.
On December 28, 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 506 West Onondaga Associates, LLC. Director John P. Funiciello is a member of 506 West
Onondaga Associates, LLC. The purchase price of the property was $612,000.
In January of 2021, the Bank entered into a lease agreement with 506 West Onondaga Associates, LLC to lease the entire
building located at 506 West Onondaga Street, Syracuse, New York and the vacant property located at 303 Slocum Avenue,
Syracuse, New York. The term of this lease will 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 $201,168.
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 $261,996.
The property will continue to be developed by 506 West Onondaga Associates, LLC up to a total project cost of $2.8 million.
All development costs over $2.8 million will be the responsibility of the Bank and treated as leasehold improvements.
F. ANTI-HEDGING POLICY
The Company’s anti-hedging and anti-pledging provisions are covered in the Company’s Insider Trading Policy. Under the
policy, directors and named executive officers are prohibited from engaging in short sales of Company stock and from engaging
in transactions in publicly-traded options, such as puts, calls and other derivative securities based on Company stock including
any hedging, monetization or similar transactions designed to decrease the risks associated with holding Company stock. In
addition, directors and named executive officers are prohibited from pledging Company stock as collateral for any loan or
holding Company stock in a margin account.
G. CODE OF ETHICS
We have adopted a Code of Ethics that is applicable to our officers, directors and employees, including our principal executive
officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code
of Ethics is available at the Corporate Information page on our website at https://ir.pathfinderbank.com. Amendments to, and
waivers from, the Code of Ethics will also be disclosed on our website.
H. SHAREHOLDER COMMUNICATIONS
The Board of Directors has established a process for shareholders to send communications to a director by either United States
mail or electronic mail. Any shareholder who desires to communicate directly with our directors should send their
communication to Board of Directors, Pathfinder Bancorp, Inc., 214 West First Street, Oswego, New York 13126 or by email
to directors@pathfinderbank.com. The communication should indicate that the author is a shareholder and if shares are not
held of record, should include appropriate evidence of stock ownership. Depending on the subject matter, management will:
Forward the communication to the director or directors to whom it is addressed;
•
• Attempt to handle the inquiry directly, for example where it is a request for information about us or it is a stock-related
matter; or
• Not forward the communication if it is primarily commercial in nature, relates to an improper or irrelevant topic, or is
unduly hostile, threatening, illegal or otherwise inappropriate.
At each Board meeting, management shall present a summary of all communications received since the last meeting that were
not forwarded and make those communications available to the directors.
III. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of the Board of Directors is conducted through meetings and activities of the Board and its committees. During the year
ended December 31, 2021, the Board of Directors held twelve regular meetings. During the year ended December 31, 2021, no
director attended fewer than 75 percent of the total meetings of the Board of Directors and committees on which such director served.
10
Much of our work is performed in Committees which is then reported to the full Board. Members in committees are described in
the following table:
Director
David A. Ayoub
William A. Barclay
Chris R. Burritt
John P. Funiciello
Adam C. Gagas
Melanie Littlejohn
Thomas W. Schneider
John F. Sharkey, III
Lloyd "Buddy" Stemple
Asset/Liability Committee
(ALCO) Member
Audit
Committee
Member
Compensation
Committee
Member
Nominating and
Governance
Committee
Member
Executive Loan
Review
Committee
Member
X
X
X
X
X
Chair
Chair
X
X
X
X
X
X
Chair
X
X
Chair
X
X
X
X
X
X
Chair
X
X
X
X
X
X
A. NOMINATING/GOVERNANCE COMMITTEE
The Nominating/Governance Committee met nine times in the year ended December 31, 2021 to address issues concerning
corporate governance, succession planning, and to nominate directors to fulfill the terms of the upcoming year. In the year
ended December 31, 2021, the Nominating/Governance Committee was comprised of Directors, Barclay, Burritt, Littlejohn,
Sharkey and Stemple, each of whom are “independent” pursuant to the NASDAQ listing requirements. The
Nominating/Governance Committee has a charter which is available at our Corporate Information page on our website at
https://ir.pathfinderbank.com.
Among other things, the functions of the Nominating/Governance Committee include the following:
•
•
•
to lead the search for individuals qualified to become members of the Board and to select director nominees to be
presented for shareholder approval;
to review and monitor compliance with the requirements for board independence; and
to review the committee structure and make recommendations to the Board regarding committee membership.
The Nominating/Governance Committee identifies nominees by first evaluating the current members of the Board of Directors
willing to continue in service. Current members of the Board with skills and experience that are relevant to our business and
who are willing to continue in service are first considered for re-nomination, balancing the value of continuity of service by
existing members of the Board with that of obtaining a new perspective. If any member of the Board does not wish to continue
in service, or if the Nominating/Governance Committee or the Board decides not to re-nominate a member for re-election, or
if the size of the Board is increased, the Nominating/Governance Committee would solicit suggestions for director candidates
from all Board members. In addition, the Nominating/Governance Committee is authorized by its charter to engage a third
party to assist in the identification of director nominees.
The Nominating/Governance Committee would seek to identify a candidate who, at a minimum, satisfies the following criteria:
•
•
•
•
•
•
has personal and professional ethics and integrity and whose values are compatible with ours;
has had experiences and achievements that have given him or her the ability to exercise and develop good business
judgment;
is willing to devote the necessary time to the work of the Board and its committees, which includes being available
for Board and committee meetings;
is familiar with the communities in which we operate and/or is actively engaged in community activities;
is involved in other activities or interests that do not create a conflict with his or her responsibilities to us and our
shareholders;
has the capacity and desire to represent the balanced, best interest of our shareholders as a group, and not primarily a
special interest group or constituency; and
11
•
has had a principal residence for two years on a continuous basis within the following counties in New York – Oswego,
Jefferson, Lewis, Oneida, Onondaga or Cayuga. Our Bylaws provide that this provision may be overridden by two-
thirds vote of the Board of Directors.
The Nominating/Governance Committee will also take into account whether a candidate satisfies the criteria for
“independence” under the NASDAQ corporate governance listing standards and, if a nominee is sought for service on the Audit
Committee, the financial and accounting expertise of a candidate, including whether an individual qualifies as an Audit
Committee Financial Expert. Diversifying our board membership is also an important consideration.
The Nominating/Governance Committee will consider candidates for the Board of Directors recommended by shareholders. In
order to make a recommendation to the Board of Directors, a shareholder must own no less than 500 shares of the Company.
Shareholders who are so qualified may send their recommendations to our Corporate Secretary for forwarding to the
Nominating/Governance Committee. In light of the due diligence required to evaluate recommendations, said recommendations
for candidates for the 2023 annual meeting must be received by the Nominating/Governance Committee by June 30, 2022.
Shareholders may submit the names of candidates to be considered in writing to our Corporate Secretary, at 214 West First
Street, Oswego, New York 13126. The submission must include the following information:
•
•
•
•
•
•
•
•
the name and address of the shareholder as it appears on our books, and number of shares of our common stock that
are owned beneficially by such shareholder (if the shareholder is not a holder of record, appropriate evidence of the
shareholder’s ownership will be required);
the name, address and contact information for the candidate, and the number of shares of our common stock that are
owned by the candidate (if the candidate is not a holder of record, appropriate evidence of the shareholder’s ownership
should be provided);
a statement of the candidate’s business and educational experience;
such other information regarding the candidate as would be required to be included in the proxy statement pursuant to
SEC Regulation 14A;
a statement detailing any relationship between us and the candidate;
a statement detailing any relationship between the candidate and any of our customers, suppliers or competitors;
detailed information about any relationship or understanding between the proposing shareholder and the candidate;
and
a statement that the candidate is willing to be considered and willing to serve as a director if nominated and elected.
The Nominating/Governance Committee will consider shareholder recommendations made in accordance with the above
similarly to any other nominee proposed by any other source. We have not paid a fee to any third party to identify or evaluate
any potential nominees. Moreover, the Nominating/Governance Committee has not received within the last year a
recommended nominee from any shareholder.
B. COMPENSATION COMMITTEE
The Compensation Committee meets periodically to review the performance of officers and to determine compensation
programs and adjustments. The entire Board of Directors ratifies the recommendations of the Compensation Committee. In the
year ended December 31, 2021, the members of the Compensation Committee were Directors Gagas, Ayoub, Barclay, Burritt,
Sharkey and Stemple. All of these directors are “independent” pursuant to NASDAQ listing requirements. The Compensation
Committee met five times during the year ended December 31, 2021. The Compensation Committee has a charter which is
available at the Corporate Information page at our website at https:/ir.pathfinderbank.com.
Any shareholder who wishes to communicate directly with a member of the compensation committee should do so by e-mail
to compcommittee@pathfinderbank.com.
C. AUDIT COMMITTEE
In 2021, the Audit Committee consisted of Directors Ayoub, Burritt, Littlejohn and Sharkey. The Audit Committee meets on
a periodic basis with the internal auditor to review audit programs and the results of audits of specific areas, on regulatory
compliance issues, as well as to review information to further their financial literacy skills. The Audit Committee meets with
the independent registered public accounting firm to review quarterly and annual filings, the results of the annual audit and
other related matters. The Chairman of the Audit Committee may meet with the Auditors on quarterly filing issues in lieu of
12
the entire committee. The Audit Committee met five times in 2021. Each member of the Audit Committee is “independent”
as defined in the listing standards of NASDAQ and SEC Rule 10A(m)-3. Our Board of Directors has adopted a written charter
for the Audit Committee which is available at the Corporate Information page on our website at https://ir.pathfinderbank.com.
The Audit Committee maintains an understanding of our key areas of risk and assesses the steps management takes to minimize
and manage such risks and:
•
•
•
•
•
selects and evaluates the qualifications and performance of the Auditors;
ensures that the internal and external auditors maintain no relationship with management and/or us that would impede
their ability to provide independent judgment;
oversees the adequacy of the systems of internal control;
reviews the nature and extent of any significant changes in accounting principles; and
oversees that management has established and maintained processes reasonably calculated to ensure our compliance
with all applicable law, regulations, corporate policies and other matters contained in our Code of Ethics which is
available at the Corporate Information page on our website at https://ir.pathfinderbank.com.
The Audit Committee has established procedures for the confidential, anonymous submission by employees of concerns
regarding accounting or auditing matters.
The Board of Directors has determined that Mr. Ayoub qualifies as an Audit Committee financial expert serving on the
committee. Mr. Ayoub meets the criteria established by the Securities and Exchange Commission.
D. ASSET/LIABILITY COMMITTEE (ALCO)
Pathfinder Bank, the operating subsidiary of the Company has an Asset/Liability Committee. The purpose of the committee is
to oversee the asset/liability, interest rate risk, liquidity, capital adequacy, funds management and investment functions of the
Bank. Members in 2021 consisted of Directors Stemple, Ayoub, Burritt, Funiciello, Gagas and Sharkey. The committee met
four times in 2021, each time being assisted by a professional consultant in ALCO matters.
E. EXECUTIVE/LOAN COMMITTEE
Pathfinder Bank’s most significant asset is its loan portfolio. The loan portfolio produces most of the Bank’s revenue but also
exposes the Bank to credit and interest rate risk. The Executive/Loan Committee is primarily responsible for monitoring this
asset. All of the board of directors are members of the committee. The committee meets generally every other week to respond
to customer demands. In addition, the Executive Loan Committee has the authority to make some decisions on behalf of the
whole Board when expediency is required.
F. OTHER COMMITTEES
Pathfinder Bank and the Company have a number of other standing and adhoc committees such as Strategic Planning, Facilities
and Technology Steering, etc. Board members are encouraged to, and do, attend various committee meetings even if they are
not official members in order to get a broader understanding of Bank operations and to give Bank management the benefit of
their experience.
IV.
COMPENSATION DISCLOSURES
A. EXECUTIVE COMPENSATION
As a smaller reporting company, we are not required to include a Compensation Discussion and Analysis (“CD&A”) under
Item 402(b) of Regulation S-K. Nevertheless, we do want our shareholders to understand our compensation policies and
procedures so we incorporate many, but not all, of the required disclosures of a full CD&A.
Our Compensation Philosophy. The Company’s ability to attract and retain talented employees and executives with skills and
experience is essential to providing value to its shareholders. The Company seeks to provide fair and competitive compensation
to its employees (including the Named Executive Officers described below) by providing the type and amount of compensation
consistent with our peers. We also seek to drive performance through short-term incentive compensation and to align our
executives’ interest with shareholders with appropriate equity awards.
13
Compensation Best Practices. Our compensation program is designed to retain and reward our Named Executive Officers by
aligning their compensation with short-term and long-term performance. Toward that end, we use the following compensation
best practices:
• Our cash-based bonus payments are tied to both financial and non-financial performance measures and are subject to
a “clawback” policy, providing for the partial or total return of the cash bonus in the event of a restatement of our
financial statements which makes the performance measures no longer valid;
• No tax “gross ups” are included in any employment related agreements;
• Our perquisites and personal benefits are limited to those that support a documented business purpose;
• Our change in control provisions in the Company’s employment and other agreements with its Named Executive
Officers provide for payment only upon termination of employment or job diminishment in connection with a change
in control (also called “double trigger” event);
• We use appropriate peer groups when establishing compensation; and
• We balance short and long-term incentives.
Compensation Program Elements. The Compensation Committee, with the assistance of our consultants, when engaged, has
incorporated the following elements into the corporate program to meet the documented corporate philosophy:
Cash based salary and employment benefits that are competitive with our peers;
Cash based bonus, directly linking pay to both Company and individual performance;
•
•
• An equity plan designed to align the executives’ interest with the Company’s shareholders in achieving long-term
performance;
• A qualified 401(k) plan allowing executives to defer “pre-tax” earnings toward retirement;
• An employee stock ownership plan rewarding long-term service to the Company;
• A defined contribution supplemental executive retirement plan (“SERP”) rewarding long-term service to the Company
for certain members of senior management;
• An executive non-qualified deferred compensation plan allowing executives to defer income for retirement purposes;
•
•
Insurance programs designed to replace income in the event of sickness, accident or death; and
Limited perquisites based on demonstrated business purpose.
Role of the Compensation Committee and Consultants. The Committee annually reviews the performance of the CEO and
other executive officers and recommends to the Board of Directors changes to base compensation, as well as the amount of any
bonus to be awarded. In determining the compensation of an officer, the Committee and the Board of Directors take into
account individual performance, performance of the Company and information regarding compensation paid to executives of
peer group institutions performing similar duties. The CEO recommends to the Compensation Committee, compensation
arrangements for the Executive Vice Presidents and Senior Vice Presidents. He does not recommend compensation
arrangements for himself or Board members.
While the Compensation Committee and the Board of Directors do not use strict numerical formulas to determine changes in
compensation for the CEO, Executive Vice Presidents and Senior Vice Presidents, and while they weigh a variety of different
factors in their deliberations, both company-wide and individually-based performance objectives are used in determining the
compensation of the CEO, Executive Vice Presidents and Senior Vice Presidents. Company-wide performance objectives
emphasize earnings, profitability, earnings contribution to capital, capital strength, asset quality, and return on equity which
are customarily used by similarly-situated financial institutions in measuring performance. Individually-based performance
objectives include non-quantitative factors considered by the Compensation Committee and the Board of Directors such as
general management oversight of the Company, the quality of communication with the Board of Directors, the productivity of
employees and execution of the Bank’s Strategic Plan. Finally, the Compensation Committee and the Board of Directors
considers the standing of the Company with customers and the community, as evidenced by customer and community
complaints and compliments.
Generally, the Company retains a compensation consultant triannually coincident with our “Say-on-Pay” vote. Accordingly, in
late 2020, the Compensation Committee retained the services of McLagan Partners, Inc. (McLagan) as its independent
compensation advisor. McLagan’s report benchmarked senior executive pay, including our Named Executive Officers, against
the same pay of the same officers of our peers in the following areas: base salary; annual short-term incentives and long-term
incentive compensation. Survey data was also available to supplement the public disclosures of our peers. Since we will have
our next “Say-on-Pay” vote in 2024, a compensation consultant will be retained in 2023.
14
B. COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS
Summary Compensation Table. The following table shows the compensation of Thomas W. Schneider, our principal executive
officer, and the two other most highly compensated executive officers (“Named Executive Officers”) that received total
compensation of $100,000 or more during the past fiscal year for services to Pathfinder Bancorp, Inc. or any of its subsidiaries.
The table includes the compensation awarded, paid to, or earned by, our Named Executive Officers during the years ended
December 31, 2021 and 2020, respectively.
Summary Compensation Table
Bonus
($) (1)
130,147
67,081
Stock
Options
($)
─
─
Restricted
Stock Units
($)
─
─
54,540
33,996
53,452
35,700
─
─
─
─
─
─
─
─
Salary
360,350
360,350
219,300
210,000
219,300
210,000
Year
2021
2020
2021
2020
2021
2020
Non-Qualified
Deferred
Compensation
Earnings
($) (2)
All Other
Compensation
($) (3)
─
6,555
10,867
8,348
3,541
2,523
659,942
130,120
87,404
84,767
61,189
56,397
Total
($)
1,150,439
564,106
372,111
337,111
337,482
304,620
Name and Principal
Position
Thomas W. Schneider
President and Chief
Executive Officer
James A. Dowd
Executive Vice President
Chief Operating Officer
Ronald Tascarella
Executive Vice President
Chief Banking Officer
(1)
(2)
(3)
Current year performance-based bonus awards were paid during March 2022.
The non-qualified deferred compensation earnings represents the above market or preferential earnings on
compensation that was deferred by each Named Executive Officer.
The amounts listed in the “All Other Compensation” column consist of the following for each Named
Executive Officer for the year ended December 31, 2021:
Employee
Savings Plan
Company
Contribution
($)
Automobile
Expense
Reimbursement
($)
Club
Dues
($)
Life
Insurance
Premium
($)
ESOP
Allocation (2)
($)
Supplemental
Executive
Retirement
Plan
($)
Named Executive
Year
Early Payment
of Executive
Deferred and
Supplemental
Executive
Retirement
Plans (1)
($)
Total
($)
Thomas W. Schneider
2021
23,762
21,112
5,860
76
15,900
22,232
571,000
659,942
James A. Dowd
2021
17,874
21,601
Ronald Tascarella
2021
15,056
─
─
─
76
14,955
32,898
─
87,404
76
13,159
32,898
─
61,189
(1)
(2)
Represents the complete withdrawal of Mr. Schneider’s entire account balance under each of the Supplemental
Executive Retirement Plan (“SERP”) and the Executive Deferred Compensation Plan due to an unforeseeable
emergency.
The ESOP value is calculated based on the Company’s stock price of $17.17 per share as of December 31,
2021.
Employment Agreement. The Company and its operating subsidiary, Pathfinder Bank, entered into an employment agreement
with Thomas W. Schneider. The agreement has an initial term of three years. Unless notice of non-renewal is provided, the
agreement renews annually. The agreement provides for the payment of a base salary, which will be reviewed at least annually,
and which may be increased. Under the agreement, the 2022 base salary for Mr. Schneider is $360,350. In addition to the
base salary, the agreement provides for, among other things, participation in employee and welfare benefit plans and incentive
compensation and bonus plans applicable to senior executive employees, and reimbursement of business expenses.
15
Mr. Schneider is entitled to severance payments and benefits in the event of termination of employment under specified
circumstances. In the event his employment is terminated for reasons other than for cause, disability or retirement, or in the
event he resigns during the term of the agreement following:
•
•
•
•
•
•
the failure to elect or re-elect or to appoint or re-appoint him to his executive position;
the failure to nominate him to be elected or re-elected as a director of the Bank or the Company;
a material change in his functions, duties, or responsibilities, which change would cause his position to become one
of lesser responsibility, importance or scope;
the liquidation or dissolution of the Company or the Bank, other than liquidations or dissolutions that are caused by
reorganizations that do not affect his status;
a relocation of his principal place of employment by more than 30 miles from its location as of the date of the
agreements or;
a material breach of the agreements by the Company or the Bank.
Mr. Schneider will be entitled to a severance payment equal to three times the sum of his base salary and the highest rate of
bonus awarded to him during the prior three years, payable as a single cash lump sum distribution within 30 days following his
date of termination. In addition, the Company or the Bank will continue to provide him with continued life insurance and non-
taxable medical and dental coverage for 36 months.
If he voluntarily resigns from his employment with the Company and the Bank, (without the occurrence of the specified
circumstances listed above) the Board will have the discretion to provide severance pay to him, provided, however, that such
amount does not exceed three times the average of the executive’s three preceding years’ base salary, including bonuses, any
other cash compensation paid during such years, and the amount of contributions made on behalf of him to any employee
benefit plans maintained by the Company or the Bank during such years.
Upon the occurrence of a change in control of the Company or the Bank followed by the Mr. Schneider’s termination of
employment for any reason, other than for cause, he will be entitled to receive a single cash lump distribution equal to 2.99
times his average base salary over the previous five years, including bonuses, any other cash compensation paid to him during
such years, and the amount of contributions made on behalf of him to any employee benefit plans maintained by the Company
or the Bank during such years. In addition, the Company or the Bank will continue to provide him with continued life insurance
and non-taxable medical and dental coverage for 36 months. In the event payments made to him include an “excess parachute
payment,” as defined in Section 280G of the Internal Revenue Code, the payment will be reduced by the minimum dollar
amount necessary to avoid this result. Should he become disabled, he would be entitled to receive his base salary for one year,
where the payment of base salary will commence within 30 days from the date he is determined to be disabled, and will be
payable in equal monthly installments.
Upon his voluntary resignation from employment (without the occurrence of the specified circumstances listed above) he agrees
not to compete with the Company or the Bank for one year following his resignation.
Change of Control Agreements. The Company and Pathfinder Bank have entered into Change of Control Agreements with
James A. Dowd and Ronald Tascarella which provide certain benefits to them should they be “dismissed” from employment
within a twelve-month period following a change of control of the Company or the Bank. Although “dismissal” does not
include a termination for cause or voluntary termination, it does include the executive’s resignation as a result of:
•
•
•
a material change in the executive’s functional duties or responsibilities which would cause the executive’s position
to become one of lesser responsibility, importance of scope;
a relocation of the executive’s principal place of employment by more than 30 miles from its location as of the date
of the agreement, or
a material reduction in the benefits to the executive as of the date of the agreement.
In the event of such dismissal, the executive, or his beneficiary should he die subsequent to the dismissal, is entitled to a lump
sum payment equal to two times the executive’s most recent annual base salary plus bonuses and any other cash compensation
paid to the executive within the most recent twelve (12) month period. The executive is also entitled to continued life, medical
16
and dental coverage for a period of twenty-four (24) months subsequent to the dismissal, and will become fully vested in any
stock option plans, deferred compensation plans, or restricted stock plans in which he participates.
Defined Contribution Supplemental Retirement Income Agreements. The Bank adopted a 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 SERP 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 equal to the lesser of the contributions required for: (1) three years or (2) the number of years remaining
until the executive’s benefit age, subject to potential reduction to avoid an excess parachute payment under Code Section 280G.
In the event of the executive’s death, disability or termination within 24 months after a change in control, the executive’s
account will be paid in a lump sum to the executive or his beneficiary, as applicable. In the event the executive is entitled to a
benefit from the SERP due to retirement or other termination of employment, the benefit will be paid either in a lump sum or
in monthly installments for 10 years as detailed in the executive’s participant agreement. In 2021, Thomas W. Schneider
received a withdrawal of his entire account balance under the SERP due to an unforeseeable emergency. Following the
withdrawal, Mr. Schneider will no longer be a participant in the SERP.
Executive Deferred Compensation Plan. Pathfinder Bank maintains an Executive Deferred Compensation Plan for a select
group of management employees. A participant in the plan is eligible to defer, on a monthly basis, a percentage of compensation
received from the Bank, up to $750. The participant’s deferred compensation will be held by the Bank subject to the claims of
the Bank’s creditors in the event of the Bank’s insolvency.
Upon the earlier of the date on which the participant terminates employment with the Bank or attains his or her benefit age (as
designated by the participant upon joining the plan), the participant will be entitled to his or her deferred compensation benefit,
which will commence on the date the participant attains his or her elected benefit age and will be payable in monthly
installments for 10 years. In the event of a change in control of the Company or the Bank followed by the participant’s
termination of employment within 36 months thereafter, the participant will receive a deferred compensation benefit calculated
as if the participant had made elective deferrals through his or her benefit age. Such benefit will commence on the date the
participant attains his or her benefit age and will be payable in monthly installments for 10 years. If the participant dies after
commencement of payment of the deferred compensation benefit, the Bank will pay the participant’s beneficiary the remaining
payments that were due.
In the event the participant becomes disabled, the participant will be entitled to receive the deferred compensation benefit as of
the participant’s date of disability. Such benefit will commence within 30 days following the date on which the participant is
disabled and will be payable in monthly installments for 10 years. If the participant dies prior to the commencement of payment
of the deferred compensation benefit, the participant’s beneficiary will be entitled to receive a survivor benefit.
In 2021, Thomas W. Schneider received a withdrawal of his entire account balance under the Executive Deferred Compensation
Plan due to an unforeseeable emergency. Following the withdrawal, Mr. Schneider will no longer be a participant in the
Executive Deferred Compensation Plan in 2022. The only Named Executive Officers remaining in the Executive Deferred
Compensation Plan are James A. Dowd and Ronald Tascarella.
2016 Equity Incentive Plan. The Pathfinder Bancorp, Inc. 2016 Equity Incentive Plan (the “2016 Equity Incentive Plan”) was
approved at our 2016 Annual Meeting. The 2016 Equity Incentive Plan authorized the issuance of up to 263,605 shares of
common stock pursuant to grants of stock option awards to our senior executive officers and outside directors. The options that
were granted to executives vest over seven years (14.3% per year for each year of the participant’s service), have an exercise
price of $11.35, (the market price on the date of the grant) and an exercise period of 10 years from the date of the grant, May
6, 2016. All of the options authorized under this plan have been granted.
The 2016 Equity Incentive Plan also authorizes the issuance of 105,442 shares of common stock pursuant to grants of restricted
stock units to our senior executive officers, directors, key management and other officers. The restricted stock units granted to
senior executive officers vest over seven years (14.3% per year for each year of the participant’s service). Restricted stock units
granted to all other officers vest over five years or three years.
17
Outstanding Equity Awards at Year-End. The following table sets forth information with respect to our outstanding equity
awards as of December 31, 2021 for the Named Executive Officers under our 2016 Equity Incentive Plan.
Outstanding Equity Awards at Fiscal Year-End
Options Awards
Restricted Shares
Number of
securities
underlying
unexercised
options
exercisable
(#)
Number of
securities
underlying
unexercised
options
unexercisable
(#)
Grant
Date (1)
Option
exercise
price
($)
Option
expiration
date
Number of
shares or units
of stock that
have not
vested (2)
(#)
5/6/2016
18,830
7,531
11.35
05/06/26
4,518
Name
Thomas W. Schneider
James A. Dowd
5/6/2016)
11,295
4,521
11.35
05/06/26
2,108
Market value of
shares or units
of stock that
have not vested
(3)
($)
77,574
36,194
Ronald Tascarella
5/6/2016
11,295
4,521
11.35
05/06/26
2,108
36,194
(1)
(2)
(3)
The stock options granted in May 2016, with an option price of $11.35, vest ratably over seven years, with an
expiration date ten years from the date of the grant, or May 2026.
The restricted stock awards were granted in May 2016 and vest ratably over seven years on each anniversary of
the grant date.
Reflects the per share value of the restricted stock units as of December 31, 2021 of $17.17.
Defined Benefit Plan. Pathfinder Bank maintains a tax-qualified noncontributory defined benefit plan (“Retirement Plan”).
The Company “froze” the Retirement Plan effective June 30, 2012 (“Plan Freeze Date”). After the Plan Freeze Date, no
employee is permitted to commence or recommence participation in the Plan and no further benefits accrue to any plan
participants. Employment service after the Plan Freeze Date does continue to be recognized for vesting purposes, however.
Prior to the Plan Freeze Date, all salaried employees age 21 or older who worked for the Bank for at least one year and were
credited with 1,000 or more hours of employment during the year were eligible to accrue benefits under the Retirement Plan.
At the normal retirement age of 65, the Retirement Plan is designed to provide a life annuity. The retirement benefit provided
is equal to 1.5% of a participant’s average monthly compensation for periods after May 1, 2004, through the plan freeze date
described above and 2.0% of the participant’s average monthly compensation for credited service prior to May 1, 2004 based
on the average of the three consecutive years during the last 10 years of employment which provides the highest monthly
average compensation multiplied by the participant’s years of credited service (not to exceed 30 years) to the normal retirement
date. Retirement benefits also are payable upon retirement due to early and late retirement. Benefits also are paid from the
Retirement Plan upon a Participant’s disability or death. A reduced benefit is payable upon early retirement at or after age 60.
Upon termination of employment other than as specified above, a participant who was employed by the Bank for a minimum
of five years is eligible to receive his or her accrued benefit reduced for early retirement or a deferred retirement benefit
commencing on such participant’s normal retirement date. Benefits are payable in various annuity forms. On December 31,
2021, the market value of the Retirement Plan trust fund was approximately $20.5 million. The Company made no contribution
to the defined benefit pension plan during 2021.
Employee Savings Plan. Pathfinder Bank maintains an Employee Savings Plan which is a profit-sharing plan with a “cash or
deferred” feature that is tax-qualified under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). All employees
who have attained age 21 and have completed 90 days of employment during which they worked at least 1,000 hours are
eligible to participate.
Participants may elect to defer a percentage of their compensation each year instead of receiving that amount in cash, in an
amount up to 75% of their compensation to the 401(k) Plan, provided that the amount deferred did not exceed $19,500 for
2021. In addition, for participants who are age 50 or older by the end of any taxable year, the participant may elect to defer
additional amounts (called “catch-up contributions”) to the 401(k) Plan. The “catch-up contributions” may be made regardless
of any other limitations on the amount that a participant may defer to the 401(k) Plan. The maximum “catch-up contribution”
that a participant could make in 2021 was $6,500. For these purposes, “compensation” includes total compensation (including
salary reduction contributions made under the 401(k) Plan or the flexible benefits plan sponsored by the Bank), but not in
excess of $290,000 for 2021. The Bank generally provides a match of 100% of the first 3% of the participating employees
18
salary, plus 50% of the next 3% of the participating employees salary. All employee contributions and earnings thereon are
fully and immediately vested. Employer matching contributions vest at the rate of 20% per year beginning at the end of a
participant’s first year of service with the Bank until a participant is 100% vested after five years of service. Participants also
will vest in employer matching contributions when they reach the normal retirement age of 65 or later, or upon death or
disability regardless of years of service. To partially offset the impact on employees due to the Retirement Plan freeze discussed
above, the Company, on January 1, 2013, began making a 3% safe harbor contribution to all eligible participants in addition to
the match contributions described above. The employer safe harbor contribution is fully vested at all times.
For the plan year ended December 31, 2021, the Bank made a matching contribution in the amount of $414,000 to the 401(k)
Plan. In addition, the Company made a safe harbor contribution in the amount of $314,000 for the 2021 plan year.
Employee Stock Ownership Plan. Pathfinder Bank maintains an employee stock ownership plan (“ESOP”). Employees who
are at least 21 years old with at least one year of employment with the Bank are eligible to participate. On April 6, 2011, the
ESOP acquired 125,000 shares of common stock to replenish its ability to make stock contributions to participants’ accounts.
The shares were acquired pursuant to a loan obtained from a third-party lender. In connection with the second step conversion
and offering, the ESOP purchased an additional 105,442 shares, which equaled 4% of the shares issued in the offering. In
connection with such purchase, the ESOP borrowed sufficient funds from the Company to both refinance the remaining
outstanding balance on the third-party loan and purchase the additional shares. The Bank makes annual contributions to the
ESOP which contributions are used by the ESOP to repay the ESOP loan.
Benefits under the ESOP become vested in an ESOP participant at the rate of 20% per year, starting upon an employee’s
completion of one year of credited service, and will be fully vested upon completion of five years of credited service.
Participants’ interest in their account under the ESOP will also fully vest in the event of termination of service due to their
normal retirement, death, disability, or upon a change in control (as defined in the plan). Vested benefits will be payable
generally upon the participants’ termination of employment with the Bank and will be paid in the form of common stock, or to
the extent participants’ accounts contain cash, benefits will be paid in cash. However, participants have the right to elect to
receive their benefits entirely in the form of cash or common stock, or a combination of both.
C. DIRECTORS’ COMPENSATION
Each non-employee director receives an annual retainer of $20,000, a meeting fee of $800 for each Board meeting attended
and $600 for each committee meeting attended, except for Executive Loan Committee fees which are $300 per meeting. The
Board Chair receives an additional retainer of $10,100. The Audit Committee Chairman receives an additional retainer of
$4,100 and the chairman of all other committees receives an additional $100 for each committee meeting in which they serve
in the capacity of committee chairman. Employee directors do not receive any fees. We paid a total of $373,491 in director
fees during the year ended December 31, 2021, which included $44,400 in fees paid to George P. Joyce, Retired Director, who
retired from Pathfinder Bancorp, Inc.’s Board of Directors, but continues to serve on Pathfinder Bank’s Board of Directors.
Set forth below is director compensation for each of our non-employee directors for the year ended December 31, 2021.
Name
David A. Ayoub (3)
William A. Barclay (4)
Chris R. Burritt (5)
John P. Funiciello (6)
Adam C. Gagas (7)
George P. Joyce (8)
Melanie Littlejohn 9)(9)
John F. Sharkey
Lloyd "Buddy" Stemple
Fees earned or
paid in cash
($)
Non-qualified
deferred
compensation
earnings (1)
($)
45,391
39,400
60,100
33,500
35,300
44,400
36,400
43,600
35,400
11,744
6,855
29,454
11,744
─
─
─
7,264
18,352
Year
2021
2021
2021
2021
2021
2021
2021
2021
2021
All Other
Compensation
(2)
($)
─
─
─
─
─
─
─
─
─
Total
($)
57,135
46,255
89,554
45,244
35,300
44,400
36,400
50,864
53,752
(1)
(2)
(3)
(4)
The non-qualified deferred compensation earnings represent the above market or preferential earnings on
compensation that was deferred by each director to the Trustee Deferred Fee Plan.
No director received perquisites and any other personal benefits that exceeded, in the aggregate, $10,000.
Mr. Ayoub has 17,023 outstanding stock options.
Mr. Barclay has 8,787 outstanding stock options.
19
(5)
(6)
(7)
(8)
(9)
Mr. Burritt has 8,787 outstanding stock options.
Mr. Funiciello has 8,787 outstanding stock options.
Mr. Gagas has 17,023 outstanding stock options.
Mr. Joyce retired from the Board of Pathfinder Bancorp, Inc. on June 4, 2021. He continues to serve as a
Director on the Board of Pathfinder Bank.
Ms. Littlejohn has 8,787 outstanding stock options.
Director fees are reviewed annually by the Compensation Committee for recommendation to the Board of Directors. The
Committee reviews relevant peer group data similar to that used in the executive compensation review. The Committee believes
that an appropriate compensation is critical to attracting, retaining and motivating directors who have the qualities necessary
to direct the Company.
Trustee (Director) Deferred Fee Plan. Pathfinder Bank maintains the Trustee Deferred Fee Plan for members of the Boards
of Directors of Pathfinder Bank and the Company. A participant in the plan is eligible to defer, on a monthly basis, up to the
lesser of (i) $2,000 or (ii) 100% of the monthly fees the participant would be entitled to receive each month. The participant’s
deferred fees will be held by the Bank subject to the claims of the Bank’s creditors in the event of the Bank’s insolvency.
Upon the earlier of the date on which the participant’s services are terminated or the participant attains his or her benefit age
(as designated by the participant upon joining the plan), the participant will be entitled to his or her deferred compensation
benefit, which will commence on the date the participant attains his or her elected benefit age and will be payable in monthly
installments for 10 years. In the event of a change in control of the Company or the Bank followed by the participant’s
termination of services within 36 months thereafter, the participant will receive a deferred compensation benefit calculated as
if the participant had made elective deferrals through his or her benefit age. Such benefit will commence on the date the
participant attains his or her benefit age and will be payable in monthly installments for 10 years. If the participant dies after
commencement of payment of the deferred compensation benefit, the Bank will pay the participant’s beneficiary the remaining
payments that were due.
In the event the participant becomes disabled, the participant will be entitled to receive the deferred compensation benefit as of
the date of the participant’s disability. Such benefit will commence within 30 days following the date on which the participant
is determined to be disabled and will be payable in monthly installments for 10 years. If the participant dies prior to the
commencement of payment of the deferred compensation benefit, the participant’s beneficiary will be entitled to receive a
survivor benefit.
V.
PROPOSAL 1 - ELECTION OF DIRECTORS
Our bylaws presently allow the Company to fix the number of directors. The number of directors of the Company shall be set at
eleven subject to the election of the two (2) new directors at the annual shareholder meeting. Our bylaws provide that the number
of directors be divided into three classes, as nearly equal in number as reasonably possible, and for approximately one third to be
elected each year. Directors are generally elected to serve for a three-year period and until their respective successors shall have
been elected and qualify. In order to provide for three “nearly equal” classes of Directors, Mr. Ayoub and Mr. Sharkey are both
nominated for a one-year term and Adam C. Gagas, Melanie Littlejohn, Meghan Crawford-Hamlin and Eric Allyn are each
nominated for three-year terms.
A. COMPOSITION OF OUR BOARD
The table below sets forth certain information regarding the composition of the Board of Directors and Director Nominees,
including the terms of office of Board members. It is intended that the proxies solicited on behalf of the Board of Directors
(other than proxies in which the vote is withheld as to one or more nominees) will be voted at the Annual Meeting for the
election of the nominees identified below. If the nominee is unable to serve, the shares represented by all such proxies will be
voted for the election of such substitute as the Board of Directors may recommend. At this time, the Board of Directors knows
of no reason why any of the nominees would be unable to serve if elected and each nominee has agreed to serve if elected.
Except as indicated herein, there are no arrangements or understandings between any nominee and any other person pursuant
to which such nominee was selected.
20
Name (1)
Age (2)
Position Held
Director
Since (3)
Current Term
to Expire
Director Nominees For a One-Year Term
David A. Ayoub
John F. Sharkey, III
New Nominees For a Three-Year Term
Eric Allyn
Meghan Crawford-Hamlin
Director Nominees for a Three-Year Term
Adam C. Gagas
Melanie Littlejohn
Directors Continuing in Office
William A. Barclay
Chris R. Burritt
John P. Funiciello
Thomas W. Schneider
Lloyd "Buddy" Stemple
59
64
58
32
50
57
53
69
58
60
61
Director
Director
None
None
Director
Director
Director
Chairman of the Board
Director
Director, President and Chief Executive Officer
Director
2012
2014
N/A
N/A
2014
2016
2011
1986
2011
2001
2005
2022
2022
N/A
N/A
2022
2022
2023
2023
2024
2024
2024
(1)
(2)
(3)
The mailing address for each person listed is 214 West First Street, Oswego, New York 13126.
As of March 22, 2022.
In the case of Mr. Burritt, service prior to 1995 reflects initial appointment to the Board of Trustees of the
mutual predecessor to Pathfinder Bank, the Company’s operating subsidiary.
The principal occupation during the past five years of each director, nominee and executive officer, as well as other relevant
experience, is set forth below. All directors, nominees and executive officers have held their present positions for five years
unless otherwise stated. None of our directors, nominees or executive officers have been the subject of securities litigation,
regulatory enforcement or bankruptcy in the past ten years.
B. DIRECTOR NOMINEES FOR A ONE-YEAR TERM
David A. Ayoub serves as Partner-in-Charge of the Tax Department at Bowers & Company CPAs, PLLC at their Syracuse
location. In that capacity, Mr. Ayoub consults on corporate mergers and acquisitions and also assists start-up businesses. In
addition, he oversees the firm’s tax compliance, technical research, planning and consulting. Mr. Ayoub has over 30 years of
accounting and taxation experience. He is a graduate of Rochester Institute of Technology with a BS in Accounting and is a
Certified Public Accountant in New York State. He is also a Member of the American Institute of Certified Public Accountants,
as well as the New York State Society of Certified Public Accountants. Mr. Ayoub pursues an active role in the community,
previously serving on boards including Make-A-Wish Foundation of Central New York, where he was the Past Chair. Mr.
Ayoub’s extensive experience with corporate transactions, his organization abilities as well as his experience in business and
tax, offers the Board an invaluable perspective of the Bank’s business. The Board, therefore, supports his re-election for a one-
year term.
John F. Sharkey, III is President of Universal Metal Works, a custom metal fabrication facility, in Fulton, New York, and the
Managing Partner of Universal Properties, LLC. Prior to his role with Universal Metal Works, Mr. Sharkey was President of
Universal Joint Sales, a heavy-duty truck parts distributor, headquartered in Syracuse, New York. During his tenure at Universal
Joint Sales, the company grew to 13 locations throughout the Northeast and Florida. In 1998, Mr. Sharkey sold Universal Joint
Sales to FleetPride. For three years following the sale of the company, Mr. Sharkey acted as FleetPride’s Regional Vice
President. Mr. Sharkey is an active member of the Central New York community, serving on boards including Center State
CEO, Oswego State Economic Advisory Council and is the Finance Director of St. Anne Mother of Mary Parish. He is also a
committee member of the Syracuse Chapter of Ducks Unlimited and volunteers as a pilot/crew member for Angel Flight.
Mr. Sharkey’s management experience and business knowledge provides a valuable resource and perspective to the Board.
The Board, therefore, supports his re-election for a one-year term.
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NEW NOMINEES FOR A THREE-YEAR TERM
Eric Allyn is the former Chairman of the Board of Directors of Welch Allyn, Inc, a company owned by the Allyn Family for
100 years, and sold in the year 2015. Today, he is Managing Member of 50 State LLC, the entity that manages proceeds from
the sale of Welch Allyn. In addition, Eric is Chief Investment Officer for 50 State, LLC and serves as Trustee to over 75
Family Trusts. Outside of his work with his family, Eric also serves on the Board of Health Care Originals; serves as LP
Advisor to Armory Square Ventures; serves on Upstate Medical University Council; on the Board of Directors of the Allyn
Family Foundation, where he has chaired the Investment Committee since 2008, and several other organizations. In addition,
Eric is Founder and Managing Partner of two private Investment Funds, which he has managed since 2011. Eric is a past board
member at GOJO (makers of Purell), Pharma Tech Industries, Eagle Dream Health, Hand-Held Products, The Gifford
Foundation (Investment Committee Chairman), NYS Business Council, and Family Firm Institute (FFI). He also served on the
Board of Directors Auburn Community Hospital (past-Chairman), the Hospital Trustees of New York State (Chairman), and
Hospital Association of New York State (HANYS). Eric is a frequent speaker nationally and internationally on the topics of
family business governance, family enterprises, philanthropy, and investment management. Eric is a graduate of Dartmouth
College, and earned his MBA from University of Virginia (Darden School). Mr. Allyn’s depth of experience in leadership,
mergers and acquisitions, and capital markets, along with his prominence and philanthropic work in the Central New York
market, will provide diverse experience, knowledge and opportunities for the Company’s governance, business prospects and
capital market reach. Therefore, the Board supports his election for a three-year term.
Meghan Crawford-Hamlin serves as the President of Institutional Sales at BHG Financial where she oversees the sales strategy
for BHG across bank partnerships and strategic partners. Ms. Crawford-Hamlin leads a national sales team focused on growing
premium revenue and enhancing the experience for clients while driving sales strategy and market development. Since joining
BHG in 2015, Ms. Crawford-Hamlin has generated and serviced relationships with hundreds of community banks nationwide.
She personally managed the sale of hundreds of millions of dollars of financing for highly skilled professionals to institutional
buyers. Prior to joining BHG, she spent many years at the rating agency, Fitch, and also worked for the technology giant, IAC.
Ms. Crawford-Hamlin is very active within the banking industry, serving as a member of many state and national bank
associations such as the American Bankers Association, as well as the Independent Community Bankers Association. While
holding a Bachelor of Arts from Bucknell University, Ms. Crawford-Hamlin also serves as an active member of New York
Cares, American Cancer Society, and CNY Autism Society of America. Ms. Crawford-Hamlin will provide diverse
perspectives into generational knowledge, marketing and sales. She has deep banking exposure, direct lending experience, and
transformational knowledge in digital banking platform development and implementation. She will play a key role in
developing executive strategies in new lending opportunities and in our digital banking development. Therefore, the Board
supports her election for a three-year term.
DIRECTOR NOMINEES FOR A THREE-YEAR TERM
Adam C. Gagas Adam C. Gagas is the Managing Director of Institutional Services at Rockbridge Investment Management, an
SEC-registered investment advisor firm in Central New York. His prior investment advisory experience includes founding and
leadership roles at Disciplined Capital Management and Breakwall Asset Management. Mr. Gagas was an analyst on teams
managing multi-billion dollar portfolios at Skandia Asset Management and Principal Global Investors in New York City. He
was awarded an Alfa Fellowship and completed a yearlong professional placement as an institutional investment analyst at
Alfa Capital in Moscow, Russia. He is also the owner/operator of Gagas Realty Corporation, a multi-property commercial real
estate holding company. In addition, he is an adjunct instructor of Corporate Finance in the SUNY Oswego School of Business.
Mr. Gagas earned a BA from Hobart College with majors in Economics and Russian Studies, and an MBA with a concentration
in Finance from the Leonard N. Stern School of Business at New York University. His extensive community involvement
includes having served as the Chairman of the Board of Oswego Health, past chair of that organization’s Audit and Investment
committees, and as a member of the Executive committee. He is the former President of the Oswego Health Foundation and a
current board member of Oswego’s historic Riverside Cemetery. Mr. Gagas’ expertise in finance, particularly of public
companies, provides us with valuable insight. The Board, therefore, supports his re-election for a three-year term.
22
Melanie Littlejohn serves as the Vice President for New York Customer and Community Management at National Grid.
(NYSE: NGG), a natural gas and electricity provider, where she is responsible for leading stakeholder management statewide
to ensure processes, planning and best practices are delivered consistently to National Grid’s New York customers. Ms.
Littlejohn joined the company (then Niagara Mohawk) in April of 1994 as the Director of Inclusion & Diversity-US Operations.
Prior to her current position, she was Director of Customer and Community Management for Central New York. Before joining
Niagara Mohawk, Ms. Littlejohn was the Executive Director of Urban League Onondaga County. Before joining the Urban
League, she was the Manager of International Client Services for Banker’s Trust Company in the Wall Street District. Ms.
Littlejohn obtained a Bachelor of Arts Degree in Liberal Arts from the State University of New York at Stony Brook and a
Master’s Degree in Business Administration from Syracuse University’s Whitman School of Management. In addition, she
was selected to participate in National Grid’s Developing Future Business Leader’s program administered by the London
Center for High Performance. She resides in Syracuse, New York. Ms. Littlejohn pursues an active role in the community,
currently serving as the Trustee/Officer of Onondaga Community College, Business Advisory Council for the Federal Reserve
Bank of New York, Chair-Board of Directors of CenterState CEO, Board of Directors of the Business Council of New York
and SUNY Morrisville Business School Council of Advisor’s. Ms. Littlejohn’s experience in working with a large public
company provides us with valuable market perspective. The Board, therefore, supports her re-election for a three-year term.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” EACH NOMINEE.
C. CONTINUING DIRECTORS
William A. Barclay is a graduate of St. Lawrence University and Syracuse University College of Law. An attorney and
businessman, Mr. Barclay is a partner in the Syracuse law firm of Barclay Damon, LLP, where he specializes in business
law. Mr. Barclay has served on several community organizations throughout his career including the SUNY Oswego College
Council, the Rosamond Gifford Zoo at Burnet Park, the Everson Museum of Art, and Northern Oswego County Health
Services, Inc. Mr. Barclay currently serves on the Boards of Countryway Insurance Company and Douglaston Manor,
Inc. Mr. Barclay also is the New York State Assemblyman for the 120th District, which includes parts of Oswego, Onondaga
and Jefferson counties. In 2020, Mr. Barclay was unanimously elected by his colleagues to serve as Minority Leader in
N.Y.S. Assembly. Mr. Barclay’s in-depth knowledge of economic development and the law provides the Board with a unique
and valuable perspective into economic development and legal issues.
Chris R. Burritt is the former President and General Manager of R.M. Burritt Motors, Inc., an automobile dealership located
in Oswego, New York. Mr. Burritt was elected Chairman of the Board effective January 1, 2014. In addition to his prior long-
term ownership and management of his well-known local business, Mr. Burritt is active in community affairs. He presently
serves on the Finance/Operations Committee of the Oswego Hospital. Mr. Burritt also serves as Director of the NYS
Automobile Dealers Association in Albany, NY. Mr. Burritt is also a Certified Instructor/Coordinator for Financial Peace
University and teaches several nine week classes each year. Additionally, Mr. Burritt is a member of the Men’s Mentor
Ministry where he serves as an advisor to men in need of financial counseling. Mr. Burritt’s experience operating a local
business and substantial ties to the communities served by the Bank provides the Board with valuable insight into managing
and overseeing a business.
John P. Funiciello is a licensed real estate broker and developer who owns and operates JF Real Estate in Syracuse, NY. Mr.
Funiciello began his career in real estate in 1986 as a commercial real estate agent and founded JF Real Estate in 1992. JF Real
Estate represents both owners and users of real estate, providing a wide array of skills and services that include brokerage,
development, tenant and owner representation, site selection, space planning, building management, and much
more. Currently, JF Real Estate represents approximately three million square feet of commercial and residential real estate in
the Central New York Region. Mr. Funiciello is a graduate of the State University of New York at Cortland with a degree in
Economics and a concentration in Business. He is an active member in the Syracuse community and has served on the Boards
of Children’s Consortium and the Samaritan Center. He currently sits on the Board at the North West YMCA. Mr. Funiciello
was recognized by the Central New York Business Journal’s Forty Under 40, an honor given to Onondaga County business
leaders under the age of 40. Mr. Funiciello’s extensive real estate experience and knowledge of the local real estate market, as
well as his insight into managing and overseeing a business, brings valuable expertise to the Board.
23
Thomas W. Schneider has been employed by the Bank since 1988. Mr. Schneider is the President and Chief Executive Officer
of the Company and the Bank. Prior to his appointment as President in 2000, Mr. Schneider was the Executive Vice President
and Chief Financial Officer of the Company and the Bank. Mr. Schneider is a member of the board of directors the Company
and the Bank. Mr. Schneider provides the Board with extensive knowledge of our customers and lending markets. Mr.
Schneider recently concluded his Chairmanship of the New York State Bankers Association and he is, therefore, well respected
by his peers.
is
the Chief Executive Officer of Constellium Rolled Products
Lloyd “Buddy” Stemple
in Ravenswood,
West Virginia, a global supplier of rolled aluminum to the Aerospace and Transportation materials industries (NYSE:
CSTM). Prior to his present position, Mr. Stemple was the Chief Executive Officer of Oman Aluminum Rolling
Company. The Oman Aluminum Rolling Company is a venture supported by the government of Oman which started
commercial production of rolled aluminum in late 2013. Prior to his work in Oman, he was the Vice-President and General
Manager of Novelis Specialty Products, Novelis Inc., which has manufacturing locations in Oswego, New York, Kingston,
Ontario, Canada; and sales offices in Cleveland, Ohio and Detroit, Michigan. He is also a member of the Compensation
Committee of SECAT. Mr. Stemple currently serves as Chairman of the Board for the Aluminum Association. Mr. Stemple
also served as a Board and Executive Committee member of the Aluminum Association in Washington, DC. The Association
promotes the use of aluminum and all matters impacting the industry. Mr. Stemple has an Engineering Degree, an MBA and a
Masters Degree in International Management from McGill University and a Diploma from INSEAD in France. Mr. Stemple’s
varied experience in management, strategic planning, human resources, and financial accountability of publicly traded
companies is a valuable asset to our Board.
D. EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
James A. Dowd, CPA, age 54, has been employed by the Bank since 1994 and presently serves as the Executive Vice President
and Chief Operating Officer of the Company and the Bank. Mr. Dowd served as Chief Financial Officer from 2000 until
January 22, 2019. Mr. Dowd is responsible for branch administration, marketing and facilities departments.
Ronald Tascarella, age 63, serves as Executive Vice President and Chief Banking Officer of the Company and the Bank. Prior
to joining us in 2006, he was Senior Vice President of Oswego County National Bank. Mr. Tascarella is responsible for the
Bank’s lending and commercial deposit operations.
Daniel R. Phillips, age 57 has been employed by the Bank since 1999 and presently serves as Senior Vice President and Chief
Information Officer of the Company and the Bank. Prior to joining us in 1999, he was Assistant Vice President of Community
Bank. Mr. Phillips is responsible for electronic delivery channels, information security and technology platforms.
Calvin L. Corriders, age 59, has been employed by the Bank since 2012 and presently serves as Regional President of
Pathfinder Bank’s Syracuse Market and Human Resource Director. Prior to joining us, he was a Senior Commercial Loan
Officer of Beacon Federal Credit Union. Mr. Corriders is responsible for managing and engaging the Bank’s presence in the
Syracuse Market and overseeing the Human Resources Department.
Walter F. Rusnak, age 68, has been employed by the Bank since 2015 as First Vice President of Finance and Accounting and
was appointed as Senior Vice President and Chief Financial Officer effective January 23, 2019. Mr. Rusnak is responsible for
the treasury, finance and accounting functions of the Company. Immediately prior to joining us in 2015, Mr. Rusnak was an
advisory board member and founding principal of Ovitz Corporation.
Will O’Brien, age 56, has been employed by the Bank since 1999. During his tenure, Mr. O’Brien has held various positions
in the Bank including branch manager and commercial lender. Mr. O’Brien most recently served as First Vice President of
Credit Administration and was just recently appointed as Senior Vice President Chief Risk Officer and Corporate Secretary.
Mr. O’Brien is responsible for overseeing the Enterprise Risk Management program, as well as Loss Mitigation, Compliance,
BSA/AML and Security functions.
VI. PROPOSAL 2 -RATIFICATION OF APPOINTMENT OF AUDITORS
The Audit Committee has approved the engagement of Bonadio & Co., LLP to be our independent registered public accounting
firm for 2022. At the Annual Meeting, shareholders will consider and vote on the ratification of the engagement of Bonadio &
Co., LLP, for the year ending December 31, 2022. A representative of Bonadio & Co., LLP is expected to attend the Annual
24
Meeting to respond to appropriate questions and to make a statement if he or she so desires. Information regarding our engagement
of Bonadio & Co., LLP is set forth below.
In order to ratify the selection of Bonadio & Co., LLP, as our independent registered public accounting firm for 2022, the proposal
must receive at least a majority of the votes cast, either at the Annual Meeting or by proxy, in favor of such ratification.
THE AUDIT COMMITTEE AND BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION
OF THE APPOINTMENT OF BONADIO & CO., LLP AS OUR AUDITORS FOR 2022.
A. AUDIT AND RELATED FEES FOR 2021 AND 2020
Our Auditors for 2021 and 2020 were Bonadio & Co., LLP.
Audit Fees
Bonadio & Co., LLP billed us a total of $188,024 and $270,942 in 2021 and 2020, respectively, for the audit of our 2021 and
2020 annual consolidated financial statements, the audit of our internal control over financial reporting for 2021, review of our
Annual Report on Form 10-K, review of consolidated financial statements included in Forms 10-Q, and services normally
provided in connection with statutory and regulatory filings, including out-of-pocket expenses.
Audit-related fees
Bonadio & Co., LLP billed us a total of $46,150 and $43,933 for 2021 and 2020, respectively, for audit-related fees, which
included professional services rendered for the three annual audits of the Company’s employee benefit plans.
Recurring and non-recurring tax services
Bonadio & Co., LLP billed us a total of $37,250 and $80,150 in 2021 and 2020, respectively, for tax fees which included the
preparation of state and federal tax returns, calculation of the quarterly tax estimates, and other tax-related consulting.
Recurring and non-recurring tax services included assistance in connection with the New York State Franchise tax examination.
All Other Fees
Bonadio & Co., LLP billed us a total of $0 for 2021 and 2020, respectively, for all other fees.
Policy On Audit Committee Pre-Approval Of Audit And Non-Audit Services Of The Independent Registered Public
Accounting Firm
The Audit Committee’s policy is to pre-approve all audit and non-audit services provided by the Auditors. These services may
include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one
year and any pre-approval is detailed as to particular service or category of services and is generally subject to a specific budget.
The Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is necessary. The
Auditors and management are required to periodically report to the full Audit Committee regarding the extent of services
provided by the Auditors in accordance with this pre-approval, and the fees for the services performed to date. All of the non-
audit fees incurred in 2021 and 2020 were preapproved pursuant to our policy.
The Audit Committee considered whether the provision of non-audit services was compatible with maintaining the
independence of its Auditors. The Audit Committee concluded that performing such services in 2021 did not affect the auditors’
independence in performing their function as independent registered public accounting firm.
B. AUDIT COMMITTEE REPORT
In accordance with rules established by the SEC, the Audit Committee has prepared the following report for inclusion in this
proxy statement:
As part of its ongoing activities, the Audit Committee has:
25
•
Reviewed and discussed with management our audited consolidated financial statements for the year ended December
31, 2021;
• Discussed with the independent registered public accounting firm the matters required to be discussed by the applicable
requirements of the Public Company Oversight Board and the SEC;
•
•
Received the written disclosures and the letter from the independent registered public accounting firm required by
applicable requirements of the Public Company Accounting Oversight Board regarding the independent registered
public accounting firm’s communications with the audit committees concerning independence, and has discussed with
the independent registered public accounting firm their independence; and
Considered the compatibility of non-audit services described above with maintaining auditor independence.
Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the
audited consolidated financial statements be included in our Annual Report on Form 10-K for the year ended December 31,
2021. The Audit Committee appointed Bonadio & Co., LLP as Auditors for 2022, which appointment the shareholders will be
asked to ratify at the 2022 Annual Meeting.
This report has been provided by the Audit Committee:
David Ayoub, Chris Burritt, Melanie Littlejohn and John Sharkey III
VII. NEXT YEAR
SHAREHOLDER PROPOSALS
In order to be eligible for inclusion in the proxy materials for next year’s Annual Meeting of Shareholders, any shareholder proposal
to take action at such meeting must be received at our executive office, 214 West First Street, Oswego, New York 13126, no later
than December 9, 2022. Any such proposals shall also be subject to the requirements of the proxy rules adopted under the
Securities Exchange Act of 1934.
Under new SEC Rule 14a-19, a shareholder intending to engage in a director election contest with respect to Pathfinder Bancorp,
Inc.’s annual meeting of shareholders to be held in 2023 must give Pathfinder Bancorp, Inc. notice of its intent to solicit proxies
by providing the names of its nominees and certain other information at least 60 calendar days before the anniversary of the
previous year’s annual meeting. This deadline is March 14, 2023.
In addition to the requirement set forth under SEC Rule 14a-19, our Bylaws provide an advance notice procedure for certain
business, or nominations to the board of directors, to be brought before an annual meeting of shareholders. In order for a
shareholder to properly bring business before an annual meeting, or to propose a nominee to the board of directors, Pathfinder
Bancorp, Inc.’s Secretary must receive written notice not less than 80 days nor more than 90 days prior to any such meeting;
provided, however, that if less than 90 days’ notice or prior public disclosure of the date of the meeting is given to shareholders,
such written notice shall be delivered or mailed to and received by the Secretary of Pathfinder Bancorp, Inc. at its principal
executive office not later than the tenth day following the day on which notice of the meeting was mailed to shareholders or such
public disclosure was made.
The notice with respect to shareholder proposals that are not nominations for director must set forth as to each matter such
shareholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address of such shareholder
as they appear on Pathfinder Bancorp, Inc.’s books and of the beneficial owner, if any, on whose behalf the proposal is made;
(iii) the class or series and number of shares of capital stock of Pathfinder Bancorp, Inc. which are owned beneficially or of record
by such shareholder and such beneficial owner; (iv) a description of all arrangements or understandings between such shareholder
and any other person or persons (including their names) in connection with the proposal of such business by such shareholder and
any material interest of such shareholder in such business; and (v) a representation that such shareholder intends to appear at the
Annual Meeting or by proxy at the annual meeting to bring such business before the meeting.
The notice with respect to director nominations must include (a) as to each person whom the shareholder proposes to nominate for
election as a director, (i) all information relating to such person that would indicate such person’s qualification to serve on the
board of directors of Pathfinder Bancorp, Inc.; (ii) an affidavit that such person would not be disqualified under the provisions of
26
Article II, Section 12 of the Bylaws; (iii) such information relating to such person that is required to be disclosed in connection
with solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, or any successor rule or regulation and (iv) a written consent of each proposed
nominee to be named as a nominee and to serve as a director if elected; and (b) as to the shareholder giving the notice: (i) the name
and address of such shareholder as they appear on Pathfinder Bancorp, Inc.’s books and of the beneficial owner, if any, on whose
behalf the nomination is made; (ii) the class or series and number of shares of capital stock of Pathfinder Bancorp, Inc. which are
owned beneficially or of record by such shareholder and such beneficial owner; (iii) a description of all arrangements or
understandings between such shareholder and each proposed nominee and any other person or persons (including their names)
pursuant to which the nomination(s) are to be made by such shareholder; (iv) a representation that such shareholder intends to
appear at the Annual Meeting or by proxy at the meeting to nominate the persons named in its notice; and (v) any other information
relating to such shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of directors pursuant to Regulation 14A under the Exchange Act of 1934 or
any successor rule or regulation.
The 2023 annual meeting of shareholders is expected to be held May 6, 2023. Advance written notice for certain business, or
nominations to the board of directors, to be brought before the next annual meeting must be given to us no earlier than February
7, 2023 and no later than February 17, 2023. If notice is received before February 7, 2023 or after February 17, 2023, it will be
considered untimely, and we will not be required to present the matter at the shareholders meeting.
Nothing in this paragraph shall be deemed to require the Company to include in its proxy statement and proxy relating to an annual
meeting
inclusion
established by the SEC in effect at the time such proposal is received.
proposal which
requirements
shareholder
not meet
does
any
the
for
all
of
BY ORDER OF THE BOARD OF DIRECTORS
Oswego, New York
April 8, 2022
William D. O’Brien
Secretary
Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting: The Notice and Proxy Statement, Annual
Report and Form 10-K and Proxy Card are available at http://www.pathfinderbank.com/annualmeeting.
27
MAIN OFFICE
214 West First Street
Oswego
(315) 343-0057
PLAZA OFFICE
State Route 104 East
Oswego
(315) 343-4483
CENTRAL SQUARE OFFICE
3025 East Avenue
Central Square
(315) 676-2265
FULTON OFFICE
5 West First Street South
Fulton
(315) 592-9545
LACONA OFFICE
1897 Harwood Drive
Lacona
(315) 387-3437
MEXICO OFFICE
Norman & Main Streets
Mexico
(315) 963-7248
DOWNTOWN DRIVE-THRU
34 East Bridge Street
Oswego
(315) 343-2577
CICERO OFFICE
6194 State Route 31
Cicero
(315) 752-0033
SYRACUSE OFFICE
109 West Fayette Street Syracuse
(315) 207- 8020
UTICA LOAN OFFICE
200 Genesee Street
Utica
315-343-0057
CLAY OFFICE
3775 Route 31
Liverpool
(315) 593-4400
pathfinderbank.com