PATHFINDER BANCORP, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2016
Commission File No. 001-36695
(Exact name of registrant as specified in its charter)
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Maryland
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38-3941859
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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214 West First Street
Oswego, NY 13126
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (315
) 343-0057
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, $0.01 par value
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The NASDAQ Stock Market LLC
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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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer
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Accelerated Filer
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Non-Accelerated Filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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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, 2016, as reported by the NASDAQ Capital Market ($11.27), was approximately $49.0 million.
As of March 15, 2017, there were 4,246,980 shares outstanding of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the 2017 Annual Meeting of Shareholders of the Registrant (Part III).
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2016
PATHFINDER BANCORP, INC.
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Business
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3
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Risk Factors
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28
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Unresolved Staff Comments
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28
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Properties
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Legal Proceedings
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30
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Mine Safety Disclosure
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30
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Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
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30
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Purchases of Equity Securities
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Selected Financial Data
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31
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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Quantitative and Qualitative Disclosures About Market Risk
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54
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Financial Statements and Supplementary Data
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Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
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118
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Controls and Procedures
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Other Information
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119
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Directors, Executive Officers and Corporate Governance
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120
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Executive Compensation
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120
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Security Ownership of Certain Beneficial Owners and Management and Related
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120
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Stockholder Matters
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Certain Relationships and Related Transactions, and Director Independence
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Principal Accounting Fees and Services
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Exhibits and Financial Statement Schedules
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Form 10-K Summary
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FORWARD-LOOKING STATEMENTS
When used in this Annual Report the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties. Actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause the Company's actual results and financial condition to differ from those indicated in the forward-looking statements include, among others:
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Credit quality and the effect of credit quality on the adequacy of our allowance for loan losses;
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Deterioration in financial markets that may result in impairment charges relating to our securities portfolio;
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Competition in our primary market areas;
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Changes in interest rates and national or regional economic conditions;
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Changes in monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;
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Significant government regulations, legislation and potential changes thereto;
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A reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;
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Increased cost of operations due to regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums;
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Limitations on our ability to expand consumer product and service offerings due to consumer protection laws and regulations; and
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Other risks described herein and in the other reports and statements we file with the SEC.
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These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Undue reliance should not be placed on any such forward-looking statements, which speak only as of the date made. The factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
GENERAL
Pathfinder Bancorp, Inc.
Pathfinder Bancorp, Inc. (the "Company") is a Maryland corporation headquartered in Oswego, New York. The primary business of the Company is its investment in Pathfinder Bank (the "Bank") which is 100% owned by the Company. Pathfinder Bank is a commercial bank chartered by the New York State Department of Financial Services (the "NYSDFS"). The Bank provides loans to, and gathers deposits from, customers primarily within Oswego and Onondaga Counties in Central New York State.
At December 31, 2016 and 2015, 4,236,744 and 4,353,850 shares of Company common stock were outstanding, respectively.
On October 15, 2015, the Company executed a $10.0 million non-amortizing subordinated loan agreement ("subordinated loan") with an unrelated third party that is scheduled to mature on October 1, 2025. The Company has the right to prepay the subordinated loan at any time after October 15, 2020 without penalty. The terms of the subordinated loan required interest payments at an annual interest rate of 3.50% from October 15, 2015 to February 29, 2016. The annual interest rate increased to 6.25% on March 1, 2016 through the maturity date. The subordinated loan is senior in the Company's credit repayment hierarchy only to the Company's common equity and, as a result, qualifies as Tier 2 capital for the Company for all future periods when applicable. The Company paid $172,000 in origination and legal fees as part of this transaction. These fees are amortized over the life of the subordinated loan through its first call date of October 1, 2020 using the effective interest method. The cost of funds related to this transaction is 6.44% calculated under this method.
The proceeds from the subordinated loan were used to repay preferred stock issued to the U.S. Treasury as part of the Small Business Lending Program ("SBLF"), which was retired on February 16, 2016. The issuance of the subordinated loan increases interest expense by $644,000 per year but prospectively reduces the amount payable to the SBLF in preferred stock dividends. Effective April 1, 2016, the annual dividend rate for the preferred stock would have been 9.0%. The retirement of the $13.0 million of the SBLF Preferred Series B stock, therefore, resulted in an annual reduction of preferred dividends payable of approximately $1.2 million. The Company paid $16,000 in preferred dividends in 2016, through the date that the preferred stock was retired, and $130,000 in 2015. These transactions had no effect on the regulatory capital position of the Bank.
On June 1, 2016, the Company announced that it had completed the process of its previously announced restructuring plan to combine the operations of its then-existent subsidiaries, Pathfinder Bank and Pathfinder Commercial Bank, into a single New York State chartered commercial bank. This transaction was completed on May 31, 2016. Simultaneously with the combination, Pathfinder Commercial Bank's charter was amended such that it became a full-service commercial bank, rather than a limited purpose commercial bank and its name was changed to "Pathfinder Bank". The transaction had no material impact on the investments or operations of the Bank, although the Bank expects some continuing annual operating cost savings as a result of the combination.
At December 31, 2016, the Company had total consolidated assets of $749.0 million, total deposits of $611.0 million and shareholders' equity of $57.9 million plus a noncontrolling interest of $432,000, which represents the 49% not owned by the Company as a result of the 2013 acquisition of the FitzGibbons Agency, LLC.
The Company's executive office is located at 214 West First Street, Oswego, New York and the telephone number at that address is (315) 343-0057. Its internet address is
www.pathfinderbank.com
. Information on our website is not and should not be considered to be a part of this report.
Pathfinder Bank
The Bank is a New York-chartered stock commercial bank and its deposit accounts are insured up to applicable limits by the FDIC through the Deposit Insurance Fund ("DIF"). The Bank is subject to extensive regulation by the Department, 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 subject to certain regulations by the Federal Home Loan Bank System.
The Bank is primarily engaged in the business of attracting deposits from the general public in the Bank's market area, and investing such deposits, together with other sources of funds, in loans secured by residential real estate, commercial real estate, small business loans, and consumer loans. The Bank invests a portion of its assets in securities issued by the United States Government and its agencies and sponsored enterprises, state and municipal obligations, corporate debt securities, mutual funds, and equity securities. The Bank also invests in mortgagebacked securities primarily issued or guaranteed by United States Government sponsored enterprises and collateralized mortgage obligations. The Bank's principal sources of funds are deposits, principal and interest payments on loans and investments, as well as borrowings from correspondent financial institutions. The principal source of income is interest on loans and investment securities. The Bank's principal expenses are interest paid on deposits, employee compensation and benefits, data processing and facilities.
The Bank owns Pathfinder REIT, Inc., a New York corporation, as its wholly-owned real estate investment trust subsidiary. At December 31, 2016, Pathfinder REIT, Inc. held $24.7 million in mortgages and mortgage related assets. All disclosures in this Form 10-K relating to the Bank's loans and investments include loans and investments that are held by Pathfinder REIT, Inc.
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, 2016, Whispering Oaks operated a small tenant-occupied commercial building and, through a wholly-owned second-tier subsidiary. is currently the sole limited partner in a limited partnership that currently operates a low-income housing facility.
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 $795,000 in annual revenues.
Finally, 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.
Employees
As of December 31, 2016, the Bank had 128 full-time employees and 11 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be good.
MARKET AREA AND COMPETITION
Market Area
We provide financial services to individuals, families, small to mid-size businesses and municipalities through our seven branch offices located in Oswego County and our two branch offices in Onondaga County. Our primary lending market area includes both Oswego and Onondaga Counties. However, our primary deposit generating area is concentrated in Oswego County and the areas surrounding our Onondaga County branches.
The economy in Oswego County is based primarily on manufacturing, energy production, heath care, education, and government. The broader Central New York market has a more diverse array of economic sectors, including, food processing production and transportation, in addition to financial services. The region has developed particular strength in emerging industries such as bio-processing, medical devices and renewable energy.
Based on recent independent market survey reports, median home values were $131,100 in Onondaga County and $94,500 in Oswego County at the end of 2016. Home values have shown only modest increases in recent years within the Syracuse metro area, including Onondaga and Oswego Counties. This modest increase in home values within the area followed a period in which home values within the area exhibited relative stability compared to many other areas of the country during the most recent economic recession that began in 2008.
Competition
Pathfinder Bank encounters strong competition both in attracting deposits and in originating real estate and other loans. Our most direct competition for deposits and loans comes from commercial banks, savings institutions and credit unions in our market area, including money-center banks such as JPMorgan Chase & Co. and Bank of America, regional banks such as M&T Bank and Key Bank N. A., and community banks such as NBT Bank and Community Bank N.A., all of which have greater total assets than we do. We compete for deposits by offering depositors a high level of personal service, a wide range of competitively priced financial services, and a well distributed network of branches, ATMs, and electronic banking. We compete for loans through our competitive pricing, our experienced and active loan officers, local knowledge of our market and local decision making, strong community support and involvement, and a highly reputable brand. As the economy has improved, and loan demand has increased, competition from financial institutions for commercial and residential loans has also increased. Additionally, some of our competitors offer products and services that we do not offer, such as trust services and private banking. Our primary focus is to build and develop profitable consumer and commercial customer relationships while maintaining our role as a community bank.
As of June 30, 2016, based on the most recently-available FDIC data, we had the second largest market share in Oswego County, representing 24.3% of all deposits, and 1.1% of all deposits in Onondaga County. In addition, when combining both Oswego and Onondaga Counties, we have the eighth largest market share of sixteen institutions, representing 4.7% of the total market.
LENDING ACTIVITIES
General
Our primary lending activity is originating commercial real estate and commercial loans, the vast majority of which have periodically adjustable rates of interest. The Bank also originates 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 junior liens and consumer loans. In order to diversify our loan portfolio, increase our revenues, and make our loan portfolio less interest rate sensitive, the Company has actively sought to increase its commercial real estate and commercial business lending activities, consistent with safe and sound underwriting practices. Accordingly, we offer adjustable-rate commercial mortgage loans, short-and medium-term mortgage loans, and floating rate commercial loans. Notwithstanding our increased emphasis on commercial real estate and commercial lending, we continue to offer shorter-term consumer loans, home equity loans and lines of credit with adjustable interest rates and municipal loans with fixed interest rates.
Commercial Real Estate Loans
Over the past several years, we have focused on originating commercial real estate loans, and we believe that commercial real estate loans will continue to provide growth opportunities for us. We expect to increase, subject to our underwriting standards and market conditions, this business line in the future with a target loan size of $500,000 to $1.0 million to small businesses and real estate projects in our market area. Commercial real estate loans are secured by properties such as multi-family residential, office, retail, warehouse and owner-occupied commercial properties.
Commercial real estate loans are generally secured by property located in our primary market area. Our commercial real estate underwriting policies provide that such real estate loans may be made in amounts up to 80% of the appraised value of the property. Commercial real estate loans are offered with interest rates that are fixed for up to three or five years then are adjustable based on the FHLBNY advance rate. Contractual maturities generally do not exceed 20 years. In reaching a decision whether to make a commercial real estate loan, we consider gross revenues, 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 credit quality of the tenants. We generally require that the properties securing these real estate loans have debt service coverage ratios (the ratio of earnings before interest, taxes, depreciation and amortization divided by interest expense and current maturities of long term debt) of at least 120%. Environmental due diligence is generally conducted for commercial real estate loans. Typically, commercial real estate loans made to corporations, partnerships and other business entities require personal guarantees by the principals and by the owners of 20% or more of the borrower.
A commercial real estate borrower's financial condition is monitored on an ongoing basis by requiring periodic financial statement updates, payment history reviews, property inspections and periodic face-to-face meetings with the borrower. We generally require borrowers with aggregate outstanding balances exceeding $100,000 to provide annual updated financial statements and federal tax returns. These requirements also apply to all guarantors on these loans. We also require borrowers to provide an annual report of income and expenses for the property, including a rent-roll, as applicable.
Loans secured by commercial real estate generally have greater credit risk than one-to-four family residential real estate loans. The increased credit risk associated with commercial real estate loans is a result of several factors, including larger loan balances concentrated with a limited number of borrowers, the impact of local and general economic conditions on the borrower's ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial real estate properties typically depends upon the successful operation of the real property securing the loan. If the cash flows from the property are reduced, the borrower's ability to repay the loan may be impaired. However, commercial real estate loans generally have higher interest rates than loans secured by one-to-four family residential real estate.
Commercial Loans
We typically originate commercial loans, including commercial term loans and commercial lines of credit, on the basis of a borrower's ability to make repayment from the cash flows of the borrower's business, conversion of current assets in the normal course of business (for seasonal working capital lines), the 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 may be 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 or, generally, consumer loans.
Commercial term loans are typically secured by equipment, furniture and fixtures, inventory, accounts receivable or other business assets, or, in limited circumstances, such loans may be unsecured. From time to time, we also originate commercial loans through Small Business Administration ("SBA") and United States Department of Agriculture ("USDA") guaranteed loan programs. Over the past several years, we have focused on increasing our commercial lending and our business strategy is to continue to increase our originations of commercial loans to small businesses in our market area, subject to our underwriting standards and market conditions. Our commercial loans are generally comprised of adjustable-rate loans, indexed to the prime rate, with terms consisting of three to seven years, depending on the needs of the borrower and the useful life of the underlying collateral. We make commercial loans to businesses operating in our market area for purchasing equipment, property improvements, business expansion or working capital. If a commercial loan is secured by equipment, the maturity of a term loan will depend on the useful life of the equipment purchased, the source of repayment for the loan and the purpose of the loan. We generally obtain personal guarantees on our commercial loans.
Our commercial lines of credit are typically adjustable rate lines, indexed to the prime interest rate. Generally, our commercial lines of credit are secured by business assets or other collateral, and generally payable on-demand pursuant to an annual review. Since the commercial lines of credit may expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements.
Residential Real Estate Loans
Historically, our primary lending focus consisted of originating one-to-four family, owner-occupied residential mortgage loans, substantially all of which were secured by properties located in our market area. As noted above, we have shifted our lending focus in recent years towards originating more commercial real estate and commercial loans.
We currently offer one-to-four family residential real estate loans with terms up to 30 years that are generally underwritten according to Federal National Mortgage Association ("Fannie Mae") guidelines, and we refer to loans that conform to such guidelines as "conforming loans." We generally originate both fixed-rate and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which as of December 31, 2016, was generally $417,000 for single-family homes in our market area.
Although conforming loans are saleable, we generally hold our one-to-four family residential real estate loans in our portfolio but have the capability to sell the mortgages into the secondary market, at management's discretion, as a source of liquidity or as a means of managing interest-rate risk. Such loan sales were conducted on a limited basis in 2016 and 2015. In the current and prolonged low interest rate environment, a significant portion of our loan portfolio consists of fixed-rate one-to-four family residential real estate loans with terms in excess of 15 years. We also originate one-to-four family residential real estate loans secured by non-owner occupied properties. However, we generally do not make loans in excess of 80% loan-to-value on non-owner occupied properties.
Our fixed-rate one-to-four family residential real estate loans include loans that generally amortize on a monthly basis over periods between 10 to 30 years. Fixed-rate one-to-four family residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers have the right to refinance or prepay their loans.
Our adjustable-rate one-to-four family residential real estate loans generally consist of loans with initial interest rates fixed for one, three, or five years, and annual adjustments thereafter are indexed based on changes in the one-year United States Treasury bill constant maturity rate. Our adjustable-rate mortgage loans generally have an interest rate adjustment limit of 200 basis points per adjustment, with a maximum lifetime interest rate adjustment limit of 600 basis points. In the current low interest rate environment, we have not originated a significant amount of adjustable-rate mortgage loans. Although adjustable-rate one-to-four family residential real estate loans may reduce, to an extent, our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase the required payments due from a borrower also increase (subject to rate caps), thereby increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by our maximum periodic and lifetime rate adjustments.
Regulations limit the amount we may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal of the property at the time the loan is originated. For borrowers who do not obtain private mortgage insurance ("PMI"), our lending policies limit the maximum loan-to-value ratio on both fixed-rate and adjustable-rate mortgage loans to 80% of the appraised value of the collateralized property, with the exception of a limited use product which allows for loans up to 90% with no PMI. For most one-to-four family residential real estate loans with loan-to-value ratios of between 80% and 95%, we require the borrower to obtain private mortgage insurance. For first mortgage loan products, we require the borrower to obtain title insurance. We also require homeowners' insurance, fire and casualty, and, if necessary, flood insurance on properties securing real estate loans. We do not, and have never offered or invested in, one-to-four family residential real estate loans specifically designed for borrowers with sub-prime credit scores, including interest-only, negative amortization or payment option adjustable-rate mortgage loans.
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. The Bank held $8.5 million and $7.9 million in residential construction loans at December 31, 2016 and 2015, respectively.
Tax-exempt Municipal Loans
Tax-exempt municipal loans are a small component of our commercial loan product segment. At December 31, 2016, loans outstanding in this category were $12.5 million, or 4.9%, of our total commercial loan portfolio.
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 will be ordered.
Home equity loans and junior liens secured by junior mortgages have greater risk than one-to-four family residential mortgage loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure, after repayment of the senior mortgages, if applicable. When customers default on their loans, we attempt to work out the relationship in order to avoid foreclosure because the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Moreover, decreases in real estate values could adversely affect our ability to fully recover the loan balance in the event of a default.
Consumer Loans
We are authorized to make loans for a variety of personal and consumer purposes and our consumer loan portfolio consists primarily of automobile, recreational vehicles and unsecured personal loans, as well as unsecured lines of credit and loans secured by deposit accounts. Our procedure for underwriting consumer loans includes an assessment of the applicant's credit history and ability to meet existing obligations and payments for the proposed loan, as well as an evaluation of the value of the collateral security, if any.
Consumer loans generally entail greater credit-related risk than one-to-four family residential mortgage loans, particularly in the case of loans that are unsecured or are secured by assets that tend to depreciate in value, such as automobiles. As a result, consumer loan collections are primarily dependent on the borrower's continuing financial stability and thus are more likely to 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.
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 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 loans that exceeded our loans-to-one borrower legal lending limit and for risk diversification. We do not purchase whole loans.
Loan Approval Procedures and Authority
The Bank's lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by management and the board of directors. Our policies are designed to provide loan officers with guidelines on acceptable levels of risk, given a broad range of factors. The loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will secure the loan, if applicable.
The board of directors grants loan officers individual lending authority to approve extensions of credit. The level of authority for loan officers varies based upon the loan type, total relationship, form of collateral and risk rating of the borrower. Each loan officer is charged with the responsibility of achieving high credit standards. Individual lending authority can be increased, suspended or removed by the board of directors, as recommended by the President or Executive Vice President and Chief Credit Officer.
If a loan is in excess of any individual loan officer's lending authority, the extension of credit must be referred to the Officer Loan Committee ("OLC").
The OLC is comprised of the President (serving as chairman), the Executive Vice President and Chief Credit Officer (serving as chair in the absence of the President), the Senior Vice President and General Counsel, as well as other members of the management team and retail and commercial lenders as may be appointed by the President.
The OLC has authority to a
pprove all commercial loans, and
one-to-four family residential real estate loans
where the total related credit is $1 million or less which are not within the lenders' individual authority.
In addition, the OLC may approve all municipal loans, where the total related credit is $2.5 million or less, and the individual loan amount is $2.5 million or less for rated municipal loans, and $1.5 million for unrated credits. The OLC has the authority to approve all consumer loans where the total related credit is $2.5 million or less and the individual loan amount is $200,000 for unsecured loans or $750,000 for secured loans. The Executive Loan Committee, which consists of members of the Bank's board of directors, must approve all extensions of credit in excess of the limits for the OLC and lenders individual authority.
Loans to One Borrower
Under New York law, New York commercial banks are subject to loans-to-one borrower limits, which are substantially similar as those applicable to national banks, which restrict loans to one borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus, which was $10.8 million at December 31, 2016, on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus, which was $7.2 million at December 31, 2016, if the loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate), subject to exceptions.
Additionally, our internal loan policies limit the total related credit to be extended to any one borrower (after application of the rules of attribution), with respect to any and all loans with Pathfinder Bank to 10% of tier 1 and 2 capital, subject to certain exceptions. The indebtedness includes all credit exposure whether direct or contingent, used or unused.
ASSET QUALITY
Loan Delinquencies and Collection Procedures
When a loan becomes delinquent, we make attempts to contact the borrower to determine the cause of the delayed payments and seek a solution to permit the loan to be brought current within a reasonable period of time. The outcome can vary with each individual borrower. In the case of mortgage loans and consumer loans, a late notice is sent 15 days after an account becomes delinquent. If delinquency persists, notices are sent at the 30 day delinquency mark, the 45 day delinquency mark and the 60 day delinquency mark. We also attempt to establish telephone contact with the borrower early on in the process. In the case of residential mortgage loans, included in every late notice is a letter that includes information regarding home-ownership counseling. As part of a workout agreement, we will accept partial payments during the month in order to bring the account current. If attempts to reach an agreement are unsuccessful and the customer is unable to comply with the terms of the workout agreement, we will review the account to determine if foreclosure is warranted, in which case, consistent with New York law, we send a 90 day notice of foreclosure and then a 30 day notice before legal proceedings are commenced. A consumer final demand letter is sent in the case of a consumer loan. In the case of commercial loans and commercial mortgage loans, we follow a similar notification practice with the exception of the previously mentioned information on home-ownership counseling. In addition, commercial loans do not require 90 day notices of foreclosure. Generally, commercial borrowers only receive 10 day notices before legal proceedings can be commenced. Commercial loans may experience longer workout times that may trigger a need for a loan modification that could meet the requirements of a troubled debt restructured loan.
Impaired Loans, Non-performing Loans and Troubled Debt Restructurings
The policy of the Bank is to provide a continuous assessment of the quality of its loan portfolio through the maintenance of an internal and external loan review process. The process incorporates a loan risk grading system designed to recognize degrees of risk on individual commercial and mortgage loans in the portfolio. Management is responsible for monitoring of asset quality and risk grade designations, which are communicated to the board on a regular basis.
We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Interest received on non-accrual loans generally is applied against principal or interest if it is recognized on the cash basis method. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, generally for a minimum of six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
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:
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All loans rated substandard or worse, on nonaccrual, and above our total related credit ("TRC") threshold balance of $300,000.
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All Troubled Debt Restructured Loans
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Commercial Lines and Loans, Commercial Real Estate and Tax-exempt loans:
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All loans rated substandard or worse, on nonaccrual, and above our TRC threshold balance of $100,000.
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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.
Foreclosed real estate
Fair values for foreclosed real estate are initially recorded based on market value evaluations by third parties, less costs to sell ("initial cost basis"). Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to foreclosed real estate are charged to the allowance for loan losses. Values are derived from appraisals of underlying collateral or discounted cash flow analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as, changes in absorption rates and market conditions from the time of valuation, and anticipated sales values considering management's plans for disposition. Either change could result in adjustment to lower the property value estimates indicated in the appraisals.
Loan delinquencies together with properties within our Foreclosed Real Estate portfolio are reviewed monthly by the board of directors.
Classified Assets
Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the FDIC to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific allowance for loan losses is not warranted. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as "special mention" by our management.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover losses that are both probable and reasonable to estimate. General allowances represent allowances which have been established to cover accrued losses associated with lending activities that are both probable and reasonable to estimate, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific allowances.
In connection with the filing of our periodic regulatory reports and in accordance with our classification of assets policy, we continuously assess the quality of our loan portfolio and we regularly review the problem loans in our loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the "watch list" initially because of emerging financial weaknesses even though the loan is currently performing in accordance with its terms, or delinquency status, or if the loan possesses weaknesses although currently performing. Management reviews the status of our loan portfolio delinquencies, by loan types, with the full board of directors on a monthly basis. Individual classified loan relationships are discussed as warranted. If a loan deteriorates in asset quality, the classification is changed to "special mention," "substandard," "doubtful" or "loss" depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified "substandard."
We also employ a risk grading system for our loans to help assure that we are not taking unnecessary and/or unmanageable risk. The primary objective of the loan risk grading system is to establish a method of assessing credit risk to further enable management to measure loan portfolio quality and the adequacy of the allowance for loan losses. Further, we contract with an external loan review firm to complete a credit risk assessment of the loan portfolio on a regular basis to help determine the current level and direction of our credit risk. The external loan review firm communicates the results of their findings to the Executive Loan Committee in writing and by periodically attending the Executive Loan Committee meetings. Any material issues discovered in an external loan review are also communicated immediately to the President of the Bank. See Note 5 to the consolidated financial statements for further details on the Company's credit quality indicators that define our risk grading system.
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the date of the statement of condition and it is recorded as a reduction of loans. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All or part of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all or part of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, unless productive collection efforts are providing results. Consumer loans may be charged off earlier in the event of bankruptcy, or if there is an amount that is deemed uncollectible. No portion of the allowance for loan losses is restricted to any individual loan type and the entire allowance is available to absorb any and all loan losses.
The allowance is based on three major components which are: (i) specific components for impaired loans, (ii) recent historical losses and several qualitative factors applied to a general pool of loans, and (iii) an unallocated component.
The first component is the specific allowance that relates to loans that are classified as impaired. For these loans, an allowance is established when the discounted cash flows or collateral value of the impaired loan are lower than the carrying value of the loan. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impairment is measured by either the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the underlying collateral if the loan is collateral dependent. The majority of our loans utilize the fair value of the underlying collateral. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reason for the delay, the borrower's prior payment record and the amount of shortfall in relation to what is owed.
The second component is the general allowance which covers pools of loans, by loan class, not considered impaired, smaller balance homogenous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based on historical loss rates for each of these categories of loans. The ratio of net charge-offs to loans outstanding within each loan class over the most recent eight quarters, lagged by one quarter, is used to generate the historical loss rates. In addition, qualitative factors are added to the historical loss rates in arriving at the total allowance for loan losses needed for this general pool of loans. The qualitative factors include changes in national and local economic trends, the rate of growth in the portfolio, trends of delinquencies and nonaccrual balances, changes in loan policy, and changes in lending management experience and related staffing. Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation.
These qualitative factors, applied to each product class, make the evaluation inherently subjective, as it requires material estimates that may be susceptible to significant revision as more information becomes available.
The third component may consist of an unallocated allowance which is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance, when present, reflects an additional margin for potential imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. This component would typically be appropriate in times of significant economic dislocations or uncertainties in either, or both, the local and national economies. The unallocated allowance generally comprises less than 10% of the total allowance for loan losses and can be as little as 0% of total allowance as was the case in at December 31, 2016 and December 31, 2015.
When a loan is determined to be impaired, we will reevaluate the collateral which secures the loan. For real estate loans, we will obtain a new appraisal or broker's opinion, whichever is considered to provide the most accurate value in the event of sale. An evaluation of equipment held as collateral will be obtained from an independent firm able to provide such an evaluation. Collateral will be inspected not less than annually for all impaired loans and will be reevaluated not less than every two years. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower's financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
Large groups of homogeneous loans are evaluated for impairment in the aggregate. Accordingly, we do not separately identify individual residential mortgage loans with outstanding principal balances less than $300,000, home equity and other consumer loans for impairment disclosures. We make exceptions to this general rule when such loans are (1) rated substandard or worse, on nonaccrual status and are related to borrowers with total related credit exposure in excess of our threshold balance of $300,000; or (2) the loans are subject to a troubled debt restructuring agreement.
In addition, the FDIC and NYSDFS, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management's comprehensive analysis of the loan portfolio, we believe the current level of the allowance for loan losses is adequate.
INVESTMENT ACTIVITIES
Our investment policy is established by the board of directors. Our investment policy dictates that investment decisions will be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, and consistency with our interest rate risk management objectives. The Asset Liability Management Committee (the "ALCO") of the board of directors acts in the capacity of an investment committee and is responsible for overseeing our investment program and evaluating on an ongoing basis our investment policy and objectives. Our President, Chief Financial Officer and Chief Investment Officer have the authority to purchase and sell securities within specific guidelines established by the investment policy. All transactions are reviewed by the board of directors at its regular meetings.
All investment securities must meet regulatory guidelines and be permissible bank investments. Our investment securities include United States Government obligations, securities of various federal agencies and of state and municipal governments, deposits at the FHLBNY, certificates of deposit at federally insured institutions, and federal funds. Within certain regulatory limits, we may also invest a portion of our assets in mutual funds, equity securities and investment grade corporate debt securities. As part of our membership in the FHLBNY, we are required to maintain a dividend-earning investment in FHLBNY stock.
All securities purchased will be classified at the time of purchase as either held-to-maturity or available-for-sale. We do not maintain a trading account. Securities purchased with the intent and ability to hold until maturity will be classified as held-to-maturity. Securities placed in the held-to-maturity category will be accounted for at amortized cost.
Securities that do not qualify or are not categorized as held-to-maturity are classified as available-for-sale. This classification includes securities that may be sold in response to changes in interest rates, the security's prepayment risk, liquidity needs, the availability of and the yield on alternative investments, and funding sources and terms. These securities are reported at fair value, which is determined on a monthly basis. Unrealized gains and losses are
reported as a separate component of capital, net of tax. The aggregate change in value of the portfolio is reported to the board of directors monthly.
The general objectives of the investment portfolio are to assist in the overall interest rate risk management of Pathfinder Bank, generate a reasonable rate of return consistent with the safety of principal, provide a source of liquidity, minimize our tax liability, and mitigate our interest rate and credit risk. We purchase securities to provide necessary liquidity for day-to-day operations and when investable funds exceed loan demand. The effect that the proposed security would have on our credit and interest rate risk and risk-based equity is also considered.
Securities classified as held-to-maturity, other than mortgage-backed securities and collateralized mortgage obligations, consist primarily of state and political subdivision securities, and to a lesser extent, federal agency obligations and corporate securities. Our securities classified as available-for-sale consist primarily of corporate securities and federal agency obligations, which include Federal Farm Credit Bank notes, FHLBNY notes, Fannie Mae notes and Federal Home Loan Mortgage Corporation ("Freddie Mac") notes. For a discussion on mortgage backed securities, see "Mortgage-Backed Securities and Collateralized Mortgage Obligations."
Included within the available-for-sale portfolio is one mutual fund position. The mutual fund is backed by adjustable-rate mortgage-backed securities and cash equivalents.
We also have an investment in FHLBNY stock which is classified separately from securities due to the restrictions on sale or transfer. For further information regarding our securities portfolio, see Note 4 to the consolidated financial statements.
As a hedge against rising short-term interest rates, the Company sold a U.S. Treasury security in the amount of $25 million during the fourth quarter of 2016. The Company was in controlling possession of, but did not own, the security which had been received as collateral, under an industry-standard repurchase agreement, for a 30-day no interest loan of approximately $25 million to an unrelated third party. The sale of this security provided the funds necessary to advance the loan to the third party and placed the Company in what is generally described as a "short position" with respect to the sold U.S. Treasury security. This transaction acted as a hedge against rising short-term interest rates because the price of the security would be expected to decline in a rising short-term interest rate environment and could be subsequently re-acquired at the conclusion of the 30-day loan period at a price lower than the price at which it was originally sold. Short-term rates rose during the 30-day loan period and, consequently, the Company recognized a gain on the sale of securities in the amount of $85,000 and a tax benefit of $34,000 when the Treasury security was repurchased. The tax benefit arose from the reversal of reserves established in prior years against the Company's deferred tax asset position as the transaction gain was characterized as a capital gain for tax purposes. This capital gain was essentially tax free to the Company as the result of the utilization of existing, previously reserved-for, capital loss tax carryforwards that were established in 2011 and 2013. The recognized tax benefit reduced the Company's effective tax rate from what would have been 26.6% to 25.2% in 2016. The gain income and the recognized tax benefits derived from this transaction were partially offset by an additional $54,000 in after-tax interest expense that increased interest expense and therefore reduced pretax net interest margin by $82,000 in the fourth quarter of 2016. In total, after-tax net income was increased by approximately $65,000 during the fourth quarter of 2016 as a result of this transaction. Prior to the commencement of this transaction, the Company incurred consulting and placement fees of $59,000, of which $53,000 has been recorded on the Company's Consolidated Statements of Condition as deferred fees. These deferred fees will be recognized ratably as interest expense on the occasions that this hedging position is reestablished in future periods. The hedge position was closed on December 23, 2016 and, other than the deferred fees of $53,000 discussed above, had no effect on the Company's consolidated financial condition at December 31, 2016.
MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS
We purchase mortgage-backed securities and collateralized mortgage obligations guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association ("Ginnie Mae"). 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. We regularly monitor the credit quality of this portfolio.
Mortgage-backed securities and collateralized mortgage obligations are created by pooling mortgages and issuing a security with an interest rate which is less than the interest rate on the underlying mortgages. These securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although we focus our investments on mortgage related securities backed by one-to-four family real estate loans. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Pathfinder Bank, and in the case of government agency sponsored issues, guarantee the payment of principal and interest to investors. Mortgage-backed securities and collateralized mortgage obligations generally yield less than the loans that underlie such securities because of the cost of payment guarantees, if any, and credit enhancements. These fixed-rate securities are usually more liquid than individual mortgage loans.
Investments in collateralized mortgage obligations involve a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or if such securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected in a rising interest rate environment, particularly since all of our collateralized mortgage obligations have a fixed rate of interest. The relatively short weighted average remaining life of our collateralized mortgage obligation portfolio mitigates our potential risk of loss in a rising interest rate environment.
SOURCES OF FUNDS
General
Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also rely on advances from the FHLBNY and the Certificates of Deposit Account Registry Service ("CDARS") provided by an independent third-party, Promontory Interfinancial Network, as a form of brokered deposits. In addition to deposits and borrowings, we derive funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings and income on interest-earning assets. While scheduled loan payments and income on interest-earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing market interest rates, economic conditions and competition from other financial institutions.
Deposits
A majority of our depositors are persons or businesses who work or reside or operate in Oswego and Onondaga Counties. We offer a variety of deposits, including checking, savings, money market deposit accounts, and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We establish interest rates, maturity terms, service fees and withdrawal penalties on a periodic basis. Management determines the rates and terms based on rates paid by competitors, our need for funds or liquidity, overall growth goals and federal and state regulations. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. The variety of deposit accounts that we offer allows us to be competitive in generating deposits and to respond with flexibility to changes in our customers' demands. We believe that deposits are a stable source of funds, but our ability to attract and maintain deposits at favorable rates will be affected by market conditions, including competition and prevailing interest rates. In addition, the Bank holds municipal deposits, which have been a more volatile source of funds.
The CDARS is a form of a brokered deposit program in which we have been a participant since 2009. In addition to offering depositors enhanced FDIC insurance coverage, being a participant in CDARS allows us to fund our balance sheet through the CDARS' One-Way Buy program. This program uses a competitive bid process for available deposits, up to $50 million, at specified terms. These deposits work well for us because of their weekly availability, coupled with their short term duration, which allows us to more closely mirror our funding needs. We believe this arrangement is a viable source of funding provided that we maintain our "well-capitalized" status. See Note 11 to the consolidated financial statements for further details on our brokered deposits.
Borrowings
We may obtain advances primarily from the FHLBNY utilizing the security of the common stock we own in the FHLBNY and qualifying residential mortgage loans as collateral, provided certain standards related to creditworthiness are met. These advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. FHLBNY advances are generally available to meet seasonal and other withdrawals of deposit accounts and to permit increased lending.
In addition to the above borrowing capability, on October 15, 2015, the Company executed the $10.0 million non-amortizing Subordinated Loan with an unrelated third party that is scheduled to mature on October 1, 2025. The Company has the right to prepay the Subordinated Loan at any time after October 15, 2020 without penalty. The Subordinated Loan is senior in the Company's credit repayment hierarchy only to the Company's common equity and, as a result, qualifies as Tier 2 capital for the Company for all future periods when applicable. The cost of funds related to this transaction is 6.44% calculated under the effective interest method.
SUPERVISION AND REGULATION
General
Pathfinder Bank is a New York-chartered stock commercial bank and the Company is a Maryland corporation and a registered bank holding company. Pathfinder Bank's deposits are insured up to applicable limits by the FDIC. Pathfinder Bank is subject to extensive regulation by NYSDFS, as its chartering agency, and by the FDIC, its primary federal regulator and deposit insurer. Pathfinder Bank is required to file reports with, and is periodically examined by, the FDIC and the NYSDFS concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other financial institutions. As a registered bank holding company, the Company is regulated by the Federal Reserve Board.
The regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of depositors and the deposit insurance funds, rather than for the protection of shareholders and creditors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies concerning the establishment of deposit insurance assessment fees, classification of assets and establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the New York State legislature, the NYSDFS, the FDIC, the Federal Reserve Board or the United States Congress, could have a material adverse impact on the financial condition and results of operations of the Company and Pathfinder Bank. As is further described below, the Dodd-Frank Act has significantly changed the bank regulatory structure and may affect the lending, investment and general operating activities of depository institutions and their holding companies.
Set forth below is a summary of certain material statutory and regulatory requirements applicable to the Company and Pathfinder Bank. The summary is not intended to be a complete description of such statutes and regulations and their effects on the Company and Pathfinder Bank.
The Dodd-Frank Act
The Dodd-Frank Act significantly changed bank regulation and has affected the lending, investment, trading and operating activities of depository institutions and their holding companies. The Dodd-Frank Act created a new Consumer Financial Protection Bureau with extensive powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. The Consumer Financial Protection Bureau also has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as Pathfinder Bank, continue to be examined by their applicable federal bank regulators. The Dodd-Frank Act also gave state attorneys general the ability to enforce applicable federal consumer protection laws.
The Dodd-Frank Act broadened the base for FDIC assessments for deposit insurance and permanently increased the maximum amount of deposit insurance to $250,000 per depositor. The Dodd-Frank Act also, among other things, required originators of certain securitized loans to retain a portion of the credit risk, stipulated regulatory rate-setting for certain debit card interchange fees, repealed restrictions on the payment of interest on commercial demand deposits and contained a number of reforms related to mortgage originations. The Dodd-Frank Act increased the ability of shareholders to influence boards of directors by requiring companies to give shareholders a non-binding vote on executive compensation and so-called "golden parachute" payments. The Dodd-Frank Act also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to company executives, regardless of whether the company is publicly traded or not.
Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates or require implementing regulations and, therefore, their impact on our operations cannot be fully determined for some time. However, the Dodd-Frank Act has increased the regulatory burden, compliance costs and interest expense for Pathfinder Bank and the Company.
New York Bank Regulation
Pathfinder Bank derives its lending, investment, branching and other authority primarily from the applicable provisions of New York State Banking Law and the regulations of the NYSDFS, as limited by federal laws and regulations. Under these laws and regulations, commercial banks, including Pathfinder Bank, may invest in real estate mortgages, consumer and commercial loans, certain types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies, certain types of corporate equity securities and certain other assets. Under the statutory authority for investing in equity securities, a bank may invest up to 2% of its assets or 20% of its capital, whichever is less in exchange-registered corporate stock. Investment in the stock of a single corporation is limited to the lesser of 1% of the bank's assets or 15% of the Bank's capital. The Bank's authority to invest in equity securities is constrained by federal law, as explained later. Such equity securities must meet certain earnings ratios and other tests of financial performance. A bank may also exercise trust powers upon approval of the NYSDFS. Pathfinder Bank does not presently have trust powers.
New York State chartered banks may also invest in subsidiaries. A bank may use this power to invest in corporations that engage in various activities authorized for banks, plus any additional activities that may be authorized by the NYSDFS.
Furthermore, New York banking regulations impose requirements on loans which a bank may make to its executive officers and directors and to certain corporations or partnerships in which such persons have equity interests. These requirements include that (i) certain loans must be approved in advance by a majority of the entire board of directors and the interested party must abstain from participating directly or indirectly in voting on such loan, (ii) the loan must be on terms that are not more favorable than those offered to unaffiliated third parties, and (iii) the loan must not involve more than a normal risk of repayment or present other unfavorable features.
Under the New York State Banking Law, the Superintendent may issue an order to a New York State chartered banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and to keep prescribed books and accounts. Upon a finding by the NYSDFS that any director, trustee or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been notified by the Superintendent to discontinue such practices, such director, trustee or officer may be removed from office after notice and an opportunity to be heard. Pathfinder Bank does not know of any past or current practice, condition or violation that may lead to any proceeding by the Superintendent or the NYSDFS against Pathfinder Bank or any of its directors or officers.
New York State Community Reinvestment Regulation
Pathfinder Bank is also subject to provisions of the New York State Banking Law which imposes continuing and affirmative obligations upon banking institutions organized in New York State to serve the credit needs of its local community ("NYCRA") which are substantially similar to those imposed by the Federal Community Reinvestment Act ("CRA"). Pursuant to the NYCRA, a bank must file an annual NYCRA report and copies of all federal CRA reports with the NYSDFS. The NYCRA requires the NYSDFS to make a biennial written assessment of a bank's compliance with the NYCRA, 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, 2012, was "satisfactory." As of the date of the issuance of this filing, Pathfinder Bank is awaiting the results of a NYCRA examination by the NYSDFS. Management believes that the examination was routine in nature and that we are in substantial compliance with all applicable regulations related to NYCRA.
Federal Regulations
Capital Requirements.
Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. These capital requirements were effective January 1, 2015 and are the result of a final rule implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (
e.g.
, recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders' equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Pathfinder Bank exercised the opt-out election. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution's capital adequacy, regulators take into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions when and where deemed necessary.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. The buffer requirement rose to 1.25% on January 1, 2017.
Standards for Safety and Soundness.
As required by statute, the federal banking agencies have adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings, compensation, fees and benefits and, more recently, safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.
Business and Investment Activities.
Under federal law, all state-chartered FDIC-insured banks, including commercial banks, have been limited in their activities as principal and in their equity investments to the type and the amount authorized for national banks, notwithstanding state law. Federal law permits certain exceptions to these limitations.
The FDIC is also authorized to permit state banks to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the FDIC insurance fund. The FDIC has adopted regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999 specified that a state bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a "financial subsidiary," if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.
Prompt Corrective Regulatory Action.
Federal law requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
The regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015. Under the amended regulations, an institution is deemed to be "well capitalized" if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is "undercapitalized" if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
"Undercapitalized" banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank's compliance with such a plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution's total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an "undercapitalized" bank fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" banks must comply with one or more of a number of additional measures, including, but not limited to, a required sale of sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or officers and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. "Critically undercapitalized" institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after being designated "critically undercapitalized."
At December 31, 2016, Pathfinder Bank was well-capitalized.
Transactions with Related Parties.
Transactions between a bank (and, generally, its subsidiaries) and its related parties or affiliates are limited by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B of the Federal Reserve Act limit the extent to which the bank or its subsidiaries may engage in "covered transactions" with any one affiliate to 10% of such institution's capital stock and surplus and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such institution's capital stock and surplus. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar transactions.
In addition, loans or other extensions of credit by the institution to the affiliate are required to be collateralized in accordance with specified requirements. The law also requires that affiliate transactions be on terms and conditions that are substantially the same, or at least as favorable to the institution, as those provided to non-affiliates.
Pathfinder Bank's authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:
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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
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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. That technique, effective July 1, 2016, replaced the previous system under which institutions were placed into risk categories.
The Dodd-Frank Act required the FDIC to revise its procedures to base assessments upon each insured institution's total assets less tangible equity instead of deposits. The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity. In conjunction with the Deposit Insurance Fund's reserve ratio achieving 1.15%, the assessment range (inclusive of possible adjustments) was reduced for insured institutions of less than $10 billion of total assets to 1.5 basis points to 30 basis points, effective July 1, 2016.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation must seek to achieve the 1.35% ratio by September 30, 2020. The Dodd-Frank Act requires insured institutions with assets of $10 billion or more to fund the increase from 1.15% to 1.35% and, effective July 1, 2016, such institutions are subject to a surcharge to achieve that goal. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation, and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long-range fund ratio of 2%.
In addition to the FDIC assessments, the
United States government-sponsored enterprise known as the Financing Corporation ("FICO") is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. The FICO assessment rate is adjusted quarterly to reflect changes in the assessment base as determined from quarterly Call Report submissions. For the quarter ended December 31, 2016, the annualized Financing Corporation assessment was equal to 0.56 of a basis point of total assets less tangible capital.
The FDIC has authority to increase insurance assessments. Any significant increase would have an adverse effect on the operating expenses and results of operations of Pathfinder Bank. Management cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
Community Reinvestment Act.
Under the CRA, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA does require the FDIC, in connection with its examination of a bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to establish or acquire branches and merger with other depository institutions. The CRA requires the FDIC to provide a written evaluation of an institution's CRA performance utilizing a four-tiered descriptive rating system. Pathfinder Bank's latest FDIC CRA rating, dated March 11, 2016, was "satisfactory."
Federal Reserve System.
The Federal Reserve Board regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily negotiable order of withdrawal (NOW) and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $115.1 million; a 10% reserve ratio is applied above $115.1 million. The first $15.5 million of otherwise reservable balances are exempted from the reserve requirements. The amounts are adjusted annually. Pathfinder Bank complies with the foregoing requirements.
Federal Home Loan Bank System.
Pathfinder Bank is a member of the Federal Home Loan Bank System, which consists of twelve regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the FHLBNY, Pathfinder Bank is required to acquire and hold a specified amount of shares of capital stock in the FHLBNY. As of December 31, 2016, 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:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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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;
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The TILA-RESPA Integrated Disclosure Rule, commonly known as the TRID rule, which became effective on October 3, 2015. This rule amended the Truth in Lending Act and the Real Estate Settlement Procedures Act to integrate several consumer disclosures for mortgage loans.
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
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Truth in Savings Act; and
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Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
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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;
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Check Clearing for the 21
st
Century Act (also known as "Check 21"), which gives "substitute checks," such as digital check images and copies made from that image, the same legal standing as the original paper check;
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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
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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.
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Holding Company Regulation
The Company, as a bank holding company, is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended, as administered by the Federal Reserve Board. The Company is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval would be required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company.
A bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing securities brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property under certain conditions; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings association.
The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including depository institutions subsidiaries that are "well capitalized" and "well managed," to opt to become a "financial holding company." A "financial holding company" may engage in a broader array of financial activities than permitted a typical bank holding company. Such activities can include insurance underwriting and investment banking. The Company has elected to be a "financial holding company."
The Dodd-Frank Act required the Federal Reserve Board to promulgate consolidated capital requirements for bank and savings and loan holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to their subsidiary depository institutions. Instruments such as cumulative preferred stock and trust-preferred securities, which are currently includable as Tier 1 capital, by bank holding companies within certain limits are no longer includable as Tier 1 capital, subject to certain grandfathering. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act's directives as to holding company capital requirements.
In December 2014, legislation was passed by Congress that requires the Federal Reserve to revise its "Small Bank Holding Company Policy Statement" to exempt bank and savings and loan holding companies with less than $1.0 billion of consolidated assets from the consolidated capital requirements, provided that such companies meet certain other conditions such as not engaging in significant nonbanking activities. The Federal Reserve maintains authority to apply the consolidated capital requirements to any bank or savings and loan holding company as warranted for supervisory purposes. Regulations implementing the exemption were effective in May 2015.
A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company's consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. The Federal Reserve Board has adopted an exception to that approval requirement for well-capitalized bank holding companies that meet certain other conditions. The Federal Reserve Board has issued guidance which requires consultation with the Federal Reserve Board prior to a redemption or repurchase in certain circumstances.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve Board's policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization's capital needs, asset quality and overall financial condition. The Federal Reserve Board's policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by using available resources to provide capital funds during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength policy. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.
The Federal Deposit Insurance Act makes depository institutions liable to the FDIC for losses suffered or anticipated by the insurance fund in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default.
The Company and Pathfinder Bank will be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for management to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of the Company or Pathfinder Bank.
The Company's status as a registered bank holding company under the Bank Holding Company Act will not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.
Federal Securities Laws
The Company's common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of the Company's shares of common stock issued in the Company's stock offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not our affiliates may be resold without registration. Shares purchased by our affiliates are subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If we meet the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of ours that complies with the other conditions of Rule 144, including those that require the affiliate's sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, we may permit affiliates to have their shares registered for sale under the Securities Act of 1933.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. We have prepared policies, procedures and systems designed to ensure compliance with these regulations.
FEDERAL AND STATE TAXATION
Federal Taxation
General
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The Bank and the Company is subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company or the Bank.
Our federal tax return for the year ended December 31, 2014 is scheduled to be audited commencing on March 31, 2017. Management believes that this audit is part of the Internal Revenue Service's normal audit and review cycle. Management does not anticipate that the findings of the audit, if any, will have a material effect on the operations or the financial position of the Company. The Company's federal tax returns have not been audited in the previous five years.
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, 2016, Pathfinder Bank had no reserves subject to recapture in excess of its base year reserves. The Bank is required to use the specific charge-off method to account for tax bad debt deductions.
Taxable Distributions and Recapture
.
Prior to 1996, bad debt reserves created prior to 1988 were subject to recapture into taxable income if Pathfinder Bank failed to meet certain thrift asset and definitional tests or made certain distributions. Tax law changes in 1996 eliminated thrift-related recapture rules. However, under current law, pre-1988 tax bad debt reserves remain subject to recapture if Pathfinder Bank makes certain non-dividend distributions, repurchases any of its common stock, pays dividends in excess of earnings and profits, or fails to qualify as a "bank" for tax purposes. At December 31, 2016 our total federal pre-base year bad debt reserve was approximately $1.3 million.
Alternative Minimum Tax
.
The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the regular income tax. Net operating losses can offset no more than 90% of alternative taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At December 31, 2016, the Company had no such amounts available as credits for carryover.
Net Operating Loss Carryovers.
A financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. As of December 31, 2016, the Company does not have a federal net operating loss carryforward.
Corporate Dividends Received Deduction.
The Company may exclude from its federal taxable income 100% of dividends received from Pathfinder Bank as a wholly-owned subsidiary by filing consolidated tax returns. The corporate dividends received deduction is 80% when the corporation receiving the dividend owns at least 20% of the stock of the distributing corporation. The dividends-received deduction is 70% when the corporation receiving the dividend owns less than 20% of the distributing corporation.
State Taxation
Prior to 2015, we were subject to the New York State Franchise Tax on Banking Corporations in an annual amount equal to the greater of (i) 7.1% of Pathfinder Bank's "entire net income" allocable to New York State during the taxable year, or (ii) the applicable alternative minimum tax. The alternative minimum tax is generally the greater of (a) 0.01% of the value of Pathfinder Bank's assets allocable to New York State with certain modifications, (b) 3% of our "alternative entire net income" allocable to New York State, or (c) $1,250.
Entire net income is similar to federal taxable income, subject to certain modifications and alternative entire net income is equal to entire net income without certain modifications. Net operating losses arising in the current period can be carried forward to the succeeding 20 taxable years.
Effective January 1, 2015, banking corporations operating in New York State began to be taxed under the New York State General Business Corporation Franchise Tax provisions. Under this change in New York State tax law, the tax rate on the business income base (formerly "entire net income") was reduced prospectively from 7.1% to 6.5% as of January 1, 2016. In addition, various modifications became available to community banks (defined as banks with less than $8 billion in total assets) regarding deductions associated with interest income. The New York State alternative minimum tax was repealed effective January 1, 2015.
Our state tax returns were under audit for the years 2012-2014 by the New York State Department of Finance. The Company received a final notice that audit was concluded on September 28, 2016, with no findings that were material to the financial position of the Company or its future operations. Our state tax returns had not been audited in the five years previous to the audit concluded on September 28, 2016.
As a Maryland business corporation, the Company is required to file an annual report with, and pay franchise taxes to, the State of Maryland.
Not required of a smaller reporting company.
None.
The Company has seven offices located in Oswego County and two offices in Onondaga 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, 2016. The aggregate net book value of the Bank's premises and equipment was $15.2 million at December 31, 2016. For additional information regarding the Bank's properties, see Notes 8 and 18 to the consolidated financial statements.
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LOCATION
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OPENING DATE
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OWNED/LEASED
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Main Office
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1874
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Owned
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214 West First Street
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Oswego, New York 13126
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Plaza Branch
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1989
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Owned (1)
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Route 104, Ames Plaza
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Oswego, New York 13126
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Mexico Branch
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1978
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Owned
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Norman & Main Streets
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Mexico, New York 13114
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Oswego East Branch
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1994
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Owned
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34 East Bridge Street
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Oswego, New York 13126
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Lacona Branch
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2002
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Owned
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1897 Harwood Drive
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Lacona, New York 13083
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Fulton Branch
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2003
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Owned (2)
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5 West First Street South
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|
Fulton, New York 13069
|
|||||
|
Central Square Branch
|
2005
|
Owned
|
|||
|
3025 East Ave
|
|||||
|
Central Square, New York 13036
|
|||||
|
Cicero Branch
|
2011
|
Owned
|
|||
|
6194 State Route 31
|
|||||
|
Cicero, New York 13039
|
|||||
|
Syracuse Pike Block Branch
|
2014
|
Leased (3)
|
|||
|
109 West Fayette Street
|
|||||
|
Syracuse, New York 13202
|
|||||
|
(1) The building is owned; the underlying land is leased with an annual rent of $33,000.
|
|||||
|
(2) The building is owned; the underlying land is leased with an annual rent of $33,000.
|
|||||
|
(3) The premises are leased with an annual rent of $58,000.
|
|||||
There are various claims and lawsuits to which the Company is periodically involved that are incidental to the Company's business. 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, 2016.
Not applicable.
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock commenced trading on the NASDAQ Capital Market on October 17, 2014 under the symbol "PBHC" following the completion of the Conversion and Offering. Prior to that date, the common stock of Pathfinder-Federal, the Company's predecessor, had traded on the NASDAQ Capital Market.
There were 1,016 shareholders of record as of March 15, 2017. The following table sets forth the high and low closing bid prices and dividends paid per share of common stock for the periods indicated.
|
Price per share
|
|
|||||||||||
|
Quarter Ended:
|
High
|
Low
|
Dividend Paid
|
|||||||||
|
December 31, 2016
|
$
|
13.45
|
$
|
12.06
|
$
|
0.05
|
||||||
|
September 30, 2016
|
$
|
12.49
|
$
|
11.27
|
$
|
0.05
|
||||||
|
June 30, 2016
|
$
|
11.96
|
$
|
10.81
|
$
|
0.05
|
||||||
|
March 31, 2016
|
$
|
12.95
|
$
|
10.95
|
$
|
0.05
|
||||||
|
December 31, 2015
|
$
|
13.05
|
$
|
10.89
|
$
|
0.05
|
||||||
|
September 30, 2015
|
$
|
11.89
|
$
|
10.60
|
$
|
0.05
|
||||||
|
June 30, 2015
|
$
|
12.35
|
$
|
10.00
|
$
|
0.03
|
||||||
|
March 31, 2015
|
$
|
10.10
|
$
|
9.67
|
$
|
0.03
|
||||||
The Company did not repurchase any shares of its common stock during the fourth quarter of 2016.
Equity Compensation Plan Information
The following table provides information as of December 31, 2016 with respect to shares of common stock that may be issued under the Company's existing equity compensation plans.
|
Plan Category
|
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
|
|||||||||
|
Equity compensation plans approved by security holders
|
422,940
|
$
|
9.41
|
47,450
|
||||||||
|
Equity compensation plans not approved by stockholders
|
N/A
|
N/A
|
N/A
|
|||||||||
Dividends and Dividend History
The Company (and its predecessor) has historically paid regular quarterly cash dividends on its common stock. The board of directors presently intends to continue the payment of regular quarterly cash dividends, subject to the need for those funds for debt service and other purposes. Payment of dividends on the common stock is subject to determination and declaration by the board of directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, Pathfinder Bank and its subsidiaries' results of operations and financial condition, tax considerations, and general economic conditions. More details are included within the section titled Regulation and Supervision.
The following selected consolidated financial data sets forth certain financial highlights of the Company and should be read in conjunction with the consolidated financial statements and related notes, and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this annual report on Form 10-K.
|
For the years ended December 31,
|
||||||||||||||||||||
|
|
2016
|
2015
|
2014
|
2013
|
2012
|
|||||||||||||||
|
Year End (
In thousands, except per share amounts
)
|
||||||||||||||||||||
|
Total assets
|
$
|
749,034
|
$
|
623,254
|
$
|
561,024
|
$
|
503,793
|
$
|
477,796
|
||||||||||
|
Investment securities available-for-sale
|
141,955
|
98,942
|
88,073
|
80,959
|
108,339
|
|||||||||||||||
|
Investment securities held-to-maturity
|
54,645
|
44,297
|
40,875
|
34,412
|
-
|
|||||||||||||||
|
Loans receivable, net
|
485,900
|
424,732
|
382,189
|
336,592
|
329,247
|
|||||||||||||||
|
Deposits
|
610,983
|
490,315
|
415,568
|
410,140
|
391,805
|
|||||||||||||||
|
Borrowings and sub-debt
|
73,972
|
56,291
|
71,255
|
46,008
|
40,119
|
|||||||||||||||
|
Shareholders' equity
|
58,361
|
71,229
|
69,204
|
43,070
|
40,747
|
|||||||||||||||
|
For the Year
|
||||||||||||||||||||
|
Total interest income
|
$
|
24,093
|
$
|
21,424
|
$
|
19,699
|
$
|
18,883
|
$
|
18,765
|
||||||||||
|
Total interest expense
|
3,804
|
2,657
|
2,614
|
3,264
|
3,908
|
|||||||||||||||
|
Net interest income
|
20,289
|
18,767
|
17,085
|
15,619
|
14,857
|
|||||||||||||||
|
Provision for loan losses
|
953
|
1,349
|
1,205
|
1,032
|
825
|
|||||||||||||||
|
Net interest income after provision for loan losses
|
19,336
|
17,418
|
15,880
|
14,587
|
14,032
|
|||||||||||||||
|
Total noninterest income
|
4,183
|
4,172
|
3,759
|
3,416
|
3,063
|
|||||||||||||||
|
Total noninterest expense
|
19,110
|
17,587
|
15,685
|
14,751
|
13,518
|
|||||||||||||||
|
Net income before income taxes
|
4,409
|
4,003
|
3,954
|
3,252
|
3,577
|
|||||||||||||||
|
Income tax expense
|
1,111
|
1,071
|
1,153
|
847
|
929
|
|||||||||||||||
|
Net income (loss) attributable to noncontrolling interest
|
26
|
43
|
56
|
(1
|
)
|
-
|
||||||||||||||
|
Net income
|
$
|
3,272
|
$
|
2,889
|
$
|
2,745
|
$
|
2,406
|
$
|
2,648
|
||||||||||
|
Per Share
|
||||||||||||||||||||
|
Income per share - basic (a)
|
$
|
0.79
|
$
|
0.67
|
$
|
0.64
|
$
|
0.58
|
$
|
0.53
|
||||||||||
|
Income per share - diluted (a)
|
0.78
|
0.66
|
0.63
|
0.58
|
0.53
|
|||||||||||||||
|
Book value per common share
|
13.67
|
13.28
|
12.82
|
11.33
|
10.60
|
|||||||||||||||
|
Tangible book value per common share
|
12.55
|
12.19
|
11.78
|
10.16
|
9.13
|
|||||||||||||||
|
Cash dividends declared
|
0.20
|
0.16
|
0.12
|
0.12
|
0.12
|
|||||||||||||||
|
Performance Ratios
|
||||||||||||||||||||
|
Return on average assets
|
0.48
|
%
|
0.48
|
%
|
0.51
|
%
|
0.48
|
%
|
0.57
|
%
|
||||||||||
|
Return on average equity
|
5.35
|
4.08
|
5.50
|
5.86
|
6.68
|
|||||||||||||||
|
Average equity to average assets
|
8.97
|
11.76
|
9.27
|
8.24
|
8.48
|
|||||||||||||||
|
Shareholders' Equity to total assets at end of year
|
7.73
|
11.36
|
12.26
|
8.55
|
8.53
|
|||||||||||||||
|
Net interest rate spread
|
3.03
|
3.21
|
3.31
|
3.23
|
3.28
|
|||||||||||||||
|
Net interest margin
|
3.14
|
3.31
|
3.40
|
3.34
|
3.41
|
|||||||||||||||
|
Average interest-earning assets to average interest-
bearing liabilities
|
118.35
|
121.73
|
117.88
|
115.85
|
113.89
|
|||||||||||||||
|
Noninterest expense to average assets
|
2.81
|
2.92
|
2.92
|
2.96
|
2.89
|
|||||||||||||||
|
Efficiency ratio (b)
|
79.90
|
78.22
|
76.51
|
79.14
|
75.53
|
|||||||||||||||
|
Dividend payout ratio (c)
|
25.18
|
25.22
|
13.89
|
12.47
|
11.37
|
|||||||||||||||
|
Return on average common equity
|
5.35
|
5.00
|
7.45
|
8.58
|
8.26
|
|||||||||||||||
|
For the years ended December 31,
|
||||||||||||||||||||
|
|
2016
|
2015
|
2014
|
2013
|
2012
|
|||||||||||||||
|
Asset Quality Ratios
|
||||||||||||||||||||
|
Nonperforming loans as a percent of total loans
|
0.98
|
%
|
1.24
|
%
|
1.61
|
%
|
1.57
|
%
|
1.66
|
%
|
||||||||||
|
Nonperforming assets as a percent of total assets
|
0.72
|
0.94
|
1.16
|
1.18
|
1.25
|
|||||||||||||||
|
Allowance for loan losses to loans receivable
|
1.27
|
1.33
|
1.38
|
1.48
|
1.35
|
|||||||||||||||
|
Allowance for loan losses as a percent of
nonperforming loans
|
129.85
|
107.30
|
85.50
|
94.22
|
81.13
|
|||||||||||||||
|
Regulatory Capital Ratios (Bank Only)
|
||||||||||||||||||||
|
Total core capital (to risk-weighted assets)
|
14.79
|
%
|
16.22
|
%
|
16.60
|
%
|
14.13
|
%
|
14.20
|
%
|
||||||||||
|
Tier 1 capital (to risk-weighted assets)
|
13.54
|
14.95
|
15.31
|
12.82
|
12.90
|
|||||||||||||||
|
Tier 1 capital (to adjusted assets)
|
9.06
|
10.00
|
10.55
|
8.72
|
8.80
|
|||||||||||||||
|
Number of:
|
||||||||||||||||||||
|
Banking offices
|
9
|
9
|
9
|
8
|
8
|
|||||||||||||||
|
Fulltime equivalent employees
|
133
|
124
|
122
|
112
|
110
|
|||||||||||||||
|
(a)
|
Adjusted to reflect the 1.6472 exchange ratio used in the conversion for 2014 and prior years.
|
|
(b)
|
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.
|
|
(c)
|
The dividend payout ratio is calculated using dividends declared and not waived by Pathfinder Bancorp, MHC for periods prior to the Conversion and Offering that occurred on October 16, 2014, divided by net income.
|
INTRODUCTION
Throughout Management's Discussion and Analysis ("MD&A") the term, the "Company", refers to the consolidated entity of Pathfinder Bancorp, Inc. Pathfinder Bank and Pathfinder Statutory Trust II are wholly owned subsidiaries of Pathfinder Bancorp, Inc.; however, Pathfinder Statutory Trust II is not consolidated for reporting purposes (see Note 13 of the consolidated financial statements). Pathfinder REIT, Inc., Pathfinder Risk Management Company, Inc., and Whispering Oaks Development Corp. are wholly owned subsidiaries of Pathfinder Bank.
On October 16, 2014, Pathfinder Bancorp, MHC converted from the mutual to stock form of organization. In connection with the Conversion, the Company sold 2,636,053 of common stock to depositors at $10.00 per share. Shareholders of Pathfinder-Federal, the Company's predecessor, received 1.6472 shares of the Company's common stock for each share of Pathfinder-Federal common stock they owned immediately prior to completion of the transaction. Following the completion of the Conversion, Pathfinder-Federal was succeeded by the Company, a Maryland corporation named Pathfinder Bancorp, Inc., and Pathfinder Bancorp, MHC ceased to exist. The Company had 4,326,744 and 4,353,850 shares outstanding at December 31, 2016 and December 31, 2015, respectively.
Our business strategy has been to transition from a traditional savings bank primarily focused on originating one-to-four family residential real estate loans to that of a commercial bank with a more diversified loan composition, while at the same time, maintaining our high standards of customer service and convenience. We have emphasized developing our business banking by offering products that are attractive to small businesses in our market area. Notwithstanding this strategy, a significant portion of our lending activity has been, and will continue to be, the origination of one-to-four family residential real estate loans. Highlights of our business strategy are as follows:
|
|
Expanding our business banking
. We have increased our emphasis on servicing the needs of small businesses in our market area. We intend to use our branch office network and experienced commercial loan and deposit specialists to provide convenient commercial loan and deposit products and services to business customers, including merchant and remote deposit capture services. We believe that by developing our commercial relationships with small businesses we will be able to offer a variety of services and deposit products that will provide a growing source of fee income. We have introduced new products and services in order to attract new business customers, and we will continue to expand our products to help meet the needs of our business customers.
|
|
|
Continuing our emphasis on commercial business and commercial real estate lending
. In recent years, we have sought to significantly increase our commercial business and commercial real estate lending, consistent with safe and sound underwriting practices. In this regard, we have added personnel who are experienced in originating and underwriting commercial real estate and commercial business loans. We view the growth of our commercial business and commercial real estate loans as a means of diversifying and increasing our interest income and establishing relationships with local businesses, which offer a recurring and potentially broader source of fee income and deposits than traditional one-to-four family residential real estate lending. We anticipate th
a
t our emphasis on commercial business and commercial real estate lending will complement our traditional one-to-four family residential real estate lending.
|
|
|
Diversifying our products and services with a goal of increasing non-interest income over time.
We have sought to reduce our dependence on net interest income by increasing fee income from the value-added services that we provide. We offer property and casualty and life insurance through our subsidiary, Pathfinder Risk Management Company, Inc., and its insurance agency subsidiary, the FitzGibbons Agency, LLC. Additionally, Pathfinder Bank's investment services provides brokerage services for purchasing stocks, bonds, mutual funds, annuities, and long-term care products. We intend to gradually grow these businesses. We believe that there will be opportunities to cross-sell these products to our deposit and borrower customers which will increase our non-interest income.
|
|
|
Continuing to grow our customer relationships and deposit base by expanding our branch network.
As conditions permit, we will expand our branch network through a combination of de novo branching and acquisitions of branches or other financial services companies. We believe that as we expand our branch network, our customer relationships and deposit base will continue to grow. We do not currently have any agreements or understandings regarding specific de novo branches or acquisitions. Additionally, we have committed significant resources to establish a banking platform to accommodate future growth by upgrading our information technology, maintaining a robust risk management and compliance staff, improving credit administration functionality, and upgrading our physical infrastructure. We believe that these investments will enable us to achieve operational efficiencies with minimal additional investments, while providing increased convenience for our customers.
|
|
|
Utilizing the net proceeds from recent capital raises to continue the controlled growth of Pathfinder Bank
. On October 16, 2014, 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. On October 15, 2015, the Company executed the $10.0 million non-amortizing Subordinated Loan with an unrelated third party that is scheduled to mature on October 1, 2025. The 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. On February 15, 2016, the Company retired $13 million in Series B Preferred stock owned by the Small Business Lending Facility ("SBLF") and has used, and will continue to use, the remaining net proceeds from Conversion to provide capital for asset growth and increased lending. We have leveraged this additional capital by growing our assets by $168.6 million, or 29.1%, since October 2014. We believe that we can continue to successfully utilize retained earnings in future periods to provide the underlying capital for further growth.
|
|
|
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 (i.e., internet banking). Our competitive advantage is our ability to make decisions, such as approving loans, more quickly than our larger competitors. Customers enjoy, and will continue to enjoy, access to senior executives and local decision makers at Pathfinder Bank and the flexibility it brings to their businesses.
|
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow practices within the banking industry. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values, and information used to record valuation adjustments for certain assets and liabilities, are based on quoted market prices or are provided by other third-party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management.
The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the allowance for loan losses, deferred income taxes, pension obligations, the evaluation of investment securities for other than temporary impairment, the annual evaluation of the Company's goodwill for possible impairment, and the estimation of fair values for accounting and disclosure purposes to be the accounting areas that require the most subjective and complex judgments. These areas could be the most subject to revision as new information becomes available.
Allowance for Loan Losses.
The allowance for loan losses represents management's estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment on the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and environmental factors, all of which may be susceptible to significant change. The Company establishes a specific allowance for all commercial loans in excess of the total related credit threshold of $100,000 and single borrower residential mortgage loans in excess of the total related credit threshold of $300,000 identified as being impaired which are on nonaccrual and have been risk rated under the Company's risk rating system as substandard, doubtful, or loss. The Company also establishes a specific allowance, regardless to the size of the loan, for all loans subject to a troubled debt restructuring agreement. In addition, an accruing substandard loan could be identified as being impaired. The measurement of impaired loans is generally based upon the present value of future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral, less costs to sell. At December 31, 2016, the Bank's position in impaired loans consisted of 42 loans totaling $8.6million. Of these loans, 31 loans, totaling $6.2 million, were valued using the present value of future cash flows method; and 11 loans, totaling $2.4 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 affect 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. A valuation allowance of $150,000 was maintained at December 31, 2016, as management believes it may not generate sufficient future taxable income in the form of capital gains to offset its capital loss carry forward position before those potential tax benefits expire. The Company's effective tax rate differs from the statutory rate due primarily to non-taxable interest income and bank owned life insurance. See Note 17 to the accompanying financial statements.
Pension Obligations.
Pension and postretirement benefit plan liabilities benefits and expenses are based upon actuarial assumptions of future events, including fair value of plan assets, interest rates, and the length of time the Company will have to provide those benefits. The assumptions used by management are discussed in Note 14 to the Consolidated Financial Statements contained herein.
Evaluation of Investment Securities for Other-Than-Temporary-Impairment ("OTTI").
The Company carries all of its available-for-sale investments at fair value with any unrealized gains or losses reported net of tax as an adjustment to shareholders' equity and included in accumulated other comprehensive income (loss), except for the credit-related portion of debt security impairment losses and OTTI of equity securities which are charged to earnings. The Company's ability to fully realize the value of its investments in various securities, including corporate debt securities, is dependent on the underlying creditworthiness of the issuing organization. In evaluating the debt security (both available-for-sale and held-to-maturity) portfolio for other-than-temporary impairment losses, management considers (1) if we intend to sell the security before recovery of its amortized cost; (2) if it is "more likely than not" we will be required to sell the security before recovery of its amortized cost basis; or (3) if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. When the fair value of a held-to-maturity or available-for-sale security is less than its amortized cost basis, an assessment is made as to whether OTTI is present. The Company considers numerous factors when determining whether a potential OTTI exists and the period over which the debt security is expected to recover. The principal factors considered are (1) the length of time and the extent to which the fair value has been less than the amortized cost basis, (2) the financial condition of the issuer and (guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (3) failure of the issuer of the security to make scheduled interest or principal payments, (4) any changes to the rating of the security by a rating agency, and (5) the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.
Evaluation of Goodwill
. Management performs an annual evaluation of the Company's goodwill for possible impairment. Based on the results of the 2016 evaluation, management has determined that the carrying value of goodwill is not impaired as of December 31, 2016. The evaluation approach is described in Note 10 of the consolidated financial statements.
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 15, 2016, the board of directors declared a quarterly dividend of $0.05 per common share. The dividend was payable on February 3, 2017 to shareholders of record on January 13, 2017.
EXECUTIVE SUMMARY AND RESULTS OF OPERATIONS
The Company reported net income of $3.3 million for 2016 as compared to $2.9 million for 2015. Basic and diluted earnings per share in 2016 were $0.79 and $0.78, respectively, as compared to $0.67 and $0.66 in 2015, respectively. Return on average assets remained unchanged from 2015 at 0.48% in 2016. Return on average equity increased 1.27% to 5.35% in 2016 as compared to 4.08% in 2015. This increase was due to the increased utilization of capital as the Company grew its total assets from $623.3 million at December 31, 2015 to $749.0 million at December 31, 2016. The Company continued to successfully execute on its growth strategies in 2016 as it effectively increased its total interest-earning assets and utilized an increased portion of the $24.9 million in net capital proceeds that it received as a result of the October 2014 conversion.
Net income increased 13.3% to $3.3 million in 2016 on average earning assets of $645.7 million as compared to net income of $2.9 million in 2015 on average earning assets of $566.3 million. Net income increased during 2016, due to increases in interest income and a favorable reduction in the provision for loan losses that were partially offset by increases in interest and noninterest expenses. Increases in the average balances of loans, and taxable and tax-exempt investment securities led to the increase in interest income, which was partially offset by a reduction in the overall average rate earned on those assets. The increase in interest income was partially offset by an increase in interest expense due to an increase in average interest-bearing liabilities of $80.3 million and an increase in the rate paid on those liabilities of 13 basis points.
N
oninterest income was $4.2 million in both 2016 and 2015. Net gains on the sales and redemptions of investment securities increased $172,000 to $594,000 in 2016 as the Company sold certain securities as part of its overall asset management strategies. All other categories of noninterest income declined $161,000 in aggregate during 2016, as compared to the previous year, as the earnings on loan servicing fees and bank owned life insurance declined $95,000 and $94,000, respectively. In addition, net proceeds from the sales of loans and foreclosed assets declined $74,000 in 2016 as compared to 2015. The declines in noninterest income in 2016 described above were partially offset by increases in other charges, commissions and fees and debit card interchange fees of $89,000 and $27,000, respectively.
Partially offsetting these aggregate increases to net income was the increase in noninterest expense to $19.1 million in 2016 from $17.6 million in 2015, due largely to the increase in salaries and employee benefits.
The provision for income taxes increased $40,000 between 2015 and 2016 due to the increase in pretax net income in 2016 of $406,000, or 10.1%, as compared to the previous year, partially offset by a lower effective income tax rate. The lower effective tax rate resulted from higher nontaxable income as a proportion to total income in 2016 as compared with the previous year and the utilization of some previously reserved-for capital loss carryforward credits in 2016.
Total assets were $749.0 million at December 31, 2016 as compared to $623.3 million at December 31, 2015. The increase in total assets of $125.8 million, or 20.2%, was the result of the increase in loans, largely commercial real estate and residential mortgages, and the increase in investment securities. The loan portfolio, net of the allowance for loan losses, increased $61.2 million and the investment securities portfolio increased $53.4 million. The increase in total assets was funded largely by a $86.4 million increase in customer deposits, a $34.2 million increase in time deposits acquired through the CDARS program and by a net increase in borrowings from the FHLBNY of $17.6 million in 2016.
Measured as a percentage of total loans and total assets, loan credit quality metrics improved in 2016 as compared to the previous year. These improvements in credit quality measures were reflected in a slight decline in the ratio
of the allowance for loan losses to year end loans decreasing from 1.33% at December 31, 2015 to 1.27% at December 31, 2016. This decrease reflects management's estimate of the probable losses inherent in the current loan portfolio.
The ratio of net charge-offs to average loans declined to 0.09% for 2016 as compared to 0.25% for 2015. This activity reflects charge-offs for those accounts deemed uncollectible but reserved for in prior years through the provision for loan losses. Total past due loans measured as a percent of total loans, decreased from 2.1% at December 31, 2015 to 2.0% at December 31, 2016. Similarly, the ratio of nonperforming loans to year end loans improved at December 31, 2016 to 0.98% as compared to 1.24% at December 31, 2015. The level of nonperforming loans decreased in aggregate by $507,000, or 9.5%, led by a decrease in nonperforming commercial and commercial real estate loans of $1.4 million, partially offset by an increase in nonperforming residential loans. Commensurate with the decline in nonperforming loans to year end loans, the
ratio of nonperforming assets to total assets
decreased to 0.72% at December 31, 2016 from 0.94% at December 31, 2015.
The Company's shareholders' equity decreased $12.9 million, or 18.2%, to $57.9 million at December 31, 2016 from $70.8 million at December 31, 2015. This decrease was principally due to the Company's redemption of all 13,000 shares of the Series B Preferred Stock outstanding at December 31, 2015 with the payment of $13.0 million to the SBLF in February 2016. In addition, shareholder's equity was reduced in 2016 by the repurchase of 143,400 shares of the Company's common stock in the amount of $1.8 million. To a lesser extent, shareholder's equity was reduced in 2016, as compared to the previous year, by a decrease in accumulated other comprehensive loss, net of tax, of $1.3 million, and preferred and common stock dividend distributions of $836,000. Offsetting this combined decrease of $16.9 million in shareholders' equity during 2016 was net income of $3.3 million and stock-based compensation-related increase of $520,000 in additional paid in capital and $180,000 in accretion of unearned ESOP shares.
Net Interest Income
Net interest income is the Company's primary source of operating income. It is the amount by which interest earned on interest-earning deposits, loans and investment securities exceeds the interest paid on deposits and borrowed money. Changes in net interest income and the net interest margin ratio resulted from the interaction between the volume and composition of earning assets, interest-bearing liabilities, and their respective yields and funding costs.
The following comments refer to the table of Average Balances and Rates and the Rate/Volume Analysis, both of which follow below.
Net interest income increased $1.5 million, or 8.1%, in 2016 to $20.3 million as compared to the previous year. Our net interest margin for the year ended December 31, 2016 decreased to 3.14% from 3.31% for the comparable prior year. The increase in net interest income was primarily due to a 12.3% increase in interest income on loans and investment securities to $23.9 million stemming from the $79.5 million increase in average balances on these earning assets. This increase was partially offset by an increase in interest expense on time deposits and FHLBNY borrowings. Increases between 2016 and 2015 were recorded in average rates paid on time deposits and FHLBNY borrowings of 18 basis points and 13 basis points, respectively. Interest expense on borrowings, the majority of which are from FHLBNY, increased $176,000, as the average balances of these borrowings increased 7.8% to $47.1 million at December 31, 2016 and the rates paid on these borrowings increased from 0.90% in 2015 to 1.21% in 2016.
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.
|
For the twelve months ended December 31,
|
||||||||||||||||||||||||||||||||||||
|
2016
|
2015
|
2014
|
||||||||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||||||||||||||
|
Average
|
Yield /
|
Average
|
Yield /
|
Average
|
Yield /
|
|||||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
Balance
|
Interest
|
Cost
|
Balance
|
Interest
|
Cost
|
Balance
|
Interest
|
Cost
|
|||||||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||||||||||||||
|
Loans
|
$
|
455,129
|
$
|
20,703
|
4.55
|
%
|
$
|
404,434
|
$
|
18,450
|
4.56
|
%
|
$
|
361,864
|
$
|
16,928
|
4.68
|
%
|
||||||||||||||||||
|
Taxable investment securities
|
142,277
|
2,494
|
1.75
|
%
|
118,035
|
2,190
|
1.86
|
%
|
106,976
|
1,975
|
1.85
|
%
|
||||||||||||||||||||||||
|
Tax-exempt investment securities
|
32,387
|
832
|
2.57
|
%
|
27,841
|
763
|
2.74
|
%
|
27,854
|
782
|
2.81
|
%
|
||||||||||||||||||||||||
|
Interest-earning time deposits
|
-
|
-
|
0.00
|
%
|
-
|
-
|
0.00
|
%
|
453
|
7
|
1.55
|
%
|
||||||||||||||||||||||||
|
Fed funds sold and interest-earning deposits
|
15,898
|
64
|
0.40
|
%
|
16,036
|
21
|
0.13
|
%
|
5,386
|
7
|
0.13
|
%
|
||||||||||||||||||||||||
|
Total interest-earning assets
|
645,691
|
24,093
|
3.73
|
%
|
566,346
|
21,424
|
3.78
|
%
|
502,533
|
19,699
|
3.92
|
%
|
||||||||||||||||||||||||
|
Noninterest-earning assets:
|
||||||||||||||||||||||||||||||||||||
|
Other assets
|
41,097
|
40,606
|
39,769
|
|||||||||||||||||||||||||||||||||
|
Allowance for loan losses
|
(5,965
|
)
|
(5,674
|
)
|
(5,152
|
)
|
||||||||||||||||||||||||||||||
|
Net unrealized gains
|
||||||||||||||||||||||||||||||||||||
|
on available for sale securities
|
397
|
790
|
736
|
|||||||||||||||||||||||||||||||||
|
Total assets
|
$
|
681,220
|
$
|
602,068
|
$
|
537,886
|
||||||||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||||||||||||||
|
NOW accounts
|
$
|
56,541
|
$
|
92
|
0.16
|
%
|
$
|
46,044
|
$
|
86
|
0.19
|
%
|
$
|
38,960
|
76
|
0.20
|
%
|
|||||||||||||||||||
|
Money management accounts
|
14,392
|
35
|
0.24
|
%
|
12,981
|
21
|
0.16
|
%
|
13,205
|
22
|
0.17
|
%
|
||||||||||||||||||||||||
|
MMDA accounts
|
167,817
|
699
|
0.42
|
%
|
125,396
|
628
|
0.50
|
%
|
94,941
|
401
|
0.42
|
%
|
||||||||||||||||||||||||
|
Savings and club accounts
|
79,317
|
74
|
0.09
|
%
|
75,307
|
62
|
0.08
|
%
|
73,683
|
63
|
0.09
|
%
|
||||||||||||||||||||||||
|
Time deposits
|
165,464
|
1,541
|
0.93
|
%
|
155,040
|
1,165
|
0.75
|
%
|
160,043
|
1,394
|
0.87
|
%
|
||||||||||||||||||||||||
|
Subordinated loans
|
15,006
|
792
|
5.28
|
%
|
6,826
|
300
|
4.39
|
%
|
5,155
|
161
|
3.12
|
%
|
||||||||||||||||||||||||
|
Borrowings
|
47,051
|
571
|
1.21
|
%
|
43,663
|
395
|
0.90
|
%
|
40,338
|
497
|
1.23
|
%
|
||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
545,588
|
3,804
|
0.70
|
%
|
465,257
|
2,657
|
0.57
|
%
|
426,325
|
2,614
|
0.61
|
%
|
||||||||||||||||||||||||
|
Noninterest-bearing liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Demand deposits
|
69,898
|
62,751
|
57,335
|
|||||||||||||||||||||||||||||||||
|
Other liabilities
|
4,632
|
3,241
|
4,356
|
|||||||||||||||||||||||||||||||||
|
Total liabilities
|
620,118
|
531,249
|
488,016
|
|||||||||||||||||||||||||||||||||
|
Shareholders' equity
|
61,102
|
70,819
|
49,870
|
|||||||||||||||||||||||||||||||||
|
Total liabilities & shareholders' equity
|
$
|
681,220
|
$
|
602,068
|
$
|
537,886
|
||||||||||||||||||||||||||||||
|
Net interest income
|
$
|
20,289
|
$
|
18,767
|
$
|
17,085
|
||||||||||||||||||||||||||||||
|
Net interest rate spread
|
3.03
|
%
|
3.21
|
%
|
3.31
|
%
|
||||||||||||||||||||||||||||||
|
Net interest margin
|
3.14
|
%
|
3.31
|
%
|
3.40
|
%
|
||||||||||||||||||||||||||||||
|
Ratio of average interest-earning assets
|
||||||||||||||||||||||||||||||||||||
|
to average interest-bearing liabilities
|
118.35
|
%
|
121.73
|
%
|
117.88
|
%
|
||||||||||||||||||||||||||||||
Rate/Volume Analysis
Net interest income can also be analyzed in terms of the impact of changing interest rates on interest-earning assets and interest-bearing liabilities, and changes in the volume or amount of these assets and liabilities. The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (change in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) total increase or decrease. Changes attributable to both rate and volume have been allocated ratably. Tax-exempt securities have not been adjusted for tax equivalency.
|
Years Ended December 31,
|
||||||||||||||||||||||||
|
2016 vs. 2015
|
2015 vs. 2014
|
|||||||||||||||||||||||
|
Increase/(Decrease) Due to
|
Increase/(Decrease) Due to
|
|||||||||||||||||||||||
|
Total
|
Total
|
|||||||||||||||||||||||
|
Increase
|
Increase
|
|||||||||||||||||||||||
|
(In thousands)
|
Volume
|
Rate
|
(Decrease)
|
Volume
|
Rate
|
(Decrease)
|
||||||||||||||||||
|
Interest Income:
|
||||||||||||||||||||||||
|
Loans
|
$
|
2,306
|
$
|
(53
|
)
|
$
|
2,253
|
$
|
1,951
|
$
|
(429
|
)
|
$
|
1,522
|
||||||||||
|
Taxable investment securities
|
430
|
(126
|
)
|
304
|
205
|
10
|
215
|
|||||||||||||||||
|
Tax-exempt investment securities
|
119
|
(50
|
)
|
69
|
-
|
(19
|
)
|
(19
|
)
|
|||||||||||||||
|
Interest-earning time deposits
|
-
|
-
|
-
|
(4
|
)
|
(4
|
)
|
(7
|
)
|
|||||||||||||||
|
Interest-earning deposits
|
-
|
43
|
43
|
14
|
-
|
14
|
||||||||||||||||||
|
Total interest income
|
2,855
|
(186
|
)
|
2,669
|
2,166
|
(442
|
)
|
1,725
|
||||||||||||||||
|
Interest Expense:
|
||||||||||||||||||||||||
|
NOW accounts
|
19
|
(13
|
)
|
6
|
13
|
(3
|
)
|
10
|
||||||||||||||||
|
Money management accounts
|
2
|
12
|
14
|
-
|
(1
|
)
|
(1
|
)
|
||||||||||||||||
|
MMDA accounts
|
189
|
(118
|
)
|
71
|
144
|
83
|
227
|
|||||||||||||||||
|
Savings and club accounts
|
3
|
9
|
12
|
1
|
(2
|
)
|
(1
|
)
|
||||||||||||||||
|
Time deposits
|
82
|
294
|
376
|
(42
|
)
|
(187
|
)
|
(229
|
)
|
|||||||||||||||
|
Subordinated loans
|
421
|
71
|
492
|
62
|
77
|
139
|
||||||||||||||||||
|
Borrowings
|
33
|
143
|
176
|
38
|
(140
|
)
|
(102
|
)
|
||||||||||||||||
|
Total interest expense
|
749
|
398
|
1,147
|
216
|
(173
|
)
|
43
|
|||||||||||||||||
|
Net change in net interest income
|
$
|
2,106
|
$
|
(584
|
)
|
$
|
1,522
|
$
|
1,950
|
$
|
(269
|
)
|
$
|
1,682
|
||||||||||
Interest Income
Changes in interest income result from changes in the average balances of loans, securities, and interest-earning deposits and the related average yields on those balances.
Interest income increased 12.5% to $24.1 million in 2016 as compared to 2015 due principally to the $79.3 million, or 14.0%, increase in average interest-earning assets. The increase in average interest-earning assets was due to the increase in average balances of loans and taxable investment securities, which increased 12.5% and 20.5%, respectively. The increase in the average balance of loans was due principally to increases in adjustable-rate commercial real estate loans. The average yields earned on loans, however, decreased by one basis point from 4.55% in 2016 to 4.56% in 2015 as maturing higher rate loans were replaced by loans at current lower market rates. Yields on taxable investment securities declined 11 basis points to 1.75% in 2016 as compared to 1.86% in 2015.
Interest Expense
Changes in interest expense result from changes in the average balances of deposits and borrowings and the related average interest costs on those balances.
Interest expense increased $1.1 million to $3.8 million in 2016 compared to 2015 due primarily to a $103,000 increase in deposit expenses for all deposit products in aggregate, excluding time deposits,
that was primarily driven by an average balance increase in MMDA accounts of $42.4 million in 2016 as compared to 2015.
The Company also paid $492,000 more in interest on subordinated debt in 2016 as a result of the issuance of an additional $10 million in such debt in October 2015. In addition, these increases in non-maturity deposit and subordinated debt interest costs were augmented by $376,000 increase in interest expense on time deposits.
The increase in interest expense on time deposits was the result of an increase in the average balance of time deposits in 2016 of $10.4 million. The average balance increase of time deposits in 2016 was due to an increase of $19.5 in time deposits originated within the Bank's customer base, partially offset by a decrease of $9.1 million in time deposits acquired through the CDARS program. This increase was largely the result of promotional activity designed to increase balances within this deposit category. Partially as a result of this promotional activity, the average rates of interest paid on time deposits increased 0.18% in 2016 to 0.93% as compared to 0.75% in 2015. Interest expense on borrowings, the majority of which are from FHLBNY, increased $176,000, as the average balances of these borrowings increased 7.8% to $47.1 million and the rates paid on these borrowings increased from 0.90% in 2015 to 1.21% in 2016.
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 $953,000 in 2016 as compared to $1.3 million recorded in the prior year. This year-over-year decrease reflects decreased levels of net charge-offs in 2016 as the Company recorded $412,000 in net charge-offs in 2016 as compared to $993,000 in net charge-offs in 2015. The $581,000 decrease in net charge-offs resided primarily in commercial real estate and industrial loans. The ratio of net charge-offs to average loans declined to 0.09% in 2016 from 0.25% in 2015. The positive effects of improving loan credit quality metrics on the amount of the required provision for loan losses in 2016, as compared with the previous year, were partially offset by increases in the required provision arising from the 14.3% increase in gross loan balances during 2016.
Noninterest Income
The Company's noninterest income is primarily comprised of fees on deposit account balances and transactions, loan servicing, commissions and net gains or losses on sales of securities, loans, and foreclosed real estate.
The following table sets forth certain information on noninterest income for the years indicated.
|
Years Ended December 31,
|
||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Change
|
|||||||||||||
|
Service charges on deposit accounts
|
$
|
1,141
|
$
|
1,155
|
$
|
(14
|
)
|
-1.2
|
%
|
|||||||
|
Earnings and gain on bank owned life insurance
|
307
|
401
|
(94
|
)
|
-23.4
|
%
|
||||||||||
|
Loan servicing fees
|
138
|
233
|
(95
|
)
|
-40.8
|
%
|
||||||||||
|
Debit card interchange fees
|
557
|
530
|
27
|
5.1
|
%
|
|||||||||||
|
Other charges, commissions and fees
|
1,486
|
1,397
|
89
|
6.4
|
%
|
|||||||||||
|
Noninterest income before gains
|
3,629
|
3,716
|
(87
|
)
|
-2.3
|
%
|
||||||||||
|
Net gains on sales and redemptions of investment securities
|
594
|
422
|
172
|
40.8
|
%
|
|||||||||||
|
Net (losses) gains on sales of loans and foreclosed real estate
|
(40
|
)
|
34
|
(74
|
)
|
-217.6
|
%
|
|||||||||
|
Total noninterest income
|
$
|
4,183
|
$
|
4,172
|
$
|
11
|
0.3
|
%
|
||||||||
N
oninterest income for the year ended December 31, 2016 increased $11,000, or 0.3%, to $4.2 million as compared to the prior year. Noninterest income before gains declined $87,000, or 2.3%, to $3.6 million as a result of declines in loan servicing fees and earnings and gain on bank owned life insurance of $95,000 and $94,000, respectively. The decline in loan servicing fees was due to the reduced size of the Bank's residential mortgage portfolio serviced for others. Earnings on bank owned life insurance decreased $94,000 during the year ended December 31, 2016, as compared to the previous year, due to the collection of a death benefit related to a former employee in 2015. Partially offsetting these decreases in noninterest income during the year ended December 31, 2016 as compared to the year ended December 31, 2015, was an increase in other charges, commissions and fees of $89,000, or 6.4%, which was primarily due to an increase in insurance commissions of $83,000. Net gains from the sale of investment securities increased by $172,000 in 2016 as compared to the previous year, as the Company managed its balance sheet positions in investment securities to meet its liquidity and interest rate risk management objectives.
Noninterest Expense
The following table sets forth certain information on noninterest expense for the years indicated.
|
Years Ended December 31,
|
||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
Change
|
|||||||||||||
|
Salaries and employee benefits
|
$
|
10,772
|
$
|
9,687
|
$
|
1,085
|
11.2
|
%
|
||||||||
|
Building occupancy
|
1,936
|
1,921
|
15
|
0.8
|
%
|
|||||||||||
|
Data processing
|
1,682
|
1,609
|
73
|
4.5
|
%
|
|||||||||||
|
Professional and other services
|
834
|
859
|
(25
|
)
|
-2.9
|
%
|
||||||||||
|
Advertising
|
730
|
518
|
212
|
40.9
|
%
|
|||||||||||
|
FDIC assessments
|
345
|
408
|
(63
|
)
|
-15.4
|
%
|
||||||||||
|
Audits and exams
|
329
|
268
|
61
|
22.8
|
%
|
|||||||||||
|
Other expenses
|
2,482
|
2,317
|
165
|
7.1
|
%
|
|||||||||||
|
Total noninterest expenses
|
$
|
19,110
|
$
|
17,587
|
$
|
1,523
|
8.7
|
%
|
||||||||
Noninterest expense for 2016 increased $1.5 million, or 8.7%, to $19.1 million from $17.6 million for the prior year. Higher noninterest expenses largely reflect investments related to the Company's continued efforts to expand brand awareness and increase its business activities in the Syracuse market. Specifically, the year-over-year increase in noninterest expenses was due in part to higher personnel expenses that increased $1.1 million, or 11.2%, in 2016 as compared to 2015. These increases resulted primarily from increases of $516,000, or 8.4%, in salaries, $209,000, or 21.3%, in employee benefits, $207,000, or 53.2%, in stock-based compensation, and $95,000, or 10.9%, in commission expense. The increase in salaries expense was due to the expansion of the Company's staffing levels in a number of areas, primarily focused on enhanced business development and risk management activities. Employee benefits expense increased due to increases in employee medical insurance premiums of $130,000 and increased 401(k) contributions of $89,000 in 2016 as compared to the previous year. Stock-based compensation increased due to the adoption of new stock-based compensation plans approved by a vote of the shareholders in May of 2016 and the granting of options previously available from plans adopted with shareholder consent in prior years.
Advertising expense increased $212,000, or 40.9%, in 2016 as compared to the previous year as the Company's management sought to increase brand awareness and corresponding business activity within the Company's market area, particularly in Onondaga County. Other expenses increased $165,000, or 7.1%, in 2016 principally due to increases in community service donations of $121,000 as compared to 2015. Partially offsetting these increases in noninterest income was a decline of $63,000, or 15.4%, in FDIC assessments due to the adoption of a reduced fee schedule by that agency.
Income Tax Expense
The Company reported income tax expense of $1.1 million in 2016 and 2015. Income tax expense increased $40,000 in 2016, as the increased tax expense that would normally be incurred due to the $406,000 increase in pretax net income recorded in 2016, as compared with the previous year, was partially offset by a decline in the effective tax rate to 25.2% in 2016 from 26.8% in 2015. The decrease in the effective tax rate was due to a higher proportion of nontaxable income to total income in 2016. These nontaxable income items included sales of certain investments that utilized available capital loss carryforward tax benefits that had been reserved against in previous years. In addition, the effective tax rate in 2016 was modestly reduced by an increase in the level of interest income earned from nontaxable loans and investment securities, calculated as a percentage of total interest income, during the year as compared to 2015. 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, 2016 were $0.79 and $0.78, respectively, as compared to basic and diluted earnings per share of $0.67 and $0.66 for the year ended December 31, 2015. The increase in basic and diluted earnings per share comparing year-over-year periods was due to the increase in net income available to common shareholders between these two years.
CHANGES IN FINANCIAL CONDITION
Total assets were $749.0 million at December 31, 2016 as compared to $623.3 million at December 31, 2015. The increase in total assets of $125.8 million, or 20.2%, was the result of the increase in loans, largely commercial real estate and residential mortgages, and the increase in investment securities. The loan portfolio, net of the allowance for loan losses, increased $61.2 million and the investment securities portfolio increased $53.4 million. The increase in total assets was funded largely by a $86.4 million increase in customer deposits, a $34.2 million increase in time deposits acquired through the CDARS program and by a net increase in borrowings from the FHLBNY of $17.6 million in 2016.
Investment Securities
The investment portfolio represented 27% of the Company's average interest earning assets in 2016 and is designed to generate a favorable rate of return consistent with safety of principal while assisting the Company in meeting its liquidity needs and interest rate risk strategies. All of the Company's investments are classified as either available-for-sale or held-to-maturity. The Company does not hold any trading securities. The Company invests primarily in securities issued by United States Government agencies and sponsored enterprises ("GSE"), mortgage-backed securities, collateralized mortgage obligations, state and municipal obligations, mutual funds, equity securities, investment grade corporate debt instruments, and common stock issued by the Federal Home Loan Bank of New York ("FHLBNY"). By investing in these types of assets, the Company reduces the credit risk of its asset base but must accept lower yields than would typically be available on loan products. Our mortgage backed securities and collateralized mortgage obligations portfolio is comprised predominantly of pass-through securities guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and does not include any securities backed by sub-prime or other high-risk mortgages.
At December 31, 2016, available-for-sale and held-to-maturity investment securities increased 43.5% to $142.0 million and 23.4% to $54.6 million, respectively. There were no securities that exceeded 10% of consolidated shareholders' equity. See Note 4 to the consolidated financial statements for further discussion on securities.
Our available-for-sale investment securities are carried at fair value and our held-to-maturity investment securities are carried at amortized cost.
The following table sets forth the carrying value of the Company's investment portfolio at December 31:
|
Available-for-Sale
|
Held-to-Maturity
|
|||||||||||||||
|
(In Thousands)
|
2016
|
2015
|
2016
|
2015
|
||||||||||||
|
Investment Securities:
|
||||||||||||||||
|
US treasury, agencies and GSEs
|
$
|
24,184
|
$
|
21,308
|
$
|
4,928
|
$
|
7,860
|
||||||||
|
State and political subdivisions
|
16,481
|
8,300
|
30,697
|
21,585
|
||||||||||||
|
Corporate
|
15,195
|
18,128
|
8,240
|
4,175
|
||||||||||||
|
Asset backed securities
|
6,664
|
-
|
-
|
-
|
||||||||||||
|
Residential mortgage-backed - US agency
|
30,566
|
32,573
|
6,386
|
7,763
|
||||||||||||
|
Collateralized mortgage obligations - US agency
|
40,986
|
16,833
|
2,927
|
2,914
|
||||||||||||
|
Collateralized mortgage obligations - Private label
|
6,577
|
-
|
1,467
|
-
|
||||||||||||
|
Mutual funds
|
626
|
1,221
|
-
|
-
|
||||||||||||
|
Equity securities
|
676
|
579
|
-
|
-
|
||||||||||||
|
Total investment securities
|
$
|
141,955
|
$
|
98,942
|
$
|
54,645
|
$
|
44,297
|
||||||||
The following table sets forth the scheduled maturities, amortized cost, fair values and average yields for the Company's investment securities at December 31, 2016. 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
|
||||||||||||||||||||||||
|
More Than One
|
More Than Five
|
|||||||||||||||||||||||
|
One Year or Less
|
to Five Years
|
to Ten Years
|
||||||||||||||||||||||
|
Annualized
|
Annualized
|
Annualized
|
||||||||||||||||||||||
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
|||||||||||||||||||
|
(Dollars in thousands)
|
Cost
|
Avg. Yield
|
Cost
|
Avg. Yield
|
Cost
|
Avg. Yield
|
||||||||||||||||||
|
Debt investment securities:
|
||||||||||||||||||||||||
|
US Treasury, agencies and GSEs
|
$
|
10,208
|
0.64
|
%
|
$
|
14,055
|
0.87
|
%
|
$
|
-
|
-
|
|||||||||||||
|
State and political subdivisions
|
1,880
|
1.66
|
%
|
3,680
|
1.79
|
%
|
5,066
|
1.95
|
%
|
|||||||||||||||
|
Corporate
|
2,590
|
1.37
|
%
|
9,273
|
2.18
|
%
|
487
|
3.00
|
%
|
|||||||||||||||
|
Asset backed securities
|
-
|
-
|
-
|
-
|
5,179
|
3.39
|
%
|
|||||||||||||||||
|
Total
|
$
|
14,678
|
0.90
|
%
|
$
|
27,008
|
1.45
|
%
|
$
|
10,732
|
2.69
|
%
|
||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
Residential mortgage-backed - US agency
|
$
|
-
|
-
|
$
|
2,016
|
1.73
|
%
|
$
|
8,644
|
1.96
|
%
|
|||||||||||||
|
Collateralized mortgage obligations - US agency
|
-
|
-
|
3,453
|
2.21
|
%
|
5,518
|
2.13
|
%
|
||||||||||||||||
|
Collateralized mortgage obligations - Private label
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
Total
|
$
|
-
|
-
|
$
|
5,469
|
2.04
|
%
|
$
|
14,162
|
2.03
|
%
|
|||||||||||||
|
Other non-maturity investments:
|
||||||||||||||||||||||||
|
Mutual funds
|
$
|
643
|
1.58
|
%
|
$
|
-
|
-
|
$
|
-
|
-
|
||||||||||||||
|
Equity securities
|
663
|
2.00
|
%
|
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Total
|
$
|
1,306
|
1.79
|
%
|
$
|
-
|
-
|
$
|
-
|
-
|
||||||||||||||
|
Total investment securities
|
$
|
15,984
|
0.97
|
%
|
$
|
32,477
|
1.55
|
%
|
$
|
24,894
|
2.31
|
%
|
||||||||||||
|
More Than Ten Years
|
Total Investment Securities
|
|||||||||||||||||||||||
|
Annualized
|
Annualized
|
|||||||||||||||||||||||
|
Amortized
|
Weighted
|
Amortized
|
Fair
|
Weighted
|
||||||||||||||||||||
|
(Dollars in thousands)
|
Cost
|
Avg. Yield
|
Cost
|
Value
|
Avg. Yield
|
|||||||||||||||||||
|
Debt investment securities:
|
||||||||||||||||||||||||
|
US Treasury, agencies and GSEs
|
$
|
-
|
-
|
$
|
24,263
|
$
|
24,184
|
0.78
|
%
|
|||||||||||||||
|
State and political subdivisions
|
6,560
|
2.10
|
%
|
17,186
|
16,481
|
1.94
|
%
|
|||||||||||||||||
|
Corporate
|
3,209
|
3.86
|
%
|
15,559
|
15,195
|
2.42
|
%
|
|||||||||||||||||
|
Asset backed securities
|
1,517
|
2.24
|
%
|
6,696
|
6,664
|
3.13
|
%
|
|||||||||||||||||
|
Total
|
$
|
11,286
|
2.62
|
%
|
$
|
63,704
|
$
|
62,524
|
1.73
|
%
|
||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
Residential mortgage-backed - US agency
|
$
|
20,544
|
1.99
|
%
|
$
|
31,204
|
$
|
30,566
|
1.97
|
%
|
||||||||||||||
|
Collateralized mortgage obligations - US agency
|
33,153
|
2.28
|
%
|
42,124
|
40,986
|
2.25
|
%
|
|||||||||||||||||
|
Collateralized mortgage obligations - Private label
|
6,682
|
2.18
|
%
|
6,682
|
6,577
|
2.18
|
%
|
|||||||||||||||||
|
Total
|
$
|
60,379
|
2.17
|
%
|
$
|
80,010
|
$
|
78,129
|
2.13
|
%
|
||||||||||||||
|
Other non-maturity investments:
|
||||||||||||||||||||||||
|
Mutual funds
|
$
|
-
|
-
|
$
|
643
|
$
|
626
|
1.58
|
%
|
|||||||||||||||
|
Equity securities
|
-
|
-
|
663
|
676
|
2.00
|
%
|
||||||||||||||||||
|
Total
|
$
|
-
|
-
|
$
|
1,306
|
$
|
1,302
|
1.80
|
%
|
|||||||||||||||
|
Total investment securities
|
$
|
71,665
|
2.24
|
%
|
$
|
145,020
|
$
|
141,955
|
1.95
|
%
|
||||||||||||||
|
HELD-TO-MATURITY
|
||||||||||||||||||||||||
|
More Than One
|
More Than Five
|
|||||||||||||||||||||||
|
One Year or Less
|
to Five Years
|
to Ten Years
|
||||||||||||||||||||||
|
Annualized
|
Annualized
|
Annualized
|
||||||||||||||||||||||
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
|||||||||||||||||||
|
(Dollars in thousands)
|
Cost
|
Avg. Yield
|
Cost
|
Avg. Yield
|
Cost
|
Avg. Yield
|
||||||||||||||||||
|
Debt investment securities:
|
||||||||||||||||||||||||
|
US Treasury, agencies and GSEs
|
$
|
-
|
-
|
$
|
4,928
|
2.07
|
%
|
$
|
-
|
-
|
||||||||||||||
|
State and political subdivisions
|
206
|
1.30
|
%
|
4,581
|
2.26
|
%
|
13,438
|
3.55
|
%
|
|||||||||||||||
|
Corporate
|
-
|
-
|
664
|
3.79
|
%
|
4,385
|
5.28
|
%
|
||||||||||||||||
|
Total
|
$
|
206
|
1.30
|
%
|
$
|
10,173
|
2.27
|
%
|
$
|
17,823
|
3.97
|
%
|
||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
Residential mortgage-backed - US agency
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
1,128
|
2.22
|
%
|
||||||||||||||
|
Collateralized mortgage obligations - US agency
|
-
|
-
|
-
|
-
|
2,928
|
3.16
|
%
|
|||||||||||||||||
|
Collateralized mortgage obligations - Private label
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
Total
|
$
|
-
|
-
|
$
|
-
|
-
|
$
|
4,056
|
2.90
|
%
|
||||||||||||||
|
Total investment securities
|
$
|
206
|
1.30
|
%
|
$
|
10,173
|
2.27
|
%
|
$
|
21,879
|
3.77
|
%
|
||||||||||||
|
More Than Ten Years
|
Total Investment Securities
|
|||||||||||||||||||||||
|
Annualized
|
Annualized
|
|||||||||||||||||||||||
|
Amortized
|
Weighted
|
Amortized
|
Fair
|
Weighted
|
||||||||||||||||||||
|
(Dollars in thousands)
|
Cost
|
Avg. Yield
|
Cost
|
Value
|
Avg. Yield
|
|||||||||||||||||||
|
Debt investment securities:
|
||||||||||||||||||||||||
|
US Treasury, agencies and GSEs
|
$
|
-
|
-
|
$
|
4,928
|
$
|
4,940
|
2.07
|
%
|
|||||||||||||||
|
State and political subdivisions
|
12,472
|
2.84
|
%
|
30,697
|
30,576
|
3.05
|
%
|
|||||||||||||||||
|
Corporate
|
3,191
|
3.69
|
%
|
8,240
|
8,097
|
4.54
|
%
|
|||||||||||||||||
|
Total
|
$
|
15,663
|
3.01
|
%
|
$
|
43,865
|
$
|
43,613
|
3.22
|
%
|
||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||
|
Residential mortgage-backed - US agency
|
$
|
5,258
|
2.87
|
%
|
$
|
6,386
|
$
|
6,397
|
2.76
|
%
|
||||||||||||||
|
Collateralized mortgage obligations - US agency
|
-
|
-
|
2,927
|
3,023
|
3.16
|
%
|
||||||||||||||||||
|
Collateralized mortgage obligations - Private label
|
1,466
|
2.87
|
%
|
1,467
|
1,396
|
2.87
|
%
|
|||||||||||||||||
|
Total
|
$
|
6,724
|
2.87
|
%
|
$
|
10,780
|
$
|
10,816
|
2.88
|
%
|
||||||||||||||
|
Total investment securities
|
$
|
22,387
|
2.97
|
%
|
$
|
54,645
|
$
|
54,429
|
3.15
|
%
|
||||||||||||||
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 70% of the Company's average interest earning assets in 2016 and account for the greatest portion of total interest income. The Company currently has the largest portion of its loan portfolio in commercial loan products that represent 52% 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 42% of total loans. The Company has seen the proportion of commercial loan products to total loans increase in recent years and it will continue to emphasize these types of loans. Notwithstanding this emphasis, the Company also anticipates a continued commitment to financing the purchase or improvement of residential real estate in its market area.
The following table sets forth the composition of our loan portfolio, including net deferred costs, in dollar amount and as a percentage of loans. There were no loans classified as loans held for sale at the dates indicated.
|
December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
2016
|
2015
|
2014
|
2013
|
2012
|
|||||||||||||||||||||||||||||||||||
|
Residential real estate
|
$
|
206,900
|
42.0
|
%
|
$
|
189,367
|
44.0
|
%
|
$
|
175,322
|
45.2
|
%
|
$
|
168,493
|
49.3
|
%
|
$
|
176,968
|
53.0
|
%
|
||||||||||||||||||||
|
Commercial real estate
|
150,569
|
30.6
|
%
|
129,481
|
30.1
|
%
|
125,883
|
32.5
|
%
|
95,510
|
28.0
|
%
|
82,357
|
24.7
|
%
|
|||||||||||||||||||||||||
|
Commercial and tax exempt
|
103,394
|
21.0
|
%
|
83,016
|
19.3
|
%
|
59,268
|
15.3
|
%
|
52,241
|
15.3
|
%
|
48,826
|
14.6
|
%
|
|||||||||||||||||||||||||
|
Home equity and junior liens
|
24,991
|
5.1
|
%
|
23,688
|
5.5
|
%
|
22,905
|
5.9
|
%
|
21,223
|
6.2
|
%
|
22,141
|
6.6
|
%
|
|||||||||||||||||||||||||
|
Consumer loans
|
6,293
|
1.3
|
%
|
4,886
|
1.1
|
%
|
4,160
|
1.1
|
%
|
4,166
|
1.2
|
%
|
3,456
|
1.0
|
%
|
|||||||||||||||||||||||||
|
Total loans receivable
|
$
|
492,147
|
100.0
|
%
|
$
|
430,438
|
100.0
|
%
|
$
|
387,538
|
100.0
|
%
|
$
|
341,633
|
100.0
|
%
|
$
|
333,748
|
100.0
|
%
|
||||||||||||||||||||
The following table shows the amount of loans outstanding, including net deferred costs, as of December 31, 2016 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.
|
Due Under
|
Due 1-5
|
Due Over
|
||||||||||||||
|
(In thousands)
|
One Year
|
Years
|
Five Years
|
Total
|
||||||||||||
|
Real estate:
|
||||||||||||||||
|
Commercial real estate
|
$
|
1,758
|
$
|
4,936
|
$
|
143,875
|
$
|
150,569
|
||||||||
|
Residential real estate
|
141
|
3,008
|
203,751
|
206,900
|
||||||||||||
|
|
1,899
|
7,944
|
347,626
|
357,469
|
||||||||||||
|
Commercial and tax exempt
|
42,528
|
26,744
|
34,122
|
103,394
|
||||||||||||
|
Home Equity and junior liens
|
77
|
1,171
|
23,743
|
24,991
|
||||||||||||
|
Consumer
|
949
|
2,768
|
2,576
|
6,293
|
||||||||||||
|
Total loans
|
$
|
45,453
|
$
|
38,627
|
$
|
408,067
|
$
|
492,147
|
||||||||
|
(In thousands)
|
Due After One Year
|
|||
|
Interest rates:
|
||||
|
Fixed
|
$
|
210,459
|
||
|
Variable
|
236,235
|
|||
|
Total loans
|
$
|
446,694
|
||
Total loans receivable, including net deferred costs, increased $61.7 million, or 14.3%, to $492.1 million at December 31, 2016 when compared to the prior year, primarily due to the growth in adjustable-rate commercial and commercial real estate loans, and fixed-rate residential mortgage loans. The Company does not originate sub-prime, Alt-A, negative amortizing or other higher risk structured residential mortgages. Commercial and commercial real estate loans increased $41.5 million, or 19.5%, to $153.9 million for the year ended December 31, 2016 as compared to December 31, 2015. The Company maintained its strict credit standards, but continued to benefit from the activities of the office in downtown Syracuse that opened in 2014 and expanding relationship-derived business activity within the markets that the bank serves.
Nonperforming Loans and Assets
The following table represents information concerning the aggregate amount of nonperforming assets:
|
|
December 31,
|
|||||||||||||||||||
|
(Dollars In thousands)
|
2016
|
2015
|
2014
|
2013
|
2012
|
|||||||||||||||
|
Nonaccrual loans:
|
||||||||||||||||||||
|
Commercial and commercial real estate loans
|
$
|
1,863
|
$
|
3,238
|
$
|
4,030
|
$
|
2,709
|
$
|
2,726
|
||||||||||
|
Consumer
|
388
|
365
|
324
|
447
|
776
|
|||||||||||||||
|
Residential mortgage loans
|
2,560
|
1,715
|
1,902
|
2,194
|
2,046
|
|||||||||||||||
|
Total nonaccrual loans
|
4,811
|
5,318
|
6,256
|
5,350
|
5,548
|
|||||||||||||||
|
Total nonperforming loans
|
4,811
|
5,318
|
6,256
|
5,350
|
5,548
|
|||||||||||||||
|
Foreclosed real estate
|
597
|
517
|
261
|
619
|
426
|
|||||||||||||||
|
Total nonperforming assets
|
$
|
5,408
|
$
|
5,835
|
$
|
6,517
|
$
|
5,969
|
$
|
5,974
|
||||||||||
|
Troubled debt restructurings not included above
|
$
|
5,531
|
$
|
1,916
|
$
|
2,219
|
$
|
2,459
|
$
|
1,937
|
||||||||||
|
Nonperforming loans to total loans
|
0.98
|
%
|
1.24
|
%
|
1.61
|
%
|
1.57
|
%
|
1.66
|
%
|
||||||||||
|
Nonperforming assets to total assets
|
0.72
|
%
|
0.94
|
%
|
1.16
|
%
|
1.18
|
%
|
1.25
|
%
|
||||||||||
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 TDRs not included above (the latter also known as accruing TDRs).
Total nonperforming loans decreased $507,000 between December 31, 2015 and December 31, 2016, driven by a $1.4 million decrease in commercial and commercial real estate nonperforming loans across several large relationships. Partially offsetting this decrease in commercial and commercial real estate nonperforming loans was an increase of $845,000 in nonperforming loans secured by residential real estate. The increase in nonperforming residential real estate was comprised of 33 loans that were nonperforming at December 31, 2016 as compared to 28 loans that were nonperforming at December 31, 2015. Management believes that the increase in nonperforming residential real estate loans is transitory and that the value of the collateral properties underlying the loans is sufficient to preclude any significant losses related to these loans. Management continues to monitor and react to national and local economic trends as well as general portfolio conditions which may impact the quality of the portfolio, and considers these environmental factors in support of the allowance for loan loss reserve. Management believes that the current level of the allowance for loan losses, at $6.2 million at December 31, 2016, 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.
FRE balances increased by $80,000 at December 31, 2016, from the prior year and reflects the timing of foreclosures versus sales in 2016. FRE properties increased from 6 to 9 between these two dates.
The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or more. There are no loans that are past due 90 days or more and still accruing interest. The Company considers a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan.
Had the loans in nonaccrual status performed in accordance with their original terms, additional interest income of $51,000 and $126,000 would have been recorded for the years ended December 31, 2016 and December 31, 2015, 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, 2016 and December 31, 2015, the Company had $8.6 million and $6.5 million in loans, which were deemed to be impaired, having specific reserves of $1.1 million and $960,000, respectively. The $2.1 million year-over-year increase in impaired loans was principally due to a $1.1 million increase in impaired residential real estate loans, and a $642,000 increase in impaired commercial real estate loans. All other loan product segments (which include commercial loans, home equity loans, junior liens and other consumer loans) reported modest year-over-year increases in impaired loans of $275,000 in aggregate. The threshold for individually measuring impairment on commercial real estate or commercial loans remains at $100,000 and for residential mortgage loans remains at $300,000 at December 31, 2016. 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 potential credit problems which may result in the borrowers not being able to comply with the current loan repayment terms and which may result in possible future impaired loan reporting. Potential problem loans decreased $3.1 million to $6.9 million at December 31, 2016, compared to $10.0 million at December 31, 2015.
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 $1.3 million decrease in potential problem commercial real estate loans and a $1.1 million decrease in potential problem loans secured by residential real estate. Potential problem loans decreased $761,000 in aggregate within all other loan product segments.
The ratio of the allowance to loan losses to period-end loans at December 31, 2016 was 1.27% as compared to 1.33% at December 31, 2015. The modest year-over-year decrease in this ratio was driven by improving credit quality metrics in the Bank's loan portfolio.
In the normal course of business, the Bank has, from time to time, sold residential mortgage loans and participation interests in commercial loans. As is typical in the industry, the Bank makes certain representations and warranties to the buyer. Pathfinder Bank maintains a quality control program for closed loans and considers the risks and uncertainties associated with potential repurchase requirements to be minimal.
Allowance for Loan Losses
The allowance for loan losses is established through provision for loan losses and reduced by loan charge-offs net of recoveries. The allowance for loan losses represents the amount available for probable credit losses in the Company's loan portfolio as estimated by management. In its assessment of the qualitative factors used in arriving at the required allowance for loan losses, management considers changes in national and local economic trends, the
rate of the portfolios' growth, trends in delinquencies and nonaccrual balances, changes in loan policy, and changes in management experience and staffing. These factors, coupled with the recent historical loss experience within the loan portfolio by product segment support the estimable and probable losses within the loan portfolio.
The Company establishes a specific allocation for all commercial loans identified as being impaired with a balance in excess of $100,000 that are also on nonaccrual or have been risk rated under the Company's risk rating system as substandard, doubtful, or loss. The measurement of impaired loans is based upon either the present value of future cash flows discounted at the historical effective interest rate or the fair value of the collateral, less costs to sell for collateral dependent loans. At December 31, 2016, the Bank's position in impaired loans consisted of 42 loans totaling $8.6million. Of these loans, 31 loans, totaling $6.2 million, were valued using the present value of future cash flows method; and 11 loans, totaling $2.4 million, were valued based on a collateral analysis. The Company uses the fair value of collateral, less costs to sell to measure impairment on commercial and commercial real estate loans. Residential real estate loans in excess of $300,000 will also be included in this individual loan review. Residential real estate loans less than this amount will be included in impaired loans if it is part of the total related credit to a previously identified impaired commercial loan. The Company also establishes a specific allowance, regardless to the size of the loan, for all loans subject to a troubled debt restructuring agreement.
The allowance for loan losses at December 31, 2016 and 2015 was $6.2 million and $5.7 million, or 1.27% and 1.33% of total year end loans, respectively. Net loan charge-offs were $412,000 during 2016, as compared to $993,000 in 2015. The decrease in net loan charge-offs were reported in all commercial real estate and commercial loan portfolio classes and these reductions in net charge-offs account for the substantial majority of the overall reduction in net charge-offs in 2016 as compared with the previous year.
For further discussion of our allowance for loan losses procedures, please see "Business-Allowance for Loan Losses" in this Annual Report on Form 10-K.
The following table sets forth the allocation of allowance for loan losses by loan category for the periods indicated. The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
|
2016
|
2015
|
2014
|
2013
|
2012
|
||||||||||||||||||||||||||||||||||||
|
Allocation
|
Percent of
|
Allocation
|
Percent of
|
Allocation
|
Percent of
|
Allocation
|
Percent of
|
Allocation
|
Percent of
|
|||||||||||||||||||||||||||||||
|
of the
|
Loans to
|
of the
|
Loans to
|
of the
|
Loans to
|
of the
|
Loans to
|
of the
|
Loans to
|
|||||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
Allowance
|
Total Loans
|
Allowance
|
Total Loans
|
Allowance
|
Total Loans
|
Allowance
|
Total Loans
|
Allowance
|
Total Loans
|
||||||||||||||||||||||||||||||
|
Residential real estate
|
$
|
759
|
42.0
|
%
|
$
|
581
|
44.0
|
%
|
$
|
509
|
45.2
|
%
|
$
|
649
|
49.3
|
%
|
$
|
811
|
53.1
|
%
|
||||||||||||||||||||
|
Commercial real estate
|
2,935
|
30.6
|
%
|
2,983
|
30.1
|
%
|
2,801
|
32.5
|
%
|
2,302
|
28.0
|
%
|
1,748
|
24.6
|
%
|
|||||||||||||||||||||||||
|
Commercial and tax exempt
|
2,056
|
21.0
|
%
|
1,674
|
19.3
|
%
|
1,497
|
15.3
|
%
|
1,233
|
15.3
|
%
|
1,192
|
14.7
|
%
|
|||||||||||||||||||||||||
|
Home equity and junior liens
|
331
|
5.1
|
%
|
350
|
5.5
|
%
|
388
|
5.9
|
%
|
433
|
6.2
|
%
|
494
|
6.6
|
%
|
|||||||||||||||||||||||||
|
Consumer loans
|
166
|
1.3
|
%
|
118
|
1.1
|
%
|
98
|
1.1
|
%
|
136
|
1.2
|
%
|
168
|
1.0
|
%
|
|||||||||||||||||||||||||
|
Unallocated
|
-
|
-
|
56
|
288
|
88
|
|||||||||||||||||||||||||||||||||||
|
Total
|
$
|
6,247
|
100.0
|
%
|
$
|
5,706
|
100.0
|
%
|
$
|
5,349
|
100.0
|
%
|
$
|
5,041
|
100.0
|
%
|
$
|
4,501
|
100.0
|
%
|
||||||||||||||||||||
The following table sets forth the allowance for loan losses for the periods indicated and related ratios:
|
(Dollars In thousands)
|
2016
|
2015
|
2014
|
2013
|
2012
|
|||||||||||||||
|
Balance at beginning of year
|
$
|
5,706
|
$
|
5,349
|
$
|
5,041
|
$
|
4,501
|
$
|
3,980
|
||||||||||
|
Provisions charged to operating expenses
|
953
|
1,350
|
1,205
|
1,032
|
825
|
|||||||||||||||
|
Recoveries of loans previously charged-off:
|
||||||||||||||||||||
|
Commercial real estate and loans
|
31
|
48
|
23
|
41
|
64
|
|||||||||||||||
|
Consumer
|
63
|
69
|
52
|
71
|
65
|
|||||||||||||||
|
Residential real estate
|
13
|
40
|
2
|
47
|
75
|
|||||||||||||||
|
Total recoveries
|
107
|
157
|
77
|
159
|
204
|
|||||||||||||||
|
Loans charged off:
|
||||||||||||||||||||
|
Commercial real estate and loans
|
(69
|
)
|
(787
|
)
|
(634
|
)
|
(319
|
)
|
(231
|
)
|
||||||||||
|
Consumer
|
(208
|
)
|
(129
|
)
|
(183
|
)
|
(179
|
)
|
(169
|
)
|
||||||||||
|
Residential real estate
|
(242
|
)
|
(234
|
)
|
(157
|
)
|
(153
|
)
|
(108
|
)
|
||||||||||
|
Total charged-off
|
(519
|
)
|
(1,150
|
)
|
(974
|
)
|
(651
|
)
|
(508
|
)
|
||||||||||
|
Net charge-offs
|
(412
|
)
|
(993
|
)
|
(897
|
)
|
(492
|
)
|
(304
|
)
|
||||||||||
|
Balance at end of year
|
$
|
6,247
|
$
|
5,706
|
$
|
5,349
|
$
|
5,041
|
$
|
4,501
|
||||||||||
|
Net charge-offs to average loans outstanding
|
0.09
|
%
|
0.25
|
%
|
0.25
|
%
|
0.15
|
%
|
0.10
|
%
|
||||||||||
|
Allowance for loan losses to year-end loans
|
1.27
|
%
|
1.33
|
%
|
1.38
|
%
|
1.48
|
%
|
1.35
|
%
|
||||||||||
Deposits
The Company's deposit base is drawn from nine full-service offices in its market area. The deposit base consists of demand deposits, money management and money market deposit accounts, savings, and time deposits. Average deposits increased $75.9 million, or 15.9%, in 2016. For the year ended 2016, 70.1% of the Company's average deposit base of $553.4 million consisted of core deposits. Core deposits, which exclude time deposits, are considered to be more stable and provide the Company with a lower cost source of funds than time deposits. The Company will continue to emphasize retail and business core deposits by providing depositors with a full range of deposit product offerings. With the opening of our Syracuse business banking office in the third quarter of 2014, we increased, and continue to expect increases in, our business deposit gathering capability. The Bank also seeks additional business growth by focusing on its local brand identification and service excellence within the municipal deposit marketplace.
At December 31, 2016, retail deposits, commercial deposits and municipal deposits increased $18.6 million, $13.9 million and $55.4 million, respectively, when compared to December 31, 2015. The increase in retail deposits reflects the Bank's increased market penetration among non-business customers, particularly in northern Onondaga County, driven by the Bank's focused marketing initiatives. The increase in commercial and municipal deposits was the result of the Company's successful execution of its strategy to expand products and services to our existing commercial and municipal relationships within the markets that we serve.
At December 31, 2016, time deposits in excess of $100,000 totaled $130.4 million, or 68.9% of time deposits and 21.4% of total deposits. At December 31, 2015, these deposits totaled $89.4 million, or 61.1% of time deposits and 18.2% of total deposits.
The following table indicates the amount of the Company's certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2016:
|
(In thousands)
|
||||
|
Remaining Maturity:
|
||||
|
Three months or less
|
$
|
47,913
|
||
|
Three through six months
|
29,823
|
|||
|
Six through twelve months
|
15,940
|
|||
|
Over twelve months
|
36,761
|
|||
|
Total
|
$
|
130,437
|
||
Borrowings
Short-term borrowings are comprised primarily of advances and overnight borrowing at the FHLBNY. At December 31, 2016 and December 31, 2015 there were $42.0 million and $24.8 million, respectively, in short-term borrowings outstanding.
The following table represents information regarding short-term borrowings during 2016 and 2015.
|
(Dollars in thousands)
|
2016
|
2015
|
||||||
|
Maximum outstanding at any month end
|
$
|
65,100
|
$
|
50,700
|
||||
|
Average amount outstanding during the year
|
31,468
|
30,202
|
||||||
|
Balance at the end of the period
|
42,000
|
24,800
|
||||||
|
Average interest rate during the year
|
0.68
|
%
|
0.53
|
%
|
||||
|
Average interest rate at the end of the period
|
0.85
|
%
|
0.48
|
%
|
||||
Long-term borrowed funds consist of advances from the FHLBNY. Long-term borrowed funds, totaled $17.0 million at December 31, 2016 as compared to $16.5 million at December 31, 2015.
On October 15, 2015, the Company executed a $10.0 million non-amortizing Subordinated Loan with an unrelated third party that is scheduled to mature on October 1, 2025. The Company has the right to prepay the Subordinated Loan at any time after October 15, 2020 without penalty. The terms of the Subordinated Loan require interest payments at an annual interest rate of 3.50% from October 15, 2015 to February 29, 2016. The annual interest rate charged to the Company increased to 6.25% on March 1, 2016 through the maturity date. The Subordinated Loan is senior in the Company's credit repayment hierarchy only to the Company's common equity and, as a result, qualifies as Tier 2 capital for all future periods when applicable. The Company paid $172,000 in origination and legal fees as part of this transaction. These fees will be amortized over the life of the Subordinated Loan through its first call date using the effective interest method. The effective cost of funds related to this transaction is 6.44% calculated under this method.
Capital
The Company's shareholders' equity decreased $12.9 million, or 18.2%, to $57.9 million at December 31, 2016 from $70.8 million at December 31, 2015. This decrease was principally due to the Company's redemption of all 13,000 shares of the Series B Preferred Stock outstanding at December 31, 2015 with the payment of $13.0 million to the SBLF in February 2016. In addition, shareholder's equity was reduced in 2016 by the repurchase of 143,400 shares of the Company's common stock in the amount of $1.8 million. To a lesser extent, shareholder's equity was reduced in 2016, as compared to the previous year, by a decrease in accumulated other comprehensive loss, net of tax, of $1.3 million, and preferred and common stock dividend distributions of $836,000. Offsetting this combined decrease of $16.9 million in shareholders' equity during 2016 was net income of $3.3 million and stock-based compensation-related increase of $520,000 in additional paid in capital and $180,000 in accretion of unearned ESOP shares.
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, 2016, the Bank exceeded all regulatory required minimum capital ratios and met the regulatory definition of a "well-capitalized" institution. See "Supervision and Regulation – Federal Regulations – Capital Requirements."
On February 16, 2016, the Company redeemed all 13,000 shares of the Series B Preferred Stock outstanding with the payment of $13.0 million to the SBLF. This redemption was substantially financed by the
issuance of the $10 million Subordinated Loan on October 15, 2015. The issuance of the Subordinated Loan will increase interest expense by $644,000 per year but prospectively reduce the amount payable to the SBLF in preferred stock dividends. Effective April 1, 2016, the annual dividend rate for the preferred stock would have been 9.0%. The retirement of the $13.0 million of the SBLF Preferred Series B stock, therefore, will result in an annual reduction of preferred dividends payable of $1.2 million. The Company paid $16,000 and $130,000 in preferred stock dividends in 2016 and 2015, respectively. These transactions had no effect on the regulatory capital position of the Bank.
As a result of the Dodd-Frank Act, the Company's ability to raise new capital through the use of trust preferred securities may be limited because these securities will no longer be included in Tier 1 capital. In addition, our ability to generate or originate additional revenue producing assets may be constrained in the future in order to comply with the new capital standards required by federal regulation that took effect January 1, 2015. See Note 20 to the consolidated financial statements 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 (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, 2016, 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.
The regulations also impose a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The buffer is separate from the capital ratios required under the Prompt Corrective Action ("PCA") standards and imposes restrictions on dividend distributions and discretionary bonuses. In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. At December 30, 2016, the Bank exceeded all current and projected regulatory required minimum capital ratios, including the maximum capital buffer level that will be required on January 1, 2019.
LIQUIDITY
Liquidity management involves the Company's ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth, meet deposit withdrawals, maintain reserve requirements, and otherwise operate the Company on an ongoing basis. The Company's primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans and maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company manages the pricing of deposits to maintain a desired deposit balance. In addition, the Company invests excess funds in short-term interest-earning and other assets, which provide liquidity to meet lending requirements.
The Company's liquidity has been enhanced by its ability to borrow from the FHLBNY, whose competitive advance programs and lines of credit provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in deposits in the future could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could include, but are not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment securities, the sale of loans, or the sale of whole loans. Such actions could result in higher interest expense costs and/or losses on the sale of securities or loans.
For the year ended 2016, cash and equivalents increased by $7.2 million. The Company reported net cash flows from financing activities of $122.3 million generated principally by an increase in deposits of $120.7 million and an increase in short-term borrowings of $17.1 million. These aggregate increases of $137.7 million in 2016 due to financing activities were partially offset by the redemption of all 13,000 shares of the Series B Preferred Stock outstanding at December 31, 2015 with the payment of $13.0 million to the SBLF and the repurchase of 143,400 shares of the Company's common stock in the amount of $1.8 million. Additionally, $6.4 million was provided through operating activities. These cash flows were primarily invested in a net increases in loan outstandings of $61.7 million and investment securities of $57.6 million net of proceeds from sales, maturities and principal reductions during 2016.
Certificates of deposit due within one year of December 31, 2016 totaled $119.9 million, representing 63.3% of certificates of deposit at December 31, 2016, a decrease from 65.9% at December 31, 2015. We believe the large percentage of certificates of deposit that mature within one year reflect customers' hesitancy to invest their funds for long periods in the current low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2017.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders and making payments on its subordinated loans. The Company may repurchase shares of its common stock in the future. The Company's primary sources of funds are the proceeds it retained from the conversion and offering, interest and dividends on securities and dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without prior regulatory approval, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. The Company believes that this restriction will not have an impact on the Company's ability to meet its ongoing cash obligations. At December 31, 2016 and 2015, the Company had cash and cash equivalents of $22.4 million and 15.2 million, respectively.
In June 2016, the Company entered into a $26.0 million Irrevocable Stand-By Letter of Credit ("LOC") with the FHLBNY as another means of collateralizing public funds deposits.
This letter of credit is due to expire on June 9, 2017.
These LOCs are conditional commitments issued by the FHLBNY to guarantee the performance of the Bank with respect to large public funds deposits. These deposits are placed with the Bank by entities, such as municipalities and other political subdivisions within the Bank's market area, and typically exceed the statutory FDIC deposit insurance limits for individual accounts. As a matter of New York State statute, municipal depositors require that collateral be directly deposited by the Bank with an independent safekeeping agent, or in certain cases, that LOCs be issued by a third party that is acceptable to the depositor. The Bank finds that, with certain depositor relationships, this later method of collateralization for the benefit of the municipal depositors is more economically efficient than posting specific securities with a safekeeping agent. The Bank committed a portion of its mortgage loan portfolio as pledged collateral to the FHLBNY for the LOC. Loans encumbered as collateral for letters of credit reduce the Bank's available liquidity position in that available borrowing capacity with the FHLBNY is decreased substantially on a dollar-for-dollar basis.
The Company has a number of existing credit facilities available to it. At December 31, 2016, total credit available under the existing lines of credit was approximately $167.6 million at FHLBNY, the Federal Reserve Bank, and three other correspondent banks. At December 31, 2016, the Company had $85.0 million of the available lines of credit utilized, including
encumbrances supporting the outstanding letters of credit, described above, on its existing lines of credit with the remainder of $82.6 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, 2016, management reported to the board of directors that the Company was in compliance with its liquidity policy guidelines.
OFF-BALANCE SHEET ARRANGEMENTS
The Company 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, 2016, the Company had $103.1 million in outstanding commitments to extend credit and standby letters of credit. See Note 18 within the Notes to Consolidated Financial Statements contained herein.
Not required of a smaller reporting company.
Index to Consolidated Financial Statements
Pathfinder Bancorp, Inc.
|
Page
|
||||
|
Management's Report on Internal Control over Financial Reporting
|
56
|
|||
|
Report of Independent Registered Public Accounting Firm
|
57
|
|||
|
58
|
||||
|
59
|
||||
|
60
|
||||
|
61
|
||||
|
62
|
||||
|
64
|
||||
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. The Company's internal control over financial reporting is a process designed under the supervision of the Company's principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with United States generally accepted accounting principles.
Under the supervision and with the participation of management, including the Company's principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in
Internal Control – Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under that framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2016. In addition, based on our assessment, management has determined that there were no material weaknesses in the Company's internal controls over financial reporting.
This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting pursuant to the rules of the Dodd-Frank Act that exempts the Company from such attestation and requires only management's report.
|
/s/ Thomas W. Schneider
|
/s/ James A. Dowd
|
|||||
|
Thomas W. Schneider
|
|
|
James A. Dowd
|
|
||
|
Thomas W. Schneider
|
|
|
James A. Dowd
|
|
||
|
President and Chief Executive Officer
|
|
|
Executive Vice President, Chief Operating Officer and Chief Financial Officer
|
|
Oswego, New York
March 31, 2017
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Pathfinder Bancorp, Inc.
Oswego, New York:
We have audited the accompanying consolidated statements of condition of Pathfinder Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 2016 and 2015 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, 2016. The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pathfinder Bancorp, Inc. and subsidiaries as of December 31, 2016 and 2015 and the results of their operations and their cash flows for each of the years in the two year period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.
/s/ BONADIO & CO., LLP
Bonadio & Co., LLP
Syracuse, New York
March 31, 2017
|
Pathfinder Bancorp, Inc.
|
||||||||
|
December 31,
|
December 31,
|
|||||||
|
(In thousands, except share and per share data)
|
2016
|
2015
|
||||||
|
ASSETS:
|
||||||||
|
Cash and due from banks
|
$
|
6,968
|
$
|
9,624
|
||||
|
Interest earning deposits
|
15,451
|
5,621
|
||||||
|
Total cash and cash equivalents
|
22,419
|
15,245
|
||||||
|
Available-for-sale securities, at fair value
|
141,955
|
98,942
|
||||||
|
Held-to-maturity securities, at amortized cost (fair value of $54,429 and $45,515, respectively)
|
54,645
|
44,297
|
||||||
|
Federal Home Loan Bank stock, at cost
|
3,250
|
2,424
|
||||||
|
Loans
|
492,147
|
430,438
|
||||||
|
Less: Allowance for loan losses
|
6,247
|
5,706
|
||||||
|
Loans receivable, net
|
485,900
|
424,732
|
||||||
|
Premises and equipment, net
|
15,177
|
14,834
|
||||||
|
Accrued interest receivable
|
2,532
|
2,053
|
||||||
|
Foreclosed real estate
|
597
|
517
|
||||||
|
Intangible assets, net
|
198
|
214
|
||||||
|
Goodwill
|
4,536
|
4,536
|
||||||
|
Bank owned life insurance
|
11,458
|
10,615
|
||||||
|
Other assets
|
6,367
|
4,845
|
||||||
|
Total assets
|
$
|
749,034
|
$
|
623,254
|
||||
|
LIABILITIES AND SHAREHOLDERS' EQUITY:
|
||||||||
|
Deposits:
|
||||||||
|
Interest-bearing
|
$
|
535,701
|
$
|
428,636
|
||||
|
Noninterest-bearing
|
75,282
|
61,679
|
||||||
|
Total deposits
|
610,983
|
490,315
|
||||||
|
Short-term borrowings
|
41,947
|
24,800
|
||||||
|
Long-term borrowings
|
17,000
|
16,500
|
||||||
|
Subordinated loans
|
15,025
|
14,991
|
||||||
|
Accrued interest payable
|
75
|
199
|
||||||
|
Other liabilities
|
5,643
|
5,220
|
||||||
|
Total liabilities
|
690,673
|
552,025
|
||||||
|
Shareholders' equity:
|
||||||||
|
Preferred stock - SBLF, par value $0.01 per share; $1,000 liquidation preference;
|
||||||||
|
13,000 shares authorized; 0 shares and 13,000 shares issued and outstanding, respectively
|
-
|
13,000
|
||||||
|
Common stock, par value $0.01; 25,000,000 authorized shares; 4,236,744 and 4,353,850
|
||||||||
|
shares outstanding, respectively
|
43
|
44
|
||||||
|
Additional paid in capital
|
27,483
|
28,717
|
||||||
|
Retained earnings
|
35,619
|
33,183
|
||||||
|
Accumulated other comprehensive loss
|
(3,822
|
)
|
(2,565
|
)
|
||||
|
Unearned ESOP
|
(1,394
|
)
|
(1,574
|
)
|
||||
|
Total Pathfinder Bancorp, Inc. shareholders' equity
|
57,929
|
70,805
|
||||||
|
Noncontrolling interest
|
432
|
424
|
||||||
|
Total equity
|
58,361
|
71,229
|
||||||
|
Total liabilities and shareholders' equity
|
$
|
749,034
|
$
|
623,254
|
||||
|
The accompanying notes are an integral part of the consolidated financial statements.
|
||||||||
|
Pathfinder Bancorp, Inc.
|
||||||||
|
|
||||||||
|
For the
|
For the
|
|||||||
|
year ended
|
year ended
|
|||||||
|
(In thousands, except per share data)
|
December 31, 2016
|
December 31, 2015
|
||||||
|
Interest and dividend income:
|
||||||||
|
Loans, including fees
|
$
|
20,703
|
$
|
18,450
|
||||
|
Debt securities:
|
||||||||
|
Taxable
|
2,360
|
2,012
|
||||||
|
Tax-exempt
|
832
|
763
|
||||||
|
Dividends
|
134
|
178
|
||||||
|
Federal funds sold and interest earning deposits
|
64
|
21
|
||||||
|
Total interest income
|
24,093
|
21,424
|
||||||
|
Interest expense:
|
||||||||
|
Interest on deposits
|
2,441
|
1,962
|
||||||
|
Interest on short-term borrowings
|
301
|
138
|
||||||
|
Interest on long-term borrowings
|
270
|
257
|
||||||
|
Interest on subordinated loans
|
792
|
300
|
||||||
|
Total interest expense
|
3,804
|
2,657
|
||||||
|
Net interest income
|
20,289
|
18,767
|
||||||
|
Provision for loan losses
|
953
|
1,349
|
||||||
|
Net interest income after provision for loan losses
|
19,336
|
17,418
|
||||||
|
Noninterest income:
|
||||||||
|
Service charges on deposit accounts
|
1,141
|
1,155
|
||||||
|
Earnings and gain on bank owned life insurance
|
307
|
401
|
||||||
|
Loan servicing fees
|
138
|
233
|
||||||
|
Net gains on sales and redemptions of investment securities
|
594
|
422
|
||||||
|
Net (losses) gains on sales of loans and foreclosed real estate
|
(40
|
)
|
34
|
|||||
|
Debit card interchange fees
|
557
|
530
|
||||||
|
Other charges, commissions & fees
|
1,486
|
1,397
|
||||||
|
Total noninterest income
|
4,183
|
4,172
|
||||||
|
Noninterest expense:
|
||||||||
|
Salaries and employee benefits
|
10,772
|
9,687
|
||||||
|
Building occupancy
|
1,936
|
1,921
|
||||||
|
Data processing
|
1,682
|
1,609
|
||||||
|
Professional and other services
|
834
|
859
|
||||||
|
Advertising
|
730
|
518
|
||||||
|
FDIC assessments
|
345
|
408
|
||||||
|
Audits and exams
|
329
|
268
|
||||||
|
Other expenses
|
2,482
|
2,317
|
||||||
|
Total noninterest expenses
|
19,110
|
17,587
|
||||||
|
Income before income taxes
|
4,409
|
4,003
|
||||||
|
Provision for income taxes
|
1,111
|
1,071
|
||||||
|
Net income attributable to noncontrolling interest and Pathfinder Bancorp, Inc.
|
3,298
|
2,932
|
||||||
|
Net income attributable to noncontrolling interest
|
26
|
43
|
||||||
|
Net income attributable to Pathfinder Bancorp Inc.
|
3,272
|
2,889
|
||||||
|
Preferred stock dividends
|
16
|
130
|
||||||
|
Net income available to common shareholders
|
$
|
3,256
|
$
|
2,759
|
||||
|
Earnings per common share - basic
|
$
|
0.79
|
$
|
0.67
|
||||
|
Earnings per common share - diluted
|
$
|
0.78
|
$
|
0.66
|
||||
|
Dividends per common share
|
$
|
0.20
|
$
|
0.16
|
||||
|
The accompanying notes are an integral part of the consolidated financial statements.
|
||||||||
|
Pathfinder Bancorp, Inc.
|
||||||||
|
Years Ended
|
||||||||
|
December 31, 2016
|
December 31, 2015
|
|||||||
|
(In thousands)
|
||||||||
|
Net Income
|
$
|
3,298
|
$
|
2,932
|
||||
|
Other Comprehensive Income (Loss)
|
||||||||
|
Retirement Plans:
|
||||||||
|
Retirement plan net losses recognized in plan expenses
|
222
|
185
|
||||||
|
Plan gains (losses) not recognized in plan expenses
|
330
|
(267
|
)
|
|||||
|
Net unrealized gain (loss) on retirement plans
|
552
|
(82
|
)
|
|||||
|
Unrealized holding gains on financial derivative:
|
||||||||
|
Change in unrealized holding gains (losses) on financial derivative
|
2
|
(6
|
)
|
|||||
|
Reclassification adjustment for interest expense included in net income
|
25
|
61
|
||||||
|
Net unrealized gain on financial derivative
|
27
|
55
|
||||||
|
Unrealized holding losses on available for sale securities
|
||||||||
|
Unrealized holding losses arising during the period
|
(2,394
|
)
|
(425
|
)
|
||||
|
Reclassification adjustment for net gains included in net income
|
(594
|
)
|
(422
|
)
|
||||
|
Net unrealized loss on available for sale securities
|
(2,988
|
)
|
(847
|
)
|
||||
|
Accretion of net unrealized loss on securities transferred to held-to-maturity
(1)
|
316
|
131
|
||||||
|
Other comprehensive loss, before tax
|
(2,093
|
)
|
(743
|
)
|
||||
|
Tax effect
|
836
|
297
|
||||||
|
Other comprehensive loss, net of tax
|
(1,257
|
)
|
(446
|
)
|
||||
|
Comprehensive income
|
$
|
2,041
|
$
|
2,486
|
||||
|
Comprehensive income, attributable to noncontrolling interest
|
$
|
26
|
$
|
43
|
||||
|
Comprehensive income attributable to Pathfinder Bancorp, Inc.
|
$
|
2,015
|
$
|
2,443
|
||||
|
Tax Effect Allocated to Each Component of Other Comprehensive Loss
|
||||||||
|
Retirement plan net losses recognized in plan expenses
|
$
|
(87
|
)
|
$
|
(74
|
)
|
||
|
Plan gains (losses) not recognized in plan expenses
|
(134
|
)
|
106
|
|||||
|
Change in unrealized holding gains (losses) on financial derivative
|
(1
|
)
|
2
|
|||||
|
Reclassification adjustment for interest expense included in net income
|
(10
|
)
|
(24
|
)
|
||||
|
Unrealized holding losses arising during the period
|
958
|
170
|
||||||
|
Reclassification adjustment for net gains included in net income
|
236
|
169
|
||||||
|
Accretion of net unrealized loss on securities transferred to held-to-maturity
(1)
|
(126
|
)
|
(52
|
)
|
||||
|
Income tax effect related to other comprehensive income
|
$
|
836
|
$
|
297
|
||||
|
(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.
|
||||||||
|
Pathfinder Bancorp, Inc.
|
||||||||||||||||||||||||||||||||
|
Years ended December 31, 2016 and December 31, 2015
|
||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Additional
|
Other Com-
|
Non-
|
||||||||||||||||||||||||||||||
|
Preferred
|
Common
|
Paid in
|
Retained
|
prehensive
|
Unearned
|
controlling
|
||||||||||||||||||||||||||
|
(In thousands, except share and per share data)
|
Stock
|
Stock
|
Capital
|
Earnings
|
Loss
|
ESOP
|
Interest
|
Total
|
||||||||||||||||||||||||
|
Balance, January 1, 2016
|
$
|
13,000
|
$
|
44
|
$
|
28,717
|
$
|
33,183
|
$
|
(2,565
|
)
|
$
|
(1,574
|
)
|
$
|
424
|
$
|
71,229
|
||||||||||||||
|
Net income
|
-
|
-
|
-
|
3,272
|
-
|
-
|
26
|
3,298
|
||||||||||||||||||||||||
|
Other comprehensive loss, net of tax
|
-
|
-
|
-
|
-
|
(1,257
|
)
|
-
|
-
|
(1,257
|
)
|
||||||||||||||||||||||
|
Preferred stock redemption (13,000 shares)
|
(13,000
|
)
|
-
|
-
|
-
|
-
|
-
|
-
|
(13,000
|
)
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Preferred stock dividends - SBLF
|
-
|
-
|
-
|
(16
|
)
|
-
|
-
|
-
|
(16
|
)
|
||||||||||||||||||||||
|
ESOP shares earned (24,442 shares)
|
-
|
-
|
113
|
-
|
-
|
180
|
-
|
293
|
||||||||||||||||||||||||
|
Stock based compensation
|
-
|
-
|
264
|
-
|
-
|
-
|
-
|
264
|
||||||||||||||||||||||||
|
Stock options exercised
|
-
|
-
|
143
|
-
|
-
|
-
|
-
|
143
|
||||||||||||||||||||||||
|
Purchase of common stock shares (143,400 shares)
|
-
|
(1
|
)
|
(1,754
|
)
|
-
|
-
|
-
|
-
|
(1,755
|
)
|
|||||||||||||||||||||
|
Common stock dividends declared ($0.20 per share)
|
-
|
-
|
-
|
(820
|
)
|
-
|
-
|
-
|
(820
|
)
|
||||||||||||||||||||||
|
Distributions from affiliates
|
-
|
-
|
-
|
-
|
-
|
-
|
(18
|
)
|
(18
|
)
|
||||||||||||||||||||||
|
Balance, December 31, 2016
|
$
|
-
|
$
|
43
|
$
|
27,483
|
$
|
35,619
|
$
|
(3,822
|
)
|
$
|
(1,394
|
)
|
$
|
432
|
$
|
58,361
|
||||||||||||||
|
Balance, January 1, 2015
|
$
|
13,000
|
$
|
44
|
$
|
28,534
|
$
|
31,085
|
$
|
(2,119
|
)
|
$
|
(1,754
|
)
|
$
|
414
|
$
|
69,204
|
||||||||||||||
|
Net income
|
-
|
-
|
-
|
2,889
|
-
|
-
|
43
|
2,932
|
||||||||||||||||||||||||
|
Other comprehensive loss, net of tax
|
-
|
-
|
-
|
-
|
(446
|
)
|
-
|
-
|
(446
|
)
|
||||||||||||||||||||||
|
Preferred stock dividends - SBLF
|
-
|
-
|
-
|
(130
|
)
|
-
|
-
|
-
|
(130
|
)
|
||||||||||||||||||||||
|
ESOP shares earned (24,442 shares)
|
-
|
-
|
89
|
-
|
-
|
180
|
-
|
269
|
||||||||||||||||||||||||
|
Stock based compensation
|
-
|
-
|
85
|
-
|
-
|
-
|
-
|
85
|
||||||||||||||||||||||||
|
Stock options exercised
|
-
|
-
|
9
|
-
|
-
|
-
|
-
|
9
|
||||||||||||||||||||||||
|
Common stock dividends declared ($0.16 per share)
|
-
|
-
|
-
|
(661
|
)
|
-
|
-
|
-
|
(661
|
)
|
||||||||||||||||||||||
|
Distributions from affiliates
|
-
|
-
|
-
|
-
|
-
|
-
|
(33
|
)
|
(33
|
)
|
||||||||||||||||||||||
|
Balance, December 31, 2015
|
$
|
13,000
|
$
|
44
|
$
|
28,717
|
$
|
33,183
|
$
|
(2,565
|
)
|
$
|
(1,574
|
)
|
$
|
424
|
$
|
71,229
|
||||||||||||||
|
The accompanying notes are an integral part of the consolidated financial statements.
|
||||||||||||||||||||||||||||||||
|
Pathfinder Bancorp, Inc.
|
||||||||
|
|
||||||||
|
For the Years ended December 31,
|
||||||||
|
(In thousands)
|
2016
|
2015
|
||||||
|
OPERATING ACTIVITIES
|
||||||||
|
Net income attributable to Pathfinder Bancorp, Inc.
|
$
|
3,272
|
$
|
2,889
|
||||
|
Adjustments to reconcile net income to net cash flows from operating activities:
|
||||||||
|
Provision for loan losses
|
953
|
1,349
|
||||||
|
Deferred income tax (benefit) expense
|
(249
|
)
|
116
|
|||||
|
Proceeds from sale of loans
|
202
|
69
|
||||||
|
Originations of loans held-for-sale
|
(197
|
)
|
(68
|
)
|
||||
|
Realized losses (gains) on sales, redemptions and calls of:
|
||||||||
|
Real estate acquired through foreclosure
|
50
|
(1
|
)
|
|||||
|
Loans
|
(10
|
)
|
(33
|
)
|
||||
|
Available-for-sale investment securities
|
(456
|
)
|
(422
|
)
|
||||
|
Held-to-maturity investment securities
|
(53
|
)
|
-
|
|||||
|
Depreciation
|
1,019
|
998
|
||||||
|
Amortization of mortgage servicing rights
|
12
|
14
|
||||||
|
Amortization of deferred loan costs
|
222
|
170
|
||||||
|
Amortization of deferred financing from subordinated loan
|
34
|
-
|
||||||
|
Earnings and gain on bank owned life insurance
|
(307
|
)
|
(259
|
)
|
||||
|
Realized gain on proceeds from bank owned life insurance
|
-
|
(142
|
)
|
|||||
|
Net amortization of premiums and discounts on investment securities
|
1,211
|
865
|
||||||
|
Amortization of intangible assets
|
16
|
16
|
||||||
|
Stock based compensation and ESOP expense
|
557
|
354
|
||||||
|
Net change in accrued interest receivable
|
(479
|
)
|
(204
|
)
|
||||
|
Net change in other assets and liabilities
|
574
|
600
|
||||||
|
Net cash flows from operating activities
|
6,371
|
6,311
|
||||||
|
INVESTING ACTIVITIES
|
||||||||
|
Purchase of investment securities available-for-sale
|
(145,264
|
)
|
(67,634
|
)
|
||||
|
Purchase of investment securities held-to-maturity
|
(16,859
|
)
|
(6,317
|
)
|
||||
|
Net (purchases of) proceeds from Federal Home Loan Bank stock
|
(826
|
)
|
1,030
|
|||||
|
Proceeds from maturities and principal reductions of
|
||||||||
|
investment securities available-for-sale
|
68,506
|
30,420
|
||||||
|
Proceeds from maturities and principal reductions of
|
||||||||
|
investment securities held-to-maturity
|
3,659
|
2,903
|
||||||
|
Proceeds from sales, redemptions and calls of:
|
||||||||
|
Available-for-sale investment securities
|
30,228
|
25,180
|
||||||
|
Held-to-maturity investment securities
|
3,000
|
-
|
||||||
|
Real estate acquired through foreclosure
|
279
|
432
|
||||||
|
Realized gains on hedging activity
|
(85
|
)
|
-
|
|||||
|
Acquisition of insurance agency
|
-
|
(225
|
)
|
|||||
|
Proceeds from bank owned life insurance
|
-
|
142
|
||||||
|
Net change in loans
|
(62,733
|
)
|
(44,784
|
)
|
||||
|
Purchase of premises and equipment
|
(1,362
|
)
|
(2,632
|
)
|
||||
|
Net cash flows from investing activities
|
(121,457
|
)
|
(61,485
|
)
|
||||
|
FINANCING ACTIVITIES
|
||||||||
|
Net change in demand deposits, NOW accounts, savings accounts,
|
||||||||
|
money management deposit accounts, MMDA accounts and escrow deposits
|
57,830
|
80,850
|
||||||
|
Net change in time deposits
|
28,594
|
9,936
|
||||||
|
Net change in brokered deposits
|
34,244
|
(16,039
|
)
|
|||||
|
Net change in short-term borrowings
|
17,147
|
(30,300
|
)
|
|||||
|
Payments on long-term borrowings
|
(3,000
|
)
|
(13,000
|
)
|
||||
|
Proceeds from long-term borrowings
|
3,500
|
18,500
|
||||||
|
Proceeds from subordinated loans
|
-
|
9,836
|
||||||
|
Repayment of loan on cash surrender value of bank owned life insurance
|
(536
|
)
|
-
|
|||||
|
Redemption of preferred stock - SBLF
|
(13,000
|
)
|
-
|
|||||
|
Purchase of common stock
|
(1,755
|
)
|
-
|
|||||
|
Proceeds from exercise of stock options
|
143
|
9
|
||||||
|
Cash dividends paid to preferred shareholder - SBLF
|
(49
|
)
|
(130
|
)
|
||||
|
Cash dividends paid to common shareholders
|
(866
|
)
|
(609
|
)
|
||||
|
Change in noncontrolling interest, net
|
8
|
10
|
||||||
|
Net cash flows from financing activities
|
122,260
|
59,063
|
||||||
|
Change in cash and cash equivalents
|
7,174
|
3,889
|
||||||
|
Cash and cash equivalents at beginning of period
|
15,245
|
11,356
|
||||||
|
Cash and cash equivalents at end of period
|
$
|
22,419
|
$
|
15,245
|
||||
|
CASH PAID DURING THE PERIOD FOR:
|
||||||||
|
Interest
|
$
|
3,928
|
$
|
2,521
|
||||
|
Income taxes
|
970
|
1,237
|
||||||
|
NON-CASH INVESTING ACTIVITY
|
||||||||
|
Real estate acquired in exchange for loans
|
390
|
722
|
||||||
The accompanying notes are an integral part of the consolidated financial statements.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The accompanying consolidated financial statements include the accounts of Pathfinder Bancorp, Inc. (the "Company") and its wholly owned subsidiary, Pathfinder Bank (the "Bank"). The Company is a Maryland corporation headquartered in Oswego, New York. On October 16, 2014, the Company completed its conversion from the mutual holding company structure and the related public offering and is now a stock holding company that is fully owned by the public. As a result of the conversion, the mutual holding company and former mid-tier holding company were merged into Pathfinder Bancorp, Inc. The primary business of the Company is its investment in Pathfinder Bank (the "Bank") which is 100% owned by the Company. The Company sold 2,636,053 shares of common stock in the offering, including 105,442 shares sold to the Pathfinder Bank employee stock ownership plan ("ESOP"). All shares were sold at a price of $10.00 per share raising $26.4 million in gross proceeds. Additionally, $197,000 in cash was received from the merger of MHC into the company; and after accounting for conversion related expenses of $1.5 million, the Company received $24.9 million in net proceeds. Concurrent with the completion of the offering, publicly owned shares of Pathfinder Bancorp, Inc., a federal corporation, were exchanged for 1.6472 shares of the Company's common stock. At December 31, 2016, 4,236,744 shares of common stock were outstanding. The Bank has three wholly owned operating subsidiaries, Pathfinder Risk Management Company, Inc. ("PRMC"), Pathfinder REIT, Inc. and Whispering Oaks Development Corp. All significant inter-company accounts and activity have been eliminated in consolidation. Although the Company owns, through its subsidiary PRMC, 51% of the membership interest in FitzGibbons Agency, LLC ("FitzGibbons"), the Company is required to consolidate 100% of FitzGibbons within the consolidated financial statements. The 49% of which the Company does not own is accounted for separately as noncontrolling interests within the consolidated financial statements.
The Company has seven offices located in Oswego County and two offices in Onondaga County. The Company is primarily engaged in the business of attracting deposits from the general public in the Company's market area, and investing such deposits, together with other sources of funds, in loans secured by commercial real estate, business assets, one-to-four family residential real estate and investment securities.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management has identified the allowance for loan losses, deferred income taxes, pension obligations, the annual evaluation of the Company's goodwill for possible impairment and the evaluation of investment securities for other than temporary impairment and the estimation of fair values for accounting and disclosure purposes to be the accounting areas that require the most subjective and complex judgments, and as such, could be the most subject to revision as new information becomes available.
The Company is subject to the regulations of various governmental agencies. The Company also undergoes periodic examinations by the regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loss allowances, and operating restrictions resulting from the regulators' judgments based on information available to them at the time of their examinations.
Significant Group Concentrations of Credit Risk
Most of the Company's activities are with customers located primarily in Oswego and Onondaga counties of New York State. A large portion of the Company's portfolio is centered in residential and commercial real estate. The Company closely monitors real estate collateral values and requires additional reviews of commercial real estate appraisals by a qualified third party for commercial real estate loans in excess of $400,000.
All residential loan appraisals are reviewed by an individual or third party who is independent of the loan origination or approval process and was not involved in the approval of appraisers or selection of the appraiser for the transaction, and has no direct or indirect interest, financial or otherwise in the property or the transaction.
Note 4 discusses the types of securities that the Company invests in. Note 5 discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or customer.
Advertising
The Company follows the policy of charging the costs of advertising to expense as incurred.
Noncontrolling Interest
Noncontrolling interest represents the portion of ownership and profit or loss that is attributable to the minority owners of the FitzGibbons Agency.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks and interest-bearing deposits (with original maturity of three months or less).
Investment Securities
The Company classifies investment securities as either available-for-sale or held-to-maturity. The Company does not hold any securities considered to be trading. Available-for-sale securities are reported at fair value, with net unrealized gains and losses reflected as a separate component of shareholders' equity, net of the applicable income tax effect. Held-to-maturity securities are those that the Company has the ability and intent to hold until maturity and are reported at amortized cost.
Gains or losses on investment security transactions are based on the amortized cost of the specific securities sold. Premiums and discounts on securities are amortized and accreted into income using the interest method over the period to maturity.
Note 4 to the consolidated financial statements includes additional information about the Company's accounting policies with respect to the impairment of investment securities.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank ("FHLB") system to hold stock of its district FHLB according to a predetermined formula. The stock is carried at cost.
Transfers of Financial Assets
Transfers of financial assets, including sales of loans and loan participations, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Loans
The Company grants mortgage, commercial, municipal, and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at their outstanding unpaid principal balances, less the allowance for loan losses plus net deferred loan origination costs. The ability of the Company's debtors to honor their contracts is dependent upon the real estate and general economic conditions in the market area. Interest income is generally recognized when income is earned using the interest method. Nonrefundable loan fees received and related direct origination costs incurred are deferred and amortized over the life of the loan using the interest method, resulting in a constant effective yield over the loan term. Deferred fees are recognized into income and deferred costs are charged to income immediately upon prepayment of the related loan.
The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. The residential mortgage segment consists of one-to-four family first-lien residential mortgages and construction loans. Commercial loans consist of the following classes: real estate, lines of credit, other commercial and industrial, and tax-exempt loans. Consumer loans include both home equity lines of credit and loans with junior liens and other consumer loans.
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of losses inherent in the loan portfolio as of the date of the statement of condition and it is recorded as a reduction of loans. The allowance is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable 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 loan outstandings within each product class, over the most recent eight quarters, lagged by one quarter, is used to generate the historical loss rates. In addition, qualitative factors are added to the historical loss rates in arriving at the total allowance for loan loss need for this general pool of loans. The qualitative factors include changes in national and local economic trends, the rate of growth in the portfolio, trends of delinquencies and nonaccrual balances, changes in loan policy, and changes in lending management experience and related staffing. Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation. These qualitative factors, applied to each product class, make the evaluation inherently subjective, as it requires material estimates that may be susceptible to significant revision as more information becomes available. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss analysis and calculation.
The third or unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio and generally comprises less than 10% of the total allowance for loan loss.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and shortfalls on a case-by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and reason for the delay, the borrower's prior payment record and the amount of shortfall in relation to what is owed. Impairment is measured by either the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the underlying collateral if the loan is collateral dependent. The majority of the Company's loans utilize the fair value of the underlying collateral.
An allowance for loan loss is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company's impaired loans are measured based on the estimated fair value of the loan's collateral. For loans secured by real estate, estimated fair values are determined primarily through third-party appraisals, less costs to sell. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower's financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual residential mortgage loans less than $300,000, home equity and other consumer loans for impairment disclosures, unless such loans are related to borrowers with impaired commercial loans or they are subject to a troubled debt restructuring agreement. Loans that are related to borrowers with impaired commercial loans or are subject to a troubled debt restructuring agreement are evaluated individually for impairment. .
Commercial loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally include but are not limited to a temporary reduction in the interest rate or an extension of a loan's stated maturity date. Commercial loans classified as troubled debt restructurings are designated as impaired and evaluated individually as discussed above.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower's overall financial condition, repayment sources, guarantors and value of the collateral, if appropriate, are evaluated not less than annually for commercial loans or when credit deficiencies arise on all loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. See Note 5 for a description of these regulatory classifications.
In addition, Federal and State regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management's comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.
Income Recognition on Impaired and Nonaccrual Loans
For all classes of loans receivable, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing. A loan may remain on accrual status if it is either well secured or guaranteed and in the process of collection. When a loan is placed on nonaccrual status, unpaid interest is reversed and charged to interest income. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management's judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Nonaccrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.
For nonaccrual loans, when future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under standby letters of credit. Such financial instruments are recorded when they are funded.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets, ranging up to 40 years for premises and 10 years for equipment. Maintenance and repairs are charged to operating expenses as incurred. The asset cost and accumulated depreciation are removed from the accounts for assets sold or retired and any resulting gain or loss is included in the determination of income.
Foreclosed Real Estate
Physical possession of residential real estate property collateralizing a residential mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. Properties acquired through foreclosure, or by deed-in-lieu of foreclosure, are recorded at their fair value less estimated costs to sell. Fair value is typically determined based on evaluations by third parties. Costs incurred in connection with preparing the foreclosed real estate for disposition are capitalized to the extent that they enhance the overall fair value of the property. Any write-downs on the asset's fair value less costs to sell at the date of acquisition are charged to the allowance for loan losses. Subsequent write downs and expenses of foreclosed real estate are included as a valuation allowance and recorded in noninterest expense.
Goodwill and Intangible Assets
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. Goodwill is not amortized, but is evaluated annually for impairment. Intangible assets, such as customer relationships, are amortized over their useful lives, generally 15 years.
Mortgage Servicing Rights
Originated mortgage servicing rights are recorded at their fair value at the time of transfer of the related loans and are amortized in proportion to, and over the period of, estimated net servicing income or loss. The carrying value of the originated mortgage servicing rights is periodically evaluated for impairment or between annual evaluations under certain circumstances.
Stock-Based Compensation
Compensation costs related to share-based payment transactions are recognized based on the grant-date fair value of the stock-based compensation issued. Compensation costs are recognized over the period that an employee provides service in exchange for the award. Compensation costs related to the Employee Stock Ownership Plan are dependent upon the average stock price and the shares committed to be released to plan participants through the period in which income is reported.
Retirement Benefits
The Company has a non-contributory defined benefit pension plan that covered substantially all employees. On May 14, 2012, the Company informed its employees of its decision to freeze participation and benefit accruals under the plan, primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan. The plan was frozen on June 30, 2012. Compensation earned by employees up to June 30, 2012 is used for purposes of calculating benefits under the plan but there will be no future benefit accruals after this date. Participants as of June 30, 2012 will continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work. Pension expense under these plans is charged to current operations and consists of several components of net pension cost based on various actuarial assumptions regarding future experience under the plans.
Gains and losses, prior service costs and credits, and any remaining transition amounts that have not yet been recognized through net periodic benefit cost are recognized in accumulated other comprehensive loss, net of tax effects, until they are amortized as a component of net periodic cost. Plan assets and obligations are measured as of the Company's statement of condition date.
The Company has unfunded deferred compensation and supplemental executive retirement plans for selected current and former employees and officers that provide benefits that cannot be paid from a qualified retirement plan due to Internal Revenue Code restrictions. These plans are nonqualified under the Internal Revenue Code, and assets used to fund benefit payments are not segregated from other assets of the Company, therefore, in general, a participant's or beneficiary's claim to benefits under these plans is as a general creditor.
The Bank sponsors an Employee Stock Ownership Plan ("ESOP") covering substantially all full time employees. The cost of shares issued to the ESOP but not committed to be released to the participants is presented in the consolidated statement of condition as a reduction of shareholders' equity. ESOP shares are released to the participants on an annual basis in accordance with a predetermined schedule. The Company records ESOP compensation expense based on the shares committed to be released and allocated to the participant's accounts multiplied by the average share price of the Company's stock over the period. Dividends related to unallocated shares are recorded as compensation expense.
Derivative Financial Instruments
Derivatives are recorded on the statement of condition as assets and liabilities measured at their fair value. The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting. The Company currently has one interest rate swap, which has been determined to be a cash flow hedge. The fair value of cash-flow hedging instruments ("Cash Flow Hedge") is recorded in either other assets or other liabilities. On an ongoing basis, the statement of condition is adjusted to reflect the then current fair value of the Cash Flow Hedge. The related gains or losses are reported in other comprehensive income (loss) and are subsequently reclassified into earnings, as a yield adjustment in the same period in which the related interest on the hedged item (primarily a variable-rate debt obligation) affects earnings. To the extent that the Cash Flow Hedge is not effective, the ineffective portion of the Cash Flow Hedge is immediately recognized as interest expense.
As a hedge against rising short-term interest rates, the Company sold a U.S. Treasury security in the amount of $25 million during the fourth quarter of 2016. The Company was in controlling possession of, but did not own, the security which had been received as collateral, under an industry-standard repurchase agreement, for a 30-day no interest loan of approximately $25 million to an unrelated third party. The sale of this security provided the funds necessary to advance the loan to the third party and placed the Company in what is generally described as a "short position" with respect to the sold U.S. Treasury security. This transaction acted as a hedge against rising short-term interest rates because the price of the security would be expected to decline in a rising short-term interest rate environment and could be subsequently re-acquired at the conclusion of the 30-day loan period at a price lower than the price at which it was originally sold. Short-term rates rose during the 30-day loan period and, consequently, the Company recognized a gain on the sale of securities in the amount of $85,000 and a tax benefit of $34,000 when the Treasury security was repurchased. The tax benefit arose from the reversal of reserves established in prior years against the Company's deferred tax asset position as the transaction gain was characterized as a capital gain for tax purposes. This capital gain was essentially tax free to the Company as the result of the utilization of existing, previously reserved-for, capital loss tax carryforwards that were established in 2011 and 2013. The recognized tax benefit reduced the Company's effective tax rate from what would have been 26.6% to 25.2% in 2016. The gain income and the recognized tax benefits derived from this transaction were partially offset by an additional $54,000 in after-tax interest expense that increased interest expense and therefore reduced pretax net interest margin by $82,000 in the fourth quarter of 2016. In total, after-tax net income was increased by approximately $65,000 during the fourth quarter of 2016 as a result of this transaction. Prior to the commencement of this transaction, the Company incurred consulting and placement fees of $59,000, of which $53,000 has been recorded on the Company's Consolidated Statements of Condition as deferred fees. These deferred fees will be recognized ratably as interest expense on the occasions that this hedging position is reestablished in future periods. The hedge position was closed on December 23, 2016 and, other than the deferred fees of $53,000 discussed above, had no effect on the Company's consolidated financial condition at December 31, 2016.
Income Taxes
Provisions for income taxes are based on taxes currently payable or refundable and deferred income taxes on temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are reported in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.
Earnings Per Share
Basic earnings per common share are computed by dividing net income, after preferred stock dividends and preferred stock discount accretion, by the weighted average number of common shares outstanding throughout each year. Diluted earnings per share gives effect to weighted average shares that would be outstanding assuming the exercise of issued stock options and warrants using the treasury stock method. Unallocated shares of the Company's ESOP plan are not included when computing earnings per share until they are committed to be released.
Segment Reporting
The Company has evaluated the activities relating to its strategic business units. The controlling interest in the FitzGibbons Agency is dissimilar in nature and management when compared to the Company's other strategic business units which are judged to be similar in nature and management. The Company has determined that the FitzGibbons Agency is below the reporting threshold in size in accordance with Accounting Standards Codification 280. Accordingly, the Company has determined it has no reportable segments.
Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the statement of condition, such items, along with net income, are components of comprehensive income.
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.
|
As of December 31,
|
||||||||
|
Accumulated Other Comprehensive Loss By Component:
|
2016
|
2015
|
||||||
|
Unrealized loss for pension and other postretirement obligations
|
$
|
(2,520
|
)
|
$
|
(3,073
|
)
|
||
|
Tax effect
|
1,007
|
1,229
|
||||||
|
Net unrealized loss for pension and other postretirement obligations
|
(1,513
|
)
|
(1,844
|
)
|
||||
|
Unrealized loss on financial derivative instruments used in cash flow hedging relationships
|
-
|
(27
|
)
|
|||||
|
Tax effect
|
-
|
11
|
||||||
|
Net unrealized loss on financial derivative instruments used in cash flow hedging relationships
|
-
|
(16
|
)
|
|||||
|
Unrealized loss on available-for-sale securities
|
(3,072
|
)
|
(85
|
)
|
||||
|
Tax effect
|
1,227
|
34
|
||||||
|
Net unrealized loss on available-for-sale securities
|
(1,845
|
)
|
(51
|
)
|
||||
|
Unrealized loss on securities transferred to held-to-maturity
|
(774
|
)
|
(1,090
|
)
|
||||
|
Tax effect
|
310
|
436
|
||||||
|
Net unrealized loss on securities transferred to held-to-maturity
|
(464
|
)
|
(654
|
)
|
||||
|
Accumulated other comprehensive loss
|
$
|
(3,822
|
)
|
$
|
(2,565
|
)
|
||
Reclassifications
Certain amounts in the 2015 consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income as previously reported.
NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS
ASU 2016-18
, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force
). This guidance amended the requirements for the presentation of restricted cash in the statement of cash flows. The guidance requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts showed on the statement of cash flows. In addition, when cash, cash equivalents, and restricted cash or cash equivalents are presented on more than one line item within the statement of financial position, the line items and amounts must be presented on the face of the statement of cash flows or disclosed in the notes to the financial statements. Information about the nature of restrictions on an entity's cash and cash equivalents must also be disclosed. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017, using a retrospective method. The Company is evaluating the impact of the guidance may have on the presentation of its consolidated future cash flows.
ASU 2017-01,
Business Combinations (Topic 805), Clarifying the Definition of a Business
. This new guidance clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments in this Update affect all reporting entities that must determine whether they have acquired or sold a business.
Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a "set") that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes.
The amendments in this Update provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated.
If the screen is not met, the amendments in this Update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the Board has developed more stringent criteria for sets without outputs.
Lastly, the amendments in this Update narrow the definition of the term
output
so that the term is consistent with how outputs are described in Topic 606.
The Company should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments in this Update should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect that the guidance to have a material impact on its consolidated financial statements.
ASU 2017-03,
Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323), Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings
. This new guidance provides the SEC staff view that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted. Consistent with Topic 11.M, if a registrant does not know or cannot reasonably estimate the impact that adoption of the ASUs referenced in this announcement is expected to have on the financial statements, then in addition to making a statement to that effect, that registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. In this regard, the SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant's current accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed.
ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
. This new guidance simplifies the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.
Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets.
An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This Update also includes amendments to the Overview and Background Sections of the Codification (as discussed in Part II of the amendments) as part of the Board's initiative to unify and improve the Overview and Background Sections across Topics and Subtopics. These changes should not affect the related guidance in these Subtopics.
An entity should apply the amendments in this Update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this Update.
A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020.
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
NOTE 3: EARNINGS PER SHARE
Basic earnings per share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Net income available to common shareholders is net income to Pathfinder Bancorp, Inc. less the total of preferred dividends declared. Diluted earnings per share include the potential dilutive effect that could occur upon the assumed exercise of issued stock options using the Treasury Stock method. Anti-dilutive shares are common stock equivalents with average exercise prices in excess of the weighted average market price for the period presented. Anti-dilutive stock options, not included in the computation below, were 214,415 and 4,118 for the years ended 2016 and 2015, respectively. Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating earnings per common share until they are committed to be released to plan participants.
The following table sets forth the calculation of basic and diluted earnings per share.
|
Years ended
|
||||||||
|
December 31,
|
||||||||
|
(In thousands, except per share data)
|
2016
|
2015
|
||||||
|
Basic Earnings Per Common Share
|
||||||||
|
Net income available to common shareholders
|
$
|
3,256
|
$
|
2,759
|
||||
|
Weighted average common shares outstanding
|
4,105
|
4,124
|
||||||
|
Basic earnings per common share
|
$
|
0.79
|
$
|
0.67
|
||||
|
Diluted Earnings Per Common Share
|
||||||||
|
Net income available to common shareholders
|
$
|
3,256
|
$
|
2,759
|
||||
|
Weighted average common shares outstanding
|
4,105
|
4,124
|
||||||
|
Effect of assumed exercise of stock options
|
85
|
67
|
||||||
|
Diluted weighted average common shares outstanding
|
4,190
|
4,191
|
||||||
|
Diluted earnings per common share
|
$
|
0.78
|
$
|
0.66
|
||||
NOTE 4: INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are summarized as follows:
|
|
December 31, 2016
|
|||||||||||||||
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
(In thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Available-for-Sale Portfolio
|
||||||||||||||||
|
Debt investment securities:
|
||||||||||||||||
|
US Treasury, agencies and GSEs
|
$
|
24,263
|
$
|
1
|
$
|
(80
|
)
|
$
|
24,184
|
|||||||
|
State and political subdivisions
|
17,185
|
33
|
(737
|
)
|
16,481
|
|||||||||||
|
Corporate
|
15,560
|
20
|
(385
|
)
|
15,195
|
|||||||||||
|
Asset backed securities
|
6,696
|
5
|
(37
|
)
|
6,664
|
|||||||||||
|
Residential mortgage-backed - US agency
|
31,204
|
-
|
(638
|
)
|
30,566
|
|||||||||||
|
Collateralized mortgage obligations - US agency
|
42,124
|
45
|
(1,183
|
)
|
40,986
|
|||||||||||
|
Collateralized mortgage obligations - Private label
|
6,682
|
-
|
(105
|
)
|
6,577
|
|||||||||||
|
Total
|
143,714
|
104
|
(3,165
|
)
|
140,653
|
|||||||||||
|
Equity investment securities:
|
||||||||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Ultra short mortgage fund
|
643
|
-
|
(17
|
)
|
626
|
|||||||||||
|
Common stock - financial services industry
|
663
|
13
|
-
|
676
|
||||||||||||
|
Total
|
1,306
|
13
|
(17
|
)
|
1,302
|
|||||||||||
|
Total available-for-sale
|
$
|
145,020
|
$
|
117
|
$
|
(3,182
|
)
|
$
|
141,955
|
|||||||
|
Held-to-Maturity Portfolio
|
||||||||||||||||
|
Debt investment securities:
|
||||||||||||||||
|
US Treasury, agencies and GSEs
|
$
|
4,928
|
$
|
30
|
$
|
(18
|
)
|
$
|
4,940
|
|||||||
|
State and political subdivisions
|
30,697
|
572
|
(693
|
)
|
30,576
|
|||||||||||
|
Corporate
|
8,240
|
85
|
(228
|
)
|
8,097
|
|||||||||||
|
Residential mortgage-backed - US agency
|
6,386
|
31
|
(20
|
)
|
6,397
|
|||||||||||
|
Collateralized mortgage obligations - US agency
|
2,927
|
96
|
-
|
3,023
|
||||||||||||
|
Collateralized mortgage obligations - Private label
|
1,467
|
-
|
(71
|
)
|
1,396
|
|||||||||||
|
Total held-to-maturity
|
$
|
54,645
|
$
|
814
|
$
|
(1,030
|
)
|
$
|
54,429
|
|||||||
|
|
December 31, 2015
|
|||||||||||||||
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
(In thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Available-for-Sale Portfolio
|
||||||||||||||||
|
Debt investment securities:
|
||||||||||||||||
|
US Treasury, agencies and GSEs
|
$
|
21,380
|
$
|
13
|
$
|
(85
|
)
|
$
|
21,308
|
|||||||
|
State and political subdivisions
|
8,198
|
107
|
(5
|
)
|
8,300
|
|||||||||||
|
Corporate
|
18,173
|
51
|
(96
|
)
|
18,128
|
|||||||||||
|
Residential mortgage-backed - US agency
|
32,740
|
113
|
(280
|
)
|
32,573
|
|||||||||||
|
Collateralized mortgage obligations - US agency
|
16,880
|
95
|
(142
|
)
|
16,833
|
|||||||||||
|
Total
|
97,371
|
379
|
(608
|
)
|
97,142
|
|||||||||||
|
Equity investment securities:
|
||||||||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Ultra short mortgage fund
|
643
|
-
|
(5
|
)
|
638
|
|||||||||||
|
Large cap equity fund
|
456
|
127
|
-
|
583
|
||||||||||||
|
Common stock - financial services industry
|
554
|
25
|
-
|
579
|
||||||||||||
|
Total
|
1,653
|
152
|
(5
|
)
|
1,800
|
|||||||||||
|
Total available-for-sale
|
$
|
99,024
|
$
|
531
|
$
|
(613
|
)
|
$
|
98,942
|
|||||||
|
Held-to-Maturity Portfolio
|
||||||||||||||||
|
Debt investment securities:
|
||||||||||||||||
|
US Treasury, agencies and GSEs
|
$
|
7,860
|
$
|
81
|
$
|
(29
|
)
|
$
|
7,912
|
|||||||
|
State and political subdivisions
|
21,585
|
881
|
-
|
22,466
|
||||||||||||
|
Corporate
|
4,175
|
53
|
(3
|
)
|
4,225
|
|||||||||||
|
Residential mortgage-backed - US agency
|
7,763
|
137
|
(5
|
)
|
7,895
|
|||||||||||
|
Collateralized mortgage obligations - US agency
|
2,914
|
103
|
-
|
3,017
|
||||||||||||
|
Total held-to-maturity
|
$
|
44,297
|
$
|
1,255
|
$
|
(37
|
)
|
$
|
45,515
|
|||||||
The majority of the Company's investments in mortgage-backed securities include pass-through securities and collateralized mortgage obligations issued and guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. As of December 31, 2016, the Company also held a total of seven private-label mortgage-backed securities or collateralized mortgage obligations with an aggregate book balance of $9.8 million and five private-label asset backed securities collateralized by consumer loans with an aggregate book balance of $6.7 million. These investments are relatively short-duration securities with significant credit enhancements. There were no private-label investments in the securities portfolio at December 31, 2015. 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.
The amortized cost and estimated fair value of debt investments at December 31, 2016 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
|
|||||||||||||||
|
Amortized
|
Estimated
|
Amortized
|
Estimated
|
|||||||||||||
|
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
||||||||||||
|
(In thousands)
|
||||||||||||||||
|
Due in one year or less
|
$
|
14,678
|
$
|
14,680
|
$
|
206
|
$
|
205
|
||||||||
|
Due after one year through five years
|
27,008
|
26,854
|
10,173
|
10,259
|
||||||||||||
|
Due after five years through ten years
|
10,732
|
10,545
|
17,823
|
18,139
|
||||||||||||
|
Due after ten years
|
11,286
|
10,445
|
15,663
|
15,010
|
||||||||||||
|
Sub-total
|
63,704
|
62,524
|
43,865
|
43,613
|
||||||||||||
|
Residential mortgage-backed - US agency
|
31,204
|
30,566
|
6,386
|
6,397
|
||||||||||||
|
Collateralized mortgage obligations - US agency
|
42,124
|
40,986
|
2,927
|
3,023
|
||||||||||||
|
Collateralized mortgage obligations - Private label
|
6,682
|
6,577
|
1,467
|
1,396
|
||||||||||||
|
Totals
|
$
|
143,714
|
$
|
140,653
|
$
|
54,645
|
$
|
54,429
|
||||||||
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:
|
December 31, 2016
|
||||||||||||||||||||||||||||||||||||
|
Less than Twelve Months
|
Twelve Months or More
|
Total
|
||||||||||||||||||||||||||||||||||
|
Number of
|
Number of
|
Number of
|
||||||||||||||||||||||||||||||||||
|
Individual
|
Unrealized
|
Fair
|
Individual
|
Unrealized
|
Fair
|
Individual
|
Unrealized
|
Fair
|
||||||||||||||||||||||||||||
|
|
Securities
|
Losses
|
Value
|
Securities
|
Losses
|
Value
|
Securities
|
Losses
|
Value
|
|||||||||||||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||||||||||||||
|
US Treasury, agencies and GSE's
|
6
|
$
|
(80
|
)
|
$
|
22,161
|
-
|
$
|
-
|
$
|
-
|
6
|
$
|
(80
|
)
|
$
|
22,161
|
|||||||||||||||||||
|
State and political subdivisions
|
53
|
(737
|
)
|
14,057
|
-
|
-
|
-
|
53
|
(737
|
)
|
14,057
|
|||||||||||||||||||||||||
|
Corporate
|
10
|
(385
|
)
|
10,587
|
-
|
-
|
-
|
10
|
(385
|
)
|
10,587
|
|||||||||||||||||||||||||
|
Asset backed securities
|
3
|
(37
|
)
|
4,455
|
-
|
-
|
-
|
3
|
(37
|
)
|
4,455
|
|||||||||||||||||||||||||
|
Equity and other investments
|
1
|
(17
|
)
|
626
|
-
|
-
|
-
|
1
|
(17
|
)
|
626
|
|||||||||||||||||||||||||
|
Residential mortgage-backed - US agency
|
23
|
(638
|
)
|
29,849
|
-
|
-
|
-
|
23
|
(638
|
)
|
29,849
|
|||||||||||||||||||||||||
|
Collateralized mortgage obligations - US agency
|
28
|
(1,087
|
)
|
33,376
|
4
|
(96
|
)
|
2,514
|
32
|
(1,183
|
)
|
35,890
|
||||||||||||||||||||||||
|
Collateralized mortgage obligations - Private label
|
5
|
(105
|
)
|
6,577
|
-
|
-
|
-
|
5
|
(105
|
)
|
6,577
|
|||||||||||||||||||||||||
|
Totals
|
129
|
$
|
(3,086
|
)
|
$
|
121,688
|
4
|
$
|
(96
|
)
|
$
|
2,514
|
133
|
$
|
(3,182
|
)
|
$
|
124,202
|
||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||||||||||||||
|
US Treasury, agencies and GSE's
|
1
|
$
|
(18
|
)
|
$
|
982
|
-
|
$
|
-
|
$
|
-
|
1
|
$
|
(18
|
)
|
$
|
982
|
|||||||||||||||||||
|
State and political subdivisions
|
16
|
(693
|
)
|
10,038
|
-
|
-
|
-
|
16
|
(693
|
)
|
10,038
|
|||||||||||||||||||||||||
|
Corporate
|
5
|
(228
|
)
|
4,402
|
-
|
-
|
-
|
5
|
(228
|
)
|
4,402
|
|||||||||||||||||||||||||
|
Residential mortgage-backed - US agency
|
3
|
(20
|
)
|
1,869
|
-
|
-
|
-
|
3
|
(20
|
)
|
1,869
|
|||||||||||||||||||||||||
|
Collateralized mortgage obligations - US agency
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||
|
Collateralized mortgage obligations - Private label
|
1
|
(71
|
)
|
1,396
|
-
|
-
|
-
|
1
|
(71
|
)
|
1,396
|
|||||||||||||||||||||||||
|
Totals
|
26
|
$
|
(1,030
|
)
|
$
|
18,687
|
-
|
$
|
-
|
$
|
-
|
26
|
$
|
(1,030
|
)
|
$
|
18,687
|
|||||||||||||||||||
|
December 31, 2015
|
||||||||||||||||||||||||||||||||||||
|
Less than Twelve Months
|
Twelve Months or More
|
Total
|
||||||||||||||||||||||||||||||||||
|
Number of
|
Number of
|
Number of
|
||||||||||||||||||||||||||||||||||
|
Individual
|
Unrealized
|
Fair
|
Individual
|
Unrealized
|
Fair
|
Individual
|
Unrealized
|
Fair
|
||||||||||||||||||||||||||||
|
|
Securities
|
Losses
|
Value
|
Securities
|
Losses
|
Value
|
Securities
|
Losses
|
Value
|
|||||||||||||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||||||||||||||
|
US Treasury, agencies and GSE's
|
9
|
$
|
(70
|
)
|
$
|
13,382
|
1
|
$
|
(15
|
)
|
$
|
984
|
10
|
$
|
(85
|
)
|
$
|
14,366
|
||||||||||||||||||
|
State and political subdivisions
|
13
|
(4
|
)
|
1,894
|
3
|
(1
|
)
|
339
|
16
|
(5
|
)
|
2,233
|
||||||||||||||||||||||||
|
Corporate
|
10
|
(57
|
)
|
8,123
|
2
|
(39
|
)
|
2,820
|
12
|
(96
|
)
|
10,943
|
||||||||||||||||||||||||
|
Asset backed securities
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||
|
Equity and other investments
|
1
|
(5
|
)
|
638
|
-
|
-
|
-
|
1
|
(5
|
)
|
638
|
|||||||||||||||||||||||||
|
Residential mortgage-backed - US agency
|
14
|
(148
|
)
|
20,204
|
5
|
(132
|
)
|
4,812
|
19
|
(280
|
)
|
25,016
|
||||||||||||||||||||||||
|
Collateralized mortgage obligations - US agency
|
6
|
(80
|
)
|
8,618
|
3
|
(62
|
)
|
1,789
|
9
|
(142
|
)
|
10,407
|
||||||||||||||||||||||||
|
Collateralized mortgage obligations - Private label
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||
|
Totals
|
53
|
$
|
(364
|
)
|
$
|
52,859
|
14
|
$
|
(249
|
)
|
$
|
10,744
|
67
|
$
|
(613
|
)
|
$
|
63,603
|
||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||||||||||||||
|
US Treasury, agencies and GSE's
|
2
|
$
|
(29
|
)
|
$
|
2,970
|
-
|
$
|
-
|
$
|
-
|
2
|
$
|
(29
|
)
|
$
|
2,970
|
|||||||||||||||||||
|
State and political subdivisions
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||
|
Corporate
|
1
|
(3
|
)
|
225
|
-
|
-
|
-
|
1
|
(3
|
)
|
225
|
|||||||||||||||||||||||||
|
Residential mortgage-backed - US agency
|
1
|
(5
|
)
|
795
|
-
|
-
|
-
|
1
|
(5
|
)
|
795
|
|||||||||||||||||||||||||
|
Collateralized mortgage obligations - US agency
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||
|
Collateralized mortgage obligations - Private label
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||||
|
Totals
|
4
|
$
|
(37
|
)
|
$
|
3,990
|
-
|
$
|
-
|
$
|
-
|
4
|
$
|
(37
|
)
|
$
|
3,990
|
|||||||||||||||||||
The Company conducts a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment ("OTTI"). The Company assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the statement of condition date. Under these circumstances, OTTI is considered to have occurred (1) if we intend to sell the security; (2) if it is "more likely than not" we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not anticipated to be sufficient to recover the entire amortized cost basis. The guidance requires that credit-related OTTI is recognized in earnings while non-credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income ("OCI"). Non-credit-related OTTI is based on other factors, including illiquidity and changes in the general interest rate environment. Presentation of OTTI is made in the consolidated statement of income on a gross basis, including both the portion recognized in earnings as well as the portion recorded in OCI. The gross OTTI would then be offset by the amount of non-credit-related OTTI, showing the net as the impact on earnings.
Management does not believe any individual unrealized loss in other securities within the portfolio as of December 31, 2016 represents OTTI. All securities which have been in an unrealized loss position for 12 months or more are issued by United States agencies or government sponsored enterprises and consist of mortgage-backed securities, collateralized mortgage obligations and direct agency financings. These positions in US government agency and government-sponsored enterprises are deemed to have no credit impairment, thus, the disclosed unrealized losses relate directly to changes in interest rates subsequent to the acquisition of the individual securities. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.
In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the length of time the equity security's fair value has been below the carrying amount. Management has determined that we have the intent and ability to retain its equity securities for a sufficient period of time to allow for recovery. At December 31, 2016 and 2015, the Company had one mutual fund investment, categorized as an equity security, with a fair value below its book value. This security, which represents an ownership interest in a mutual fund primarily invested in adjustable-rate mortgage securities, had a fair value of $626,000 at December 31, 2016, which was below its book value by $17,000 at that date. This same security had a fair value of $638,000 at December 31, 2015 and that value was $5,000 below its book value at that date.
Proceeds of $33.2 million and $25.2 million, respectively on sales and redemptions of securities for the years ended December 31 resulted in gross realized gains (losses) detailed below:
|
(In thousands)
|
2016
|
2015
|
||||||
|
Realized gains on investments
|
$
|
526
|
$
|
439
|
||||
|
Realized gains on hedging activity
|
85
|
-
|
||||||
|
Realized losses on investments
|
(17
|
)
|
(17
|
)
|
||||
|
|
$
|
594
|
$
|
422
|
||||
As of December 31, 2016 and December 31, 2015, securities with a fair value of $96.4 million and $89.7 million, respectively, were pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of $12.9 million and $17.8 million were pledged against certain borrowing arrangements.
Management has reviewed its loan and mortgage-backed securities portfolios and determined that, to the best of its knowledge, little or no exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of investing in, or originating, these types of investments or loans.
NOTE 5: LOANS
Major classifications of loans are as follows:
|
December 31,
|
December 31,
|
|||||||
|
(In thousands)
|
2016
|
2015
|
||||||
|
Residential mortgage loans:
|
||||||||
|
1-4 family first-lien residential mortgages
|
$
|
199,000
|
$
|
181,792
|
||||
|
Construction
|
8,505
|
7,924
|
||||||
|
Total residential mortgage loans
|
207,505
|
189,716
|
||||||
|
Commercial loans:
|
||||||||
|
Real estate
|
150,698
|
129,506
|
||||||
|
Lines of credit
|
23,225
|
19,035
|
||||||
|
Other commercial and industrial
|
67,646
|
54,899
|
||||||
|
Tax exempt loans
|
12,523
|
9,081
|
||||||
|
Total commercial loans
|
254,092
|
212,521
|
||||||
|
Consumer loans:
|
||||||||
|
Home equity and junior liens
|
24,722
|
23,463
|
||||||
|
Other consumer
|
6,293
|
4,886
|
||||||
|
Total consumer loans
|
31,015
|
28,349
|
||||||
|
|
||||||||
|
Total loans
|
492,612
|
430,586
|
||||||
|
Net deferred loan fees
|
(465
|
)
|
(148
|
)
|
||||
|
Less allowance for loan losses
|
(6,247
|
)
|
(5,706
|
)
|
||||
|
Loans receivable, net
|
$
|
485,900
|
$
|
424,732
|
||||
The Company originates residential mortgage, commercial and consumer loans largely to customers throughout Oswego, Onondaga and surrounding counties. Although the Company has a diversified loan portfolio, a substantial portion of its borrowers' abilities to honor their contracts is dependent upon the counties' employment and economic conditions.
As of December 31, 2016 and December 31, 2015, residential mortgage loans with a carrying value of $140.3 million and $125.8 million, respectively, have been pledged by the Company to the Federal Home Loan Bank of New York ("FHLBNY") under a blanket collateral agreement to secure the Company's line of credit and term borrowings.
Loan Origination / Risk Management
The Company has lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management and the board of directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by frequently providing management with reports related to loan production, loan quality, loan delinquencies, nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.
Risk Characteristics of Portfolio Segments
Each portfolio segment generally carries its own unique risk characteristics.
The residential mortgage loan segment is impacted by general economic conditions, unemployment rates in the Bank's service area, real estate values and the forward expectation of improvement or deterioration in economic conditions.
The commercial loan segment is impacted by general economic conditions but, more specifically, the industry segment in which each borrower participates. Unique competitive changes within a borrower's specific industry, or geographic location could cause significant changes in the borrower's revenue stream, and therefore, impact its ability to repay its obligations. Commercial real estate is also subject to general economic conditions but changes within this segment typically lag changes seen within the consumer and commercial segment. Included within this portfolio are both owner occupied real estate, in which the borrower occupies the majority of the real estate property and upon which the majority of the sources of repayment of the obligation is dependent upon, and non-owner occupied real estate, in which several tenants comprise the repayment source for this portfolio segment. The composition and competitive position of the tenant structure may cause adverse changes in the repayment of debt obligations for the non-owner occupied class within this segment.
The consumer loan segment is impacted by general economic conditions, unemployment rates in the Company's service area, and the forward expectation of improvement or deterioration in economic conditions.
Real estate loans, including residential mortgages, commercial real estate loans and home equity, comprise 78% of the portfolio in 2016, substantially identical to the composition in 2015, where such loans represented 81% of total loans. Loans secured by real estate generally provide strong collateral protection and thus significantly reduce the inherent credit risk in the portfolio.
Management has reviewed its loan portfolio and determined that, to the best of its knowledge, little or no exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of originating these types of loans.
Description of Credit Quality Indicators
The Company utilizes an eight tier risk rating system to evaluate the quality of its loan portfolio. Loans that are risk rated "1" through "4" are considered "Pass" loans. In accordance with regulatory guidelines, loans rated "5" through "8" are termed "criticized" loans and loans rated "6" through "8" are termed "classified" loans. A description of the Company's credit quality indicators follows.
For Commercial Loans:
|
1.
|
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.
|
|
2.
|
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.
|
|
3.
|
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.
|
|
4.
|
Satisfactory Watch:
A four is not a criticized or classified credit. These credits do not display the characteristics of a criticized asset as defined by the regulatory definitions. A credit is given a Satisfactory Watch designation if there are matters or trends observed deserving attention somewhat beyond normal monitoring. Borrowing obligations may be handled according to agreement but could be adversely impacted by developing factors such as industry conditions, operating problems, litigation pending of a significant nature or declining collateral quality and adequacy.
|
|
5.
|
Special Mention
: A warning risk grade that portrays one or more weaknesses that may be tolerated in the short term. Assets in this category are currently protected but are potentially weak. This loan would not normally be booked as a new credit, but may have redeeming characteristics persuading the Bank to continue working with the borrower. Loans accorded this classification have potential weaknesses which may, if not checked or corrected, weaken the company's assets, inadequately protect the Bank's position or effect the orderly, scheduled reduction of the debt at some future time.
|
|
6.
|
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.
|
|
7.
|
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.
|
|
8.
|
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.
|
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.
|
|
6.
|
Substandard
: All loans 90 days past due are classified Substandard. The loan is not upgraded until it has been current for six consecutive months.
|
|
7.
|
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:
|
|
As of December 31, 2016
|
|||||||||||||||||||
|
Special
|
||||||||||||||||||||
|
(In thousands)
|
Pass
|
Mention
|
Substandard
|
Doubtful
|
Total
|
|||||||||||||||
|
Residential mortgage loans:
|
||||||||||||||||||||
|
1-4 family first-lien residential mortgages
|
$
|
194,377
|
$
|
1,445
|
$
|
2,115
|
$
|
1,063
|
$
|
199,000
|
||||||||||
|
Construction
|
8,505
|
-
|
-
|
-
|
8,505
|
|||||||||||||||
|
Total residential mortgage loans
|
202,882
|
1,445
|
2,115
|
1,063
|
207,505
|
|||||||||||||||
|
Commercial loans:
|
||||||||||||||||||||
|
Real estate
|
143,126
|
3,714
|
3,858
|
-
|
150,698
|
|||||||||||||||
|
Lines of credit
|
22,141
|
684
|
400
|
-
|
23,225
|
|||||||||||||||
|
Other commercial and industrial
|
66,279
|
661
|
702
|
4
|
67,646
|
|||||||||||||||
|
Tax exempt loans
|
12,523
|
-
|
-
|
-
|
12,523
|
|||||||||||||||
|
Total commercial loans
|
244,069
|
5,059
|
4,960
|
4
|
254,092
|
|||||||||||||||
|
Consumer loans:
|
||||||||||||||||||||
|
Home equity and junior liens
|
23,963
|
170
|
389
|
200
|
24,722
|
|||||||||||||||
|
Other consumer
|
6,224
|
17
|
8
|
44
|
6,293
|
|||||||||||||||
|
Total consumer loans
|
30,187
|
187
|
397
|
244
|
31,015
|
|||||||||||||||
|
Total loans
|
$
|
477,138
|
$
|
6,691
|
$
|
7,472
|
$
|
1,311
|
$
|
492,612
|
||||||||||
|
|
As of December 31, 2015
|
|||||||||||||||||||
|
Special
|
||||||||||||||||||||
|
(In thousands)
|
Pass
|
Mention
|
Substandard
|
Doubtful
|
Total
|
|||||||||||||||
|
Residential mortgage loans:
|
||||||||||||||||||||
|
1-4 family first-lien residential mortgages
|
$
|
177,244
|
$
|
1,375
|
$
|
2,425
|
$
|
748
|
$
|
181,792
|
||||||||||
|
Construction
|
7,924
|
-
|
-
|
-
|
7,924
|
|||||||||||||||
|
Total residential mortgage loans
|
185,168
|
1,375
|
2,425
|
748
|
189,716
|
|||||||||||||||
|
Commercial loans:
|
||||||||||||||||||||
|
Real estate
|
121,283
|
4,345
|
3,878
|
-
|
129,506
|
|||||||||||||||
|
Lines of credit
|
17,358
|
1,469
|
208
|
-
|
19,035
|
|||||||||||||||
|
Other commercial and industrial
|
53,540
|
848
|
504
|
7
|
54,899
|
|||||||||||||||
|
Tax exempt loans
|
9,081
|
-
|
-
|
-
|
9,081
|
|||||||||||||||
|
Total commercial loans
|
201,262
|
6,662
|
4,590
|
7
|
212,521
|
|||||||||||||||
|
Consumer loans:
|
||||||||||||||||||||
|
Home equity and junior liens
|
22,780
|
182
|
287
|
214
|
23,463
|
|||||||||||||||
|
Other consumer
|
4,840
|
31
|
15
|
-
|
4,886
|
|||||||||||||||
|
Total consumer loans
|
27,620
|
213
|
302
|
214
|
28,349
|
|||||||||||||||
|
Total loans
|
$
|
414,050
|
$
|
8,250
|
$
|
7,317
|
$
|
969
|
$
|
430,586
|
||||||||||
Nonaccrual and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date.
An age analysis of past due loans, exclusive of deferred costs, segregated by class of loans were as follows:
|
|
As of December 31, 2016
|
|||||||||||||||||||||||
|
30-59 Days
|
60-89 Days
|
90 Days
|
||||||||||||||||||||||
|
Past Due
|
Past Due
|
and Over
|
Total
|
Total Loans
|
||||||||||||||||||||
|
(In thousands)
|
And Accruing
|
And Accruing
|
Past Due
|
Current
|
Receivable
|
|||||||||||||||||||
|
Residential mortgage loans:
|
||||||||||||||||||||||||
|
1-4 family first-lien residential mortgages
|
$
|
1,247
|
$
|
832
|
$
|
2,560
|
$
|
4,639
|
$
|
194,361
|
$
|
199,000
|
||||||||||||
|
Construction
|
-
|
-
|
-
|
-
|
8,505
|
8,505
|
||||||||||||||||||
|
Total residential mortgage loans
|
1,247
|
832
|
2,560
|
4,639
|
202,866
|
207,505
|
||||||||||||||||||
|
Commercial loans:
|
||||||||||||||||||||||||
|
Real estate
|
1,063
|
375
|
1,223
|
2,661
|
148,037
|
150,698
|
||||||||||||||||||
|
Lines of credit
|
819
|
-
|
-
|
819
|
22,406
|
23,225
|
||||||||||||||||||
|
Other commercial and industrial
|
333
|
-
|
640
|
973
|
66,673
|
67,646
|
||||||||||||||||||
|
Tax exempt loans
|
-
|
-
|
-
|
-
|
12,523
|
12,523
|
||||||||||||||||||
|
Total commercial loans
|
2,215
|
375
|
1,863
|
4,453
|
249,639
|
254,092
|
||||||||||||||||||
|
Consumer loans:
|
||||||||||||||||||||||||
|
Home equity and junior liens
|
105
|
157
|
338
|
600
|
24,122
|
24,722
|
||||||||||||||||||
|
Other consumer
|
8
|
13
|
50
|
71
|
6,222
|
6,293
|
||||||||||||||||||
|
Total consumer loans
|
113
|
170
|
388
|
671
|
30,344
|
31,015
|
||||||||||||||||||
|
Total loans
|
$
|
3,575
|
$
|
1,377
|
$
|
4,811
|
$
|
9,763
|
$
|
482,849
|
$
|
492,612
|
||||||||||||
|
|
As of December 31, 2015
|
|||||||||||||||||||||||
|
30-59 Days
|
60-89 Days
|
90 Days
|
||||||||||||||||||||||
|
Past Due
|
Past Due
|
and Over
|
Total
|
Total Loans
|
||||||||||||||||||||
|
(In thousands)
|
And Accruing
|
And Accruing
|
Past Due
|
Current
|
Receivable
|
|||||||||||||||||||
|
Residential mortgage loans:
|
||||||||||||||||||||||||
|
1-4 family first-lien residential mortgages
|
$
|
1,115
|
$
|
808
|
$
|
1,715
|
$
|
3,638
|
$
|
178,154
|
$
|
181,792
|
||||||||||||
|
Construction
|
-
|
-
|
-
|
-
|
7,924
|
7,924
|
||||||||||||||||||
|
Total residential mortgage loans
|
1,115
|
808
|
1,715
|
3,638
|
186,078
|
189,716
|
||||||||||||||||||
|
Commercial loans:
|
||||||||||||||||||||||||
|
Real estate
|
940
|
135
|
2,694
|
3,769
|
125,737
|
129,506
|
||||||||||||||||||
|
Lines of credit
|
20
|
-
|
174
|
194
|
18,841
|
19,035
|
||||||||||||||||||
|
Other commercial and industrial
|
159
|
216
|
370
|
745
|
54,154
|
54,899
|
||||||||||||||||||
|
Tax exempt loans
|
-
|
-
|
-
|
-
|
9,081
|
9,081
|
||||||||||||||||||
|
Total commercial loans
|
1,119
|
351
|
3,238
|
4,708
|
207,813
|
212,521
|
||||||||||||||||||
|
Consumer loans:
|
||||||||||||||||||||||||
|
Home equity and junior liens
|
132
|
-
|
360
|
492
|
22,971
|
23,463
|
||||||||||||||||||
|
Other consumer
|
14
|
15
|
5
|
34
|
4,852
|
4,886
|
||||||||||||||||||
|
Total consumer loans
|
146
|
15
|
365
|
526
|
27,823
|
28,349
|
||||||||||||||||||
|
Total loans
|
$
|
2,380
|
$
|
1,174
|
$
|
5,318
|
$
|
8,872
|
$
|
421,714
|
$
|
430,586
|
||||||||||||
Year-end nonaccrual loans, segregated by class of loan, were as follows:
|
December 31,
|
December 31,
|
|||||||
|
(In thousands)
|
2016
|
2015
|
||||||
|
Residential mortgage loans:
|
||||||||
|
1-4 family first-lien residential mortgages
|
$
|
2,560
|
$
|
1,715
|
||||
|
|
2,560
|
1,715
|
||||||
|
Commercial loans:
|
||||||||
|
Real estate
|
1,223
|
2,694
|
||||||
|
Lines of credit
|
-
|
174
|
||||||
|
Other commercial and industrial
|
640
|
370
|
||||||
|
|
1,863
|
3,238
|
||||||
|
Consumer loans:
|
||||||||
|
Home equity and junior liens
|
338
|
360
|
||||||
|
Other consumer
|
50
|
5
|
||||||
|
|
388
|
365
|
||||||
|
Total nonaccrual loans
|
$
|
4,811
|
$
|
5,318
|
||||
There were no loans past due ninety days or more and still accruing interest at December 31, 2016 or 2015.
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.
|
For the year ended December 31, 2016
|
||||||||||||||||
|
(In thousands)
|
Number of loans
|
Pre-modification outstanding recorded investment
|
Post-modification outstanding recorded investment
|
Additional provision for loan losses
|
||||||||||||
|
Individually evaluated for impairment:
|
||||||||||||||||
|
Residential mortgage loans
|
3
|
$
|
127
|
$
|
135
|
$
|
29
|
|||||||||
|
Commercial real estate loans
|
1
|
2,088
|
2,088
|
-
|
||||||||||||
The TDRs individually evaluated for impairment have been classified as TDRs due to economic concessions granted, which consisted of additional funds advanced without associated increases in collateral, interest rate reduction, extended term and/or extended interest only payment terms. The Company was required to increase the specific reserves against the loans individually reviewed for impairment by $29,000, which was a component of the provision for loan losses in the fourth quarter of 2016. The Company changed the criteria for evaluating impairment on TDRs as of December 31, 2016 to include all TDRs, regardless of the size of the loan, to be individually evaluated for impairment. The Company previously established thresholds of $100,000 for residential and consumer loans and $300,000 for commercial real estate loans, commercial lines and loans and tax exempt loans for reviewing TDRs individually for impairment. TDRs below these threshold amounts were collectively evaluated for impairment as of December 31, 2015.
|
For the year ended December 31, 2015
|
||||||||||||||||
|
(In thousands)
|
Number of loans
|
Pre-modification outstanding recorded investment
|
Post-modification outstanding recorded investment
|
Additional provision for loan losses
|
||||||||||||
|
Individually evaluated for impairment:
|
||||||||||||||||
|
Commercial real estate loans
|
1
|
$
|
678
|
$
|
324
|
$
|
354
|
|||||||||
|
Collectively evaluated for impairment:
|
||||||||||||||||
|
Residential mortgage loans
|
2
|
$
|
69
|
$
|
79
|
$
|
-
|
|||||||||
The TDR individually evaluated for impairment has been classified as a TDR due to the economic concessions granted, which included extended payment terms without an associated increase in collateral. The Company was required to increase the specific reserve against this loan by an additional $354,000, which was a component of the provision for loan losses in the second quarter of 2015. The TDRs collectively evaluated for impairment were included in the general loan loss allocation and qualitative review and the impact on the allowance for loan losses was immaterial.
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, 2016, which had subsequently defaulted during the year ended December 31, 2016.
The Company had no loans that had been modified as TDRs during the twelve months prior to December 31, 2015, which had subsequently defaulted during the year ended December 31, 2015.
When the Company modifies a loan within a portfolio segment that is individually evaluated for impairment, a potential impairment is analyzed either based on the present value of the expected future cash flows discounted at the interest rate of the original loan terms or the fair value of the collateral less costs to sell. If it is determined that the value of the loan is less than its recorded investment, then impairment is recognized as a component of the provision for loan losses, an associated increase to the allowance for loan losses or as a charge-off to the allowance for loan losses in the current period.
Impaired Loans
The following table summarizes impaired loans information by portfolio class:
|
December 31, 2016
|
December 31, 2015
|
|||||||||||||||||||||||
|
Unpaid
|
Unpaid
|
|||||||||||||||||||||||
|
Recorded
|
Principal
|
Related
|
Recorded
|
Principal
|
Related
|
|||||||||||||||||||
|
(In thousands)
|
Investment
|
Balance
|
Allowance
|
Investment
|
Balance
|
Allowance
|
||||||||||||||||||
|
With no related allowance recorded:
|
||||||||||||||||||||||||
|
1-4 family first-lien residential mortgages
|
$
|
850
|
$
|
857
|
$
|
-
|
$
|
473
|
$
|
473
|
$
|
-
|
||||||||||||
|
Commercial real estate
|
4,254
|
4,344
|
-
|
2,580
|
2,709
|
-
|
||||||||||||||||||
|
Commercial lines of credit
|
400
|
400
|
-
|
574
|
597
|
-
|
||||||||||||||||||
|
Other commercial and industrial
|
470
|
470
|
-
|
536
|
569
|
-
|
||||||||||||||||||
|
Home equity and junior liens
|
140
|
140
|
-
|
187
|
187
|
-
|
||||||||||||||||||
|
Other consumer
|
-
|
-
|
-
|
5
|
6
|
-
|
||||||||||||||||||
|
With an allowance recorded:
|
||||||||||||||||||||||||
|
1-4 family first-lien residential mortgages
|
763
|
763
|
117
|
-
|
-
|
-
|
||||||||||||||||||
|
Commercial real estate
|
818
|
872
|
455
|
1,850
|
1,963
|
760
|
||||||||||||||||||
|
Commercial lines of credit
|
-
|
-
|
-
|
5
|
5
|
5
|
||||||||||||||||||
|
Other commercial and industrial
|
552
|
552
|
553
|
224
|
230
|
193
|
||||||||||||||||||
|
Home equity and junior liens
|
345
|
345
|
5
|
101
|
101
|
2
|
||||||||||||||||||
|
Total:
|
||||||||||||||||||||||||
|
1-4 family first-lien residential mortgages
|
1,613
|
1,620
|
117
|
473
|
473
|
-
|
||||||||||||||||||
|
Commercial real estate
|
5,072
|
5,216
|
455
|
4,430
|
4,672
|
760
|
||||||||||||||||||
|
Commercial lines of credit
|
400
|
400
|
-
|
579
|
602
|
5
|
||||||||||||||||||
|
Other commercial and industrial
|
1,022
|
1,022
|
553
|
760
|
799
|
193
|
||||||||||||||||||
|
Home equity and junior liens
|
485
|
485
|
5
|
288
|
288
|
2
|
||||||||||||||||||
|
Other consumer
|
-
|
-
|
-
|
5
|
6
|
-
|
||||||||||||||||||
|
Totals
|
$
|
8,592
|
$
|
8,743
|
$
|
1,130
|
$
|
6,535
|
$
|
6,840
|
$
|
960
|
||||||||||||
The following table presents the average recorded investment in impaired loans for the years ended December 31:
|
(In thousands)
|
2016
|
2015
|
||||||
|
1-4 family first-lien residential mortgages
|
$
|
777
|
$
|
671
|
||||
|
Commercial real estate
|
4,325
|
4,742
|
||||||
|
Commercial lines of credit
|
479
|
520
|
||||||
|
Other commercial and industrial
|
724
|
803
|
||||||
|
Home equity and junior liens
|
325
|
305
|
||||||
|
Other consumer
|
2
|
7
|
||||||
|
Total
|
$
|
6,632
|
$
|
7,048
|
||||
The following table presents the cash basis interest income recognized on impaired loans for the years ended December 31:
|
(In thousands)
|
2016
|
2015
|
||||||
|
1-4 family first-lien residential mortgages
|
$
|
64
|
$
|
17
|
||||
|
Commercial real estate
|
161
|
92
|
||||||
|
Commercial lines of credit
|
-
|
-
|
||||||
|
Other commercial and industrial
|
66
|
29
|
||||||
|
Home equity and junior liens
|
13
|
-
|
||||||
|
Other consumer
|
-
|
-
|
||||||
|
Total
|
$
|
304
|
$
|
138
|
||||
NOTE 6: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 2016 and 2015 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.
|
|
December 31, 2016
|
|||||||||||||||||||
|
1-4 family
|
||||||||||||||||||||
|
first-lien
|
Other
|
|||||||||||||||||||
|
residential
|
Commercial
|
Commercial
|
commercial
|
|||||||||||||||||
|
(In thousands)
|
mortgage
|
Construction
|
real estate
|
lines of credit
|
and industrial
|
|||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||
|
Beginning Balance
|
$
|
581
|
$
|
-
|
$
|
2,983
|
$
|
401
|
$
|
1,270
|
||||||||||
|
Charge-offs
|
(242
|
)
|
-
|
-
|
(69
|
)
|
-
|
|||||||||||||
|
Recoveries
|
13
|
-
|
6
|
11
|
14
|
|||||||||||||||
|
Provisions (credits)
|
407
|
-
|
(54
|
)
|
54
|
374
|
||||||||||||||
|
Ending balance
|
$
|
759
|
$
|
-
|
$
|
2,935
|
$
|
397
|
$
|
1,658
|
||||||||||
|
Ending balance: related to loans
|
||||||||||||||||||||
|
individually evaluated for impairment
|
$
|
117
|
$
|
-
|
$
|
455
|
$
|
-
|
$
|
553
|
||||||||||
|
Ending balance: related to loans
|
||||||||||||||||||||
|
collectively evaluated for impairment
|
$
|
642
|
$
|
-
|
$
|
2,480
|
$
|
397
|
$
|
1,105
|
||||||||||
|
Loans receivables:
|
||||||||||||||||||||
|
Ending balance
|
$
|
199,000
|
$
|
8,505
|
$
|
150,698
|
$
|
23,225
|
$
|
67,646
|
||||||||||
|
Ending balance: individually
|
||||||||||||||||||||
|
evaluated for impairment
|
$
|
1,613
|
$
|
-
|
$
|
5,072
|
$
|
400
|
$
|
1,022
|
||||||||||
|
Ending balance: collectively
|
||||||||||||||||||||
|
evaluated for impairment
|
$
|
197,387
|
$
|
8,505
|
$
|
145,626
|
$
|
22,825
|
$
|
66,624
|
||||||||||
|
Home equity
|
Other
|
|||||||||||||||||||
|
|
Tax exempt
|
and junior liens
|
consumer
|
Unallocated
|
Total
|
|||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||
|
Beginning Balance
|
$
|
3
|
$
|
350
|
$
|
118
|
$
|
-
|
$
|
5,706
|
||||||||||
|
Charge-offs
|
-
|
(147
|
)
|
(61
|
)
|
-
|
(519
|
)
|
||||||||||||
|
Recoveries
|
-
|
10
|
53
|
-
|
107
|
|||||||||||||||
|
Provisions (credits)
|
(2
|
)
|
118
|
56
|
-
|
953
|
||||||||||||||
|
Ending balance
|
$
|
1
|
$
|
331
|
$
|
166
|
$
|
-
|
$
|
6,247
|
||||||||||
|
Ending balance: related to loans
|
||||||||||||||||||||
|
individually evaluated for impairment
|
$
|
-
|
$
|
5
|
$
|
-
|
$
|
-
|
$
|
1,130
|
||||||||||
|
Ending balance: related to loans
|
||||||||||||||||||||
|
collectively evaluated for impairment
|
$
|
1
|
$
|
326
|
$
|
166
|
$
|
-
|
$
|
5,117
|
||||||||||
|
Loans receivables:
|
||||||||||||||||||||
|
Ending balance
|
$
|
12,523
|
$
|
24,722
|
$
|
6,293
|
$
|
492,612
|
||||||||||||
|
Ending balance: individually
|
||||||||||||||||||||
|
evaluated for impairment
|
$
|
-
|
$
|
485
|
$
|
-
|
$
|
8,592
|
||||||||||||
|
Ending balance: collectively
|
||||||||||||||||||||
|
evaluated for impairment
|
$
|
12,523
|
$
|
24,237
|
$
|
6,293
|
$
|
484,020
|
||||||||||||
|
|
December 31, 2015
|
|||||||||||||||||||
|
1-4 family
|
||||||||||||||||||||
|
first-lien
|
Other
|
|||||||||||||||||||
|
residential
|
Commercial
|
Commercial
|
commercial
|
|||||||||||||||||
|
(In thousands)
|
mortgage
|
Construction
|
real estate
|
lines of credit
|
and industrial
|
|||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||
|
Beginning Balance
|
$
|
509
|
$
|
-
|
$
|
2,801
|
$
|
460
|
$
|
1,034
|
||||||||||
|
Charge-offs
|
(234
|
)
|
-
|
(308
|
)
|
(206
|
)
|
(272
|
)
|
|||||||||||
|
Recoveries
|
40
|
-
|
-
|
38
|
10
|
|||||||||||||||
|
Provisions
|
266
|
-
|
490
|
109
|
498
|
|||||||||||||||
|
Ending balance
|
$
|
581
|
$
|
-
|
$
|
2,983
|
$
|
401
|
$
|
1,270
|
||||||||||
|
Ending balance: related to loans
|
||||||||||||||||||||
|
individually evaluated for impairment
|
$
|
-
|
$
|
-
|
$
|
760
|
$
|
5
|
$
|
193
|
||||||||||
|
Ending balance: related to loans
|
||||||||||||||||||||
|
collectively evaluated for impairment
|
$
|
581
|
$
|
-
|
$
|
2,223
|
$
|
396
|
$
|
1,077
|
||||||||||
|
Loans receivables:
|
||||||||||||||||||||
|
Ending balance
|
$
|
181,792
|
$
|
7,924
|
$
|
129,506
|
$
|
19,035
|
$
|
54,899
|
||||||||||
|
Ending balance: individually
|
||||||||||||||||||||
|
evaluated for impairment
|
$
|
473
|
$
|
-
|
$
|
4,430
|
$
|
579
|
$
|
760
|
||||||||||
|
Ending balance: collectively
|
||||||||||||||||||||
|
evaluated for impairment
|
$
|
181,319
|
$
|
7,924
|
$
|
125,076
|
$
|
18,456
|
$
|
54,139
|
||||||||||
|
Home equity
|
Other
|
|||||||||||||||||||
|
|
Tax exempt
|
and junior liens
|
consumer
|
Unallocated
|
Total
|
|||||||||||||||
|
Allowance for loan losses:
|
||||||||||||||||||||
|
Beginning Balance
|
$
|
3
|
$
|
388
|
$
|
98
|
$
|
56
|
$
|
5,349
|
||||||||||
|
Charge-offs
|
-
|
(26
|
)
|
(103
|
)
|
-
|
(1,149
|
)
|
||||||||||||
|
Recoveries
|
-
|
10
|
59
|
-
|
157
|
|||||||||||||||
|
Provisions (credits)
|
-
|
(22
|
)
|
64
|
(56
|
)
|
1,349
|
|||||||||||||
|
Ending balance
|
$
|
3
|
$
|
350
|
$
|
118
|
$
|
-
|
$
|
5,706
|
||||||||||
|
Ending balance: related to loans
|
||||||||||||||||||||
|
individually evaluated for impairment
|
$
|
-
|
$
|
2
|
$
|
-
|
$
|
-
|
$
|
960
|
||||||||||
|
Ending balance: related to loans
|
||||||||||||||||||||
|
collectively evaluated for impairment
|
$
|
3
|
$
|
348
|
$
|
118
|
$
|
-
|
$
|
4,746
|
||||||||||
|
Loans receivables:
|
||||||||||||||||||||
|
Ending balance
|
$
|
9,081
|
$
|
23,463
|
$
|
4,886
|
$
|
430,586
|
||||||||||||
|
Ending balance: individually
|
||||||||||||||||||||
|
evaluated for impairment
|
$
|
-
|
$
|
288
|
$
|
5
|
$
|
6,535
|
||||||||||||
|
Ending balance: collectively
|
||||||||||||||||||||
|
evaluated for impairment
|
$
|
9,081
|
$
|
23,175
|
$
|
4,881
|
$
|
424,051
|
||||||||||||
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.
|
Each factor is assigned a value to reflect improving, stable or declining conditions based on management's best judgment using relevant information available at the time of the evaluation. These qualitative factors, applied to each product class, make the evaluation inherently subjective, as it requires material estimates that may be susceptible to significant revision as more information becomes available. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan losses analysis and calculation.
The allocation of the allowance for loan losses summarized on the basis of the Company's calculation methodology was as follows:
|
December 31, 2016
|
||||||||||||||||||||
|
|
1-4 family
|
|||||||||||||||||||
|
first-lien
|
Other
|
|||||||||||||||||||
|
residential
|
Commercial
|
Commercial
|
commercial
|
|||||||||||||||||
|
(In thousands)
|
mortgage
|
Construction
|
real estate
|
lines of credit
|
and industrial
|
|||||||||||||||
|
Specifically reserved
|
$
|
117
|
$
|
-
|
$
|
455
|
$
|
-
|
$
|
553
|
||||||||||
|
Historical loss rate
|
106
|
-
|
45
|
31
|
50
|
|||||||||||||||
|
Qualitative factors
|
536
|
-
|
2,435
|
366
|
1,055
|
|||||||||||||||
|
Total
|
$
|
759
|
$
|
-
|
$
|
2,935
|
$
|
397
|
$
|
1,658
|
||||||||||
|
Home equity
|
Other
|
|||||||||||||||||||
|
(In thousands)
|
Tax exempt
|
and junior liens
|
consumer
|
Unallocated
|
Total
|
|||||||||||||||
|
Specifically reserved
|
$
|
-
|
$
|
5
|
$
|
-
|
$
|
-
|
$
|
1,130
|
||||||||||
|
Historical loss rate
|
-
|
35
|
16
|
-
|
283
|
|||||||||||||||
|
Qualitative factors
|
1
|
291
|
150
|
-
|
4,834
|
|||||||||||||||
|
Total
|
$
|
1
|
$
|
331
|
$
|
166
|
$
|
-
|
$
|
6,247
|
||||||||||
|
December 31, 2015
|
||||||||||||||||||||
|
|
1-4 family
|
|||||||||||||||||||
|
first-lien
|
Other
|
|||||||||||||||||||
|
residential
|
Commercial
|
Commercial
|
commercial
|
|||||||||||||||||
|
(In thousands)
|
mortgage
|
Construction
|
real estate
|
lines of credit
|
and industrial
|
|||||||||||||||
|
Specifically reserved
|
$
|
-
|
$
|
-
|
$
|
760
|
$
|
5
|
$
|
193
|
||||||||||
|
Historical loss rate
|
70
|
-
|
97
|
49
|
54
|
|||||||||||||||
|
Qualitative factors
|
511
|
-
|
2,126
|
347
|
1,023
|
|||||||||||||||
|
Total
|
$
|
581
|
$
|
-
|
$
|
2,983
|
$
|
401
|
$
|
1,270
|
||||||||||
|
Home equity
|
Other
|
|||||||||||||||||||
|
(In thousands)
|
Tax exempt
|
and junior liens
|
consumer
|
Unallocated
|
Total
|
|||||||||||||||
|
Specifically reserved
|
$
|
-
|
$
|
2
|
$
|
-
|
$
|
-
|
$
|
960
|
||||||||||
|
Historical loss rate
|
-
|
26
|
25
|
-
|
321
|
|||||||||||||||
|
Qualitative factors
|
3
|
322
|
93
|
-
|
4,425
|
|||||||||||||||
|
Total
|
$
|
3
|
$
|
350
|
$
|
118
|
$
|
-
|
$
|
5,706
|
||||||||||
NOTE 7: SERVICING
Loans serviced for others are not included in the accompanying consolidated statements of condition. At December 31, 2016 and 2015, the Bank serviced 268 and 317 residential mortgage loans for others, respectively. The unpaid principal balances of mortgage loans serviced for others were $17.0 million and $20.9 million at December 31, 2016 and 2015, respectively. The balance of capitalized servicing rights included in other assets at December 31, 2016 and 2015, was $40,000 and $52,000, respectively.
The following summarizes mortgage servicing rights capitalized and amortized:
|
(In thousands)
|
2016
|
2015
|
||||||
|
Mortgage servicing rights capitalized
|
$
|
-
|
$
|
-
|
||||
|
Mortgage servicing rights amortized
|
$
|
12
|
$
|
14
|
||||
NOTE 8: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, is as follows:
|
(In thousands)
|
2016
|
2015
|
||||||
|
Land
|
$
|
2,205
|
$
|
2,176
|
||||
|
Buildings
|
13,704
|
12,111
|
||||||
|
Furniture, fixtures and equipment
|
12,948
|
11,194
|
||||||
|
Construction in progress
|
455
|
2,502
|
||||||
|
29,312
|
27,983
|
|||||||
|
Less: Accumulated depreciation
|
14,135
|
13,149
|
||||||
|
|
$
|
15,177
|
$
|
14,834
|
||||
NOTE 9: FORECLOSED REAL ESTATE
The Company is required to disclose the carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession of the property at each reporting period.
|
December 31,
|
December 31,
|
|||||||||||||||
|
(Dollars in thousands)
|
Number of properties
|
2016
|
Number of properties
|
2015
|
||||||||||||
|
Foreclosed residential real estate
|
7
|
$
|
393
|
2
|
$
|
182
|
||||||||||
At December 31, 2016, the Company reported $659,000 in residential real estate loans in the process of foreclosure.
NOTE 10: GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. Goodwill is not amortized, but is evaluated annually for impairment or between annual evaluations in certain circumstances. Management performs an annual assessment of the Company's goodwill to determine whether or not any impairment of the carrying value may exist.
Of the $4.5 million of goodwill carried on the Company's books as of December 31, 2016, $3.8 million of this amount was due to prior periods acquisitions of bank branches and $696,000 was due to the 2013 acquisition of the FitzGibbons Agency by Pathfinder Risk Management Company, Inc. and the 2015 acquisition of the Huntington Agency in suburban Syracuse.
The Company is permitted to assess qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than the carrying value. Based on the results of the assessment, management has determined that the carrying value of goodwill in the amount of $4.5 million is not impaired as of December 31, 2016.
The identifiable intangible asset of $198,000 as of December 31, 2016 was due to the acquisition of the FitzGibbons and Huntington Agencies and represents the amortized carrying amount of the customer lists intangible. The weighted average amortization period of this intangible asset is 7.0 years.
The gross carrying amount and annual amortization for this identifiable intangible asset are as follows:
|
December 31,
|
||||||||
|
(In thousands)
|
2016
|
2015
|
||||||
|
Gross carrying amount
|
$
|
214
|
$
|
175
|
||||
|
Addition due to Huntington Agency purchase
|
-
|
55
|
||||||
|
Amortization recognized in the year
|
(16
|
)
|
(16
|
)
|
||||
|
Net amortizing intangibles
|
$
|
198
|
$
|
214
|
||||
The estimated amortization expense for each of the five succeeding years ended December 31, is as follows:
|
(In thousands)
|
||||
|
2017
|
$
|
16
|
||
|
2018
|
16
|
|||
|
2019
|
16
|
|||
|
2020
|
16
|
|||
|
2021
|
16
|
|||
|
Thereafter
|
118
|
|||
|
|
$
|
198
|
||
NOTE 11: DEPOSITS
A summary of deposits at December 31 is as follows:
|
(In thousands)
|
2016
|
2015
|
||||||
|
Savings accounts
|
$
|
80,139
|
$
|
73,540
|
||||
|
Time accounts
|
132,007
|
111,250
|
||||||
|
Time accounts of $250,000 or more
|
57,349
|
35,213
|
||||||
|
Money management accounts
|
14,718
|
14,081
|
||||||
|
MMDA accounts
|
192,692
|
146,862
|
||||||
|
Demand deposit interest-bearing
|
53,587
|
42,758
|
||||||
|
Demand deposit noninterest-bearing
|
75,282
|
61,679
|
||||||
|
Mortgage escrow funds
|
5,209
|
4,932
|
||||||
|
Total Deposits
|
$
|
610,983
|
$
|
490,315
|
||||
At December 31, 2016, the scheduled maturities of time deposits are as follows:
|
(In thousands)
|
||||
|
Year of Maturity:
|
||||
|
2017
|
$
|
119,945
|
||
|
2018
|
38,693
|
|||
|
2019
|
8,774
|
|||
|
2020
|
14,313
|
|||
|
2021
|
4,770
|
|||
|
Thereafter
|
2,861
|
|||
|
Total
|
$
|
189,356
|
||
In addition to deposits obtained from its business operations within its target market areas, the Bank also obtains brokered deposits through various programs administered by Promontory Interfinancial Network.
|
At December 31,
|
||||||||||||||||||||||||
|
2016
|
2015
|
|||||||||||||||||||||||
|
(In thousands)
|
Non-Brokered
|
Brokered
|
Total
|
Non-Brokered
|
Brokered
|
Total
|
||||||||||||||||||
|
Savings accounts
|
$
|
80,139
|
$
|
-
|
$
|
80,139
|
$
|
73,540
|
$
|
-
|
$
|
73,540
|
||||||||||||
|
Time accounts
|
89,200
|
42,807
|
132,007
|
78,234
|
33,016
|
111,250
|
||||||||||||||||||
|
Time accounts of $250,000 or more
|
57,349
|
-
|
57,349
|
35,213
|
-
|
35,213
|
||||||||||||||||||
|
Money management accounts
|
14,718
|
-
|
14,718
|
14,081
|
-
|
14,081
|
||||||||||||||||||
|
MMDA accounts
|
105,755
|
86,937
|
192,692
|
99,187
|
47,675
|
146,862
|
||||||||||||||||||
|
Demand deposit interest-bearing
|
53,587
|
-
|
53,587
|
42,758
|
-
|
42,758
|
||||||||||||||||||
|
Demand deposit noninterest-bearing
|
75,282
|
-
|
75,282
|
61,679
|
-
|
61,679
|
||||||||||||||||||
|
Mortgage escrow funds
|
5,209
|
-
|
5,209
|
4,932
|
-
|
4,932
|
||||||||||||||||||
|
Total Deposits
|
$
|
481,239
|
$
|
129,744
|
$
|
610,983
|
$
|
409,624
|
$
|
80,691
|
$
|
490,315
|
||||||||||||
NOTE 12: BORROWED FUNDS
The composition of borrowings (excluding subordinated loans) at December 31 is as follows:
|
(In thousands)
|
2016
|
2015
|
||||||
|
Short-term:
|
||||||||
|
FHLB Advances
|
$
|
42,000
|
$
|
24,800
|
||||
|
Deferred fees hedging
|
(53
|
)
|
-
|
|||||
|
Total short-term borrowings
|
$
|
41,947
|
$
|
24,800
|
||||
|
Long-term:
|
||||||||
|
FHLB advances
|
$
|
17,000
|
$
|
16,500
|
||||
|
Total long-term borrowings
|
$
|
17,000
|
$
|
16,500
|
||||
The principal balances, interest rates and maturities of the remaining borrowings, all of which are at a fixed rate, at December 31, 2016 are as follows:
|
Term
|
Principal
|
Rates
|
||||||
|
(Dollars in thousands)
|
||||||||
|
Advances with FHLB
|
||||||||
|
due within 1 year
|
$
|
7,000
|
0.78-2.56
|
%
|
||||
|
due within 2 years
|
2,000
|
1.04
|
%
|
|||||
|
due within 10 years
|
8,000
|
1.16-2.55
|
%
|
|||||
|
Total advances with FHLB
|
$
|
17,000
|
||||||
|
Total long-term fixed rate borrowings
|
$
|
17,000
|
||||||
At December 31, 2016, scheduled repayments of long-term debt are as follows:
|
(In thousands)
|
||||
|
2017
|
$
|
7,000
|
||
|
2018
|
2,000
|
|||
|
2019
|
5,000
|
|||
|
2020
|
1,000
|
|||
|
2021
|
-
|
|||
|
Thereafter
|
2,000
|
|||
|
$
|
17,000
|
|||
The Company has access to Federal Home Loan Bank advances, under which it can borrow at various terms and interest rates. Residential mortgage loans with a carrying value of $140.3 million and FHLB stock with a carrying value of $3.3 million have been pledged by the Company under a blanket collateral agreement to secure the Company's borrowings at December 31, 2016. 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 $12.9 million line of credit available at December 31, 2016 with the Federal Reserve Bank of New York through its Discount Window and has pledged various corporate and municipal securities against the line. The Company has $14.4 million in lines of credit available with three other correspondent banks. $9.4 million of that line of credit is available on an unsecured basis and the remaining $5.0 million must be collateralized with marketable investment securities. Interest on the lines is determined at the time of borrowing.
NOTE 13: SUBORDINATED LOANS
The Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust II, of which the Company owns 100% of the common equity. The Trust issued $5,000,000 of 30-year floating rate Company-obligated pooled capital securities of Pathfinder Statutory Trust II ("Floating-Rate Debentures"). The Company borrowed the proceeds of the capital securities from its subsidiary by issuing floating rate junior subordinated deferrable interest debentures having substantially similar terms. The capital securities mature in 2037 and are treated as Tier 1 capital by the Federal Deposit Insurance Corporation and the Federal Reserve Board ("FRB"). The capital securities of the trust are a pooled trust preferred fund of Preferred Term Securities VI, Ltd. and are tied to the 3-month LIBOR (1.00%) plus 1.65% for a total of 2.65% at December 31, 2016 with a five-year call provision. The Company guarantees all of these securities.
The Company's equity interest in the trust subsidiary of is included in other assets on the Consolidated Statements of Financial Condition at December 31, 2016 and 2015. For regulatory reporting purposes, the Federal Reserve has indicated that the preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that Trust Preferred Securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them.
On October 15, 2015, the Company executed the $10.0 million non-amortizing subordinated loan with an unrelated third party that is scheduled to mature on October 1, 2025. The Company has the right to prepay the subordinated loan at any time after October 15, 2020 without penalty. The terms of the subordinated loan required interest payments at an annual interest rate of 3.50% from October 15, 2015 to February 29, 2016. The annual interest rate charged the Company increased to 6.25% on March 1, 2016 through the maturity date. The Subordinated Loan is senior in the Company's credit repayment hierarchy only to the Company's common equity and, as a result, qualifies as Tier 2 capital for all future periods when applicable. The Company paid $172,000 in origination and legal fees as part of this transaction. These fees will be amortized over the life of the subordinated loan through its first call date using the effective interest method. The effective cost of funds related to this transaction is 6.44% calculated under this method.
The composition of subordinated loans at December 31 is as follows:
|
(In thousands)
|
2016
|
2015
|
||||||
|
Subordinated loans:
|
||||||||
|
Junior subordinated debenture
|
$
|
5,155
|
$
|
5,155
|
||||
|
Subordinated loan
|
9,870
|
9,836
|
||||||
|
Total subordinated loans
|
$
|
15,025
|
$
|
14,991
|
||||
The principal balances, interest rates and maturities of the subordinated loans at December 31, 2016 are as follows:
|
Term
|
Principal
|
Rates
|
||||||
|
(Dollars in thousands)
|
||||||||
|
Subordinated loans:
|
||||||||
|
due within 10 years
|
$
|
9,870
|
6.48
|
%
|
||||
|
due within 21 years
|
5,155
|
3-Month Libor + 1.65%
|
||||||
|
Total subordinated loans
|
$
|
15,025
|
||||||
At December 31, 2016, scheduled repayments of the subordinated loans:
|
(In thousands)
|
||||
|
2017
|
$
|
-
|
||
|
2018
|
-
|
|||
|
2019
|
-
|
|||
|
2020
|
-
|
|||
|
2021
|
-
|
|||
|
Thereafter
|
15,025
|
|||
|
$
|
15,025
|
|||
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:
|
Pension Benefits
|
Postretirement Benefits
|
|||||||||||||||
|
(In thousands)
|
2016
|
2015
|
2016
|
2015
|
||||||||||||
|
Change in benefit obligations:
|
||||||||||||||||
|
Benefit obligations at beginning of year
|
$
|
9,319
|
$
|
9,679
|
$
|
159
|
$
|
356
|
||||||||
|
Service cost
|
-
|
-
|
-
|
-
|
||||||||||||
|
Interest cost
|
464
|
468
|
8
|
17
|
||||||||||||
|
Actuarial gain
|
(231
|
)
|
(586
|
)
|
-
|
(201
|
)
|
|||||||||
|
Benefits paid
|
(229
|
)
|
(242
|
)
|
(13
|
)
|
(13
|
)
|
||||||||
|
Benefit obligations at end of year
|
9,323
|
9,319
|
154
|
159
|
||||||||||||
|
Change in plan assets:
|
||||||||||||||||
|
Fair value of plan assets at beginning of year
|
12,808
|
13,125
|
-
|
-
|
||||||||||||
|
Actual return on plan assets
|
1,055
|
(75
|
)
|
-
|
-
|
|||||||||||
|
Benefits paid
|
(229
|
)
|
(242
|
)
|
(13
|
)
|
(13
|
)
|
||||||||
|
Employer contributions
|
-
|
-
|
13
|
13
|
||||||||||||
|
Fair value of plan assets at end of year
|
13,634
|
12,808
|
-
|
-
|
||||||||||||
|
Funded Status - asset (liability)
|
$
|
4,311
|
$
|
3,489
|
$
|
(154
|
)
|
$
|
(159
|
)
|
||||||
The funded status of the pension was recorded within other assets on the statement of condition. The unfunded status of the postretirement plan is recorded as a liability on the statement of condition.
Amounts recognized in accumulated other comprehensive loss as of December 31 are as follows:
|
Pension Benefits
|
Postretirement Benefits
|
|||||||||||||||
|
(In thousands)
|
2016
|
2015
|
2016
|
2015
|
||||||||||||
|
Net loss/(gain)
|
$
|
2,685
|
$
|
3,245
|
$
|
(165
|
)
|
$
|
(172
|
)
|
||||||
|
Tax Effect
|
1,074
|
1,298
|
(66
|
)
|
(69
|
)
|
||||||||||
|
|
$
|
1,611
|
$
|
1,947
|
$
|
(99
|
)
|
$
|
(103
|
)
|
||||||
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, 2016 and December 31, 2015. The following points address the approach taken.
|
1.
|
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 5.15% at December 31, 2016.
|
|
2.
|
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 5.32% at December 31, 2016.
|
|
3.
|
Each discount rate was developed by matching the expected future cash flows of Pathfinder Bank to high quality bonds. Every bond considered has earned ratings of at least AA by Fitch Group, AA by Standard & Poor's, or Aa2 by Moody's Investor Services.
|
The accumulated benefit obligation for the defined benefit pension plan was $9.3 million at December 31, 2016 and 2015. The postretirement plan had an accumulated benefit obligation of $154,000 and $159,000 at December 31, 2016 and 2015, respectively.
The significant assumptions used in determining the benefit obligations as of December 31, are as follows:
|
Pension Benefits
|
Postretirement Benefits
|
|||||||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
||||||||||||
|
Weighted average discount rate
|
5.15
|
%
|
5.05
|
%
|
5.32
|
%
|
5.23
|
%
|
||||||||
|
Rate of increase in future compensation levels
|
-
|
-
|
-
|
-
|
||||||||||||
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 6.25% for 2017, gradually decreasing to 5.00% in 2022 and remain at that level thereafter.
The composition of the net periodic benefit plan cost for the years ended December 31 is as follows:
|
Pension Benefits
|
Postretirement Benefits
|
|||||||||||||||
|
(In thousands)
|
2016
|
2015
|
2016
|
2015
|
||||||||||||
|
Service cost
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
|
Interest cost
|
464
|
468
|
8
|
17
|
||||||||||||
|
Expected return on plan assets
|
(951
|
)
|
(975
|
)
|
-
|
-
|
||||||||||
|
Amortization of transition obligation
|
-
|
-
|
-
|
-
|
||||||||||||
|
Amortization of net losses/(gains)
|
226
|
180
|
(3
|
)
|
5
|
|||||||||||
|
Amortization of unrecognized past service liability
|
-
|
-
|
(5
|
)
|
(5
|
)
|
||||||||||
|
Net periodic benefit plan (benefit) cost
|
$
|
(261
|
)
|
$
|
(327
|
)
|
$
|
-
|
$
|
17
|
||||||
The significant assumptions used in determining the net periodic benefit plan cost for years ended December 31, were as follows:
|
Pension Benefits
|
Postretirement Benefits
|
|||||||||||||||
|
|
2016
|
2015
|
2016
|
2015
|
||||||||||||
|
Weighted average discount rate
|
5.05
|
%
|
4.90
|
%
|
5.23
|
%
|
4.98
|
%
|
||||||||
|
Expected long term rate of return on plan assets
|
7.50
|
%
|
7.50
|
%
|
-
|
-
|
||||||||||
|
Rate of increase in future compensation levels
|
-
|
-
|
-
|
-
|
||||||||||||
The long term rate of return on assets assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the plan's target allocation of asset classes. Equities and fixed income securities were assumed to earn real rates of return in the ranges of 6.0%-8.0% and 3.0%-5.0%, respectively. The long-term inflation rate was estimated to be 2.5%. When these overall return expectations are applied to the plan's target allocation, the expected rate of return was determined to be in the range of 5.0% to 7.0%. Management chose to use a 7.5% expected long-term rate of return in 2016 and a 7.0% expected long-term rate of return in 2017 reflecting current economic conditions and expected rates of return. Based on the $13.6 million fair value of plan assets at December 31, 2016, each 50 basis point decrease in the expected long-term rate of return would reduce after tax net income by approximately $42,000.
The estimated net actuarial loss that will be amortized from accumulated other comprehensive loss into net periodic benefit plan cost during 2017 is $154,000. The estimated amortization of the unrecognized transition obligation and actuarial gain for the post retirement health plan in 2017 is $3,000. The expected net periodic benefit plan benefit for 2017 is estimated to be $318,000 for both retirement plans in aggregate.
Plan assets are invested in four diversified investment funds of the Pentegra Retirement Trust (the "Trust", formerly known as RSI Retirement Trust), 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 Liability Driven Investment (LDI) approach which seeks to fund the current and future liabilities of the Plan and aims to mitigate funded status and contribution volatility. The fair value of plan assets is determined primarily through direct observations of market pricing for the underlying assets within the investment fund. Where direct pricing observations are not available, fair value is determined by observations of market pricing for similar securities actively traded within publically accessible markets.
The Plan's asset allocation targets to hold 38% of assets in equity securities via investment in the Long-Term Growth – Equity Portfolio ('LTGE'), 16% in intermediate-term investment grade bonds via investment in the Long-Term Growth – Fixed-Income Portfolio ('LTGFI'), 35% in long duration bonds via the Liability Focused Fixed-Income Portfolio ('LFFI'), 10% in an alternative asset fund (the ALT Portfolio), and 1% in a cash equivalents portfolio (for liquidity).
LTGE is a diversified portfolio that invests in a number of actively and passively managed equity-focused mutual funds and collective investment trusts. The Portfolio holds a diversified mix of equity funds in order to gain exposure to the U.S. and non-U.S. equity markets. LTGFI is a diversified portfolio that invests in a number of fixed-income mutual funds and collective investment trusts. The Portfolio invests primarily in intermediate-term bond funds with a focus on Core Plus fixed-income investment approaches. LFFI is a diversified high quality fixed-income portfolio that currently invests in passively managed collective investment trusts that hold long duration bonds. The ALT Portfolio invests in professionally managed private funds that hold alternative assets. The Portfolio currently invests in three long/short equity hedge funds.
The investment objectives, investment strategies and risk of each of the daily valued and unitized Portfolios and the funds held within the Portfolios are detailed in the Private Placement Memorandum and the Trust's Investment Policy Statement.
The 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. A broadly diversified combination of equity and fixed income portfolios and various risk management techniques are used to help achieve these objectives.
In addition, significant consideration is paid to the plan's funding levels when determining the overall asset allocation. If the plan is considered to be well-funded, approximately 65% of the plan's assets are allocated to equities and approximately 35% allocated to fixed-income. Asset rebalancing normally occurs when the equity and fixed-income allocations vary by more than 10% from their respective targets (i.e., a 10% policy range guideline).
Pension plan assets measured at fair value are summarized below:
|
At December 31, 2016
|
||||||||||||||||
|
Total Fair
|
||||||||||||||||
|
(In thousands)
|
Level 1
|
Level 2
|
Level 3
|
Value
|
||||||||||||
|
Asset Category:
|
||||||||||||||||
|
Mutual funds - equity
|
||||||||||||||||
|
Large-cap value (a)
|
$
|
-
|
$
|
958
|
$
|
-
|
$
|
958
|
||||||||
|
Large-cap Growth (b)
|
-
|
860
|
-
|
860
|
||||||||||||
|
Large-cap Core (c)
|
-
|
609
|
-
|
609
|
||||||||||||
|
Mid-cap Value (d)
|
-
|
204
|
-
|
204
|
||||||||||||
|
Mid-cap Growth (e)
|
-
|
186
|
-
|
186
|
||||||||||||
|
Mid-cap Core (f)
|
-
|
209
|
-
|
209
|
||||||||||||
|
Small-cap Value (g)
|
-
|
167
|
-
|
167
|
||||||||||||
|
Small-cap Growth (h)
|
-
|
140
|
-
|
140
|
||||||||||||
|
Small-cap Core (i)
|
-
|
312
|
-
|
312
|
||||||||||||
|
International Equity (j)
|
-
|
1,131
|
-
|
1,131
|
||||||||||||
|
Equity -Total
|
-
|
4,776
|
-
|
4,776
|
||||||||||||
|
Fixed Income Funds
|
||||||||||||||||
|
Fixed Income-US Core (k)
|
-
|
1,695
|
-
|
1,695
|
||||||||||||
|
Intermediate Duration (l)
|
-
|
2,932
|
-
|
2,932
|
||||||||||||
|
Long Duration (m)
|
-
|
2,474
|
-
|
2,474
|
||||||||||||
|
Fixed Income-Total
|
-
|
7,101
|
-
|
7,101
|
||||||||||||
|
Long/Short Equity(n)
|
-
|
1,165
|
-
|
1,165
|
||||||||||||
|
Company Common Stock
|
-
|
-
|
-
|
-
|
||||||||||||
|
Cash Equivalents-Money market*
|
70
|
522
|
-
|
592
|
||||||||||||
|
Total
|
$
|
70
|
$
|
13,564
|
$
|
-
|
$
|
13,634
|
||||||||
|
At December 31, 2015
|
||||||||||||||||
|
Total Fair
|
||||||||||||||||
|
(In thousands)
|
Level 1
|
Level 2
|
Level 3
|
Value
|
||||||||||||
|
Asset Category:
|
||||||||||||||||
|
Mutual funds - equity
|
||||||||||||||||
|
Large-cap value (a)
|
$
|
-
|
$
|
696
|
$
|
-
|
$
|
696
|
||||||||
|
Large-cap Growth (b)
|
-
|
783
|
-
|
783
|
||||||||||||
|
Large-cap Core (c)
|
-
|
510
|
-
|
510
|
||||||||||||
|
Mid-cap Value (d)
|
-
|
166
|
-
|
166
|
||||||||||||
|
Mid-cap Growth (e)
|
-
|
163
|
-
|
163
|
||||||||||||
|
Mid-cap Core (f)
|
-
|
162
|
-
|
162
|
||||||||||||
|
Small-cap Value (g)
|
-
|
119
|
-
|
119
|
||||||||||||
|
Small-cap Growth (h)
|
-
|
117
|
-
|
117
|
||||||||||||
|
Small-cap Core (i)
|
-
|
238
|
-
|
238
|
||||||||||||
|
International Equity (j)
|
-
|
996
|
-
|
996
|
||||||||||||
|
Equity -Total
|
-
|
3,950
|
-
|
3,950
|
||||||||||||
|
Fixed Income Funds
|
||||||||||||||||
|
Fixed Income-US Core (k)
|
-
|
1,578
|
-
|
1,578
|
||||||||||||
|
Intermediate Duration (l)
|
-
|
2,865
|
-
|
2,865
|
||||||||||||
|
Long Duration (m)
|
-
|
2,347
|
-
|
2,347
|
||||||||||||
|
Fixed Income-Total
|
-
|
6,790
|
-
|
6,790
|
||||||||||||
|
Long/Short Equity(n)
|
-
|
1,793
|
-
|
1,793
|
||||||||||||
|
Company Common Stock
|
-
|
-
|
-
|
-
|
||||||||||||
|
Cash Equivalents-Money market*
|
72
|
203
|
-
|
275
|
||||||||||||
|
Total
|
$
|
72
|
$
|
12,736
|
$
|
-
|
$
|
12,808
|
||||||||
|
*Includes cash equivalents investments in equity and fixed income strategies
|
||||||||||||||||
|
(a)
|
This category contains large-cap stocks with above-average yield. The portfolio typically holds between 60 and 70 stocks.
|
|
(b)
|
This category seeks long-term capital appreciation by investing primarily in large growth companies based in the U.S.
|
|
(c)
|
This fund tracks the performance of the S&P 500 index by purchasing the securities represented in the index in approximately the same weightings as the index.
|
|
(d)
|
This category employs an indexing investment approach designed to track the performance of the CRSP US Mid-Cap Value Index.
|
|
(e)
|
This category employs an indexing investment approach designed to track the performance of the CRSP US Mid-Cap Growth Index.
|
|
(f)
|
This category seeks to track the performance of the S&P Midcap 400 Index.
|
|
(g)
|
This category consists of a selection of investments based on the Russell 2000 Value Index.
|
|
(h)
|
This category consists of a selection of investments based on the Russell 2000 Growth Index.
|
|
(i)
|
This category consists of an index fund designed to track the Russell 2000, along with a fund investing in readily marketable securities of U.S. companies with market capitalizations within the smallest 10% of the market universe, or smaller than the 1000th largest US company.
|
|
(j)
|
This category has investments in medium to large non-US companies, including high quality, durable growth companies and companies based in countries with stable economic and political systems. A portion of this category consists of an index fund designed to track the MSC ACWI ex-US Net Dividend Return Index.
|
|
(k)
|
This category currently includes equal investments in three mutual funds, two of which usually hold at least 80% of fund assets in investment grade fixed income securities, seeking to outperform the Barclays US Aggregate Bond Index while maintaining a similar duration to that index. The third fund targets investments of 50% or more in mortgage-backed securities guaranteed by the US government and its agencies.
|
|
(l)
|
This category consists mostly of a fund which seeks to track the Barclays Capital US Corporate A or Better 5-20 Year, Bullets only Index, along with a diversified mutual fund holding fixed income securities rated A or better.
|
|
(m)
|
This category consists of a fund that seeks to approximate the performance of the Barclays Capital US Corporate A or Better, 20+ Year Bullets Only Index over the long term.
|
|
(n)
|
This category currently invests in three long/short equity hedge funds.
|
For the fiscal year ending December 31, 2017, the Company expects to contribute approximately $13,000 to the postretirement plan.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid from both retirement plans:
|
Pension
|
Postretirement
|
|||||||||||
|
(In thousands)
|
Benefits
|
Benefits
|
Total
|
|||||||||
|
Years ending December 31:
|
||||||||||||
|
2017
|
$
|
266
|
$
|
13
|
$
|
279
|
||||||
|
2018
|
282
|
13
|
295
|
|||||||||
|
2019
|
292
|
13
|
305
|
|||||||||
|
2020
|
312
|
13
|
325
|
|||||||||
|
2021
|
329
|
12
|
341
|
|||||||||
|
Years 2022-2026
|
2,175
|
60
|
2,235
|
|||||||||
The Company also offers a 401(k) plan to its employees. Contributions to this plan by the Company were $300,000 and $269,000 for 2016 and 2015, respectively.
In addition, the Company made a $219,000 safe harbor contribution to the plan in 2016.
The Company maintains optional deferred compensation plans for its directors and certain executive officers, whereby fees and income normally received are deferred and paid by the Company based upon a payment schedule commencing at age 65 and continuing monthly for 10 years. Directors must serve on the board for a minimum of 5 years to be eligible for the Plan. At December 31, 2016 and 2015, other liabilities include approximately $2.4 million and $2.2 million, respectively, relating to deferred compensation. Deferred compensation expense for the years ended December 31, 2016 and 2015 amounted to approximately $339,000 and $310,000, respectively.
The Company has a supplemental executive retirement plan ("SERP") for the benefit of a retired Chief Executive Officer at December 31, 2016. At December 31, 2016 and 2015, other liabilities included approximately $0 and $15,000, respectively, accrued under this plan related to the retired CEO. Compensation expense includes approximately $0 relating to this supplemental executive retirement plan for the year ended December 31, 2016 and $4,000 for the year ended December 31, 2015. This plan fully paid out during 2016.
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, 2016 and 2015, the cash surrender values of these policies were $11.5 million and $10.6 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, 2016, other liabilities included $473,000 accrued under this plan.
NOTE 15: STOCK BASED COMPENSATION PLANS
All share and per share values have been adjusted, where appropriate, by the 1.6472 exchange rate used in the Conversion and Offering that occurred on October 16, 2014.
The April 2010 Stock Option Plan
In June 2011, the board of directors of the Company approved the grant of stock option awards to its directors and executive officers under the 2010 Stock Option Plan that had 247,080 shares authorized for award. A total of 74,124 stock option awards were granted to the nine directors of the Company, at that time, and 123,540 stock option awards, in total, were granted to the Chief Executive Officer and the Company's then four senior vice presidents. The awards will vest ratably over five years (20% per year for each year of the participant's service with the Company) and will expire ten years from the date of the grant, or June 2021. The fair value of each option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted average assumptions: risk-free interest rate of 2.2%; volatility factors of the expected market price of the Company's common stock of 0.45; weighted average expected lives of the options of 7.0 years: cash dividend yield of 1.49%. Based upon these assumptions, the weighted average fair value of options granted was $2.29.
In July 2013, the board of directors of the Company approved the grant of 16,472 stock option awards in total to two newly elected directors of the Company. The awards will vest ratably over five years (20% per year for each year of the participant's service with the Company) and will expire ten years from the date of the grant, or July 2023. The fair value of each option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted average assumptions: risk-free interest rate of 2.0%; volatility factors of the expected market price of the Company's common stock of 0.45; weighted average expected lives of the options of 7.0 years: cash dividend yield of 1.0%. Based upon these assumptions, the weighted average fair value of options granted was $3.69.
In November 2015, the board of directors of the Company approved the grant of 16,472 stock option awards in total to two newly elected directors of the Company. The awards will vest ratably over five years (20% per year for each year of the participant's service with the Company) and will expire ten years from the date of the grant, or November 2025. The fair value of each option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted average assumptions: risk-free interest rate of 1.9%; volatility factors of the expected market price of the Company's common stock of 0.23; weighted average expected lives of the options of 7.0 years: cash dividend yield of 1.4%. Based upon these assumptions, the weighted average fair value of options granted was $2.56.
In April 2016, the board of directors of the Company approved the grant of 47,768 stock option awards in total to three officers and one recently promoted senior officer. The awards will vest ratably over five years (20% per year for each year of the participant's service with the Company) and will expire ten years from the date of the grant, or April 2026. The fair value of each option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model 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.
The May 2016 Stock Option Plan
In May 2016, the board of directors of the Company approved the grant of stock option awards to its directors, executive Officers, senior officers and officers under the 2016 Equity Incentive Plan that was approved at the Annual Meeting of Shareholders on May 4, 2016 when 263,605 shares were authorized for award.
A total of 79,083 stock option awards were granted to the nine directors of the Company and 44,812 stock option awards, in total, were granted to thirteen officers. The awards will vest ratably over five years (20% per year for each year of the participant's service with the Company) and will expire ten years from the date of the grant, or May 2026. The fair value of each option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted average assumptions: risk-free interest rate of 1.6%; volatility factors of the expected market price of the Company's common stock of 0.32; weighted average expected lives of the options of 7.0 years: cash dividend yield of 1.55%. Based upon these assumptions, the weighted average fair value of options granted was $3.32.
A total of 92,261 stock option awards, in total, were granted to the Chief Executive Officer, two executive officers and three senior officers. The awards will vest ratably over seven years (approximately 14.28% per year for each year of the participant's service with the Company) with the exception of one senior officer whose awards will vest upon retirement on August 1, 2017 and will expire ten years from the date of the grant, or May 2026. The fair value of each option grant was established at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model used the following weighted average assumptions: risk-free interest rate of 1.7%; volatility factors of the expected market price of the Company's common stock of 0.32; weighted average expected lives of the options of 7.0 years: cash dividend yield of 1.55%. Based upon these assumptions, the weighted average fair value of options granted was $3.59.
Activity in the stock option plans is as follows:
|
Weighted
|
||||||||||||
|
Options
|
Average
|
Shares
|
||||||||||
|
(Shares in thousands)
|
Outstanding
|
Exercise Price
|
Exercisable
|
|||||||||
|
Outstanding at December 31, 2014
|
170
|
$
|
5.75
|
95
|
||||||||
|
Granted
|
17
|
$
|
11.09
|
-
|
||||||||
|
Newly vested
|
-
|
5.75
|
35
|
|||||||||
|
Exercised
|
(2
|
)
|
-
|
(2
|
)
|
|||||||
|
Expired
|
-
|
-
|
-
|
|||||||||
|
Outstanding at December 31, 2015
|
185
|
$
|
5.75
|
128
|
||||||||
|
Granted
|
264
|
$
|
11.25
|
-
|
||||||||
|
Newly vested
|
-
|
6.21
|
37
|
|||||||||
|
Exercised
|
(26
|
)
|
-
|
(26
|
)
|
|||||||
|
Expired
|
-
|
-
|
-
|
|||||||||
|
Outstanding at December 31, 2016
|
423
|
$
|
6.21
|
139
|
||||||||
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, 2016, the intrinsic value of the stock options was $1.7 million. At December 31, 2015, the intrinsic value of the stock options was $1.2 million.
At December 31, 2016, there were 422,940 options outstanding, of which 139,246 were exercisable at an average exercise price of $5.80, and an average remaining contractual life of 4.7 years.
The May 2016 Restricted Stock Awards
In May 2016, the board of directors of the Company approved the grant of restricted stock 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 105,442 shares were authorized for award. A total of 31,635 restricted stock awards were granted to the nine directors of the Company and 8,436 restricted stock awards, in total, were granted to two officers. The awards will vest ratably over five years (20% per year for each year of the participant's service with the Company).
A total of 46,570 stock option awards, in total, were granted to the Chief Executive Officer, two executive officers and three senior officers. The awards will vest ratably over seven years (approximately 14.28% per year for each year of the participant's service with the Company) with the exception of one senior officer whose awards will vest upon retirement on August 1, 2017.
The compensation expense of the awards is based on the fair value of the instruments on the date of grant. The Company recorded compensation expense in the amount of $264,000 and $85,000 in 2016 and 2015, respectively, and is expected to record $328,000, $323,000, $316,000, $314,000, $176,000, $113,000 and $38,000 in 2017 through 2023.
NOTE 16: EMPLOYEE STOCK OWNERSHIP PLAN
The Bank established the Pathfinder Bank Employee Stock Ownership Plan ("Plan") to purchase stock of the Company for the benefit of its employees. In July 2011, the Plan received a $1.1 million loan from Community Bank, N.A., guaranteed by the Company, to fund the Plan's purchase of 125,000 shares of the Company's treasury stock. The loan was being repaid in equal quarterly installments of principal plus interest over ten years beginning October 1, 2011. Interest accrued at the Wall Street Journal Prime Rate plus 1.00%, and was secured by the unallocated shares of the ESOP stock. This loan was refinanced in connection with the Conversion and Offering that occurred on October 16, 2014.
In connection with the Conversion and Offering, the ESOP purchased 105,442 shares issued in the offering by obtaining a loan from the Company which was used to purchase both the additional shares and refinance the remaining outstanding balance on the loan from Community Bank N.A. There were 138,982.5 shares associated with the refinanced loan resulting in a total of 244,424.5 shares associated with the new loan provided by the Company.
The ESOP loan from the Company has a ten year term and is being repaid in equal payments of principal and interest under a fixed rate of interest equal to 3.25% which was the prime rate of interest on the date of the closing of the offering. This ESOP loan from the Company, also referred to as an internally leveraged ESOP, does not appear as a liability on the Company's consolidated statement of condition as of December 31, 2016 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 $333,000 and $305,000 in compensation expense in 2016 and 2015, respectively, including $40,000 and $36,000 for dividends on unallocated shares in these same time periods. At December 31, 2016, there were 189,429 unearned ESOP shares with a fair value of $2.6 million.
NOTE 17: INCOME TAXES
The provision for income taxes for the years ended December 31, is as follows:
|
(In thousands)
|
2016
|
2015
|
||||||
|
Current
|
$
|
1,360
|
$
|
955
|
||||
|
Deferred
|
(249
|
)
|
116
|
|||||
|
|
$
|
1,111
|
$
|
1,071
|
||||
|
The provision for income taxes includes the following:
|
||||||||
|
(In thousands)
|
2016
|
2015
|
||||||
|
Federal Income Tax
|
$
|
980
|
$
|
929
|
||||
|
State Tax
|
131
|
142
|
||||||
|
|
$
|
1,111
|
$
|
1,071
|
||||
The components of the net deferred tax liability, included in other liabilities as of December 31, are as follows:
|
(In thousands)
|
2016
|
2015
|
||||||
|
Assets:
|
||||||||
|
Deferred compensation
|
$
|
912
|
$
|
858
|
||||
|
Allowance for loan losses
|
2,392
|
2,185
|
||||||
|
Postretirement benefits
|
56
|
61
|
||||||
|
Subordinated loan interest
|
37
|
-
|
||||||
|
Investment securities and financial derivative
|
1,229
|
-
|
||||||
|
Impairment losses on investment securities
|
88
|
155
|
||||||
|
Loan origination fees
|
184
|
66
|
||||||
|
Capital loss carryforward
|
62
|
120
|
||||||
|
Held-to-maturity securities
|
310
|
417
|
||||||
|
Other
|
166
|
121
|
||||||
|
Total
|
5,436
|
3,983
|
||||||
|
Liabilities:
|
||||||||
|
Prepaid pension
|
(1,605
|
)
|
(1,336
|
)
|
||||
|
Depreciation
|
(1,083
|
)
|
(1,011
|
)
|
||||
|
Accretion
|
(211
|
)
|
(145
|
)
|
||||
|
Loan origination fees
|
-
|
-
|
||||||
|
Intangible assets
|
(1,470
|
)
|
(1,470
|
)
|
||||
|
Investment securities and financial derivative
|
-
|
(21
|
)
|
|||||
|
Mortgage servicing rights
|
(15
|
)
|
(20
|
)
|
||||
|
Prepaid expenses and transaction fees
|
(204
|
)
|
(97
|
)
|
||||
|
Total
|
(4,588
|
)
|
(4,100
|
)
|
||||
|
848
|
(117
|
)
|
||||||
|
Less: deferred tax asset valuation allowance
|
(150
|
)
|
(265
|
)
|
||||
|
Net deferred tax asset
|
$
|
698
|
$
|
(382
|
)
|
|||
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.
The judgment about the level of future taxable income is inherently subjective and is reviewed on a continual basis as regulatory and business factors change. The valuation allowance of $150,000 at December 31, 2016 represents the portion of the deferred tax asset that management believes may not be realizable, as the Company may not generate sufficient capital gains in future years to offset its existing cumulative capital losses prior to the expiration of the related capital loss carryforward tax benefits. The deferred tax allowance was $265,000 at December 31, 2015. The $115,000 decrease in this allowance between December 31, 2015 and December 31, 2016, relates primarily to the reduction in current taxes payable resulting from capital gain income that was realized in 2016.
A reconciliation of the federal statutory income tax rate to the effective income tax rate for the years ended December 31, is as follows:
|
|
2016
|
2015
|
||||||
|
Federal statutory income tax rate
|
34.0
|
%
|
34.0
|
%
|
||||
|
State tax, net of federal benefit
|
1.9
|
2.3
|
||||||
|
Tax-exempt interest income
|
(8.6
|
)
|
(8.1
|
)
|
||||
|
Increase in value of bank owned life insurance less premiums paid
|
(2.0
|
)
|
(3.0
|
)
|
||||
|
Change in valuation allowance
|
(2.6
|
)
|
(4.8
|
)
|
||||
|
Other
|
2.5
|
6.4
|
||||||
|
Effective income tax rate
|
25.2
|
%
|
26.8
|
%
|
||||
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, 2016 and 2015, the following financial instruments were outstanding whose contract amounts represent credit risk:
|
Contract Amount
|
||||||||
|
(In thousands)
|
2016
|
2015
|
||||||
|
Commitments to grant loans
|
$
|
46,649
|
$
|
20,168
|
||||
|
Unfunded commitments under lines of credit
|
48,653
|
34,469
|
||||||
|
Unfunded commitments related to construction loans in progress
|
5,918
|
5,726
|
||||||
|
Standby letters of credit
|
1,900
|
1,884
|
||||||
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, 2016 with fixed interest rates amounted to approximately $7.8 million. Loan commitments, including unused lines of credit and standby letters of credit, outstanding at December 31, 2016 with variable interest rates amounted to approximately $89.4 million. These outstanding loan commitments carry current market rates.
Unfunded commitments under standby letters of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.
Letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The amount of the liability as of December 31, 2016 and 2015 for guarantees under standby letters of credit issued is not material.
The Company leases land and leasehold improvements under agreements that expire in various years with renewal options over the next 30 years. Rental expense, included in building occupancy expense, amounted to $149,000 for 2016 and $135,000 for 2015.
Approximate minimum rental commitments for non-cancelable operating leases are as follows:
|
Years Ending December 31:
|
||||
|
(In thousands)
|
||||
|
2017
|
147
|
|||
|
2018
|
105
|
|||
|
2019
|
62
|
|||
|
2020
|
56
|
|||
|
2021
|
31
|
|||
|
Thereafter
|
293
|
|||
|
Total minimum lease payments
|
$
|
694
|
||
NOTE 19: DIVIDENDS AND RESTRICTIONS
The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company. In addition to state law requirements and the capital requirements discussed in Note 20, federal statutes, regulations and policies limit the circumstances under which the Bank may pay dividends. The amount of retained earnings legally available under these regulations approximated $10.4 million as of December 31, 2016. 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, 2016, December 31, 2015 or December 31, 2014.
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 30, 2016, the Bank met the regulatory definition of a "well-capitalized" institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 8%, Tier 1 common equity exceeding 6.5%, and a total risk-based capital ratio exceeding 10%.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The buffer is separate from the capital ratios required under the Prompt Corrective Action ("PCA") standards. In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. At December 30, 2016, the Bank exceeded all current and projected regulatory required minimum capital ratios, including the maximum capital buffer level that will be required on January 1, 2019.
NOTE 20: REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
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, 2016, the Bank's most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as "well-capitalized", under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized", the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the tables below. There are no conditions or events since that notification that management believes have changed the Bank's category.
As noted above, the regulations also impose a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The buffer is separate from the capital ratios required under the Prompt Corrective Action ("PCA") standards and imposes restrictions on dividend distributions and discretionary bonuses. In order to avoid these restrictions, the capital conservation buffer effectively increases the minimum the following capital to risk-weighted assets ratios: (1) Core Capital, (2) Total Capital and (3) Common Equity. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. At December 30, 2016, the Bank exceeded all current and projected regulatory required minimum capital ratios, including the maximum capital buffer level that will be required on January 1, 2019.
The Bank's actual capital amounts and ratios as of December 31, 2016 and 2015 are presented in the following table.
|
Actual
|
Minimum For
Capital Adequacy Purposes
|
Minimum To Be
"Well-Capitalized"
Under Prompt
Corrective Provisions
|
Well-Capitalized
With Buffer, Fully
Phased In For 2019
|
|||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||||||||
|
As of December 31, 2016
|
||||||||||||||||||||||||||||||||
|
Total core capital (to risk-weighted assets)
|
$
|
72,098
|
14.79
|
%
|
$
|
38,996
|
8.00
|
%
|
$
|
48,745
|
10.00
|
%
|
$
|
51,182
|
10.50
|
%
|
||||||||||||||||
|
Tier 1 capital (to risk-weighted assets)
|
$
|
66,003
|
13.54
|
%
|
$
|
29,247
|
6.00
|
%
|
$
|
38,996
|
8.00
|
%
|
$
|
41,433
|
8.50
|
%
|
||||||||||||||||
|
Tier 1 common equity (to risk-weighted assets)
|
$
|
66,003
|
13.54
|
%
|
$
|
21,935
|
4.50
|
%
|
$
|
31,684
|
6.50
|
%
|
$
|
34,121
|
7.00
|
%
|
||||||||||||||||
|
Tier 1 capital (to adjusted assets)
|
$
|
66,003
|
9.06
|
%
|
$
|
29,154
|
4.00
|
%
|
$
|
36,443
|
5.00
|
%
|
$
|
36,443
|
5.00
|
%
|
||||||||||||||||
|
As of December 31, 2015:
|
||||||||||||||||||||||||||||||||
|
Total core capital (to risk-weighted assets)
|
$
|
67,286
|
16.22
|
%
|
$
|
33,187
|
8.00
|
%
|
$
|
41,484
|
10.00
|
%
|
||||||||||||||||||||
|
Tier 1 capital (to risk-weighted assets)
|
$
|
62,038
|
14.95
|
%
|
$
|
24,891
|
6.00
|
%
|
$
|
33,187
|
8.00
|
%
|
||||||||||||||||||||
|
Tier 1 common equity (to risk-weighted assets)
|
$
|
62,038
|
14.95
|
%
|
$
|
18,668
|
4.50
|
%
|
$
|
26,965
|
6.50
|
%
|
||||||||||||||||||||
|
Tier 1 capital (to adjusted assets)
|
$
|
62,038
|
10.00
|
%
|
$
|
24,816
|
4.00
|
%
|
$
|
31,020
|
5.00
|
%
|
||||||||||||||||||||
On September 1, 2011, the Company entered into a Securities Purchase Agreement with the Secretary of the Treasury ("Treasury") pursuant to which the Company sold to the Treasury, 13,000 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series B ("Series B Preferred Stock"), having a liquidation preference of $1,000 per share for aggregate proceeds of $13,000,000. This transaction was entered into as part of the SBLF.
The Series B Preferred Stock was entitled to receive non-cumulative dividends payable quarterly, on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The dividend rate, which was calculated on the aggregate liquidation amount, was initially set at 4.2% per annum based upon the level of "Qualified Small Business Lending," or "QSBL" (as defined in the Securities Purchase Agreement) by Pathfinder Bank. The dividend rate for dividend periods subsequent to the initial period was set based upon the "Percentage Change in Qualified Lending" (as defined in the Securities Purchase Agreement) between each dividend period and the "Baseline" QSBL level. In general, the dividend rate decreased as the level of Pathfinder Bank's QSBL increased. Our dividend rate as of December 31, 2015 was 1.0%. Such dividends were not cumulative, but we could only declare and pay dividends on our common stock (or any other equity securities junior to the Series B Preferred Stock) if we have declared and paid dividends for the current dividend period on the Series B Preferred Stock. We were also subject to other restrictions on our ability to repurchase or redeem other securities.
The Company had the right to redeem the shares of Series B Preferred Stock, in whole or in part, at any time at a redemption price equal to the sum of the liquidation amount per share and the per-share amount of any unpaid dividends for the then-current period, subject to any required prior approval by its primary federal regulator. On February 16, 2016, the Company redeemed all 13,000 shares of the Series B Preferred Stock outstanding with the payment of $13.0 million to the SBLF. This redemption was substantially financed by the
issuance of the $10 million Subordinated Loan on October 15, 2015. The issuance of the Subordinated Loan will increase interest expense by $644,000 per year but prospectively reduce the amount payable to the SBLF in preferred stock dividends. Effective April 1, 2016, the annual dividend rate for the preferred stock would have been 9.0%. The retirement of the $13.0 million of the SBLF Preferred Series B stock, therefore will result in an annual reduction of preferred dividends payable of $1.2 million. The Company paid $16,000 and $130,000 in preferred dividends in 2016 and 2015, respectively. These transactions had no effect on the regulatory capital position of the Bank.
The Company's goal is to maintain a strong capital position, consistent with the risk profile of its subsidiary banks that supports growth and expansion activities while at the same time exceeding regulatory standards. At December 31, 2016, the Bank exceeded all regulatory required minimum capital ratios and met the regulatory definition of a "well-capitalized" institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6% and a total risk-based capital ratio exceeding 10%.
The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2016 and 2015, these reserve balances amounted to $13.2 million and $3.9 million, respectively and are included in cash and due from banks in the statement of condition.
NOTE 21:
INTEREST RATE DERIVATIVE
Derivative instruments are entered into primarily as a risk management tool of the Company. Financial derivatives are recorded at fair value as other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability are recognized currently in earnings. For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in other comprehensive income and subsequently reclassified to earnings as the hedged transaction impacts net income. Any ineffective portion of a cash flow hedge is recognized currently in earnings. See Note 22 for further discussion of the fair value of the interest rate derivative.
The Company has $5.0 million of floating rate trust preferred debt indexed to 3-month LIBOR. As a result, it is exposed to variability in cash flows related to changes in projected interest payments caused by changes in the benchmark interest rate. During the fourth quarter of fiscal 2009, the Company entered into an interest rate swap agreement, with a $2.0 million notional amount, to convert a portion of the floating rate trust preferred debt to a fixed rate for a term of approximately seven years at a rate of 4.96%. This swap agreement expired in the second quarter of 2016 and was not renewed. The derivative, while in effect, was designated as a cash flow hedge. The hedging strategy ensured that changes in cash flows from the derivative would have been highly effective at offsetting changes in interest expense from the hedged exposure.
The following table summarizes the fair value of outstanding derivatives and their presentation on the statements of condition as of December 31:
|
(In thousands)
|
2016
|
2015
|
||||||
|
Cash flow hedge:
|
||||||||
|
Other liabilities
|
$
|
-
|
$
|
27
|
||||
The change in accumulated other comprehensive loss, on a pretax basis, and the impact on earnings from the interest rate swap that qualifies as a cash flow hedge for the year ended December 31 were as follows:
|
(In thousands)
|
2016
|
2015
|
||||||
|
Balance as of December 31:
|
$
|
(27
|
)
|
$
|
(82
|
)
|
||
|
Amount of gains/losses recognized in other comprehensive income
|
2
|
(6
|
)
|
|||||
|
Amount of loss reclassified from other comprehensive income
|
||||||||
|
and recognized as interest expense
|
25
|
61
|
||||||
|
Balance as of December 31:
|
$
|
-
|
$
|
(27
|
)
|
|||
No amount of ineffectiveness had been included in earnings for prior periods and the changes in fair value were recorded in other comprehensive (loss) income. Some, or all, of the amount included in accumulated other comprehensive (loss) income would have been reclassified into current earnings should a portion of, or the entire hedge no longer been considered effective.
NOTE 22: FAIR VALUE MEASUREMENTS AND DISCLOSURES
Accounting guidance related to fair value measurements and disclosures specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs have created the following fair value hierarchy:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.
An asset's or liability's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs, minimize the use of unobservable inputs, to the extent possible, and considers counterparty credit risk in its assessment of fair value.
The Company used the following methods and significant assumptions to estimate fair value:
Investment securities: The fair values of securities available-for-sale are obtained from an independent third party and are based on quoted prices on nationally recognized securities exchanges where available (Level 1). If quoted prices are not available, fair values are measured by utilizing matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2). Management made no adjustment to the fair value quotes that were received from the independent third party pricing service. During the third quarter of 2015, the Company purchased $313,000 of the common stock of a community-based financial institution that conducts its operations outside of the Company's primary market area. During the second quarter of 2016, the Company purchased an additional $130,000 of this common stock. The first purchase was in conjunction with a capital raise by the financial institution that attracted multiple investors and the second purchase was made in a private sale. The stock of this financial institution is not traded on any exchange and there are no quoted market prices available for this security (Level 3). Management has reviewed the results of the financial operations of the financial institution for the quarter and year ended December 31, 2016 and has concluded that this investment was appropriately valued at the acquisition cost of its most recent purchase, which was considered to be its fair value as of the measurement date.
Interest rate swap derivative: The fair value of the interest rate swap derivative is obtained from a third party pricing agent and is calculated based on a discounted cash flow model. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date. The curve utilized for discounting and projecting is built by obtaining publicly available third party market quotes for various swap maturity terms, and therefore is classified within Level 2 of the fair value hierarchy. The swap agreement presented in the accompanying financial statements expired in the second quarter of 2016 and was not renewed.
Impaired loans: Impaired loans are those loans in which the Company has measured impairment based on the fair value of the loan's collateral or the discounted value of expected future cash flows. Fair value is generally determined based upon market value evaluations by third parties of the properties and/or estimates by management of working capital collateral or discounted cash flows based upon expected proceeds. These appraisals may include up to three approaches to value: the sales comparison approach, the income approach (for income-producing property), and the cost approach. Management modifies the appraised values, if needed, to take into account recent developments in the market or other factors, such as, changes in absorption rates or market conditions from the time of valuation and anticipated sales values considering management's plans for disposition. Such modifications to the appraised values could result in lower valuations of such collateral. Estimated costs to sell are based on current amounts of disposal costs for similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Impaired loans are subject to nonrecurring fair value adjustment upon initial recognition or subsequent impairment. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.
Foreclosed real estate: Fair values for foreclosed real estate are initially recorded based on market value evaluations by third parties, less costs to sell ("initial cost basis"). Any write-downs required when the related loan receivable is exchanged for the underlying real estate collateral at the time of transfer to foreclosed real estate are charged to the allowance for loan losses. Values are derived from appraisals, similar to impaired loans, of underlying collateral or discounted cash flow analysis. Subsequent to foreclosure, valuations are updated periodically and assets are marked to current fair value, not to exceed the initial cost basis. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as, changes in absorption rates and market conditions from the time of valuation and anticipated sales values considering management's plans for disposition. Either change could result in adjustment to lower the property value estimates indicated in the appraisals. These measurements are classified as Level 3 within the fair value hierarchy.
The following tables summarize assets measured at fair value on a recurring basis as of December 31, segregated by the level of valuation inputs within the hierarchy utilized to measure fair value:
|
2016
|
||||||||||||||||
|
Total Fair
|
||||||||||||||||
|
(In thousands)
|
Level 1
|
Level 2
|
Level 3
|
Value
|
||||||||||||
|
Available-for-sale portfolio
|
||||||||||||||||
|
Debt investment securities:
|
||||||||||||||||
|
US Treasury, agencies and GSEs
|
$
|
-
|
$
|
24,184
|
$
|
-
|
$
|
24,184
|
||||||||
|
State and political subdivisions
|
-
|
16,481
|
-
|
16,481
|
||||||||||||
|
Corporate
|
-
|
15,195
|
-
|
15,195
|
||||||||||||
|
Asset backed securities
|
-
|
6,664
|
-
|
6,664
|
||||||||||||
|
Residential mortgage-backed - US agency
|
-
|
30,566
|
-
|
30,566
|
||||||||||||
|
Collateralized mortgage obligations - US agency
|
-
|
40,986
|
-
|
40,986
|
||||||||||||
|
Collateralized mortgage obligations - Private label
|
-
|
6,577
|
-
|
6,577
|
||||||||||||
|
Equity investment securities:
|
||||||||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Ultra short mortgage fund
|
626
|
-
|
-
|
626
|
||||||||||||
|
Large cap equity fund
|
-
|
-
|
-
|
-
|
||||||||||||
|
Common stock - Financial services industry
|
-
|
220
|
456
|
676
|
||||||||||||
|
Total available-for-sale securities
|
$
|
626
|
$
|
140,873
|
$
|
456
|
$
|
141,955
|
||||||||
|
Interest rate swap derivative
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
|
|
||||||||||||||||
| 2015 |
Total Fair
|
|||||||||||||||
|
(In thousands)
|
Level 1
|
Level 2
|
Level 3
|
Value
|
||||||||||||
|
Available-for-sale portfolio
|
||||||||||||||||
|
Debt investment securities:
|
||||||||||||||||
|
US Treasury, agencies and GSEs
|
$
|
-
|
$
|
21,308
|
$
|
-
|
$
|
21,308
|
||||||||
|
State and political subdivisions
|
-
|
8,300
|
-
|
8,300
|
||||||||||||
|
Corporate
|
-
|
18,128
|
-
|
18,128
|
||||||||||||
|
Residential mortgage-backed - US agency
|
-
|
32,573
|
-
|
32,573
|
||||||||||||
|
Collateralized mortgage obligations - US agency
|
-
|
16,833
|
-
|
16,833
|
||||||||||||
|
Collateralized mortgage obligations - Private label
|
-
|
-
|
-
|
-
|
||||||||||||
|
Equity investment securities:
|
||||||||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Ultra short mortgage fund
|
638
|
-
|
-
|
638
|
||||||||||||
|
Large cap equity fund
|
583
|
-
|
-
|
583
|
||||||||||||
|
Common stock - Financial services industry
|
46
|
220
|
313
|
579
|
||||||||||||
|
Total available-for-sale securities
|
$
|
1,267
|
$
|
97,362
|
$
|
313
|
$
|
98,942
|
||||||||
|
Interest rate swap derivative
|
$
|
-
|
$
|
(27
|
)
|
$
|
-
|
$
|
(27
|
)
|
||||||
|
The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis as of December 31 were as follows:
|
||||
|
(In thousands)
|
Common Stock - Financial Services Industry
|
|||
|
Balance - December 31, 2015
|
$
|
313
|
||
|
Total gains realized/unrealized:
|
||||
|
Included in earnings
|
-
|
|||
|
Included in other comprehensive income
|
13
|
|||
|
Settlements
|
130
|
|||
|
Sales
|
-
|
|||
|
Balance - December 31, 2016
|
$
|
456
|
||
|
Changes in unrealized gains included in earnings related to assets still held at December 31, 2016
|
$
|
-
|
||
The following table summarizes the valuation techniques and significant unobservable inputs used for the Company's investments that are categorized within Level 3 of the fair value hierarchy at the indicated dates:
|
(In thousands)
|
At December 31, 2016
|
|||||||||
|
Investment Type
|
Fair Value
|
Valuation Techniques
|
Unobservable Input
|
Weight
|
||||||
|
Common Stock - Financial Services Industry
|
$
|
456
|
Inputs to comparables
|
Weight ascribed to comparable companies
|
100
|
%
|
||||
|
(In thousands)
|
At December 31, 2015
|
|||||||||
|
Investment Type
|
Fair Value
|
Valuation Techniques
|
Unobservable Input
|
Weight
|
||||||
|
Common Stock - Financial Services Industry
|
$
|
313
|
Inputs to comparables
|
Weight ascribed to comparable companies
|
100
|
%
|
||||
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
The following tables summarize assets measured at fair value on a nonrecurring basis as of December 31, segregated by the level of valuation inputs within the hierarchy utilized to measure fair value:
|
2016
|
||||||||||||||||
|
Total Fair
|
||||||||||||||||
|
(In thousands)
|
Level 1
|
Level 2
|
Level 3
|
Value
|
||||||||||||
|
Impaired loans
|
$
|
-
|
$
|
-
|
$
|
4,049
|
$
|
4,049
|
||||||||
|
Foreclosed real estate
|
$
|
-
|
$
|
-
|
$
|
393
|
$
|
393
|
||||||||
| 2015 | ||||||||||||||||
|
Total Fair
|
||||||||||||||||
|
(In thousands)
|
Level 1
|
Level 2
|
Level 3
|
Value
|
||||||||||||
|
Impaired loans
|
$
|
-
|
$
|
-
|
$
|
1,070
|
$
|
1,070
|
||||||||
|
Foreclosed real estate
|
$
|
-
|
$
|
-
|
$
|
360
|
$
|
360
|
||||||||
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.
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
|
Valuation
|
Unobservable
|
Range
|
|
|
|
Techniques
|
Input
|
(Weighted Avg.)
|
|
At December 31, 2016
|
|
|
|
|
Impaired loans
|
Appraisal of collateral
|
Appraisal Adjustments
|
5% - 10% (5%)
|
|
(Sales Approach)
|
Costs to Sell
|
8% - 13% (10%)
|
|
|
Discounted Cash Flow
|
|||
|
Foreclosed real estate
|
Appraisal of collateral
|
Appraisal Adjustments
|
15% - 15% (15%)
|
|
(Sales Approach)
|
Costs to Sell
|
6% - 8% (7%)
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
|
Valuation
|
Unobservable
|
Range
|
|
|
|
Techniques
|
Input
|
(Weighted Avg.)
|
|
At December 31, 2015
|
|
|
|
|
Impaired loans
|
Appraisal of collateral
|
Appraisal Adjustments
|
5% - 10% (8%)
|
|
(Sales Approach)
|
Costs to Sell
|
8% - 15% (14%)
|
|
|
Discounted Cash Flow
|
|||
|
Foreclosed real estate
|
Appraisal of collateral
|
Appraisal Adjustments
|
15% - 15% (15%)
|
|
(Sales Approach)
|
Costs to Sell
|
6% - 8% (7%)
|
|
|
|
|
|
|
Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated statement of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
The Company has various processes and controls in place to ensure that fair value is reasonably estimated. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process.
While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company's assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company's disclosures and those of other companies may not be meaningful. The Company, in estimating its fair value disclosures for financial instruments, used the following methods and assumptions:
Cash and cash equivalents – The carrying amounts of these assets approximate their fair value and are classified as Level 1.
Interest earning time deposits – The carrying amounts of these assets approximate their fair value and are classified as Level 1.
Investment securities – The fair values of securities available-for-sale and held-to-maturity are obtained from an independent third party and are based on quoted prices on nationally recognized exchange where available (Level 1). If quoted prices are not available, fair values are measured by utilizing matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2). Management made no adjustment to the fair value quotes that were received from the independent third party pricing service. During the third quarter of 2015, the Company purchased $313,000 of the common stock of a community-based financial institution that conducts its operations outside of the Company's primary market area. During the second quarter of 2016, the Company purchased an additional $130,000 of this common stock. The first purchase was in conjunction with a capital raise by the financial institution that attracted multiple investors and the second purchase was made in a private sale. The stock of this financial institution is not traded on any exchange and there are no quoted market prices available for this security (Level 3). Management has reviewed the results of the financial operations of the financial institution for the quarter and year ended December 31, 2016 and has concluded that this investment was appropriately valued at the acquisition cost of its most recent purchase, which was considered to be its fair value as of the measurement date.
Federal Home Loan Bank stock – The carrying amount of these assets approximates their fair value and are classified as Level 2.
Net loans – For variable-rate loans that re-price frequently, fair value is based on carrying amounts. The fair value of other loans (for example, fixed-rate commercial real estate loans, mortgage loans, and commercial and industrial loans) is estimated using discounted cash flow analysis, based on interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality. Loan value estimates include judgments based on expected prepayment rates. The measurement of the fair value of loans, including impaired loans, is classified within Level 3 of the fair value hierarchy.
Accrued interest receivable and payable – The carrying amount of these assets approximates their fair value and are classified as Level 1.
Deposits – The fair values disclosed for demand deposits (e.g., interest-bearing and noninterest-bearing checking, passbook savings and certain types of money management accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) and are classified within Level 1 of the fair value hierarchy. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates of deposits to a schedule of aggregated expected monthly maturities on time deposits. Measurements of the fair value of time deposits are classified within Level 2 of the fair value hierarchy.
Borrowings – Fixed/variable term "bullet" structures are valued using a replacement cost of funds approach. These borrowings are discounted to the FHLBNY advance curve. Option structured borrowings' fair values are determined by the FHLB for borrowings that include a call or conversion option. If market pricing is not available from this source, current market indications from the FHLBNY are obtained and the borrowings are discounted to the FHLBNY advance curve less an appropriate spread to adjust for the option. These measurements are classified as Level 2 within the fair value hierarchy.
Subordinated Loans – The Company secures quotes from its pricing service based on a discounted cash flow methodology or utilizes observations of recent highly-similar transactions which result in a Level 2 classification.
Interest rate swap derivative – The fair value of the interest rate swap derivative is obtained from a third party pricing agent and is calculated based on a discounted cash flow model. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date. The curve utilized for discounting and projecting is built by obtaining publicly available third party market quotes for various swap maturity terms, and therefore is classified within Level 2 of the fair value hierarchy. The swap agreement presented in the accompanying financial statements expired in the second quarter of 2016 and was not renewed.
The carrying amounts and fair values of the Company's financial instruments as of December 31 are presented in the following table:
|
2016
|
2015
|
|||||||||||||||||||
|
Fair Value
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
||||||||||||||||
|
(In thousands)
|
Hierarchy
|
Amounts
|
Fair Values
|
Amounts
|
Fair Values
|
|||||||||||||||
|
Financial assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
1
|
$
|
22,419
|
$
|
22,419
|
$
|
15,245
|
$
|
15,245
|
|||||||||||
|
Investment securities - available-for-sale
|
1
|
626
|
626
|
1,267
|
1,267
|
|||||||||||||||
|
Investment securities - available-for-sale
|
2
|
140,873
|
140,873
|
97,362
|
97,362
|
|||||||||||||||
|
Investment securities - available-for-sale
|
3
|
456
|
456
|
313
|
313
|
|||||||||||||||
|
Investment securities - held-to-maturity
|
2
|
54,645
|
54,429
|
44,297
|
45,515
|
|||||||||||||||
|
Federal Home Loan Bank stock
|
2
|
3,250
|
3,250
|
2,424
|
2,424
|
|||||||||||||||
|
Net loans
|
3
|
485,900
|
484,704
|
424,732
|
428,410
|
|||||||||||||||
|
Accrued interest receivable
|
1
|
2,532
|
2,532
|
2,053
|
2,053
|
|||||||||||||||
|
Financial liabilities:
|
||||||||||||||||||||
|
Demand Deposits, Savings, NOW and MMDA
|
1
|
$
|
421,627
|
$
|
421,627
|
$
|
343,853
|
$
|
343,853
|
|||||||||||
|
Time Deposits
|
2
|
189,356
|
189,197
|
146,462
|
146,158
|
|||||||||||||||
|
Borrowings
|
2
|
58,947
|
58,918
|
41,300
|
41,282
|
|||||||||||||||
|
Subordinated loans
|
2
|
15,025
|
14,310
|
14,991
|
14,027
|
|||||||||||||||
|
Accrued interest payable
|
1
|
75
|
75
|
199
|
199
|
|||||||||||||||
|
Interest rate swap derivative
|
2
|
-
|
-
|
27
|
27
|
|||||||||||||||
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
|
2016
|
2015
|
||||||
|
(In thousands)
|
||||||||
|
Assets
|
||||||||
|
Cash
|
$
|
5,424
|
$
|
21,418
|
||||
|
Investments
|
455
|
358
|
||||||
|
Investment in bank subsidiary
|
67,281
|
64,519
|
||||||
|
Investment in non-bank subsidiary
|
155
|
155
|
||||||
|
Other assets
|
475
|
185
|
||||||
|
Total assets
|
$
|
73,790
|
$
|
86,635
|
||||
|
Liabilities and Shareholders' Equity
|
||||||||
|
Accrued liabilities
|
$
|
404
|
$
|
415
|
||||
|
Subordinated loans
|
15,025
|
14,991
|
||||||
|
Shareholders' equity
|
58,361
|
71,229
|
||||||
|
Total liabilities and shareholders' equity
|
$
|
73,790
|
$
|
86,635
|
||||
|
Statements of Income
|
2016
|
2015
|
||||||
|
(In thousands)
|
||||||||
|
Income
|
||||||||
|
Dividends from non-bank subsidiary
|
$
|
4
|
$
|
4
|
||||
|
Realized gains on available-for sale investment securities
|
108
|
-
|
||||||
|
Total income
|
112
|
4
|
||||||
|
Expenses
|
||||||||
|
Interest
|
880
|
300
|
||||||
|
Operating, net
|
230
|
248
|
||||||
|
Total expenses
|
1,110
|
548
|
||||||
|
Loss before taxes and equity in undistributed net income of subsidiaries
|
(998
|
)
|
(544
|
)
|
||||
|
Tax benefit
|
254
|
162
|
||||||
|
Loss before equity in undistributed net income of subsidiaries
|
(744
|
)
|
(382
|
)
|
||||
|
Equity in undistributed net income of subsidiaries
|
4,016
|
3,271
|
||||||
|
Net income
|
$
|
3,272
|
$
|
2,889
|
||||
|
Statements of Cash Flows
|
2016
|
2015
|
||||||
|
(In thousands)
|
||||||||
|
Operating Activities
|
||||||||
|
Net Income
|
$
|
3,272
|
$
|
2,889
|
||||
|
Equity in undistributed net income of subsidiaries
|
(4,016
|
)
|
(3,271
|
)
|
||||
|
Realized gains on available-for-sale investment securities
|
(23
|
)
|
-
|
|||||
|
Stock based compensation and ESOP expense
|
557
|
354
|
||||||
|
Amortization of deferred financing from subordinated loan
|
34
|
-
|
||||||
|
Net change in other assets and liabilities
|
(152
|
)
|
95
|
|||||
|
Net cash flows from operating activities
|
(328
|
)
|
67
|
|||||
|
Investing Activities
|
||||||||
|
Purchase investments
|
(130
|
)
|
(312
|
)
|
||||
|
Net gain on hedging transaction
|
(85
|
)
|
-
|
|||||
|
Proceeds from sale of investment
|
43
|
-
|
||||||
|
Net cash flows from investing activities
|
(172
|
)
|
(312
|
)
|
||||
|
Financing activities
|
||||||||
|
Redemption of preferred stock - SBLF
|
(13,000
|
)
|
-
|
|||||
|
Proceeds from exercise of stock options
|
143
|
9
|
||||||
|
Proceeds from subordinated loan
|
-
|
9,836
|
||||||
|
Purchase of common stock
|
(1,755
|
)
|
-
|
|||||
|
Cash dividends paid to preferred shareholders
|
(16
|
)
|
(130
|
)
|
||||
|
Cash dividends paid to common shareholders
|
(866
|
)
|
(609
|
)
|
||||
|
Net cash flows from financing activities
|
(15,494
|
)
|
9,106
|
|||||
|
Change in cash and cash equivalents
|
(15,994
|
)
|
8,861
|
|||||
|
Cash and cash equivalents at beginning of year
|
21,418
|
12,557
|
||||||
|
Cash and cash equivalents at end of year
|
$
|
5,424
|
$
|
21,418
|
||||
NOTE 24: RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted loans to certain directors, executive officers and their affiliates (collectively referred to as "related parties"). These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated parties and do not involve more than normal risk of collectability.
The following represents the activity associated with loans to related parties during the year ended December 31, 2016:
|
(In thousands)
|
||||
|
Balance at the beginning of the year
|
$
|
10,324
|
||
|
Originations and Officer additions
|
2,122
|
|||
|
Principal payments
|
(1,562
|
)
|
||
|
Balance at the end of the year
|
$
|
10,884
|
||
Deposits of related parties at December 31, 2016 and December 31, 2015 were $3.4 million and $2.0 million, respectively.
NOTE 25: CONVERSION AND REORGANIZATION
On October 16, 2014, the former Pathfinder Bancorp ("former Pathfinder") completed the conversion and reorganization pursuant to which Pathfinder Bancorp, MHC converted to the stock holding company form of organization under a "second step" conversion (the "Conversion"), and the Bank reorganized from the two-tier mutual holding company structure to the stock holding company structure. Prior to the completion of the Conversion, the MHC owned approximately 60.4% of the common stock of the Company. The Company, the new stock holding company for Pathfinder Bank, sold 2,636,053 shares of common stock at $10.00 per share, for gross offering proceeds of $26.4 million in its stock offering. In addition, $197,000 in cash was received by the Company from the MHC upon it ceasing to exist.
Concurrent with the completion of the offering, shares of common stock of the Company owned by the public were exchanged for shares of the Company's common stock so that the shareholders now own approximately the same percentage of the Company's common stock as they owned of the former Pathfinder's common stock immediately prior to the Conversion. Shareholders of the former Pathfinder received 1.6472 shares of the Company's common stock for each share of the former Pathfinder's common stock that they owned immediately prior to completion of the transaction. As a result of the offering and the exchange of shares, the Company had 4,353,850 shares outstanding at December 31, 2014. The Company has 4,353,850 and 4,236,744 shares outstanding at December 31, 2015 and December 31, 2016, respectively.
The Conversion was accounted for as a change in corporate form with no resulting change in the historical basis of the Company's assets, liabilities, and equity. Costs related to the offering were primarily marketing fees paid to the Company's investment banking firm, legal and professional fees, registration fees, printing and mailing costs and totaled $1.5 million. Accordingly, net proceeds were $24.9 million. In addition, as part of the Conversion and dissolution of the MHC, the Company received $197,000 of cash previously held by the MHC. As a result of the Conversion and Offering, Pathfinder Bancorp, Inc., a federal corporation, was succeeded by a new fully public Maryland corporation with the same name and the MHC ceased to exist.
The shares of common stock sold in the offering and issued began trading on the NASDAQ Capital Market on October 17, 2014 under the trading symbol "PBHC."
In accordance with Board of Governors of the Federal Reserve System regulations, at the time of the reorganization, the Company substantially restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The Bank will establish a parallel liquidation account to support the Company's liquidation account in the event the Company does not have sufficient assets to fund its obligations under its liquidation account. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation accounts. In the event of a complete liquidation of the Bank or the Company, each account holder will be entitled to receive a distribution in an amount proportionate to the adjusted qualifying account balances then held.
The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.
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.
|
For the years ended December 31, 2016
|
||||||||||||||||||||
|
(In thousands)
|
Retirement Plans
|
Unrealized Gains and Losses on Financial derivative
|
Unrealized Gains and Losses on Available-for-Sale Securities
|
Unrealized Loss on Securities
Transferred to
Held-to-Maturity
|
Total
|
|||||||||||||||
|
Beginning balance
|
$
|
(1,844
|
)
|
$
|
(16
|
)
|
$
|
(51
|
)
|
$
|
(654
|
)
|
$
|
(2,565
|
)
|
|||||
|
Other comprehensive income before reclassifications
|
198
|
1
|
(1,436
|
)
|
190
|
(1,045
|
)
|
|||||||||||||
|
Amounts reclassified from AOCI
|
133
|
15
|
(358
|
)
|
-
|
(212
|
)
|
|||||||||||||
|
Ending balance
|
$
|
(1,513
|
)
|
$
|
-
|
$
|
(1,845
|
)
|
$
|
(464
|
)
|
$
|
(3,822
|
)
|
||||||
|
For the years ended December 31, 2015
|
||||||||||||||||||||
|
(In thousands)
|
Retirement Plans
|
Unrealized Gains and Losses on Financial derivative
|
Unrealized Gains and Losses on Available-for-Sale Securities
|
Unrealized Loss on Securities Transferred to Held-to-Maturity
|
Total
|
|||||||||||||||
|
Beginning balance
|
$
|
(1,794
|
)
|
$
|
(49
|
)
|
$
|
457
|
$
|
(733
|
)
|
$
|
(2,119
|
)
|
||||||
|
Other comprehensive (loss) income before reclassifications
|
(161
|
)
|
(4
|
)
|
(255
|
)
|
79
|
(341
|
)
|
|||||||||||
|
Amounts reclassified from AOCI
|
111
|
37
|
(253
|
)
|
-
|
(105
|
)
|
|||||||||||||
|
Ending balance
|
$
|
(1,844
|
)
|
$
|
(16
|
)
|
$
|
(51
|
)
|
$
|
(654
|
)
|
$
|
(2,565
|
)
|
|||||
The following table presents the amounts reclassified out of each component of AOCI for the indicated annual period:
|
(In thousands)
|
For the years ended
|
||||||||
|
Details about AOCI
1
components
|
December 31, 2016
|
December 31, 2015
|
Affected Line Item in the Statement of Income
|
||||||
|
Unrealized holding gain on financial derivative:
|
|||||||||
|
Reclassification adjustment for
|
|||||||||
|
interest expense included in net income
|
$
|
(25
|
)
|
$
|
(61
|
)
|
Interest on long term borrowings
|
||
|
10
|
24
|
Provision for income taxes
|
|||||||
|
$
|
(15
|
)
|
$
|
(37
|
)
|
Net Income
|
|||
|
Retirement plan items
|
|||||||||
|
Retirement plan net losses
|
|||||||||
|
recognized in plan expenses
2
|
$
|
(222
|
)
|
$
|
(185
|
)
|
Salaries and employee benefits
|
||
|
89
|
74
|
Provision for income taxes
|
|||||||
|
$
|
(133
|
)
|
$
|
(111
|
)
|
Net Income
|
|||
|
Available-for-sale securities
|
|||||||||
|
Realized gain on sale of securities
|
$
|
594
|
$
|
422
|
Net gains on sales and redemptions of investment securities
|
||||
|
(236
|
)
|
(169
|
)
|
Provision for income taxes
|
|||||
|
358
|
253
|
Net Income
|
|||||||
|
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.
|
|||||||||
None.
REPORT OF MANAGEMENT'S RESPONSIBILITY
The Company's management, including the Company's principal executive officer and principal financial officer, have evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the "SEC") (1) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management's report on internal control over financial reporting is contained in "Item 8 – Financial Statements and Supplementary Data" in this annual report in Form 10-K.
This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting pursuant to the rules of the SEC that exempts the Company from such attestation and requires only management's report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
None.
|
(a)
|
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.
|
|
(b)
|
Information concerning the officers and directors compliance with Section 16(a) of the Securities Exchange Act is incorporated herein by reference to the Company's Proxy Statement for the Annual Meeting of Shareholders under the caption "Section 16(a) Beneficial Ownership Reporting Compliance".
|
|
(c)
|
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".
|
|
(d)
|
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, 2016.
|
|
Name
|
Age
|
Positions Held With the Company
|
|
Thomas W. Schneider
|
55
|
President and Chief Executive Officer
|
|
James A. Dowd, CPA
|
49
|
Executive Vice President, Chief Operating Officer and Chief Financial Officer
|
|
Ronald Tascarella
|
58
|
Executive Vice President, Chief Credit Officer
|
|
Edward A. Mervine
|
60
|
Senior Vice President, General Counsel
|
|
Melissa A. Miller
|
59
|
Senior Vice President, Customer Experience Officer
|
|
Daniel Phillips
|
52
|
Senior Vice President, Chief Information Officer
|
|
(a)
|
Information with respect to management compensation and transactions required under this item is incorporated by reference hereunder in the Company's Proxy Materials for the Annual Meeting of Shareholders under the caption "Compensation Committee".
|
|
(b)
|
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."
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".
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".
|
(a)(1)
|
Financial Statements - The Company's consolidated financial statements, for the years ended December 31, 2016 and 2015, together with the Report of Independent Registered Public Accounting Firm are filed as part of this Form 10-K report. See "Item 8: Financial Statements and Supplementary Data."
|
|
(a)(2)
|
Financial Statement Schedules - All financial statement schedules have been omitted as the required information is inapplicable or has been included in "Item 7: Management Discussion and Analysis."
|
|
(b)
|
Exhibits
|
|
3.1
|
Articles of Incorporation of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.1 to Pathfinder Bancorp, Inc.'s Registration Statement on Form S-1, file no. 333-196676, originally filed on June 11, 2014)
|
|
3.2
|
Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 3.2 to Pathfinder Bancorp, Inc.'s Registration Statement on Form S-1, file no. 333-196676, filed on June 11, 2014)
|
|
4.1
|
Form of Stock Certificate of Pathfinder Bancorp, Inc. (Incorporated herein by reference to Exhibit 4 to Pathfinder Bancorp, Inc.'s Registration Statement on Form S-1, file no. 333-196676, filed on June 11, 2014)
|
|
4.2
|
Indenture between Pathfinder Bancorp, Inc., a federal corporation, and Wilmington Trust Company, as trustee, dated March 22, 2007 (Incorporated herein by reference to Exhibit 4.1 to Pathfinder Bancorp, Inc.'s Current Report on Form 8-K, file no. 001-36695, filed on October 22, 2014)
|
|
4.3
|
Supplemental Indenture between Pathfinder Bancorp, Inc. and Wilmington Trust Company, as trustee, dated October 16, 2014 (Incorporated herein by reference to Exhibit 4.2 to Pathfinder Bancorp, Inc.'s Current Report on Form 8-K, file no. 001-36695, filed on October 22, 2014)
|
|
10.1
|
Pathfinder Bank 1997 Stock Option Plan (Incorporated herein by reference to Appendix A to Pathfinder Bancorp, Inc's Registration Statement on Form S-4, file no. 333-36051, filed on September 19, 1997)
|
|
10.3
|
2003 Executive Deferred Compensation Plan (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2008 file no. 000-23601, filed on March 27, 2009)
|
|
10.4
|
2003 Trustee Deferred Fee Plan (Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2008 file no. 000-23601,
filed on March 27, 2009
)
|
|
10.5
|
Employment Agreement between Pathfinder Bank and Thomas W. Schneider, President and Chief Executive Officer (Incorporated by reference to Exhibit 10.5 to Pathfinder Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008, file no. 000-23601, filed on March 27, 2009)
|
|
10.6
|
Employment Agreement between Pathfinder Bank and Edward A. Mervine, Vice President, General Counsel and Secretary (Incorporated by reference to Exhibit 10.6 to Pathfinder Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008, file no. 000-23601, filed on March 27, 2009)
|
|
10.7
|
Change of Control Agreement between Pathfinder Bank and Ronald Tascarella (Incorporated by reference to Exhibit 10.7 to Pathfinder Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008, file no. 000-23601, filed on March 27, 2009)
|
|
10.8
|
Change of Control Agreement between Pathfinder Bank and James A. Dowd (Incorporated by reference to Exhibit 10.8 to Pathfinder Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008, file no. 000-23601, filed on March 27, 2009)
|
|
10.9
|
Change of Control Agreement between Pathfinder Bank and Melissa A. Miller (Incorporated by reference to Exhibit 10.9 to Pathfinder Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008, file no. 000-23601, filed on March 27, 2009)
|
|
10.10
|
Executive Supplemental Retirement Agreement between Pathfinder Bank and Thomas W. Schneider (Incorporated by reference to Exhibit 10.11 to Pathfinder Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008, file no. 000-23601, filed on March 27, 2009)
|
|
10.11
|
Executive Supplemental Retirement Agreement between the Bank and Thomas W. Schneider (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2008 file no. 000-23601, filed on March 27, 2009)
|
|
10.12
|
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and Thomas W. Schneider effective February 24, 2014 (Incorporated by reference to Exhibit 10.13 to Pathfinder Bancorp, Inc.'s Current Report Form 8-K, file no. 000-23601, filed on February 25, 2014)
|
|
10.13
|
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and Edward A. Mervine effective February 24, 2014 (Incorporated by reference to Exhibit 10.14 to Pathfinder Bancorp, Inc.'s Current Report Form 8-K, file no. 000-23601, filed on February 25, 2014)
|
|
10.14
|
Executive Supplemental Retirement Plan Agreement between Pathfinder Bank and James A. Dowd effective February 24, 2014 (Incorporated by reference to Exhibit 10.15 to Pathfinder Bancorp, Inc.'s Current Report Form 8-K, file no. 000-23601, filed on February 25, 2014)
|
|
10.15
|
Amended and Restated Declaration of Trust among Pathfinder Bancorp, Inc., a federal corporation, as Sponsor, Wilmington Trust Company, as Delaware and Institutional Trustee, and the administrative trustees of the Pathfinder Statutory Trust II
(Incorporated herein by reference to Exhibit 10.1 to Pathfinder Bancorp, Inc.'s Current Report on Form 8-K, file no. 001-36695, filed on October 22, 2014)
|
|
10.17
|
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, filed on March 13, 2015)
|
|
10.18
|
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,filed on March 13, 2015)
|
|
10.19
|
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, filed on March 13, 2015)
|
|
10.20
|
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)
|
|
14
|
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)
|
|
21
|
Subsidiaries of Registrant (Incorporated herein by reference to Exhibit 21 to Pathfinder Bancorp, Inc.'s Registration Statement on Form S-1, file no. 333-196676, filed on June 11, 2014)
|
|
23
|
Consent of Bonadio & Co., LLP
|
|
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
101
|
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition as of December 31, 2016 and 2015, (ii) the Consolidated Statements of Income for the years ended December 31, 2016 and 2015, (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015, (iv) the Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2016 and 2015, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015, and (vi) the Notes to the Consolidated Financial Statements
|
None.
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.
|
|||
|
Pathfinder Bancorp, Inc.
|
|||
|
Date:
|
March 31, 2017
|
By:
|
/s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
|
|
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
|||
|
By:
|
/s/ Thomas W. Schneider
|
By:
|
/s/ James A. Dowd
|
||
|
Thomas W. Schneider, President and
Chief Executive Officer
|
James A. Dowd, Executive Vice President, Chief Operating Officer and
Chief Financial Officer
|
||||
|
(Principal Executive Officer)
|
(Principal Financial Officer)
|
||||
|
Date:
|
March 31, 2017
|
Date:
|
March 31, 2017
|
||
|
By:
|
/s/ Lloyd Stemple
|
By:
|
/s/ Lisa A. Kimball
|
||
|
Lloyd Stemple, Director
|
Lisa A. Kimball, Vice President and
|
||||
|
Date:
|
March 31, 2017
|
Controller (Principal Accounting Officer)
|
|||
|
Date:
|
March 31, 2017
|
||||
|
By:
|
/s/John P. Funiciello
|
By:
|
/s/ William A. Barclay
|
||
|
John Funiciello, Director
|
William A. Barclay, Director
|
||||
|
Date:
|
March 31, 2017
|
Date:
|
March 31, 2017
|
||
|
By:
|
/s/ David A. Ayoub
|
By:
|
/s/ Chris R. Burritt
|
||
|
David A. Ayoub, Director
|
Chris R. Burritt, Director
|
||||
|
Date:
|
March 31, 2017
|
Date:
|
March 31, 2017
|
||
|
By:
|
/s/ George P. Joyce
|
By:
|
/s/ John F. Sharkey
|
||
|
George P. Joyce, Director
|
John F. Sharkey, Director
|
||||
|
Date:
|
March 31, 2017
|
Date:
|
March 31, 2017
|
||
|
By:
|
/s/ Adam C. Gagas
|
By:
|
/s/ Melanie Littlejohn
|
||
|
Adam C. Gagas, Director
|
Melanie Littlejohn, Director
|
||||
|
Date:
|
March 31, 2017
|
Date:
|
March 30, 2017
|
||
EXHIBIT 21: SUBSIDIARIES OF THE COMPANY
|
Company
|
Owned by
|
Percent Owned
|
Jurisdiction or State of Incorporation
|
|
Pathfinder Bank
|
Pathfinder Bancorp, Inc.
|
100%
|
New York
|
|
Pathfinder Statutory Trust II
|
Pathfinder Bancorp, Inc.
|
100%
|
Delaware
|
|
Pathfinder REIT, Inc.
|
Pathfinder Bank
|
100%
|
New York
|
|
Whispering Oaks Development Corp.
|
Pathfinder Bank
|
100%
|
New York
|
|
Pathfinder Risk Management Company Inc.
|
Pathfinder Bank
|
100%
|
New York
|
EXHIBIT 23: CONSENT OF BONADIO & CO., LLP
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Pathfinder Bancorp, Inc.
Oswego, New York
We hereby consent to the incorporation by reference in this Annual Report on Form 10-K of Pathfinder Bancorp, Inc. and subsidiaries for the year ended December 31, 2016 our report dated March 31, 2017 included in its Registration Statement on Form S-8 (No. 333-202081) relating to the consolidated financial statements for the year ended December 31, 2016.
/s/ Bonadio & Co., LLP
Bonadio & Co., LLP
Syracuse, New York
March 31, 2017
TABLE OF CONTENTS
Part IItem 1: BusinessItem 1A: Risk FactorsItem 1B: Unresolved Staff CommentsItem 2: PropertiesItem 3: Legal ProceedingsItem 4: Mine Safety DisclosurePart IIItem 5: Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6: Selected Financial DataItem 7: Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A: Quantitative and Qualitative Disclosures About Market RiskItem 8: Financial Statements and Supplementary DataNote 1: Summary Of Significant Accounting PoliciesNote 2: New Accounting PronouncementsNote 3: Earnings Per ShareNote 4: Investment SecuritiesNote 5: LoansNote 6: Allowance For Loan LossesNote 7: ServicingNote 8: Premises and EquipmentNote 9: Foreclosed Real EstateNote 10: Goodwill and Intangible AssetsNote 11: DepositsNote 12: Borrowed FundsNote 13: Subordinated LoansNote 14: Employee Benefits and Deferred Compensation and Supplemental Retirement PlansNote 15: Stock Based Compensation PlansNote 16: Employee Stock Ownership PlanNote 17: Income TaxesNote 18: Commitments and ContingenciesNote 19: Dividends and RestrictionsNote 20: Regulatory MattersNote 21: Interest Rate DerivativeNote 22: Fair Value Measurements and DisclosuresNote 23: Parent Company Financial InformationNote 24: Related Party TransactionsNote 25: Conversion and ReorganizationNote 26: Accumulated Other Comprehensive Income (loss)Item 9: Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A: Controls and ProceduresItem 9B: Other InformationPart IIIItem 10: Directors, Executive Officers and Corporate GovernanceItem 11: Executive CompensationItem 12: Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13: Certain Relationships and Related Transactions, and Director IndependenceItem 14: Principal Accounting Fees and ServicesPart IVItem 15: Exhibits and Financial Statement SchedulesItem 16: Form 10-k Summary