SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transaction period from ___________________ to ______________________
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Commission File Number: 000-23601
PATHFINDER BANCORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
FEDERAL 16-1540137
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) (Number)
214 WEST FIRST STREET, OSWEGO, NY 13126
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(Address of Principal Executive Office) (Zip Code)
(315) 343-0057
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
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 twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES NO X
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As of June 30, 2003 there were 2,916,919 shares issued and 2,431,632 shares
outstanding of the Registrant's Common Stock. The aggregate value of the voting
stock held by non-affiliates of the Registrant, computed by reference to the
average bid and asked prices of the Common Stock as of June 30, 2003 ($14.20)
was $8,130,892.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 2003 (Parts II and IV).
2. Proxy Statement for the 2003 Annual Meeting of Stockholders (Parts I and
III).
1
PATHFINDER BANCORP, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I.
Item 1... . . . .Business 3-11
Item 2... . . . .Properties 12
Item 3... . . . .Legal Proceedings 12
Item 4.. . . .Submission of Matter to a Vote of Security Holders (This
item is omitted since no matters were submitted to a vote of
security holders during the fourth quarter of 2003)
PART II.
Item 5... . . . .Market for Registrant's Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities 13
Item 6... . . . .Selected Financial Data 13
Item 7.. . . . .Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 7A. . . . Quantitative Disclosures about Market Risk 13
Item 8.. . . . Financial Statement and Supplementary Data 13-16
Item 9.. . . . Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 16-17
Item 9A. . . . Controls and Procedures 17
PART III.
Item 10. . . . Directors and Executive Officers of the Registrant 17
Item 11. . . . Executive Compensation 17
Item 12. . . . Security Ownership of Certain Beneficial Owners and Management 17
Item 13. . . . Certain Relationships and Related Transactions 18
Item 14. . . . Principal Accountant Fees and Services 18
PART IV.
Item 15. . . . Exhibits, Financial Statement Schedules and Reports
on Form 8-K 18-19
Signatures 20
2
PART I
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ITEM 1. BUSINESS
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GENERAL
PATHFINDER BANCORP, INC.
Pathfinder Bancorp, Inc. (the "Company") is a Federal corporation. On July
19, 2001, the Company completed its conversion from a Delaware chartered company
to a federal charter. As a result of the charter conversion the Company's
chartering authority and primary federal regulator is the Office of Thrift
Supervision. References to the Company include the Company before or after the
charter conversion. Upon completion of the charter conversion, the outstanding
shares of common stock, par value $0.10 per share of Pathfinder Bancorp, Inc.
become, by operation of law, common stock, par value $0.01 per share of the
Company on a one-for-one basis. The primary business of the Company is its
investment in Pathfinder Bank (the "Bank") and Pathfinder Statutory Trust I.
The Company is majority owned by Pathfinder Bancorp, M.H.C., a
Federally-chartered mutual holding company (the "Mutual Holding Company"). At
December 31, 2003 the Mutual Holding Company held 1,583,239 shares of Common
Stock and the public held 848,860 shares of Common Stock (the "Minority
Shareholders"). At December 31, 2003, Pathfinder Bancorp, Inc. had total assets
of $277.9 million, total deposits of $206.9 million and shareholders' equity of
$21.8 million.
On June 26, 2002, the Company formed a wholly owned subsidiary, Pathfinder
Statutory Trust I, a Connecticut business trust. The trust issued $5,000,000 of
30-year floating rate Company-obligated pooled capital securities of Pathfinder
Statutory Trust I. 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 2032 and qualify as Tier 1 capital by the Federal Deposit Insurance
Company and the Office of Thrift Supervision. 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 plus 3.45% with a five year call provision.
These securities are guaranteed by the Company.
The Company's executive office is located at 214 West First Street, Oswego,
New York and the telephone number at that address is (315) 343-0057.
PATHFINDER BANK
The Bank is a New York-chartered savings bank headquartered in Oswego, New
York. The Bank has six full-service offices located in its market area
consisting of Oswego County and the contiguous counties. The Bank's deposits
are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank was
chartered as a New York savings bank in 1859 as Oswego City Savings Bank. The
Bank is a consumer-oriented institution dedicated to providing mortgage loans
and other traditional financial services to its customers. The Bank is
committed to meeting the financial needs of its customers in Oswego County, New
York, the county in which it operates. At December 31, 2003, the Bank had total
assets of $277.5 million, total deposits of $208.4 million, and shareholders'
equity of $24.9 million.
On October 25, 2002, Pathfinder Bank completed the purchase of assets and
the assumption of non-municipal deposits of the Lacona, New York branch of
Cayuga Bank (the "Branch Acquisition"). In addition, Pathfinder Bank formed a
limited purpose commercial bank subsidiary, Pathfinder Commercial Bank.
Pathfinder Commercial Bank was established to serve the depository needs of
public entities in its market area and it assumed the municipal deposit
liabilities acquired as part of the Branch Acquisition. The transaction included
approximately $26.4 million in deposits, $2.3 million in loans and $430,000 in
vault cash and facilities and equipment. The acquisition reflects a premium on
deposit liabilities assumed of approximately $2.4 million. As of December 31,
2003, no impairment has been recognized.
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 one- to four-family
residential real estate. At December 31, 2003, $173.2 million, or 90% of the
Bank's total loan portfolio consisted of loans secured by real estate, of which
$129.0 million, or 67%, were loans secured by one- to four-family residences and
$31.3 million, or 16%, were secured by commercial real estate. Additionally,
$12.9 million, or 7%, of total real estate loans, were secured by second liens
on residential properties that are classified in consumer loans. The Bank also
originates commercial and consumer loans that totaled $15.1 and $3.9 million,
respectively, or 10%, of the Bank's total loan portfolio. The Bank invests a
portion of its assets in securities issued by the United States Government,
state and municipal obligations, corporate debt securities, mutual funds, and
equity securities. The Bank also invests in mortgage-backed securities
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primarily issued or guaranteed by the United States Government or agencies
thereof. The Bank's principal sources of funds are deposits, principal and
interest payments on loans and borrowings from correspondent financial
institutions. The principal source of income is interest on loans and
investment securities. The Bank's principal expenses are interest paid on
deposits, and employee compensation and benefits.
The Bank's executive office is located at 214 West First Street, Oswego,
New York, and its telephone number at that address is (315) 343-0057.
In April 1999, the Bank established Pathfinder REIT, Inc. as the Bank's
wholly-owned real estate investment trust subsidiary. At December 31, 2003,
Pathfinder REIT, Inc. held $26.7 million in mortgage and mortgage related
assets. All disclosures in the Form 10-K relating to the Bank's loans and
investments include loan and investments that are held by Pathfinder REIT, Inc.
MARKET AREA AND COMPETITION
The economy in the Bank's market area is manufacturing-oriented and is also
significantly dependent upon the State University of New York College at Oswego.
The major manufacturing employers in the Bank's market area are National Grid,
Alcan, Constellation, NRG and Huhtamaki. The Bank is the second largest
financial institution headquartered in Oswego County. However, the Bank
encounters competition from a variety of sources. The Bank's business and
operating results are significantly affected by the general economic conditions
prevalent in its market areas.
The Bank encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks, savings
associations and credit unions in its market area. Competition for loans comes
from such financial institutions as well as mortgage banking companies. The
Bank expects continued strong competition in the foreseeable future, including
increased competition from "super-regional" banks entering the market by
purchasing large banks and savings banks. Many such institutions have greater
financial and marketing resources available to them than does the Bank. The
Bank competes for savings deposits by offering depositors a high level of
personal service and a wide range of competitively priced financial services.
The Bank competes for real estate loans primarily through the interest rates and
loan fees it charges and advertising, as well as by originating and holding in
its portfolio mortgage loans which do not necessarily conform to secondary
market underwriting standards.
REGULATION AND SUPERVISION
REGULATION
GENERAL. The Bank is a New York-chartered stock savings bank and its
deposit accounts are insured up to applicable limits by the FDIC through the
Bank Insurance Fund. 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 required to file reports with, and
is periodically examined by, the FDIC and the Superintendent 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 banking institutions. The Bank is a member of the FHLB
of New York and is subject to certain regulations by the Federal Home Loan Bank
System. On July 19, 2001 the Company and the Mutual Holding Company completed
their conversion to federal charters. Consequently, they are subject to
regulations of the Office of Thrift Supervision ("OTS") as savings and loan
holding companies. Any change in such regulations, whether by the Department,
the FDIC, or the OTS could have a material adverse impact on the Bank, the
Company or the Mutual Holding Company.
Regulatory requirements applicable to the Bank, the Company and the Mutual
Holding Company are referred to below or elsewhere herein.
NEW YORK BANK REGULATION. The exercise by an FDIC-insured savings bank of
the lending and investment powers under the New York State Banking Law is
limited by FDIC regulations and other federal law and regulations. In
particular, the applicable provisions of New York State Banking Law and
regulations governing the investment authority and activities of an FDIC insured
state-chartered savings bank have been substantially limited by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the FDIC
regulations issued pursuant thereto.
4
The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the 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 savings bank may invest up to 7.5% of its assets in corporate
stock, with an overall limit of 5% of its assets invested in common stock.
Investment in the stock of a single corporation is limited to the lesser of 2%
of the outstanding stock of such corporation or 1% of the savings bank's assets,
except as set forth below. Such equity securities must meet certain earnings
ratios and other tests of financial performance. A savings bank's lending
powers are not subject to percentage of assets limitations, although there are
limits applicable to single borrowers. A savings bank may also, pursuant to the
"leeway" power, make investments not otherwise permitted under the New York
State Banking Law. This power permits investments in otherwise impermissible
investments of up to 1% of assets in any single investment, subject to certain
restrictions and to an aggregate limit for all such investments of up to 5% of
assets. Additionally, in lieu of investing in such securities in accordance
with and reliance upon the specific investment authority set forth in the New
York State Banking Law, savings banks are authorized to elect to invest under a
"prudent person" standard in a wider range of investment securities as compared
to the types of investments permissible under such specific investment
authority. However, in the event a savings bank elects to utilize the "prudent
person" standard, it will be unable to avail itself of the other provisions of
the New York State Banking Law and regulations which set forth specific
investment authority. The Bank has not elected to conduct its investment
activities under the "prudent person" standard. A savings bank may also
exercise trust powers upon approval of the Department.
New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment authority. A savings bank may use
this power to invest in corporations that engage in various activities
authorized for savings banks, plus any additional activities which may be
authorized by the Banking Board. Investment by a savings bank in the stock,
capital notes and debentures of its service corporations is limited to 3% of the
bank's assets, and such investments, together with the bank's loans to its
service corporations, may not exceed 10% of the savings bank's assets.
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, but are not limited to, requirements that (i) certain
loans must be approved in advance by a majority of the entire board of trustees
and the interested party must abstain from participating directly or indirectly
in the 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 Department 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.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member of
the BIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the U.S. Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings banks, after giving the Superintendent an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged or is engaging in unsafe or unsound
practices or is in an unsafe or unsound condition.
The FDIC establishes deposit insurance premiums based upon the risks a
particular bank or savings association poses to its deposit insurance funds.
Under the risk-based deposit insurance assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information, as of the reporting period ending six months before the
assessment period, consisting of: (i) well capitalized; (ii) adequately
capitalized; or (iii) undercapitalized and one of three supervisory
subcategories within each capital group. With respect to the capital ratios,
institutions are classified as well capitalized or adequately capitalized using
ratios that are substantially similar to the prompt corrective action capital
ratios discussed above. Any institution that does not meet these two
definitions is deemed to be undercapitalized for this purpose. The supervisory
5
subgroup to which an institution is assigned is based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds (which may
include, if applicable, information provided by the institution's state
supervisor). An institution's assessment rate depends on the capital category
and supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessments rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. The Bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the Bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the earnings
of the Bank.
REGULATORY CAPITAL REQUIREMENTS. The FDIC has adopted risk-based capital
guidelines to which the Bank is subject. The guidelines establish a systematic
analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations. The Bank is
required to maintain certain levels of regulatory capital in relation to
regulatory risk-weighted assets. The ratio of such regulatory capital to
regulatory risk-weighted assets is referred to as the Bank's "risk-based capital
ratio." Risk-based capital ratios are determined by allocating assets and
specified off-balance sheet items to four risk-weighted categories ranging from
0% to 100%, with higher levels of capital being required for the categories
perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of at least 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
FDIC and the other federal banking regulators have proposed amendments to their
minimum capital regulations to provide that the minimum leverage capital ratio
for a depository institution that has been assigned the highest composite rating
of 1 under the Uniform Financial Institutions Rating System will be 3% and that
the minimum leverage capital ratio for any other depository institution will be
4% unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. The FDIC may,
however, set higher leverage and risk-based capital requirements on individual
institutions when particular circumstances warrant. Savings banks experiencing
or anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. The FDIC has the
authority to use its enforcement powers to prohibit a savings bank from paying
dividends if, in its opinion, the payment of dividends would constitute an
unsafe or unsound practice. Federal law also prohibits the payment of dividends
by a bank that will result in the bank failing to meet its applicable capital
requirements on a pro forma basis. New York law also restricts the Bank from
declaring a dividend which would reduce its capital below (i) the amount
required to be maintained by state law and regulation, or (ii) the amount of the
Bank's liquidation account established in connection with the Reorganization.
PROMPT CORRECTIVE ACTION. The federal banking agencies have promulgated
regulations to implement the system of prompt corrective action required by
federal law. Under the regulations, a bank shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to any written capital order or directive; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized"; (iii) "undercapitalized" if it has a
total risk-based capital ratio that is lessthan 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
6
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Federal law and regulations also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution to comply with supervisory actions as if it were in the
next lower category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.
TRANSACTIONS WITH AFFILIATES. Under current federal law, transactions
between depository institutions and their affiliates are governed by Sections
23A and 23B of the Federal Reserve Act and its implementing regulations. An
affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary of the savings bank. In a holding company context, at a minimum, the
parent holding company of a savings bank and any companies which are controlled
by such parent holding company are affiliates of the savings bank. Generally,
Section 23A limits the extent to which the savings bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such savings bank's capital stock and surplus and contains an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus. The term "covered transaction" includes the
making of loans or other extensions of credit to an affiliate; the purchase of
assets from an affiliate, the purchase of, or an investment in, the securities
of an affiliate; the acceptance of securities of an affiliate as collateral for
a loan or extension of credit to any person; or issuance of a guarantee,
acceptance, or letter of credit on behalf of an affiliate. Section 23A also
establishes specific collateral requirements for loans or extensions of credit
to, or guarantees, acceptances on letters of credit issued on behalf of an
affiliate. Section 23B requires that covered transactions and a broad list of
other specified transactions be on terms substantially the same, or no less
favorable, to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act and its implementing
regulations restrict a savings bank with respect to loans to directors,
executive officers, and principal stockholders. Under Section 22(h), loans to
directors, executive officers and stockholders who control, directly or
indirectly, 10% or more of voting securities of a savings bank and certain
related interests of any of the foregoing, may not exceed, together with all
other outstanding loans to such persons and affiliated entities, the savings
bank's total capital and surplus. Section 22(h) also prohibits loans above
amounts prescribed by the appropriate federal banking agency to directors,
executive officers, and stockholders who control 10% or more of voting
securities of a stock savings bank, and their respective related interests,
unless such loan is approved in advance by a majority of the board of directors
of the savings bank. Any "interested" director may not participate in the
voting. The loan amount (which includes all other outstanding loans to such
person) as to which such prior board of director approval is required, is the
greater of $25,000 or 5% of capital and surplus or any loans over $500,000.
Further, pursuant to Section 22(h), loans to directors, executive officers and
principal stockholders must generally be made on terms substantially the same as
offered in comparable transactions to other persons. Section 22(g) of the
Federal Reserve Act places additional limitations on loans to executive
officers.
FEDERAL HOLDING COMPANY REGULATION.
GENERAL. The Company and the Mutual Holding Company are nondiversified
mutual savings and loan holding companies within the meaning of the Home Owners'
Loan Act. As such, the Company and the Mutual Holding Company are registered
with the OTS and are subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over the
Company and the Mutual Holding Company, and their subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings institution.
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PERMITTED ACTIVITIES. Under OTS regulation and policy, a mutual holding
company and a federally chartered mid-tier holding company such as the Company
may engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company, one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; (x) any activity permissible
for financial holding companies under Section 4(k) of the Bank Holding Company
Act, including securities and insurance underwriting; and (xi) purchasing,
holding, or disposing of stock acquired in connection with a qualified stock
issuance if the purchase of such stock by such savings and loan holding company
is approved by the Director. If a mutual holding company acquires or merges
with another holding company, the holding company acquired or the holding
company resulting from such merger or acquisition may only invest in assets and
engage in activities listed in (i) through (xi) above, and has a period of two
years to cease any nonconforming activities and divest of any nonconforming
investments.
The Home Owners' Loan Act prohibits a savings and loan holding company,
directly or indirectly, or through one or more subsidiaries, from acquiring
another savings association or holding company thereof, without prior written
approval of the OTS. It also prohibits the acquisition or retention of, with
certain exceptions, more than 5% of a nonsubsidiary savings association, a
nonsubsidiary holding company, or a nonsubsidiary company engaged in activities
other than those permitted by the Home Owners' Loan Act; or acquiring or
retaining control of an institution that is not federally insured. In
evaluating applications by holding companies to acquire savings association, the
OTS must consider the financial and managerial resources, future prospects of
the company and association involved, the effect of the acquisition on the risk
to the insurance fund, the convenience and needs of the community and
competitive factors.
The Office of Thrift Supervision is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company
controlling savings association in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
WAIVERS OF DIVIDENDS BY MUTUAL HOLDING COMPANY. Office of Thrift
Supervision regulations require the Mutual Holding Company to notify the OTS of
any proposed waiver of its receipt of dividends from the Company. The OTS
reviews dividend waiver notices on a case-by-case basis, and, in general, does
not object to any such waiver if: (i) the mutual holding company's board of
directors determines that such waiver is consistent with such directors'
fiduciary duties to the mutual holding company's members; (ii) for as long as
the savings association subsidiary is controlled by the mutual holding company,
the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; and (iv) the amount of any
waived dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under OTS capital distribution regulations.
The Mutual Holding Company generally intends to waive dividends paid by the
Company in excess of its operating cash requirements. Under OTS regulations,
our public stockholders would not be diluted because of any dividends waived by
the Mutual Holding Company (and waived dividends would not be considered in
determining an appropriate exchange ratio) in the event the Mutual Holding
Company converts to stock form.
CONVERSION OF THE MUTUAL HOLDING COMPANY TO STOCK FORM. OTS regulations
permit the Mutual Holding Company to convert from the mutual form of
organization to the capital stock form of organization (a "Conversion
Transaction"). There can be no assurance when, if ever, a Conversion
Transaction will occur, and the Board of Directors has no current intention or
plan to undertake a Conversion Transaction. In a Conversion Transaction a new
holding company would be formed as the successor to the Company (the "New
8
Holding Company"), the Mutual Holding Company's corporate existence would end,
and certain depositors of the Bank would receive the right to subscribe for
additional shares of the New Holding Company. In a Conversion Transaction, each
share of common stock held by stockholders other than the Mutual Holding Company
("Minority Stockholders") would be automatically converted into a number of
shares of common stock of the New Holding Company determined pursuant an
exchange ratio that ensures that Minority Stockholders own the same percentage
of common stock in the New Holding Company as they owned in the Company
immediately prior to the Conversion Transaction. Under OTS regulations,
Minority Stockholders would not be diluted because of any dividends waived by
the Mutual Holding Company (and waived dividends would not be considered in
determining an appropriate exchange ratio), in the event the Mutual Holding
Company converts to stock form. The total number of shares held by Minority
Stockholders after a Conversion Transaction also would be increased by any
purchases by Minority Stockholders in the stock offering conducted as part of
the Conversion Transaction.
NEW YORK STATE BANK HOLDING COMPANY REGULATION. In addition to the federal
regulation, a holding company controlling a state chartered savings bank
organized or doing business in New York State also may be subject to regulation
under the New York State Banking Law. The term "bank holding company," for the
purposes of the New York State Banking Law, is defined generally to include any
person, company or trust that directly or indirectly either controls the
election of a majority of the directors or owns, controls or holds with power to
vote more than 10% of the voting stock of a bank holding company or, if the
Company is a banking institution, another banking institution, or 10% or more of
the voting stock of each of two or more banking institutions. In general, a
bank holding company controlling, directly or indirectly, only one banking
institution will not be deemed to be a bank holding company for the purposes of
the New York State Banking Law. Under New York State Banking Law, the prior
approval of the Banking Board is required before: (1) any action is taken that
causes any company to become a bank holding company; (2) any action is taken
that causes any banking institution to become or be merged or consolidated with
a subsidiary of a bank holding company; (3) any bank holding company acquires
direct or indirect ownership or control of more than 5% of the voting stock of a
banking institution; (4) any bank holding company or subsidiary thereof acquires
all or substantially all of the assets of a banking institution; or (5) any
action is taken that causes any bank holding company to merge or consolidate
with another bank holding company. Additionally, certain restrictions apply to
New York State bank holding companies regarding the acquisition of banking
institutions which have been chartered five years or less and are located in
smaller communities. Officers, directors and employees of New York State bank
holding companies are subject to limitations regarding their affiliation with
securities underwriting or brokerage firms and other bank holding companies and
limitations regarding loans obtained from its subsidiaries.
FEDERAL SECURITIES LAW. The common stock of the Company is registered with
the SEC under the Exchange Act, prior to completion of the Offering and
Reorganization. The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
The Company Common Stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain noninterest-bearing reserves at specified levels
against their transaction accounts (primarily checking, money management and
NOW checking accounts). At December 31, 2003, the Bank was in compliance with
these reserve requirements.
FEDERAL REGULATION. Under the Community Reinvestment Act, as amended (the
"CRA"), as implemented by FDIC regulations, a savings 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, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
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. The CRA requires the FDIC to provide a written evaluation
of an institution's CRA performance utilizing a four-tiered descriptive rating
system. The Bank's latest CRA rating was "outstanding."
NEW YORK STATE REGULATION. The Bank is also subject to provisions of the
New York State Banking Law which impose continuing and affirmative obligations
9
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 CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA
report and copies of all federal CRA reports with the Department. The NYCRA
requires the Department 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.
The Bank's NYCRA rating as of its latest examination was "satisfactory."
THE USA PATRIOT ACT
In response to the events of September 11, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the federal government new powers
to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing and broadened
anti-money laundering requirements. Financial institutions, such as the Bank,
have had a federal anti-money laundering obligations for years. As such, the
Bank does not believe the USA Patriot Act will have a material impact on its
operations.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of
2002 ("Sarbanes-Oxley"), which implemented legislative reforms intended to
address corporate and accounting fraud. In addition to the establishment of a
new accounting oversight board that will enforce auditing, quality control and
independence standards and will be funded by fees from all publicly traded
companies, Sarbanes-Oxley places certain restrictions on the scope of services
that may be provided by accounting firms to their public company audit clients.
Any non-audit services being provided to a public company audit client will
require preapproval by the company's audit committee. In addition,
Sarbanes-Oxley makes certain changes to the requirements for audit partner
rotation after a period of time. Sarbanes-Oxley requires chief executive
officers and chief financial officers, or their equivalent, to certify to the
accuracy of periodic reports filed with the Securities and Exchange Commission,
subject to civil and criminal penalties if they knowingly or willingly violate
this certification requirement. The Company's Chief Executive Officer and Chief
Financial Officer have signed certifications to this Form 10-K as required by
Sarbanes-Oxley. In addition, under Sarbanes-Oxley, counsel will be required to
report evidence of a material violation of the securities laws or a breach of
fiduciary duty by a company to its chief executive officer or its chief legal
officer, and, if such officer does not appropriately respond, to report such
evidence to the audit committee or other similar committee of the board of
directors or the board itself.
Under Sarbanes-Oxley, longer prison terms will apply to corporate
executives who violate federal securities laws; the period during which certain
types of suits can be brought against a company or its officers is extended; and
bonuses issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading the company's
securities during retirement plan "blackout" periods, and loans to company
executives (other than loans by financial institutions permitted by federal
rules and regulations) are restricted. In addition, a provision directs that
civil penalties levied by the Securities and Exchange Commission as a result of
any judicial or administrative action under Sarbanes-Oxley be deposited to a
fund for the benefit of harmed investors. The Federal Accounts for Investor
Restitution provision also requires the Securities and Exchange Commission to
develop methods of improving collection rates. The legislation accelerates the
time frame for disclosures by public companies, as they must immediately
disclose any material changes in their financial condition or operations.
Directors and executive officers must also provide information for most changes
in ownership in a company's securities within two business days of the change.
Sarbanes-Oxley also increases the oversight of, and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit
committee members must be independent and are absolutely barred from accepting
consulting, advisory or other compensatory fees from the issuer. In addition,
companies must disclose whether at least one member of the committee is a
"financial expert" (as such term is defined by the Securities and Exchange
Commission) and if not, why not. Under Sarbanes-Oxley, a company's registered
public accounting firm is prohibited from performing statutorily mandated audit
10
services for a company if such company's chief executive officer, chief
financial officer, comptroller, chief accounting officer or any person serving
in equivalent positions had been employed by such firm and participated in the
audit of such company during the one-year period preceding the audit initiation
date. Sarbanes-Oxley also prohibits any officer or director of a company or any
other person acting under their direction from taking any action to fraudulently
influence, coerce, manipulate or mislead any independent accountant engaged in
the audit of the company's financial statements for the purpose of rendering the
financial statements materially misleading. Sarbanes-Oxley also requires the
Securities and Exchange Commission to prescribe rules requiring inclusion of any
internal control report and assessment by management in the annual report to
shareholders. Sarbanes-Oxley requires the company's registered public
accounting firm that issues the audit report to attest to and report on
management's assessment of the company's internal controls.
Although we anticipate that we will incur additional expense in complying
with the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. 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.
BAD DEBT RESERVES. Prior to the 1996 Act, the 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 the Bank's taxable income. As a result of the 1996 Act, the Bank must use
the small bank experience method in computing its bad debt deduction beginning
with its 1996 Federal tax return. In addition, the federal legislation requires
the recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitionaltests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank cease to retain a bank or thrift charter or make certain non-dividend
distributions.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future years.
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. This provision applies to losses incurred in
taxable years beginning after August 5, 1997.
The Internal Revenue Service has examined the federal income tax return for
the fiscal year ended 1992; the New York State fiscal year-end tax returns for
1998 through 1999 are currently under examination by the New York State
Department of Taxation and Finance. See Note 13 to the Financial Statements.
STATE TAXATION
NEW YORK TAXATION. The Bank is subject to the New York State Franchise Tax
on Banking Corporations in an annual amount equal to the greater of (i) 8.0% of
the 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 the Bank's assets
allocable to New York State with certain modifications, (b) 3% of the Bank's
"alternative entire net income" allocable to New York State, or (c) $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 can be carried
forward to the succeeding 20 taxable years.
The availability of the Company's Annual Report on Form 10-K may be
accessed on the Company's website at WWW.PATHFINDERBANK.COM.
11
ITEM 2. PROPERTIES
--------------------------------------------------------------------------------
The Bank conducts its business through its main office located in Oswego,
New York, and five full service branch offices located in Oswego County. The
following table sets forth certain information concerning the main office and
each branch office of the Bank at December 31, 2003. The aggregate net book
value of the Bank's premises and equipment was $6.7 million at December 31,
2003. For additional information regarding the Bank's properties, see Note 8 to
Notes to Financial Statements.
LOCATION OPENING DATE OWNED/LEASED ANNUAL RENT
------------------------- ------------ ------------- -----------
Main Office . . . . . . . 1874 Owned -
-------------------------
214 West First Street
Oswego, New York 13126
Plaza Branch. . . . . . . 1989 Owned (1) -
-------------------------
Route 104, Ames Plaza
Oswego, New York 13126
Mexico Branch . . . . . . 1978 Owned -
-------------------------
Norman & Main Streets
Mexico, New York 13114
Oswego East Branch. . . . 1994 Owned -
-------------------------
34 East Bridge Street
Oswego, New York 13126
Fulton Branch . . . . . . 1994 Owned (2) -
-------------------------
114 Oneida Street
Fulton, New York 13069
Lacona Branch . . . . . . 2002 Owned -
-------------------------
1897 Harwood Drive
Lacona, New York 13083
Fulton Branch . . . . . . 2003 Owned (3) -
-------------------------
5 West First Street South
Fulton, New York 13069
(1) The building is owned; the underlying land is leased paying an annual
rent of $20,000
(2) This branch closed in July of 2003 and the branch was relocated to the
5 West First Street South location in Fulton
(3) The existing Fulton Branch was moved to this location in July of 2003.
The building is owned; the underlying land is leased paying an annual
rent of $21,000
ITEM 3. LEGAL PROCEEDINGS
--------------------------------------------------------------------------------
There are various claims and lawsuits to which the Company is periodically
involved incident to the Company's business. In the opinion of management such
claims and lawsuits in the aggregate are immaterial to the Company's
consolidated financial condition and results of operations.
12
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
--------------------------------------------------------------------------------
The "Market for Common Stock" section of the Company's Annual Report to
Stockholders, except for information below, is incorporated herein by reference.
DIVIDENDS AND DIVIDEND HISTORY
The Company has historically paid regular quarterly cash dividends on its
common stock, and 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. The Company's mutual holding company, Pathfinder Bancorp,
M.H.C., may elect to waive or receive dividends each time the Company declares a
dividend. The election to waive the dividend receipt requires prior consent from
the Office of Thrift Supervision.
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------
The selected financial information for the year ended December 31, 2003 is
filed as part of the Company's Annual Report to Stockholders and is incorporated
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------
The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report to Stockholders which is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------------------------------
The financial statements are contained in the Company's Annual Report to
Stockholders and are incorporated herein by reference.
The following supplementary data schedules are not included in the Company's
Annual Report.
LOAN DATA
The following table show the amounts of loans outstanding as of December 31,
2003 which, based on remaining scheduled repayments of principal, are due in the
periods indicated. Demand loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or less.
Adjustable and floating rate loans are included in the period in which interest
rates are next scheduled to adjust rather than the period in which they
contractually mature, and fixed rate loans are included in the period in which
the final contractual repayment is due.
13
Due Under Due 1-5 Due Over
One Year Years Five Years Total
---------- -------- ----------- --------
(In thousands)
Real estate:
Commercial mortgage. . . . . . . . $ 6,703 $ 18,437 $ 6,138 $ 31,278
Construction and land development. 4,375 0 0 4,375
Residential mortgage . . . . . . . 31,254 46,588 43,252 121,094
42,332 65,025 49,390 156,747
---------- -------- ----------- --------
Commercial . . . . . . . . . . . . 1,264 8,862 4,964 15,090
Consumer . . . . . . . . . . . . . 10,557 2,620 3,703 16,880
Total loans. . . . . . . . . . . . $ 54,153 $ 76,507 $ 58,057 $188,717
---------------------------------- ---------- -------- ----------- --------
Interest rates:. . . . . . . . . . 0
Fixed. . . . . . . . . . . . . . . 11,770 51,091 55,570 118,431
Variable . . . . . . . . . . . . . 42,383 25,416 2,487 70,286
---------------------------------- ---------- -------- ----------- --------
Total Loans. . . . . . . . . . . . $ 54,153 $ 76,507 $ 58,057 $188,717
---------------------------------- ---------- -------- ----------- --------
ANALYSIS OF THE RESERVE FOR LOAN LOSSES DATA
The following table sets forth the analysis of the allowance for loan losses at
or for the periods indicated.
2003 2002 2001 2000 1999
-------------------------------------------------------------------------------------------
(In thousands)
Balance at beginning of year. . . . . . . . . $1,481 $ 1,679 $1,274 $1,150 $ 939
Provisions charged to operating expenses. . . 598 1,375 708 244 373
-------------------------------------------------------------------------------------------
Recoveries of loans previously charged-off
Commercial. . . . . . . . . . . . . . . . . . 3 56 53 0 0
Consumer. . . . . . . . . . . . . . . . . . . 17 33 9 19 28
Real estate . . . . . . . . . . . . . . . . . 17 0 0 0 0
-------------------------------------------------------------------------------------------
Total recoveries. . . . . . . . . . . . . . . 37 89 62 19 28
-------------------------------------------------------------------------------------------
Loans charged off:
Commercial. . . . . . . . . . . . . . . . . . (128) (1,285) (72) (38) 0
Consumer. . . . . . . . . . . . . . . . . . . (189) (291) (184) (61) (190)
Real estate . . . . . . . . . . . . . . . . . (84) (86) (109) (40) 0
-------------------------------------------------------------------------------------------
Total charged-off . . . . . . . . . . . . . . (401) (1,662) (365) (139) (190)
-------------------------------------------------------------------------------------------
Net charge-offs . . . . . . . . . . . . . . . (364) (1,573) (303) (120) (162)
--------------------------------------------- ------- -------- ------- ------- -------
Balance at end of year. . . . . . . . . . . . $1,715 $ 1,481 $1,679 $1,274 $1,150
===========================================================================================
Net charge-offs to average loans outstanding. 0.19% 0.89% 0.19% 0.08% 0.12%
Allowance for loan losses to year-end loans . 0.91% 0.82% 1.03% 0.86% 0.88%
--------------------------------------------- ------- -------- ------- ------- -------
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
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.
2003 2002 2001 2000 1999
----------------------------------------------------------------------------------------------------------
% Gross. . % Gross % Gross % Gross % Gross
Amount . Loans Amount Loans Amount Loans Amount Loans Amount Loans
----------------------------------------------------------------------------------------------------------
Commercial loans $1,218 8.0% $1,042 7.3% $1,083 8.8% $ 455 8.6% $ 392 6.5%
Consumer loans . 120 8.9% 136 8.3% 100 7.7% 353 8.6% 318 9.8%
Real estate. . . 377 83.1% 303 84.4% 496 83.5% 466 82.8% 440 83.7%
----------------------------------------------------------------------------------------------------------
Total. . . . . . $1,715 100.0% $1,481 100.0% $1,679 100.0% $1,274 100.0% $1,150 100.0%
==========================================================================================================
14
INVESTMENT PORTFOLIO
The following table sets forth the carrying value of the Company's investment
portfolio and Federal Home Loan Bank Stock at the dates indicated.
At December 31,
--------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------
(In Thousands)
Investment Securities:
US Government and agency obligations . . . . . $ 6,354 $ 4,378 $ 5,971
State and municipal obligations. . . . . . . . 7,359 8,549 6,012
Corporate debt issues. . . . . . . . . . . . . 6,421 15,375 20,949
Mortgage-backed securities . . . . . . . . . . 29,734 24,440 14,121
Equity securities. . . . . . . . . . . . . . . 2,932 6,225 3,227
Mutual funds . . . . . . . . . . . . . . . . . 6,200 3,070 3,007
--------------------------------------------------------------------------------
59,000 62,037 53,287
Unrealized loss on available for sale portfolio. 607 469 135
--------------------------------------------------------------------------------
Total investments. . . . . . . . . . . . . . $59,607 $62,506 $53,422
================================================================================
SECURITIES PORTFOLIO MATURITIES
The following table sets forth the scheduled maturities, carrying values, market
values and average yields for the Bank's investment securities and Federal Home
Loan Bank ("FHLB") Stock at December 31, 2003. Yield is calculated on the
amortized cost to maturity and adjusted to a fully tax-equivalent basis.
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
------------------------------------------------------------------------------------------------------------------------
ANNUALIZED ANNUALIZED ANNUALIZED
CARRYING WEIGHTED CARRYING WEIGHTED CARRYING WEIGHTED
VALUE AVERAGE YIELD VALUE AVERAGE YIELD VALUE AVERAGE YIELD
------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Debt investment securities:
U.S. Agency securities . . . . . . . $ 0 0.0% $ 5,590 2.7% $ 744 3.6%
U.S. Treasury securities . . . . . . $ 0 0.0% $ 0 0.0% $ 20 10.8%
State and political subdivision. . . $ 575 5.7% $ 2,661 6.6% $ 1,328 6.2%
Corporate debt issues. . . . . . . . $ 8 2.9% $ 3,791 5.8% $ 497 10.0%
------------------------------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . $ 583 5.7% $ 12,042 4.4% $ 2,589 6.2%
Equity and mortgage-backed securities:
Mutual funds . . . . . . . . . . . . $ 6,200 1.0% $ 0 0.0% $ 0 0.0%
Mortgage-backed securities . . . . . $ 0 0.0% $ 2,413 5.8% $ 7,290 3.8%
Common stock and FHLB stock. . . . . $ 2,932 3.7% $ 0 0.0% $ 0 0.0%
------------------------------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . $ 9,132 1.9% $ 2,413 5.8% $ 7,290 3.8%
TOTAL INVESTMENT SECURITIES. . . . . . $ 9,715 2.1% $ 14,455 4.8% $ 9,879 4.5%
======================================================================================================================
MORE THAN TEN YEARS TOTAL INVESTMENT SECURITIES
-----------------------------------------------------------------------------------------------------
ANNUALIZED ANNUALIZED
CARRYING WEIGHTED CARRYING MARKET WEIGHTED
VALUE AVERAGE YIELD VALUE VALUE AVERAGE YIELD
-----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Debt investment securities:
U.S. Agency securities . . . . . . . . $ - 0.0% $ 6,334 $ 6,304 2.8%
U.S. Treasury securities . . . . . . . - 0.0% 20 22 10.8%
State and political subdivisions . . . 2,795 6.4% 7,359 7,663 6.4%
Corporate debt issues. . . . . . . . . 2,125 1.9% 6,421 6,696 5.0%
-----------------------------------------------------------------------------------------------------
Total 4,920 4.6% 20,134 20,685 4.8%
Equity and mortgage-backed securities:
Mutual funds . . . . . . . . . . . . . - 0.0% 6,200 5,715 1.0%
Mortgage-backed securities . . . . . . 20,031 4.0% 29,734 29,934 4.1%
Common stock and FHLB stock. . . . . . - 0.0% 2,932 3,273 3.7%
-----------------------------------------------------------------------------------------------------
Total 20,031 4.0% 38,866 38,922 3.6%
$ 24,951 4.1% $59,000 $59,607 4.0%
===================================================================================================
15
DEPOSIT STRUCTURE
The following table indicates the amount of the Bank's certificates of deposit
of $100,000 or more by time remaining until maturity as of December 31, 2003.
Certificates of
Deposit of
Remaining Maturity $100,000 or more
-------------------------- ----------------
(In Thousands)
Three Months or less . . . $ 2,336
Three through Six months . 2,987
Six through twelve months. 3,536
Over twelve months . . . . 5,759
--------------------------------------------
Total. . . . . . . . . $ 14,618
================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------
During 2003, the Company analyzed the service provided by and associated
costs of its external auditing firm. After reviewing proposals from a number of
independent accounting firms, the Board of Directors approved the appointment of
Beard Miller Company LLP as auditors for the fiscal year ended December 31,
2003. The Company's previous auditor, PricewaterhouseCoopers, LLP ("PwC") was
engaged for the examination of the first two quarters Form 10-Q filings during
2003. PwC performed audits of the consolidated financial statements for the two
years ended December 31, 2002 and 2001. Their reports on the financial
statements did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope, or accounting
principles. During the two years ended December 31, 2002 and from December 31,
2002 through the effective date of the PwC termination, there have been no
disagreements between the Registrant and PwC on any matter of accounting
principles or practice, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of PwC,
would have caused PwC to make reference to the subject matter of such
disagreements in connection with their reports on the financial statements for
such years.
During the two years ended December 31, 2002, and from December 31, 2002
until the effective date of the dismissal of PwC, PwC did not advise the
Registrant of any of the following matters:
1. That the internal controls necessary for the Registrant to develop
reliable financial statements did not exist.
2. That information had come to PwC's attention that had lead it to no
longer be able to rely on management's representations, or that had
made it unwilling to be associated with the financial statements
prepared by management;
3. That there was a need to expand significantly the scope of the audit
of the Registrant, or that information had come to PwC's attention
that if further investigated: (i) may materially impact the fairness
or reliability of either a previously-issued audit report or
underlying financial statements, or the financial statements issued or
to be issued covering the fiscal periods subsequent to the date of the
most recent financial statement covered by an audit report (including
information that may prevent it from rendering an unqualified audit
report on those financial statements) or (ii) may cause it to be
unwilling to rely on management's representation or be associated with
the Registrant's financial statements and that, due to its dismissal,
PwC did not so expand the scope of its audit or conduct such further
investigation;
4. That information had come to PwC's attention that it had concluded
materially impacted the fairness or reliability of either: (i) a
previously-issued audit report or the underlying financial statements
or (ii) the financial statements issued or to be issued covering the
fiscal period subsequent to the date of the most recent financial
statements covered by an audit report (including information that,
unless resolved to the accountant's satisfaction, would prevent it
from rendering an unqualified report on those financial statements),
or that, due to its dismissal, there were no such unresolved issues as
of the date of its dismissal.
16
During the two years ended December 31, 2002, and from December 31, 2002
through the engagement of Beard Miller Company LLP as the Registrant's
independent accountant, neither the Registrant nor anyone on its behalf had
consulted Beard Miller Company LLP with respect to any accounting, auditing or
financial reporting issues involving the Registrant. In particular, there was
no discussion with the Registrant regarding the application of accounting
principles to a specified transaction, the type of audit opinion that might be
rendered on the financial statement, or any related item.
ITEM 9A. CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------
Under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
the Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this annual
report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There has been no change in the
Company's internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonable likely to
materially affect, the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
--------------------------------------------------------------------------------
(a) Information concerning the directors of the Company is incorporated by
reference hereunder in the Company's Proxy Materials for the Annual
Meeting of Stockholders.
(b) Set forth below is information concerning the Executive Officers of
the Company at December 31, 2003.
NAME AGE POSITIONS HELD WITH THE COMPANY
--------------------------------------------------------------------------------
Thomas W. Schneider 42 President and Chief Executive Officer
James A. Dowd, CPA 36 Vice President, Chief Financial Officer
Edward A. Mervine 47 Vice President, General Counsel
John F. Devlin 39 Vice President, Senior Commercial Lender
Melissa A. Miller 46 Vice President, Operations, Corporate,
Secretary, Compliance Officer
Gregory L. Mills 43 Vice President, Director of Marketing,
Branch Administrator
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------------------------------------------------------
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 Stockholders under the caption
"Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------------------------
The information contained under the sections captioned "Stock Ownership of
Management" is incorporated by reference to the Company's Proxy Materials for
its Annual Meeting of Stockholders.
17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------------------------
The information required by this item is set forth under the caption
"Certain Transactions" in the Definitive Proxy Materials for the Annual Meeting
of Stockholders and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------------------------------------------------
The information required by this item is set forth under the caption "Audit and
Related Fees" in the Definitive Proxy Materials for the Annual Meeting of
Stockholders and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------------
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this Form
10-K are as follows:
(A) Independent Auditors' Report;
(B) Consolidated Statements of Condition - December 31, 2003 and
2002.
(C) Consolidated Statements of Income - years ended December 31,
2003, 2002 and 2001.
(D) Consolidated Statements of Changes in Shareholders' Equity -
years ended December 31, 2003, 2002 and 2001.
(E) Consolidated Statements of Cash Flows - years ended December 31,
2003, 2002 and 2001; and
(F) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(b) Exhibits
3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc. (Incorporated
herein by reference to the Company's Current Report on Form 8-K dated
June 25, 2001)
3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference
to the Company's Current Report on Form 8-K dated June 25, 2001)
4 Form of Stock Certificate of Pathfinder Bancorp, Inc. (Incorporated
herein by reference to the Company's Current Report on Form 8-K dated
June 25, 2001)
10.1 Form of Pathfinder Bank 1997 Stock Option Plan (Incorporated herein by
reference to the Company's S-8 file no. 333-53027)
10.2 Form of Pathfinder Bank 1997 Recognition and Retention Plan
(Incorporated by reference to the Company's S-8 file no. 333-53027)
10.3 Employment Agreement between the Bank and Thomas W. Schneider,
President and Chief Executive Officer (Incorporated by reference to
the Company's S-4 file no. 333-36051)
18
13 Annual Report to Stockholders
14 Code of Ethics for Directors, Officers and Employees
21 Subsidiaries of Company
23.1 Consent of Beard Miller Company LLP
23.2 Consent of Pricewaterhouse Coopers LLP
31.1 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive
Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial
Officer
32.1 Section 1350 Certification of the Chief Executive and Chief Financial
Officer
99.1 Report of PricewaterhouseCoopers LLP
(c) Reports on Form 8-K
----------------------
The Company has two Current Reports on Form 8-K during the fourth quarter
of the fiscal year ended December 31, 2003 dated November 5, 2003 and November
3, 2003 reporting press releases relating to the fourth quarter earnings release
and the Board's approval of a change in auditors, respectively. The 8-K filed
on November 3, 2003 was a duplicate filing of the 8-K filed on August 19, 2003.
19
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 30, 2004 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/ Janette Resnick
--------------------------------------
Janette Resnick, Chairman of the Board
Date: March 30, 2004
By: /s/ Thomas W. Schneider By: /s/ Chris R. Burritt
---------------------------------------- --------------------
Thomas W. Schneider, President and Chief Chris R. Burritt,
Executive Officer Director
Date: March 30, 2004 Date: March 30, 2004
By: /s/ James A. Dowd By: /s/ Raymond W. Jung
---------------------------------------- --------------------
James A. Dowd, Vice President and . . Raymond W. Jung,
Chief Financial Officer Director
Date: March 30, 2004 Date: March 30, 2004
By: /s/ Bruce B. Manwaring By: /s/ George P. Joyce
---------------------------------------- --------------------
Bruce E. Manwaring., . . . . . George P. Joyce,
Director Director
Date: March 30, 2004 Date: March 30, 2004
By: /s/ L. William Nelson, Jr. By: /s/ Corte J. Spencer
---------------------------------------- --------------------
L. William Nelson, Jr., . . . . Corte J. Spencer,
Director Director
Date:.March 30, 2004 Date: March 30, 2004
By: /s/ Steven W. Thomas By: /s/ Chris C. Gagas
---------------------------------------- -------------------
Steven W. Thomas, . . . . . . . Chris C. Gagas,
Director Director
Date:.March 30, 2004 Date: March 30, 2004
20
EXHIBIT 13 ANNUAL REPORT TO STOCKHOLDERS
2003 ANNUAL REPORT
[PHOTOS] IF IT'S IMPORTANT TO YOU,
IT'S IMPORTANT TO US.
[LOGO] PathFinder
BANCORP, INC.
[PHOTOS] [LOGO] PathFinder
BANCORP, INC.
FINANCIAL HIGHLIGHTS
Pathfinder Bancorp, Inc. ("the Company") is the parent company of Pathfinder
Bank and Pathfinder Statutory Trust I. Pathfinder Bank has three operating
subsidiaries - Pathfinder Commercial Bank, Pathfinder REIT Inc., and Whispering
Oaks Development Corporation.
The following table sets forth certain financial highlights of the Company for
the years ended December 31:
2003 2002 2001 2000 1999
-----------------------------------------------------------------------------------------------------
YEAR END (IN THOUSANDS)
Total assets . . . . . . . . . . . . . . . . . $277,940 $279,056 $244,514 $232,355 $216,324
Loans receivable, net. . . . . . . . . . . . . 187,002 179,001 162,588 148,362 130,063
Deposits . . . . . . . . . . . . . . . . . . . 206,894 204,522 169,589 161,459 152,436
Equity . . . . . . . . . . . . . . . . . . . . 21,785 23,230 22,185 20,962 20,075
FOR THE YEAR (IN THOUSANDS)
Net interest income. . . . . . . . . . . . . . $ 9,337 $ 8,789 $ 7,853 $ 7,393 $ 7,629
Net income . . . . . . . . . . . . . . . . . . 1,652 1,156 1,602 356 930
PER SHARE
Net income (basic) . . . . . . . . . . . . . . $ 0.68 $ 0.45 $ 0.62 $ 0.14 $ 0.35
Book value . . . . . . . . . . . . . . . . . . 8.96 8.90 8.64 8.06 7.61
Cash dividends declared. . . . . . . . . . . . 0.40 0.30 0.26 0.24 0.24
RATIOS
Return on average assets . . . . . . . . . . . 0.59% 0.45% 0.68% 0.16% 0.44%
Return on average equity . . . . . . . . . . . 7.61% 5.01% 7.34% 1.79% 4.33%
Average equity to average assets . . . . . . . 7.77% 8.94% 9.22% 8.91% 10.24%
Dividend payout ratio (a). . . . . . . . . . . 39.41% 36.85% 28.37% 173.62% 67.65%
Net interest rate spread . . . . . . . . . . . 3.53% 3.47% 3.35% 3.34% 3.73%
Allowance for loan losses to loans receivable. 0.91% 0.82% 1.03% 0.86% 0.88%
Noninterest expense to total assets. . . . . . 3.27% 2.85% 2.81% 3.31% 3.30%
Efficiency ratio (b) . . . . . . . . . . . . . 76.13% 73.18% 70.61% 90.64% 80.54%
(a) The dividend payout ratio is calculated using dividends declared and
not waived by the Company's mutual holding company parent, Pathfinder
Bancorp, M.H.C., divided by net income.
(b) The efficiency ratio is calculated as noninterest expense divided by
net interest income plus noninterest income.
MARKET FOR COMMON STOCK
Pathfinder Bancorp, Inc.'s common stock currently trades on the NASDAQ SmallCap
Market under the symbol "PBHC". There were 359 shareholders of record as of
February 20, 2004. The following table sets forth the high and low closing bid
prices and dividends paid per share of common stock for the periods indicated:
DIVIDEND
QUARTER ENDED: HIGH LOW PAID
----------------------------------------------
December 31, 2003. $ 18.459 $16.250 $0.100
September 30, 2003 17.000 14.000 0.100
June 30, 2003. . . 15.250 13.685 0.100
March 31, 2003 . . 14.890 13.200 0.100
------------------ --------- ------- ------
December 31, 2002. 15.000 11.910 0.080
September 30, 2002 12.850 10.380 0.080
June 30, 2002. . . 14.990 12.750 0.070
March 31, 2002 . . 13.500 12.050 0.070
1
[PHOTOS]
2
[PHOTOS]
LETTER TOSHAREHOLDERS
Janette Resnick, Chairman, Thomas W. Schneider, President and CFO
LETTER TO SHAREHOLDERS
On behalf of the Board of Directors and the employees of Pathfinder Bancorp,
Inc., we are pleased to present our Annual Report to our shareholders. We
invite you to attend our annual meeting on April 28, 2004 at 10:00 a.m. at the
Econo Lodge Riverfront Hotel in Oswego.
2003 REVIEW The Company's activities during 2003 were primarily focused on: 1)
enhancing the breadth and capabilities of our delivery systems, 2) providing
core banking products and services to our customers, and 3) ensuring enhanced
governance processes to meet regulatory and shareholder expectations.
Pathfinder Bank is the leading depository institution in our market with a 41%
deposit market share in the city of Oswego and a 23% deposit market share in
Oswego County. We are strategically focused on retaining and expanding that
leadership position by differentiating ourselves through higher quality service
delivery. To accomplish this we are directing our development efforts toward
what we believe are the core drivers of service delivery and market position:
1) location development, 2) systems enhancements, 3) product diversity and 4)
employee training and education.
Toward that end in 2003, we have done the following:
Relocated our Fulton branch to provide better access, parking, drive-thru
capabilities, and a superior customer experience through design,
state-of-the-art equipment and training.
Redesigned the lobby in our Lacona branch to provide private offices and an
ATM.
Reconfigured and expanded the parking and drive-thru in our Mexico branch.
Acquired prime property in Central Square to locate our 7th branch.
Installed a new Windows based teller/platform system for enhanced customer
service.
Introduced our new deposit services to the municipalities in the county
through our commercial bank subsidiary.
Continued our focus on employee development through Pathfinder University
and other training and education forums.
We strongly believe that our focus in these areas will allow the Company to gain
market share through superior customer service.
Residential mortgage lending dominated our core banking activities in 2003 as
originations exceeded $50 million. Total loans grew $8.2 million with $23.4
million sold into the secondary market. The Company's mortgage servicing
portfolio for loans sold is $47.6 million at December 31, 2003. Deposit growth
for the year was nominal following a 21% increase in the prior year. A stagnant
local economy has precluded the flow of new funds into the market. It is
anticipated that in 2004, deposit growth through branch expansion and municipal
markets will be more robust, while commercial lending production through
Pathfinder Business Services will accelerate as residential mortgage lending
activity slows.
Pathfinder Investment Services had a record year of growth in 2003 with revenues
increasing 22% over the prior year. Our investment services division now serves
over 700 individuals, families, and businesses in our market.
3
The Board of Directors was highly active and engaged in understanding their
evolving responsibilities resultant from adoption of the Sarbanes-Oxley Act of
2002. The Governance/Nominating Committee adopted a comprehensive set of
governance guidelines in 2003. The Audit Committee added meetings specifically
targeted for educational purposes. The Board also successfully transitioned the
Chairman's position as Chris C. Gagas stepped down after 17 years as Chairman
and was replaced by unanimous decision with Janette Resnick as Chairman. Chris
remains on the Board of Directors and the Directors and Company deeply
appreciate his unparalleled leadership. The Board of Directors is comprised of
9 independent directors and one inside director who are committed to ensuring
that the Company represents the best interests of its shareholders, customers,
and community.
SHAREHOLDER VALUE Earnings of $1.7 million in 2003 resulted in a return on
average equity of 7.61% and earnings per share of $.68. Both performance
measures were more than a 50% improvement over the prior year, while EPS
achieved the highest level in the Company's history as a public company.
The Company continued to use share repurchases and increased dividends as a
means to provide return and value to shareholders. The Company repurchased
approximately 18% of the shares of common stock held by public shareholders
during the year and increased the dividend to $.40 per share, a 33% increase
over the prior year.
The Company's common stock performance reflected both this positive trend in
earnings and dividends, as well as the rising values of the bank and thrift
stock sectors. During 2003, the common stock provided a total return of 28%.
LOOKING AHEAD In 2004, our strategic focus remains dedicated to the principles
we have outlined above. Our management team is educated, experienced and well
positioned to execute the Company's business plans and lead our bank through the
turbulent times ahead. In an industry that is constantly changing through
consolidation, competition, and regulation, we believe a consistently improving
bank dedicated to the people, businesses, and organizations in the communities
we serve, will garner the benefits of customer loyalty and the resultant market
share. We look forward to the challenges and opportunities that lay ahead, the
successful implementation of our business plan, and our continued service to the
market.
/s/: Janette Resnick /s/: Thomas W. Schneider
----------------------- -------------------------------
Janette Resnick Thomas W. Schneider
Chairman President and CEO
4
MANAGEMENT DISCUSSION AND ANALYSIS
INTRODUCTION
Throughout the 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 I are wholly owned subsidiaries
of Pathfinder Bancorp, Inc. Pathfinder Commercial Bank, Pathfinder REIT, Inc.
and Whispering Oaks Development Corp. represent wholly owned subsidiaries of
Pathfinder Bank. At December 31, 2003, Pathfinder Bancorp, M.H.C, the Company's
mutual holding company parent, whose activities are not included in the MD&A,
held 65.1% of the Company's common stock and the public held 34.9%.
When used in this Annual Report the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project" or
similar expression 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, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market areas and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that 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.
The Company does not undertake, and specifically declines any obligation, to
publicly release the results of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
The Company's business strategy is to operate as a well-capitalized, profitable
and independent community bank dedicated to providing value-added products and
services to our customers. Generally, the Company has sought to implement this
strategy by emphasizing retail deposits as its primary source of funds and
maintaining a substantial part of its assets in locally-originated residential
first mortgage loans, loans to business enterprises operating in its markets,
and in investment securities. Specifically, the Company's business strategy
incorporates the following elements: (i) operating as an independent
community-oriented financial institution; (ii) maintaining capital in excess of
regulatory requirements; (iii) emphasizing investment in one-to-four family
residential mortgage loans, loans to small businesses and investment securities;
and (iv) maintaining a strong retail deposit base.
The Company's net income is primarily dependent on its net interest income,
which is the difference between interest income earned on its investments in
mortgage and other loans, investment securities and other assets, and its cost
of funds consisting of interest paid on deposits and other borrowings. The
Company's net income also is affected by its provision for loan losses, as well
as by the amount of noninterest income, including income from fees, service
charges and servicing rights, net gains and losses on sales of securities, loans
and foreclosed real estate, and noninterest expense such as employee
compensation and benefits, occupancy and equipment costs, data processing costs
and income taxes. Earnings of the Company also are affected significantly by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, which
events are beyond the control of the Company. In particular, the general level
of market rates tends to be highly cyclical.
On October 25, 2002, Pathfinder Bank completed the purchase of assets and the
assumption of non-municipal deposits of the Lacona, New York branch of Cayuga
Bank (the "Branch Acquisition"). In addition, Pathfinder Bank formed a limited
purpose commercial bank subsidiary, Pathfinder Commercial Bank. Pathfinder
Commercial Bank was established to serve the depository needs of public entities
in its market area and it assumed the municipal deposit liabilities of the
Lacona, New York branch. The transaction included approximately $26.4 million in
deposits, $2.3 million in loans and $430,000 in vault cash and facilities and
equipment. The acquisition reflects a premium on deposit liabilities assumed of
approximately $2.4 million.
On January 13, 2003, the Company completed the purchase of 160,114 shares of
common stock at a price of $2.3 million, or $14.60 per share, from Jewelcor
Management Inc. ("JMI"), which is owned by Mr. Seymour Holtzman ("the
Repurchase"). The Repurchase represented approximately 6.1% of the Company's
outstanding common stock as of December 31, 2002.
As part of the repurchase agreement, Mr. Holtzman and JMI, as well as those
persons and entities who signed the Schedule 13D with Mr. Holtzman with respect
to the Company's common stock, agreed in writing, that neither they nor their
affiliates will purchase shares of the Company's common stock for a period of
five years. JMI also agreed to stipulate to the discontinuance with prejudice
of the lawsuit entitled "Jewelcor Management, Inc. v. Pathfinder Bancorp, Inc.",
and withdrew a shareholder proposal previously submitted by JMI.
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 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
5
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 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 determination of the allowance for loan losses to
be the accounting area that requires the most subjective and complex judgments,
and as such could be the most subject to revision as new information becomes
available.
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 and 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 consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type
on the consolidated balance sheet. 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.
The Company carries all of its investments at fair value with any unrealized
gains or losses reported net of tax as an adjustment to shareholders' equity.
Based on management's assessment, at December 31, 2003, the Company did not hold
any security that had a fair value decline that is currently expected to be
other than temporary. Consequently, any declines in a specific security's fair
value below amortized cost have not been provided for in the income statement.
The Company's ability to fully realize the value of its investment in various
securities, including corporate debt securities, is dependent on the underlying
creditworthiness of the issuing organization.
RESULTS OF OPERATIONS
Net income for 2003 was $1.7 million, an increase of $495,000, or 43%, compared
to net income of $1.2 million for 2002. Basic earnings per share increased to
$0.68 per share for the year ended December 31, 2003 from $0.45 per share for
the year ended December 31, 2002. Return on average equity increased 52% to
7.61% in 2003 from 5.01% in 2002.
In the current low interest rate environment, the Company was able to maintain a
strong net interest margin through growth in average earning assets of 7%,
resulting in an increase in net interest income, on a tax-equivalent basis, of
$530,000, or 6%. Provision for loans losses decreased 57% due to a prior year
charge-off of two significant credit relationships. The Company also
experienced a 21% increase in other income, net of securities gains and losses,
primarily attributable to increased deposit levels, service charges associated
with checking accounts and mortgage servicing fees. Earnings were hampered by
an increase in other expenses of 14% primarily attributable to the operation of
a new branch and an increase in employee pension and healthcare costs.
SELECTED PERFORMANCE MEASURES
Years Ended December 31,
-----------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------
Return on average assets . . . . . . 0.59% 0.45% 0.68%
Return on average equity . . . . . . 7.61% 5.01% 7.34%
Net interest margin (1). . . . . . . 3.68% 3.73% 3.67%
Noninterest income to total assets . 0.94% 0.75% 0.76%
Noninterest expense to total assets. 3.27% 2.85% 2.81%
(1) net interest margin is calculated on a tax-equivalent basis
NET INTEREST INCOME
Net interest income is the Company's primary source of operating income for
payment of operating expenses and providing for possible loan losses. It is the
amount by which interest earned on interest-earning deposits, loans and
investment securities, exceeds the interest paid on deposits and other
interest-bearing liabilities. Changes in net interest income and net interest
margin ratio result from the interaction between the volume and composition of
earning assets, interest-bearing liabilities, related yields and associated
funding costs.
Net interest income, on a tax-equivalent basis, increased $530,000, or 6%, to
$9.4 million for the year ended December 31, 2003, as compared to the year ended
December 31, 2002. The Company's net interest margin for 2003 decreased
slightly to 3.68% from 3.73% in 2002. The increase in net interest income is
attributable to increased volumes in earning asset and deposit balances and the
maintenance of stable spreads. The average balance of interest-earning assets
grew $17.5 million, or 7%, during 2003 and the average balance of
interest-bearing deposits increased by $24.1 million, or 14%. The increase in
the average balance of interest-bearing deposits is attributable to the Branch
Acquisition. The Company invested the proceeds from the Branch Acquisition into
6
the loan and investment portfolio. The decrease in the average yield on
interest-earning assets by 67 basis points more than offset the increase in
average balance as loans were refinanced or modified and new investment
securities were acquired at lower yields. As a result, interest income, on a
tax-equivalent basis, decreased $544,000 during 2003. Interest expense on
deposits decreased $906,000, or 19%, resulting from a decrease in the cost of
deposits to 1.96% in 2003 from 2.78% in 2002. In addition to the decrease in
the cost of deposits, interest expense on borrowings also decreased by $168,000,
or 7%, from the prior year.
In comparison, net interest income increased $943,000, or 12%, on a
tax-equivalent basis, from 2001 to 2002. The increase in net interest income
was comprised of a decrease in net interest expenses of $1.5 million, or 17%,
partially offset by a decrease in interest income of $519,000, or 3%.
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 is on a fully
tax-equivalent basis using marginal federal income tax rates of 34%. 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. Non-accrual loans have been included in interest-earning assets for
purposes of these calculations.
For the Years Ended December 31,
2003 2002
Average Average
Average Yield / Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
--------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Real estate loans residential . . . . . . . $129,687 $ 8,346 6.44% $117,688 $ 8,194 6.96%
Real estate loans commercial. . . . . . . . 31,122 2,480 7.97% 31,790 2,641 8.31%
Commercial loans. . . . . . . . . . . . . . 14,181 798 5.62% 14,774 984 6.66%
Consumer loans. . . . . . . . . . . . . . . 15,787 1,225 7.76% 12,795 1,117 8.73%
Taxable investment securities . . . . . . . 54,115 2,193 4.05% 46,247 2,437 5.27%
Tax-exempt investment securities. . . . . . 7,869 305 3.87% 6,036 434 7.19%
Interest-earning deposits . . . . . . . . . 3,252 33 0.99% 9,163 117 1.28%
--------------------------------------------------------------------------------------------------------
Total interest-earning assets . . . . . . . $256,013 $ 15,380 6.01% $238,493 $ 15,924 6.68%
Noninterest-earning assets:
Other assets. . . . . . . . . . . . . . . . 24,859 20,987
Allowance for loan losses . . . . . . . . . (1,591) (1,877)
Net unrealized gains
on available for sale securities. . . . . 52 368
--------------------------------------------------------------------------------------------------------
Total Assets . . . . . . . . . . . . . . . $279,333 $257,971
========================================================================================================
Interest-bearing liabilities:
NOW accounts. . . . . . . . . . . . . . . . $ 17,663 $ 140 0.79% $ 15,850 $ 167 1.06%
Money management accounts . . . . . . . . . 21,788 248 1.14% 11,571 242 2.09%
Savings and club accounts . . . . . . . . . 66,481 511 0.77% 62,494 948 1.52%
Time deposits . . . . . . . . . . . . . . . 85,751 2,852 3.33% 77,701 3,299 4.25%
Mandatorily redeemable preferred securites. 5,000 236 4.66% 2,635 138 5.24%
Borrowings . . . . . . . . . . . . . . . . 43,490 1,962 4.51% 48,626 2,228 4.58%
--------------------------------------------------------------------------------------------------------
Total Interest-bearing liabilities. . . . . $240,173 $ 5,949 2.48% $218,877 $ 7,023 3.21%
--------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits . . . . . . . . . . . . . . 16,345 13,154
Other liabilities . . . . . . . . . . . . . 1,098 2,873
--------------------------------------------------------------------------------------------------------
Total liabilities . . . . . . . . . . . . . 257,616 234,904
--------------------------------------------------------------------------------------------------------
Shareholders' equity. . . . . . . . . . . . 21,717 23,067
--------------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity. . $279,333 $ 257,971
========================================================================================================
Net interest income . . . . . . . . . . . . $ 9,431 $ 8,901
Net interest rate spread. . . . . . . . . . 3.53% 3.47%
Net interest margin . . . . . . . . . . . . 3.68% 3.73%
========================================================================================================
Ratio of average interest-earning assets
to average interest-bearing liabilities . . 106.60% 108.96%
========================================================================================================
For the Year Ended December 31,
--------------------------------------------------------------------------------
2001
--------------------------------------------------------------------------------
Average
Average Yield/
(Dollars in Thousands) Balance Interest Cost
--------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Real estate loans residential. . . . . . . $101,363 $ 7,678 7.58%
Real estate loans commercial . . . . . . . 27,847 2,487 8.93%
Commercial loans . . . . . . . . . . . . . 13,843 1,170 8.45%
Consumer loans . . . . . . . . . . . . . . 12,600 1,220 9.69%
Taxable investment securities. . . . . . . 53,581 3,382 6.31%
Tax-exempt investment securities . . . . . 6,192 441 7.12%
Interest-earning deposits. . . . . . . . . 1,418 65 4.58%
--------------------------------------------------------------------------------
Total interest-earning assets. . . . . . . $216,844 $ 16,443 7.58%
Noninterest-earning assets:
Other assets . . . . . . . . . . . . . . . 20,796
Allowance for loan losses. . . . . . . . . (1,431)
Net unrealized gains
on available for sale securities . . . . 605
--------------------------------------------------------------------------------
Total Assets. . . . . . . . . . . . . . . $236,814
================================================================================
Interest-bearing liabilities:
NOW accounts . . . . . . . . . . . . . . . $ 16,064 $ 228 1.42%
Money management accounts. . . . . . . . . 1,080 41 3.80%
Savings and club accounts. . . . . . . . . 60,936 1,435 2.35%
Time deposits. . . . . . . . . . . . . . . 77,681 4,396 5.66%
Mandatorily redeemable preferred securites - - -
Borrowings. . . . . . . . . . . . . . . . 44,458 2,385 5.36%
--------------------------------------------------------------------------------
Total Interest-bearing liabilities . . . . $200,219 $ 8,485 4.24%
--------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits. . . . . . . . . . . . . . 11,175
Other liabilities. . . . . . . . . . . . . 3,592
--------------------------------------------------------------------------------
Total liabilities. . . . . . . . . . . . . 214,986
--------------------------------------------------------------------------------
Shareholders' equity . . . . . . . . . . . 21,828
--------------------------------------------------------------------------------
Total liabilities & shareholders' equity . $236,814
================================================================================
Net interest income. . . . . . . . . . . . $ 7,958
Net interest rate spread . . . . . . . . . 3.35%
Net interest margin. . . . . . . . . . . . 3.67%
================================================================================
Ratio of average interest-earning assets
to average interest-bearing liabilities. . 108.30%
================================================================================
7
INTEREST INCOME
Average loans increased $13.7 million in 2003, with yields declining 57 basis
points to 6.74%. The Company's residential mortgage loan portfolio increased
$12.0 million, or 10%, when comparing the year 2003 to 2002. The average yield
on the residential mortgage loan portfolio decreased 52 basis points to 6.44% in
2003 from 6.96% in 2002. New loans were originated at lower rates than in the
prior period and a large volume of existing mortgages had their rates modified
downward or were refinanced at lower rates. An increase in the average balance
of consumer loans of $3.0 million, or 23%, resulted from an increase in home
equity loans. The average yield declined 97 basis points, to 7.76% from 8.73% in
2002. Average commercial loans remained relatively constant and experienced a
decline in the average tax-equivalent yield of 104 basis points, to 5.62% from
6.66%, in 2002. The decrease in the yield on commercial loans was affected, in
part, by the offering of short-term notes to municipalities beginning in 2003.
The average balance of loans to municipal entities was $2.3 million, having a
tax-equivalent yield of 3.00%.
Average loans in 2002 increased $21.4 million compared to 2001, while average
loan yields declined 76 basis points. Interest income on loans increased
$381,000, or 3% in 2002 compared to 2001. For the comparable periods, average
residential mortgage loans increased $16.3 million, or 16%, average consumer
loans increased $195,000, or 2%, and average commercial mortgage loans increased
$3.9 million, or 14%.
Average investment securities (taxable and tax-exempt) in 2003 increased by $9.7
million, with a decrease in tax-equivalent interest income from investments of
$373,000, or 13%, compared to 2002. The average tax-equivalent yield of the
portfolio declined 146 basis points, to 4.03% from 5.49%. The increase in the
average balance of investment securities resulted from the investment of the net
proceeds received in the Branch Acquisition into the investment and loan
portfolios. The net proceeds as well as proceeds from maturities and principal
payments received on existing investment securities were reinvested into the
portfolio at lower interest rates.
Average investment securities (taxable and tax-exempt) decreased $7.5 million,
or 13%, in 2002 compared to 2001, with tax-equivalent interest income down
$952,000, or 25%, for the comparative period. The average tax-equivalent yield
on the portfolio had declined 91 basis points in 2002, when compared to 2001.
Proceeds from maturities and principal repayments of investment securities
funded the loan growth in 2002.
INTEREST EXPENSE
Interest expense decreased $1.1 million, or 15%, in 2003, when compared to 2002.
Average interest-bearing liabilities increased $21.3 million, or 10%, in 2003.
This increase was more than offset by a reduction in the average cost of
interest-bearing liabilities of 73 basis points, to 2.48% in 2003 from 3.21% at
2002.
Interest expense decreased $1.5 million, or 17%, in 2002 compared to 2001. The
average cost of interest bearing liabilities declined 103 basis points during
the 12 months ended December 31, 2002.
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
changing 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.
8
Years Ended December 31,
----------------------------------------------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
Increase/(Decrease) Due to Increase/(Decrease) Due to
----------------------------------------------------------------------------------------------------
Total Total
Increase Increase
(In thousands) Volume Rate (Decrease) Volume Rate (Decrease)
----------------------------------------------------------------------------------------------------
INTEREST INCOME:
Real estate loans residential . . . . . . . $ 794 $ (642) $ 152 $1,176 $ (659) $ 517
Real estate loans commercial. . . . . . . . (55) (106) (161) 334 (181) 153
Commercial loans. . . . . . . . . . . . . . (38) (148) (186) 75 (261) (186)
Consumer loans. . . . . . . . . . . . . . . 241 (133) 108 19 (122) (103)
Mortgage-backed securities. . . . . . . . . 553 (357) 196 (197) (148) (345)
Taxable investment securities . . . . . . . (222) (218) (440) (234) (366) (600)
Tax-exempt investment securities. . . . . . 108 (237) (129) (11) 4 (7)
Interest-earning deposits . . . . . . . . . (62) (22) (84) 129 (77) 52
----------------------------------------------------------------------------------------------------
Total interest income . . . . . . . . . . . 1,319 (1,863) (544) 1,291 (1,810) (519)
Interest Expense:
NOW accounts . . . . . . . . . . . . . . . 18 (46) (28) (3) (58) (61)
Money management accounts . . . . . . . . . 149 (143) 6 227 (26) 201
Savings and club accounts . . . . . . . . . 57 (494) (437) 35 (522) (487)
Time deposits . . . . . . . . . . . . . . . 318 (765) (447) 1 (1,098) (1,097)
Mandatorily redeemable preferred securities 114 (16) 98 138 - 138
Borrowings . . . . . . . . . . . . . . . . (232) (34) (266) 210 (367) (157)
----------------------------------------------------------------------------------------------------
Total interest expense. . . . . . . . . . . 424 (1,498) (1,074) 608 (2,071) (1,463)
----------------------------------------------------------------------------------------------------
Net change in net interest income . . . . . $ 895 $ (365) $ 530 $ 683 $ 261 $ 944
=====================================================================================================
NONINTEREST INCOME
The Company's noninterest income is primarily comprised of fees on deposit
account balances and transactions, loan servicing, commissions, and net gains on
securities, loans and foreclosed real estate.
The following table sets forth certain information on noninterest income for the
years indicated:
For the Years Ended December 31,
---------------------------------------------------------------------------------------
(In thousands) 2003 2002 2001
---------------------------------------------------------------------------------------
Service charges on deposit accounts. . . . . . . . . . . . . $ 818 $ 629 $ 520
Loan servicing fees. . . . . . . . . . . . . . . . . . . . . 282 265 175
Increase in the value of bank owned life insurance . . . . . 171 179 246
Net gains (losses) on sales of loans/foreclosed real estate. 326 193 (240)
Other charges, commissions and fees. . . . . . . . . . . . . 469 438 414
---------------------------------------------------------------------------------------
Core noninterest income. . . . . . . . . . . . . . . . . . . 2,066 1,704 1,115
Net gains on sales and impairment of investment securities . 542 390 749
---------------------------------------------------------------------------------------
Total noninterest income . . . . . . . . . . . . . . . . . . $2,608 $2,094 $1,864
=======================================================================================
Noninterest income in 2003 increased 25%, compared to 2002, as a result of a 21%
increase in core noninterest income and a 39% increase in the non-core item, net
gains on sales and impairment of investment securities. The increase in the
number of deposit accounts and the introduction of new services to customers
primarily accounted for the $189,000 increase in service charges on deposit
accounts when compared to 2002. Net gains on the sale of loans/foreclosed real
estate increased $133,000, or 69%, resulting from a $151,000 gain recognized on
the sale of loans to the secondary market, partially offset by a net loss on the
sale of foreclosed real estate of $18,000. Investment security gains increased
$152,000, or 39%, when compared to the 2002 period. Investment security net
gains consist of net gains associated with the sale of equity and corporate debt
securities.
Noninterest income increased $230,000, or 12%, in 2002 compared to 2001. The
increase is primarily attributable to a $589,000 increase in the core
noninterest income components: a $109,000 increase in service charges on
deposit accounts; a $90,000 increase in loan servicing fees due to the increase
in our servicing portfolio and a $433,000 increase in net gains on sale of
loans/foreclosed real estate. These increases in core noninterest income were
partially offset by a $67,000 decrease in the value of bank owned life
insurance. The increase in the net gains on sale of loans/foreclosed real
estate primarily resulted from the Company recognizing a loss of $187,000 in
2001 related to forward sale loan commitments. The $359,000 decrease in net
gains on sales of security investments when compared to 2001 primarily resulted
from the Company recognizing a $275,000 impairment loss on a corporate debt
security in the fourth quarter of 2002.
9
NONINTEREST EXPENSE
The following table sets forth certain information on noninterest expense for
the years indicated:
For the Years Ended December 31,
-----------------------------------------------------------
(In thousands) 2003 2002 2001
-----------------------------------------------------------
Salaries and employee benefits. . $4,455 $3,757 $2,983
Building occupancy. . . . . . . . 1,004 796 820
Data processing expenses. . . . . 868 920 782
Professional and other services . 770 858 719
Amortization of intangible asset. 223 39 316
Other expenses. . . . . . . . . . 1,774 1,594 1,243
-----------------------------------------------------------
Total noninterest expense . . . . $9,094 $7,964 $6,863
===========================================================
Noninterest expenses increased $1.1 million, or 14%, for the 12 months ended
December 31, 2003 when compared to 2002. Salaries and employee benefits
increased 19% in 2003 primarily resulting from the incremental salary and
benefit costs associated with the operation of an additional branch location and
increased pension and health insurance costs. The 26% increase in building
occupancy expenses during 2003 also related to additional costs associated with
a full year's operation of the additional branch. Amortization expense for 2003
increased $184,000 due to the amortization of branch acquisition intangibles.
The 11% increase in other operating expenses during 2003 resulted primarily from
a $164,000 expense relating to personnel realignment.
Noninterest expenses increased 16% when comparing 2002 to 2001. The increase in
operating expenses resulted primarily from a 26% increase in salaries and
employee benefits, an 18% increase in data processing expenses and a 28%
increase in other operating expenses. The increase in salaries and employee
benefits was attributable to the hiring of a senior commercial credit officer
and chief legal counsel and staff, an increase in branch hours, an increase in
the cost of health insurance and employee pension costs and an increase in
personnel expenses resulting from the Branch Acquisition. The increase in data
processing expenses primarily resulted from nonrecurring costs associated with
the Branch Acquisition. The increase in other operating expenses resulted from
expenses associated with the operation of a foreclosed real estate property and
legal costs incurred in the litigation between the Company and a significant
shareholder. These increases were offset by a decrease in amortization expense
of $277,000 in 2002 as compared to 2001 due to the adoption of Financial
Accounting Standard No. 147, which resulted in goodwill no longer being
amortized, but rather evaluated at least annually for impairment.
INCOME TAX EXPENSE
Income tax expense increased $213,000 to $601,000 for the year ended December
31, 2003 as compared to $388,000 in the prior year. The increase in income tax
expense reflected higher pre-tax income during the year. The Company's
effective tax rate increased to 27% in 2003 compared to 25% in the prior year.
The increase in the effective tax rate was attributable to the decrease in
tax-exempt interest income, resulting from a decline in the yield of tax-exempt
securities. The Company has reduced its tax rate from the statutory rate
primarily through the ownership of tax-exempt investment securities, bank owned
life insurance and other tax saving strategies.
CHANGES IN FINANCIAL CONDITION
INVESTMENT SECURITIES
The investment portfolio represents 23% of the Company's earning assets and is
designed to generate a favorable rate of return consistent with the safety of
principle while assisting the Company in meeting the liquidity needs of the loan
and deposit operations and managing the Company's interest rate risk strategies.
All of the Company's investments are classified as available for sale. The
Company invests in investment securities consisting primarily of investment
grade corporate debt instruments, securities issued by the United States
Government, state and municipal obligations, mutual funds, equity securities,
and mortgage-backed securities. 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 commercial real estate loans and
multi-family real estate loans.
Investment securities and Federal Home Loan Bank ("FHLB") stock decreased $2.9
million, or 5%, to $59.6 million at December 31, 2003 from $62.5 million at
December 31, 2002. The decrease in investment securities was primarily
attributable to the acceleration of principal repayments on mortgaged-backed
securities, reflecting refinancing activity in the underlying loans, combined
with $9.2 million in proceeds on sales of investment securities, of which $4.3
million were sales of corporate bonds. Proceeds from principal payments and
sales of investment securities were reinvested into the investment securities
portfolio and the loan portfolio. In comparison, investment securities
increased $9.1 million, or 17%, from 2001 to 2002. The increase in 2002
primarily resulted from the investment of a portion of the net proceeds received
from the Branch Acquisition into the Company's investment portfolio, partially
offset by maturities and principal repayments on mortgage-backed securities.
10
LOANS RECEIVABLE
Loans receivable represent 75% of the Company's earning assets and account for
the greatest portion of total interest income. The Company emphasizes
residential real estate financing and anticipates a continued commitment to
financing the purchase or improvement of residential real estate in its market
area. The Company also extends credit to businesses within its marketplace
secured by commercial real estate, equipment, inventories and accounts
receivable. It is anticipated that small business lending in the form of
mortgages, term loans, leases, and lines of credit will provide the most
opportunity for balance sheet and revenue growth over the near term. Commercial
loans comprise 8% of the total loan portfolio. At December 31, 2003, 90% of the
Company's total loan portfolio consisted of loans secured by real estate, of
which 18% consisted of commercial real estate loans.
December 31,
-----------------------------------------------------------------------------
(In thousands) 2003 2002 2001 2000 1999
-----------------------------------------------------------------------------
Residential real estate (1) $128,989 $123,178 $112,110 $ 97,268 $ 87,851
Commercial real estate. . . 31,278 32,657 30,455 27,367 22,570
Commercial loans. . . . . . 15,090 13,196 14,358 12,873 8,635
Consumer loans. . . . . . . 16,880 15,068 12,615 12,987 12,939
-----------------------------------------------------------------------------
$192,237 $184,099 $169,538 $150,495 $131,995
=============================================================================
(1) residential real estate includes mortgage loans held-for-sale.
Total loans receivable increased $8.1 million, or 4%, over the prior year. By
comparison, loans receivable increased $14.6 million, or 9%, in 2002. The
growth of the loan portfolio is primarily attributable to the continued growth
in the residential real estate portfolio and home equity loan products, which
are included in the consumer loan portfolio.
Residential real estate loans increased $5.8 million, or 5%, during 2003. The
residential real estate portfolio consists of 68% in fixed-rate mortgages and
32% in adjustable-rate mortgages. The increase in the residential real estate
portfolio is principally due to a net increase in 15-year fixed rate mortgages
of $16.0 million, partially offset by a decrease in the adjustable rate mortgage
portfolio. Customers continued to refinance their higher fixed rate and
adjustable rate mortgages into the fixed rate portfolio products. During 2003,
the Company originated $23.0 million of 30-year fixed rate mortgages and
subsequently sold them into the secondary market, as compared to $14.1 million
in originations of 30-year fixed rate mortgages in 2002.
Commercial real estate loans decreased $1.4 million, or 4%, from the prior year.
By comparison, commercial real estate loans increased $2.2 million, or 7%,
during 2002. During 2003, the Company focused on enhancing the underwriting
standards and collection procedures to improve the overall asset quality of the
commercial loan portfolio, resulting in a decreased emphasis on loan
originations for 2003.
Consumer loans, which include second mortgage loans, home equity lines of
credit, direct installment and revolving credit loans, increased 12% to $16.9
million at December 31, 2003. The increase resulted from an increase in home
equity lines of credit and second mortgage loans. The Company has promoted its
home equity products by offering the customer loans with no closing costs and
competitive market rates. Management feels these loans are an attractive use of
funds and will continue to promote home equity products in 2004. During 2002,
consumer loans increased $2.4 million, or 19%, resulting from the acquisition of
consumer loans from the Branch Acquisition occurring in the fourth quarter of
2002.
Commercial loans increased 11% over the prior year to $15.1 million at December
31, 2003. The increase in commercial loans primarily relates to the origination
of short-term loans to the Company's municipal customers. The balance of
municipal loans at December 31, 2003 was $2.6 million. In comparison,
commercial loans decreased 8% during 2002.
11
NONPERFORMING LOANS AND ASSETS
The following table represents information concerning the aggregate amount of
nonperforming assets:
December 31,
----------------------------------------------------------------------------------------------
(In thousands) 2003 2002 2001 2000 1999
----------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial. . . . . . . . . . . . . . . . . . . . $1,677 $ 603 $ 488 $ 169 $ 203
Consumer. . . . . . . . . . . . . . . . . . . . . 172 166 56 65 67
Real estate - Construction . . . . . . . . . . . 270 0 0 0 0
Mortgage . . . . . . . . . . 873 942 1,576 1,594 2,284
----------------------------------------------------------------------------------------------
Total nonaccrual loans. . . . . . . . . . . . . . $2,992 $1,711 $2,120 $1,828 $2,554
Loans past due 90 days or more and still accruing 0 0 0 0 0
----------------------------------------------------------------------------------------------
Total non-performing loans. . . . . . . . . . . . $2,992 $1,711 $2,120 $1,828 $2,554
Foreclosed real estate. . . . . . . . . . . . . . 202 1,396 632 884 641
----------------------------------------------------------------------------------------------
Total non-performing assets . . . . . . . . . . . $3,194 $3,107 $2,752 $2,712 $3,195
==============================================================================================
Non-performing loans to total loans . . . . . . . 1.59% 0.95% 1.30% 1.23% 1.96%
Non-performing assets to total assets . . . . . . 1.15% 1.11% 1.13% 1.17% 1.48%
----------------------------------------------------------------------------------------------
Interest income received on nonaccrual loans. . . 0 0 0 0 0
----------------------------------------------------------------------------------------------
Interest income that would have been recorded
under the original terms of the loans . . . . . . $ 75 $ 141 $ 118 $ 132 $ 84
----------------------------------------------------------------------------------------------
Total nonperforming assets (nonperforming loans and foreclosed real estate) at
December 31, 2003 were 1.15% of total assets as compared to 1.11% of total
assets at December 31, 2002. Total nonperforming loans (past due 90 days or
more) increased $1.3 million, or 75%, during 2003. The total delinquent loans
(those 30 days or more delinquent) as a percentage of total loans were 3.46% at
December 31, 2003 compared to 2.28% at December 31, 2002. Approximately 49% of
the Company's nonperforming loans at December 31, 2003 are secured by
residential real estate with loss potential expected to be manageable within the
allocated reserves. Nonperforming loans increased due to an increase in
commercial real estate and residential mortgage delinquencies. The higher level
of nonperforming loans at December 31, 2003 is partially caused by the time
period required to foreclose on the underlying real estate collateral.
Management believes that adequate reserves exist for any potential losses that
may occur from the remediation process, and that the increase in nonperforming
loans is temporary in nature. Of the $3.0 million in total nonperforming loans
at year end, 22%, or $637,000 has either paid off or returned to performing
status during the first quarter of 2004. Management anticipates that an
additional 21%, or $618,000 of the nonperforming assets will return to
performing status or be transferred to foreclosed real estate during the second
quarter of 2004. Management believes that the quality of the underlying
collateral is marketable and that any resulting losses will be manageable within
the allocated reserves. Foreclosed real estate decreased $1.2 million, or 86%,
from 2002. The Company foreclosed on a large commercial real estate property
during 2002 and subsequently sold the property in 2003, recognizing a $78,000
gain on the sale.
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. 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.
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 fair
value of the collateral. The Company used the fair value of collateral to
measure impairment on commercial and commercial real estate loans in 2003. At
December 31, 2003, the Company had $3.8 million in loans which were deemed to be
impaired having a valuation allowance of $527,000. $2.7 million of the impaired
loan balance represents one commercial credit relationship that was restructured
during 2003. A $388,000 impairment reserve is recorded on this relationship.
The customer has been able to make payments under the restructured terms.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a reserve established through charges to
expense in the form of a provision for loan losses and reduced by loan
charge-offs net of recoveries. Allowance for loan losses represents the amount
available for probable credit losses in the Company's loan portfolio as
estimated by management. The Company maintains an allowance for loan losses
based upon a monthly evaluation of known and inherent risks in the loan
portfolio, which includes a review of the balances and composition of the loan
portfolio as well as analyzing the level of delinquencies in each segment of the
loan portfolio. The Company uses a general allocation method for the
residential real estate and the consumer loan pools based upon a methodology
that uses loss factors applied to loan balances and reflects actual loss
12
experience, delinquency trends and current economic conditions. The Company
reviews individually, commercial real estate and commercial loans greater than
$150,000, on nonaccrual and risk rated under the Company's risk rating system,
as special mention, substandard, doubtful or loss to determine if the loans are
impaired. If loans are determined to be impaired, the Company establishes a
specific reserve allocation. The specific allocation is determined based on the
most recent valuation of the loan's collateral and the customer's ability to
pay. For all other commercial real estate and commercial loans, the Company
uses the general allocation methodology that establishes a reserve for each risk
rating category. The general allocation methodology for commercial real estate
and commercial loans considers the same factors that are considered when
evaluating residential real estate and consumer loans pools. The allowance for
loan losses reflects management's best estimate of probable loan losses at
December 31, 2003.
The allowance for loans losses was $1.7 million at December 31, 2003, a
$234,000, or 16%, increase from December 31, 2002. The allowance for loans
losses as a percentage of total loans increased to 0.91% at December 31, 2003
from 0.82% in the prior year. Net loan charge-offs were $363,000 during 2003
compared to $1.6 million in 2002. The Company experienced a high level of
charge-offs during 2002 resulting from the charge-off of two significant
commercial lending relationships. The current year charge-off levels are more
consistent with years previous to 2002.
DEPOSITS
The Company's retail deposit base is drawn from six full-service offices in its
market area. The deposit base consists of demand deposits, money management
accounts, savings and time deposits. At December 31, 2003, 59% of the Company's
average deposit base of $208.0 million consisted of core deposits. Core
deposits are considered to be more stable and provide the Company with a
low-cost source of funds. The Company will continue to emphasize retail
deposits by maintaining its network of full service offices and providing
depositors with a full range of deposit product offerings. Pathfinder
Commercial Bank, the limited-purpose commercial banking subsidiary of Pathfinder
Bank, assumed $11.6 million in municipal deposits as part of the Branch
Acquisition. The Commercial Bank will allow the Company to serve the
depository needs of the various municipalities, school districts, and other
public funding sources throughout its market area. The Commercial Bank will
seek business growth by focusing on its local identification and service
excellence. The Commercial Bank had an average balance of $10.7 million in
municipal deposits in 2003, primarily concentrated in money management accounts.
Average deposits increased $27.3 million, or 15%, when compared to 2002.
Deposit growth in 2003 primarily resulted from the assumption of $26.4 million
in deposits through the Branch Acquisition and the consumers' continued shift
from equity markets into insured bank deposits.
The Company's average deposit mix in 2003, as compared to 2002, reflected a
slight shift from savings and time deposits to money management accounts. The
Company's average demand deposits, interest and noninterest bearing, represented
16% of total average deposits, which was comparable with 2002. The Company's
money management accounts represented 10% of total deposits, up 4 percentage
points for the same period in 2002. The Company promotes its money management
account by offering competitive rates to retain existing and attract new
customers.
At December 31, 2003, time deposits in excess of $100,000 totaled $14.6 million,
or 18%, of time deposits and 7% of total deposits. At December 31, 2002, these
deposits totaled $15.8 million, or 18% of time deposits and 8% of total
deposits.
The average amount of deposits, average rate paid and percentage of deposits are
Summarized below for the years indicated:
For the Years Ended December 31,
--------------------------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------------------------------------------
Avg Percent Avg Percent Avg Percent
Avg Rate of Avg Rate of Avg Rate of
($in thousands) Balance Paid Deposits Balance Paid Deposits Balance Paid Deposits
--------------------------------------------------------------------------------------------------------------
Noninterest bearing
demand accounts . . . . $ 16,345 0.00% 7.86% $ 13,154 0.00% 7.28% $ 11,175 0.00% 6.69%
NOW accounts . . . . . . . 17,663 0.79% 8.49% 15,850 1.06% 8.77% 16,064 1.42% 9.62%
Money management accounts. 21,788 1.14% 10.47% 11,571 2.09% 6.40% 1,080 3.80% 0.65%
Savings and club accounts. 66,481 0.77% 31.96% 62,494 1.52% 34.57% 60,936 2.35% 36.50%
Time deposits. . . . . . . 85,751 3.33% 41.22% 77,701 4.25% 42.98% 77,681 5.66% 46.53%
--------------------------------------------------------------------------------------------------------------
Total average deposits . . $208,028 1.96% 100.00% $180,770 2.78% 100.00% $166,936 3.65% 100.00%
==============================================================================================================
13
CAPITAL
Shareholders' equity decreased $1.4 million, or 6%, to $21.8 million at December
31, 2003. The decrease in shareholders' equity primarily resulted from the
Company purchasing $2.7 million of its common stock. The increase in treasury
stock resulted from the Company's privately negotiated purchase of 160,114
shares of its common stock for a price of $2.3 million, or $14.60 per share,
during the first quarter of 2003 and other treasury stock purchases of $349,000.
The Company added $1.7 million to retained earnings through net income and
returned $651,000 to its shareholders in the form of cash dividends. The
Company's mutual holding company parent, Pathfinder Bancorp, M.H.C, waived its
right to receive the dividend for the quarters ended September 30, 2003 and
December 31, 2003.
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 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, 2003, Pathfinder
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%. See footnote 17 for the Company's
and the Bank's ratios.
LIQUIDITY
Liquidity management involves the Company's ability to generate cash or
otherwise obtain funds at reasonable rates to support asset growth and reduce
assets to meet deposit withdrawals, to maintain reserve requirements, and to
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 membership in the Federal Home
Loan Bank of New York, 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, trust preferred
security offerings, brokered deposits, negotiated time deposits, the sale of
"available-for-sale" investment securities, the sale of securitized 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.
The Asset Liability Management Committee (ALCO) of the Company is responsible
for implementing the policies and guidelines for the maintenance of prudent
levels of liquidity. As of December 31, 2003, management believes that
liquidity as measured by the Company is in compliance with its policy
guidelines.
AGGREGATE CONTRACTUAL OBLIGATIONS
The following table represents the Company's on and off-balance sheet aggregate
contractual obligations to make future payments as of December 31, 2003:
1 Year Over 1 Over 3 Over 5
(In thousands) or Less to 3 Years to 5 years Years Total
--------------------------------------------------------------------------------
Time deposits. . . . . . . $47,230 $25,537 $ 5,218 $ 5,061 $ 83,046
Trust preferred securities - - - 5,000 5,000
Borrowings . . . . . . . . 7,600 12,000 17,960 3,400 40,960
Operating leases . . . . . 40 87 97 215 439
--------------------------------------------------------------------------------
Total. . . . . . . . . . . $54,870 $37,624 $23,275 $13,676 $129,445
================================================================================
In addition, the Company, in the conduct of ordinary business operations,
routinely enters into contracts for services. These contracts may require
payment for services to be provided in the future and may also contain penalty
clauses for the early termination of the contract. Management is not aware of
any additional commitments or contingent liabilities, which may have a material
adverse impact on the liquidity or capital resources of the Company.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is also 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, 2003, the Company had $19.4 million in
outstanding commitments to extend credit and standby letters of credit. See
footnote 15.
14
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's risk of loss arising from adverse changes in the fair value of
financial instruments, or market risk, is composed primarily of interest rate
risk. The management of interest rate sensitivity seeks to avoid fluctuating
net interest margins and to provide consistent net interest income through
periods of changing interest rates. The primary objective of the Company's
asset-liability management activities is to maximize net interest income while
maintaining acceptable levels of interest rate risk. The Company has an
Asset-Liability Management Committee (ALCO) which is responsible for
establishing policies to limit exposure to interest rate risk, and to ensure
procedures are established to monitor compliance with those policies. Those
procedures include reviewing the Company's assets and liability policies,
setting prices and terms on rate-sensitive products, and monitoring and
measuring the impact of interest rate changes on the Company's earnings and
capital. The Company's Board of Directors reviews the guidelines established by
ALCO.
During the past three years, the Federal Reserve lowered interest rates thirteen
times by a total of 550 basis points. These interest rate reductions have
caused significant repricing of the bank's interest-earning assets and
interest-bearing liabilities. With the overnight borrowing rate at a 40 year
low, the Company is positioning itself for anticipated interest rate increases
in the future. Efforts are being made to shorten the repricing duration of its
rate sensitive assets by purchasing investment securities with maturities within
the next 3 to 5 years and promoting portfolio ARM (adjustable rate mortgage) and
hybrid ARM products. In addition, the Company is extending the duration of its
rate sensitive liabilities by lengthening the maturities of its existing
borrowings and offering certificates of deposit with three and four year terms
which allow depositors to make a one-time election, at any time during the term
of the certificate of deposit, to adjust the rate of the instrument to the then
prevailing rate for the certificate of deposit with the same term.
An interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates. Historically, the most common method of
estimating interest rate risk was to measure the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities
at specific point in time ("GAP") typically one year. Under this method, a
company is considered liability sensitive when the amount of its
interest-bearing liabilities exceeds the amount of its interest-earning assets
within the on-year horizon. However, assets and liabilities with similar
repricing characteristics may not reprice at the same time or to the same
degree. As a result, the Company's GAP does not necessarily predict the impact
of changes in general levels of interest rates on net interest income.
The following table shows the GAP position for the Company as of December 31,
2003:
Amounts Maturing or Repricing
--------------------------------------------------------------------------------------------------------------------------------
Within 3 to 12 1 to 3 3 to 5 5 to 10 More than
(Dollars in thousands) 3 Months Months Years Years Years 10 Years Total
--------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Interest earning deposits . . . . . . . . . . . . . . $ 2,911 $ - $ - $ - $ - $ - $ 2,911
Investment securities and FHLB stock. . . . . . . . . 15,126 2,802 11,922 15,009 10,640 4,108 59,607
Loans receivable. . . . . . . . . . . . . . . . . . . 27,995 29,677 45,277 31,231 39,591 18,466 192,237
--------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets . . . . . . . . . . . . $ 46,032 $ 32,479 $ 57,199 $ 46,240 $50,231 $22,574 $254,755
================================================================================================================================
Interest-bearing liabilities:
Transaction deposit accounts (1). . . . . . . . . . . $ 32,221 $ 4,200 $ 2,886 $ - $ - $ - $ 39,307
Savings deposits (1). . . . . . . . . . . . . . . . . 29,392 5,682 8,648 6,187 9,309 9,533 68,751
Certificates of deposit . . . . . . . . . . . . . . . 14,162 33,035 25,551 5,222 5,076 - 83,046
Borrowings. . . . . . . . . . . . . . . . . . . . . . 2,000 5,600 13,000 16,960 3,400 - 40,960
Trust preferred obligations . . . . . . . . . . . . . 5,000 - - - - - 5,000
--------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities. . . . . . . . . . $ 82,775 $ 48,517 $ 50,085 $ 28,369 $17,785 $ 9,533 $237,064
================================================================================================================================
Interest-earning assets less interest-
bearing liabilities ("interest rate sensitivity gap") $(36,743) $(16,038) $ 7,114 $ 17,871 $32,446 $13,041
Cumulative excess (deficiency) of interest-
sensitive assets over interest-sensitive liabilities. $(36,743) $(52,781) $(45,667) $(27,796) $ 4,650 $17,691
Interest sensitivity gap to total assets. . . . . . . -13.22% -5.77% 2.56% 6.43% 11.67% 4.69%
Cumulative interest sensitivity gap to total assets . -13.22% -18.99% -16.43% -10.00% 1.67% 6.37%
Ratio of interest-earning assets to interest-
bearing liabilities . . . . . . . . . . . . . . . . . 55.61% 66.94% 114.20% 162.99% 282.43% 236.80%
Cumulative ratio of interest-earning assets to
interest-bearing liabilities. . . . . . . . . . . . . 55.61% 59.80% 74.82% 86.75% 102.04% 107.46%
================================================================================================================================
(1) The following assumptions have been used when analyzing non-maturity
deposits for GAP Table purposes: 16% of savings deposits are assumed
to reprice or mature within one year, 23% within 1 to 3 years and 20%
within each of the remaining time periods. Transaction deposits - 66%
of the NOW account balances are assumed to reprice or mature within
one year, and the remaining 34% is assumed to reprice or mature within
the 1 to 3 year time frame. 100% of the money management accounts are
assumed to reprice within the first three months.
15
Management believes the simulation of net interest income (Earnings at Risk) and
net portfolio value (Value at Risk) in different interest rate environments
provides a more meaningful measure of interest rate risk. Income simulation
analysis captures both the potential of all assets and liabilities to mature or
reprice and the probability that they will do so. Income simulation also
attends to the relative interest rate sensitivities of these items, and projects
their behavior over an extended period of time. Finally, income simulation
permits management to assess the probable effects on the balance sheet not only
of changes in interest rates, but also of proposed strategies for responding to
them. Net portfolio value represents the fair value of net assets (determined
as the market value of assets minus the market value of liabilities using a
discounted cash flow technique).
The following table measures the Company's interest rate risk exposure in terms
of the percentage change in its net interest income and net portfolio value as a
result of hypothetical changes in 100 basis point increments in market interest
rates. The table quantifies the changes in net interest income and net
portfolio value to parallel shifts in the yield curve. The column "Percentage
Change in Net Interest Income" measures the change to the next twelve month's
projected net interest income, due to parallel shifts in the yield curve. The
column "Percentage Change in Net Portfolio Value" measures changes in the
current fair value of assets and liabilities to parallel shifts in the yield
curve. The column "NPV Capital Ratio" measures the ratio of the fair value of
net assets to the fair value of total assets at the base case and in 100 basis
point incremental interest rate shocks. Currently, the Company's model projects
a 300 basis point increase and a 100 basis point decrease during the next year.
With the federal funds rate at a record low, the Company's ALCO believed it was
a better measure of current risk assuming a minus 100 point scenario, as a minus
300 basis point reduction would be unlikely given that current short-term market
interest rates are already below 3.00%. The Company uses these percentage
changes as a means to measure interest rate risk exposure and quantifies those
changes against guidelines set by the Board of Directors as part of the
Company's Interest Rate Risk policy. The Company's current interest rate risk
exposure is within those guidelines set forth.
Percentage Percentage
Change in NPV Change in Change in
Interest Capital Net Interest Net Portfolio
Rates Ratio Income Value
-----------------------------------------------------
300 . . . 9.03% -11.44% -24.87%
200 . . . 9.91% -7.38% -15.33%
100 . . . 10.65% -3.45% -6.50%
0 11.11% ---- ----
-100. . . 11.04% 1.43% 1.42%
16
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Pathfinder Bancorp, Inc.
Oswego, New York
We have audited the accompanying consolidated statement of condition of
Pathfinder Bancorp, Inc. and subsidiaries as of December 31, 2003, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The December 31, 2002 and 2001 consolidated financial statements were
audited by other auditors whose report, dated January 31, 2003, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 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, 2003, and the
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1, "Intangible Assets", to the consolidated financial
statements, effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 147, "Accounting for Certain Acquisitions of
Bank or Thrift Institutions."
/s/: Beard Miller Company LLP
Harrisburg, Pennsylvania
February 6, 2004
17
STATEMENTS OF CONDITION
December 31,
------------------------------------------------------------------------------------------------------------
2003 2002
------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,802,613 $ 7,026,126
Interest earning deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,911,169 6,714,279
------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . 8,713,782 13,740,405
Investment securities, at fair value . . . . . . . . . . . . . . . . . . . . . 57,558,696 60,262,544
Mortgage loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . 3,520,211 3,616,711
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,717,017 180,482,284
Less: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . 1,715,213 1,480,874
------------------------------------------------------------------------------------------------------------
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . 187,001,804 179,001,410
Premises and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . 6,650,442 5,622,171
Accrued interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 1,273,501 1,334,126
Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,649 1,395,714
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,840,226 3,840,226
Intangible asset, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 849,882 1,073,182
Federal Home Loan Bank stock, at cost. . . . . . . . . . . . . . . . . . . . . 2,048,000 2,243,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,281,636 6,926,378
------------------------------------------------------------------------------------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $277,939,829 $279,055,867
============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $191,103,854 $188,757,723
Noninterest-bearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,789,957 15,764,382
------------------------------------------------------------------------------------------------------------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206,893,811 204,522,105
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100,000 700,000
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,860,000 42,160,000
Company obligated mandatorily redeemable preferred securities of subsidiary,
Pathfinder Statutory Trust I, holding solely junior subordinated debentures of
the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 5,000,000
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,301,209 3,443,740
------------------------------------------------------------------------------------------------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256,155,020 255,825,845
Shareholders' equity:
Preferred stock, authorized shares 1,000,000; no shares issued or outstanding
Common stock, par value $.01; authorized 10,000,000 shares;
2,919,386 and 2,914,669 shares issued; and 2,432,099 and
2,610,496 shares outstanding, respectively.. . . . . . . . . . . . . . . . . . 29,194 29,146
Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . . . . 7,224,772 7,113,811
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,746,545 19,745,651
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . 364,178 280,905
Unearned ESOP shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (77,922) (124,467)
Treasury Stock, at cost; 487,287 and 304,173 shares, respectively. . . . . . . (6,501,958) (3,815,024)
------------------------------------------------------------------------------------------------------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . 21,784,809 23,230,022
------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . $277,939,829 $279,055,867
============================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
18
STATEMENTS OF INCOME
Years Ended December 31,
-------------------------------------------------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees . . . . . . . . . . . . . . . . . . . . $12,832,605 $12,935,710 $12,555,321
Debt securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,033,991 2,256,550 3,201,319
Tax-exempt. . . . . . . . . . . . . . . . . . . . . . . . . . . 226,131 322,091 335,619
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . 159,203 180,494 181,099
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,821 116,927 64,585
-------------------------------------------------------------------------------------------------------
Total interest income. . . . . . . . . . . . . . . . . . 15,284,751 15,811,772 16,337,943
-------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits. . . . . . . . . . . . . . . . . . . . . . 3,750,654 4,656,015 6,099,776
Interest on short-term borrowings . . . . . . . . . . . . . . . 31,236 331,962 697,945
Interest on long-term borrowings. . . . . . . . . . . . . . . . 1,930,333 1,896,473 1,687,218
Interest on company obligated mandatorily redeemable preferred
securities of subsidiary. . . . . . . . . . . . . . . . . . . . 235,723 138,119 -
-------------------------------------------------------------------------------------------------------
Total interest expense. . . . . . . . . . . . . . . . . . . . . 5,947,946 7,022,569 8,484,939
-------------------------------------------------------------------------------------------------------
Net interest income . . . . . . . . . . . . . . . . . . . . . . 9,336,805 8,789,203 7,853,004
PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . 597,766 1,374,989 707,899
-------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses . . . . . . 8,739,039 7,414,214 7,145,105
-------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts . . . . . . . . . . . . . . 817,661 628,633 520,483
Increase in value of bank owned life insurance. . . . . . . . . 170,879 179,246 245,909
Loan servicing fees . . . . . . . . . . . . . . . . . . . . . . 281,898 265,465 174,784
Net gains on sales and impairment of investment securities. . . 542,501 389,779 749,237
Net gains (losses) on sales of loans and foreclosed real estate 326,164 192,853 (240,241)
Other charges, commissions & fees . . . . . . . . . . . . . . . 468,830 438,394 413,589
-------------------------------------------------------------------------------------------------------
Total other income. . . . . . . . . . . . . . . . . . . . . . . 2,607,933 2,094,370 1,863,761
-------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits. . . . . . . . . . . . . . . . . 4,454,931 3,756,961 2,982,879
Building occupancy. . . . . . . . . . . . . . . . . . . . . . . 1,004,079 795,957 820,085
Data processing expenses. . . . . . . . . . . . . . . . . . . . 867,957 920,364 781,495
Professional and other services . . . . . . . . . . . . . . . . 770,266 857,866 719,122
Amortization of intangible asset. . . . . . . . . . . . . . . . 223,300 39,258 315,755
Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . 1,773,853 1,593,838 1,243,301
-------------------------------------------------------------------------------------------------------
Total other expenses. . . . . . . . . . . . . . . . . . . . . . 9,094,386 7,964,244 6,862,637
-------------------------------------------------------------------------------------------------------
Income before income taxes. . . . . . . . . . . . . . . . . . . 2,252,586 1,544,340 2,146,229
Provision for income taxes. . . . . . . . . . . . . . . . . . . 600,923 388,061 543,739
-------------------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,651,663 $ 1,156,279 $ 1,602,490
=======================================================================================================
NET INCOME PER SHARE - BASIC. . . . . . . . . . . . . . . . . . $ 0.68 $ 0.45 $ 0.62
=======================================================================================================
NET INCOME PER SHARE - DILUTED. . . . . . . . . . . . . . . . . $ 0.67 $ 0.44 $ 0.62
=======================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
19
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Issued Additional
------------------- Paid-in Retained
Shares Amount Capital Earnings
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000. . . . . . . 2,884,720 $288,472 $6,562,085 $17,859,388
Comprehensive income:
Net income. . . . . . . . . . . . . . . 1,602,490
Reduction in par value of common stock. (259,625) 259,625
ESOP shares earned. . . . . . . . . . . 33,692
Stock option exercised. . . . . . . . . 9,500 95 62,415
Treasury stock purchased
Dividends declared ($.26 per share) . . (446,239)
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001. . . . . . . 2,894,220 28,942 6,917,817 19,015,639
Comprehensive income:
Net income. . . . . . . . . . . . . . . 1,156,279
ESOP shares earned. . . . . . . . . . . 57,340
Stock option exercised. . . . . . . . . 20,449 204 138,654
Treasury stock purchased
Dividends declared ($.30 per share) . . (426,267)
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002. . . . . . . 2,914,669 29,146 7,113,811 19,745,651
Comprehensive income:
Net income. . . . . . . . . . . . . . . 1,651,663
ESOP shares earned. . . . . . . . . . . 75,635
Stock option exercised. . . . . . . . . 4,717 48 35,326
Treasury stock purchased
Dividends declared ($.40 per share) . . (650,769)
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003. . . . . . . 2,919,386 $ 29,194 $7,224,772 $20,746,545
=======================================================================================
20
Accumulated
Other Com- Unearned
Comprehensive prehensive ESOP Treasury
Income Income Shares Stock Total
-----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000. . . . . . . $ 30,919 $(227,230) $(3,551,159) $20,962,475
Comprehensive income:
Net income. . . . . . . . . . . . . . . $1,602,490 1,602,490
Unrealized gains on securities:
Unrealized holding gains arising
during period . . . . . . . . . . . . . 832,429
Reclassification adjustment for
gains included in net income. . . . . . (749,237)
------------
Other comprehensive income, before tax. 83,192
Income tax provision. . . . . . . . . . (33,459)
------------
Other comprehensive income, net of tax
and reclassification adjustment . . . . 49,733 49,733 49,733
------------
Comprehensive income: . . . . . . . . . $1,652,223
============
Reduction in par value of common stock. -
ESOP shares earned. . . . . . . . . . . 54,088 87,780
Stock option exercised. . . . . . . . . 62,510
Treasury stock purchased. . . . . . . . (134,000) (134,000)
Dividends declared ($.26 per share) . . (446,239)
-------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001. . . . . . . 80,652 (173,142) (3,685,159) 22,184,749
Comprehensive income:
Net income. . . . . . . . . . . . . . . $1,156,279 1,156,279
Unrealized gains on securities:
Unrealized holding gains arising
during period . . . . . . . . . . . . . 723,235
Reclassification adjustment for
gains included in net income. . . . . . (389,779)
------------
Other comprehensive income, before tax. 333,456
Income tax provision. . . . . . . . . . (133,203)
------------
Other comprehensive income, net of tax
and reclassification adjustment . . . . 200,253 200,253 200,253
------------
Comprehensive income: . . . . . . . . . $1,356,532
============
ESOP shares earned. . . . . . . . . . . 48,675 106,015
Stock option exercised. . . . . . . . . 138,858
Treasury stock purchased. . . . . . . . (129,865) (129,865)
Dividends declared ($.30 per share) . . (426,267)
-----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002. . . . . . . 280,905 (124,467) (3,815,024) 23,230,022
Comprehensive income:
Net income. . . . . . . . . . . . . . . $1,651,663 1,651,663
Unrealized gains on securities:
Unrealized holding gains arising
during period . . . . . . . . . . . . . 681,290
Reclassification adjustment for
gains included in net income. . . . . . (542,501)
------------
Other comprehensive income, before tax. 138,789
Income tax provision. . . . . . . . . . (55,516)
------------
Other comprehensive income, net of tax
and reclassification adjustment . . . . 83,273 83,273 83,273
------------
Comprehensive income: . . . . . . . . . $1,734,936
============
ESOP shares earned. . . . . . . . . . . 46,545 122,180
Stock option exercised. . . . . . . . . 35,374
Treasury stock purchased. . . . . . . . (2,686,934) (2,686,934)
Dividends declared ($.40 per share) . . (650,769)
-------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003. . . . . . . $364,178 $ (77,922) $(6,501,958) $21,784,809
=============================================================================================================
21
STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,651,663 $ 1,156,279 $ 1,602,490
Adjustments to reconcile net income to net cash provided by (used in) operating
activities
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 597,766 1,374,989 707,899
ESOP shares earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,180 106,015 87,780
Deferred income tax expense (benefit). . . . . . . . . . . . . . . . . . . . . . 306,924 292,546 (296,228)
Proceeds from sale of loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 23,380,281 19,611,815 14,109,043
Originations of loans held-for-sale. . . . . . . . . . . . . . . . . . . . . . . (23,049,083) (17,759,391) (20,102,155)
Realized (gains) losses on sales of:
Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (91,466) 5,283 133,451
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (234,698) (198,136) 106,790
Available-for-sale investment securities . . . . . . . . . . . . . . . . . . . . (542,501) (389,779) (749,237)
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542,250 469,474 465,591
Amortization of intangible asset . . . . . . . . . . . . . . . . . . . . . . . . 223,300 39,258 315,755
Amortization of deferred financing costs . . . . . . . . . . . . . . . . . . . . 30,204 15,100 -
Increase in surrender value of life insurance. . . . . . . . . . . . . . . . . . (170,879) (179,246) (245,909)
Net accretion of premiums and discounts on investment securities . . . . . . . . 287,759 (27,369) (4,185)
Decrease in interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . 60,625 131,221 213,242
Net change in other assets and liabilities . . . . . . . . . . . . . . . . . . . 280,761 (624,017) 426,772
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . 3,395,086 4,024,042 (3,228,901)
------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of investment securities available-for-sale and
Federal Home Loan Bank Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . (25,780,354) (21,452,772) (2,152,878)
Proceeds from maturities and principal reductions of
investment securities available-for-sale . . . . . . . . . . . . . . . . . . . . 19,898,202 11,272,921 5,078,515
Proceeds from sale:
Available-for-sale investment securities . . . . . . . . . . . . . . . . . . . . 9,174,531 1,847,060 9,601,934
Real estate acquired through foreclosure . . . . . . . . . . . . . . . . . . . . 1,890,486 369,768 466,517
Net cash received in branch acquisition. . . . . . . . . . . . . . . . . . . . . - 21,324,109 -
Net increase in loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,203,115) (16,723,674) (15,281,529)
Purchase of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . (1,570,521) (911,275) (783,326)
------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . (5,590,771) (4,273,863) (3,070,767)
------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, savings accounts,
money management deposit accounts and escrow deposits . . . . . . . . . . . . . . 5,429,106 6,423,999 10,485,060
Net (decrease) increase in time deposits . . . . . . . . . . . . . . . . . . . . (3,057,400) 2,109,923 (2,355,203)
Net proceeds from (repayments on) short-term borrowings. . . . . . . . . . . . . 1,400,000 (16,518,000) 6,096,000
Payments on long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . (9,000,000) (3,912,500) (21,885,000)
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . 5,700,000 13,850,000 18,000,000
Proceeds from issuance of mandatorily redeemable preferred securities. . . . . . - 4,849,000 -
Proceeds from exercise of stock options. . . . . . . . . . . . . . . . . . . . . 35,374 138,858 62,510
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (651,084) (415,145) (531,086)
Treasury stock purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,686,934) (129,865) (134,000)
-----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . (2,830,938) 6,396,270 9,738,281
------------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in cash and cash equivalents. . . . . . . . . . . . . . . . . (5,026,623) 6,146,449 3,438,613
Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . . . . 13,740,405 7,593,956 4,155,343
Cash and cash equivalents at end of period. . . . . . . . . . . . . . . . . . . . $ 8,713,782 $ 13,740,405 $ 7,593,956
==============================================================================================================================
CASH PAID DURING THE PERIOD FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,990,930 $ 7,122,065 $ 8,555,605
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000 850,000 632,500
NON-CASH INVESTING ACTIVITY:
Transfer of loans to foreclosed real estate. . . . . . . . . . . . . . . . . . . 604,955 1,138,300 348,113
Securitization of loans and held as an investment security . . . . . . . . . . . - - 1,355,095
The accompanying notes are an integral part of the consolidated financial
statements
22
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 subsidiaries,
Pathfinder Bank (the "Bank") and Pathfinder Statutory Trust I. Pathfinder
Statutory Trust I was formed in 2002 for the purpose of issuing mandatorily
redeemable convertible securities, which are considered Tier I capital under
regulatory capital adequacy requirements (See Note 17). The Bank has three
wholly owned operating subsidiaries, Pathfinder Commercial Bank, Whispering Oaks
Development Inc. and Pathfinder REIT, Inc. All inter-company accounts and
activity have been eliminated in consolidation. The Company has six full
service offices located in Oswego 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 one-to-four family residential real estate, commercial real
estate, business assets and investment securities.
Pathfinder Bancorp, M.H.C., (the "Holding Company") a mutual holding company
whose activity is not included in the accompanying financial statements, owns
approximately 65.1% of the outstanding common stock of the Company. Salaries,
employee benefits and rent approximating $124,000, $115,000 and $101,000 were
allocated from the Company to Pathfinder Bancorp, M.H.C. during 2003, 2002 and
2001, respectively.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of 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 to be the accounting
area that requires 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 parts of Onondaga counties of New York State. 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.
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 available-for-sale.
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. None of the Company's investment securities
have been classified as trading or held-to-maturity securities.
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
first call or maturity.
The Company monitors investment securities for impairment on a quarterly basis
by analyzing security credit ratings and related fair market values. When
significant declines in fair market values or credit ratings are determined to
be other than temporary, appropriate action is taken.
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.
MORTGAGE LOANS HELD-FOR-SALE
Mortgage loans held-for-sale are carried at the lower of cost or fair value.
Fair value is determined in the aggregate. As of December 31, 2003, the Company
had approximately $2.1 million of mortgage loan forward commitments outstanding
to hedge interest rate risk on certain committed and originated loans. The
difference between the settlement value of the forward commitments and the fair
value of these commitments at December 31, 2003 was not significant. As of
December 31, 2002, the Company had no outstanding mortgage loan forward
commitments.
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.
23
LOANS
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan origination fees and costs. 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.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The Company periodically evaluates the adequacy of the allowance for loan losses
in order to maintain the allowance at a level that is sufficient to absorb
probable credit losses. Management's evaluation of the adequacy of the
allowance is based on a review of the Company's historical loss experience,
known and inherent risks in the loan portfolio and an analysis of the levels and
trends of delinquencies and charge-offs.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as impaired. For
impaired loans, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors. An 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.
A loan is considered impaired, based on current information and events, if it is
probable 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. The measurement of impaired loans is generally based upon the
present value of future cash flows discounted at the historical effective rate,
except that all collateral-dependent loans are measured for impairment based on
fair values of collateral.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures.
INCOME RECOGNITION ON IMPAIRED AND NON-ACCRUAL LOANS
Loans, including impaired loans, are generally classified as non-accrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days. When a loan is classified as non-accrual and the future
collectibility of the recorded loan balance is doubtful, collections of interest
and principal are generally applied as a reduction to principal outstanding.
When future collectibility of the recorded loan balance is expected, interest
income may be recognized on a cash basis. In the case where a non-accrual 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 39 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
Properties acquired through foreclosure, or by deed in lieu of foreclosure, are
carried at the fair value less estimated disposal costs. Write downs of, and
expenses related to, foreclosed real estate holdings included in noninterest
expense were $124,000, $155,000 and $99,000 in 2003, 2002 and 2001,
respectively.
INTANGIBLE ASSETS
Intangible assets represent core deposit intangibles and goodwill arising from
acquisitions. Core deposit intangibles represent the premium the Company has
paid for deposits acquired in excess of the cost incurred had the funds been
purchased in the capital markets. Core deposit intangibles are amortized on a
straight-line basis over a period of five years. Goodwill represents the excess
cost of an acquisition over the fair value of the net assets acquired. On
January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other Intangible
Assets," and SFAS 147, "Accounting for Certain Acquisitions of Banking and
Thrift Institutions." Under the provisions of SFAS 142 and SFAS 147, effective
January 1, 2002, goodwill is no longer ratably amortized into the income
statement over an estimated life, but rather is tested at least annually for
24
impairment using fair value methodologies. Prior to the adoption of SFAS 142
and SFAS 147, the Company's goodwill was amortized on a straight-line basis over
15 years resulting in amortization expense of $193,000 in 2001. Amortization
expense related to core deposit intangibles is estimated to be $850,000 for 2004
through 2008.
MORTGAGE SERVICING RIGHTS
Originated mortgage servicing rights are recorded at their fair value at the
time of transfer 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.
STOCK-BASED COMPENSATION
The Company accounts for stock awards issued to directors, officers and key
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25. This method requires that compensation expense
be recognized to the extent that the fair value of the stock exceeds the
exercise price of the stock award at the grant date. The Company generally does
not recognize compensation expense related to stock awards because the stock
awards generally have fixed terms and exercise prices that are equal to or
greater than the fair value of the Company's common stock at the grant date.
Pro forma amounts of net income and earnings per share under Statement of
Financial Accounting Standards No. 123 are as follows:
2003 2002 2001
-------------------------------------------------------------------------
Net Income:
As reported . . . . . . . . . . . . . $1,651,663 $1,156,279 $1,602,490
Total stock-based compensation
cost, net of tax, that would have
been included in the determination
of net income if the fair value based
method had been applied to all awards 28,278 108,766 146,009
-------------------------------------------------------------------------
Pro forma . . . . . . . . . . . . . . $1,623,385 $1,047,513 $1,456,481
=========================================================================
2003 2002 2001
-------------------------------------------------------------------------
Earnings per share: Basic Diluted Basic Diluted Basic Diluted
------------------- ------ -------- ------ -------- ------ --------
As reported . . . . $ 0.68 $ 0.67 $ 0.45 $ 0.44 $ 0.62 $ 0.62
Pro forma . . . . . $ 0.67 $ 0.66 $ 0.41 $ 0.40 $ 0.57 $ 0.56
The fair value of these options was estimated at the date of grant using the
Black-Scholes options pricing model with the following assumptions: risk free
interest rate - 5.0%; dividend yield - 2.0%; market price volatility - 52.4%. An
assumed weighted average option life of 6 years has been utilized. For purposes
of pro forma disclosures, the estimated fair value of the options is amortized
to expense over the options' vesting period. Therefore, the foregoing pro forma
results are not likely to be representative of the effects of reported net
income of future periods due to additional years of vesting. No options were
granted during 2003 and 2002. The weighted-average fair value per share of
granted options during 2001 was $3.90.
RETIREMENT BENEFITS
The Company has established tax qualified retirement plans covering
substantially all full-time employees and certain part-time employees. 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. In addition, 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.
TREASURY STOCK
Treasury stock purchases are recorded at cost. In 2003, 2002 and 2001, the
Company purchased 183,114, 11,000 and 10,000 shares of treasury stock at an
average cost of $14.67, $11.86 and 13.40 per share, respectively. 160,114 of
the shares purchased by the Company in 2003 related to a privately negotiated
stock repurchase from Jewelcor Management Inc. The shares were purchased at
$14.60 per share and represented approximately 6.1% of the Company's outstanding
common stock as of December 31, 2002. The privately negotiated transaction was
not part of the share repurchase program in effect for that period. The Company
believes repurchase programs to be in the best interest of its shareholders as a
method to enhance long-term shareholder value.
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 financial statements.
Deferred tax assets and liabilities are reported in the 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 share are computed by dividing net income by the weighted
average number of common shares outstanding throughout each year. Diluted
earnings per share gives effect to weighted average shares that would be
outstanding assuming the exercise of issued stock options using the treasury
stock method.
25
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
RECLASSIFICATIONS
Certain amounts from 2002 and 2001 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
In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." This Interpretation expands the disclosures to be made by a guarantor
in its financial statements about its obligations under certain guarantees and
requires the guarantor to recognize a liability for the fair value of an
obligation assumed under certain specified guarantees. Under FIN 45, the
Company does not issue any guarantees that would require liability recognition
or disclosure, other than its standby letters of credit, as discussed in Note
15. Adoption of FIN 45 did not have a significant impact on the Company's
financial condition or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." FIN 46 was revised in December 2003. This
Interpretation provides new guidance for the consolidation of variable interest
entities ("VIEs") and requires such entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risk among parties
involved. The Interpretation also adds disclosure requirements for investors
that are involved with unconsolidated VIEs. The disclosure requirements apply
to all financial statements issued after December 31, 2003. The consolidation
requirements apply to companies that have interests in special-purpose entities
for periods ending after December 15, 2003. Consolidation of other types of VIEs
is required in financial statements for periods ending after March 15, 2004.
The adoption of this Interpretation did not have, and is not expected to have, a
material impact on the Company's financial condition or results of operations.
In its current form, FIN 46 will require the Company to deconsolidate its
investment in Pathfinder Statutory Trust I (the "Trust") on the March 15, 2004
effective date. The deconsolidation will result in an additional asset and
borrowings of $155,000. The deconsolidation of subsidiary trusts of bank
holding companies formed in connection with the issuance of trust preferred
securities, like the Trust, appears to be an unintended consequence of FIN 46.
In July 2003, the Board of Governors of the Federal Reserve System issued a
supervisory letter instructing bank holding companies to continue to include the
trust preferred securities in their Tier 1 capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of any accounting treatment changes and, if
necessary or warranted, provide further appropriate guidance. When the Trust is
no longer included in consolidated results, the Company will still meet all
regulatory capital requirements to which it is subject.
In April 2003, the Financial Accounting Standards Board (FASB) issued Statement
No. 149, "Amendment of Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities." This Statement clarifies the definition of a
derivative and incorporates certain decisions made by the Board as part of the
Derivatives Implementation Group process. This Statement is effective for
contracts entered into or modified and for hedging relationships designated
after June 30, 2003 and should be applied prospectively. The provisions of the
Statement that relate to implementation issues addressed by the Derivatives
Implementation Group that have been effective should continue to be applied in
accordance with their respective dates. Adoption of this standard did not have
an impact on the Company's financial condition or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This Statement requires that an issuer classify a
financial instrument that is within its scope as a liability. Many of these
instruments were previously classified as equity. This Statement was effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise was effective beginning July 1, 2003 and did not have an impact on the
Company's financial condition or results of operations.
NOTE 3: ACQUISITION
On October 25, 2002, the Company's subsidiary, Pathfinder Bank, acquired the
Lacona, New York branch of Cayuga Bank. In conjunction with the acquisition,
the Bank formed a limited-purpose commercial bank subsidiary, Pathfinder
Commercial Bank, to serve the depository needs of public entities in its market
area and to assume the municipal deposit liabilities of the Lacona branch. The
transaction included approximately $26,400,000 in deposits, $2,300,000 in loans
and $430,000 in vault cash and facilities and equipment. The acquisition
reflects a premium on deposits liabilities assumed of approximately $2,400,000.
The results of the Lacona branch operation have been included in the
consolidated financial statements since the date of acquisition. As a result of
the acquisition, the Company has expanded its service area and now has the
ability to serve the needs of public entities in the market area.
26
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed as of the acquisition date:
Cash. . . . . . . . . . . . $21,558,800
Loans receivable. . . . . . 2,260,000
Allowance for loan losses . (56,500)
-----------------------------------------
Net loans receivable. . . . 2,203,500
Bank premises and equipment 251,000
Other assets. . . . . . . . 9,700
Intangible assets . . . . . 2,376,000
Total assets. . . . . . . . $26,399,000
=========================================
Deposits. . . . . . . . . . 26,399,000
-----------------------------------------
Total liabilities. . . . . $26,399,000
=========================================
Intangible assets include $1,100,000 in core deposit intangibles amortized over
a weighted-average useful life of 5 years. Accumulated amortization approximated
$262,000 and $39,000 at December 31, 2003 and 2002, respectively. The remaining
$1,300,000 in intangible assets represents goodwill. Amortization of goodwill
and the core deposit intangible is deductible for tax purposes.
NOTE 4: INVESTMENT SECURITIES - AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of investment securities are
summarized as follows:
December 31, 2003
-------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------------------
Bond investment securities:
US treasury and agencies . . . . $ 6,353,640 $ 47,942 $ (75,559) $ 6,326,023
State and political subdivisions 7,359,256 304,166 (323) 7,663,099
Corporate. . . . . . . . . . . . 6,420,909 344,674 (70,025) 6,695,558
Mortgage-backed. . . . . . . . . 29,733,939 387,836 (187,937) 29,933,838
-------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . 49,867,744 1,084,618 (333,844) 50,618,518
Equity investments . . . . . . . 7,083,988 347,300 (491,110) 6,940,178
-------------------------------------------------------------------------------------------
Total investment securities. . . $ 56,951,732 $ 1,431,918 $ (824,954) $57,558,696
============================================================================================
December 31, 2002
-------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------------------
Bond investment securities:
US treasury and agencies . . . . $ 4,378,243 $ 87,728 $ (1,514) $ 4,464,457
State and political subdivisions 8,549,215 337,409 (22,719) 8,863,905
Corporate. . . . . . . . . . . . 15,375,316 429,445 (534,501) 15,270,260
Mortgage-backed. . . . . . . . . 24,439,493 727,012 (6,676) 25,159,829
-------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . 52,742,267 1,581,594 (565,410) 53,758,451
Equity investments . . . . . . . 7,052,102 - (548,009) 6,504,093
-------------------------------------------------------------------------------------------
Total investment securities. . . $ 59,794,369 $ 1,581,594 $(1,113,419) $60,262,544
============================================================================================
Gross gains of $581,000, $665,000 and $759,000 for 2003, 2002 and 2001,
respectively and gross losses of $38,000, $275,000 and $9,000 for 2003, 2002 and
2001, respectively were realized on sales and calls of securities. The $275,000
loss in 2002 represented an impairment loss recognized on a corporate debt
security. This security was sold during 2003 and a gain of $178,000 was
recognized after reversal of the 2002 impairment reserve.
Investment securities with a carrying value of $12,477,000 at December 31, 2003
were pledged to collateralize certain deposit and borrowing arrangements.
The amortized cost and estimated fair value of debt investments at December 31,
2003 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.
Amortized Estimated
Cost Fair Value
----------------------------------------------------------------
Due in one year or less. . . . . . . . $ 582,606 $ 598,562
Due after one year through five years. 12,041,628 12,406,059
Due after five years through ten years 2,589,202 2,758,978
Due after ten years. . . . . . . . . . 4,920,369 4,921,081
Mortgage-backed securities . . . . . . 29,733,939 29,933,838
----------------------------------------------------------------
Totals . . . . . . . . . . . . . . . . $49,867,744 $50,618,518
================================================================
27
The following table shows 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 at
December 31, 2003.
December 31, 2003
--------------------------------------------------------------------------------------------------------------------------
Less than Twelve Twelve Months
Months or More Total
--------------------------------------------------------------------------------------------------------------------------
Unrealized Fair Unrealized Fair Unrealized Fair
Losses Value Losses Value Losses Value
--------------------------------------------------------------------------------------------------------------------------
US treasury and agency securities. . . . . $ (60,390) $ 3,835,398 $ (15,169) $ 165,387 $ (75,559) $ 4,000,785
State and political subdivision securities (323) 114,677 - - (323) 114,677
Corporate securities . . . . . . . . . . . - - (70,025) 1,879,020 (70,025) 1,879,020
Mortgage-backed securities . . . . . . . . (137,459) 10,076,014 (50,478) 3,220,434 (187,937) 5,642,191
Equity investment securities . . . . . . . (16,601) 3,115,467 (474,509) 2,633,952 (491,110) 5,749,419
--------------------------------------------------------------------------------------------------------------------------
$ (214,773) $17,141,556 $ (610,181) $7,898,793 $ (824,954) $17,386,092
==========================================================================================================================
The above noted declines in fair value relating to 36 mortgage-backed and debt
securities are considered temporary by management, as the collection of
contractual amounts of principal and interest are deemed probable, and the
company has the intent and ability to hold the individual securities to
maturity.
The Company's equity investment holdings with fair values less than their
carrying amounts for a period in excess of twelve months represent investments
in a fund consisting primarily of dividend paying common stocks of large
capitalization companies with market capitalization in excess of $5 billion,
representing investment grade corporate securities. The fund performance has
historically closely correlated to overall market trends and management is
confident that this close correlation will continue. Over the past twelve
months, the overall fund value has increased in excess of 25% and a review of
the underlying securities that comprise the fund indicates no individual
impaired holdings and there is no indication that the profitability of these
corporations is impaired beyond the economic cycle. Thus, the unrealized loss is
considered temporary.
NOTE 5: LOANS
Major classifications of loans at December 31, are as follows:
2003 2002
------------------------------------------------------------
Real estate mortgages:
Conventional . . . . . . . . . $120,657,337 $114,880,488
Construction . . . . . . . . . 4,374,721 4,388,792
Commercial . . . . . . . . . . 31,278,158 32,657,177
------------------------------------------------------------
156,310,216 151,926,457
------------------------------------------------------------
Other loans:
Consumer . . . . . . . . . . . 3,833,743 3,718,774
Home Equity/2nd Mortgage . . . 12,948,290 11,151,317
Passbook loans . . . . . . . . 97,798 198,113
Lease financing. . . . . . . . 50,825 431,555
Commercial . . . . . . . . . . 15,039,129 12,764,633
------------------------------------------------------------
31,969,785 28,264,392
------------------------------------------------------------
Total loans. . . . . . . . . . 188,280,001 180,190,849
------------------------------------------------------------
Net deferred loan costs. . . . 437,016 291,435
Less allowance for loan losses (1,715,213) (1,480,874)
------------------------------------------------------------
Loans receivable, net. . . . . $187,001,804 $179,001,410
============================================================
The Company grants mortgage and consumer loans to customers throughout Oswego
and parts of Onondaga counties. Although the Company has a diversified loan
portfolio, a substantial portion of its debtor's ability to honor their
contracts is dependent upon the counties' employment and economic conditions.
The following represents the approximate activity associated with loans to
officers and directors during the fiscal year ending December 31, 2003:
Balance at beginning of year $ 5,341,000
Originations . . . . . . . . 1,089,000
Principal payments . . . . . (1,120,000)
------------------------------------------
Balance at end of year . . . $ 5,310,000
==========================================
NOTE 6: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the year ended December 31, are
summarized as follows:
2003 2002 2001
--------------------------------------------------------------------
Balance at beginning of year $1,480,874 $ 1,679,215 $1,273,707
Recoveries credited. . . . . 37,323 31,916 62,330
Provision for loan losses. . 597,766 1,374,989 707,899
Allowance on acquired loans. - 56,500 -
Loans charged-off. . . . . . (400,750) (1,661,746) (364,721)
--------------------------------------------------------------------
Balance at end of year . . . $1,715,213 $ 1,480,874 $1,679,215
====================================================================
The following is a summary of information pertaining to impaired loans.
For the Year Ended December 31, 2003
---------------------------------------------------------
Impaired loans without a valuation allowance. $ -
Impaired loans with a valuation allowance . . 3,804,000
---------------------------------------------------------
Total impaired loans. . . . . . . . . . . . . $3,804,000
=========================================================
Valuation allowance related to impaired loans $ 527,000
Average investment in impaired loans. . . . . $3,446,000
Interest income recognized on impaired loans. $ 139,000
Interest income recognized on a cash basis on
impaired loans. . . . . . . . . . . . . . . . $ 93,000
As of December 31, 2003, no additional funds are committed to be advanced in
connection with impaired loans. At December 31, 2002 and 2001, the Company had
no loans classified as impaired.
The amount of loans on which the Company has ceased accruing interest aggregated
approximately $2,992,000 and $1,711,000 at December 31, 2003 and 2002,
respectively. There were no loans past due ninety days or more and still
accruing interest at December 31, 2003, 2002 or 2001.
28
NOTE 7: SERVICING
Loans serviced for others are not included in the accompanying consolidated
statements of condition. The unpaid principal balances of mortgage and other
loans serviced for others were $47.6 million and $41.4 million at December 31,
2003 and 2002, respectively.
The balance of capitalized servicing rights included in other assets at December
31, 2003 and 2002, was $257,000 and $200,000, respectively.
The following summarizes mortgage-servicing rights capitalized and amortized:
2003 2002 2001
----------------------------------------------------------
Mortgage servicing rights capitalized $ 179 $ 152 $ 131
----------------------------------------------------------
Mortgage servicing rights amortized . $ 122 $ 84 $ 39
----------------------------------------------------------
NOTE 8: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, is as follows:
2003 2002
--------------------------------------------------------
Land . . . . . . . . . . . . . . $ 674,773 $ 674,773
Buildings. . . . . . . . . . . . 5,171,939 4,287,046
Furniture, fixture and equipment 5,057,003 4,606,257
Construction in progress . . . . 471,364 309,279
--------------------------------------------------------
11,375,079 9,877,355
Less: Accumulated depreciation . 4,724,637 4,255,184
--------------------------------------------------------
$ 6,650,442 $5,622,171
=========================================================
NOTE 9: DEPOSITS
A summary of deposits at December 31, is as follows:
2003 2002
--------------------------------------------------------------
Savings accounts . . . . . . . . . $ 66,683,019 $ 65,843,713
Time accounts. . . . . . . . . . . 68,428,288 70,276,112
Time accounts over $100,000. . . . 14,618,101 15,827,677
Money management accounts. . . . . 22,337,225 19,765,014
Demand deposit interest-bearing. . 16,968,962 15,404,423
Demand deposit noninterest-bearing 15,789,957 15,764,382
Mortgage escrow funds. . . . . . . 2,068,259 1,640,784
--------------------------------------------------------------
$206,893,811 $204,522,105
==============================================================
At December 31, 2003, the schedules maturities of time deposits are as follows:
Year of Maturity Amount
-----------------------------
2004 . . . . . . $47,228,000
2005 . . . . . . 14,289,000
2006 . . . . . . 11,249,000
2007 . . . . . . 4,048,000
2008 . . . . . . 1,171,000
Thereafter . . . 5,061,000
-----------------------------
$83,046,000
=============================
NOTE 10: BORROWED FUNDS
The composition of borrowings at December 31 is as follows:
2003 2002
--------------------------------------------------------------------------------
Short-term:
FHLB Advances . . . . . . . . . . . . . . . . . . . . $ 2,100,000 $ 700,000
Total short-term. . . . . . . . . . . . . . . . . . . 2,100,000 700,000
--------------------------------------------------------------------------------
Long-term:
FHLB Repurchase agreements. . . . . . . . . . . . . . 3,400,000 3,400,000
FHLB advances . . . . . . . . . . . . . . . . . . . . 35,460,000 38,760,000
--------------------------------------------------------------------------------
Total long-term . . . . . . . . . . . . . . . . . . . 38,860,000 42,160,000
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the Company. . . . . . . . 5,000,000 5,000,000
--------------------------------------------------------------------------------
Total borrowings. . . . . . . . . . . . . . . . . . . $45,960,000 $ 47,860,000
================================================================================
The principal balance, interest rate and maturity of the above borrowings at
December 31, 2003 is as follows:
Term. . . . . . . . . . . . . . . . . . . . . . . . . Principal Rates
--------------------------------------------------------------------------------
Short-term:
Advances with FHLB
due within 3-6 months . . . . . . . . . . . . . . . . $ 1,100,000 1.30%
due within 6 months to 1 year . . . . . . . . . . . . 1,000,000 1.27%
--------------------------------------------------------------------------------
Total short-term borrowings . . . . . . . . . . . . . $ 2,100,000
================================================================================
Long-term:
Repurchase agreements (due in 2006 and 2009). . . . . 3,400,000 5.56% -5.85%
--------------------------------------------------------------------------------
Advances with FHLB
due within 2 years. . . . . . . . . . . . . . . . . . 10,500,000 2.07%-5.43%
due within 3 years. . . . . . . . . . . . . . . . . . 7,000,000 4.13%-5.32%
due within 4 years. . . . . . . . . . . . . . . . . . 11,350,000 3.00%-5.04%
due after 5 years . . . . . . . . . . . . . . . . . . 6,610,000 2.67%-6.00%
--------------------------------------------------------------------------------
Total advances with FHLB. . . . . . . . . . . . . . . 35,460,000
------------------------------------------------------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the Company. . . . . . . . 5,000,000 LIBOR+3.45%
--------------------------------------------------------------------------------
Total long-term borrowings. . . . . . . . . . . . . . $43,860,000
================================================================================
Other information related to short term borrowings is as follows:
2003 2002 2001
------------------------------------------------------------------------------------
Maximum outstanding at any month end . . . $12,000,000 $20,668,000 $20,218,000
Average amount outstanding during the year 2,660,000 7,164,000 15,240,000
Average interest rate during the year. . . 1.17% 4.63% 4.56%
The repurchase agreements with the Federal Home Loan Bank ("FHLB") are
collateralized by certain investment securities, real estate mortgages and cash,
which had a carrying value of $3,400,000 at December 31, 2003. The collateral
29
is under the Company's control. The line of credit agreement with the FHLB is
used for liquidity purposes. Interest on this line is determined at the time
of borrowing. The average rate paid on the overnight line during 2003
approximated 0.97%. At December 31, 2003, $14,104,000 was available under the
line of credit. In addition to the overnight line of credit program, the
Company also has access to the FHLB's Term Advance Program under which it can
borrow at various terms and interest rates. Residential mortgage loans with a
carrying value of $101,940,000 have been pledged by the Company under a blanket
collateral agreement to secure the Company's line of credit and term borrowings.
On June 26, 2002, the Company formed a wholly owned subsidiary, Pathfinder
Statutory Trust I, a Connecticut business trust. The Trust issued $5,000,000 of
30 year floating rate Company-obligated pooled capital securities of Pathfinder
Statutory Trust I. 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 2032 and are treated as Tier 1 capital by the Federal Deposit
Insurance Company and the Office of Thrift Supervision. 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 plus 3.45% (4.62% at December 31, 2003)
with a five-year call provision. The Company guarantees all of these
securities. The Company capitalized $151,000 of deferred financing costs
associated with the debt issuance, which are being amortized on a straight-line
basis over the 5-year period to call date.
NOTE 11: EMPLOYEE BENEFITS, 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. In addition, the Company provides certain
health and life insurance benefits for 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 Company uses an October 1 measurement date for the defined benefit plan and
a December 31 measurement date for the postretirement benefit plan.
The following tables set forth the changes in the plan's benefit obligation,
fair value of plan assets and prepaid (accrued) benefit (cost) as of December
31, 2003 and 2002:
Pension Benefits Postretirement Benefits
--------------------------------------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------------------------------------------
Change in benefit obligations:
Benefit obligation at beginning of year . . . . $3,031,096 $2,479,215 $ 367,576 $ 362,456
Service cost. . . . . . . . . . . . . . . . . . 153,883 118,697 1,939 1,708
Interest cost . . . . . . . . . . . . . . . . . 200,169 183,781 20,795 22,461
Actuarial gain. . . . . . . . . . . . . . . . . 165,360 402,687 453 14,762
Plan participants' contributions. . . . . . . . - - 7,208 -
Benefit paid. . . . . . . . . . . . . . . . . . (150,558) (157,424) (27,915) (33,811)
Settlements . . . . . . . . . . . . . . . . . . (17,615) - - -
Plan amendment. . . . . . . . . . . . . . . . . - 4,140 (3,081) -
--------------------------------------------------------------------------------------------------
Benefit obligation at end of year . . . . . . . $3,382,335 $3,031,096 $ 366,975 $ 367,576
--------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year. $2,492,524 $2,598,427 $ - $ -
Actual return (loss) on plan assets . . . . . . 266,103 (328,553) - -
Plan participants' contributions. . . . . . . . - - 7,208 -
Benefits paid . . . . . . . . . . . . . . . . . (150,558) (157,424) (27,915) (33,811)
Employer contributions. . . . . . . . . . . . . 201,840 380,074 20,707 33,811
Settlements . . . . . . . . . . . . . . . . . . (17,615) - - -
--------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year. . . . $2,792,294 $2,492,524 $ - $ -
--------------------------------------------------------------------------------------------------
Components of prepaid/accrued benefit cost
Unfunded status . . . . . . . . . . . . . . . . $ (590,041) $ (538,572) $(366,975) $(367,576)
Unrecognized prior service cost . . . . . . . . - 121 - -
Unrecognized transition obligation. . . . . . . - - 152,197 173,546
Unrecognized actuarial net loss . . . . . . . . 1,400,677 1,380,111 45,401 45,604
--------------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit/(cost). . . . . . . . $ 810,636 $ 841,660 $(169,377) $(148,426)
==================================================================================================
30
The accumulated benefit obligation for the defined benefit plan was $2,735,000
and $2,434,000 at December 31, 2003 and 2002, respectively.
The significant assumptions used in determining the benefit obligation as of
December 31, 2003 and 2002 is as follows:
Pension Benefits Postretirement Benefits
-------------------------------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------------------------------
Weighted average discount rate . . . . . . . . 6.25% 6.50% 6.00% 6.00%
Rate of increase in future compensation levels 3.50% 4.00% - -
Assumed health care cost trend rates have a significant effect on the amounts
reported for the postretirement health care plans. The annual rates of
increase in the per capita cost of covered medical and prescription drug
benefits for year-end calculations were assumed to be 8.5% and 12.0%,
respectively. The rates were assumed to decrease gradually to 5.0% in 2010 and
remain at that level thereafter. A one-percentage point change in the health
care cost trend rates would have the following effects:
1 Percentage 1 Percentage
Point Point
Increase Decrease
---------------------------------------------------------------------------------
Effect on total of service and interest
cost components. . . . . . . . . . . . . . . $ 1,900 $ (1,728)
Effect on post retirement benefit obligation 28,064 (25,793)
The composition of the net periodic benefit plan cost (benefit) for the years
ended December 31, 2003, 2002 and 2001 is as follows:
Pension Benefits Postretirement Benefits
---------------------------------------------------------------------------------------------------------------
2003 2002 2001 2003 2002 2001
---------------------------------------------------------------------------------------------------------------
Service cost . . . . . . . . . . . . . . . . . . $ 153,883 $ 118,697 $ 85,697 $ 1,939 $ 1,708 $ 1,538
Interest cost. . . . . . . . . . . . . . . . . . 200,169 183,781 171,492 20,795 22,461 21,323
Amortization of transition obligation. . . . . . - - - 18,265 18,519 18,522
Amortization of unrecognized prior service cost. 121 959 959 - - -
Amortization of gains and losses . . . . . . . . 105,536 26,542 (11,922) 656 162 158
Expected return on plan assets . . . . . . . . . (226,845) (234,761) (280,516) - - -
---------------------------------------------------------------------------------------------------------------
Net periodic benefit plan cost (benefit) . . . . $ 232,864 $ 95,218 $ (34,290) $41,655 $42,850 $41,541
===============================================================================================================
The significant assumptions used in determining the net periodic benefit plan
cost (benefit) for years ended December 31:
Pension Benefits Postretirement Benefits
--------------------------------------------------------------------------------------------------------
2003 2002 2001 2003 2002 2001
--------------------------------------------------------------------------------------------------------
Weighted average discount rate . . . . . . . . . 6.50% 7.25% 8.00% 6.00% 6.50% 6.50%
Expected long term rate of return on plan assets 9.00% 9.00% 9.00% - - -
Rate of increase in future compensation levels . 4.00% 4.50% 5.50% - - -
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 5-9% and 2-6%, respectively. The long-term
inflation rate was estimated to be 3%. When these overall return expectations
are applied to the plan's target allocation, the expected rate of return is
determined to be 9.0%, which is roughly the midpoint of the range of expected
return.
The Company's pension plan weighted-average asset allocations at October 1, the
measurement date, by asset category are as follows:
Asset Category 2003 2002
-------------------------------
Cash. . . . . . . - 9%
Equity securities 67% 57%
Debt securities . 33% 34%
-------------------------------
Total . . . . . . 100% 100%
===============================
Plan assets are invested in six diversified investment funds of the RSI
Retirement Trust (the "Trust"), a no load series open-ended mutual fund. In
addition, a small portion of the assets (less than 1%) is invested in RS Group
common stock. The investment funds include four equity mutual funds and two
bond mutual funds, each with its own investment objectives, investment
strategies and risks, as detailed in the Trust's prospectus. 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 Statement
of Investment Objectives and Guidelines (the "Guidelines").
The long-term investment objective is to be invested 65% in equity securities
(equity mutual funds) and 35% in debt securities (bond mutual funds). If the
plan is underfunded under the Guidelines, the bond fund portion will be
temporarily increased to 50% in order to lessen asset value volatility. When
the plan is no longer underfunded, the bond fund portion will be decreased back
to 35%. Asset rebalancing is performed at least annually, with interim
adjustments made when the investment mix varies more than 5% from the target
(i.e., a 10% target range).
31
The investment goal is to achieve investment results that will contribute to the
proper funding of the pension plan by exceeding the rate of inflation over the
long-term. In addition, investment managers for the Trust are expected to
provide above average performance when compared to their peer managers.
Performance volatility is also monitored. Risk/volatility is further managed by
the distinct investment objectives of each of the Trust funds and the
diversification within each fund.
For the fiscal year ending December 31, 2004, the Bank expects to contribute
approximately $250,000 to the Plan.
The Company also offers a 401(k) plan to its employees. Contributions to this
plan were $84,000, $74,000 and $52,000 for 2003, 2002 and 2001, respectively.
The Company maintains optional deferred compensation plans for its directors
whereby fees normally received are deferred and paid by the Company based upon a
payment schedule commencing at age 65 and continue 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, 2003 and 2002, other liabilities include approximately
$1,172,000 and $1,143,000, respectively, relating to deferred compensation.
Deferred compensation expense for the years ended December 31, 2003, 2002 and
2001 amounted to approximately $116,000, $113,000 and $94,000, respectively.
The Company has a supplemental executive retirement plan for the benefit of
certain executive officers. At December 31, 2003 and 2002, other liabilities
include approximately $473,000 and $495,000 accrued under these plans.
Compensation expense includes approximately $68,000, $74,000 and $110,000
relating to the supplemental executive retirement plan for 2003, 2002 and 2001,
respectively.
To fund the benefits under these plans, the Company is the owner of single
premium life insurance policies on participants in the non-qualified retirement
plans. At December 31, 2003 and 2002, the cash value of these policies was
$4,493,000 and $4,322,000, respectively.
NOTE 12: STOCK BASED COMPENSATION PLANS
In February 1997, the Board of Directors approved an option plan and granted
options there under with an exercise price equal to the market value of the
Company's shares at the date of grant. Under the Stock Option Plan, up to
132,249 options have been authorized for grant of incentive stock options and
nonqualified stock options.
In July 2001, the Board approved the issuance of 38,499 stock options remaining
in the 1997 Stock Option Plan. The exercise price is equal to the market value
of the Company's shares at the date of grant ($8.34). The options granted under
the issuance have a 10-year term with one-third vesting upon grant date and the
remaining vesting and becoming exercisable ratably over a 2-year period.
Activity in the Stock Option Plan is as follows:
Weighted
Options Average Shares
Outstanding Exercise Price Exercisable
-----------------------------------------------------------------------------
Outstanding at December 31, 2000 84,000 $ 6.58 84,000
Granted. . . . . . . . . . . . . 38,499 8.34
Exercised. . . . . . . . . . . . (9,500) 6.58
-----------------------------------------------------------------------------
Outstanding at December 31, 2001 112,999 $ 7.18 87,333
Exercised. . . . . . . . . . . . (20,449) 6.79
-----------------------------------------------------------------------------
Outstanding at December 31, 2002 92,550 $ 7.27 79,717
Exercised. . . . . . . . . . . . (4,717) 7.49
-----------------------------------------------------------------------------
Outstanding at December 31, 2003 87,833 $ 7.25 87,833
=============================================================================
The Bank sponsors an Employee Stock Ownership Plan (ESOP) for employees who have
attained the age of 21 and who have completed a 12 month period of employment
with the Bank during which they worked at least 1,000 hours. The Bank purchased
92,574 shares of common stock on behalf of the ESOP. The purchase of the shares
was funded by a loan from the Company and the unearned shares are pledged as
collateral for the borrowing. As the loan is repaid, earned shares are released
from collateral and are allocated to the participants. As shares are earned,
the Bank records compensation expense at the average market price of the shares
during the period. Cash dividends received on unearned shares are allocated
among the participants and are reported as compensation expense. ESOP
compensation expense, including cash dividends received on unearned shares,
approximated $129,000, $113,000 and $88,000 for the years ended December 31,
2003, 2002 and 2001, respectively. Total earned shares at December 31, 2003,
2002 and 2001 were 79,367, 71,478 and 63,228, respectively. The estimated fair
value of the remaining 13,207 unearned shares at December 31, 2003 is $242,000.
Unearned ESOP shares are not considered outstanding for purposes of computing
earnings per share.
32
NOTE 13: INCOME TAXES
The provision for income taxes for the years ended December 31, is as follows:
2003 2002 2001
----------------------------------------
Current $293,999 $ 95,515 $ 839,967
Deferred 306,924 292,546 (296,228)
----------------------------------------
$600,923 $388,061 $ 543,739
========================================
The provision for income taxes includes the following:
2003 2002 2001
----------------------------------------------------------
Federal Income Tax . . . . . $600,923 $388,061 $520,379
New York State Franchise Tax - - 23,360
----------------------------------------------------------
$600,923 $388,061 $543,739
==========================================================
The components of net deferred tax asset (liability), included in other assets
for the years ended December 31, are as follows:
2003 2002
----------------------------------------------------------------------
ASSETS:
Deferred compensation. . . . . . . . . . . $ 640,805 $ 637,607
Allowance for loan losses. . . . . . . . . 668,075 576,801
Postretirement benefits. . . . . . . . . . 65,759 59,904
AMT tax credit carryforward. . . . . . . . - 71,079
Mortgage recording tax credit carryforward 263,227 202,111
NOL carryforward . . . . . . . . . . . . . - 14,815
Investment impairment loss . . . . . . . . - 107,113
Other. . . . . . . . . . . . . . . . . . . 45,287 16,266
----------------------------------------------------------------------
1,683,153 1,685,696
Liabilities:
Prepaid pension. . . . . . . . . . . . . . (315,743) (327,826)
Mutual fund reserve. . . . . . . . . . . . (190,235) (190,235)
Depreciation . . . . . . . . . . . . . . . (360,056) (194,022)
Accretion. . . . . . . . . . . . . . . . . (48,854) (65,267)
Loan origination fees. . . . . . . . . . . (166,856) (100,715)
Intangible assets. . . . . . . . . . . . . (223,773) (123,071)
Investment securities. . . . . . . . . . . (242,786) (187,270)
----------------------------------------------------------------------
(1,548,303) (1,188,406)
----------------------------------------------------------------------
Net deferred tax asset . . . . . . . . . . $ 134,850 $ 497,290
======================================================================
The Company has a New York State mortgage recording tax credit that has no carry
forward limitations. The Company has determined that no valuation allowance is
necessary as it is more likely than not deferred tax assets will be realized
through carryback to taxable income in prior years, future reversals of existing
temporary differences and through future taxable income.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate for the years ended December 31, is as follows:
2003 2002 2001
-------------------------------------------------------------
----- ----- -----
Federal statutory income tax rate. . . . 34.0% 34.0% 34.0%
State tax. . . . . . . . . . . . . . . . (0.6) (0.7) (1.2)
Tax-exempt interest income, net of TEFRA (5.1) (6.4) (4.6)
Increase in value of life insurance. . . (2.6) (3.9) (3.9)
Other. . . . . . . . . . . . . . . . . . 1.0 2.1 1.0
-------------------------------------------------------------
Effective income tax rate. . . . . . . . 26.7% 25.1% 25.3%
=============================================================
NOTE 14: EARNINGS PER SHARE
The following is a reconciliation of basic to diluted earnings per share for the
years ended December 31:
Earnings Shares EPS
-----------------------------------------------------------
2003 Net Income. . . . . . . $1,651,663
Basic EPS . . . . . . . . . . 1,651,663 2,423,966 $0.68
-----------------------------------------------------------
Effect of dilutive securities
Stock options . . . . . . . . - 47,805
Diluted EPS . . . . . . . . . $1,651,663 2,471,771 $0.67
===========================================================
2002 Net Income. . . . . . . $1,156,279
Basic EPS . . . . . . . . . . 1,156,279 2,577,857 $0.45
-----------------------------------------------------------
Effect of dilutive securities
Stock options . . . . . . . . - 45,491
Diluted EPS . . . . . . . . . $1,156,279 2,623,348 $0.44
===========================================================
2001 Net Income. . . . . . . $1,602,490
Basic EPS . . . . . . . . . . 1,602,490 2,567,048 $0.62
-----------------------------------------------------------
Effect of dilutive securities
Stock options . . . . . . . . - 28,358
Diluted EPS . . . . . . . . . $1,602,490 2,595,406 $0.62
===========================================================
NOTE 15: 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 commitment 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's exposure to credit loss is represented by the contractual amount
of these commitments. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
At December 31, 2003 and 2002, the following financial instruments were
outstanding whose contract amounts represent credit risk:
Contract Amount
-------------------------------------------------------------------
2003 2002
-------------------------------------------------------------------
Commitments to grant loans . . . . . . . . $ 7,163,000 $9,099,000
Unfunded commitments under lines of credit 11,554,000 6,203,000
Standby letters of credit. . . . . . . . . 665,000 783,000
===================================================================
Commitments to extend credit are agreements to lend to a customer as long as
33
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.
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.
Outstanding letters of credit written are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The majority
of these standby letters of credit expire within the next twelve months. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending other loan commitments. The Bank requires collateral
supporting these letters of credit as deemed necessary. Management believes
that the proceeds obtained through a liquidation of such collateral would be
sufficient to cover the maximum potential amount of future payments required
under the corresponding guarantees. The current amount of the liability as of
December 31, 2003 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 operating expenses, amounted to $41,000, $21,000 and $18,000 in
2003, 2002 and 2001, respectively. In October 2002, the Company entered into a
land lease with one of its directors on an arms-length basis. The rent expense
paid to the related party during 2003 and 2002 was $21,000 and $5,250,
respectively. Approximate minimum rental commitments for the noncancelable
operating leases are as follows:
Years Ending December 31:
---------------------------------------
2004 . . . . . . . . . . . . $ 40,000
2005 . . . . . . . . . . . . 41,500
2006 . . . . . . . . . . . . 46,000
2007 . . . . . . . . . . . . 46,750
2008 . . . . . . . . . . . . 50,000
Thereafter . . . . . . . . . 214,500
--------------------------------------
Total minimum lease payments $438,750
======================================
NOTE 16: DIVIDENDS AND RESTRICTIONS
The board of directors of Pathfinder Bancorp, M.H.C., determines whether the
Holding Company will waive or receive dividends declared by the Company each
time the Company declares a dividend, which is expected to be on a quarterly
basis. The Holding Company may elect to receive dividends and utilize such funds
to pay expenses or for other allowable purposes. The Office of Thrift
Supervision ("OTS") has indicated that (i) the Holding Company shall provide the
OTS annually with written notice of its intent to waive its dividends prior to
the proposed date of the dividend, and the OTS shall have the authority to
approve or deny any dividend waiver request; (ii) if a waiver is granted,
dividends waived by the Holding Company will be excluded from the Company's
capital accounts for purposes of calculating dividend payments to minority
shareholders; (iii) the Company shall establish a restricted capital account in
the amount of any dividends waived by the Holding Company, and the amount of any
dividend waived by the Holding Company shall be available for declaration as a
dividend solely to the Holding Company. During 2003, the Company paid cash
dividends totaling $317,000 to the Holding Company. For the third and fourth
quarters ending September 30, 2003 and December 31, 2003, respectively, the
Holding Company waived the right to receive its portion of the cash dividends
declared on September 16, 2003 and December 23, 2003, respectively. During 2002
and 2001, the Holding Company waived $348,000 and $222,000, respectively. The
Company maintains a restricted capital account with an $887,000 balance,
representing the Holding Company's portion of dividends waived as of December
31, 2003.
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 17, the
circumstances under which the Bank may pay dividends are limited by federal
statutes, regulations and policies. The amount of retained earnings legally
available under these regulations approximated $2,833,000 as of December 31,
2003.
NOTE 17: REGULATORY MATTERS
The Company (on a consolidated basis) and the Bank are 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 and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the their 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. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and 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). Management believes, as of December 31, 2003, that the Bank
meets all capital adequacy requirements to which it is subject.
34
As of December 31, 2003, 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 Company's and the Bank's actual capital
amounts and ratios as of December 31, 2003 and 2002 are also presented in the
following table:
To Be "Well-
Capitalized"
For Capital Under Prompt
Actual Adequacy Purposes Corrective Provisions
----------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------------------------------------------------
COMPANY
As of December 31, 2003:
Total Core Capital (to Risk-Weighted Assets) $18,446,000 10.8% $13,704,000 8.0% N/A N/A
Tier 1 Capital (to Risk-Weighted Assets) . . $16,731,000 9.8% $ 6,852,000 4.0% N/A N/A
Tier 1 Capital (to Average Assets) . . . . . $16,731,000 6.6% $10,117,000 4.0% N/A N/A
----------------------------------------------------------------------------------------------------------------------
BANK
As of December 31, 2003:
Total Core Capital (to Risk-Weighted Assets) $21,282,000 12.5% $13,626,000 8.0% $17,032,000 10.0%
Tier 1 Capital (to Risk-Weighted Assets) . . $19,567,000 11.5% $ 6,813,000 4.0% $10,219,000 6.0%
Tier 1 Capital (to Average Assets) . . . . . $19,567,000 6.9% $11,389,000 4.0% $14,237,000 5.0%
----------------------------------------------------------------------------------------------------------------------
COMPANY
As of December 31, 2002:
Total Core Capital (to Risk-Weighted Assets) $24,517,000 13.7% $14,283,000 8.0% N/A N/A
Tier 1 Capital (to Risk-Weighted Assets) . . $23,036,000 12.9% $ 7,141,000 4.0% N/A N/A
Tier 1 Capital (to Average Assets) . . . . . $23,036,000 9.1% $10,111,000 4.0% N/A N/A
----------------------------------------------------------------------------------------------------------------------
BANK
As of December 31, 2002:
Total Core Capital (to Risk-Weighted Assets) $20,957,000 11.8% $14,166,000 8.0% $17,708,000 10.0%
Tier 1 Capital (to Risk-Weighted Assets) . . $19,476,000 11.0% $ 7,083,000 4.0% $10,625,000 6.0%
Tier 1 Capital (to Average Assets) . . . . . $19,476,000 7.2% $10,816,000 4.0% $13,520,000 5.0%
----------------------------------------------------------------------------------------------------------------------
The Bank is required to maintain average balances on hand or with the Federal
Reserve Bank. At December 31, 2003 and 2002, these reserve balances amounted to
$2,098,000 and 1,550,000, respectively.
NOTE 18: FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," requires
disclosure of 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.
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
year-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
year-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 approximates fair value.
INVESTMENT SECURITIES - fair values of securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
LOANS AND MORTGAGE LOANS HELD-FOR-SALE - for variable rate loans that reprice
frequently and with no significant credit risk, fair values approximate carrying
values. Fair values for fixed rate loans are estimated using discounted cash
flow analysis, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
35
FEDERAL HOME LOAN BANK STOCK - the carrying amounts reported approximates fair
value.
MORTGAGE SERVICING RIGHTS - the carrying value approximates fair value.
ACCRUED INTEREST RECEIVABLE AND PAYABLE - the carrying amount of accrued
interest receivable and payable approximate their fair values.
DEPOSIT LIABILITIES - 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). Fair
values for fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates of deposits to a schedule of aggregated expected monthly maturities
on time deposits.
BORROWINGS - the fair values for short-term borrowings and mandatorily
redeemable preferred securities approximate the carrying amounts. The fair
values for long-term borrowings were estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
OFF-BALANCE SHEET INSTRUMENTS - Fair values for the Company's off-balance sheet
instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
The carrying amounts and fair values of the Company's financial instruments as
of December 31 are presented in the following table:
2003 2002
--------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amounts Fair Values Amounts Fair Values
--------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents. . . $ 8,714,000 $ 8,714,000 $ 13,740,000 $ 13,740,000
Investment securities. . . . . 57,559,000 57,559,000 60,263,000 60,263,000
Mortgage loans held-for-sale . 3,520,000 3,743,000 3,617,000 4,004,000
Net Loans. . . . . . . . . . . 187,002,000 192,392,000 179,001,000 186,978,000
Federal Home Loand Bank Stock. 2,048,000 2,048,000 2,243,000 2,243,000
Accrued interest receivable. . 1,274,000 1,274,000 1,334,000 1,334,000
Mortgage servicing rights. . . 257,000 257,000 200,000 200,000
--------------------------------------------------------------------------------------
Financial liabilities:
Deposits . . . . . . . . . . . $206,894,000 $208,560,000 $204,522,000 $206,885,000
Borrowed funds . . . . . . . . 40,960,000 42,749,000 42,860,000 45,361,000
Trust preferred obligation . . 5,000,000 5,000,000 5,000,000 5,000,000
Accrued interest payable . . . 209,000 209,000 167,000 167,000
--------------------------------------------------------------------------------------
Off-balance sheet instruments:
Standby letter of credit . . . $ - $ - $ - $ -
Commitments to extend credit . - - - -
--------------------------------------------------------------------------------------
NOTE 19: PARENT COMPANY - FINANCIAL INFORMATION
The following represents the condensed financial information of Pathfinder
Bancorp, Inc. for years ended December 31:
STATEMENTS OF CONDITION 2003 2002
-------------------------------------------------------------------------------
ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . $ 1,543,488 $ 3,185,445
Investments . . . . . . . . . . . . . . . . . . . . 447,300 450,450
Receivable from bank subsidiary . . . . . . . . . . 96,919 152,415
Investment in subsidiaries. . . . . . . . . . . . . 25,084,981 24,616,171
Due from subsidiaries . . . . . . . . . . . . . . . - 63,608
Other assets. . . . . . . . . . . . . . . . . . . . 134,811 166,955
Total assets. . . . . . . . . . . . . . . . . . . . $27,307,499 $28,635,044
-------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued liabilities . . . . . . . . . . . . . . . . 367,320 250,022
Due to subsidiary . . . . . . . . . . . . . . . . . 370 -
Trust preferred debt. . . . . . . . . . . . . . . . 5,155,000 5,155,000
Shareholders' equity. . . . . . . . . . . . . . . . 21,784,809 23,230,022
Total liabilities and shareholders' equity. . . . . $27,307,499 $28,635,044
-------------------------------------------------------------------------------
STATEMENTS OF INCOME. . . . . . . . . . . . . . . . 2003 2002 2001
---------------------------------------------------------------------------------------------
Interest income . . . . . . . . . . . . . . . . . . 16,410 45,641 42,436
Interest expense. . . . . . . . . . . . . . . . . . 243,030 142,400 -
---------------------------------------------------------------------------------------------
Net interest (expense) income . . . . . . . . . . . (226,620) (96,759) 42,436
Operating expense . . . . . . . . . . . . . . . . . (105,891) (71,703) (65,369)
Realized gain on sale of investment security. . . . 103,745
Amortization of deferred financing costs. . . . . . (30,204) (15,100) -
---------------------------------------------------------------------------------------------
Loss before tax benefit and equity in
undistributed net income of subsidiaries. . . . . . (258,970) (183,562) (22,933)
---------------------------------------------------------------------------------------------
Tax benefit . . . . . . . . . . . . . . . . . . . . (73,213) (71,589) (8,944)
---------------------------------------------------------------------------------------------
Loss before equity in undistributed net
income of subsidiaries. . . . . . . . . . . . . . . $ (185,757) $ (111,973) $ (13,989)
---------------------------------------------------------------------------------------------
Equity in undistributed net income of subsidiaries. $ 1,837,420 $ 1,268,252 $ 1,616,479
Net income. . . . . . . . . . . . . . . . . . . . . $ 1,651,663 $ 1,156,279 $ 1,602,490
---------------------------------------------------------------------------------------------
36
STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . 2003 2002 2001
---------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income. . . . . . . . . . . . . . . . . . . . . $ 1,651,663 $ 1,156,279 $ 1,602,490
Equity in undistributed
earnings of subsidiaries. . . . . . . . . . . . . . (1,837,420) (1,268,252) (1,616,479)
Realized gain on sale of investment security. . . . (103,745) - -
ESOP shares earned. . . . . . . . . . . . . . . . . 122,180 106,015 87,780
Amortization of deferred financing costs. . . . . . 30,204 15,100 -
Other operating activities. . . . . . . . . . . . . 81,243 (123,486) (842,750)
---------------------------------------------------------------------------------------------
Net cash used in
operating activities. . . . . . . . . . . . . . . . (55,875) (114,344) (768,959)
---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from loan to
subsidiary. . . . . . . . . . . . . . . . . . . . . 55,496 55,497 55,497
Dividends receivable. . . . . . . . . . . . . . . . 7,321 4,170 -
Purchase of investments . . . . . . . . . . . . . . - (155,000) -
Proceeds from sale of investments . . . . . . . . . 153,745 - -
---------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities. . . . . . . . . . . . . . . . 216,562 (95,333) 55,497
---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from exercise of
stock options . . . . . . . . . . . . . . . . . . . 35,374 138,858 62,510
Proceeds from trust preferred obligation. . . . . . - 5,004,000 -
Investment in Bank subsidiary . . . . . . . . . . . - (2,000,000) -
Dividend received from subsidiary . . . . . . . . . 1,500,000 - -
Cash dividends. . . . . . . . . . . . . . . . . . . (651,084) (415,145) (531,086)
Treasury stock purchased. . . . . . . . . . . . . . (2,686,934) (129,865) (134,000)
---------------------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities. . . . . . . . . . . . . . . . (1,802,644) 2,597,848 (602,576)
---------------------------------------------------------------------------------------------
(Decrease) Increase in cash and
cash equivalents. . . . . . . . . . . . . . . . . . (1,641,957) 2,388,171 (1,316,038)
Cash and cash equivalents at
beginning of year . . . . . . . . . . . . . . . . . 3,185,445 797,274 2,113,312
---------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of year. . . . . . . . . . . . . . . . . . . $ 1,543,488 $ 3,185,445 $ 797,274
---------------------------------------------------------------------------------------------
NOTE 20: SELECTED QUARTERLY DATA (UNAUDITED)
Summarized quarterly financial information for the years ended December 31, 2003
and 2002 is as follows:
For the Quarters Ended
-----------------------------------------------------------------------------------
(In thousands except Dec. 31, Sept. 30, June 30, Mar. 31,
Per Share Data) 2003 2003 2003 2003
-----------------------------------------------------------------------------------
Interest Income . . . . . . . . . . . $ 3,730 $ 3,677 $ 3,877 $ 4,001
Interest Expense. . . . . . . . . . . 1,388 1,428 1,532 1,600
Net Interest Income . . . . . . . . . 2,342 2,249 2,345 2,401
Net Income. . . . . . . . . . . . . . 310 333 517 492
Net Income Per Share (Basic). . . . . $ 0.13 $ 0.14 $ 0.21 $ 0.20
Net Income Per Share (Diluted). . . . $ 0.13 $ 0.14 $ 0.21 $ 0.20
For the Quarters Ended
-----------------------------------------------------------------------------------
(In thousands except. . . . . . . . . Dec. 31, Sept. 30, June 30, Mar. 31,
Per Share Data) . . . . . . . . . . . 2002 2002 2002 2002
-----------------------------------------------------------------------------------
Interest Income . . . . . . . . . . . $ 3,991 $ 3,918 $ 3,913 $ 3,989
Interest Expense. . . . . . . . . . . 1,735 1,768 1,729 1,790
Net Interest Income . . . . . . . . . 2,256 2,150 2,184 2,199
Net (Loss) Income . . . . . . . . . . (103) 349 360 550
Net (Loss) Income Per Share (Basic) . $ (0.04) $ 0.14 $ 0.14 $ 0.22
Net (Loss) Income Per Share (Diluted) $ (0.04) $ 0.13 $ 0.14 $ 0.21
37
CORPORATE INFORMATION
Pathfinder Bancorp, Inc.. . . . . . . . . . Rhonda Hutchins INDEPENDENT AUDITORS
BOARD OF DIRECTORS (1). . . . . . . . . . . Assistant Vice President, Loan Officer Beard Miller Company LLP
Janette Resnick, Chairman . . . . . . . . . 320 East Market Street
Chris R. Burritt. . . . . . . . . . . . . . Pamela S. Knox Harrisburg, PA 17108
Chris C. Gagas. . . . . . . . . . . . . . . Assistant Vice President, Lending
George P. Joyce . . . . . . . . . . . . . . TRANSFER AGENT
Raymond W. Jung . . . . . . . . . . . . . . Laurie L. Lockwood Registrar and Transfer Company
Bruce E. Manwaring. . . . . . . . . . . . . Assistant Vice President, 10 Commerce Drive
L. William Nelson . . . . . . . . . . . . . Assistant Controller, Cranford, NJ 07016
Thomas W. Schneider . . . . . . . . . . . . Human Resource Officer
Corte J. Spencer. . . . . . . . . . . . . . INVESTOR RELATIONS
Steven W. Thomas. . . . . . . . . . . . . . Will O'Brien Thomas W. Schneider
Assistant Vice President, . . . . . . . President, Chief Executive Officer
DIRECTORS EMERITUS. . . . . . . . . . . . . Business Relationship Manager
Victor S. Oakes . . . . . . . . . . . . . . James A. Dowd, CPA
Lawrence W. O'Brien . . . . . . . . . . . . Daniel R. Phillips Vice President, Chief Financial Officer
Assistant Vice President, MIS
PATHFINDER EXECUTIVE OFFICERS:. . . . . . . 214 West First Street
Thomas W. Schneider . . . . . . . . . . . . Shane R. Stepien Oswego, NY 13126
President, Chief Executive Officer. . . . Assistant Vice President, (315) 343-0057
Marketing Manager
John F. Devlin. . . . . . . . . . . . . . . GENERAL INQUIRIES AND REPORTS
Vice President, Senior Commercial Lender. Michele C. Torbitt A copy of the Bank's 2003 Annual
Assistant Vice President, . . . Report to the Securities and Exchange
James A. Dowd, CPA. . . . . . . . . . . . . Electronic Commerce Commission, Form 10-K, may be
Vice President, Chief Financial Officer,. obtained without charge by written
PATHFINDER BRANCH MANAGERS. . . . . . . . request of shareholders to:
Edward Mervine, Esq.
Vice President, General Counsel . . . . . Susan M. Cahill, Main Office Melissa A. Miller
Craig J. Nessel, Plaza and. . . . . . . . Vice President, Operations,
Melissa A. Miller . . . . . . . . . . . . . Eastside Offices Corporate Secretary
Vice President, Operations, . . . . . . . Cynthia L. Clafin, Mexico Office Pathfinder Bank
Corporate Secretary,. . . . . . . . . . . Tona L. Kempston, Fulton Office 214 West First Street
Compliance Officer. . . . . . . . . . . . Denise M. Lyga, Lacona Office Oswego, NY 13126
Gregory L. Mills. . . . . . . . . . . . . . CORPORATE HEADQUARTERS The public may read and copy any mate-
Vice President, Marketing,. . . . . . . . 214 West First Street rials the Company files with the SEC
Branch Administration . . . . . . . . . . Oswego, NY 13126 at the SEC's Public Reference Room at
(315) 343-0057 450 Fifth Street, N.W. Washington, D.C.
PATHFINDER OFFICERS:. . . . . . . . . . . . 20549. The public may obtain informa-
ANNUAL MEETING. . . . . . . . . . . . . . tion on the operation of the Public Ref-
Anita J. Austin . . . . . . . . . . . . . . Wednesday, April 28, 2004, 10:00 AM erence Room by calling the SEC at
Auditor . . . . . . . . . . . . . . . . . Econo Lodge Riverfront Hotel 1-800-SEC-0330. The Company's
70 East First Street. . . . . . . . . . . filings are also available electronically
Annette L. Burns, CPA . . . . . . . . . . . Oswego, NY 13126 free of charge at the SEC website:
Controller. . . . . . . . . . . . . . . . http://www.sec.gov and at their
STOCK LISTING . . . . . . . . . . . . . . website:http://www.pathfinderbank.com
Cynthia L. Clafin . . . . . . . . . . . . . The Nasdaq Small Cap Market (SM)
Assistant Vice President, . . . . . . . . Symbol: PBHC Listing: PathBcp FDIC DISCLAIMER
Mexico Branch Manager . . . . . . . . . . This Annual Report has not been
SPECIAL COUNSEL . . . . . . . . . . . . . reviewed, or confirmed for accuracy
Roberta Davis . . . . . . . . . . . . . . . Luse, Gorman, Pomerenk & Schick or relevance, by the FDIC.
Assistant Treasurer . . . . . . . . . . . 5335 Wisconsin Avenue N.W.
Suite 400 . . . . . . . . . . . . . . . . (1) Information concerning the principal
Jack Forsyth. . . . . . . . . . . . . . . . Washington, D.C. 20015 occupation of the Directors is available
Vice President, Municipal Banking Officer . in the Company's Form 10-K.
EXHIBIT 14 CODE OF ETHICS
-----------------------------
PATHFINDER BANCORP, INC.
CODE OF ETHICS
FOR
DIRECTORS, OFFICERS AND EMPLOYEES
I. PREFACE
Pathfinder Bancorp Inc. and its subsidiaries (collectively "Pathfinder" or
"the Company") are committed to the highest standard of ethical business
conduct. Pathfinder expects that its directors, officers and employees
(collectively "Personnel") will observe the highest standards of integrity in
the context of Pathfinder's business. Pathfinder is committed to complying with
the letter and spirit of all applicable laws and regulations.
This code of business conduct and ethics sets forth Pathfinder's policy
embodying the high standards of business and ethics of integrity required of all
Pathfinder Personnel (1). When conducting business affairs on behalf of
Pathfinder, all Personnel are required to abide scrupulously by the provisions
of this code as well as with all applicable laws. The provisions of this code
will be enforced vigorously, and any individual found to be in violation will be
appropriately disciplined, which may include immediate termination of
employment.
II. APPLICABILITY
Every one of Pathfinder's Personnel has a responsibility to deal ethically
and honestly in all aspects of Pathfinder's business including the ethical
handling of actual or apparent conflicts of interest and to comply fully with
all laws, regulations and Pathfinder's policies. Every person is expected to
assume responsibility for applying these standards of ethical conduct and for
acquainting himself/herself with the various laws, regulations and Pathfinder
policies applicable to his or her assigned duties. When in doubt, Personnel
have the affirmative responsibility to seek clarification from their supervisor,
the Compliance Officer, or, if necessary, from legal counsel.
III. ADMINISTRATION AND ENFORCEMENT
BOARD OF DIRECTORS. The Board of Directors is responsible for approving
this Code and making appropriate supplements and revisions from time to time.
As provided below, the Board also has the authority to issue waivers of this
Code upon application. Finally, issues that cannot be resolved by the Audit
Committee as described below, shall be resolved by the full Board of Directors.
(1) Due to their special responsibilities, the Chief Executive and the
Chief Financial Officer are also subject to an additional code
attached hereto.
1
AUDIT COMMITTEE. The Audit Committee of the Board of Directors of
Pathfinder (the "Committee") is responsible for oversight of the Pathfinder's
Code of Ethics (this "Code"). The Committee has responsibility for implementing
and administrating this Code.
COMPLIANCE OFFICER. To assist the Committee in administering this Code on
a regular basis and to provide guidance in situations where Personnel may have
questions concerning the right course of action to take, the Committee shall
appoint a Compliance Officer to provide guidance on implementing this Code and
to work with the Officers of the Company to ensure compliance with this Code.
It is the responsibility of the Chief Executive Officer, with assistance from
the Compliance Officer, to ensure that this Code has been read and understood by
all Personnel. The Compliance Officer will meet as necessary with the Officers
of the Company and the Committee to implement this Code, but will report to the
Committee no less than every year barring extraordinary circumstances.
WAIVERS. This Code is intended to apply equally to all Personnel.
Accordingly, any waiver of the standards set forth in this Code by executive
officers or directors may be made only by the Committee and the full Board of
Directors of the Company and must be disclosed to shareholders within two (2)
business days by filing an SEC Form 8-K.
IV. ACCURACY IN REPORTING
CORPORATE RECORDS. All Personnel have a responsibility to ensure that all
Company documents and reports for which the person is responsible are prepared
and maintained properly and are free of any false, misleading, incomplete or
otherwise improper information. Personnel are prohibited from defrauding,
misleading, manipulating or coercing any employees or directors of the Company
or any advisors to the Company, including outside counsel or auditors.
FINANCIAL STATEMENTS. Whenever a person is responsible for the preparation
or review of the Company's financial statements, the person shall ensure that
the financial statements are prepared in accordance with generally accepted
accounting principals as currently in force.
ERRORS OR MISLEADING STATEMENTS. If a person ever becomes aware of an
error or potential misstatement in any company documents including financial
statements or other documents filed with the SEC, the person must contact
immediately their supervisor and Compliance Officer and report the error or
potential misstatement.
AUDITS. All Personnel shall cooperate fully with any audits of the
Company's financial statements or other corporate documents whether conducted
internally or by a third party.
V. CONFLICTS OF INTEREST
A. GENERAL.
A conflict of interest arises when an individual has an interest in
2
any business or property or an obligation to any person that could
affect the person's judgment in fulfilling his or her responsibilities to
Pathfinder. Pathfinder Personnel are expected to refrain from any activity
or investment that constitutes, or might appear to constitute, a conflict
of interest with respect to dealings between Pathfinder and any other
organization or individual.
B. RECUSAL AND RECORDATION.
DISCLOSURE AND RECUSAL. Whenever a person has a conflict of interest
in connection with an internal or external operation or other conduct of
the Company, the person shall make a full disclosure of the nature of the
conflict of interest, recuse himself/herself from the decision-making
process and abstain from any further action thereon.
RECORDATION. Whenever a person has declared a conflict of interest in
Connection with a transaction, such declaration and the person's recusal
and abstention from the decision-making process shall be reported to the
Compliance Officer. The Compliance Officer shall report the conflict of
interest to the Committee and shall ensure that the conflict of interest is
recorded in the Committee meeting minutes.
C. CORPORATE OPPORTUNITIES.
GENERAL PROHIBITION. Personnel and their affiliates (defined as
immediate Family members) must not compete with the Company, profit or
otherwise take advantage from inside information or take business
opportunities which are within the line of business conducted by the
Company or within a line of business that the Company might reasonably be
expected to enter in the future.
DISCLOSURE. In the event that a person or his affiliate is presented
with or otherwise becomes aware of a corporate opportunity which is within
the line of business conducted by the Company or a line of business that
the Company might be expected to enter in the future, the person shall
fully disclose both the details of the opportunity and his/her interest in
the opportunity to the person's supervisor and the Compliance Officer.
Thereafter, the person shall abstain from discussion and voting on any
approval or disapproval thereof. Where it is unclear whether a business
opportunity would present a corporate opportunity to the Company based upon
a review of the business plan disclosure should be made to the Committee
and then the entire Board of Directors.
RECORDATION. A decision by the Board approving or disapproving
dealings with a corporate opportunity presented to it by a person shall be
recorded in the minutes of the Board and shall reflect the nature of the
opportunity and all members who take action or abstain from taking action
on its consideration.
FURTHER ACTION. If, after full disclosure, the Board elects not to
take a Corporate opportunity presented to it, to the extent it does not
otherwise present a conflict of interest with his/her position, or the
Board does not rule otherwise, the person who presented the matter to the
Board is free to pursue the opportunity.
3
D. INSIDER TRANSACTIONS.
DISCLOSURE. Insiders (defined as Officers and Directors) shall
disclose all conflicts of interest they may have with regard to any
contract or other business arrangement to be entered into by the Company.
Contracts or other business arrangement between the Company and an Insider
or between the Company and an affiliate of an Insider, shall be presented
by the Compliance Officer to the Board for approval only after full
disclosure of the conflict of interest by the Insider who shall thereafter
recuse himself/herself from the decision making process and abstain from
voting on the matter.
RECORDATION. A decision by the Board approving or disapproving a
contract or other business arrangement with an Insider or affiliate of an
Insider or where an Insider otherwise has a financial interest, shall be
recorded in the minutes of the Board which shall reflect the nature of the
contract or other arrangement and all members who take action or abstain
from taking action on its consideration.
TERMS. Any contract or business arrangement entered into by the
Company with an Insider or affiliate of an Insider shall be on such terms
and conditions and at such costs as would be reasonable under the facts and
circumstances if entered into with an unrelated third party.
COMPLIANCE WITH LAW. All contracts or other business arrangements with
any Insider or affiliates of Insiders in which the Insiders have a personal
or financial interest, shall comply with any applicable statutes, rules or
regulation.
PAYMENT OF FEES. In paying any management or other fees to Insiders,
the following criteria should be taken into consideration.
1. Management fees and other fees paid by the Company shall have a
direct relationship to and be based solely upon the fair market
value of the goods received or services rendered.
2. Fees shall be paid only for goods which meet the legitimate needs
of the Company and which are actually rendered.
3. Fees shall take into consideration the qualifications of the
individual(s) providing services.
4. Reasonable fees may be based upon cost, cost plus a reasonable
profit or current fair market value of the services rendered and
may take reasonable overhead costs into consideration.
5. No prepayment of fees for services shall be made.
4
E. ACCEPTANCE OF GIFTS AND OTHER GRATUITIES.
GENERAL. Personnel are prohibited from (a) soliciting for themselves or a
third party (other than the Company) anything of value from anyone in return for
any business, service or confidential information of the Company; or (b)
accepting anything in value (other than salary, wages, fees or other usual
compensation) from anyone in connection with the business of the Company, either
prior to or after a transaction.
EXCEPTIONS. Exceptions to the general prohibition regarding acceptance of
things of value in connection with the Company's business may include the
acceptance of:
1. gifts, gratuities, amenities or favors based on obvious family or
personal relationships (such as those with the parents, children
or spouse of a Company official) where the circumstances make it
clear that it is those relationships rather than the business of
the Company, which are the motivating factors;
2. meals, refreshments, entertainment, accommodations or travel
arrangements, all of reasonable value, during the course of a
meeting or other occasion, the purpose of which is to hold bona
fide business discussions or to foster better business relations,
provided that the expense would be paid for by the Company as a
reasonable business expense, if not paid for by another party;
3. advertising or promotional material of reasonable value, such as
pens, pencils, note pads, key chains, calendars or similar items;
4. discounts or rebates on merchandise or services that do not
exceed those available to other customers;
5. gifts of value not to exceed $35.00 that are related to commonly
recognized events or occasions, such as a promotion, new job,
wedding, retirement, Christmas or bat or bar mitzvah; or
6. civic, charitable, educational, religious organizational awards
for recognition service accomplishment.
NOTIFICATION AND APPROVAL. In the event a person is offered anything of
value from anyone in return for any business, service, or confidential
information of the Company and the item of value is not clearly subject to the
exceptions described above, the person should report it immediately to his or
her supervisor or to the Compliance Officer.
VI. CONFIDENTIAL INFORMATION
All Personnel must treat the confidential information of Pathfinder and
third parties with which Pathfinder deals with the utmost care to ensure that it
is not disseminated inappropriately to individuals or organizations. It is
improper for Personnel, during or subsequent to employment and without proper
authorization, to give or make available to anyone, or use for his/her benefit,
information of a confidential nature which was derived from his/her employment.
5
VII. PROHIBITIONS UNDER SECURITY LAWS
Personnel are prohibited from buying or selling securities on the basis of
"material inside information", which includes any information which a person
acquires and which is not available to ordinary investors in the market place.
Personnel are also prohibited from communicating or relating such inside
information to others for the purpose of that person buying or selling
securities themselves. Even casual reference of such information could amount to
the breach of the rules and regulations in this area.
VIII. REPORTING ILLEGAL OR UNETHICAL BEHAVIOR
The Company strives to maintain sound and ethical business practices and
holds all persons to high ethical standards. In order to maintain these
standards, all Personnel have an affirmative obligation to report to their
supervisor, if appropriate, or the Compliance Officer a violation of any laws,
regulations or provisions of this Code by any person. If a person is ever
uncertain of the best course of action in a specific situation, he or she should
immediately seek clarification and help from their supervisor or the Compliance
Officer.
The Company will not tolerate any attempt by anyone to retaliate against a
person who, while acting in good faith pursuant to this Code, reports illegal or
unethical behavior by any employee, director, officer or third party advisor to
the Company. Thus, no person may be discharged, demoted, suspended, or in any
manner threatened, harassed or discriminated against for providing information
about violations of the law or this Code, or assisting in the investigation of a
violation of the law or this Code, or participating in bringing a lawsuit.
IX. BREACHES OF ETHICAL BEHAVIOR
If any person breaches any of the provisions of this Code, such breach
shall be reported to that person's supervisor, the Compliance Officer, the Chief
Executive Officer and the Committee. The Compliance Officer and the Committee
shall review, or designate a committee to review, the facts and circumstances of
the breach of this Code and shall determine the appropriate remedy including
immediate termination for cause of the person who breached this Code.
6
CODE OF ETHICS
FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS
OF PATHFINDER BANCORP, INC.
It is the policy of Pathfinder Bancorp, Inc. and its subsidiaries (collectively
"Pathfinder" or the "Company") that the Chief Executive Officer ("CEO"), and
Chief Financial Officer ("CFO") adhere to and advocate the following principles
governing their professional and ethical conduct in the fulfillment of their
responsibilities:
1. Act with honesty and integrity, avoid actual or apparent conflicts
between his or her personal, private interests and the interests of the Company,
including receiving improper personal benefits as a result of his or her
position
2. Perform responsibilities with a view to causing periodic reports and
other documents filed with the SEC to contain information which is accurate,
complete, fair and understandable.
3. Comply with laws of federal, state, and local governments applicable to
the Company, and the rules and regulations of private and public regulatory
agencies having jurisdiction over the Company.
4. Act in good faith, responsibly, with due care, and diligence, without
misrepresenting or omitting material facts or allowing independent judgment to
be compromised.
5. Respect the confidentiality of information acquired in the course of the
performance of his or her responsibilities except when authorized or otherwise
legally obligated to disclose. Not use confidential information acquired in the
course of the performance of his or her responsibilities for personal advantage.
6. Proactively promote ethical behavior among subordinates and peers.
7. Use corporate assets and resources employed or entrusted in a responsible
manner.
8. Not use corporate information, corporate assets, corporate opportunities
or one's position with the Company for personal gain. Not compete directly or
indirectly with the Company.
9. Comply in all respects with the Company's Code of Business Conduct and
Ethics and the Company's Policy on Insider Trading.
10. Advance the Company's legitimate interests when the opportunity arises.
It is also the Company's Policy that the CEO and CFO of the Company acknowledge
and certify to the foregoing annually and file a copy of such certification with
each of the Audit Committee and the Nominating/Governance Committee of the
Board.
7
The Audit Committee shall have the power to monitor, make determinations, and
recommend action to the Board with respect to violations of this Policy.
8
EXHIBIT 21 SUBSIDIARIES OF THE COMPANY
-------------------------------------------
Company Percent Owned
------- --------------
Pathfinder Bank (1) 100%
Pathfinder Statutory Trust 100%
(1) Pathfinder Commercial Bank, Pathfinder REIT, Inc. and Whispering Oaks
Development Corporation, 100% owned by Pathfinder Bank
EXHIBIT 23.1 CONSENT OF BEARD MILLER COMPANY LLP
-------------------------------------------------------
CONSENT OF INDEPENDENT AUDITORS
Regarding:
Registration Statement, File No. 333-53027
We consent to the incorporation by reference in the above listed Registration
Statement of our report dated February 6, 2004, relating to the consolidated
financial statements of Pathfinder Bancorp, Inc. incorporated by reference in
its Annual Report (Form 10-K) for the year ended December 31, 2003.
/s/ Beard Miller Company LLP
Harrisburg, Pennsylvania
March 24, 2004
EXHIBIT 23.2 CONSENT OF PRICEWATERHOUSECOOPERS LLP
-------------------------------------------------------
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-53027) of Pathfinder Bancorp, Inc. of our report
dated January 31, 2003 relating to the financial statements, which appear in the
Annual Report to Shareholders, which is incorporated in this Annual Report on
Form 10-K.
/s/ Pricewaterhouse Coopers LLP
Syracuse, New York
March 29, 2004
EXHIBIT 31.1 RULE 13A-14(A) / 15D-14(A) CERTIFICATION OF THE CHIEF EXECUTIVE
--------------------------------------------------------------------------------
OFFICER
-------
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas W. Schneider, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Pathfinder Bancorp,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
March 30, 2004 /s/ Thomas W. Schneider
---------------- --------------------------
Date Thomas W. Schneider
President and Chief Executive Officer
EXHIBIT 31.2 RULE 13A-14(A) / 15D-14(A) CERTIFICATION OF THE CHIEF FINANCIAL
--------------------------------------------------------------------------------
OFFICER
-------
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James A. Dowd, Vice President and Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Pathfinder Bancorp,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors:
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
March 30, 2004 /s/ James A. Dowd
---------------- --------------------
Date James A. Dowd
Vice President and Chief Financial Officer
EXHIBIT 32.1 SECTION 1350 CERTIFICATION OF THE CHIEF EXECUTIVE AND
------------- ---------------------------------------------------------
CHIEF FINANCIAL OFFICER
-------------------------
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Thomas W. Schneider, President and Chief Executive Officer, and James A. Dowd,
Vice President and Chief Financial Officer of Pathfinder Bancorp, Inc. (the
"Company"), each certify in his capacity as an officer of the Company that he
has reviewed the Annual Report of the Company on Form 10-K for the year ended
December 31, 2003 and that to the best of his knowledge:
1. the report fully complies with the requirements of Sections 13(a) of
the Securities Exchange Act of 1934; and
2. the information contained in the report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
March 30, 2004 /s/ Thomas W. Schneider
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Date Thomas W. Schneider
President and Chief Executive Officer
March 30, 2004 /s/ James A. Dowd
---------------- --------------------
Date James A. Dowd
Vice President and Chief Financial Officer
EXHIBIT 99.1 REPORT OF PRICEWATERHOUSECOOPERS LLP
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REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Pathfinder Bancorp, Inc.
Oswego, New York
In our opinion, the consolidated statement of condition as of December 31, 2002
and the related consolidated statements of income, of changes in shareholders'
equity and of cash flows for each of the two years in the period ended December
31, 2002 (appearing on pages 18 through 22 of the Pathfinder Bancorp, Inc. 2003
Annual Report to shareholders which has been incorporated by reference in this
Form 10-K) present fairly, in all material respects, the financial position,
results of operations and cash flows of Pathfinder Bancorp, Inc. and its
subsidiaries at December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 147, "Accounting for Certain Acquisitions of Bank or Thrift Institutions".
/s/ PricewaterhouseCoopers LLP
Syracuse, New York
January 31, 2003
[Logo] PathFinder
BANCORP, INC.