UNITED STATES
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, 2006
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d.) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from _______ to _______
COMMISSION FILE NUMBER: 23601
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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 Incorporation or Organization) (I.R.S. Employer Identification 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: Common Stock, par value $.01 per share
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Name of Exchange on which Registered:
Nasdaq Capital Market
Securities Registered Pursuant
to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X].
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X].
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 such reports) and (2) has been subject to such
requirements for the past 90 days. Yes [X] No [ ].
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. [X]
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large Accelerated Filer [] Accelerated Filer [] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of March 15, 2007, there were 2,970,819 shares issued and 2,483,532
shares outstanding of the Registrant's Common Stock.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant, computed by reference to the last sale
price on June 30, 2006, as reported by the Nasdaq Capital Market was
approximately $10,708,298. Revenues for the years 2005 and 2006 were less than
$25 million. The Company will file its annual and quarterly reports in 2007 as
a Small Business Issuer.
DOCUMENTS INCORPORATED BY REFERENCE:
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2006
PATHFINDER BANCORP, INC.
Page
PART I
Item 1. Business 1
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 11
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for the Registrant's Common Equity, Related 13
Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial 16
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about 34
Market Risk
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes In and Disagreements With Accountants on 70
Accounting and Financial Disclosure
Item 9A. Controls and Procedures 70
Item 9B. Other Information 70
PART III
Item 10. Directors, Executive Officers and Corporate Governance 71
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners and 71
Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and 71
Director Independence
Item 14. Principal Accountant Fees and Services 71
PART IV
Item 15. Exhibits and Financial Statement Schedules 72
PART I
ITEM 1: BUSINESS
GENERAL
PATHFINDER BANCORP, INC.
Pathfinder Bancorp, Inc. (the "Company") is a Federally chartered mid-tier
holding company headquartered in Oswego, New York. 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, 2006, the Mutual Holding Company held 1,583,239 shares of Common
Stock and the public held 883,093 shares of Common Stock (the "Minority
Shareholders"). At December 31, 2006, Pathfinder Bancorp, Inc. had total assets
of $301.4 million, total deposits of $245.6 million and shareholders' equity of
$20.9 million.
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 operates from its main office as well as 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 customer-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.
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 and commercial real estate. At December 31, 2006, $158.2 million,
or 78% of the Bank's total loan portfolio consisted of loans secured by real
estate, of which $117.7 million, or 74%, were loans secured by one- to
four-family residences and $40.5 million, or 26%, were secured by commercial
real estate. Additionally, $18.0 million, or 11%, of total real estate loans,
were secured by second liens on residential properties that are classified as
consumer loans. The Bank also originates commercial and consumer loans that
totaled $23.0 and $3.2 million, respectively, or 13%, of the Bank's total loan
portfolio. The Bank invests a portion of its assets in securities issued by the
United States Government agencies and sponsored enterprises, state and municipal
obligations, corporate debt securities, mutual funds, and equity securities.
The Bank also invests in mortgage-backed securities primarily issued or
guaranteed by United States Government sponsored enterprises. 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.
Pathfinder Bank formed a limited purpose commercial bank subsidiary, Pathfinder
Commercial Bank, in October of 2002. Pathfinder Commercial Bank was established
to serve the depository needs of public entities in its market area.
In April 1999, the Bank established Pathfinder REIT, Inc. as the Bank's
wholly-owned real estate investment trust subsidiary. At December 31, 2006,
Pathfinder REIT, Inc. held $26.5 million in mortgages and mortgage related
assets. Recent legislation proposed by the New York State legislature may
significantly impact the tax treatment accorded REITs. Enactment of this
legislation would increase the state tax rate for the Company. All disclosures
in the Form 10-K relating to the Bank's loans and investments include loans and
investments that are held by Pathfinder REIT, Inc.
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The Bank also has 100% ownership in Whispering Oaks Development Corp., which was
originally formed to develop the Whispering Oaks real estate subdivision in
Baldwinsville, New York. The Bank gained title to the Whispering Oaks real
estate subdivision through foreclosure. The Whispering Oaks real estate
subdivision has been fully developed. The subsidiary is retained, however, in
case the need to operate or develop other foreclosed real estate emerges.
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 Entergy Nuclear
Northeast, Novelis, 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 commercial 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.
On April 23, 2006, Alliance Bank N.A. announced it had reached a definitive
agreement to merge with the parent company of Oswego County National Bank
(OCNB). OCNB, formerly, Oswego County Savings Bank has been domiciled in the
city of Oswego since its founding in 1870 and has been the primary local
competitor for Pathfinder Bank. In management's view, the absorption of OCNB
into Alliance Bank, a $900 million bank headquartered in Syracuse, NY, will
provide both challenges and opportunities for Pathfinder Bank. The challenge
will be the ability of a larger competitor to more actively and aggressively
market within the primary business area of Pathfinder Bank. Opportunities exist,
as management believes that it's unique competencies and differentiators are
more closely matched by a locally domiciled bank, than one headquartered outside
our primary market area. Opportunities may exist to garner additional business
opportunities with the traditional customer base of OCNB which is more apt to
conduct its business with a local bank.
REGULATION AND SUPERVISION
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 Deposit Insurance Fund
("DIF "). The DIF is a merger of the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF"). This merger was made effective
March 31, 2006. The Bank is subject to extensive regulation by the New York
State Banking Department (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 of the Department 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 Federal Home Loan Bank
of New York ("FHLBNY") 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
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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.
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. 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. Under FDICIA and the FDIC's
implementing regulations, the Bank's investment and service corporation
activities are limited to activities permissible for a national bank unless the
FDIC otherwise permits it.
The FDIC and the Superintendent have broad enforcement authority over the Bank.
Under this authority, the FDIC and the Superintendent have the ability to issue
formal or informal orders to correct violations of law or unsafe or unsound
banking practices.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the DIF, 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.
The Federal Deposit Insurance Reform Act of 2005 was signed into law on February
8, 2006, and gives the FDIC increased flexibility in assessing premiums on banks
and savings associations, including the Bank, to pay for deposit insurance and
in managing its deposit insurance reserves. The reform legislation provides a
credit to all insured institutions, based on the amount of their insured
deposits at year-end 1996, to offset the premiums that they may be assessed:
combines the BIF and SAIF to form a single Deposit Insurance Fund; increase
deposit insurance to $250,000 for Individual Retirement Accounts; and authorizes
inflation-based increases in deposit insurance on other accounts every 5 years,
beginning in 2001. In connection with the reform act of 2005, the Company has
received communication from the FDIC disclosing how insurance premiums will be
calculated for 2007 and forward, as well as the preliminary statement of
one-time assessment credit. Management estimates that this one time credit will
offset premiums assessed, beginning in July 2007, for a period of approximately
18-21 months.
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
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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 undertaken in 1997.
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% or more, has a Tier I risk-based capital ratio of 6%
or more, has a Tier I leverage capital ratio of 5% 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% or more, a Tier I risk-based capital
ratio of 4% or more and a Tier I leverage capital ratio of 4% or more (3% 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%, a Tier I risk-based capital ratio that is less than 4% or a Tier I
leverage capital ratio that is less than 4% (3% under certain circumstances);
(iv) "significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6%, a Tier I risk-based capital ratio that is less than 3% or
a Tier I leverage capital ratio that is less than 3%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2%. 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 currently meets the criteria to be classified
as a "well capitalized" savings institution.
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TRANSACTIONS WITH AFFILIATES AND INSIDERS
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 unimpaired capital and unimpaired 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. The Company and the Mutual Holding Company are registered with the OTS and
are subject to OTS regulations, examinations, supervision and reporting
requirements. As such, the OTS has enforcement authority over the Company and
the Mutual Holding Company, and their non-savings institution 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.
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;
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(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 of the OTS, 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 associations, 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 associations 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.
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 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.
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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. As such, neither
the Company nor the Mutual Holding Company is subject to supervision by the
Department.
FEDERAL SECURITIES LAW
The common stock of the Company is registered with the SEC under the Exchange
Act. 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, 2006, the Bank was in compliance with these reserve requirements.
FEDERAL COMMUNITY REINVESTMENT 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 "satisfactory."
NEW YORK STATE COMMUNITY REINVESTMENT REGULATION
The Bank is also subject to provisions of the New York State Banking Law which
impose continuing and affirmative obligations upon banking institutions
organized in New York State to serve the credit needs of its local community
("NYCRA") which are substantially similar to those imposed by the 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
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7
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
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. The USA
PATRIOT Act also requires the federal banking agencies to take into
consideration the effectiveness of controls designed to combat money laundering
activities in determining whether to approve a merger or other acquisition
application of a member institution. Accordingly, if the Company were to engage
in a merger or other acquisitions, its controls designed to combat money
laundering would be considered as part of the application process. The Company
and the Bank have established policies, procedures and systems designed to
comply with these regulations.
SARBANES-OXLEY ACT OF 2002
The Sarbanes-Oxley Act of 2002 was signed into law on July 30, 2002. The
Sarbanes-Oxley Act of 2002 is a law that addresses, among other issues,
corporate governance, auditing and accounting, executive compensation, and
enhanced and timely disclosure of corporate information. As directed by Section
302(a) of Sarbanes-Oxley Act of 2002, the Company Chief Executive Officer and
Chief Financial Officer are each required to certify that the company's
quarterly and annual reports do not contain any untrue statement of a material
fact. The rules have several requirements, including having these officers
certify that: they are responsible for establishing, maintaining and regularly
evaluating the effectiveness of our internal controls; they have made certain
disclosures to our auditors and the audit committee of the Board of Directors
about our internal controls; and they have included information in our quarterly
and annual reports about their evaluation and whether there have been
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the evaluation. We will be
subject to further reporting requirements with the year ending December 31, 2007
under the provisions of Section 404 of the Sarbanes-Oxley Act. Recently revised
dates for compliance with Section 404 have given non-accelerated filers some
relief by extending the date for compliance with auditor attestation
requirements to the year ending December 31, 2008. We have existing policies,
procedures and systems designed to comply with these regulations, and are
further enhancing and documenting such policies, procedures and systems to
ensure continued compliance with these regulations.
The Company maintains an Internet website located at www.pathfinderbank.com on
----------------------
which, among other things, the Company makes available, free of charge, various
reports that it files with or furnishes to the Securities and Exchange
Commission, including its Annual Report on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K. The Company has also made available on
its website its Audit Committee Charter, Compensation Committee Charter,
Governance Guidelines and Code of Ethics. These reports are made available as
soon as reasonably practicable after these reports are filed with or furnished
to the Securities and Exchange Commission.
The Company's Annual Report on Form 10-K may be accessed on the Company's
website at www.pathfinderbank.com.
----------------------
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.
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8
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.
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 Internal Revenue 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. New York State has examined fiscal year-end tax returns
through 2000. 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 the current period can be
carried forward to the succeeding 20 taxable years.
ITEM 1A: RISK FACTORS
The material risks and uncertainties that management believes affect the Company
are described below. The risks and uncertainties described below are not the
only ones facing the Company. Additional risks and uncertainties that management
is not aware of or that management currently deems immaterial may also impair
the Company's business operations. This report is qualified in its entirety by
these risk factors. If any of the following risks actually occur, the Company's
financial condition and results of operations could be materially and adversely
affected.
CHANGES IN INTEREST RATES CAN HAVE AN ADVERSE EFFECT ON PROFITABILITY
The Company's earnings and cash flows are largely dependent upon its net
interest income. Net interest income is the difference between interest income
earned on interest earning assets such as loans and investment securities and
interest expense paid on interest bearing liabilities such as deposits and
borrowed funds. Interest rates are highly sensitive to many factors that are
beyond the Company's control, including general economic conditions,
competition, and policies of various governmental and regulatory agencies and,
in particular, the Board of Governors of the Federal Reserve System. Changes in
monetary policy, including changes in interest rates, could influence not only
the interest the Company receives on loans and investment securities and the
amount of interest it pays on deposits and borrowings, but such changes could
also affect (i) the Company's ability to originate loans and obtain deposits,
(ii) the fair value of the Company's financial assets and liabilities, and (iii)
the average duration of the Company's assets and liabilities. If the interest
--------------------------------------------------------------------------------
9
rates paid on deposits and other borrowings increase at a faster rate than the
interest rates received on loans and other investments, the Company's net
interest income, and therefore earnings, could be adversely affected. Earnings
could also be adversely affected if the interest rates received on loans and
other investments fall more quickly than the interest rates paid on deposits and
other borrowings.
Although management believes it has implemented effective asset and liability
management strategies to reduce the potential effects of changes in interest
rates on the Company's results of operations, any substantial, unexpected,
prolonged change in market interest rates could have a material adverse effect
on the Company's financial condition and results of operations. See Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk" located elsewhere
in this report for further discussion related to the Company's management of
interest rate risk.
ALLOWANCE FOR LOAN LOSSES MAY BE INSUFFICIENT
The Company's loan customers may not repay their loans according to their terms
and the collateral securing the payment of these loans may be insufficient to
assure repayment. The Company may experience significant loan losses, which
would have a material adverse effect on earnings. Management makes various
assumptions and judgments about the collectibility of the loan portfolio,
including the creditworthiness of borrowers and the value of the real estate and
other assets serving as collateral for the repayment of loans.
The Company maintains an allowance for loan losses in an attempt to cover any
loan losses inherent in the portfolio. In determining the size of the allowance,
management relies on an analysis of the loan portfolio based on historical loss
experience, volume and types of loans, trends in classification, volume and
trends in delinquencies and non-accruals, national and local economic conditions
and other pertinent information. If those assumptions are incorrect, the
allowance may not be sufficient to cover future loan losses and adjustments may
be necessary to allow for different economic conditions or adverse developments
in the loan portfolio. In addition, regulatory agencies review the Company's
allowance for loan losses and may require additions to the allowance based on
their judgment about information available to them at the time of their
examination. An increase in the Company's allowance for loan losses would reduce
its earnings.
EXTENSIVE REGULATION AND SUPERVISION
The Company, primarily through its principal subsidiaries, Pathfinder Bank and
Pathfinder Commercial Bank, and certain non-bank subsidiaries, is subject to
extensive federal and state regulation and supervision. Banking regulations are
primarily intended to protect depositors' funds, federal deposit insurance funds
and the banking system as a whole, not shareholders. These regulations affect
the Company's lending practices, capital structure, investment practices,
dividend policy and growth, among other things. The Company is also subject to a
number of federal laws, which, among other things, require it to lend to various
sectors of the economy and population, and establish and maintain comprehensive
programs relating to anti-money laundering and customer identification. Congress
and federal regulatory agencies continually review banking laws, regulations and
policies for possible changes. Changes to statutes, regulations or regulatory
policies, including changes in interpretation or implementation of statutes,
regulations or policies, could affect the Company in substantial and
unpredictable ways. Such changes could subject the Company to additional costs,
limit the types of financial services and products it may offer and/or increase
the ability of non-banks to offer competing financial services and products,
among other things. Failure to comply with laws, regulations or policies could
result in sanctions by regulatory agencies, civil money penalties and/or
reputation damage, which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's
compliance with certain of these laws will be considered by banking regulators
when reviewing bank merger and bank holding company acquisitions. While the
Company has policies and procedures designed to prevent any such violations,
there can be no assurance that such violations will not occur. See the
"Regulation and Supervision" section in Item 1, "Business" and Note 17 to
consolidated financial statements included in Item 8, "Financial Statements and
Supplementary Data", which are located elsewhere in this report.
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10
LOCAL MARKET ECONOMIES
The Company's business is concentrated in Oswego and parts of Onondaga counties
of New York State. The economy in the Company's market area is
manufacturing-oriented and dependent on the State University of New York College
at Oswego. As a result, its financial condition, results of operations and cash
flows are subject to changes if there are changes in the economic conditions in
these areas. A prolonged period of economic recession or other adverse economic
conditions in one or both of these areas could have a negative impact on the
Company. The Company can provide no assurance that conditions in its market area
economies will not deteriorate in the future and that such deterioration would
not have a material adverse effect on the Company.
COMPETITION IN THE FINANCIAL SERVICES INDUSTRY
The Company faces substantial competition in all areas of its operations from a
variety of different competitors, many of which are larger and may have more
financial resources. The Company competes with other providers of financial
services such as other bank holding companies, commercial and savings banks,
savings and loan associations, credit unions, money market and mutual funds,
mortgage companies, title agencies, asset managers, insurance companies and a
growing list of other local, regional and national institutions which offer
financial services. If the Company is unable to compete effectively, it will
lose market share and income generated from loans, deposits, and other financial
products will decline.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None
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11
ITEM 2: PROPERTIES
The Bank conducts its business through its main office located in Oswego, New
York, and six 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, 2006. The aggregate net book
value of the Bank's premises and equipment was $7.6 million at December 31,
2006. For additional information regarding the Bank's properties, see Note 7 to
Notes to Consolidated Financial Statements.
LOCATION OPENING DATE OWNED/LEASED
-----------------------------------------------------------
Main Office 1874 Owned
214 West First Street
Oswego, New York 13126
Plaza Branch 1989 Owned (1)
Roue 104, Ames Plaza
Oswego, New York 13126
Mexico Branch 1978 Owned
Norman and Main Streets
Mexico, New York 13114
Oswego East Branch 1994 Owned
34 East Bridge Street
Oswego, New York 13126
Lacona Branch 2002 Owned
1897 Hardwood Drive
Lacona, New York 13083
Fulton Branch 2003 Owned (2)
5 West First Street South
Fulton, New York 13069
Central Square Branch 2005 Owned
3025 East Ave
Central Square, New York 13036
(1) The building is owned; the underlying land is leased with an
annual rent of $21,000
(2) The building is owned; the underlying land is leased with an
annual rent of $27,000
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 not expected to have a material adverse
impact on the Company's consolidated financial condition and results of
operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 2006 to a vote of
the Company's shareholders.
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12
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK, RELATED SECURITY HOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Pathfinder Bancorp, Inc.'s common stock currently trades on the Nasdaq Capital
Market under the symbol "PBHC". There were 499 shareholders of record as of
March 9, 2007. 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, 2006 $16.000 $13.037 $ 0.1025
September 30, 2006 14.370 11.700 0.1025
June 30, 2006 13.070 11.750 0.1025
March 31, 2006 14.130 11.000 0.1025
-----------------------------------------------
December 31, 2005 $15.050 $12.360 $ 0.1025
September 30, 2005 15.250 13.050 0.1025
June 30, 2005 18.000 14.250 0.1025
March 31, 2005 17.950 16.250 0.1025
PERFORMANCE GRAPH
Set forth hereunder is a performance graph comparing (a) the total return on
the Common Stock for the period beginning on December 31, 2001 through December
31, 2006, (b) the cumulative total return on stocks included in the Nasdaq
Composite Index over such period, and (c) the yearly cumulative total return on
stocks included in the SNL Thrift Index over such period. The cumulative
total return on the Common Stock was computed assuming the reinvestment
of cash dividends during the fiscal year.
There can be no assurance that the Common Stock's performance will continue
in the future with the same or similar trend depicted in the graph. The Company
will not make or endorse any predictions as to future stock performance.
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13
[GRAPHIC OMITED]
Period Ending
-----------------------------------------------------------
------------------------------------------------------------------------------------
Index 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
Pathfinder Bancorp, Inc 100.00 113.55 146.14 135.86 108.18 111.48
NASDAQ Composite 100.00 68.76 103.67 113.16 115.57 127.58
SNL Thrift Index 100.00 119.29 168.88 188.16 194.80 227.07
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
non-objection of the Office of Thrift Supervision. Pathfinder Bancorp, M.H.C.
elected to waive its dividend for the quarters ended March 31, 2006 and
September 30, 2006. During 2007, Pathfinder Bancorp, M.H.C. expects to waive
two quarterly dividends.
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14
ITEM 6: SELECTED FINANCIAL DATA
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 Corp.
The following selected consolidated financial data sets forth certain financial
highlights of the Company and should be read in conjunction with the
consolidated financial statements and related notes, and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this annual report on Form 10-K.
2006 2005 2004 2003 2002
-----------------------------------------------------------------------------------------------------
YEAR END (In thousands)
Total assets $301,382 $296,948 $302,037 $277,940 $279,056
Loans receivable, net 201,713 187,889 185,125 187,002 179,001
Deposits 245,585 236,377 236,672 206,894 204,522
Equity 20,850 20,928 21,826 21,785 23,230
FOR THE YEAR (In thousands)
Net interest income $ 8,326 $ 8,742 $ 8,905 $ 9,337 $ 8,789
Noninterest income 2,635 2,040 3,047 2,608 2,094
Core noninterest income (a) 2,416 2,333 1,996 1,740 1,511
Noninterest expense 9,668 10,060 9,307 9,094 7,964
Net income 1,028 462 1,405 1,652 1,156
PER SHARE
Net income (basic) $ 0.42 $ 0.19 $ 0.58 $ 0.68 $ 0.45
Book value 8.45 8.50 8.91 8.96 8.90
Tangible book value (b) 6.82 6.77 7.04 7.03 7.02
Cash dividends declared 0.410 0.410 0.405 0.40 0.30
RATIOS
Return on average assets 0.34% 0.15% 0.47% 0.59% 0.45%
Return on average equity 4.86 2.16 6.45 7.61 5.01
Return on average tangible equity (b) 6.04 2.72 8.17 9.77 7.03
Average equity to average assets 7.03 6.95 7.29 7.77 8.94
Dividend payout ratio (c) 66.73 147.84 47.54 39.41 36.76
Allowance for loan losses to loans receivable 0.74 0.89 0.98 0.91 0.82
Net interest rate spread 2.92 3.07 3.22 3.53 3.47
Noninterest income to average assets 0.87 0.66 1.02 0.93 0.81
Core noninterest income to average assets (a) 0.80 0.76 0.67 0.62 0.59
Noninterest expense to average assets 3.21 3.28 3.12 3.26 3.09
Efficiency ratio (d) 88.19 93.30 77.87 76.13 73.18
(a) Core noninterest income excludes net (losses) gains on sales and
impairment of investment securities and net (losses) gains on sales of
loans and foreclosed real estate.
(b) Tangible equity excludes intangible assets.
(c) 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.
(d) The efficiency ratio is calculated as noninterest expense divided
by the sum of net interest income and noninterest income.
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15
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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., however, Pathfinder Statutory Trust I is
deconsolidated for reporting purposes (see Note 10). Pathfinder Commercial
Bank, Pathfinder REIT, Inc. and Whispering Oaks Development Corp. represent
wholly owned subsidiaries of Pathfinder Bank. At December 31, 2006, Pathfinder
Bancorp, M.H.C, the Company's mutual holding company parent, whose activities
are not included in the MD&A, held 64.2% of the Company's outstanding common
stock and the public held 35.8%.
On March 22, 2007, the Company entered into a trust preferred issuance for $5.0
million, adjustable quarterly at a spread over LIBOR. The Company intends to
use all the proceeds from the issuance to retire its existing trust preferred
obligation on June 27th, 2007, at its first call date.
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.
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16
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
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 security 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, 2006, 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 consolidated
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.
EXECUTIVE SUMMARY
The Company opened a full service branch in Central Square, New York in June of
2005. Total deposits for this branch were $11.0 million at December 31, 2006,
as compared to $6.3 million at December 31, 2005. Total deposits for the
Company increased 4%, to $245.6 million at December 31, 2006, while the average
balance of deposits decreased $1.5 million to $238.4 million at December 31,
2006. The Company will continue to focus on building its market share in
Central Square and developing more core deposit relationships in its existing
markets during 2007.
Total assets increased 2%, primarily in the loan portfolio and interest-earning
deposits. The loan portfolio increased 7% as net growth in the commercial real
estate, commercial and consumer loan portfolios was partially offset by a
decrease in the residential real estate portfolio. Asset quality continued to
--------------------------------------------------------------------------------
17
improve during 2006. The ratio of nonperforming assets to total assets was
0.58% at December 31, 2006 compared to 0.82% in the prior year. The improvement
in asset quality is attributable to the enhancement of collection procedures.
The Company expects to concentrate on continued commercial mortgage and
commercial loan portfolio growth during 2007.
Net income for 2006 was $1.0 million, or $0.42 per share, as compared to
$462,000, or $0.19 per share, in 2005. An improvement in asset quality,
increased service charges on deposit accounts, a reduction in noninterest
expenses and an increase in net gains on investment securities contributed to
the increase in net income from 2005. Net interest margin compression
negatively impacted earnings during 2006.
The Company experienced net interest margin compression to 3.10% in 2006 from
3.21% in 2005. Net interest income decreased 5% to $8.3 million for the year
ended December 31, 2006. Beginning in June 2004, the Federal Reserve has
increased its target for federal funds rate numerous times. While these
short-term market interest rates have increased, longer-term market interest
rates have remained relatively unchanged. This "flattening" of the market yield
curve has had a negative impact on the Company's interest rate spread and net
interest margin to date. If short-term interest rates continue to rise, and if
rates on deposits and borrowings continue to reprice upwards faster than the
rates on longer-term loans and investments, the Bank will continue to experience
compression of its net interest rate spread and net interest margin, which would
result in a negative impact on the Company's profitability. The Company has
implemented an asset/liability management strategy to address the current
interest rate environment, including the growth of the more rate sensitive
commercial real estate and commercial loan portfolio, and increasing core
deposit relationships and strategies to mitigate the rising cost of deposits.
The Company's efforts to enhance other income during 2006 by increasing the
customer deposit base and increasing overdraft, returned check and
non-sufficient fund charges to be more reflective with local competition
resulted in a 6% increase in service charges on deposit accounts during 2006.
The Company continues to explore cost saving strategies to minimize the growth
of operating expenses. The Company's efforts resulted in a reduction in
noninterest expense of $392,000, or 3.9%, when comparing current year operating
expense levels to the prior year. The expense reductions were achieved while
operating the new Central Square branch for a full year in 2006.
RESULTS OF OPERATIONS
Net income for 2006 was $1.0 million, an increase of $566,000, or 123%, compared
to net income of $462,000 for 2005. Basic earnings per share increased to $0.42
per share for the year ended December 31, 2006 from $0.19 per share for the year
ended December 31, 2005. Return on average equity increased to 4.86% in 2006
from 2.16% in 2005.
Net interest income, on a tax equivalent basis, decreased $467,000, or 5%,
primarily resulting from interest rate spread compression as shorter term
funding sources are repricing into higher rates faster than longer term assets.
Provision for loan losses at December 31, 2006 decreased 93% reflecting improved
asset quality during 2006 and fewer charge-offs. The Company experienced a 4%
increase in noninterest income, exclusive of securities gains and losses,
primarily attributable to increased deposit levels and the related service
charges associated with checking accounts, combined with an increase in the
value of bank owned life insurance and commercial loan fees. Noninterest
expense decreased 4% due to a reduction in personnel expense, decreased
professional and other services and other expenses.
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 borrowed
money. Changes in net interest income and the net interest margin ratio result
from the interaction between the volume and composition of earning assets and
interest-bearing liabilities, and their respective yields and funding costs.
Net interest income, on a tax-equivalent basis, decreased $467,000, or 5%, to
$8.5 million for the year ended December 31, 2006, as compared to the year ended
December 31, 2005. The Company's net interest margin for 2006 decreased to
--------------------------------------------------------------------------------
18
3.10% from 3.21% in 2005. The decrease in net interest income is attributable
to increased costs of interest-bearing liabilities and was partially offset by
an increase in the yields on interest earning assets. The average balance of
interest-earning assets decreased $5.4 million, or 2%, during 2006 and the
average balance of interest-bearing liabilities decreased by $6.7 million, or
3%. The decrease in the average balance of interest-bearing liabilities
primarily resulted from a $3.8 million, or 9%, decrease in the average balance
of borrowed funds and a $2.9 million, or 1% decrease in the average balance of
deposits. Interest income, on a tax-equivalent basis, increased $720,000 during
2006, as the yield on interest earning assets increased to 5.86% in 2006 from
5.49% in 2005. Interest expense on deposits increased $1.2 million, or 27%, as
the cost of deposits rose to 2.52% in 2006 from 1.96% in 2005. In addition to
the increase in the cost of deposits, interest expense on borrowings also
increased by $19,000, or 1%, from the prior year.
In comparison, net interest income decreased $106,000, or 1%, on a
tax-equivalent basis, from 2004 to 2005. The decrease in net interest income
was comprised of an increase in interest expense of $783,000, or 14%, partially
offset by an increase in interest income of $677,000, or 5%. The average balance
of interest-earning assets grew $8.2 million during 2005 and the average balance
of interest-bearing liabilities increased by $7.8 million. The increase in the
average balance of interest-bearing liabilities primarily resulted from
attracting new municipal deposit customers. The decrease in the average yield
on interest-earning assets by 60 basis points resulted from the downward
repricing of loans from refinancing and originations in the lower interest rate
environment and the purchase of $35.6 million in investment securities at lower
yields than the existing portfolio.
--------------------------------------------------------------------------------
19
AVERAGE BALANCES AND RATES
The following table sets forth information concerning average interest-earning
assets and interest-bearing liabilities and the yields and rates thereon.
Interest income and resultant yield information in the table 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,
-------------------------------------------------------------
2006 2005
-------------------------------------------------------------
Average Average
Average Yield / Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
--------------------------------------------------------------------------------------------------------
Interest-earning assets:
Real estate loans residential $119,417 $ 6,876 5.76% $121,875 $ 7,092 5.82%
Real estate loans commercial 35,076 2,705 7.71% 29,385 2,181 7.42%
Commercial loans 19,961 1,574 7.88% 17,563 1,135 6.46%
Consumer loans 20,153 1,641 8.14% 19,257 1,418 7.36%
Taxable investment securities 66,788 2,656 3.97% 74,496 2,728 3.66%
Tax-exempt investment securities 10,240 482 4.70% 13,202 681 5.16%
Interest-earning deposits 1,779 92 5.12% 3,041 71 2.33%
--------------------------------------------------------------------------------------------------------
Total interest-earning assets $273,414 $ 16,026 5.86% $278,819 $ 15,306 5.49%
Noninterest-earning assets:
Other assets 31,600 31,455
Allowance for loan losses (1,661) (1,835)
Net unrealized losses
on available for sale securities (2,142) (1,307)
--------------------------------------------------------------------------------------------------------
Total Assets $301,211 $307,132
========================================================================================================
Interest-bearing liabilities:
NOW accounts $ 21,094 $ 102 0.48% $ 19,877 $ 107 0.54%
Money management accounts 13,318 110 0.83% 16,096 138 0.86%
MMDA accounts 20,608 786 3.81% 25,284 697 2.76%
Savings and club accounts 58,997 266 0.45% 65,558 291 0.44%
Time deposits 103,596 4,223 4.08% 93,732 3,086 3.29%
Junior subordinated debentures 5,155 448 8.57% 5,155 351 6.72%
Borrowings 33,589 1,608 4.79% 37,348 1,686 4.51%
--------------------------------------------------------------------------------------------------------
Total Interest-bearing liabilities $256,357 $ 7,543 2.94% $263,050 $ 6,356 2.42%
--------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits 20,745 19,324
Other liabilities 2,943 3,416
--------------------------------------------------------------------------------------------------------
Total liabilities 280,045 285,790
--------------------------------------------------------------------------------------------------------
Shareholders' equity 21,166 21,342
Total liabilities & shareholders' equity $301,211 $307,132
========================================================================================================
Net interest income $ 8,483 $ 8,950
Net interest rate spread 2.92% 3.07%
Net interest margin 3.10% 3.21%
--------------------------------------------------------------------------------------------------------
Ratio of average interest-earning assets
to average interest-bearing liabilities 106.65% 105.99%
--------------------------------------------------------------------------------------------------------
2004
------------------------------
Average
Average Yield/
(Dollars in thousands) Balance Interest Cost
-------------------------------------------------------------------------
Interest-earning assets:
Real estate loans residential $124,734 $ 7,491 6.01%
Real estate loans commercial 30,958 2,254 7.28%
Commercial loans 16,060 901 5.61%
Consumer loans 17,427 1,194 6.85%
Taxable investment securities 65,480 2,220 3.39%
Tax-exempt investment securities 8,603 488 5.67%
Interest-earning deposits 7,338 81 1.10%
-------------------------------------------------------------------------
Total interest-earning assets $270,600 $ 14,629 5.41%
Noninterest-earning assets:
Other assets 30,236
Allowance for loan losses (1,792)
Net unrealized gains
on available for sale securities (515)
-------------------------------------------------------------------------
Total Assets $298,529
=========================================================================
Interest-bearing liabilities:
NOW accounts $ 20,808 $ 135 0.65%
Money management accounts 14,459 167 1.15%
MMDA accounts 26,316 400 1.52%
Savings and club accounts 68,046 453 0.67%
Time deposits 82,769 2,484 3.00%
Junior subordinated debentures 5,155 251 4.80%
Borrowings 37,674 1,683 4.47%
-------------------------------------------------------------------------
Total Interest-bearing liabilities $255,227 $ 5,573 2.18%
-------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits 17,974
Other liabilities 3,556
-------------------------------------------------------------------------
Total liabilities 276,757
-------------------------------------------------------------------------
Shareholders' equity 21,772
Total liabilities & shareholders' equity $298,529
=========================================================================
Net interest income $ 9,056
Net interest rate spread 3.22%
Net interest margin 3.35%
-------------------------------------------------------------------------
Ratio of average interest-earning assets
to average interest-bearing liabilities 106.02%
-------------------------------------------------------------------------
INTEREST INCOME
Changes in interest income are derived as a result of the volume of loans and
securities, as measured by changes in the respective average balance and by the
related yields on those balances. Interest income on a tax-equivalent basis
increased $720,000, or 5%. Average loans increased 3% in 2006, with yields
--------------------------------------------------------------------------------
20
increasing 29 basis points to 6.58%. The Company's average residential mortgage
loan portfolio decreased $2.5 million, or 2%, when comparing the year 2006 to
2005. The average yield on the residential mortgage loan portfolio decreased 6
basis points to 5.76% in 2006 from 5.82% in 2005. An increase in the average
balance of consumer loans of $896,000, or 5%, resulted from an increase in home
equity loans. The average yield increased 78 basis points, to 8.14% from 7.36%
in 2005, primarily resulting from the increase in home equity loans, which are
based on the Bank's prime rate. Average commercial loans increased 14% while the
tax-equivalent yield increased 143 basis points to 7.89% in 2006 compared to
6.46%, in 2005.
Average loans decreased $1.1 million in 2005, with average yields increasing 3
basis points to 6.29%. The interest income on loans decreased $14,000 in 2005
compared to 2004. For the comparable periods, average residential mortgage
loans decreased $2.9 million, or 2% and average commercial mortgage loans
decreased by $1.6 million, or 5%. These decreases were partially offset by
increases in average consumer loans of $1.8 million, or 11% and average
commercial loans of $1.5 million, or 9%.
Interest income on investment securities decreased 8% from 2005, resulting from
a decrease in the average balance of investment securities (taxable and
tax-exempt) by $10.7 million, or 12%, to $77.0 million in 2006 from $87.7
million in 2005. The decrease in the average balance of investment securities
is primarily the result of cash flows generated from security portfolio
maturities, amortization and sales being utilized to fund loan portfolio growth.
The tax-equivalent yield increased 19 basis points to 4.08% in 2006 from 3.89%
in 2005.
Average investment securities (taxable and tax-exempt) in 2005 increased by
$13.6 million, with an increase in tax-equivalent interest income from
investments of $701,000, or 26%, compared to 2004. The average tax-equivalent
yield of the portfolio rose 23 basis points, to 3.89% from 3.66%. The increase
in the average balance of investment securities and the increase in the
tax-equivalent yield resulted from security portfolio acquisitions required for
municipal deposit collateralization occurring at yields in excess of the
existing average portfolio yield.
INTEREST EXPENSE
Changes in interest expense are derived as a result of the volume of deposits
and borrowings as measured by changes in the respective average balances and by
the related interest costs on those balances. Interest expense increased $1.2
million, or 19%, in 2006, when compared to 2005. The increase in the cost of
funds resulted from an increase in the average cost of interest-bearing
liabilities of 52 basis points, to 2.94% in 2006 from 2.42% at 2005, offset by a
$6.7 million decrease in the average balance of interest-bearing liabilities
during 2006. The average cost of deposits increased 56 basis points to 2.52%
during 2006 from 1.96% for 2005. The increase in the cost of average deposits
resulted from rising short-term interest rates, combined with a shift from lower
cost savings products to the higher cost time deposits. The average cost of
MMDA accounts increased 105 basis points and the cost of time deposits increased
79 basis points. The average balance of deposits decreased $2.9 million to
$217.6 million at 2006 from $220.5 million at 2005. The decrease in the average
balance of deposits primarily resulted from a $5.9 million, or 20%, decrease in
the average balance of municipal deposits, offset by an increase in the average
balance of retail deposits resulting primarily from inflows into the new branch
in Central Square. The cost of junior subordinated debentures increased 185
basis points, increasing interest expense by $97,000.
Interest expense increased $783,000, or 14%, in 2005 compared to 2004. The
average cost of interest-bearing liabilities rose 24 basis points during the 12
months ended December 31, 2005.
--------------------------------------------------------------------------------
21
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.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
2006 VS. 2005 2005 VS. 2004
------------------------------------------------------
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 $(143) $ (73) $ (216) $(168) $(231) $(399)
Real estate loans commercial 436 88 524 (116) 43 (73)
Commercial loans 167 272 439 89 145 234
Consumer loans 68 155 223 131 93 224
Taxable investment securities (296) 224 (72) 322 186 508
Tax-exempt investment securities (143) (56) (199) 240 (47) 193
Interest-earning deposits (39) 60 21 (65) 55 (10)
---------------------------------------------------------------------------------------
Total interest income 50 670 720 433 244 677
---------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW accounts 7 (12) (5) (6) (22) (28)
Money management accounts (23) (5) (28) (14) (15) (29)
MMDA accounts (145) 234 89 39 258 297
Savings and club accounts (31) 6 (25) (16) (146) (162)
Time deposits 346 791 1,137 348 254 602
Junior subordinated debentures - 97 97 - 100 100
Borrowings (177) 99 (78) (13) 16 3
---------------------------------------------------------------------------------------
Total interest expense (23) 1,210 1,187 338 445 783
---------------------------------------------------------------------------------------
Net change in net interest income $ 73 $ (540) $ (467) $ 95 $(201) $(106)
=======================================================================================
--------------------------------------------------------------------------------
22
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) 2006 2005 2004
---------------------------------------------------------------------------------------------
Service charges on deposit accounts $1,391 $1,318 $ 967
Loan servicing fees 224 215 256
Increase in the value of bank owned life insurance 225 218 175
Debit card interchange fees 189 147 119
Other charges, commissions and fees 387 435 479
---------------------------------------------------------------------------------------------
Core noninterest income $2,416 $2,333 $1,996
Net gains (losses) on sales and impairment of investment securities 299 (205) 772
Net (losses) gains on sales of loans and foreclosed real estate (80) (88) 279
---------------------------------------------------------------------------------------------
Total noninterest income $2,635 $2,040 $3,047
=============================================================================================
Noninterest income in 2006 increased 29%, when compared to 2005, as a result of
a 4% increase in core noninterest income and a 174% increase in the non-core
items, net gains (losses) on sales and impairment of investment securities and
net (losses) gains on sales of loans and foreclosed real estate. Service charges
on deposit accounts increased 6% as deposit related charges were increased to be
more in line with local competition and the number of deposit accounts
increased, creating a higher volume of fee-generating transactions, including
overdrafts, nonsufficient funds, debit cards and ATM transactions. The value of
bank owned life insurance increased 3%. Loan servicing fees increased 4% due to
a reduction in the amortization of mortgage servicing rights, offset by a
decrease in late charges on mortgage and commercial loans and a reduction in
internal mortgage legal fees collected as outside sources were used for loan
closings. Investment security gains increased $504,000, when compared to the
2005 period resulting primarily from the recording of a long-term capital gain
in the fourth quarter of 2006 and an impairment reserve of $193,000 being
recognized on equity security holdings during 2005 that did not recur in 2006.
Net losses on the sale of loans/ foreclosed real estate decreased $8,000 when
compared to the prior year.
Noninterest income in 2005 decreased 33%, when compared to 2004, as a result of
a 17% increase in core noninterest income and a 128% decrease in the non-core
items. Service charges on deposit accounts increased 36% as the number of
deposit accounts increased, a full year's effect of a fee enhancement program,
increased ATM usage fees and increased internet banking usage. The value of bank
owned life insurance increased 25%. These increases were offset by a decrease
in loan servicing fees of 16%, primarily due to a reduction in fees associated
with mortgage and commercial loan late charges, and internal mortgage legal
fees. Investment security losses increased $977,000, when compared to the 2004
period resulting primarily from net gains recognized in prior years combined
with a $193,000 impairment loss recognized on an equity security and fourth
quarter investment portfolio restructurings. Net losses on the sale of
loans/foreclosed real estate increased $367,000 when compared to the prior year,
as a result of a $215,000 reduction in the gain recognized on the sale of loans
to the secondary market as the volume of loans sold decreased by 25%, combined
with adjustments made to the Fannie Mae custodial accounts to cover additional
interest due caused by early pay offs of sold and serviced loans.
--------------------------------------------------------------------------------
23
NONINTEREST EXPENSE
The following table sets forth certain information on noninterest expense for
the years indicated.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
(In thousands) 2006 2005 2004
---------------------------------------------------------------------------------
Salaries and employee benefits $5,007 $ 5,123 $4,798
Building occupancy 1,203 1,178 1,169
Data processing expenses 1,278 1,262 981
Professional and other services 615 782 682
Amortization of intangible asset 223 223 223
Other expenses 1,342 1,492 1,454
---------------------------------------------------------------------------------
Total noninterest expense $9,668 $10,060 $9,307
=================================================================================
Noninterest expenses decreased $392,000, or 4%, for the year ended December 31,
2006 when compared to 2005. Salaries and employee benefits decreased 2% in 2006
primarily due to personnel realignments made in the fourth quarter of 2005 and a
reduction in stock based compensation. This reduction was offset by normal
salary merit increases, incentive compensation and lower deferred payroll
expense due to fewer mortgage loan originations in 2006. The 21% decrease in
professional and other expenses was primarily due to outside consulting charges
for performance management, a process improvement program, and strategic
planning projects in 2005. This decrease was offset by 2006 expenses incurred
for the on-going SOX 404 process review, the creation of a new general ledger
cost center accounting program, economic impact studies and a direct mailing
campaign to attract new deposit customers. The 10% decrease in other expenses
primarily resulted from a reduction in audits and exams, dues and membership and
FDIC assessments. Additionally, ORE expenses were lower in conjunction with a
reduction in the number of properties held during 2006. Mortgage recording
taxes were lower than 2005 in direct correlation to the decreased volume of
residential mortgage originations. The 2% increase in building occupancy is
primarily due to a full year's operation of the new Central Square branch and
increased lease expense on properties. The 1% increase in data processing
expenses during 2006 related to increases in annual maintenance expense on our
core processing system, depreciation expenses and third party processing
charges. This increase was offset by a reduction in ATM processing charges as
the number of offsite ATM machines decreased.
Noninterest expenses increased $753,000, or 8%, for the year ended December 31,
2005 when compared to 2004. Salaries and employee benefits increased 7% in 2005
primarily resulting from incremental salary raises, the staffing of a new
Central Square branch and fourth quarter personnel realignment costs. The 25%
increase in data processing expenses during 2005 related to increased
depreciation expense, an increase in internet banking expense due to increased
volume of users, increased check processing charges due to an increase in the
number of deposit accounts, and the increased annual maintenance expense on our
core processing system. Professional and other services increased 20% due to
outside consulting charges for performance management, a process improvement
program, and strategic planning projects, along with increased advertising fees
for the new Central Square branch. The 3% increase in other operating expenses
during 2005 resulted primarily from the charge off of losses on ATM transactions
and bad checks, additional ORE expenses associated with taxes and maintenance of
properties, the write off of property and equipment at our former Fulton Branch,
as well as an increase in audits and exams. These expenses were offset by
decreases in postage expense, office supply expense and lower mortgage recording
taxes due to decreased loan volume.
INCOME TAX EXPENSE
In 2006, the Company reported income tax expense of $242,000 compared to an
income tax provision of $51,000 in 2005. The income tax expense in 2006
resulted from an increase in pretax income of $859,000, while income earned on
tax-exempt investment securities decreased. The effective tax rate increased to
--------------------------------------------------------------------------------
24
19% in 2006 compared to a tax benefit of (12)% in 2005. The increase in the
effective tax rate resulted primarily from an increase in the level of pre-tax
income, combined with a reduction in tax-exempt investment security income.
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. Enactment of proposed state tax legislation
regarding Real Estate Investment Trusts would increase the state tax rate for
the Company.
Income tax expense decreased $553,000 to a $(51,000) tax benefit for the year
ended December 31, 2005 when compared to the prior year. The decrease in income
tax expense reflected lower pre-tax income during the year. The Company's
effective tax rate at 2005 was (12%) compared to 26% in 2004.
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 safety of
principal while assisting the Company in meeting the liquidity needs and
interest rate risk strategies of the Company. All of the Company's investments
are classified as available for sale. The Company invests in securities
consisting primarily of mortgage-backed securities, securities issued by United
States Government agencies and sponsored enterprises, state and municipal
obligations, mutual funds, equity securities, investment grade corporate debt
instruments, and common stock issued by the Federal Home Loan Bank of New York
(FHLBNY). By investing in these types of assets, the Company reduces the credit
risk of its asset base, but must accept lower yields than would typically be
available on alternative loan products.
Investment securities decreased $11.8 million, to $64.2 million at December 31,
2006 from $76.0 million at December 31, 2005. The decrease in investment
securities was primarily attributable to the sale of lower yielding investment
securities in the fourth quarter of 2005, and first and fourth quarters of 2006.
In comparison, investment securities decreased $793,000, or 1%, from 2004 to
2005. The decrease in investment securities was primarily attributable to the
sale of lower yielding investment securities in the fourth quarter of 2005.
The following table sets forth the carrying value of the Company's investment
portfolio at the dates indicated.
AT DECEMBER 31,
---------------------------
(In thousands) 2006 2005 2004
----------------------------------------------------------------------------
INVESTMENT SECURITIES:
US Treasury and agencies $19,966 $20,713 $21,609
State and political subdivisions 5,870 11,177 8,881
Corporate 5,575 5,936 5,919
Mortgage-backed 25,481 31,565 32,213
Equity securities and FHLB stock 2,406 2,626 2,800
Mutual funds 6,336 6,177 5,935
----------------------------------------------------------------------------
65,634 78,194 77,357
Unrealized loss on available for sale portfolio (1,415) (2,150) (520)
----------------------------------------------------------------------------
Total investments in securities $64,219 $76,044 $76,837
============================================================================
25
The following table sets forth the scheduled maturities, amortized cost, fair
values and average yields for the Company's investment securities at December
31, 2006. 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
AMORTIZED WEIGHTED AMORTIZED WEIGHTED AMORTIZED WEIGHTED
(Dollars in thousands) COST AVG YIELD COST AVG YIELD COST AVG YIELD
-----------------------------------------------------------------------------------------------------------------
DEBT INVESTMENT SECURITIES:
US Treasury and agencies $ 4,107 4.14% $ 11,794 4.30% $ 4,065 4.68%
State and political subdivisions 505 2.94% 3,248 3.46% 2,117 3.87%
Corporate 200 7.00% 2,246 4.72% 989 4.75%
-----------------------------------------------------------------------------------------------------------------
Total $ 4,812 4.13% 17,288 4.20% $ 7,171 4.45%
-----------------------------------------------------------------------------------------------------------------
EQUITY AND MORTGAGE-BACKED SECURITIES:
Mutual funds $ 6,336 2.50% $ - - $ - -
Mortgage-backed - - 6,559 4.11% 4,244 4.99%
Equity securities and FHLB stock 2,406 5.63% - - - -
-----------------------------------------------------------------------------------------------------------------
Total $ 8,742 3.36% $ 6,559 3.87% $ 4,244 4.99%
-----------------------------------------------------------------------------------------------------------------
Total investment securities $ 13,554 3.64% $ 23,847 4.17% $11,415 4.65%
=================================================================================================================
MORE THAN TEN YEARS TOTAL INVESTMENT SECURITIES
---------------------------------------------------------
ANNUALIZED ANNUALIZED
AMORTIZED WEIGHTED AMORTIZED FAIR WEIGHTED
(Dollars in thousands) COST AVG YIELD COST VALUE AVG YIELD
----------------------------------------------------------------------------------------------------
DEBT INVESTMENT SECURITIES:
US Treasury and agencies $ - - $ 19,966 $19,409 4.34%
State and political subdivisions - - 5,870 5,791 3.57%
Corporate 2,140 5.31% 5,575 5,514 5.03%
-------------------------------------------------------------------------------------------------
Total $ 2,140 5.31% $ 31,411 $30,714 4.32%
-------------------------------------------------------------------------------------------------
EQUITY AND MORTGAGE-BACKED SECURITIES:
Mutual funds $ - - $ 6,336 $ 6,112 2.50%
Mortgage-backed 14,678 4.64% 25,481 24,896 4.56%
Equity securities and FHLB stock - - 2,406 2,497 5.63%
-------------------------------------------------------------------------------------------------
Total $ 14,678 4.52% 34,223 33,505 4.26%
-------------------------------------------------------------------------------------------------
Total investment securities $ 16,818 4.73% $ 65,634 $64,219 4.29%
=================================================================================================
The above noted yield information does not give effect to changes in fair value
that are reflected in the changes to consolidated shareholders' equity.
--------------------------------------------------------------------------------
26
LOANS RECEIVABLE
Loans receivable represent 74% 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 11% of the total loan portfolio. At December 31, 2006, 78% of
the Company's total loan portfolio consisted of loans secured by real estate, of
which 20% consisted of commercial real estate loans.
DECEMBER 31,
------------------------------------------------=
(In thousands) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------
Residential real estate (1) $118,494 $119,707 $123,898 $128,989 $123,178
Commercial real estate 40,501 31,845 29,874 31,278 32,657
Commercial loans 23,001 18,334 16,834 15,090 13,196
Consumer loans 21,213 19,682 18,505 16,880 15,068
------------------------------------------------------------------------------
Total loans receivable $203,209 $189,568 $189,111 $192,237 $184,099
==============================================================================
(1) Includes loans held for sale.
The following table shows the amount of loans outstanding as of December 31,
2006 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 one year or less. Adjustable
and floating rate loans are included in the period on which interest rates are
next scheduled to adjust rather than the period in which they contractually
mature, and fixed rate loans are included in the period in which the final
contractual repayment is due.
DUE UNDER DUE 1-5 DUE OVER
(In thousands) ONE YEAR YEARS FIVE YEARS TOTAL
-----------------------------------------------------------------------------------
REAL ESTATE:
Commercial real estate $ 9,962 $22,721 $ 7,818 $ 40,501
Construction 33 153 1,974 2,160
Residential real estate 46,263 65,941 4,130 116,334
-----------------------------------------------------------------------------------
56,258 88,815 13,922 158,995
-----------------------------------------------------------------------------------
Commercial 16,763 4,531 1,707 23,001
Consumer 9,504 5,188 6,521 21,213
-----------------------------------------------------------------------------------
Total loans $85,525 $98,534 $22,150 $203,209
===================================================================================
INTEREST RATES:
Fixed 14,129 62,119 12,260 88,508
Variable 68,396 36,415 9,890 114,701
-----------------------------------------------------------------------------------
Total Loans $85,525 $98,534 $22,150 $203,209
===================================================================================
Total loans receivable increased 7% when compared to the prior year. The
commercial real estate, commercial loan and consumer loan portfolios increased
$8.7 million, $4.7 million and $1.5 million, respectively. The increases in
these portfolios were partially offset by a decrease in the residential real
estate loans of $1.2 million. By comparison, loans receivable increased
$457,000, in 2005 from 2004.
Residential real estate loans decreased $1.3 million, or 1%, during 2006. The
residential real estate portfolio consists of 57% in fixed-rate mortgages and
43% in adjustable-rate mortgages. The decrease in the residential real estate
portfolio is principally due to a net decrease in 15-year fixed rate mortgages
--------------------------------------------------------------------------------
27
of $6.0 million and a $3.0 million decrease in 30-year fixed rate loans held for
sale, offset by an increase in the adjustable rate mortgage portfolio. The
increase in the adjustable rate mortgage portfolio primarily resulted from an
increase in customer demand for the Company's hybrid adjustable rate mortgages
("ARM"s). Hybrid ARMs have rates that are fixed for an initial period
(principally 3, 5, 7 or 10 years) and then convert to one-year adjustable rate
mortgages.
Commercial real estate loans increased $8.7 million, or 27%, from the prior year
as new loan products and relationships were added to the portfolio. Commercial
real estate loans increased $2.0 million, or 7%, during 2005.
Commercial loans, including loans to municipalities, increased 25% over the
prior year to $23.0 million at December 31, 2006. The increase in commercial
loans resulted primarily from a $4.4 million net increase from new lending
relationships and new loan products. In comparison, commercial loans, including
municipal loans, increased 9% during 2005.
Consumer loans, which include second mortgage loans, home equity lines of
credit, direct installment and revolving credit loans, increased 8% to $21.2
million at December 31, 2006. 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 at
competitive market rates. Management feels these loans are an attractive use of
funds and will continue to promote home equity products in 2007. During 2005,
consumer loans increased $1.2 million, or 6%, resulting primarily from an
increase in home equity products.
NONPERFORMING LOANS AND ASSETS
The following table represents information concerning the aggregate amount of
nonperforming assets:
DECEMBER 31,
------------------------------------------
(Dollars in thousands) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------------------
>
NONACCRUAL LOANS:
Commercial real estate and commercial $ 481 $ 757 $ 776 $1,677 $ 603
Consumer 125 89 122 172 166
Real estate - construction - - - 270 -
mortgage 566 834 953 873 942
--------------------------------------------------------------------------------------------
Total nonaccrual loans $1,172 $1,680 $1,851 $2,992 $1,711
--------------------------------------------------------------------------------------------
Total non-performing loans $1,172 $1,680 $1,851 $2,992 $1,711
--------------------------------------------------------------------------------------------
Foreclosed real estate 471 743 798 202 1,396
--------------------------------------------------------------------------------------------
Total non-performing assets $1,643 $2,423 $2,649 $3,194 $3,107
--------------------------------------------------------------------------------------------
Non-performing loans to total loans 0.57% 0.89% 0.98% 1.59% 0.95%
Non-performing assets to total assets 0.54% 0.82% 0.88% 1.15% 1.11%
--------------------------------------------------------------------------------------------
Interest income that would have been recorded
under the original terms of the loans $ 53 $ 34 $ 64 $ 75 $ 141
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
28
The asset quality of the Company's loan portfolio has improved during 2006.
Residential delinquencies declined by 32% during 2006 and 14% during 2005,
resulting from the institution of a more stringent collection policy. Total
nonperforming assets (nonperforming loans and foreclosed real estate) at
December 31, 2006 were 0.54% of total assets as compared to 0.82% of total
assets at December 31, 2005. Total nonperforming loans (past due 90 days or
more) decreased $508,000, or 30%, during 2006 and decreased 11% during 2005.
Total delinquent loans (those 30 days or more delinquent) as a percentage of
total loans were 2.05% at December 31, 2006 compared to 2.03% at December 31,
2005. Approximately 44% of the Company's nonperforming loans at December 31,
2006 are secured by residential real estate with loss potential expected to be
manageable within the allocated reserves.
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. At December
31, 2006 and 2005, the Company had $98,000 and $2.5 million in loans which were
deemed to be impaired, having valuation allowances of $24,000 and $90,000,
respectively. Of the prior year impaired loan balance, $2.3 million represented
one commercial credit relationship which was paid in full during 2006.
Management has identified additional potential problem loans totaling $2.3
million as of December 31, 2006. These loans have been internally classified as
substandard or lower, yet are not currently considered past due or in nonaccrual
status. Management has identified potential credit problems which may result in
the borrower not being able to comply with the current loan repayment terms and
which may result in it being included in subsequent past due reporting.
Management believes that the current allowance for loan losses is adequate to
cover probable credit losses in the current loan portfolio.
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
experience, delinquency trends and current economic conditions. The Company
reviews individually, commercial real estate and commercial loans greater than
$150,000, that are not accruing interest 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 method that establishes a reserve
for each risk rating category. The general allocation method for commercial
real estate and commercial loans considers the same factors that are considered
when evaluating residential real estate and consumer loan pools. The allowance
for loan losses reflects management's best estimate of probable loan losses at
December 31, 2006.
The allowance for loan losses was $1.5 million at December 31, 2006, an 11%
decrease from December 31, 2005. The allowance for loan losses as a percentage
of total loans decreased to 0.74% at December 31, 2006 from 0.89% in the prior
year. Net loan charge-offs were $206,000 during 2006 compared to $459,000 in
--------------------------------------------------------------------------------
29
2005. The majority of the current year charge-off activity is the result of the
write down of portions of two commercial lending relationships. The continued
improvement in the overall loan portfolio asset quality resulted in reduced
current year provisioning and lower allowance coverage ratios.
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.
2006 2005 2004 2003 2002
---------------------------------------------------------------------------------------------
% GROSS % GROSS % GROSS % GROSS % GROSS
(Dollars in thousands) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------------------------------------------------------------------------------------------------------------------------------
Commercial real estate and loans $ 985 31.3% $ 1,282 26.5% $ 1,483 24.7% $ 1,218 24.1% $ 1,042 24.9%
Consumer loans 339 10.4% 289 10.4% 270 9.8% 120 8.8% 136 8.2%
Residential real estate 172 58.3% 108 63.1% 74 65.5% 377 67.1% 303 66.9%
--------------------------------------------------------------------------------------------------------------------------------
Total $ 1,496 100.0% $ 1,679 100.0% $ 1,827 100.0% $ 1,715 100.0% $ 1,481 100.0%
=================================================================================================================================
The following table sets forth the analysis of the allowance for loan losses at
or for the periods indicated.
(Dollars in thousands) 2006 2005 2004 2003 2002
-------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $1,679 $1,827 $1,715 $1,481 $ 1,679
Allowance acquired in branch purchase - - - - 57
Provisions charged to operating expenses 23 311 738 598 1,375
-------------------------------------------------------------------------------------------
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF:
Commercial real estate and loans - 25 41 3 26
Consumer 18 14 20 17 6
Residential real estate 4 10 - 17 -
-------------------------------------------------------------------------------------------
Total recoveries 22 49 61 37 32
-------------------------------------------------------------------------------------------
LOANS CHARGED OFF:
Commercial real estate and loans (114) (284) (439) (128) (1,285)
Consumer (89) (137) (126) (189) (291)
Residential real estate (25) (87) (122) (84) (86)
-------------------------------------------------------------------------------------------
Total charged-off (228) (508) (687) (401) (1,662)
-------------------------------------------------------------------------------------------
Net charge-offs (206) (459) (626) (364) (1,630)
-------------------------------------------------------------------------------------------
Balance at end of year $1,496 $1,679 $1,827 $1,715 $ 1,481
===========================================================================================
Net charge-offs to average loans outstanding 0.11% 0.24% 0.33% 0.19% 0.92%
Allowance for loan losses to year-end loans 0.74% 0.89% 0.98% 0.91% 0.82%
===========================================================================================
DEPOSITS
The Company's deposit base is drawn from seven full-service offices in its
market area. The deposit base consists of demand deposits, money management and
money market deposit accounts, savings and time deposits. During 2006, 57% of
the Company's average deposit base of $238.4 million consisted of core deposits.
Core deposits are considered to be more stable and provide the Company with a
lower 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 will seek business growth by focusing on its local
identification and service excellence. The Commercial Bank had an average
balance of $26.5 million in municipal deposits in 2006, primarily concentrated
in money market deposit accounts.
Average deposits decreased $1.5 million, or 1%, when compared to 2005. The
decrease in average deposits primarily related to a $3.1 million decrease in the
average balance of municipal deposits, offset by an increase in retail deposits
of $1.6 million. The new branch in Central Square added $6.8 million to the
--------------------------------------------------------------------------------
30
average balance of retail deposits since its opening in June of 2005. In
comparison, average deposits increased $9.5 million, or 4%, from 2004 to 2005.
Deposit growth in 2005 resulted from the growth both in retail and in municipal
deposits.
The Company's average deposit mix in 2006, as compared to 2005, reflected a
shift from savings and club deposits to time deposits. The Company's average
demand deposits, interest and noninterest bearing, represented 18% of total
average deposits, compared to 16% at 2005. The Company's MMDA accounts
represented 9% of total deposits, down 2 percentage points for the same period
in 2005. The Company's time deposit accounts represented 43% of total deposits,
up 4 percentage points from the same period in 2005. The Company promotes its
MMDA and time deposit accounts by offering competitive rates to retain existing
and attract new customers.
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,
----------------------------------------------------------------------------------
2006 2005 2004
--------------------------------------------------------------------------------------------------------------
AVG PERCENT AVG PERCENT AVG PERCENT
AVG RATE OF AVG RATE OF AVG RATE OF
(Dollars in thousands) BALANCE PAID DEPOSITS BALANCE PAID DEPOSITS BALANCE PAID DEPOSITS
--------------------------------------------------------------------------------------------------------------
Noninterest bearing
demand accounts $ 20,745 - 8.7% $ 19,324 - 8.1% $ 17,974 - 7.8%
NOW accounts 21,094 0.48% 8.9% 19,877 0.54% 8.3% 20,808 0.65% 9.0%
Money management accounts 13,318 0.83% 5.5% 16,096 0.86% 6.7% 14,459 1.15% 6.3%
MMDA accounts 20,608 3.81% 8.7% 25,284 2.76% 10.5% 26,316 1.52% 11.4%
Savings and club accounts 58,997 0.45% 24.8% 65,558 0.44% 27.3% 68,046 0.67% 29.6%
Time deposits 103,596 4.08% 43.4% 93,732 3.29% 39.1% 82,769 3.00% 35.9%
--------------------------------------------------------------------------------------------------------------
Total average deposits $238,358 2.52% 100.00% $239,871 1.96% 100.00% $230,372 1.71% 100.00%
==============================================================================================================
At December 31, 2006, time deposits in excess of $100,000 totaled $32.8 million,
or 32%, of time deposits and 14% of total deposits. At December 31, 2005, these
deposits totaled $24.0 million, or 26% of time deposits and 10% of total
deposits.
The following table indicates the amount of the Bank's certificates of deposit
of $100,000 or more sorted by time remaining until maturity as of December 31,
2006:
(In thousands)
-------------------------------------------------------
REMAINING MATURITY:
Three months or less $ 9,336
Three through six months 5,943
Six through twelve months 10,177
Over twelve months 7,320
-------------------------------------------------------
Total $32,776
=======================================================
--------------------------------------------------------------------------------
31
BORROWINGS
Short-term borrowings are comprised primarily of advances and overnight
borrowing at the FHLBNY. There were no short-term borrowings outstanding at
December 31, 2006, as compared to $2.0 million at December 31, 2005.
Information regarding short-term borrowings during 2006, 2005 and 2004 is as
follows:
(Dollars in thousands) 2006 2005 2004
-------------------------------------------------------------------------
Maximum outstanding at any month end $15,000 $15,000 $3,100
Average amount outstanding during the year 5,321 5,692 1,400
Average interest rate during the year 4.99% 3.57% 1.31%
========================================================================
Long-term borrowed funds consist of advances and repurchase agreements from the
FHLBNY and junior subordinated debentures. Long-term borrowed funds totaled
$31.5 million at December 31, 2006 as compared to $34.5 million at December 31,
2005.
CAPITAL
Shareholders' equity decreased $78,000 to $20.9 million at December 31, 2006.
The Company added $1.0 million to retained earnings through net income, which
was offset by cash dividends returned to its shareholders of $686,000.
Accumulated other comprehensive loss increased $485,000 to $1.8 million at
December 31, 2006, resulting from the adoption of SFAS No. 158 on December 31,
2006, which resulted in $921,000 of accumulated other comprehensive loss, offset
by unrealized gains on securities available for sale, net of tax, of $436,000.
Additional paid in capital increased $65,000 due to the exercise of stock
options during 2006.
The Company's mutual holding company parent, Pathfinder Bancorp, M.H.C., waived
its right to receive the dividend for the quarters ended June 30, 2006 and
December 31, 2006.
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, 2006, 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 Note 17 in the accompanying
financial statements 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, meet deposit
withdrawals, maintain reserve requirements, and otherwise operate the Company on
an ongoing basis. The Company's primary sources of funds are deposits, borrowed
funds, amortization and prepayment of loans and maturities of investment
securities and other short-term investments, and earnings and funds provided
from operations. While scheduled principal repayments on loans are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company manages the pricing of deposits to maintain a desired deposit balance.
In addition, the Company invests excess funds in short-term interest-earning and
other assets, which provide liquidity to meet lending requirements.
--------------------------------------------------------------------------------
32
The Company's liquidity has been enhanced by its membership in the FHLBNY, whose
competitive advance programs and lines of credit provide the Company with a
safe, reliable and convenient source of funds. A significant decrease in
deposits in the future could result in the Company having to seek other sources
of funds for liquidity purposes. Such sources could include, but are not
limited to, additional borrowings, 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, 2006, the Company is in compliance with
its policy guidelines with regard to liquidity.
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, 2006:
OVER 1 OVER 3
1 YEAR TO TO OVER 5
(In thousands) OR LESS 3 YEARS 5 YEARS YEARS TOTAL
----------------------------------------------------------------------------------
Time deposits $ 85,445 $ 22,809 $ 7,519 $ 3,699 $119,472
Junior subordinated debentures - - - 5,155 5,155
Borrowings 11,350 10,010 5,000 - 26,360
Operating leases 63 130 117 63 373
Payments under benefit plans 330 743 779 10,155 12,007
----------------------------------------------------------------------------------
Total $ 97,188 $ 33,692 $ 13,415 $19,072 $163,367
==================================================================================
Despite the fact that the junior subordinated note is not contractually due
until 2032, we expect to call the note in 2007 and replace it with a newly
originated junior subordinated note with a lower carrying cost. 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, 2006, the Company had $26.9 million in
outstanding commitments to extend credit and standby letters of credit. See
Note 15 in the accompanying financial statements.
--------------------------------------------------------------------------------
33
ITEM 7A: 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 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 asset 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 the ALCO.
Since December of 2004, the Federal Reserve has increased short-term target
rates 11 times, 25 basis points each time to 5.25% from 2.50%. During this time
frame longer-term interest rates have remained relatively unchanged resulting in
a flattening and inversion of the yield curve. The short-term interest rate
increases have caused continued net interest margin compression as short-term
deposits and borrowings on the Company's liability sensitive balance sheet
reprice into the current rate environment while security purchases and loan
originations and refinances were being done at the stable longer-term rates.
During the past 36-month period of rising short-term interest rates, the Company
has continued to practice conservative balance sheet management strategies by
attempting to extend the maturities of its rate sensitive liabilities and
shorten the maturity or repricing term of its rate sensitive assets. This
conservative balance sheet management strategy has resulted in additional margin
pressure and reduction in net interest income during the prior years.
Management believes this balance sheet strategy best positions the Company and
lessens its risk against future interest rate fluctuations.
The primary objective of the Company's asset/liability management process is to
maximize earnings and return on capital within acceptable levels of risk. The
Company does not believe it is possible to reliably predict future interest rate
movements, and it seeks to maintain an appropriate process and set of
measurement tools that enable it to identify and quantify sources of interest
rate risk ("IRR") in varying rate environments. The primary tools used by the
Company in managing rate risk are income simulation and net portfolio value
modeling techniques.
Interest rate risk can result from timing differences in the maturity/repricing
of an institution's assets, liabilities and off balance sheet contracts; the
effect of embedded options, such as loan prepayments, interest rate caps/floors,
and deposit withdrawals; and the difference in the behavior of the various
lending and funding rates, sometimes referred to as basis risk.
Given the potential types and differing related characteristics of IRR, it is
important that the Company maintain an appropriate process and set of
measurement tools that enable it to identify and quantify its primary sources of
IRR. The Company also recognizes that effective management of IRR includes an
understanding of when potential adverse changes in interest rates will flow
through its income statements. Accordingly, the Company not only looks at a 12
month horizon when managing its exposure to IRR, it also considers a longer-term
strategic horizon.
It is the Company's objective to manage its exposure to IRR, understanding that
it is in the business of taking on rate risk and the elimination of such risk is
not possible. It is also understood that as exposure to IRR is reduced, it may
also result in net interest margin being reduced.
Management believes the modeling and analysis of net interest income (Earnings
at Risk) and net portfolio value (Value at Risk) in different interest rate
environments provides the most meaningful measure of IRR. Net interest income
simulation analysis captures both the potential of all assets and liabilities to
mature or reprice and the probability that they will do so. Net interest income
simulation also attends to the relative interest rate sensitivities of these
items, and projects their behavior over an extended period of time. Finally,
--------------------------------------------------------------------------------
34
net interest 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 IRR 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. The Company uses these percentage changes as
a means to measure IRR exposure and quantifies those changes against guidelines
set by the Board of Directors as part of the Company's IRR policy. The
Company's current IRR 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 7.14% -15.85% -33.55%
200 8.13% -10.42% -22.59%
100 9.10% -5.14% -11.30%
0 10.03% - -- ----
-100 10.53% 2.52% 7.31%
-200 10.49% 2.12% 8.73%
-300 10.14% 0.15% 6.79%
--------------------------------------------------------------------------------
35
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 IRR was to measure the maturity and repricing relationships between
interest-earning assets and interest-bearing liabilities at a 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 one-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,
2006:
MORE
WITHIN 3 TO 12 1 TO 3 3 TO 5 5 TO 10 THAN
(Dollars in thousands) 3 MONTHS MONTHS YEARS YEARS YEARS 10 YEARS TOTAL
----------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Interest earning deposits $ 6,655 $ - $ - $ - $ - $ - $ 6,655
Investment securities and FHLB stock 19,177 16,044 14,714 8,342 5,721 221 64,219
Loans receivable 46,230 36,295 67,419 31,115 18,614 3,536 203,209
----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 72,062 $ 52,339 $82,133 $39,457 $ 24,335 $ 3,757 $274,083
----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Transaction deposit accounts (1) $ 8,269 $ 24,809 $17,041 $ - $ - $ - $ 50,119
Savings deposits (1) 1,068 7,655 11,900 9,143 12,670 12,976 55,412
Certificates of deposit 27,761 57,684 22,809 7,519 3,699 - 119,472
Borrowings 4,350 7,000 10,010 5,000 - - 26,360
Junior subordinated debentures - - - - - 5,155 5,155
----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 41,448 $ 97,148 $61,760 $21,662 $ 16,369 $ 18,131 $256,518
==================================================================================================================================
Interest-earning assets less interest-
bearing liabilities ("interest rate sensitivity gap") $ 30,614 $(44,809) $20,373 $17,795 $ 7,966 $ (14,374)
------------------------------------------------------------------------------------------------------------------------
Cumulative excess (deficiency) of interest-
sensitive assets over interest-sensitive liabilities $ 30,614 $(14,198) $ 6,178 $23,973 $ 31,939 $ 17,565
------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap to total assets 10.16% -14.87% 6.76% 5.90% 2.64% -4.77%
------------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap to total assets 10.16% -4.71% 2.05% 7.95% 10.60% 5.83%
------------------------------------------------------------------------------------------------------------------------
Ratio of interest-earning assets to interest-
bearing liabilities 173.86% 53.88% 132.99% 182.15% 148.67% 20.72%
Cumulative ratio of interest-earning assets to
interest-bearing liabilities 173.86% 89.76% 103.08% 110.80% 113.40% 106.85%
------------------------------------------------------------------------------------------------------------------------
(1) The following assumptions have been used when analyzing non-maturity
deposits for GAP Table purposes: 14% of savings deposits are assumed to
reprice or mature within one year, 22% within 1 to 3 years, 16% within 3 to
5 years, and 24% 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
--------------------------------------------------------------------------------
36
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PATHFINDER BANCORP, INC
Page
----
Report of Independent Registered Public Accounting Firm 38
Consolidated Statements of Condition 39
Consolidated Statements of Income 40
Consolidated Statements of Changes in Shareholders' Equity 41
Consolidated Statements of Cash Flows 42
Notes to Consolidated Financial Statements 43
--------------------------------------------------------------------------------
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[GRAPHIC OMITED]
To the Board of Directors and Shareholders
Pathfinder Bancorp, Inc.
Oswego, New York
We have audited the accompanying consolidated statements of condition of
Pathfinder Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2006. 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 audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pathfinder
Bancorp, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 11 to the consolidated financial statements, the
Company changed its method of accounting for its defined benefit pension and
postretirement benefit plans in 2006.
/s/ BEARD MILLER COMPANY LLP
Beard Miller Company LLP
Harrisburg, Pennsylvania
March 27, 2007
--------------------------------------------------------------------------------
38
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
------------------
(In thousands, except share data) 2006 2005
----------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 7,068 $ 7,309
Interest earning deposits 6,655 586
----------------------------------------------------------------------------------------------------
Total cash and cash equivalents 13,723 7,895
Investment securities, at fair value 62,640 74,239
Federal Home Loan Bank stock, at cost 1,579 1,805
Loans 203,209 189,568
Less: Allowance for loan losses 1,496 1,679
----------------------------------------------------------------------------------------------------
Loans receivable, net 201,713 187,889
Premises and equipment, net 7,597 8,020
Accrued interest receivable 1,694 1,678
Foreclosed real estate 471 743
Goodwill 3,840 3,840
Intangible asset, net 181 404
Bank owned life insurance 6,212 5,987
Other assets 1,732 4,448
----------------------------------------------------------------------------------------------------
Total assets $301,382 $296,948
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing $225,003 $216,136
Noninterest-bearing 20,582 20,241
----------------------------------------------------------------------------------------------------
Total deposits 245,585 236,377
Short-term borrowings - 2,000
Long-term borrowings 26,360 29,360
Junior subordinated debentures 5,155 5,155
Other liabilities 3,432 3,128
----------------------------------------------------------------------------------------------------
Total liabilities 280,532 276,020
Shareholders' equity:
Preferred stock, authorized shares 1,000,000; no shares issued or outstanding
Common stock, par value $.01; authorized 10,000,000 shares;
2,953,619 and 2,950,419 shares issued; and 2,466,332 and
2,463,132 shares outstanding, respectively 29 29
Additional paid-in-capital 7,786 7,721
Retained earnings 21,307 20,965
Accumulated other comprehensive loss (1,770) (1,285)
Treasury Stock, at cost; 487,287 shares (6,502) (6,502)
----------------------------------------------------------------------------------------------------
Total shareholders' equity 20,850 20,928
----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $301,382 $296,948
====================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
--------------------------------------------------------------------------------
39
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-----------------------------
(In thousands, except per share data) 2006 2005 2004
-------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees $ 12,764 $11,794 $11,815
Debt securities:
Taxable 2,364 2,481 2,075
Tax-exempt 357 505 362
Dividends 292 247 145
Other 92 71 81
-------------------------------------------------------------------------------------------------------------------
Total interest income 15,869 15,098 14,478
-------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 5,487 4,319 3,639
Interest on short-term borrowings 265 204 17
Interest on long-term borrowings 1,791 1,833 1,917
-------------------------------------------------------------------------------------------------------------------
Total interest expense 7,543 6,356 5,573
-------------------------------------------------------------------------------------------------------------------
Net interest income 8,326 8,742 8,905
PROVISION FOR LOAN LOSSES 23 311 738
-------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 8,303 8,431 8,167
-------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 1,391 1,318 967
Increase in value of bank owned life insurance 225 218 175
Loan servicing fees 224 215 256
Net gains (losses) on sales and impairment of investment securities 299 (205) 772
Net (losses) gains on sales of loans and foreclosed real estate (80) (88) 279
Debit card interchange fees 189 147 119
Other charges, commissions and fees 387 435 479
-------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,635 2,040 3,047
-------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 5,007 5,123 4,798
Building occupancy 1,203 1,178 1,169
Data processing expenses 1,278 1,262 981
Professional and other services 615 782 682
Amortization of intangible asset 223 223 223
Other expenses 1,342 1,492 1,454
-------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 9,668 10,060 9,307
-------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,270 411 1,907
Provision (Benefit) for income taxes 242 (51) 502
-------------------------------------------------------------------------------------------------------------------
Net income $ 1,028 $ 462 $ 1,405
===================================================================================================================
Net income per share - basic $ 0.42 $ 0.19 $ 0.58
-------------------------------------------------------------------------------------------------------------------
Net income per share - diluted $ 0.41 $ 0.19 $ 0.57
-------------------------------------------------------------------------------------------------------------------
Dividends per share $ 0.41 $ 0.41 $ 0.405
===================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
--------------------------------------------------------------------------------
40
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER UNEARNED
COMMON STOCK ISSUED PAID-IN RETAINED COMPREHENSIVE ESOP
-------------------
(In thousands, except share data) SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) SHARES
---------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2004 2,919,386 $ 29 $ 7,225 $ 20,449 $ 662 $ (78)
Comprehensive income:
Net income 1,405
Other comprehensive loss, net of tax
Unrealized net losses on securities (969)
TOTAL COMPREHENSIVE INCOME
ESOP shares earned 88 45
Stock options exercised 18,033 - 140
Dividends declared ($.405 per share) (668)
---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 2,937,419 $ 29 $ 7,453 $ 21,186 $ (307) $ (33)
====================================================================================================================
Comprehensive loss:
Net income 462
Other comprehensive loss, net of tax
Unrealized net losses on securities (978)
TOTAL COMPREHENSIVE LOSS
ESOP shares earned 55 33
Stock options exercised 13,000 - 213
Dividends declared ($.41 per share) (683)
---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005 2,950,419 $ 29 $ 7,721 $ 20,965 $(1,285) $ -
====================================================================================================================
Comprehensive income:
Net income 1,028
Other comprehensive income, net of tax
Unrealized net gains on securities 436
TOTAL COMPREHENSIVE INCOME
Adjustment to initially apply FASB
Statement No. 158, net of tax (921)
Stock options exercised, including 3,200 - 65
$42 tax benefit
Dividends declared ($.41 per share) (686)
---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2006 2,953,619 $ 29 $ 7,786 $ 21,307 $(1,770) $ -
====================================================================================================================
TREASURY
(In thousands, except share data) STOCK TOTAL
-----------------------------------------------------------
BALANCE, JANUARY 1, 2004 $(6,502) $21,785
Comprehensive income:
Net income 1,405
Other comprehensive loss, net of tax
Unrealized net losses on securities (969)
--------
TOTAL COMPREHENSIVE INCOME 436
ESOP shares earned 133
Stock options exercised 140
Dividends declared ($.405 per share) (668)
-----------------------------------------------------------
BALANCE, DECEMBER 31, 2004 $(6,502) $21,826
===========================================================
Comprehensive loss:
Net income 462
Other comprehensive loss, net of tax
Unrealized net losses on securities (978)
--------
TOTAL COMPREHENSIVE LOSS (516)
ESOP shares earned 88
Stock options exercised 213
Dividends declared ($.41 per share) (683)
-----------------------------------------------------------
BALANCE, DECEMBER 31, 2005 $(6,502) $20,928
===========================================================
Comprehensive income:
Net income 1,028
Other comprehensive income, net of tax
Unrealized net gains on securities 436
-------
TOTAL COMPREHENSIVE INCOME 1,464
Adjustment to initially apply FASB
Statement No. 158, net of tax (921)
Stock options exercised, including 65
$42 tax benefit
Dividends declared ($.41 per share) (686)
-----------------------------------------------------------
BALANCE, DECEMBER 31, 2006 $(6,502) $20,850
===========================================================
The accompanying notes are an integral part of the consolidated financial
statements.
--------------------------------------------------------------------------------
41
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------
(In thousands) 2006 2005 2004
-------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income $ 1,028 $ 462 $ 1,405
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 23 311 738
ESOP shares earned - 88 133
Deferred income tax expense (67) 109 502
Proceeds from sale of loans 1,739 8,795 12,440
Originations of loans held-for-sale (1,715) - (10,884)
Realized losses (gains) on sales of:
Foreclosed real estate 104 23 (84)
Loans (24) 65 (195)
Premises and equipment (13) - -
Available-for-sale investment securities (299) 205 (772)
Depreciation 754 697 590
Amortization of intangible asset 223 223 223
Amortization of deferred financing costs 30 30 30
Amortization of mortgage servicing rights 95 123 158
Increase in value of bank owned life insurance (225) (218) (175)
Net amortization of premiums and discounts on investment securities 162 364 358
Increase in interest receivable (16) (173) (231)
Net change in other assets and liabilities 646 (482) (1,855)
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,445 10,622 2,381
-------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of investment securities available-for-sale (13,030) (19,758) (35,512)
Net redemption (purchase) of Federal Home Loan Bank stock 226 (37) 280
Proceeds from maturities and principal reductions of investment securities available-for-sale 19,528 15,361 9,897
Proceeds from sale:
Available-for-sale investment securities 5,973 3,027 6,904
Real estate acquired through foreclosure 504 770 382
Premises and equipment 146 - -
Purchase of bank owned life insurance - - (1,100)
Net (increase) decrease in loans (13,087) (10,514) 245
Purchase of premises and equipment (464) (1,137) (1,520)
-------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (204) (12,288) (20,424)
-------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, NOW accounts, saving accounts,
money market deposit accounts, MMDA accounts, escrow deposits (14,109) (12,066) 28,441
Net increase in time deposits 23,317 11,772 1,337
Net (repayments on) proceeds from short-term borrowings (2,000) 1,000 (1,100)
Payments on long-term borrowings (3,000) (10,000) (4,500)
Proceeds from long-term borrowings - 5,000 -
Proceeds from exercise of stock options 23 213 140
Tax benefit upon exercise of stock options 42 - -
Cash dividends (686) (683) (664)
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,587 (4,764) 23,654
-------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 5,828 (6,430) 5,611
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 7,895 14,325 8,714
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 13,723 $ 7,895 $ 14,325
-------------------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE PERIOD FOR:
Interest $ 7,543 $ 6,338 $ 5,639
Income taxes paid 5 95 312
NON-CASH INVESTING ACTIVITY:
Conversion of Holding Company advance to loan receivable 1,096 - -
Transfer of loans to foreclosed real estate 336 738 894
Transfer of loans to loans held-for-sale - 6,701 -
The accompanying notes are an integral part of the consolidated financial
statements
--------------------------------------------------------------------------------
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The accompanying consolidated financial statements include the accounts of
Pathfinder Bancorp, Inc. (the "Company") and its wholly owned subsidiary,
Pathfinder Bank (the "Bank"). The Bank has three wholly owned operating
subsidiaries, Pathfinder Commercial Bank, Whispering Oaks Development Corp. and
Pathfinder REIT, Inc. All inter-company accounts and activity have been
eliminated in consolidation. The Company has seven 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 64.2% of the outstanding common stock of the Company. Salaries,
employee benefits and rent approximating $127,000, $135,000 and $130,000, were
allocated from the Company to Pathfinder Bancorp, M.H.C. during 2006, 2005 and
2004, respectively. As of December 31, 2006, the Bank had a loan receivable
from the Holding Company of $1,096,000.
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 and the evaluation of
securities for other than temporary impairment to be the accounting areas that
require the most subjective and complex judgments, and as such, could be the
most subject to revision as new information becomes available.
The Company is subject to the regulations of various governmental agencies. The
Company also undergoes periodic examinations by the regulatory agencies which
may subject it to further changes with respect to asset valuations, amounts of
required loss allowances, and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examinations.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Company's activities are with customers located primarily in Oswego
and parts of Onondaga counties of New York State. Note 3 discusses the types of
securities that the Company invests in. Note 4 discusses the types of lending
that the Company engages in. The Company does not have any significant
concentrations to any one industry or customer.
--------------------------------------------------------------------------------
43
ADVERTISING
The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising costs included in other operating expenses were
$300,000, $249,000 and $224,000 for the years ended December 31, 2006, 2005 and
2004, respectively.
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.
Declines in the fair value of investment securities below cost that are deemed
to be other-than-temporary are reflected in earnings as realized losses. In
estimating other-than-temporary impairment losses, management considers (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair value.
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. There were no forward commitments
outstanding as of December 31, 2006 and 2005.
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.
--------------------------------------------------------------------------------
44
LOANS
The Company grants mortgage, commercial and consumer loans to customers. Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off, generally are stated at unpaid principal balances,
less the allowance for loan losses and net deferred loan origination fees and
costs. The ability of the Company's debtors to honor their contracts is
dependent upon the real estate and general economic conditions in the market
area. Interest income is generally recognized when income is earned using the
interest method. Nonrefundable loan fees received and related direct origination
costs incurred are deferred and amortized over the life of the loan using the
interest method, resulting in a constant effective yield over the loan term.
Deferred fees are recognized into income and deferred costs are charged to
income immediately upon prepayment of the related loan.
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. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision
as more information becomes available.
The allowance consists of specific and 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, unless such loans are
the subject of a restructuring agreement.
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.
--------------------------------------------------------------------------------
45
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 40 years for premises and 10 years
for equipment. Maintenance and repairs are charged to operating expenses as
incurred. The asset cost and accumulated depreciation are removed from the
accounts for assets sold or retired and any resulting gain or loss is included
in the determination of income.
FORECLOSED REAL ESTATE
Properties acquired through foreclosure, or by deed in lieu of foreclosure, are
carried at the lower of the Bank's recorded investment or at their fair value
less estimated disposal costs. Fair value is determined based on a current
appraisal and inspection. Costs incurred in connection with preparing the
foreclosed real estate for disposition are capitalized to the extent that they
enhance the overall fair value of the property. Write downs of, and expenses
related to, foreclosed real estate holdings included in noninterest expense were
$111,000, $155,000 and $85,000 in 2006, 2005 and 2004, 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. Goodwill
is not amortized but is evaluated annually for impairment.
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.
--------------------------------------------------------------------------------
46
STOCK-BASED COMPENSATION
Prior to 2006, the Company accounted for stock-based compensation issued to
directors and employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). This method required 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 did not
recognize compensation expense related to stock option awards because the stock
options generally had fixed terms and exercise prices that were equal to or
greater than the fair value of the Company's common stock at the grant date.
Effective January 1, 2006, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 123(R), Share-Based Payment, ("SFAS 123(R)"). SFAS
123(R) requires compensation costs related to share-based payment transactions
to be recognized in the income statement (with limited exceptions). The Company
is using the modified prospective method based on the grant-date fair value of
the stock-based compensation issued. Compensation costs are recognized over the
period that an employee provides service in exchange for the award. As of the
date of adoption of SFAS 123(R), the Company's options were fully granted and
vested, and accordingly, there was no impact to the Company's consolidated
financial position or results of operations. No options were granted during
2006, 2005 and 2004.
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 2006, the Company adopted SFAS 158, which required the recognition of the
under funded status of pension and other postretirement benefit plans on the
consolidated statements of condition. Under SFAS 158, gains and losses, prior
service costs and credits, and any remaining transition amounts under SFAS 87
and SFAS 106 that have not yet been recognized through net periodic benefit cost
will be recognized in accumulated other comprehensive income, net of tax
effects, until they are amortized as a component of net periodic cost.
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.
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 consolidated financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled.
EARNINGS PER SHARE
Basic earnings per 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.
--------------------------------------------------------------------------------
47
OTHER COMPREHENSIVE (LOSS) INCOME
Accounting principles generally accepted in the United States of America,
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 shareholders' equity section of the consolidated statements of
condition, such items, along with net income, are components of comprehensive
income. The adoption of SFAS 158 created a new component of other comprehensive
income in 2006. The under funded status of pension and other postretirement
benefits is now presented in the statement of condition through this account.
The components of other comprehensive (loss) income and related tax effects are
as follows:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
(In thousands) 2006 2005 2004
------------------------------------------------------------------------------------
Gross change in unrealized gains (losses) on
securities available for sale $ 1,034 $(1,835) $ (843)
Reclassification adjustment for (gains) losses
included in net income (299) 205 (772)
------------------------------------------------------------------------------------
735 (1,630) (1,615)
Tax effect (299) 652 646
------------------------------------------------------------------------------------
Net of tax amount $ 436 $ (978) $ (969)
====================================================================================
The components of accumulated other comprehensive loss, net of related tax
effects, at December 31, are as follows:
(In thousands) 2006 2005
------------------------------------------------------------------------
Unrealized losses on available for sale securities $ (849) $(1,285)
Unrecognized pension and other postretirement
benefit losses (921) -
------------------------------------------------------------------------
$(1,770) $(1,285)
========================================================================
RECLASSIFICATIONS
Certain amounts in the 2005 and 2004 consolidated financial statements have been
reclassified to conform to the current year presentation. These
reclassifications had no effect on net income as previously reported.
NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards (SFAS), No. 155, Accounting for
Certain Hybrid Financial Instruments ("SFAS 155"). SFAS 155 amends FASB
Statement No. 133 and FASB Statement No. 140, and improves the financial
reporting of certain hybrid financial instruments by requiring more consistent
accounting that eliminates exemptions and provides a means to simplify the
accounting for these instruments. Specifically, SFAS 155 allows financial
instruments that have embedded derivatives to be accounted for as a whole
(eliminating the need to bifurcate the derivative from its host) if the holder
elects to account for the whole instrument on a fair value basis. The Company is
required to adopt the provisions of SFAS 155, as applicable, beginning in 2007.
Management does not believe the adoption of SFAS 155 will have a material impact
on the Company's consolidated financial position and results of operations.
--------------------------------------------------------------------------------
48
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets -An Amendment of FASB Statement No. 140 ("SFAS 156"). SFAS 156
requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. The statement
permits, but does not require, the subsequent measurement of servicing assets
and servicing liabilities at fair value. SFAS 156 is effective for the Company
beginning in 2007. The Company does not believe that the adoption of SFAS 156
will have a significant effect on its consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" ("FIN
48"), which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that companies recognize in their financial statements
the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective for fiscal years beginning after December 15,
2006, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. Management does not believe that
the adoption of FIN 48 will have a significant effect on its consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, ("SFAS
157") which defines fair value, establishes a framework for measuring fair value
under GAAP, and expands disclosures about fair value measurements. SFAS 157
applies to other accounting pronouncements that require or permit fair value
measurements. The new guidance is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and for interim periods within
those fiscal years. We are currently evaluating the potential impact, if any, of
the adoption of SFAS 157 on our consolidated financial position, results of
operations and cash flows.
On September 13, 2006, the Securities and Exchange Commission "SEC" issued Staff
Accounting Bulletin No. 108 ("SAB 108"). SAB 108 provides interpretive guidance
on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a potential current year misstatement. Prior
to SAB 108, companies might evaluate the materiality of financial statement
misstatements using either the income statement or balance sheet approach, with
the income statement approach focusing on new misstatements added in the
current year, and the balance sheet approach focusing on the cumulative amount
of misstatement present in a company's balance sheet. Misstatements that would
be material under one approach could be viewed as immaterial under another
approach, and not be corrected. SAB 108 now requires that companies view
financial statement misstatements as material if they are material according to
either the income statement or balance sheet approach. The Company has analyzed
SAB 108 and determined that, upon adoption in the fourth quarter of 2006, it had
no impact on the reported results of operations or financial condition.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115, ("SFAS 159"). This standard permits an entity to choose to
measure many financial instruments and certain other items at fair value. Most
of the provisions in SFAS 159 are elective; however, the amendment to SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities, applies to all
entities with available-for-sale and trading securities. The FASB's stated
objective in issuing this standard is as follows: "to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions." The fair value
option established by SFAS 159 permits all entities to choose to measure
eligible items at fair value at specified election dates. A business entity will
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. The fair value
option: (a) may be applied instrument by instrument, with a few exceptions, such
as investments otherwise accounted for by the equity method; (b) is irrevocable
(unless a new election date occurs); and (c) is applied only to entire
instruments and not to portions of instruments. SFAS 159 is effective for the
Company as of January 1, 2008, unless early adoption is elected. The Company is
currently analyzing the effects of this interpretation but does not expect its
implementation will have a significant impact on the Company's financial
condition or results of operations.
--------------------------------------------------------------------------------
49
NOTE 3: INVESTMENT SECURITIES - AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of investment securities are
summarized as follows:
DECEMBER 31, 2006
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(In thousands) COST GAINS LOSSES VALUE
--------------------------------------------------------------------------------------------
Bond investment securities:
US Treasury and agencies $ 19,966 $ - $ (557) $ 19,409
State and political subdivisions 5,870 - (79) 5,791
Corporate 5,575 18 (79) 5,514
Mortgage-backed 25,481 53 (638) 24,896
--------------------------------------------------------------------------------------------
Total 56,892 71 (1,353) 55,610
--------------------------------------------------------------------------------------------
Equity investments 7,163 91 (224) 7,030
--------------------------------------------------------------------------------------------
Total investment securities $ 64,055 $ 162 $(1,577) $ 62,640
============================================================================================
DECEMBER 31, 2005
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(In thousands) COST GAINS LOSSES VALUE
--------------------------------------------------------------------------------------------
Bond investment securities:
US Treasury and agencies $ 20,713 $ - $ (746) $ 19,967
State and political subdivisions 11,177 2 (199) 10,980
Corporate 5,936 24 (106) 5,854
Mortgage-backed 31,565 67 (914) 30,718
--------------------------------------------------------------------------------------------
Total 69,391 93 (1,965) 67,519
--------------------------------------------------------------------------------------------
Equity investments 6,998 14 (292) 6,720
--------------------------------------------------------------------------------------------
Total investment securities $ 76,389 $ 107 $(2,257) $ 74,239
============================================================================================
Gross gains of $325,000, $190,000 and $828,000 for 2006, 2005 and 2004,
respectively and gross losses of $26,000, $395,000 and $56,000 for 2006, 2005
and 2004, respectively were realized on sales and calls of securities. The tax
expense related to net gains on investment securities was $117,000 for 2006.
The tax benefit related to net losses on investment securities in 2005 was
$80,000. Tax expense related to net gains on investment securities was $301,000
for 2004.
Investment securities with a carrying value of approximately $35,441,000 at
December 31, 2006 were pledged to collateralize certain deposit and borrowing
arrangements.
--------------------------------------------------------------------------------
50
The amortized cost and estimated fair value of debt investments at December 31,
2006 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
(In thousands) COST FAIR VALUE
-----------------------------------------------------------------
Due in one year or less $ 4,812 $ 4,774
Due after one year through five years 17,288 16,841
Due after five years through ten years 7,171 6,971
Due after ten years 2,140 2,128
Mortgage-backed securities 25,481 24,896
----------------------------------------------------------------
Totals $ 56,892 $ 55,610
================================================================
The Company's investment securities' gross unrealized losses and fair value,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, is as follows:
DECEMBER 31, 2006
----------------------------------------------------------------------
LESS THAN TWELVE MONTHS TWELVE MONTHS OR MORE TOTAL
---------------------------------------------------------------------------------------------------------------
UNREALIZED FAIR UNREALIZED FAIR UNREALIZED FAIR
(In thousands) LOSSES VALUE LOSSES VALUE LOSSES VALUE
---------------------------------------------------------------------------------------------------------------
US Treasury and agency securities $ (1) $1,996 $ (556) $17,413 $ (557) $19,409
State and political subdivision securities (1) 439 (78) 5,218 (79) 5,657
Corporate securities - - (79) 3,887 (79) 3,887
Mortgage-backed securities (1) 198 (637) 22,525 (638) 22,723
Equity investment securities (136) 2,747 (88) 3,366 (224) 6,113
-----------------------------------------------------------------------------------------------------------------
$(139) $5,380 $(1,438) $52,409 $(1,577) $57,789
=================================================================================================================
DECEMBER 31, 2005
----------------------------------------------------------------------
LESS THAN TWELVE MONTHS TWELVE MONTHS OR MORE TOTAL
---------------------------------------------------------------------------------------------------------------
UNREALIZED FAIR UNREALIZED FAIR UNREALIZED FAIR
(In thousands) LOSSES VALUE LOSSES VALUE LOSSES VALUE
---------------------------------------------------------------------------------------------------------------
US Treasury and agency securities $(106) $ 4,130 $ (640) $15,837 $ (746) $19,967
State and political subdivision securities (152) 8,872 (47) 1,491 (199) 10,363
Corporate securities (35) 1,965 (71) 1,896 (106) 3,861
Mortgage-backed securities (322) 13,814 (592) 15,073 (914) 28,887
Equity investment securities - - (292) 6,135 (292) 6,135
-----------------------------------------------------------------------------------------------------------------
$(615) $28,781 $(1,642) $40,432 $(2,257) $69,213
=================================================================================================================
The Company reviews its securities portfolio for potential impairment issues at
least quarterly. No impairment losses were recorded during 2006. The Company
recognized an impairment charge of $196,000 during 2005 in connection with one
marketable equity security holding. No impairment losses were recognized in
2004.
At December 31, 2006 53 mortgage-backed and 31 US Treasury and agency securities
have unrealized losses. These unrealized losses relate principally to changes
in interest rates subsequent to the acquisition of specific securities. None of
the securities in this category had an unrealized loss that exceeded 6% of their
carrying amount and a majority had unrealized losses totaling less than 3% of
their carrying amount. The Company has the intent and ability to hold the
individual securities to maturity or market price recovery.
--------------------------------------------------------------------------------
51
At December 31, 2006, 19 state and political subdivision securities and 4
corporate securities have unrealized losses. In analyzing the issuer's
financial condition, management considers the industry analyst's reports,
financial performance and projected target prices of investment analysts within
a one-year time frame. None of the securities in this category had an
unrealized loss that exceeded 4% of carrying value and a majority had unrealized
losses totaling less than 2% of carrying value. The Company has the intent and
ability to hold the individual securities to maturity or market price recovery.
At December 31, 2006, 2 equity securities had unrealized losses. One of these
securities is a mutual fund backed by short-term adjustable rate mortgage-backed
securities and has an unrealized loss of 3% of carrying value. The unrealized
loss relates principally to changes in interest rates subsequent to the
acquisition of the mutual fund. A second equity security is a mutual fund
consisting primarily of investment grade dividend-paying common stocks of large
capitalization companies, i.e., companies with market capitalization in excess
of $5 billion. A review of the underlying securities indicates no individually
impaired holdings and there is no indication that the profitability of these
corporations is impaired beyond the economic cycle. As such, the decline in
investment is not considered to be other-than-temporarily impaired.
NOTE 4: LOANS
Major classifications of loans at December 31, are as follows:
(In thousands) 2006 2005
------------------------------------------------------
REAL ESTATE MORTGAGES:
Conventional $115,588 $116,423
Construction 2,160 2,607
Commercial 40,501 31,845
------------------------------------------------------
158,249 150,875
------------------------------------------------------
OTHER LOANS:
Consumer 3,248 3,363
Home Equity/Second Mortgage 17,965 16,319
Lease financing 623 334
Commercial 19,890 14,741
Municipal loans 2,488 3,259
-----------------------------------------------------
44,214 38,016
------------------------------------------------------
Total loans 202,463 188,891
------------------------------------------------------
Net deferred loan costs 746 677
Less allowance for loan losses (1,496) (1,679)
-----------------------------------------------------
Loans receivable, net $201,713 $187,889
======================================================
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.
--------------------------------------------------------------------------------
52
The following represents the activity associated with loans to officers and
directors and their affiliated entities during the fiscal year ending December
31, 2006:
(In thousands)
---------------------------------------
Balance at beginning of year $ 5,581
Originations 398
Principal payments (1,278)
---------------------------------------
Balance at end of year $ 4,701
=======================================
NOTE 5: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the year ended December 31, are
summarized as follows:
(In thousands) 2006 2005 2004
--------------------------------------------------------
Balance at beginning of year $1,679 $1,827 $1,715
Recoveries credited 22 49 61
Provision for loan losses 23 311 738
Loans charged-off (228) (508) (687)
-------------------------------------------------------
Balance at end of year $1,496 $1,679 $1,827
=======================================================
The following is a summary of information pertaining to impaired loans for the
years ending December 31:
(In thousands) 2006 2005 2004
-------------------------------------------------------------------------
Impaired loans without a valuation allowance $ - $ - $ -
Impaired loans with a valuation allowance 98 2,452 3,110
-------------------------------------------------------------------------
Total impaired loans $ 98 $2,452 $3,110
-------------------------------------------------------------------------
Valuation allowance related to impaired loans $ 24 $ 90 $ 760
-------------------------------------------------------------------------
Average investment in impaired loans $ 91 $2,856 $3,611
-------------------------------------------------------------------------
Interest income recognized on impaired loans $ 1 $ 175 $ 153
-------------------------------------------------------------------------
Interest income recognized on a cash basis on
impaired loans $ - $ - $ -
-------------------------------------------------------------------------
The amount of loans on which the Company has ceased accruing interest aggregated
approximately $1,172,000 and $1,680,000 at December 31, 2006 and 2005,
respectively. There were no loans past due ninety days or more and still
accruing interest at December 31, 2006 or 2005.
NOTE 6: 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 $53,100,000, $56,300,000 and $53,000,000 at
December 31, 2006, 2005 and 2004, respectively.
The balance of capitalized servicing rights included in other assets at December
31, 2006 and 2005, was $65,000 and $146,000, respectively.
--------------------------------------------------------------------------------
53
The following summarizes mortgage-servicing rights capitalized and amortized:
(In thousands) 2006 2005 2004
------------------------------------------------------------
Mortgage servicing rights capitalized $ 14 $ 70 $ 99
Mortgage servicing rights amortized $ 95 $ 123 $ 158
============================================================
NOTE 7: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, is as follows:
(In thousands) 2006 2005
---------------------------------------------------
Land $ 1,226 $ 1,150
Buildings 6,458 6,590
Furniture, fixture and equipment 6,401 6,120
Construction in progress 130 119
---------------------------------------------------
$14,215 $13,979
Less: Accumulated depreciation 6,618 5,959
---------------------------------------------------
$ 7,597 $ 8,020
===================================================
The Company has entered into certain contractual arrangements associated with
renovations being made to one of its branches drive thru facilities. Total
estimated project costs are $427,000, with an anticipated completion date of
June 2007.
NOTE 8: GOODWILL AND INTANGIBLE ASSETS
A summary of intangible assets is as follows:
2006 2005
-------------------------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
(In thousands) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------------------------------------------------------------------------------
Core deposit intangible $ 1,111 $ (930) $ 1,111 $ (707)
Amortization expense related to core deposit intangibles is estimated to total
$181,000 for the year ending December 31, 2007. Amortization of goodwill and the
core deposit intangible is deductible for tax purposes.
NOTE 9: DEPOSITS
A summary of deposits at December 31, is as follows:
(In thousands) 2006 2005
-------------------------------------------------------
Savings accounts $ 52,506 $ 60,176
Time accounts 86,696 72,121
Time accounts over $100,000 32,776 24,034
Money management accounts 12,630 14,685
MMDA accounts 17,615 24,324
Demand deposit interest-bearing 19,875 18,259
Demand deposit noninterest-bearing 20,582 20,241
Mortgage escrow funds 2,905 2,537
-------------------------------------------------------
$245,585 $236,377
=======================================================
--------------------------------------------------------------------------------
54
At December 31, 2006 the scheduled maturities of time deposits are as follows:
(In thousands)
------------------
YEAR OF MATURITY:
2007 $ 85,445
2008 15,011
2009 7,798
2010 3,491
2011 4,028
Thereafter 3,699
----------------------------
$119,472
============================
NOTE 10: BORROWED FUNDS
The composition of borrowings at December 31 is as follows:
(In thousands) 2006 2005
--------------------------------------------------------------
SHORT-TERM FHLB ADVANCES:
FHLB Advances $ - $ 2,000
--------------------------------------------------------------
Total short-term borrowings $ - $ 2,000
==============================================================
LONG-TERM:
FHLB Repurchase agreements $ 2,400 $ 3,400
FHLB advances 23,960 25,960
--------------------------------------------------------------
Total long-term borrowings $26,360 $29,360
==============================================================
The principal balance, interest rate and maturity of the above borrowings at
December 31, 2006 is as follows:
TERM PRINCIPAL RATES
----------------------------------------------------------------
(Dollars in thousands)
Long-term:
Repurchase agreements (due in 2009) 2,400 5.56% -5.76%
---------------------------------------------------------------
Advances with FHLB
due within 1 year 11,350 3.00%-5.04%
due within 2 years 6,610 2.67%-5.98%
due within 3 years 1,000 6.00%
due within 4 years 5,000 4.39%
---------------------------------------------------------------
Total advances with FHLB $23,960
---------------------------------------------------------------
Total long-term borrowings $26,360
===============================================================
The repurchase agreements with the Federal Home Loan Bank ("FHLB") are
collateralized by certain investment securities having a carrying value of
$2,661,000 at December 31, 2006. The collateral 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 2006 approximated 5.21%. At December 31,
2006, $30,393,000 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 $69,547,000 and FHLB stock
with a carrying value of $1,579,000 have been pledged by the Company under a
blanket collateral agreement to secure the Company's line of credit and term
borrowings. The Company also maintains a $5,000,000 line of credit with a
correspondent bank. Interest on the line is determined at the time of
borrowing. The Company did not draw on the line during 2006. Investment
securities with a carrying value of $6,104,000 at December 31, 2006
collateralize the line of credit.
--------------------------------------------------------------------------------
55
The Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust
I, of which 100% of the common equity is owned by the Company. 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 Corporation 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% (8.82% at
December 31, 2006 and 7.97% at December 31, 2005) with a five-year call
provision. The Company guarantees all of these securities.
The Company's equity interest in the trust subsidiary of $155,000 is reported in
"Other assets". For regulatory reporting purposes, the Federal Reserve Board
has indicated that the preferred securities will continue to qualify as Tier 1
Capital subject to previously specified limitations, until further notice. If
regulators make a determination that Trust Preferred Securities can no longer be
considered in regulatory capital, the securities become callable and the Company
may redeem them.
On March 22, 2007, the Company entered into a trust preferred issuance of
$5,000,000, adjustable quarterly at a 1.65% spread over the 3-month LIBOR rate.
The Company intends to use the proceeds from the issuance to retire its existing
trust preferred obligation which is callable in June of 2007.
NOTE 11: EMPLOYEE BENEFITS AND DEFERRED COMPENSATION AND SUPPLEMENTAL
RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan covering
substantially all employees. The plan provides defined benefits based on years
of service and final average salary. 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
postretirement benefit plan.
--------------------------------------------------------------------------------
56
The following tables set forth the changes in the plans' benefit obligations,
fair value of plan assets and prepaid (accrued) benefit (cost) as of December
31:
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------------
(In thousands) 2006 2005 2006 2005
------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation at beginning of year $4,361 $3,745 $ 354 $ 309
Service cost 193 151 2 2
Interest cost 252 229 20 18
Actuarial (loss) gain (203) 378 (10) 46
Plan participants' contributions - - - 6
Benefits paid (164) (142) (20) (27)
------------------------------------------------------------------------------------------
Benefit obligations at end of year $4,439 $4,361 $ 346 $ 354
------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $4,070 $3,154 $ - $ -
Actual return on plan assets 297 388 - -
Plan participants' contributions - - - 6
Benefits paid (164) (142) (20) (27)
Employer contributions 135 670 20 21
------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $4,338 $4,070 $ - $ -
------------------------------------------------------------------------------------------
COMPONENTS OF PREPAID/(ACCRUED) BENEFIT (COST):
Unfunded status $ (101) $ (291) $(346) $(354)
Unrecognized transition obligation - - - 115
Unrecognized actuarial net loss - 1,656 - 34
------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit/(cost) $ (101) $1,365 $(346) $(205)
==========================================================================================
The accumulated benefit obligation for the defined benefit plan was $3,710,000
and $3,602,000 at December 31, 2006 and 2005, respectively.
The significant assumptions used in determining the benefit obligations as of
December 31, 2006, 2005 and 2004 are as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------------------------
2006 2005 2004 2006 2005 2004
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Weighted average discount rate 6.25% 5.88% 6.25% 6.25% 5.88% 6.25%
Expected long term rate of return on plan assets 9.00% 9.00% 9.00% - -
Rate of increase in future compensation levels 3.00% 3.00% 3.50% - -
=============================================================================================
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 9.0% and 9.5%,
respectively. The rates were assumed to decrease gradually to 3.75% in 2012 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
(In thousands) INCREASE DECREASE
----------------------------------------------------------------------------
Effect on total of service and interest
cost components $ 23 $ (22)
Effect on post retirement benefit obligation 9 (8)
============================================================================
--------------------------------------------------------------------------------
57
The composition of the net periodic benefit plan cost for the years ended
December 31, 2006, 2005 and 2004 is as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------------------------------------------------------
(In thousands) 2006 2005 2004 2006 2005 2004
------------------------------------------------------------------------------------
Service cost $ 193 $ 151 $ 155 $ 2 $ 2 $ 2
Interest cost 252 229 207 20 18 19
Amortization of transition obligation - - - 18 19 18
Amortization of gains and losses 110 96 94 - - -
Expected return on plan assets (368) (285) (254) - - -
------------------------------------------------------------------------------------
Net periodic benefit plan cost $ 187 $ 191 $ 202 $40 $39 $39
====================================================================================
The significant assumptions used in determining the net periodic benefit plan
cost for years ended December 31 were as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------------------------------------------------------------------
2006 2005 2004 2006 2005 2004
----------------------------------------------------------------------------------------------
Weighted average discount rate 6.25% 5.88% 6.25% 6.25% 5.88% 6.25%
Expected long term rate of return on plan assets 9.00% 9.00% 9.00% - -
Rate of increase in future compensation levels 3.00% 3.50% 3.50% - -
==============================================================================================
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 5-9.0% and 2-6.0%, respectively. The long-term
inflation rate was estimated to be 3.0%. 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 2006 2005
-------------------------------
Equity securities 73% 72%
Debt securities 27% 28%
-------------------------------
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. 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 under funded 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 under funded, 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).
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.
--------------------------------------------------------------------------------
58
For the fiscal year ending December 31, 2007, the Bank expects to contribute
approximately $190,000 to the Plan.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid.
YEARS ENDING DECEMBER 31:
----------------------------------
(In thousands)
2007 $ 146
2008 145
2009 149
2010 154
2011 161
Years 2012 - 2016 1,075
==================================
On September 29, 2006, the Financial Accounting Standards Board "FASB" issued
SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans ("SFAS 158"), which amends SFAS 87 and SFAS 106 to require
recognition of the overfunded or underfunded status of pension and other
postretirement benefit plans on the balance sheet. Under SFAS 158, gains and
losses, prior service costs and credits, and any remaining transition amounts
under SFAS 87 and SFAS 106 that have not yet been recognized through net
periodic benefit cost will be recognized in accumulated other comprehensive
income, net of tax effects, until they are amortized as a component of net
periodic cost. The measurement date - the date at which the benefit obligation
and plan assets are measured - is required to be the company's fiscal year end.
SFAS 158 is effective for publicly-held companies for fiscal years ending after
December 15, 2006, except for the measurement date provisions, which are
effective for fiscal years ending after December 15, 2008. The Company has
adopted SFAS 158 on December 31, 2006. The effect of the implementation was to
increase accumulated other comprehensive loss by $921,000 (net of related
deferred tax effect of $614,000), decrease prepaid pension cost by $1,414,000
and increase accrued post retirement benefit by $121,000.
In 2007, it is estimated that $87,000 will be amortized from accumulated
comprehensive loss into the net periodic cost for the defined benefit pension
plan.
The Company also offers a 401(k) plan to its employees. Contributions to this
plan by the Company were $148,000, $145,000 and $92,000 for 2006, 2005 and
2004, respectively.
The Company maintains optional deferred compensation plans for its directors,
and certain executive officers, whereby fees and income normally received are
deferred and paid by the Company based upon a payment schedule commencing 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, 2006 and 2005,
other liabilities include approximately $1,556,000 and $1,412,000, respectively,
relating to deferred compensation. Deferred compensation expense for the years
ended December 31, 2006, 2005 and 2004 amounted to approximately $240,000,
$211,000 and $185,000, respectively.
The Company has a supplemental executive retirement plan for the benefit of
certain executive officers. At December 31, 2006 and 2005, other liabilities
include approximately $396,000 and $424,000 accrued under these plans.
Compensation expense includes approximately $51,000, $56,000 and $53,000
relating to the supplemental executive retirement plan for 2006, 2005 and 2004,
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, 2006 and 2005, the cash value of these policies was
$6,212,000 and $5,987,000, respectively.
--------------------------------------------------------------------------------
59
NOTE 12: STOCK BASED COMPENSATION PLANS
In February 1997, the Board of Directors approved an option plan and granted
options thereunder 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 OPTIONS
(Shares in thousands) OUTSTANDING EXERCISE PRICE EXERCISABLE
----------------------------------------------------------------------------------
Outstanding at December 31, 2003 88 $ 7.25 88
Exercised (18) 7.75
----------------------------------------------------------------------------------
Outstanding at December 31, 2004 70 $ 7.12 70
Exercised (13) 6.58
Expired (16) 6.58
----------------------------------------------------------------------------------
Outstanding at December 31, 2005 41 $ 7.41 41
Exercised (4) 7.35
Expired - -
----------------------------------------------------------------------------------
Outstanding at December 31, 2006 37 $ 7.53 37
==================================================================================
The aggregate intrinsic value of a stock option represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying
stock exceeds the exercise price of the option) that would have been received by
the option holders had all option holders exercised their options on December
31, 2006. This amount changes based on changes in the market value of the
Company's stock. At December 31, 2006, the aggregate intrinsic value of all
outstanding and exercisable stock options approximated $206,000.
The total intrinsic value of stock options exercised during 2006 approximated
$22,600.
Information pertaining to options outstanding at December 31, 2006 is as
follows:
OPTIONS OUTSTANDING AND EXERCISABLE
-------------------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE
PRICE OUTSTANDING CONTRACTUAL LIFE PRICE
-------------------------------------------------------------------------------------
$ 6.58 17,200 .07 years $6.58
$ 8.34 20,150 4.5 years $8.34
------------------------------------------------------------------------------------
Outstanding at end of year 37,350 2.5 years $7.53
====================================================================================
No new options have been granted since July 2001. All outstanding options were
fully vested as of July 2003.
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
--------------------------------------------------------------------------------
60
collateral for the borrowing. As the loan was repaid, earned shares were
released from collateral and allocated to the participants. As shares were
earned, the Bank recorded compensation expense at the average market price of
the shares during the period. Cash dividends received on unearned shares were
allocated among the participants and were reported as compensation expense. All
shares were earned at December 31, 2005, therefore, no compensation expense
related to the ESOP was recorded in 2006. ESOP compensation expense, including
cash dividends received on unearned shares, approximated $88,000 and $133,000
for the years ended December 31, 2005 and 2004, respectively. Total earned
shares at December 31, 2006 and 2005 were 92,574. Unearned ESOP shares were
not considered outstanding for purposes of computing earnings per share.
NOTE 13: Income Taxes
The provision for income tax expense (benefit) for the years ended December 31,
is as follows:
(In thousands) 2006 2005 2004
--------------------------------------
Current $ 309 $(160) $ -
Deferred (67) 109 502
--------------------------------------
$ 242 $ (51) $ 502
======================================
The provision for income taxes includes the following:
(In thousands) 2006 2005 2004
-----------------------------------------------------
Federal Income Tax $ 267 $ (29) $ 520
New York State Franchise Tax (25) (22) (18)
-----------------------------------------------------
$ 242 $ (51) $ 502
=====================================================
--------------------------------------------------------------------------------
61
The components of net deferred tax asset, included in other assets as of
December 31, are as follows:
(In thousands) 2006 2005
----------------------------------------------------------------
ASSETS:
Deferred compensation $ 760 $ 715
Allowance for loan losses 583 654
Postretirement benefits 88 82
Prepaid pension 85 -
Mortgage recording tax credit carryforward 364 361
Investment securities 566 865
Other 142 121
----------------------------------------------------------------
$ 2,588 $ 2,798
----------------------------------------------------------------
LIABILITIES:
Prepaid pension - (532)
Depreciation (573) (647)
Accretion (38) (37)
Loan origination fees (289) (250)
Intangible assets (536) (432)
Prepaid expenses (83) (79)
----------------------------------------------------------------
$(1,519) $(1,977)
----------------------------------------------------------------
Net deferred tax asset $ 1,069 $ 821
================================================================
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the carry
back period. A valuation allowance is provided when its more likely than not
that some portion, or all of the deferred tax assets, will not be realized. In
assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax liabilities, the level of historical taxable income
and the projected future level of taxable income over the periods in which the
temporary differences comprising the deferred tax assets will be deductible.
Based on its assessment, management determined that no valuation allowance is
necessary.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate for the years ended December 31, is as follows:
2006 2005 2004
-----------------------------------------------------------------
Federal statutory income tax rate 34.0% 34.0% 34.0%
State tax (1.3) (3.0) (0.9)
Tax-exempt interest income, net of TEFRA (11.1) (44.8) (6.0)
Increase in value of life insurance (5.3) (18.1) (3.1)
Other 2.8 19.5 2.3
-----------------------------------------------------------------
Effective income tax rate 19.1% (12.4)% 26.3%
=================================================================
--------------------------------------------------------------------------------
62
NOTE 14: EARNINGS PER SHARE
The following is a reconciliation of basic to diluted earnings per share for the
years ended December 31:
(In thousands, except per share data) EARNINGS SHARES EPS
---------------------------------------------------------------
2006 Net Income $ 1,028
Basic EPS 1,028 2,464 $0.42
Effect of dilutive securities
Stock options - 19
---------------------------------------------------------------
Diluted EPS $ 1,028 2,483 $0.41
---------------------------------------------------------------
2005 Net Income $ 462
Basic EPS 462 2,456 $0.19
Effect of dilutive securities
Stock options - 25
---------------------------------------------------------------
Diluted EPS $ 462 2,481 $0.19
---------------------------------------------------------------
2004 Net Income $ 1,405
Basic EPS 1,405 2,435 $0.58
Effect of dilutive securities
Stock options - 44
---------------------------------------------------------------
Diluted EPS $ 1,405 2,479 $0.57
===============================================================
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.
--------------------------------------------------------------------------------
63
At December 31, 2006 and 2005, the following financial instruments were
outstanding whose contract amounts represent credit risk:
CONTRACT AMOUNT
----------------
(In thousands) 2006 2005
----------------------------------------------------------------------
Commitments to grant loans $ 9,388 $ 6,371
Unfunded commitments under lines of credit 17,260 12,361
Standby letters of credit 271 798
======================================================================
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitment amounts are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counter party. Collateral held varies but
may include residential real estate and income-producing commercial properties.
Loan commitments outstanding at December 31, 2006 with fixed interest rates
amounted to approximately $6.2 million. Loan commitments, including unused lines
of credit, outstanding at December 31, 2006 with variable interest rates
amounted to approximately $20.4 million. These outstanding loan commitments
carry current market rates.
Unfunded commitments under standby letters of credit, revolving credit lines and
overdraft protection agreements are commitments for possible future extensions
of credit to existing customers. These lines of credit usually do not contain a
specified maturity date and may not be drawn upon to the total extent to which
the Company is committed.
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 amount of the liability as of December
31, 2006 and 2005 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 $62,000, $42,000 and $41,000 in
2006, 2005 and 2004, respectively. In October 2002, the Company entered into a
land lease with one of its directors on an arms-length basis. In January 2006,
the Company entered into a lease with Pathfinder Bancorp, MHC, for the use of a
training facility. This lease was also executed on an arms-length basis. The
rent expense paid to the related parties during 2006, 2005 and 2004 was $42,000,
$23,000 and $21,000, respectively. Approximate minimum rental commitments for
the noncancelable operating leases are as follows:
YEARS ENDING DECEMBER 31:
-----------------------------------
(In thousands)
-----------------------------------
2007 $ 63
2008 65
2009 65
2010 65
2011 52
Thereafter 63
-----------------------------------
Total minimum lease payments $373
===================================
--------------------------------------------------------------------------------
64
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. During 2006, the Company paid cash dividends totaling $325,000 to
the Holding Company. For the second and fourth quarters ending June 30, 2006 and
December 31, 2006, respectively, the Holding Company waived the right to receive
its portion of the cash dividends declared on June 28, 2006 and December 28,
2006, respectively, which totaled $325,000. During 2005 and 2004, the Holding
Company waived dividends totaling $325,000 and $320,000, respectively.
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 $2,823,000 as of December 31, 2006.
Dividends paid by the Bank to the Company would be prohibited if the effect
thereof would cause the Bank's capital to be reduced below applicable minimum
capital requirements.
NOTE 17: REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of 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 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, 2006, that the Bank meets all
capital adequacy requirements to which it is subject.
--------------------------------------------------------------------------------
65
As of December 31, 2006, 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 Bank's actual capital amounts and ratios as of
December 31, 2006 and 2005 are also presented in the following table.
TO BE "WELL-
CAPITALIZED"
FOR CAPITAL UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE PROVISIONS
------------------------------------------------------------------------------------------------------
(Dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2006:
BANK
Total Core Capital (to Risk-Weighted Assets) $24,676 12.9% $15,297 8.0% $19,121 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $23,180 12.1% $ 7,648 4.0% $11,472 6.0%
Tier 1 Capital (to Average Assets) $23,180 7.7% $11,987 4.0% $14,984 5.0%
======================================================================================================
AS OF DECEMBER 31, 2005:
BANK
Total Core Capital (to Risk-Weighted Assets) $22,957 12.6% $14,615 8.0% $18,269 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $21,278 11.7% $ 7,307 4.0% $10,961 6.0%
Tier 1 Capital (to Average Assets) $21,278 7.1% $11,927 4.0% $14,909 5.0%
======================================================================================================
The Bank is required to maintain average balances on hand or with the Federal
Reserve Bank. At December 31, 2006 and 2005, these reserve balances amounted to
$1,856,000 and $1,608,000, 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:
--------------------------------------------------------------------------------
66
CASH AND CASH EQUIVALENTS - the carrying amounts approximate 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.
FEDERAL HOME LOAN BANK STOCK - the carrying amounts reported approximate fair
value.
MORTGAGE SERVICING RIGHTS - the carrying amount approximates fair value.
ACCRUED INTEREST RECEIVABLE AND PAYABLE - the carrying amounts 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 junior subordinated
debentures 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.
--------------------------------------------------------------------------------
67
The carrying amounts and fair values of the Company's financial instruments as
of December 31 are presented in the following table:
2006 2005
------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(Dollars in thousands) AMOUNTS FAIR VALUES AMOUNTS FAIR VALUES
---------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 13,723 $ 13,723 $ 7,895 $ 7,895
Investment securities 62,640 62,640 74,239 74,239
Net Loans 201,713 200,555 187,889 189,598
Federal Home Loan Bank Stock 1,579 1,579 1,805 1,805
Accrued interest receivable 1,694 1,694 1,678 1,678
Mortgage servicing rights 65 65 146 146
---------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Deposits $245,585 $ 246,236 $236,377 $ 236,552
Borrowed funds 26,360 26,173 31,360 33,883
Junior subordinated debentures 5,155 5,155 5,155 5,155
Accrued interest payable 161 161 161 161
---------------------------------------------------------------------------------
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. as of and for the years ended December 31:
STATEMENTS OF CONDITION 2006 2005
------------------------------------------------------------------
(In thousands)
ASSETS
Cash $ 100 $ 245
Investments 24 19
Investment in subsidiary 25,529 24,530
Investment in non-bank subsidiary 155 155
Due from subsidiaries - 1,042
Other assets 317 207
-------------------------------------------------------------------
Total assets $26,125 $26,198
===================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued liabilities 120 115
Junior subordinated debentures 5,155 5,155
Shareholders' equity 20,850 20,928
-------------------------------------------------------------------
Total liabilities and shareholders' equity $26,125 $26,198
===================================================================
--------------------------------------------------------------------------------
68
STATEMENTS OF INCOME 2006 2005 2004
-------------------------------------------------------------------------------------
(In thousands)
Interest income $ 20 $ 14 $ 9
Interest expense 450 352 259
------------------------------------------------------------------------------------
Net interest expense (430) (338) (250)
Operating expense (96) (92) (130)
Realized gain on sale of investment securities 6 - 330
Amortization of deferred financing costs (30) (30) (30)
------------------------------------------------------------------------------------
Loss before tax benefit and equity in
undistributed net income of subsidiaries (550) (460) (80)
Tax benefit 94 128 20
------------------------------------------------------------------------------------
Loss before equity in undistributed net
income of subsidiaries (456) (332) (60)
Equity in undistributed net income of subsidiaries 1,484 794 1,465
------------------------------------------------------------------------------------
Net income $ 1,028 $ 462 $ 1,405
====================================================================================
STATEMENTS OF CASH FLOWS 2006 2005 2004
-----------------------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES
Net Income $ 1,028 $ 462 $ 1,405
Equity in undistributed earnings of subsidiaries (1,484) (794) (1,465)
Realized gain on sale of investment securities (6) - (330)
ESOP shares earned - 88 133
Amortization of deferred financing costs 30 30 30
Other operating activities 908 (987) (304)
------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 505 (1,201) (531)
------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from loan to subsidiary - 41 56
Dividends receivable - 911 8
Purchase of investments (24) (18) -
Proceeds from sale of investments 24 - 430
-------------------------------------------------------------------------------------
Net cash provided by investing activities - 934 494
-------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 23 213 140
Tax benefit upon exercise of stock options 42 - -
Cash dividends (686) (683) (664)
------------------------------------------------------------------------------------
Net used in financing activities (621) (470) (524)
------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (145) (737) (561)
Cash and cash equivalents at beginning of year 245 982 1,543
------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 100 $ 245 $ 982
====================================================================================
--------------------------------------------------------------------------------
69
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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.
ITEM 9B: OTHER INFORMATION
None
--------------------------------------------------------------------------------
70
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(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, 2006
NAME AGE POSITIONS HELD WITH THE COMPANY
Thomas W. Schneider 45 President and Chief Executive Officer
James A. Dowd, CPA 39 Senior Vice President, Chief Financial Officer
Edward A. Mervine 50 Senior Vice President, General Counsel
Melissa A. Miller 49 Senior Vice President, Chief Operating Officer
Ronald Tascarella 48 Senior Vice President, Chief Credit Officer
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 AND
RELATED STOCKHOLDER MATTERS
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.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is set forth under the caption
"Transactions with Certain Related Persons" 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.
--------------------------------------------------------------------------------
71
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1)Financial Statements - The Company's consolidated financial statements,
for the years ended December 31, 2005, 2004 and 2003, together with the
Report of Independent Registered Public Accounting Firm are filed as part
of this Form 10-K report. See "Item 8: Financial Statements and
Supplementary Data." The supplemental financial information listed and
appearing hereafter should be read in conjunction with the financial
statements included in this report.
(a)2)Financial Statement Schedules - All financial statement schedules have
been omitted as the required information is inapplicable or has been
included in "Item 7: Management Discussion and Analysis."
(b) Exhibits
3.1 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 2003 Executive Deferred Compensation Plan (Incorporated by herein by
reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004 file no. 000-23601)
10.4 2003 Trustee Deferred Fee Plan (Incorporated by herein by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2004 file no. 000-23601)
10.5 Employment Agreement between the Bank and Thomas W. Schneider, President
and Chief Executive Officer (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 file no.
000-23601)
10.6 Employment Agreement between the Bank and Edward A. Mervine, Corporate
Counsel (Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004 file no. 000-23601)
10.7 Change of Control Agreement between the Bank and Ronald Tascarella
10.8 Change of Control Agreement between the Bank and James A. Dowd
10.9 Change of Control Agreement between the Bank and Melissa A. Miller
14 Code of Ethics (Incorported by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2003)
21 Subsidiaries of Company
72
23 Consent of Beard Miller Company 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
--------------------------------------------------------------------------------
73
EXHIBIT 10.7
PATHFINDER BANCORP, INC.
PATHFINDER BANK
CHANGE IN CONTROL AGREEMENT
This Agreement is made effective as of the 19th day of December, 2006, by
and between Pathfinder Bank (the "Bank"), a New York chartered stock savings
bank, with its principal administrative office at 214 West First Street, Oswego,
New York 13126-2547, jointly with Pathfinder Bancorp, Inc, the sole stockholder
of the Bank, and Ronald Tascarella (the "Executive"). Any reference to
"Company" herein shall mean Pathfinder Bancorp, Inc. or any successor thereto.
Any reference to "Employer" herein shall mean both the Bank and the Company or
any successors thereto
WHEREAS, the Executive is employed by the Employer; and
WHEREAS, the Employer desires to provide Executive with certain benefits in
the event of a Change in Control of the Employer, as hereinafter defined:
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. CHANGE IN CONTROL DEFINED
For purposes of this Agreement, a "Change in Control" of the Bank or
Company shall mean a Change in Control of a nature that (i) would be required to
be reported in response to Item 5.01 of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Company within the meaning of the Home Owners Loan
Act, as amended, and applicable rules and regulations promulgated there under,
as in effect at the time of the Change in Control (collectively, the "HOLA"); or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (a) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing 25% or more of the combined voting power of Company's
outstanding securities except for any securities purchased by the Employer's
employee stock ownership plan or trust; or (b) individuals who constitute the
Company's Board of Directors on the date hereof (the "Incumbent Board") cease
for any reason to constitute at least a majority thereof, provided that any
person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Company's stockholders
was approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (b), considered as though he were a member
of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation,
sale of all or substantially all the assets of the Bank or the Company or
similar transaction in which the Bank or Company is not the surviving
institution occurs; or (d) a proxy statement soliciting proxies from
stockholders of the Company, by someone other than the current management of the
Company, seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Company or similar transaction with one or more
corporations or financial institutions, and as a result such proxy solicitation
a plan of reorganization, merger consolidation or similar transaction involving
the Company is approved by the requisite vote of the Company's stockholders; or
(e) a tender offer is made for 25% or more of the voting securities of the
Company and the shareholders owning beneficially or of record 25% or more of the
outstanding securities of the Company have tendered or offered to sell their
shares pursuant to such tender offer and such tendered shares have been accepted
by the tender offeror. Notwithstanding anything to the contrary herein, a
"Change in Control" of the Bank or the Company shall not be deemed to have
occurred in the event of a conversion of Pathfinder Bancorp, MHC to stock
holding company form.
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74
2. BENEFITS DUE EXECUTIVE IN THE EVENT OF CHANGE IN CONTROL
If any of the events described in Section 1 hereof constituting a Change in
Control have occurred, Executive shall be entitled to the benefits provided in
paragraphs (a), (b), (c), (d) and (e) of this Section 2 upon his dismissal from
employment within twelve (12) months of the Change in Control ("Dismissal").
(Notwithstanding any other provision of this Agreement, a voluntary termination
by the Executive shall not be deemed a "Dismissal")
(a) Upon the occurrence of a Change in Control followed by the
Executive's Dismissal, the Employer shall pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to his most
recent annual base salary, including bonuses and any other cash compensation
paid to the Executive within the most recent twelve (12) month period. Such
Payment shall be made by the Employer on the Date of Dismissal.
(b) Upon the occurrence of a Change in Control followed by the
Executive's Dismissal of employment, the Employer will cause to be continued
life, medical, dental and disability coverage substantially identical to the
coverage maintained by the Employer for Executive prior to his Dismissal. Such
coverage and payments shall cease upon the expiration of twelve (12) months.
(c) Upon the occurrence of a Change in Control, Executive shall become
fully vested in and entitled to all benefits granted to him pursuant to any
Stock Option Plan of the Bank or Company.
(d) Upon the occurrence of a Change in Control, Executive shall become
fully vested in and entitled to all benefits granted to him pursuant to
Supplemental Executive Retirement Plan of the Bank or Company, applicable to
him, if any.
(e) Upon the occurrence of a Change in Control, the Executive shall
become fully vested in and entitled to all benefits awarded to him under the
Bank's or the Company's Recognition and Retention Plan or any restricted stock
plan in effect.
(f) Notwithstanding the preceding paragraphs of this Section 2, in the
event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits") would be deemed to
include an "excess parachute payment" under Section 280G of the Internal Revenue
Code or any successor thereto, and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an
amount equal to the total amount of payments permissible under Section 280G of
the Internal Revenue Code or any successor thereto, then the Termination
Benefits to be paid to Executive shall be so reduced so as to be a
Non-Triggering Amount.
(g) Notwithstanding the foregoing, there will be no reduction in the
Payment otherwise payable to Executive during any period during which Executive
is incapable of performing his duties hereunder by reason of disability.
--------------------------------------------------------------------------------
75
3. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. In determining incompetence, the
acts or omissions shall be measured against standards generally prevailing in
the financial services industry. For purposes of this paragraph, no act or
failure to act on the part of Executive shall be considered "willful" unless
done, or omitted to be done, by the Executive not in good faith and without
reasonable belief that the Executive's action or omission was in the best
interest of the Employer. Notwithstanding the foregoing, Executive shall not be
deemed to have been Terminated for Cause unless and until there shall have been
delivered to him a copy of a resolution duly adopted by the affirmative vote of
not less than three-fourths of the members of the Boards of Directors of the
Company and the Bank at a meeting of said Boards called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Boards), finding that in the good
faith opinion of the Boards, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Notwithstanding any provision in paragraph 2, the Executive shall not have the
right to receive Termination Benefits for any period after Termination for
Cause.
4. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Employer and their respective successors and assigns.
5. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
6. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
--------------------------------------------------------------------------------
76
7. EMPLOYMENT AT WILL
Except for the limited benefits granted herein, nothing in this Agreement
shall be construed to create an employment contract and the parties acknowledge
that the Executive's employment remains "at will".
8. AGREEMENT TERM
The initial "Agreement Term" shall begin on the date this agreement is
executed and shall continue through December 31, 2007. As of December 31, 2007,
and as of each December 31st thereafter, the agreement term shall extend
automatically for one year unless the Bank gives notice to the executive prior
to the date of such extension that the agreement term will not be extended.
Notwithstanding the foregoing, if a change in control occurs during the
agreement term, the agreement term shall continue through and terminate on the
first anniversary of the date on which the change in control occurs.
9. PROPRIETARY INFORMATION
The parties agree to the protection of the Bank's proprietary information as
follows:
(a) Nondisclosure of Confidential Information
(i) Access. The Executive acknowledges that employment with the Bank
necessarily involves exposure to, familiarity with, and opportunity to learn
highly sensitive, confidential and proprietary information of the Bank and its
subsidiaries, which may include information about products and services,
markets, customers and prospective customers, vendors and suppliers,
miscellaneous business relationships, investment products, pricing, billing and
collection procedures, proprietary software and other intellectual property,
financial and accounting data, personnel and compensation, data processing and
communications, technical data, marketing strategies, research and development
of new or improved products and services, and know-how regarding the business of
the Bank and its products and services (collectively referred to herein as
"Confidential Information")
(ii) Valuable Asset. The Executive further acknowledges that the
Confidential Information is a valuable, special, and unique asset of the Bank,
such that the unauthorized disclosure or use by persons or entities outside the
Bank would cause irreparable damage to the business of the Bank. Accordingly,
the Executive agrees that during and after the Executive's employment with the
Bank, until the Confidential Information becomes publicly known, the Executive
shall not directly or indirectly disclose to any person or entity, use for any
purpose or permit the exploitation, copying or summarizing of, any Confidential
Information of the Bank, except as specifically required in the proper
performance of his duties for the Bank.
(iii) Duties. The Executive agrees to take all appropriate action, whether
by instruction, agreement or otherwise, to endure the protection,
confidentiality and security of the Confidential Information and to satisfy his
obligations under this Agreement. Prior to lecturing or publishing articles
which reference to Bank and its business, the Executive will provide to an
officer of the Bank a copy of the material to be presented for the Bank to
review and approve in order to ensure that no Confidential Information is
disclosed.
--------------------------------------------------------------------------------
77
(iv) Confidential Relationship. The Bank considers its Confidential
Information to constitute "trade secrets" which are protected from unauthorized
disclosure under applicable law. However, whether or not the Confidential
Information constitutes trade secrets, the Executive acknowledges and agrees
that the Confidential Information is protected from unauthorized disclosure or
use due to his covenants under this Section 9 and his fiduciary duties as an
executive of the Bank.
(v) Return of Documents. The Executive acknowledges and agrees that the
Confidential Information is and at all times shall remain the sole and exclusive
property of the Bank. Upon the termination of his employment with the Bank or
upon request by the Bank, the Executive will promptly return to the Bank in good
condition all documents, data and records of any kind, whether in hardcopy or
electronic form, which contain any Confidential Information, including any and
all copies thereof, as well as all materials furnished to or acquired by the
Executive during the course of the Executive's employment with the Bank.
(b) Enforcement. For purposes of this Section 9, the term "Bank" shall
include the Bank and the Company and all of their subsidiaries. Each such
entity shall be an intended third party beneficiary of this Agreement and shall
have the right to enforce the provisions of this Agreement against the Executive
individually or collectively with any one or more of the other subsidiaries.
(c) Equitable Relief. The Executive acknowledges and agreed that, by reason
of the sensitive nature of the Confidential Information of the Bank referred to
in this Agreement, in addition to recovery of damages and any other legal relief
to which the Bank may be entitled in the event of the Executive's violation of
this Agreement, the Bank shall also be entitled to equitable relief, including
such injunctive relief as may be necessary to protect the interests of the Bank
in such Confidential Information and as may be necessary to specifically enforce
the Executive's obligations under this Agreement.
10. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
11. GOVERNING LAW
This Agreement shall be governed by the laws of the State of New York, but
only to the extent not superseded by federal law.
12. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
--------------------------------------------------------------------------------
78
13. SUCCESSOR TO THE EMPLOYER
The Employer shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Employer's obligations
under this Agreement, in the same manner and to the same extent that the
Employer would be required to perform if no such succession or assignment had
taken place.
SIGNATURES
IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed
and its seal to be affixed hereunto by its duly authorized officer, and
Executive has signed this Agreement, on the day and date first above written.
ATTEST: PATHFINDER BANK
________________ By: _________________________________
Secretary Thomas W. Schneider
President and Chief Executive Officer
ATTEST: PATHFINDER BANCORP, INC.
________________ By: _________________________________
Secretary Thomas W. Schneider
President and Chief Executive Officer
WITNESS: EXECUTIVE
________________ By: __________________________________
--------------------------------------------------------------------------------
79
EXHIBIT 10.8
PATHFINDER BANCORP, INC.
PATHFINDER BANK
CHANGE IN CONTROL AGREEMENT
This Agreement is made effective as of the 19th day of December, 2006, by
and between Pathfinder Bank (the "Bank"), a New York chartered stock savings
bank, with its principal administrative office at 214 West First Street, Oswego,
New York 13126-2547, jointly with Pathfinder Bancorp, Inc, the sole stockholder
of the Bank, and James A. Dowd (the "Executive"). Any reference to "Company"
herein shall mean Pathfinder Bancorp, Inc. or any successor thereto. Any
reference to "Employer" herein shall mean both the Bank and the Company or any
successors thereto
WHEREAS, the Executive is employed by the Employer; and
WHEREAS, the Employer desires to provide Executive with certain benefits in
the event of a Change in Control of the Employer, as hereinafter defined:
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. CHANGE IN CONTROL DEFINED
For purposes of this Agreement, a "Change in Control" of the Bank or
Company shall mean a Change in Control of a nature that (i) would be required to
be reported in response to Item 5.01 of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Company within the meaning of the Home Owners Loan
Act, as amended, and applicable rules and regulations promulgated there under,
as in effect at the time of the Change in Control (collectively, the "HOLA"); or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (a) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing 25% or more of the combined voting power of Company's
outstanding securities except for any securities purchased by the Employer's
employee stock ownership plan or trust; or (b) individuals who constitute the
Company's Board of Directors on the date hereof (the "Incumbent Board") cease
for any reason to constitute at least a majority thereof, provided that any
person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Company's stockholders
was approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (b), considered as though he were a member
of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation,
sale of all or substantially all the assets of the Bank or the Company or
similar transaction in which the Bank or Company is not the surviving
institution occurs; or (d) a proxy statement soliciting proxies from
stockholders of the Company, by someone other than the current management of the
Company, seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Company or similar transaction with one or more
corporations or financial institutions, and as a result such proxy solicitation
a plan of reorganization, merger consolidation or similar transaction involving
the Company is approved by the requisite vote of the Company's stockholders; or
(e) a tender offer is made for 25% or more of the voting securities of the
Company and the shareholders owning beneficially or of record 25% or more of the
outstanding securities of the Company have tendered or offered to sell their
shares pursuant to such tender offer and such tendered shares have been accepted
by the tender offeror. Notwithstanding anything to the contrary herein, a
"Change in Control" of the Bank or the Company shall not be deemed to have
occurred in the event of a conversion of Pathfinder Bancorp, MHC to stock
holding company form.
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80
2. BENEFITS DUE EXECUTIVE IN THE EVENT OF CHANGE IN CONTROL
If any of the events described in Section 1 hereof constituting a Change in
Control have occurred, Executive shall be entitled to the benefits provided in
paragraphs (a), (b), (c), (d) and (e) of this Section 2 upon his dismissal from
employment within twelve (12) months of the Change in Control ("Dismissal").
(Notwithstanding any other provision of this Agreement, a voluntary termination
by the Executive shall not be deemed a "Dismissal")
(a) Upon the occurrence of a Change in Control followed by the
Executive's Dismissal, the Employer shall pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to his most
recent annual base salary, including bonuses and any other cash compensation
paid to the Executive within the most recent twelve (12) month period. Such
Payment shall be made by the Employer on the Date of Dismissal.
(b) Upon the occurrence of a Change in Control followed by the
Executive's Dismissal of employment, the Employer will cause to be continued
life, medical, dental and disability coverage substantially identical to the
coverage maintained by the Employer for Executive prior to his Dismissal. Such
coverage and payments shall cease upon the expiration of twelve (12) months.
(c) Upon the occurrence of a Change in Control, Executive shall become
fully vested in and entitled to all benefits granted to him pursuant to any
Stock Option Plan of the Bank or Company.
(d) Upon the occurrence of a Change in Control, Executive shall become
fully vested in and entitled to all benefits granted to him pursuant to
Supplemental Executive Retirement Plan of the Bank or Company , applicable to
him, if any.
(e) Upon the occurrence of a Change in Control, the Executive shall
become fully vested in and entitled to all benefits awarded to him under the
Bank's or the Company's Recognition and Retention Plan or any restricted stock
plan in effect.
(f) Notwithstanding the preceding paragraphs of this Section 2, in the
event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits") would be deemed to
include an "excess parachute payment" under Section 280G of the Internal Revenue
Code or any successor thereto, and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an
amount equal to the total amount of payments permissible under Section 280G of
the Internal Revenue Code or any successor thereto, then the Termination
Benefits to be paid to Executive shall be so reduced so as to be a
Non-Triggering Amount.
(g) Notwithstanding the foregoing, there will be no reduction in the
Payment otherwise payable to Executive during any period during which Executive
is incapable of performing his duties hereunder by reason of disability.
--------------------------------------------------------------------------------
81
3. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. In determining incompetence, the
acts or omissions shall be measured against standards generally prevailing in
the financial services industry. For purposes of this paragraph, no act or
failure to act on the part of Executive shall be considered "willful" unless
done, or omitted to be done, by the Executive not in good faith and without
reasonable belief that the Executive's action or omission was in the best
interest of the Employer. Notwithstanding the foregoing, Executive shall not be
deemed to have been Terminated for Cause unless and until there shall have been
delivered to him a copy of a resolution duly adopted by the affirmative vote of
not less than three-fourths of the members of the Boards of Directors of the
Company and the Bank at a meeting of said Boards called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Boards), finding that in the good
faith opinion of the Boards, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Notwithstanding any provision in paragraph 2, the Executive shall not have the
right to receive Termination Benefits for any period after Termination for
Cause.
4. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Employer and their respective successors and assigns.
5. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
6. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
--------------------------------------------------------------------------------
82
7. EMPLOYMENT AT WILL
Except for the limited benefits granted herein, nothing in this Agreement
shall be construed to create an employment contract and the parties acknowledge
that the Executive's employment remains "at will".
8. AGREEMENT TERM
The initial "Agreement Term" shall begin on the date this agreement is
executed and shall continue through December 31, 2007. As of December 31, 2007,
and as of each December 31st thereafter, the agreement term shall extend
automatically for one year unless the Bank gives notice to the executive prior
to the date of such extension that the agreement term will not be extended.
Notwithstanding the foregoing, if a change in control occurs during the
agreement term, the agreement term shall continue through and terminate on the
first anniversary of the date on which the change in control occurs.
9. PROPRIETARY INFORMATION
The parties agree to the protection of the Bank's proprietary information as
follows:
(a) Nondisclosure of Confidential Information
(i) Access. The Executive acknowledges that employment with the Bank necessarily
involves exposure to, familiarity with, and opportunity to learn highly
sensitive, confidential and proprietary information of the Bank and its
subsidiaries, which may include information about products and services,
markets, customers and prospective customers, vendors and suppliers,
miscellaneous business relationships, investment products, pricing, billing and
collection procedures, proprietary software and other intellectual property,
financial and accounting data, personnel and compensation, data processing and
communications, technical data, marketing strategies, research and development
of new or improved products and services, and know-how regarding the business of
the Bank and its products and services (collectively referred to herein as
"Confidential Information")
(ii) Valuable Asset. The Executive further acknowledges that the
Confidential Information is a valuable, special, and unique asset of the Bank,
such that the unauthorized disclosure or use by persons or entities outside the
Bank would cause irreparable damage to the business of the Bank. Accordingly,
the Executive agrees that during and after the Executive's employment with the
Bank, until the Confidential Information becomes publicly known, the Executive
shall not directly or indirectly disclose to any person or entity, use for any
purpose or permit the exploitation, copying or summarizing of, any Confidential
Information of the Bank, except as specifically required in the proper
performance of his duties for the Bank.
(iii) Duties. The Executive agrees to take all appropriate action, whether
by instruction, agreement or otherwise, to endure the protection,
confidentiality and security of the Confidential Information and to satisfy his
obligations under this Agreement. Prior to lecturing or publishing articles
which reference to Bank and its business, the Executive will provide to an
officer of the Bank a copy of the material to be presented for the Bank to
review and approve in order to ensure that no Confidential Information is
disclosed.
--------------------------------------------------------------------------------
83
(iv) Confidential Relationship. The Bank considers its Confidential
Information to constitute "trade secrets" which are protected from unauthorized
disclosure under applicable law. However, whether or not the Confidential
Information constitutes trade secrets, the Executive acknowledges and agrees
that the Confidential Information is protected from unauthorized disclosure or
use due to his covenants under this Section 9 and his fiduciary duties as an
executive of the Bank.
(v) Return of Documents. The Executive acknowledges and agrees that the
Confidential Information is and at all times shall remain the sole and exclusive
property of the Bank. Upon the termination of his employment with the Bank or
upon request by the Bank, the Executive will promptly return to the Bank in good
condition all documents, data and records of any kind, whether in hardcopy or
electronic form, which contain any Confidential Information, including any and
all copies thereof, as well as all materials furnished to or acquired by the
Executive during the course of the Executive's employment with the Bank.
(b) Enforcement. For purposes of this Section 9, the term "Bank" shall
include the Bank and the Company and all of their subsidiaries. Each such
entity shall be an intended third party beneficiary of this Agreement and shall
have the right to enforce the provisions of this Agreement against the Executive
individually or collectively with any one or more of the other subsidiaries.
(c) Equitable Relief. The Executive acknowledges and agreed that, by reason
of the sensitive nature of the Confidential Information of the Bank referred to
in this Agreement, in addition to recovery of damages and any other legal relief
to which the Bank may be entitled in the event of the Executive's violation of
this Agreement, the Bank shall also be entitled to equitable relief, including
such injunctive relief as may be necessary to protect the interests of the Bank
in such Confidential Information and as may be necessary to specifically enforce
the Executive's obligations under this Agreement.
10. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
11. GOVERNING LAW
This Agreement shall be governed by the laws of the State of New York, but
only to the extent not superseded by federal law.
12. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
--------------------------------------------------------------------------------
84
13. SUCCESSOR TO THE EMPLOYER
The Employer shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Employer's obligations
under this Agreement, in the same manner and to the same extent that the
Employer would be required to perform if no such succession or assignment had
taken place.
SIGNATURES
IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed
and its seal to be affixed hereunto by its duly authorized officer, and
Executive has signed this Agreement, on the day and date first above written.
ATTEST: PATHFINDER BANK
________________ By: _________________________________
Secretary Thomas W. Schneider
President and Chief Executive Officer
ATTEST: PATHFINDER BANCORP, INC.
________________ By: _________________________________
Secretary Thomas W. Schneider
President and Chief Executive Officer
WITNESS: EXECUTIVE
________________ By: __________________________________
--------------------------------------------------------------------------------
85
EXHIBIT 10.9
PATHFINDER BANCORP, INC.
PATHFINDER BANK
CHANGE IN CONTROL AGREEMENT
This Agreement is made effective as of the 19th day of December, 2006, by
and between Pathfinder Bank (the "Bank"), a New York chartered stock savings
bank, with its principal administrative office at 214 West First Street, Oswego,
New York 13126-2547, jointly with Pathfinder Bancorp, Inc, the sole stockholder
of the Bank, and Melissa A. Miller (the "Executive"). Any reference to
"Company" herein shall mean Pathfinder Bancorp, Inc. or any successor thereto.
Any reference to "Employer" herein shall mean both the Bank and the Company or
any successors thereto
WHEREAS, the Executive is employed by the Employer; and
WHEREAS, the Employer desires to provide Executive with certain benefits in
the event of a Change in Control of the Employer, as hereinafter defined:
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. CHANGE IN CONTROL DEFINED
For purposes of this Agreement, a "Change in Control" of the Bank or
Company shall mean a Change in Control of a nature that (i) would be required to
be reported in response to Item 5.01 of the current report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Company within the meaning of the Home Owners Loan
Act, as amended, and applicable rules and regulations promulgated thereunder, as
in effect at the time of the Change in Control (collectively, the "HOLA"); or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (a) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing 25% or more of the combined voting power of Company's
outstanding securities except for any securities purchased by the Employer's
employee stock ownership plan or trust; or (b) individuals who constitute the
Company's Board of Directors on the date hereof (the "Incumbent Board") cease
for any reason to constitute at least a majority thereof, provided that any
person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Company's stockholders
was approved by the same Nominating Committee serving under an Incumbent Board,
shall be, for purposes of this clause (b), considered as though he were a member
of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation,
sale of all or substantially all the assets of the Bank or the Company or
similar transaction in which the Bank or Company is not the surviving
institution occurs; or (d) a proxy statement soliciting proxies from
stockholders of the Company, by someone other than the current management of the
Company, seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Company or similar transaction with one or more
corporations or financial institutions, and as a result such proxy solicitation
a plan of reorganization, merger consolidation or similar transaction involving
the Company is approved by the requisite vote of the Company's stockholders; or
(e) a tender offer is made for 25% or more of the voting securities of the
Company and the shareholders owning beneficially or of record 25% or more of the
outstanding securities of the Company have tendered or offered to sell their
shares pursuant to such tender offer and such tendered shares have been accepted
by the tender offeror. Notwithstanding anything to the contrary herein, a
"Change in Control" of the Bank or the Company shall not be deemed to have
occurred in the event of a conversion of Pathfinder Bancorp, MHC to stock
holding company form.
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2. BENEFITS DUE EXECUTIVE IN THE EVENT OF CHANGE IN CONTROL
If any of the events described in Section 1 hereof constituting a Change in
Control have occurred, Executive shall be entitled to the benefits provided in
paragraphs (a), (b), (c), (d) and (e) of this Section 2 upon his dismissal from
employment within twelve (12) months of the Change in Control ("Dismissal").
(Notwithstanding any other provision of this Agreement, a voluntary termination
by the Executive shall not be deemed a "Dismissal")
(a) Upon the occurrence of a Change in Control followed by the
Executive's Dismissal, the Employer shall pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to his most
recent annual base salary, including bonuses and any other cash compensation
paid to the Executive within the most recent twelve (12) month period. Such
Payment shall be made by the Employer on the Date of Dismissal.
(b) Upon the occurrence of a Change in Control followed by the
Executive's Dismissal of employment, the Employer will cause to be continued
life, medical, dental and disability coverage substantially identical to the
coverage maintained by the Employer for Executive prior to his Dismissal. Such
coverage and payments shall cease upon the expiration of twelve (12) months.
(c) Upon the occurrence of a Change in Control, Executive shall become
fully vested in and entitled to all benefits granted to him pursuant to any
Stock Option Plan of the Bank or Company.
(d) Upon the occurrence of a Change in Control, Executive shall become
fully vested in and entitled to all benefits granted to him pursuant to
Supplemental Executive Retirement Plan of the Bank or Company , applicable to
him, if any.
(e) Upon the occurrence of a Change in Control, the Executive shall
become fully vested in and entitled to all benefits awarded to him under the
Bank's or the Company's Recognition and Retention Plan or any restricted stock
plan in effect.
(f) Notwithstanding the preceding paragraphs of this Section 2, in the
event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits") would be deemed to
include an "excess parachute payment" under Section 280G of the Internal Revenue
Code or any successor thereto, and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an
amount equal to the total amount of payments permissible under Section 280G of
the Internal Revenue Code or any successor thereto, then the Termination
Benefits to be paid to Executive shall be so reduced so as to be a
Non-Triggering Amount.
(g) Notwithstanding the foregoing, there will be no reduction in the
Payment otherwise payable to Executive during any period during which Executive
is incapable of performing his duties hereunder by reason of disability.
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3. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. In determining incompetence, the
acts or omissions shall be measured against standards generally prevailing in
the financial services industry. For purposes of this paragraph, no act or
failure to act on the part of Executive shall be considered "willful" unless
done, or omitted to be done, by the Executive not in good faith and without
reasonable belief that the Executive's action or omission was in the best
interest of the Employer. Notwithstanding the foregoing, Executive shall not be
deemed to have been Terminated for Cause unless and until there shall have been
delivered to him a copy of a resolution duly adopted by the affirmative vote of
not less than three-fourths of the members of the Boards of Directors of the
Company and the Bank at a meeting of said Boards called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Boards), finding that in the good
faith opinion of the Boards, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Notwithstanding any provision in paragraph 2, the Executive shall not have the
right to receive Termination Benefits for any period after Termination for
Cause.
4. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Employer and their respective successors and assigns.
5. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
6. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
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7. EMPLOYMENT AT WILL
Except for the limited benefits granted herein, nothing in this Agreement
shall be construed to create an employment contract and the parties acknowledge
that the Executive's employment remains "at will".
8. AGREEMENT TERM
The initial "Agreement Term" shall begin on the date this agreement is
executed and shall continue through December 31, 2007. As of December 31, 2007,
and as of each December 31st thereafter, the agreement term shall extend
automatically for one year unless the Bank gives notice to the executive prior
to the date of such extension that the agreement term will not be extended.
Notwithstanding the foregoing, if a change in control occurs during the
agreement term, the agreement term shall continue through and terminate on the
first anniversary of the date on which the change in control occurs.
9. PROPRIETARY INFORMATION
The parties agree to the protection of the Bank's proprietary information as
follows:
(a) Nondisclosure of Confidential Information
(i) Access. The Executive acknowledges that employment with the Bank
necessarily involves exposure to, familiarity with, and opportunity to learn
highly sensitive, confidential and proprietary information of the Bank and its
subsidiaries, which may include information about products and services,
markets, customers and prospective customers, vendors and suppliers,
miscellaneous business relationships, investment products, pricing, billing and
collection procedures, proprietary software and other intellectual property,
financial and accounting data, personnel and compensation, data processing and
communications, technical data, marketing strategies, research and development
of new or improved products and services, and know-how regarding the business of
the Bank and its products and services (collectively referred to herein as
"Confidential Information")
(ii) Valuable Asset. The Executive further acknowledges that the
Confidential Information is a valuable, special, and unique asset of the Bank,
such that the unauthorized disclosure or use by persons or entities outside the
Bank would cause irreparable damage to the business of the Bank. Accordingly,
the Executive agrees that during and after the Executive's employment with the
Bank, until the Confidential Information becomes publicly known, the Executive
shall not directly or indirectly disclose to any person or entity, use for any
purpose or permit the exploitation, copying or summarizing of, any Confidential
Information of the Bank, except as specifically required in the proper
performance of his duties for the Bank.
(iii) Duties. The Executive agrees to take all appropriate action, whether
by instruction, agreement or otherwise, to endure the protection,
confidentiality and security of the Confidential Information and to satisfy his
obligations under this Agreement. Prior to lecturing or publishing articles
which reference to Bank and its business, the Executive will provide to an
officer of the Bank a copy of the material to be presented for the Bank to
review and approve in order to ensure that no Confidential Information is
disclosed.
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(iv) Confidential Relationship. The Bank considers its Confidential
Information to constitute "trade secrets" which are protected from unauthorized
disclosure under applicable law. However, whether or not the Confidential
Information constitutes trade secrets, the Executive acknowledges and agrees
that the Confidential Information is protected from unauthorized disclosure or
use due to his covenants under this Section 9 and his fiduciary duties as an
executive of the Bank.
(v) Return of Documents. The Executive acknowledges and agrees that the
Confidential Information is and at all times shall remain the sole and exclusive
property of the Bank. Upon the termination of his employment with the Bank or
upon request by the Bank, the Executive will promptly return to the Bank in good
condition all documents, data and records of any kind, whether in hardcopy or
electronic form, which contain any Confidential Information, including any and
all copies thereof, as well as all materials furnished to or acquired by the
Executive during the course of the Executive's employment with the Bank.
(b) Enforcement. For purposes of this Section 9, the term "Bank" shall
include the Bank and the Company and all of their subsidiaries. Each such
entity shall be an intended third party beneficiary of this Agreement and shall
have the right to enforce the provisions of this Agreement against the Executive
individually or collectively with any one or more of the other subsidiaries.
(c) Equitable Relief. The Executive acknowledges and agreed that, by reason
of the sensitive nature of the Confidential Information of the Bank referred to
in this Agreement, in addition to recovery of damages and any other legal relief
to which the Bank may be entitled in the event of the Executive's violation of
this Agreement, the Bank shall also be entitled to equitable relief, including
such injunctive relief as may be necessary to protect the interests of the Bank
in such Confidential Information and as may be necessary to specifically enforce
the Executive's obligations under this Agreement.
10. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
11. GOVERNING LAW
This Agreement shall be governed by the laws of the State of New York, but
only to the extent not superseded by federal law.
12. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
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13. SUCCESSOR TO THE EMPLOYER
The Employer shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Employer's obligations
under this Agreement, in the same manner and to the same extent that the
Employer would be required to perform if no such succession or assignment had
taken place.
SIGNATURES
IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed
and its seal to be affixed hereunto by its duly authorized officer, and
Executive has signed this Agreement, on the day and date first above written.
ATTEST: PATHFINDER BANK
________________ By: _________________________________
Secretary Thomas W. Schneider
President and Chief Executive Officer
ATTEST: PATHFINDER BANCORP, INC.
________________ By: _________________________________
Secretary Thomas W. Schneider
President and Chief Executive Officer
WITNESS: EXECUTIVE
________________ By: __________________________________
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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 Corp. 100% owned by Pathfinder Bank
EXHIBIT 23: CONSENT OF BEARD MILLER COMPANY LLP
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Pathfinder Bancorp, Inc.
Oswego, New York
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 March 27, 2007, relating to the consolidated financial statements which
appears in this Annual Report on Form 10-K.
/s/ BEARD MILLER COMPANY LLP
Beard Miller Company LLP
Harrisburg, Pennsylvania
March 27, 2007
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92
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, 2007 /s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
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93
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, Senior 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, 2007 /s/ James A. Dowd
James A. Dowd
Senior Vice President and
Chief Financial Officer
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94
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,
Senior 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, 2006 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, 2007 /s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
March 30, 2007 /s/ James A. Dowd
James A. Dowd
Senior Vice President and
Chief Financial Officer
95
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.
March 30, 2007 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, 2007
By: /s/ Thomas W. Schneider By: /s/ Chris R. Burritt
Thomas W. Schneider, President Chris R. Burritt, Director
and Chief Executive Officer
Date: March 30, 2007 Date: March 30, 2007
By: /s/ James A. Dowd By: /s/ George P. Joyce
James A. Dowd, Vice President, George P. Joyce, Director
Chief Financial Officer and Trust Officer
Date: March 30, 2007 Date: March 30, 2007
By: /s/ Bruce E. Manwaring By: /s/ Corte J. Spencer
Bruce E. Manwaring, Director Corte J. Spencer, Director
Date: March 30, 2007 Date: March 30, 2007
By: /s/ L. William Nelson, Jr. By: /s/ Lloyd Stemple
L. William Nelson, Jr. Director Lloyd Stemple, Director
Date: March 30, 2007 Date: March 30, 2007
By: /s/ Steven W. Thomas
Steven W. Thomas, Director
Date: March 30, 2007