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 ended December 31, 2007.
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________.
Commission file number: 000-23601
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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 (I.R.S. Employer
incorporation or organization) Identification No.)
214 WEST FIRST STREET
OSWEGO, NY 13126
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (315) 343-0057
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $0.01 par value The NASDAQ Stock 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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec.229.405 of this chapter) 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 amendment to this Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer
Smaller reporting company X
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). YES NO X
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, 2007, as reported by the Nasdaq Capital Market, was approximately
$9.5 million.
As of March 13, 2008, there were 2,971,019 shares issued and 2,483,732 shares
outstanding of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Proxy Statement for the 2008 Annual Meeting of Stockholders of the
Registrant (Part III).
(2) Annual Report to Stockholders (Part II and IV).
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2007
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
Stockholder Matters and Issuer Purchases of Equity
Securities 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 64
Item 9A.(T) Controls and Procedures 64
Item 9B. Other Information 64
PART III
Item 10. Directors, Executive Officers and Corporate Governance 65
Item 11. Executive Compensation 65
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 65
Item 13. Certain Relationships and Related Transactions,
and Director Independence 65
Item 14. Principal Accountant Fees and Services 65
PART IV
Item 15. Exhibits and Financial Statement Schedules 66
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, 2007, the Mutual Holding Company held 1,583,239 shares of Common
Stock and the public held 900,493 shares of Common Stock (the "Minority
shareholders"). At December 31, 2007, Pathfinder Bancorp, Inc. had total assets
of $320.7 million, total deposits of $251.1 million and shareholders' equity of
$21.7 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 branch 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, and the contiguous counties.
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, 2007, $171.3 million,
or 78% of the Bank's total loan portfolio consisted of loans secured by real
estate, of which $125.8 million, or 73%, were loans secured by one- to
four-family residences and $45.5 million, or 27%, were secured by commercial
real estate. Additionally, $21.4 million, or 12%, 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 $25.3 million and $3.9 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, 2007,
Pathfinder REIT, Inc. held $25.4 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 is
retained in case the need to operate or develop foreclosed real estate emerges.
This subsidiary is currently inactive.
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 largest
depository 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. The recent turmoil in the
residential mortgage sector of the United States economy has caused certain
competitors to be less effective in the market place. While Central New York
did not experience the level of speculative lending and borrowing in residential
real estate that has deeply impacted other regions on a national basis, certain
mortgage brokers and finance companies are either no longer operating, or have
limited aggressive lending practices. Additionally, as certain money center and
large regional banks grapple with the fallout from sub-prime lending products,
their ability to compete as effectively has been muted. Management believes
that these conditions have created a window of lessened competition for
residential loans, and to a lesser extent, commercial real estate loans.
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 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. The Company and the Mutual Holding Company are federal
chartered. Consequently, they are subject to regulations of the Office of
Thrift Supervision ("OTS") as savings and loan holding companies. Any change in
such regulations, whether by the Department, the FDIC, or the OTS could have a
material adverse impact on the Bank, the Company or the Mutual Holding Company.
Regulatory requirements applicable to the Bank, the Company and the Mutual
Holding Company are referred to below or elsewhere herein.
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NEW YORK BANK AND FDIC REGULATION
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. 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. 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.
FDIC INSURANCE ON DEPOSITS
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
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.
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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 the amount required to be maintained by state law and regulation. The
Company is also subject to the OTS capital distribution rules by virtue of being
an OTS regulated mutual holding company.
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 less
than 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 non affiliates.
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. 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 non diversified 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;
(vii) holding or managing properties used or occupied by a savings association
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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 non subsidiary savings association, a non
subsidiary holding company, or a non subsidiary 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 OTS 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. OTS regulations require the
Mutual Holding Company to notify the OTS of any proposed waiver of its receipt
of dividends from the Company. The OTS may object to such waivers.
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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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, 2007, 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 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 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."
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THE USA PATRIOT ACT
The USA PATRIOT Act ("the PATRIOT Act") was signed into law on October 26, 2001.
The 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 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 ("Sarbanes Oxley") was signed into law on July
30, 2002. Sarbanes-Oxley 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, 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. 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. There is presently a proposal with the SEC that could extend the
auditor attestation requirement another year, or for the year ending December
31, 2009. 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.
BAD DEBT RESERVES. Prior to the Tax Reform Act of 1996 ("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.
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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 definitional tests. 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.
Neither the Internal Revenue Service or New York State have examined our federal
or state tax returns within the past 5 years.
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
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
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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.
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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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.
LOSS OF EXECUTIVE OFFICERS OR OTHER KEY PERSONNEL
Our success depends, to a great extent, upon the services of our executive
officers. The unexpected loss of these individuals could have an adverse effect
on our operations. From time to time, we also need to recruit personnel to fill
vacant positions for experienced lending officers and branch staff. Competition
for qualified personnel in the banking industry is significant, and there is no
assurance that we will continue to be successful in attracting, recruiting and
retaining the necessary skilled managerial, sales and technical personnel for
the successful operation of our existing lending, operations, accounting and
administrative functions or to support the needs of our organization resulting
from future growth. Our inability to hire or retain key personnel could have an
adverse effect on the Company's results of operations.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None
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ITEM 2: PROPERTIES
The Bank conducts its business through its main office located in Oswego, New
York, and six 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, 2007. The aggregate net book value of the Bank's
premises and equipment was $7.8 million at December 31, 2007. 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)
Route 104, Ames Plaza
Oswego, New York 13126
Mexico Branch 1978 Owned
Norman & Main Streets
Mexico, New York 13114
Oswego East Branch 1994 Owned
34 East Bridge Street
Oswego, New York 13126
Lacona Branch 2002 Owned
1897 Harwood 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
$20,000
(2) The building is owned; the underlying land is leased with an annual rent of
$28,000
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 2007 to a vote of
the Company's shareholders.
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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 457 shareholders of record as of
March 13, 2008. 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, 2007 $10.880 $ 9.070 $ 0.1025
September 30, 2007 12.390 9.350 0.1025
June 30, 2007 13.250 11.930 0.1025
March 31, 2007 14.000 12.780 0.1025
-----------------------------------------------
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
-----------------------------------------------
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 OTS. Pathfinder Bancorp, M.H.C. elected to waive its
dividend for the quarters ended June 30, 2007 and December 31, 2007. During
2008, Pathfinder Bancorp, M.H.C. expects to waive two quarterly dividends, and
the OTS has issued its non-objection letter thereto.
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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.
2007 2006 2005 2004 2003
--------- --------- --------- --------- ---------
YEAR END (In thousands)
Total assets $320,691 $301,382 $296,948 $302,037 $277,940
Loans receivable, net 221,046 201,713 187,889 185,125 187,002
Deposits 251,085 245,585 236,377 236,672 206,894
Shareholders' Equity 21,704 20,850 20,928 21,826 21,785
FOR THE YEAR (In thousands)
Net interest income $ 8,667 $ 8,346 $ 8,742 $ 8,905 $ 9,337
Noninterest income 3,042 2,615 2,040 3,047 2,608
Core noninterest income (a) 2,622 2,396 2,333 1,996 1,740
Noninterest expense 9,838 9,668 10,060 9,307 9,094
Net income 1,122 1,028 462 1,405 1,652
PER SHARE
Net income (basic) $ 0.45 $ 0.42 $ 0.19 $ 0.58 $ 0.68
Book value 8.74 8.45 8.50 8.91 8.96
Tangible book value (b) 7.19 6.82 6.77 7.04 7.03
Cash dividends declared 0.41 0.41 0.41 0.405 0.40
RATIOS
Return on average assets 0.36% 0.34% 0.15% 0.47% 0.59%
Return on average equity 5.27 4.86 2.16 6.45 7.61
Return on average tangible equity (b) 6.47 6.04 2.72 8.17 9.77
Average equity to average assets 6.82 7.03 6.95 7.29 7.77
Dividend payout ratio (c) 62.03 66.73 147.84 47.54 39.41
Allowance for loan losses to loans receivable 0.76 0.74 0.89 0.98 0.91
Net interest rate spread 2.81 2.92 3.07 3.22 3.53
Noninterest income to average assets 0.98 0.87 0.66 1.02 0.93
Core noninterest income to average assets (a) 0.84 0.80 0.76 0.67 0.62
Noninterest expense to average assets 3.15 3.21 3.28 3.12 3.26
Efficiency ratio (d) 84.02 88.19 93.30 77.87 76.13
(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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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 not
consolidated 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, 2007, Pathfinder
Bancorp, M.H.C, the Company's mutual holding company parent, whose activities
are not included in the MD&A, held 63.7% of the Company's outstanding common
stock and the public held 36.3%.
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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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, 2007, 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
Total deposits for the Company increased 2%, to $251.1 million at December 31,
2007, while the average balance of deposits increased $17.4 million to $255.8
million at December 31, 2007. The Company will continue to focus on building
market share in the Central Square and Fulton markets where the existing
Pathfinder share of the market is less than 20%. In all other market areas,
Pathfinder currently has the majority of the current deposit market share.
Pathfinder seeks to continue to develop core deposit relationships in all
markets through the acquisition of demand deposit relationships. Efforts will
also be focused on the expansion of commercial deposit relationships with the
bank's existing commercial lending relationships.
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Total assets increased 6%, primarily in the loan and investment security
portfolios. The loan portfolio increased 10% with net growth in all loan
categories. The Company expects to concentrate on continued commercial mortgage
and commercial loan portfolio growth during 2008. The ratio of nonperforming
assets to total assets was 0.77% at December 31, 2007 compared to 0.54% in the
prior year. The decrease in asset quality is primarily the result of a $394,000
increase in foreclosed real estate, combined with a $354,000 increase in
non-performing residential real estate loans.
Net income for 2007 was $1.1 million, or $0.45 per share, as compared to $1.0
million, or $0.42 per share, in 2006. Increased service charges on deposit
accounts and an increase in net gains on investment securities contributed to
the increase in net income from 2006. Net interest margin compression
negatively impacted earnings during 2007.
On March 22, 2007, the Company entered into a junior subordinated debenture for
$5.2 million, with interest adjustable quarterly at a 1.65% spread over the
3-month LIBOR. The Company used the proceeds from that issuance to retire its
original junior subordinated debenture on June 27, 2007, at its first call date.
The original obligation was for $5.2 million, adjustable quarterly at a spread
of 3.45% over the 3-month LIBOR. The new issuance and retirement of the
original junior subordinated debenture resulted in an approximate pre-tax
savings of $29,000 to the Company in 2007. Future pre-tax annual savings on the
new debenture will amount to approximately $92,000.
The Company experienced net interest margin compression to 3.07% in 2007 from
3.11% in 2006. Net interest income increased 4% to $8.8 million for the year
ended December 31, 2007. The Federal Reserve increased its federal funds target
rate 17 times since June of 2004, resulting in a total increase of 4.25% during
that period. While these short-term market interest rates increased,
longer-term market interest rates remained relatively unchanged, resulting in a
"flattening" of the market yield curve. During this extended period in which
the yield curve was flat, net interest margin compression was significant as the
Company's deposits and borrowings repriced faster than the longer term interest
earning assets, loans and security investments. Beginning in August of 2007,
the Federal Reserve Bank began providing economic stimulus in the form of
reductions in the short-term interest rate reductions to the federal funds
target rate. As a result, the market yield curve now has some positive slope,
and the lower shorter term rate environment has allowed management to
aggressively lower deposit and borrowing costs while engaging in activities to
retain yield on our securities and loan portfolios. This will continue to be the
Company's primary emphasis over the near term - to enhance net interest rate
spread and margin as the market yield curve steepens.
The Company's efforts to enhance other income during 2007 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 an 8% increase in service charges on deposit accounts during 2007.
The Company continues to explore cost saving strategies to minimize the growth
of operating expenses. The Company's efforts resulted in an increase in
noninterest expense of approximately $170,000, or 2%, while Company revenues
increased $748,000, or 6.8%, during 2007.
RESULTS OF OPERATIONS
Net income for 2007 was $1.1 million, an increase of $94,000, or 9%, compared to
net income of $1.0 million for 2006. Basic and diluted earnings per share
increased to $0.45 per share for the year ended December 31, 2007 from $0.42 and
$0.41 per share respectively, for the year ended December 31, 2006. Return on
average equity increased to 5.27% in 2007 from 4.86% in 2006.
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Net interest income, on a tax equivalent basis, increased $329,000, or 4%,
primarily resulting from volume increases in the commercial and consumer loans
interest-earning asset categories which were partially offset by volume and rate
increases within time deposits. Provision for loan losses for the year ended
December 31, 2007 increased $342,000 reflecting the increased inherent risk
within the expanding commercial lending activities and the overall growth in the
total loan portfolio and general weakening economic conditions. The Company
experienced a 9% 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, an increase in issued Visa
Debit cards and increased usage from the existing customer base and increased
in-house investment sales revenue. Noninterest expense increased 2% due to
increases in personnel expense, building occupancy, data processing and
professional and other services, partially offset by reductions in amortization
of intangibles 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, increased $329,000, or 4%, to
$8.8 million for the year ended December 31, 2007, as compared to $8.5 million
for the year ended December 31, 2006. The Company's net interest margin for
2007 decreased to 3.07% from 3.11% in 2006. The increase in net interest income
is attributable to an increase in the average balance of interest earning
assets, combined with increased yields on interest earning assets and was
partially offset by an increase in the cost of interest-bearing liabilities.
The average balance of interest-earning assets increased $13.7 million, or 5%,
during 2007 and the average balance of interest-bearing liabilities increased by
$8.1 million, or 3%. The increase in the average balance of interest earning
assets primarily resulted from a $15.8 million increase in the average balance
of the loan portfolio and a $3.3 million increase in the average balance of
interest earning deposits, offset by a $5.4 million reduction in the average
balance of the security investment portfolio. The increase in the average
balance of interest-bearing liabilities primarily resulted from a $15.3 million,
or 7%, increase in the average balance of deposits, offset by a $7.2 million, or
19%, decrease in the average balance of borrowed funds. Interest income, on a
tax-equivalent basis, increased $1.4 million, or 9%, during 2007, as the yield
on interest earning assets increased to 6.08% in 2007 from 5.86% in 2006.
Interest expense on deposits increased $1.4 million, or 26%, as the cost of
deposits rose to 2.96% in 2007 from 2.51% in 2006. Interest expense on
borrowings decreased $315,000, or 15%, during 2007 as the average balance of
borrowed fund decreased $7.2 million, or 19%, offset by an increase in the cost
of borrowed funds to 5.52% in 2007 from 5.31% in 2006.
--------------------------------------------------------------------------------
Page 18
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,
---------------------------------------------------------------------------------------------------------
2007 2006
---------------------------------------------------------------------------------------------------------
Average Average
Average Yield / Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
---------------------------------------------------------------------------------------------------------
Interest-earning assets:
Real estate loans residential $120,079 $ 6,945 5.78% $119,417 $ 6,876 5.76%
Real estate loans commercial 43,573 3,309 7.59% 35,076 2,705 7.71%
Commercial loans 23,710 1,976 8.33% 19,961 1,574 7.88%
Consumer loans 23,011 1,894 8.23% 20,153 1,641 8.14%
Taxable investment securities 66,230 2,881 4.35% 66,788 2,658 3.97%
Tax-exempt investment securities 5,446 258 4.74% 10,240 481 4.70%
Interest-earning deposits 5,050 211 4.18% 1,779 91 5.12%
----------------------------------------------------------------------------------------------------------
Total interest-earning assets $287,099 $ 17,474 6.08% $273,414 $ 16,026 5.86%
----------------------------------------------------------------------------------------------------------
Noninterest-earning assets:
Other assets 27,774 31,600
Allowance for loan losses (1,583) (1,661)
Net unrealized losses
on available for sale securities (1,372) (2,142)
----------------------------------------------------------------------------------------------------------
Total Assets $311,918 $301,211
==========================================================================================================
Interest-bearing liabilities:
NOW accounts $ 22,235 $ 113 0.51% $ 21,094 $ 102 0.48%
Money management accounts 11,348 89 0.78% 13,318 110 0.83%
MMDA accounts 23,682 937 3.96% 20,608 786 3.81%
Savings and club accounts 53,359 279 0.52% 58,997 266 0.45%
Time deposits 122,333 5,483 4.48% 103,596 4,203 4.06%
Junior subordinated debentures 6,454 511 7.81% 5,155 448 8.57%
Borrowings 25,063 1,230 4.91% 33,589 1,608 4.79%
----------------------------------------------------------------------------------------------------------
Total Interest-bearing liabilities $264,474 $ 8,642 3.27% $256,357 $ 7,523 2.93%
----------------------------------------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits 22,828 20,745
Other liabilities 3,338 2,943
----------------------------------------------------------------------------------------------------------
Total liabilities 290,640 280,045
----------------------------------------------------------------------------------------------------------
Shareholders' equity 21,278 21,166
----------------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity $311,918 $301,211
==========================================================================================================
Net interest income $ 8,832 $ 8,503
Net interest rate spread 2.81% 2.93%
Net interest margin 3.07% 3.11%
==========================================================================================================
Ratio of average interest-earning assets
to average interest-bearing liabilities 108.55% 106.55%
==========================================================================================================
For the Years Ended December 31,
---------------------------------------------------------------------------
2005
---------------------------------------------------------------------------
Average
Average Yield/
(Dollars in thousands) Balance Interest Cost
---------------------------------------------------------------------------
Interest-earning assets:
Real estate loans residential $121,875 $ 7,092 5.82%
Real estate loans commercial 29,385 2,181 7.42%
Commercial loans 17,563 1,135 6.46%
Consumer loans 19,257 1,418 7.36%
Taxable investment securities 74,496 2,728 3.66%
Tax-exempt investment securities 13,202 681 5.16%
Interest-earning deposits 3,041 71 2.33%
---------------------------------------------------------------------------
Total interest-earning assets $278,819 $ 15,306 5.49%
Noninterest-earning assets:
Other assets 31,455
Allowance for loan losses (1,835)
Net unrealized losses
on available for sale securities (1,307)
---------------------------------------------------------------------------
Total Assets $307,132
===========================================================================
Interest-bearing liabilities:
NOW accounts $ 19,877 $ 107 0.54%
Money management accounts 16,096 138 0.86%
MMDA accounts 25,284 697 2.76%
Savings and club accounts 65,558 291 0.44%
Time deposits 93,732 3,086 3.29%
Junior subordinated debentures 5,155 351 6.72%
Borrowings 37,348 1,686 4.51%
---------------------------------------------------------------------------
Total Interest-bearing liabilities $263,050 $ 6,356 2.42%
---------------------------------------------------------------------------
Noninterest-bearing liabilities:
Demand deposits 19,324
Other liabilities 3,416
---------------------------------------------------------------------------
Total liabilities 285,790
---------------------------------------------------------------------------
Shareholders' equity 21,342
---------------------------------------------------------------------------
Total liabilities & shareholders' equity $307,132
===========================================================================
Net interest income $ 8,950
Net interest rate spread 3.07%
Net interest margin 3.21%
===========================================================================
Ratio of average interest-earning assets
to average interest-bearing liabilities 105.99%
--------------------------------------------------------------------------------
Page 19
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 $1.4 million, or 9%. Average loans increased 8% in 2007, with yields
increasing 12 basis points to 6.70%. The Company's average residential mortgage
loan portfolio increased $660,000, or 1%, when comparing the year 2007 to 2006.
The average yield on the residential mortgage loan portfolio increased 2 basis
points to 5.78% in 2007 from 5.76% in 2006. The average balance of commercial
real estate increased $8.5 million, or 24%, while the yield decreased to 7.59%
in 2007 from 7.71% in 2006. Average commercial loans increased 19% and the
tax-equivalent yield increased 35 basis points to 8.23% in 2007 compared to
7.88%, in 2006. An increase in the average balance of consumer loans of $2.9
million, or 14%, resulted from an increase in home equity loans. The average
yield increased 9 basis points, to 8.23% from 8.14% in 2006, primarily resulting
from the increase in home equity loans, which are based on the Bank's prime
rate.
Interest income on investment securities decreased 1% from 2006, resulting from
a decrease in the average balance of investment securities (taxable and
tax-exempt) by $5.4 million, or 7%, to $71.7 million in 2007 from $77.0 million
in 2006. 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 24 basis points to 4.32% in 2007 from 4.08% in
2006.
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 $1.1
million, or 15%, in 2007, when compared to 2006. The increase in the cost of
funds resulted from an increase in the average cost of interest-bearing
liabilities of 34 basis points, to 3.27% in 2007 from 2.93% at 2006, combined
with an $8.1 million increase in the average balance of interest-bearing
liabilities during 2007. The average cost of deposits increased 45 basis points
to 2.96% during 2007 from 2.51% for 2006. The increase in the cost of average
deposits resulted from higher short-term interest rates in the first 8 months of
2007 compared to 2006, combined with a shift from lower cost savings products to
the higher cost time deposits. The average cost of MMDA accounts increased 15
basis points and the cost of time deposits increased 42 basis points. The
average balance of deposits increased $15.3 million to $233.0 million at 2007
from $217.6 million at 2006. The increase in the average balance of deposits
primarily resulted from a $1.2 million, or 5%, increase in the average balance
of municipal deposits and a $14.1 million, or 7%, increase in the average
balance of retail deposits. The cost of junior subordinated debentures
decreased 76 basis points, decreasing interest expense by $63,000, that resulted
from the issuance of new subordinated debentures at a rate of 3-month LIBOR plus
1.65%, which paid off subordinated debentures at 3 month LIBOR plus 3.45%.
--------------------------------------------------------------------------------
Page 20
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,
--------------------------------------------------------
2007 VS. 2006 2006 VS. 2005
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 $ 42 $ 27 $ 69 $(143) $ (73) $ (216)
Real estate loans commercial 647 (43) 604 436 88 524
Commercial loans 310 92 402 167 272 439
Consumer loans 235 18 253 68 155 223
Taxable investment securities (23) 230 207 (296) 224 (72)
Tax-exempt investment securities (227) 4 (223) (143) (56) (199)
Interest-earning deposits 140 (20) 120 (39) 60 21
---------------------------------------------------------------------------------------------
Total interest income 1,123 309 1,432 50 670 720
---------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW accounts 5 6 11 7 (12) (5)
Money management accounts (15) (6) (21) (23) (5) (28)
MMDA accounts 119 32 151 (145) 234 89
Savings and club accounts (26) 39 13 (31) 6 (25)
Time deposits 831 450 1,281 326 791 1,117
Junior subordinated debentures 105 (42) 63 - 97 97
Borrowings (418) 39 (379) (177) 99 (78)
----------------------------------------------------------------------------------------------
Total interest expense 601 518 1,119 (43) 1,210 1,167
---------------------------------------------------------------------------------------------
Net change in net interest income $ 522 $(209) $ 313 $ 93 $ (540) $ (447)
=============================================================================================
--------------------------------------------------------------------------------
Page 21
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) 2007 2006
------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 1,474 $1,371
Loan servicing fees 250 224
Increase in the value of bank owned life insurance 225 225
Debit card interchange fees 246 189
Other charges, commissions and fees 427 387
-------------------------------------------------------------------------------------
Core noninterest income $ 2,622 $2,396
Net gains on sales and impairment of investment securities 378 299
Net gains (losses) on sales of loans and foreclosed real estate 42 (80)
---------------------------------------------------------------------------------------
Total noninterest income $ 3,042 $2,615
=======================================================================================
Noninterest income in 2007 increased 16%, when compared to 2006, as a result of
a 9% increase in core noninterest income and a 92% increase in the non-core
items, net gains (losses) on sales and impairment of investment securities and
net gains (losses) on sales of loans and foreclosed real estate. Service charges
on deposit accounts increased 8% 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. Loan
servicing fees increased 12% due to a reduction in the amortization of mortgage
servicing rights and increased late charges on mortgage and commercial loans.
Other charges, commissions and fees increased 10% due to increased internal
investment services activity and related revenue and increased foreign ATM usage
fees. Investment security gains increased $79,000, when compared to the 2006
period resulting primarily from the gain recognized on the sale of the Company's
holdings in the common stock of Fannie Mae, offset by a slightly lower long-term
capital gain recorded in the fourth quarter of 2007 than was recorded in 2006.
Net gains on the sale of loans/foreclosed real estate increased $122,000 when
compared to the prior year primarily due to losses recorded on the sale of eight
foreclosed real estate properties during 2006. In 2007, gains were recognized
on the sale of four foreclosed properties.
NONINTEREST EXPENSE
The following table sets forth certain information on noninterest expense for
the years indicated.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
(In thousands) 2007 2006
-------------------------------------------------------
Salaries and employee benefits $5,094 $5,007
Building occupancy 1,254 1,203
Data processing expenses 1,333 1,278
Professional and other services 769 615
Amortization of intangible asset 182 223
Other expenses 1,206 1,342
-----------------------------------------------------
Total noninterest expense $9,838 $9,668
=====================================================
--------------------------------------------------------------------------------
Page 22
Noninterest expenses increased $170,000, or 2%, for the year ended December 31,
2007 when compared to 2006. Salaries and employee benefits increased 2% in 2007
primarily due to normal salary merit increases and incentive compensation. A
25% increase in professional and other services expense was primarily due to
consulting expenses associated with the on-going SOX 404 process review, a
customer base risk analysis for BSA compliance and a direct mail campaign aimed
at attracting new deposit customers. The decrease in other expenses was
primarily due to a reduction in expenses associated with insurance and travel
and training. Additionally, the write-off of losses on ATM transactions and bad
checks was lower in 2007 when compared to the same period in 2006 and the
deferred financing expense associated with the original Statutory Trust
financing was fully amortized in June eliminating $15,000 in expense.
INCOME TAX EXPENSE
In 2007, the Company reported income tax expense of $384,000 compared with
$242,000 in 2006. The effective tax rate increased to 25% in 2007 compared to a
tax rate of 19% in 2006. The increase in income tax expense and effective tax
rate in 2007 resulted from a higher pretax income of $236,000, combined with a
reduction of income earned on tax-exempt investment securities. The Company has
reduced its tax rate from the statutory rate primarily through the ownership of
tax-exempt investment securities, bank owned life insurance and other tax saving
strategies.
CHANGES IN FINANCIAL CONDITION
INVESTMENT SECURITIES
The investment portfolio represents 23% of the Company's earning assets and is
designed to generate a favorable rate of return consistent with 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. Our mortgage backed securities
portfolio is comprised predominantly of pass-through securities guaranteed by
either Fannie Mae, Freddie Mac or Ginnie Mae and does not, to our knowledge,
include any securities backed by sub-prime or other high risk mortgages.
Investment securities increased $2.9 million, to $67.1 million at December 31,
2007 from $64.2 million at December 31, 2006. The increase in investment
securities was primarily attributable to the $4.0 million purchase of mortgage
backed securities in the fourth quarter of 2007.
The following table sets forth the carrying value of the Company's investment
portfolio at December 31:
AT DECEMBER 31,
-----------------------------
(In thousands) 2007 2006 2005
-------------------------------------------------------------------------------
INVESTMENT SECURITIES:
US Treasury and agencies $ 18,672 $19,966 $20,713
State and political subdivisions 5,342 5,870 11,177
Corporate 6,392 5,575 5,936
Mortgage-backed 28,615 25,481 31,565
Equity securities and FHLB stock 2,706 2,406 2,626
Mutual funds 6,514 6,336 6,177
-------------------------------------------------------------------------------
68,241 65,634 78,194
Unrealized loss on available for sale portfolio (1,103) (1,415) (2,150)
-------------------------------------------------------------------------------
Total investment securities $ 67,138 $64,219 $76,044
===============================================================================
--------------------------------------------------------------------------------
Page 23
The following table sets forth the scheduled maturities, amortized cost, fair
values and average yields for the Company's investment securities at December
31, 2007. 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 $ 6,499 3.76% $ 10,157 4.62% $ 2,016 4.83%
State and political subdivisions 1,010 3.36% 2,855 3.55% 1,477 3.94%
Corporate 1,250 5.10% 2,021 5.33% 990 4.75%
------------------------------------------------------------------------------------------------------------
Total $ 8,759 3.91% $ 15,033 4.51% $ 4,483 4.52%
------------------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES:
Mortgage-backed $ 127 4.00% $ 6,619 4.18% $ 3,181 5.12%
------------------------------------------------------------------------------------------------------------
Total $ 127 4.00% $ 6,619 4.18% $ 3,181 5.12%
------------------------------------------------------------------------------------------------------------
OTHER NON-MATURITY INVESTMENTS:
Mutual funds $ 6,514 3.25% $ - - $ - -
Equity securities and FHLB stock 2,706 5.36% - - - -
------------------------------------------------------------------------------------------------------------
Total $ 9,220 3.87% $ - - $ - -
------------------------------------------------------------------------------------------------------------
Total investment securities $ 18,106 3.89% $ 21,652 4.41% $ 7,664 4.77%
============================================================================================================
MORE THAN TEN YEARS TOTAL INVESTMENT SECURITIES
-----------------------------------------------------------
ANNUALIZED ANNUALIZED
AMORTIZED WEIGHTED AMORTIZED FAIR WEIGHTED
(Dollars in thousands) COST AVG YIELD COST VALUE AVG YIELD
----------------------------------------------------------------------------------------------
DEBT INVESTMENT SECURITIES:
US Treasury and agencies $ - - $18,672 $18,646 4.34%
State and political subdivisions - - 5,342 5,327 3.57%
Corporate 2,131 5.13% 6,392 6,027 5.03%
----------------------------------------------------------------------------------------------
Total $ 2,131 5.13% $30,406 $30,000 4.35%
-------------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES:
Mortgage-backed $18,688 5.00% $28,615 $28,377 4.56%
----------------------------------------------------------------------------------------------
Total $18,688 5.00% $28,615 $28,377 4.56%
----------------------------------------------------------------------------------------------
OTHER NON-MATURITY INVESTMENTS:
Mutual funds $ - - $ 6,514 $ 6,043 3.25%
Equity securities and FHLB stock - - 2,706 2,718 5.36%
----------------------------------------------------------------------------------------------
Total $ - - $ 9,220 $ 8,761 3.87%
--------------------------------------------------------------------------------------------------
Total investment securities $20,819 5.01% $68,241 $67,138 4.37%
==============================================================================================
The above noted yield information does not give effect to changes in fair value
that are reflected in the changes to consolidated shareholders' equity.
LOANS RECEIVABLE
Loans receivable represent 77% 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
--------------------------------------------------------------------------------
Page 24
and municipal loans comprise 11% of the total loan portfolio. At December 31,
2007, 87% 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) 2007 2006 2005 2004 2003
---------------------------------------------------------------------------------------
Residential real estate (1) $ 126,666 $118,494 $119,707 $123,898 $128,989
Commercial real estate 45,490 40,501 31,845 29,874 31,278
Commercial and municipal loans 25,288 23,001 18,334 16,834 15,090
Consumer loans 25,305 21,213 19,682 18,505 16,880
---------------------------------------------------------------------------------------
Total loans receivable $ 222,749 $203,209 $189,568 $189,111 $192,237
=======================================================================================
(1) Includes loans held for sale.
The following table shows the amount of loans outstanding as of December 31,
2007 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. Deferred loan costs of $845,000 have not been
included in a maturity category.
Due Under Due 1-5 Due Over
(In thousands) One Year Years Five Years Total
--------------------------------------------------------------------------
Real estate:
Commercial real estate $ 15,019 $ 28,707 $ 1,764 $ 45,490
Residential real estate 60,355 58,873 6,593 125,821
-----------------------------------------------------------------------------
$ 75,374 $ 87,580 $ 8,357 $171,311
-----------------------------------------------------------------------------
Commercial and municipal loans 21,033 2,845 1,410 25,288
Consumer 13,045 10,885 1,375 25,305
----------------------------------------------------------------------------
Total loans $109,452 $101,310 $ 11,142 $221,904
=============================================================================
Interest rates:
Fixed 30,357 60,252 10,088 100,697
Variable 79,095 41,058 1,054 121,207
-----------------------------------------------------------------------------
Total Loans $109,452 $101,310 $ 11,142 $221,904
=============================================================================
Total loans receivable increased 10% when compared to the prior year.
Residential real estate loans increased $8.2 million, or 7%, during 2007. The
residential real estate portfolio consists of 55% in fixed-rate mortgages and
45% in adjustable-rate mortgages. The increase in the residential real estate
portfolio is principally due to an increase in 5-year adjustable rate mortgages
of $6.9 million and a $2.1 million increase in 30-year fixed rate loans, offset
by a decrease in the 3/1 and 10/1 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. The Company does not originate sub-prime, Alt-A, negative amortizing
or other higher risk structured residential mortgages.
Commercial real estate loans increased $5.0 million, or 12%, from the prior year
as new loan products and relationships were added to the portfolio.
--------------------------------------------------------------------------------
Page 25
Commercial loans, including loans to municipalities, increased 10% over the
prior year to $25.3 million at December 31, 2007. The increase in commercial
loans was primarily the result of new lending relationships with an expanding
commercial customer base, combined with a $1.4 million increase in the municipal
loan portfolio. The Company has continued its efforts to transform its more
traditional thrift balance sheet, which emphasized residential real estate
lending, to a more diversified balance sheet which includes a greater proportion
of commercial lending products.
Consumer loans, which include second mortgage loans, home equity lines of
credit, direct installment and revolving credit loans, increased 19% to $25.3
million at December 31, 2007. 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 2008.
NONPERFORMING LOANS AND ASSETS
The following table represents information concerning the aggregate amount of
nonperforming assets:
DECEMBER 31,
----------------------------------------------
(Dollars in Thousands) 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate and commercial $ 521 $ 481 $ 757 $ 776 $1,677
Consumer 150 125 89 122 172
Residential real estate 920 566 834 953 1,143
--------------------------------------------------------------------------------------------
Total nonaccrual loans $1,591 $1,172 $1,680 $1,851 $2,992
---------------------------------------------------------------------------------------------
Total non-performing loans $1,591 $1,172 $1,680 $1,851 $2,992
---------------------------------------------------------------------------------------------
Foreclosed real estate 865 471 743 798 202
---------------------------------------------------------------------------------------------
Total non-performing assets $2,456 $1,643 $2,423 $2,649 $3,194
---------------------------------------------------------------------------------------------
Non-performing loans to total loans 0.71% 0.57% 0.89% 0.98% 1.59%
Non-performing assets to total assets 0.77% 0.54% 0.82% 0.88% 1.15%
---------------------------------------------------------------------------------------------
Interest income that would have been recorded
under the original terms of the loans $ 71 $ 53 $ 34 $ 64 $ 75
---------------------------------------------------------------------------------------------
The asset quality of the Company's loan portfolio has deteriorated slightly
during 2007. Total nonperforming assets (nonperforming loans and foreclosed
real estate) at December 31, 2007 were 0.77% of total assets as compared to
0.54% of total assets at December 31, 2006. Total nonperforming loans (past due
90 days or more) increased $419,000, or 36%, during 2007. The increase in
nonperforming loans is primarily the result of increased residential real estate
delinquencies. Total nonperforming residential mortgages increased $354,000
during 2007. Management believes that the increase is being driven by general
economic conditions in the market area. Total delinquent loans (those 30 days or
more delinquent) as a percentage of total loans were 2.40% at December 31, 2007
compared to 2.05% at December 31, 2006. Approximately 58% of the Company's
nonperforming loans at December 31, 2007 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
--------------------------------------------------------------------------------
Page 26
measure impairment on commercial and commercial real estate loans. At December
31, 2007 and 2006, the Company had $193,000 and $98,000 in loans which were
deemed to be impaired, having valuation allowances of $71,000 and $24,000,
respectively.
Management has identified additional potential problem loans totaling $724,000
as of December 31, 2007. 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 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 require an impairment reserve. If impairment is noted, 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, 2007.
The allowance for loan losses was $1.7 million at December 31, 2007, a 14%
increase from December 31, 2006. The allowance for loan losses as a percentage
of total loans increased to 0.76% at December 31, 2007 from 0.74% in the prior
year. Net loan charge-offs were $158,000 during 2007 compared to $206,000 in
2006. The majority of the current year charge-off activity is the result of the
write down of one commercial lending relationship. The increase in the current
year provisioning was a result of a deterioration in the overall asset quality
of the Company's residential real estate portfolio. Management believes that
the asset quality deterioration is being driven by general economic conditions
in the market area. However, current delinquency levels are more reflective of
historic norms as compared to the reduced delinquency levels experienced in the
prior 12 to 18 months. In addition, the current year provisioning was impacted
by the increased risk characteristics associated with the expanding commercial
lending activities, as well as growth in the overall loan portfolio.
--------------------------------------------------------------------------------
Page 27
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.
2007 2006 2005 2004 2003
-------------------------------------------------------------------------------------------
% GROSS % GROSS % GROSS % GROSS % GROSS
(Dollars in thousands) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------------------------------------------------------------------------------------------------------------------------------
Commercial real estate and loans $ 956 31.8% $ 985 31.3% $ 1,282 26.5% $ 1,483 24.7% $ 1,218 24.1%
Consumer loans 283 11.3% 339 10.4% 289 10.4% 270 9.8% 120 8.8%
Residential real estate 464 56.9% 172 58.3% 108 63.1% 74 65.5% 377 67.1%
--------------------------------------------------------------------------------------------------------------------------------
Total $ 1,703 100.0% $ 1,496 100.0% $ 1,679 100.0% $ 1,827 100.0% $ 1,715 100.0%
================================================================================================================================
The following table sets forth the roll forward of the allowance for loan losses
for the periods indicated, and related ratios.
(Dollars in thousands) 2007 2006 2005 2004 2003
-----------------------------------------------------------------------------------------
Balance at beginning of year $1,496 $1,679 $1,827 $1,715 $1,481
Provisions charged to operating expenses 365 23 311 738 598
------------------------------------------------------------------------------------------
Recoveries of loans previously charged-off
Commercial real estate and loans - - 25 41 3
Consumer 27 18 14 20 17
Residential real estate 23 4 10 - 17
------------------------------------------------------------------------------------------
Total recoveries 50 22 49 61 37
------------------------------------------------------------------------------------------
Loans charged off:
Commercial real estate and loans (85) (114) (284) (439) (128)
Consumer (77) (89) (137) (126) (189)
Residential real estate (46) (25) (87) (122) (84)
------------------------------------------------------------------------------------------
Total charged-off (208) (228) (508) (687) (401)
------------------------------------------------------------------------------------------
Net charge-offs (158) (206) (459) (626) (364)
------------------------------------------------------------------------------------------
Balance at end of year $1,703 $1,496 $1,679 $1,827 $1,715
==========================================================================================
Net charge-offs to average loans outstanding 0.08% 0.11% 0.24% 0.33% 0.19%
==========================================================================================
Allowance for loan losses to year-end loans 0.76% 0.74% 0.89% 0.98% 0.91%
==========================================================================================
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 2007, 52% of
the Company's average deposit base of $255.8 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 core
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 $28.9 million in municipal deposits in 2007, primarily concentrated
in money market deposit accounts.
Average deposits increased $17.4 million, or 7%, when compared to 2006. The
increase in average deposits primarily related to a $1.2 million increase in the
average balance of municipal deposits and a $16.2 million increase in retail
deposits.
--------------------------------------------------------------------------------
Page 28
The Company's average deposit mix in 2007, as compared to 2006, 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 for both 2007 and 2006. The Company's MMDA accounts
represented 9% of total deposits for both 2007 and 2006. The Company's time
deposit accounts represented 48% of total deposits, up 4 percentage points from
the same period in 2006. The Company promotes its MMDA and time deposit accounts
by offering competitive rates to retain existing and attract new customers.
At December 31, 2007, time deposits in excess of $100,000 totaled $33.0 million,
or 28%, of time deposits and 13% of total deposits. At December 31, 2006, these
deposits totaled $32.8 million, or 32% of time deposits and 13% 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,
2007:
(In thousands)
------------------------------------
Remaining Maturity
Three Months or less $ 6,417
Three through Six months 8,457
Six through twelve months 7,277
Over twelve months 10,865
-----------------------------------
Total $33,016
===================================
BORROWINGS
Short-term borrowings are comprised primarily of advances and overnight
borrowing at the FHLBNY. There were $18.4 million in short-term borrowings
outstanding at December 31, 2007. At December 31, 2006, there were no
short-term borrowings outstanding.
Information regarding short-term borrowings during 2007, 2006 and 2005:
(Dollars in thousands) 2007 2006 2005
-----------------------------------------------------------------------
Maximum outstanding at any month end $18,400 $15,000 $15,000
Average amount outstanding during the year 4,528 5,321 5,692
Average interest rate during the year 5.05% 4.99% 3.57%
=========================================================================
At December 31, 2007, the weighted average interest rate associated with the
Company's short-term borrowings was approximately 4.92%.
Long-term borrowed funds consist of advances and repurchase agreements from the
FHLBNY and junior subordinated debentures. Long-term borrowed funds totaled
$25.2 million at December 31, 2007 as compared to $31.5 million at December 31,
2006.
CAPITAL
Shareholders' equity increased $854,000 to $21.7 million at December 31, 2007.
The Company added $1.1 million to retained earnings through net income, which
was offset by cash dividends returned to its shareholders of $695,000.
Accumulated other comprehensive loss decreased $313,000 to $1.5 million at
December 31, 2007, resulting from the amortization of SFAS No. 158, net of tax,
which resulted in $125,000 of accumulated other comprehensive income, combined
with unrealized gains on securities available for sale, net of tax, of $188,000.
Capital increased $114,000 due to the exercise of stock options during 2007.
--------------------------------------------------------------------------------
Page 29
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, 2007 and
December 31, 2007.
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, 2007, 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.
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, 2007, the Company is in compliance with
its policy guidelines with regard to liquidity.
Despite the fact that the junior subordinated note was not contractually due
until 2032, we called the note in June 2007 and replaced 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, 2007, the Company had $29.3 million in
outstanding commitments to extend credit and standby letters of credit. See
Note 15 in the accompanying financial statements.
--------------------------------------------------------------------------------
Page 30
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PATHFINDER BANCORP, INC
Page
Management's Report On Internal Control Over Financial Reporting 32
Report of Independent Registered Public Accounting Firm 33
Consolidated Statements of Condition 34
Consolidated Statements of Income 35
Consolidated Statements of Changes in Shareholders' Equity 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 38
--------------------------------------------------------------------------------
Page 31
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as
amended. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with policies or procedures may deteriorate. The Company's
internal control over financial reporting is a process designed under the
supervision of the Company's principal executive officer and principal financial
officer to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of the Company's financial statements for external
reporting purposes in accordance with United States generally accepted
accounting principles.
Under the supervision and with the participation of management, including the
Company's principal executive officer and principal financial officer, the
Company conducted an evaluation of the effectiveness of its internal control
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on its evaluation under that framework, management concluded
that the Company's internal control over financial reporting was effective as of
December 31, 2007. In addition, based on our assessment, management has
determined that there were no material weaknesses in the Company's internal
controls over financial reporting.
This annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management's report in this annual report.
/s/ Thomas W. Schneider /s/ James A. Dowd
----------------------- ------------------
Thomas W. Schneider James A. Dowd
President & Chief Executive Senior Vice President and Chief Financial
Officer Officer
Oswego, New York
March 29, 2008
--------------------------------------------------------------------------------
Page 32
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, 2007 and 2006, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the years then ended. Pathfinder Bancorp, Inc.'s management
is responsible for these consolidated financial statements. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our 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 consolidated financial position of
Pathfinder Bancorp, Inc. and subsidiaries as of December 31, 2007 and 2006, and
the consolidated results of their operations and their cash flows for the years
then ended 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 29, 2008
--------------------------------------------------------------------------------
Page 33
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
----------------------
(In thousands, except share data) 2007 2006
------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 9,908 $ 7,068
Interest earning deposits 305 6,655
------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 10,213 13,723
Investment securities, at fair value 65,010 62,640
Federal Home Loan Bank stock, at cost 2,128 1,579
Loans 222,749 203,209
Less: Allowance for loan losses 1,703 1,496
------------------------------------------------------------------------------------------------------
Loans receivable, net 221,046 201,713
Premises and equipment, net 7,807 7,597
Accrued interest receivable 1,673 1,694
Foreclosed real estate 865 471
Goodwill 3,840 3,840
Intangible asset, net - 181
Bank owned life insurance 6,437 6,212
Other assets 1,672 1,732
------------------------------------------------------------------------------------------------------
Total assets $320,691 $301,382
======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing $228,319 $225,003
Noninterest-bearing 22,766 20,582
------------------------------------------------------------------------------------------------------
Total deposits 251,085 245,585
Short-term borrowings 18,400 -
Long-term borrowings 20,010 26,360
Junior subordinated debentures 5,155 5,155
Other liabilities 4,337 3,432
------------------------------------------------------------------------------------------------------
Total liabilities 298,987 280,532
Shareholders' equity:
Preferred stock, authorized shares 1,000,000; no shares issued or outstanding
Common stock, par value $0.01; authorized 10,000,000 shares;
2,971,019 and 2,953,619 shares issued; and 2,483,732 and
2,466,332 shares outstanding, respectively 30 29
Additional paid-in-capital 7,899 7,786
Retained earnings 21,734 21,307
Accumulated other comprehensive loss (1,457) (1,770)
Treasury stock, at cost; 487,287 shares (6,502) (6,502)
------------------------------------------------------------------------------------------------------
Total shareholders' equity 21,704 20,850
------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $320,691 $301,382
======================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
--------------------------------------------------------------------------------
Page 34
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-------------------------
(In thousands, except per share data) 2007 2006
---------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees $ 14,047 $ 12,764
Debt securities:
Taxable 2,529 2,364
Tax-exempt 170 357
Dividends 352 292
Other 211 92
-----------------------------------------------------------------------------------------
Total interest income 17,309 15,869
-----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 6,901 5,467
Interest on short-term borrowings 229 265
Interest on long-term borrowings 1,512 1,791
-----------------------------------------------------------------------------------------
Total interest expense 8,642 7,523
-----------------------------------------------------------------------------------------
Net interest income 8,667 8,346
PROVISION FOR LOAN LOSSES 365 23
-----------------------------------------------------------------------------------------
Net interest income after provision for loan losses 8,302 8,323
-----------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 1,474 1,371
Increase in value of bank owned life insurance 225 225
Loan servicing fees 250 224
Net gains on sales of investment securities 378 299
Net gains (losses) on sales of loans and foreclosed real estate 42 (80)
Debit card interchange fees 246 189
Other charges, commissions and fees 427 387
-----------------------------------------------------------------------------------------
Total noninterest income 3,042 2,615
-----------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 5,094 5,007
Building occupancy 1,254 1,203
Data processing expenses 1,333 1,278
Professional and other services 769 615
Amortization of intangible asset 181 223
Other expenses 1,207 1,342
-----------------------------------------------------------------------------------------
Total noninterest expenses 9,838 9,668
-----------------------------------------------------------------------------------------
Income before income taxes 1,506 1,270
Provision for income taxes 384 242
-----------------------------------------------------------------------------------------
Net income $ 1,122 $ 1,028
=========================================================================================
Net income per share - basic $ 0.45 $ 0.42
=========================================================================================
Net income per share - diluted $ 0.45 $ 0.41
=========================================================================================
Dividends per share $ 0.41 $ 0.41
=========================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
--------------------------------------------------------------------------------
Page 35
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Additional Other Com-
Common Stock Issued Paid-In Retained prehensive Treasury
(In thousands, except per share data) Shares Amount Capital Earnings Loss Stock Total
-------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2006 2,950,419 $ 29 $ 7,721 $20,965 $ (1,285) $(6,502) $20,928
Comprehensive income:
Net income 1,028 1,028
Other comprehensive income, net of tax:
Unrealized net gains on securities 436 436
-----
TOTAL COMPREHENSIVE INCOME 1,464
Stock options exercised, including
$42 tax benefit 3,200 - 65 65
Dividends declared ($0.41 per share) (686) (686)
Adjustment to initially apply FASB
Statement No. 158, net of tax (921) (921)
--------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2006 2,953,619 $ 29 $ 7,786 $21,307 $(1,770) $(6,502) $20,850
==========================================================================================================================
Comprehensive income:
Net income 1,122 1,122
Other comprehensive income, net of tax:
Unrealized net gains on securities 188 188
Pension plan gains and losses and
past service liability not
recognized in pension expense 125 125
-----
TOTAL COMPREHENSIVE INCOME: 1,435
Stock options exercised 17,400 1 113 114
Dividends declared ($0.41 per share) (695) (695)
--------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2007 2,971,019 $ 30 $ 7,899 $21,734 $(1,457) $(6,502) $21,704
==========================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statementconsolidated statements of changes in shareholders' equity
--------------------------------------------------------------------------------
Page 36
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In thousands) 2007 2006
--------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income $ 1,122 $ 1,028
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 365 23
Deferred income tax expense (benefit) 465 (67)
Proceeds from sale of loans 3,000 1,739
Originations of loans held-for-sale (2,973) (1,715)
Realized (gains) losses on sales of:
Foreclosed real estate (15) 104
Loans (27) (24)
Premises and equipment - (13)
Available-for-sale investment securities (378) (299)
Depreciation 734 754
Amortization of intangible asset 181 223
Amortization of deferred financing costs 15 30
Amortization of mortgage servicing rights 46 95
Increase in value of bank owned life insurance (225) (225)
Net amortization of premiums and discounts on investment securities 144 162
Decrease (increase) in interest receivable 21 (16)
Net change in other assets and liabilities 449 646
-----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,924 2,445
-----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of investment securities available-for-sale (23,503) (13,030)
Net (purchase) redemption of Federal Home Loan Bank stock (549) 226
Proceeds from maturities and principal reductions of
investment securities available-for-sale 18,951 19,528
Proceeds from sale:
Available-for-sale investment securities 2,728 5,973
Real estate acquired through foreclosure 276 504
Premises and equipment 34 146
Net increase in loans (20,362) (13,087)
Purchase of premises and equipment (978) (464)
-----------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,403) (204)
-----------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW accounts, savings accounts,
money management and MMDA deposit accounts and escrow deposits 5,368 (14,109)
Net increase in time deposits 132 23,317
Net proceeds from (repayments on) short-term borrowings 18,400 (2,000)
Payments on long-term borrowings (11,350) (3,000)
Proceeds from long-term borrowings 5,000 -
Proceeds from junior subordinated debentures 5,155 -
Payments on junior subordinated debentures (5,155) -
Proceeds from exercise of stock options 114 23
Tax benefit upon exercise of stock options - 42
Cash dividends (695) (686)
-----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,969 3,587
-----------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (3,510) 5,828
Cash and cash equivalents at beginning of period 13,723 7,895
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 10,213 $ 13,723
=====================================================================================================
CASH PAID DURING THE PERIOD FOR:
Interest $ 8,553 $ 7,543
Income taxes paid 185 5
NON-CASH INVESTING ACTIVITY:
Conversion of Parent Company receivables to loans receivable - 1,096
Transfer of loans to foreclosed real estate 664 336
The accompanying notes are an integral part of the consolidated financial
statements
--------------------------------------------------------------------------------
Page 37
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 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 63.7% of the outstanding common stock of the Company. Salaries,
employee benefits and rent approximating $144,000 and $127,000 were allocated
from the Company to the Holding Company during 2007 and 2006, respectively. As
of December 31, 2007, the Bank had a loan receivable from the Holding Company of
$1,085,000.
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.
--------------------------------------------------------------------------------
Page 38
ADVERTISING
The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising costs included in other operating expenses were
$297,000 and $300,000 for the years ended December 31, 2007 and 2006,
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, 2007 and 2006.
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.
--------------------------------------------------------------------------------
Page 39
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 charge 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 and estimable credit losses.
The allowance consists of specific, general and unallocated components. It
includes amounts specifically allocated to impaired loans. 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. Specific reserves
are established based on the fair market value of underlying collateral or
discounted cash flows, as appropriate, when those values are lower than the
carrying value of the loan. The allowance is also comprised of general
reserves, which are established by applying loss factors to the aggregate
balance of major loan categories or pools of smaller balance homogeneous loans.
The loss factors are determined by management based on an evaluation of
historical loss experience, delinquency trends, volume and type of lending
conducted, and the impact of current economic conditions in the market area. An
unallocated component of the allowance may be maintained to cover uncertainties
that could affect management's estimate of probable losses. The unallocated
component reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio. While management uses the best information available to make
evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the evaluation.
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.
--------------------------------------------------------------------------------
Page 40
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
recorded 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 $98,000 and $111,000 in 2007 and
2006, 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 were amortized on a
straight-line basis over a period of five years. As of October 2007, all core
deposit intangibles are fully amortized. 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.
--------------------------------------------------------------------------------
Page 41
STOCK-BASED COMPENSATION
Compensation costs related to share-based payment transactions are recognized
based on the grant-date fair value of the stock-based compensation issued.
Compensation costs are recognized over the period that an employee provides
service in exchange for the award. No options were granted during 2007 or 2006,
and all outstanding options were fully vested on January 1, 2006 and,
accordingly, there was no impact to the Company's consolidated financial
position or results of operations for the periods presented.
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
underfunded 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
are recognized in accumulated other comprehensive loss, 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.
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, and unrecognized gains and
losses, prior service costs and transition assets or obligations for defined
benefit pension and post-retirement plans 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.
--------------------------------------------------------------------------------
Page 42
The components of other comprehensive income and related tax effects for the
years ended December 31, are as follows:
(In thousands) 2007 2006
------------------------------------------------------------------------------------
Unrealized holding gains on securities available for sale:
Unrealized holding gains arising during the year $ 690 $1,034
Reclassification adjustment for gains included in net income (378) (299)
--------------------------------------------------------------------------------------
Net unrealized gains on securities available for sale 312 735
--------------------------------------------------------------------------------------
Defined benefit pension and post-retirement plans:
Additional plan losses 103 -
Reclassification adjustment for amortization of plans' net loss
and past service liability recognized in net periodic expense 105 -
--------------------------------------------------------------------------------------
Net change in defined benefit plans asset 208 -
--------------------------------------------------------------------------------------
Other comprehensive income before tax 520 735
Tax effect (207) (299)
--------------------------------------------------------------------------------------
Other comprehensive income $ 313 $ 436
======================================================================================
The components of accumulated other comprehensive loss, net of related tax
effects, at December 31, are as follows:
(In thousands) 2007 2006
---------------------------------------------------------------------------------------
Unrealized losses on securities available for sale (net of tax
benefit 2007 - $441; 2006 - $566) $ (661) $ (849)
Net pension losses and past service liability (net of tax
benefit 2007 - $495; 2006 - $566) (742) (848)
Net post-retirement losses and past service liability (net of tax
benefit 2007 - $36; 2006 - $48) (54) (73)
-----------------------------------------------------------------------------------------
$(1,457) $ (1,770)
=========================================================================================
RECLASSIFICATIONS
Certain amounts in the 2006 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 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. In May 2007,
the FASB issued FASB Staff Position ("FSP") FIN 48-1, "Definition of Settlement
in FASB Interpretation No. 48" (FSP FIN 48-1). FSP FIN 48-1 provides guidance
on how to determine whether a tax position is effectively settled for the
purpose of recognizing previously unrecognized tax benefits. The provisions of
FIN 48 and FSP FIN 48-1 were effective for years beginning after December 15,
2006, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. The Company adopted the
provisions of FIN 48 and FSP FIN 48-1, as required, on January 1, 2007, with no
impact on the Company's consolidated financial position and results of
operations, as a result of no significant unrecognized tax benefits being
identified.
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
--------------------------------------------------------------------------------
Page 43
applies to other accounting pronouncements that require or permit fair value
measurements. The new guidance is effective for the Company for financial
statements issued after January 1, 2008, including interim periods. The
adoption of SFAS 157 will not have a significant impact on our consolidated
financial position, results of operations or cash flows, although it will
increase disclosures required in our consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, "Effective
Date of FASB Statement No. 157," that permits a one-year deferral in applying
the measurement provisions of Statement No. 157 to non-financial assets and
non-financial liabilities (non-financial items) that are not recognized or
disclosed at fair value in an entity's financial statements on a recurring basis
(at least annually). Therefore, if the change in fair value of a non-financial
item is not required to be recognized or disclosed in the financial statements
on an annual basis or more frequently, the effective date of application of
Statement 157 to that item is deferred until fiscal years beginning after
November 15, 2008 and interim periods within those fiscal years. The adoption of
FSP 157-2 will not have a significant impact on the consolidated financial
position or results of operations.
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. The Company does not expect its implementation
will have a significant impact on the Company's financial condition or results
of operations.
In December 2007, the FASB issued Statement No. 141, (R) Business Combinations.
This Statement establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The Statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. The guidance will become
effective for the Company January 1, 2009. This new pronouncement will impact
the Company's accounting for business combinations completed beginning January
1, 2009.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51. This Statement
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
become effective for the Company January 1, 2009. The Company does not expect
the adoption of SFAS No.160 to have a material impact on its consolidated
financial statements.
Staff Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded
at Fair Value Through Earnings" expresses the views of the staff regarding
written loan commitments that are accounted for at fair value through earnings
under generally accepted accounting principles. To make the staff's views
consistent with current authoritative accounting guidance, the SAB revises and
rescinds portions of SAB No. 105, "Application of Accounting Principles to Loan
Commitments." Specifically, the SAB revises the SEC staff's views on
--------------------------------------------------------------------------------
Page 44
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
Company does not expect SAB 109 to have a material impact on its financial
statements.
NOTE 3: INVESTMENT SECURITIES - AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of investment securities are
summarized as follows:
DECEMBER 31, 2007
---------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
(In thousands) COST GAINS LOSSES VALUE
----------------------------------------------------------------------------------
Bond investment securities:
US Treasury and agencies $ 18,672 $ 27 $ (53) $ 18,646
State and political subdivisions 5,342 5 (20) 5,327
Corporate 6,392 1 (366) 6,027
Mortgage-backed 28,615 87 (325) 28,377
---------------------------------------------------------------------------------
Total 59,021 120 (764) 58,377
Equity investments 7,092 14 (473) 6,633
---------------------------------------------------------------------------------
Total investment securities $ 66,113 $ 134 $(1,237) $ 65,010
=================================================================================
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) $ 19,4096
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
==================================================================================
Gross gains of $385,000 and $325,000 for 2007 and 2006, respectively and gross
losses of $7,000 and $26,000 for 2007 and 2006, respectively were realized on
sales and calls of securities. The tax expense related to net gains on
investment securities was $147,000 for 2007 and $117,000 for 2006.
Investment securities with a carrying value of approximately $29,545,000 at
December 31, 2007 were pledged to collateralize certain deposit and borrowing
arrangements.
The amortized cost and estimated fair value of debt investments at December 31,
2007 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.
--------------------------------------------------------------------------------
Page 45
AMORTIZED ESTIMATED
(In thousands) COST FAIR VALUE
---------------------------------------------------------------
Due in one year or less $ 8,759 $ 8,736
Due after one year through five years 15,033 14,982
Due after five years through ten years 4,483 4,426
Due after ten years 2,131 1,856
Mortgage-backed securities 28,615 28,377
----------------------------------------------------------------
Totals $ 59,021 $ 58,377
================================================================
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, 2007
---------------------------------------------------------------------
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) $1,004 $ (52) $ 10,599 $ (53) $11,603
State and political subdivision securities - - (20) 3,362 (20) 3,362
Corporate securities (94) 885 (272) 3,692 (366) 4,577
Mortgage-backed securities (16) 4,973 (309) 17,169 (325) 22,142
Equity investment securities (2) 12 (471) 6,043 (473) 6,055
------------------------------------------------------------------------------------------------------------------
$ (113) $6,874 $(1,124) $ 40,865 $(1,237) $47,739
==================================================================================================================
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
===============================================================================================================
The Company reviews its securities portfolio for potential impairment issues at
least quarterly. No impairment losses were recorded during 2007 or 2006.
At December 31, 2007, 48 mortgage-backed and 14 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 4% 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.
At December 31, 2007, 11 state and political subdivision 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 2% of carrying
--------------------------------------------------------------------------------
Page 46
value and a majority had unrealized losses totaling less than 1% of carrying
value. The Company has the intent and ability to hold the individual securities
to maturity or market price recovery. Due to recent negative market news
concerning various municipal bond insurers, management has reviewed its holdings
in municipal bonds in order to determine any potential exposure to the troubled
insurers. Management has reviewed its holdings and identified the current bond
insurers credit rating and the underlying credit rating of the issuer.
Management continues to stay apprised of the issues affecting the insurers and
currently feels that no impairment writedowns are needed.
At December 31, 2007, 5 corporate securities had unrealized losses. Two of the
corporate securities represent trust preferred issuances from large money center
financial institutions. These securities were issued at spreads to LIBOR that
are significantly lower than currently originated similar issuances. Two
additional holdings represent shorter term financial sector bonds whose value
has been negatively impacted by changes in interest rates since their issuance,
combined with the recent turmoil in the mortgage market. Management has the
intent and ability to hold these securities to maturity. The remaining
security's unrealized loss is less than $1,000 and is thus deemed insignificant.
At December 31, 2007, 4 equity and other 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.
The remaining two securities had a combined total unrealized loss of $4,000 and
were deemed to be insignificant.
NOTE 4: LOANS
Major classifications of loans at December 31, are as follows:
(In thousands) 2007 2006
----------------------------------------------------
REAL ESTATE MORTGAGES:
Conventional $122,045 $115,588
Construction 3,776 2,160
Commercial 45,490 40,501
-----------------------------------------------------
171,311 158,249
-----------------------------------------------------
OTHER LOANS:
Consumer 3,926 3,248
Home Equity/Second Mortgage 21,379 17,965
Lease financing 777 623
Commercial 20,576 19,890
Municipal loans 3,935 2,488
-----------------------------------------------------
50,593 44,214
-----------------------------------------------------
Total loans 221,904 202,463
-----------------------------------------------------
Net deferred loan costs 845 746
Less allowance for loan losses (1,703) (1,496)
-----------------------------------------------------
Loans receivable, net $221,046 $201,713
=====================================================
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.
--------------------------------------------------------------------------------
Page 47
The following represents the activity associated with loans to officers and
directors and their affiliated entities during the year ended December 31, 2007:
(In thousands)
--------------------------------------
Balance at beginning of year $ 4,701
Originations 360
Principal payments (1,226)
---------------------------------------
Balance at end of year $ 3,835
=======================================
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) 2007 2006
-----------------------------------------------
Balance at beginning of year $1,496 $1,679
Recoveries credited 50 22
Provision for loan losses 365 23
Loans charged-off (208) (228)
-----------------------------------------------
Balance at end of year $1,703 $1,496
===============================================
The following is a summary of information pertaining to impaired loans for the
years ended December 31:
(In thousands) 2007 2006
--------------------------------------------------------------
Impaired loans without a valuation allowance $1,312 $ -
Impaired loans with a valuation allowance 409 98
--------------------------------------------------------------
Total impaired loans $1,721 $ 98
==============================================================
Valuation allowance related to impaired loans $ 152 $ 24
==============================================================
Average investment in impaired loans $1,749 $ 91
==============================================================
Interest income recognized on impaired loans $ 92 $ 1
==============================================================
Interest income recognized on a cash basis on
impaired loans $ - $ -
==============================================================
The amount of loans on which the Company has ceased accruing interest aggregated
approximately $1,591,000 and $1,172,000 at December 31, 2007 and 2006,
respectively. There were no loans past due ninety days or more and still
accruing interest at December 31, 2007 or 2006.
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 $50,409,000 and $53,100,000 at December 31, 2007
and 2006, respectively.
The balance of capitalized servicing rights included in other assets at December
31, 2007 and 2006, was $43,000 and $65,000, respectively.
The following summarizes mortgage-servicing rights capitalized and amortized:
(In thousands) 2007 2006
----------------------------------------------------
Mortgage servicing rights capitalized $ 24 $ 14
Mortgage servicing rights amortized 46 95
====================================================
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Page 48
NOTE 7: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, is as follows:
(In thousands) 2007 2006
---------------------------------------------------
Land $ 1,226 $ 1,226
Buildings 6,963 6,458
Furniture, fixture and equipment 6,861 6,401
Construction in progress 66 130
---------------------------------------------------
$15,116 $14,215
Less: Accumulated depreciation 7,309 6,618
---------------------------------------------------
$ 7,807 $ 7,597
===================================================
NOTE 8: GOODWILL AND INTANGIBLE ASSETS
A summary of intangible assets at December 31, is as follows:
2007 2006
-------------------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
(In thousands) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------------------------------------------------------------------------
Goodwill $ 3,840 $ - $ 3,840 $ -
Core deposit intangible 1,111 (1,111) 1,111 (930)
Core deposit intangibles became fully amortized in October 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) 2007 2006
---------------------------------------------------------
Savings accounts $ 50,789 $ 52,506
Time accounts 86,588 86,696
Time accounts over $100,000 33,016 32,776
Money management accounts 9,657 12,630
MMDA accounts 24,882 17,615
Demand deposit interest-bearing 20,467 19,875
Demand deposit noninterest-bearing 22,766 20,582
Mortgage escrow funds 2,920 2,905
---------------------------------------------------------
$251,085 $245,585
=========================================================
--------------------------------------------------------------------------------
Page 49
At December 31, 2007, the scheduled maturities of time deposits are as follows:
(In thousands)
-----------------------------
YEAR OF MATURITY:
2008 $ 77,396
2009 26,940
2010 4,533
2011 4,918
2012 2,257
Thereafter 3,560
----------------------------
$119,604
============================
NOTE 10: BORROWED FUNDS
The composition of borrowings at December 31 is as follows:
(In thousands) 2007 2006
---------------------------------------------------------
SHORT-TERM FHLB ADVANCES:
FHLB Advances $ 9,000 $ -
Overnight Line of Credit with FHLB 9,400 -
--------------------------------------------------------
Total short-term borrowings $18,400 $ -
========================================================
LONG-TERM:
FHLB Repurchase agreements $ 2,400 $ 2,400
FHLB advances 17,610 23,960
--------------------------------------------------------
Total long-term borrowings $20,010 $26,360
========================================================
The principal balance, interest rate and maturity of the above fixed rate
borrowings at December 31, 2007 is as follows:
TERM PRINCIPAL RATES
------------------------------------------------------------------
(Dollars in thousands)
Short-term advances with FHLB $ 18,400 4.13%-5.52%
==================================================================
Long-term:
Repurchase agreements (due in 2009) 2,400 5.56%-5.76%
------------------------------------------------------------------
Advances with FHLB
due in 2008 6,610 2.67%-5.98%
due in 2009 3,000 4.03%-6.00%
due in 2010 5,000 4.39%
due in 2012 3,000 4.91%
------------------------------------------------------------------
Total advances with FHLB $ 17,610
------------------------------------------------------------------
Total long-term borrowings $ 20,010
------------------------------------------------------------------
Total borrowings $ 38,410
==================================================================
The repurchase agreements with the Federal Home Loan Bank ("FHLB") are
collateralized by certain investment securities having a carrying value of
$2,558,000 at December 31, 2007. 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 2007 approximated 5.12%. At December 31,
2007, $22,314,000 was available under the overnight line. As a companion to the
overnight line with the FHLB, the Company also has access to a One-Month
Overnight Repricing Line of Credit. This allows the Company to borrow funds for
--------------------------------------------------------------------------------
Page 50
a term of one month which reprice daily over the term, thus freeing up the
overnight line for daily liquidity needs. The Company has $31,714,000 available
under this facility, yet has never accessed the one-month overnight repricing
line. 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
$66,681,000 and FHLB stock with a carrying value of $2,138,000 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 2007. In order
to utilize the line, the Company is required to secure the outstanding balance
with marketable investment securities.
The Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust
II, 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 II. The Company borrowed the proceeds
of the capital securities from its subsidiary by issuing floating rate junior
subordinated deferrable interest debentures having substantially similar terms.
The capital securities mature in 2037 and are treated as Tier 1 capital by the
Federal Deposit Insurance Corporation and the 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 1.65% (6.64% at
December 31, 2007) 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.
The Company retired its original trust preferred issuance of $5,000,000 during
June 2007, at its earliest call date. The original issuance of pooled capital
securities were tied to the 3-month LIBOR plus 3.45%. The proceeds from the new
issuance, Pathfinder Statutory Trust II, were used to retire the original
issuance, Pathfinder Statutory Trust I.
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.
--------------------------------------------------------------------------------
Page 51
The following tables set forth the changes in the plans' benefit obligations,
fair value of plan assets and the prepaid plans' funded status as of December
31:
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------------------------------------
(In thousands) 2007 2006 2007 2006
--------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation at beginning of year $ 4,439 $ 4,361 $ 346 $ 354
Service cost 196 193 3 2
Interest cost 273 252 21 20
Actuarial gain (loss) 83 (203) (13) (10)
Benefits paid (148) (164) (22) (20)
-------------------------------------------------------------------------------------------------
Benefit obligations at end of year 4,843 4,439 335 346
-------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year 4,338 4,070 - -
Actual return on plan assets 565 297 - -
Benefits paid (148) (164) (22) (20)
Employer contributions 222 135 22 20
-------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 4,977 4,338 - -
-------------------------------------------------------------------------------------------------
Funded Status - asset (liability) $ 134 $ (101) $(335) $(346)
=================================================================================================
Amounts recognized in accumulated other comprehensive loss as of December 31,
(In thousands) 2007 2006
----------------------------------------------------
Unrecognized transition obligation $ 79 $ 97
Net loss 1,248 1,438
-----------------------------------------------------
1,327 1,535
Tax effect 531 614
-----------------------------------------------------
$ 796 $ 921
=====================================================
The accumulated benefit obligation for the defined benefit plan was $3,953,000
and $3,710,000 at December 31, 2007 and 2006, respectively. The postretirement
plan had an accumulated benefit obligation of $335,000 and $346,000 at December
31, 2007 and 2006, respectively.
The significant assumptions used in determining the benefit obligations as of
December 31, 2007 and 2006 are as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------------------
2007 2006 2007 2006
-----------------------------------------------------------------------------------------------
Weighted average discount rate 6.63% 6.25% 6.63% 6.25%
Expected long term rate of return on plan assets 9.00% 9.00% - -
Rate of increase in future compensation levels 4.00% 3.00% - -
===========================================================================================
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Assumed health care cost trend rates have a significant effect on the amounts
reported for the postretirement health care plan. The annual rates of increase
in the per capita cost of covered medical and prescription drug benefits for
year-end calculations were assumed to be 7.75% and 9.0%, 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 $ 1 $ (1)
Effect on post retirement benefit obligation 9 (9)
==========================================================================
The composition of the net periodic benefit plan cost for the years ended
December 31, 2007 and 2006 is as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------------------------------
(In thousands) 2007 2006 2007 2006
-----------------------------------------------------------------------------------
Service cost $ 196 $ 193 $ 3 $ 2
Interest cost 273 252 21 20
Amortization of transition obligation - - 18 18
Amortization of gains and losses 87 110 - -
Expected return on plan assets (392) (368) - -
----------------------------------------------------------------------------------
Net periodic benefit plan cost $ 164 $ 187 $ 42 $ 40
==================================================================================
The significant assumptions used in determining the net periodic benefit plan
cost for years ended December 31 were as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
-----------------------------------------------
2007 2006 2007 2006
-----------------------------------------------------------------------------------------------
Weighted average discount rate 6.25% 5.88% 6.25% 5.88%
Expected long term rate of return on plan assets 9.00% 9.00% - -
Rate of increase in future compensation levels 3.00% 3.00% - -
===============================================================================================
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 2007 2006
-------------------------------
Equity securities 70% 73%
Debt securities 30% 27%
-------------------------------
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,
--------------------------------------------------------------------------------
Page 53
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 scheduled when the investment mix varies more than
10% from the target (i.e., a 20% 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.
For the fiscal year ending December 31, 2008, the Bank expects to contribute
approximately $233,000 to the Plans.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid.
YEARS ENDING DECEMBER 31:
--------------------------
(In thousands)
2008 $ 185
2009 190
2010 194
2011 200
2012 211
Years 2013- 2017 1,398
==================================
On September 29, 2006, 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 are 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 became effective for the Company
December 13, 2006, except for the measurement date provisions, which are
effective for fiscal years ending after December 31, 2008. 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, and for each year going forward, the accumulated other comprehensive
loss, recorded at the time of SFAS 158 implementation, will be adjusted to
reflect (a) how much gain or loss, prior service cost and transition
asset/liability is included in that year's expenses, (b) new gains and losses
during the year and (c) any new plan changes.
For the year ended December 31, 2007, the accumulated other comprehensive loss
was amortized by $125,000 (net of related deferred tax effect of $83,000).
The Company also offers a 401(k) plan to its employees. Contributions to this
plan by the Company were $148,000 for 2007 and 2006, each.
--------------------------------------------------------------------------------
Page 54
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 continues 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, 2007 and 2006,
other liabilities include approximately $1,660,000 and $1,556,000, respectively,
relating to deferred compensation. Deferred compensation expense for the years
ended December 31, 2007 and 2006 amounted to approximately $212,000 and
$240,000, respectively.
The Company has a supplemental executive retirement plan for the benefit of
certain executive officers. At December 31, 2007 and 2006, other liabilities
include approximately $366,000 and $396,000 accrued under these plans.
Compensation expense includes approximately $49,000 and $51,000 relating to the
supplemental executive retirement plan for 2007 and 2006, 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, 2007 and 2006, the cash value of these policies was
$6,437,000 and $6,212,000, respectively.
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 had 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 was 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 January 1, 2006 41 $ 7.41 41
Exercised (4) 7.35
-----------------------------------------------------------------------------
Outstanding at December 31, 2006 37 $ 7.53 37
Exercised (17) 6.60
-----------------------------------------------------------------------------
Outstanding at December 31, 2007 20 $ 8.34 20
=============================================================================
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, 2007. This amount changes based on changes in the market value of the
Company's stock. At December 31, 2007, the aggregate intrinsic value of all
outstanding and exercisable stock options approximated $38,000.
The total intrinsic value of stock options exercised during 2007 approximated
$64,000.
At December 31, 2007, the 19,950 options outstanding all had an exercise price
of $8.34 and an average remaining contractual life of 3.5 years.
No new options have been granted since July 2001. All outstanding options were
fully vested as of July 2003.
--------------------------------------------------------------------------------
Page 55
NOTE 13: INCOME TAXES
The provision for income tax expense (benefit) for the years ended December 31,
is as follows:
(In thousands) 2007 2006
--------------------------------------------
Current $ 432 $ 309
Deferred (48) (67)
---------------------------------------------
$ 384 $ 242
=============================================
The provision for income taxes includes the following:
(In thousands) 2007 2006
--------------------------------------------
Federal Income Tax $ 405 $ 267
New York State Franchise Tax (21) (25)
=============================================
$ 384 $ 242
=============================================
The components of net deferred tax asset, included in other assets as of
December 31, are as follows:
(In thousands) 2007 2006
-------------------------------------------------------------
ASSETS:
Deferred compensation $ 783 $ 760
Allowance for loan losses 659 583
Postretirement benefits 129 88
Pension - 85
Mortgage recording tax credit carryforward 408 364
Investment securities 441 566
Other 94 142
-----------------------------------------------------------------
$ 2,514 $ 2,588
=================================================================
LIABILITIES:
Pension $ (52) $ -
Depreciation (517) (573)
Accretion (57) (38)
Loan origination fees (335) (289)
Intangible assets (651) (536)
Prepaid expenses (107) (83)
-----------------------------------------------------------------
$(1,719) $(1,519)
=================================================================
Net deferred tax asset $ 795 $ 1,069
=================================================================
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the carry
back period. A valuation allowance is provided when it is more likely than not
that some portion, or all of the deferred tax assets, will not be realized. In
assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax liabilities, the level of historical taxable income
and the projected future level of taxable income over the periods in which the
temporary differences comprising the deferred tax assets will be deductible.
Based on its assessment, management determined that no valuation allowance is
necessary.
--------------------------------------------------------------------------------
Page 56
A reconciliation of the federal statutory income tax rate to the effective
income tax rate for the years ended December 31, is as follows:
2007 2006
-------------------------------------------------------
Federal statutory income tax rate 34.0% 34.0%
State tax (0.9) (1.3)
Tax-exempt interest income, net of TEFRA (6.1) (11.1)
Increase in value of life insurance (5.1) (6.0)
Other 3.6 3.5
-------------------------------------------------------
Effective income tax rate 25.5% 19.1%
=======================================================
The adoption of FIN 48 at January 1, 2007 did not have an impact on the
Company's financial statements. At January 1, 2007, (date of adoption) and
December 31, 2007, the Company did not have any uncertain tax positions. The
Company's policy is to recognize interest and penalties on unrecognized tax
benefits, if any, in income tax expense in the Consolidated Statements of
Income. The tax years subject to examination by the taxing authorities are the
years ended December 31, 2006, 2005, 2004 and 2003.
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
---------------------------------------------------------------
2007 Net Income $ 1,122
Basic EPS 1,122 2,483 $0.45
Effect of dilutive securities
Stock options - 4
---------------------------------------------------------------
Diluted EPS $ 1,122 2,487 $0.45
===============================================================
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
===============================================================
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.
--------------------------------------------------------------------------------
Page 57
At December 31, 2007 and 2006, the following financial instruments were
outstanding whose contract amounts represent credit risk:
CONTRACT AMOUNT
-------------------
(In thousands) 2007 2006
----------------------------------------------------------------
Commitments to grant loans $ 9,677 $ 9,388
Unfunded commitments under lines of credit 17,912 17,260
Standby letters of credit 1,744 271
================================================================
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, 2007 with fixed interest rates
amounted to approximately $6.3 million. Loan commitments, including unused lines
of credit, outstanding at December 31, 2007 with variable interest rates
amounted to approximately $23.0 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, 2007 and 2006 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 $63,000 and $62,000, in 2007 and
2006, 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 2007 and 2006 was $43,000 and
$42,000, respectively. Approximate minimum rental commitments for the
noncancelable operating leases are as follows:
YEARS ENDING DECEMBER 31:
-----------------------------------
(In thousands)
2008 $ 65
2009 65
2010 65
2011 52
2012 43
Thereafter 20
-----------------------------------
Total minimum lease payments $310
===================================
--------------------------------------------------------------------------------
Page 58
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 2007, the Company paid cash dividends totaling $325,000 to
the Holding Company. For the second and fourth quarters ending June 30, 2007 and
December 31, 2007, respectively, the Holding Company waived the right to receive
its portion of the cash dividends declared on June 26, 2007 and December 20,
2007, respectively, which totaled $325,000. During 2006, the Holding Company
waived dividends totaling $325,000.
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 $2,110,000 as of December 31, 2007.
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 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.
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, 2007, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 2007, 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.
--------------------------------------------------------------------------------
Page 59
The Bank's actual capital amounts and ratios as of December 31, 2007 and 2006
are also presented in the following table.
Minimum
To Be "Well-
Minimum Capitalized"
For Capital Under Prompt
Actual Adequacy Purposes Corrective Provisions
--------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------
As of December 31, 2007:
Total Core Capital (to Risk-Weighted Assets) $25,447 12.2% $16,648 8.0% $20,810 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $23,744 11.4% $ 8,324 4.0% $12,486 6.0%
Tier 1 Capital (to Average Assets) $23,744 7.7% $12,437 4.0% $15,548 5.0%
=====================================================================================================
As of December 31, 2006:
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%
=====================================================================================================
The Bank is required to maintain average balances on hand or with the Federal
Reserve Bank. At December 31, 2007 and 2006, these reserve balances amounted to
$2,130,000 and $1,856,000, respectively.
NOTE 18: FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosure About Fair Value of Financial Instruments, requires
disclosure of fair value information of financial instruments, whether or not
recognized in the consolidated statement of condition, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument.
Management uses its best judgment in estimating the fair value of the Company's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Company
could have realized in a sales transaction on the dates indicated. The
estimated fair value amounts have been measured as of their respective
year-ends, and have not been re-evaluated or updated for purposes of these
financial statements subsequent to those respective dates. As such, the
estimated fair values of these financial instruments subsequent to the
respective reporting dates may be different than the amounts reported at each
year-end.
The following information should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only provided for
a limited portion of the Company's assets and liabilities. Due to a wide range
of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company's disclosures and those of other
companies may not be meaningful. The Company, in estimating its fair value
disclosures for financial instruments, used the following methods and
assumptions:
CASH AND CASH EQUIVALENTS - the carrying amounts 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.
--------------------------------------------------------------------------------
Page 60
LOANS AND MORTGAGE LOANS HELD-FOR-SALE - the fair values of portfolio loans,
commercial and commercial real estate are estimated using an option adjusted
discounted cash flow model that discounts future cash flows using recent market
interest rates, market volatility and credit spread assumptions. All non
accrual loans are assumed to be carried at their fair value.
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 - Fixed/variable term "bullet" structures are valued using a
replacement cost of funds approach. These borrowings are discounted to the
FHLBNY advance curve. Option structured borrowings fair value are determined by
the FHLB for borrowings that include a call or conversion option. If market
pricing is not available from this source, current market indications from the
FHLBNY are obtained, and the borrowings are discounted to the FHLBNY advance
curve less an appropriate spread to adjust for the option.
OFF-BALANCE SHEET INSTRUMENTS - Fair values for the Company's off-balance sheet
instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
The carrying amounts and fair values of the Company's financial instruments as
of December 31 are presented in the following table:
2007 2006
-----------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(Dollars in thousands) AMOUNTS FAIR VALUES AMOUNTS FAIR VALUES
--------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 10,213 $ 10,213 $ 13,723 $ 13,723
Investment securities 65,010 65,010 62,640 62,640
Net loans 221,046 224,397 201,713 200,555
Federal Home Loan Bank Stock 2,128 2,128 1,579 1,579
Accrued interest receivable 1,673 1,673 1,694 1,694
Mortgage servicing rights 43 43 65 65
-------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Deposits $ 251,085 $ 251,655 $ 245,585 $ 246,236
Borrowed funds 38,410 38,192 26,360 26,173
Junior subordinated debentures 5,155 5,155 5,155 5,155
Accrued interest payable 250 250 161 161
-------------------------------------------------------------------------------------
OFF-BALANCE SHEET INSTRUMENTS:
Standby letters of credit $ - $ - $ - $ -
Commitments to extend credit - - - -
-------------------------------------------------------------------------------------
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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 2007 2006
--------------------------------------------------------------------------------
(In thousands)
ASSETS
Cash $ 178 $ 100
Investments 20 24
Investment in bank subsidiary 26,587 25,529
Investment in non-bank subsidiary 155 155
Other assets 16 317
---------------------------------------------------------------------------------
Total assets $26,956 $26,125
=================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued liabilities 97 120
Junior subordinated debentures 5,155 5,155
Shareholders' equity 21,704 20,850
---------------------------------------------------------------------------------
Total liabilities and shareholders' equity $26,956 $26,125
=================================================================================
STATEMENTS OF INCOME 2007 2006
--------------------------------------------------------------------------------
(In thousands)
INCOME:
Dividends from bank subsidiary $ 900 $ -
Dividends from non-bank subsidiary 15 13
Dividends on other investments 70 7
Realized gain on sale of securities - 6
---------------------------------------------------------------------------------
Total income 985 26
---------------------------------------------------------------------------------
EXPENSES:
Interest 511 450
Operating 93 126
---------------------------------------------------------------------------------
Total expenses 604 576
---------------------------------------------------------------------------------
Income (loss) before taxes and equity in undistributed net
income of subsidiary 381 (550)
Tax benefit (expense) (2) 94
---------------------------------------------------------------------------------
Income (loss) before equity in undistributed net income
of subsidiary 379 (456)
Equity in undistributed net income of subsidiary 743 1,484
---------------------------------------------------------------------------------
Net income $ 1,122 $ 1,028
=================================================================================
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STATEMENTS OF CASH FLOWS 2007 2006
-------------------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES
Net Income $ 1,122 $ 1,028
Equity in undistributed earnings of subsidiaries (743) (1,484)
Realized gain on sale of investment securities - (6)
Amortization of deferred financing costs 15 30
Other operating activities 265 908
--------------------------------------------------------------------------------
Net cash provided by operating activities 659 476
--------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investments - (24)
Proceeds from sale of investments - 24
Investment in unconsolidated subsidiary trust (155) -
Liquidation of unconsolidated subsidiary trust 155 -
-------------------------------------------------------------------------------
Net cash provided by investing activities - -
--------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 114 23
Proceeds from issuance of subordinated debt 5,155 -
Redemption of subordinated debt (5,155) -
Tax benefit upon exercise of stock options - 42
Cash dividends (695) (686)
--------------------------------------------------------------------------------
Net cash used in financing activities (581) (621)
--------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 78 (145)
Cash and cash equivalents at beginning of year 100 245
---------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 178 $ 100
=================================================================================
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ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A(T): CONTROLS AND PROCEDURES
REPORT OF MANAGEMENT'S RESPONSIBILITY
Management is responsible for preparation of the consolidated financial
statements and related financial information contained in all sections of this
Annual Report on Form 10-K, including the determination of amounts that must
necessarily be based on judgments and estimates. It is the belief of management
that effective internal controls over financial reporting have been designed to
produce reliable financial statements that have been prepared in conformity, in
all material respects, with generally accepted accounting principles appropriate
in the circumstances, and that the financial information appearing throughout
this annual report is consistent, in all material respects, with the
consolidated financial statements.
The Audit Committee of the Board of Directors, composed solely of independent
directors, meets periodically with the Company's management, internal auditors
and independent registered public accounting firm, Beard Miller Company LLP to
review matters relating to the quality of financial reporting, internal
accounting control, and the nature, extent, and results of audit efforts. The
internal auditors and independent public accounting firm have unlimited access
to the Audit Committee to discuss all such matters.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management's responsibilities related to establishing and maintaining effective
disclosure controls and procedures include maintaining effective internal
controls over financial reporting that are designed to produce reliable
financial statements in accordance with accounting principles generally accepted
in the United States. As disclosed in the Report on Management's Assessment of
Internal Control Over Financial Reporting which is set forth in Item 8 -
"Financial Statements and Supplementary Data" on page 31 and is incorporated
herein by reference, management assessed the Company's system of internal
control over financial reporting as of December 31, 2007, in relation to
criteria for effective internal control over financial reporting as described in
"Internal Control - Integrated Framework," issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that, as of December 31, 2007, its system of internal control over
financial reporting met those criteria and is effective.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 9B: OTHER INFORMATION
None
--------------------------------------------------------------------------------
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PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE, COMPLIANCE WITH SECTIONS 16 (A) OF EXCHANGE ACT
(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, 2007.
NAME AGE POSITIONS HELD WITH THE COMPANY
Thomas W. Schneider 46 President and Chief Executive Officer
James A. Dowd, CPA 40 Senior Vice President, Chief Financial Officer
Edward A. Mervine 51 Senior Vice President, General Counsel
Melissa A. Miller 50 Senior Vice President, Chief Operating Officer
Ronald Tascarella 49 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
Committee".
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information contained under the sections captioned "Voting Securities and
Principal Holders Thereof " 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.
--------------------------------------------------------------------------------
Page 65
PART IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)Financial Statements - The Company's consolidated financial statements,
for the years ended December 31, 2007 and 2006, 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 the "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 Quarterly Report on Form 10-Q dated August 15, 2005 and November
28, 2007)
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 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 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, Vice
President, General Counsel and Secretary (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
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2006 file no. 000-23601)
10.8 Change of Control Agreement between the Bank and James A. Dowd
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2006 file no. 000-23601)
10.9 Change of Control Agreement between the Bank and Melissa A. Miller
(Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2006 file no. 000-23601)
14. Code of Ethics (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2003)
21. Subsidiaries of the Company
--------------------------------------------------------------------------------
Page 66
23. Consent of Bear 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
--------------------------------------------------------------------------------
Page 67
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Pathfinder Bancorp, Inc.
Date: March 31, 2008 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 31, 2008
By: /s/ Thomas W. Schneider By: /s/ Chris R. Burritt
Thomas W. Schneider, President and Chief Chris R. Burritt, Director
Executive Officer
(Principal Executive Officer)
Date: March 31, 2008 Date: March 31, 2008
By: /s/ James A. Dowd By: /s/ George P. Joyce
James A. Dowd, Senior Vice President and George P. Joyce, Director
Chief Financial Officer
(Principal Financial Officer)
Date: March 31, 2008 Date: March 31, 2008
By: /s/ Shelley Tafel By: /s/ Corte J. Spencer
Shelley Tafel Corte J. Spencer, Director
Vice President, Controller Date: March 31, 2008
(Principal Accounting Officer)
Date: March 31, 2008 By: /s/ Lloyd Stemple
Lloyd Stemple, Director
By: /s/ Bruce E. Manwaring Date: March 31, 2008
Bruce E. Manwaring, Director
Date: March 31, 2008
By: /s/ L. William Nelson, Jr.
L. William Nelson, Jr. Director
Date: March 31, 2008
By: /s/ Steven W. Thomas
Steven W. Thomas, Director
Date: March 31, 2008
--------------------------------------------------------------------------------
Page 68
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 29, 2008, relating to the consolidated financial statements which
appears in this Form 10-K.
/s/ BEARD MILLER COMPANY LLP
Beard Miller Company LLP
Harrisburg, Pennsylvania
March 29, 2008
--------------------------------------------------------------------------------
Page 69
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) 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) Designed such internal control over financial reporting, or
caused such internal control over financial reporting, to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) 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
(d) 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 31, 2008 /s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
--------------------------------------------------------------------------------
Page 70
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) 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) Designed such internal control over financial reporting, or
caused such internal control over financial reporting, to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) 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
(d) 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 31, 2008 /s/ James A. Dowd
James A. Dowd
Senior Vice President and Chief Financial Officer
--------------------------------------------------------------------------------
Page 71
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, 2007 and that to the best of his knowledge:
1. the report fully complies with the requirements of Section 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 31, 2008 /s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
March 31, 2008 /s/ James A. Dowd
James A. Dowd
Senior Vice President and Chief Financial Officer
--------------------------------------------------------------------------------
Page 72