SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transaction period from ___________________ to ______________________
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Commission File Number: 000-23601
PATHFINDER BANCORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
FEDERAL 16-1540137
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) (Number)
214 WEST FIRST STREET, OSWEGO, NY 13126
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(Address of Principal Executive Office) (Zip Code)
(315) 343-0057
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES NO X
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As of June 30, 2003 there were 2,916,919 shares issued and 2,431,632 shares
outstanding of the Registrant's Common Stock. The aggregate value of the voting
stock held by non-affiliates of the Registrant, computed by reference to the
average bid and asked prices of the Common Stock as of June 30, 2003 ($14.20)
was $8,130,892.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 2003 (Parts II and IV).
2. Proxy Statement for the 2003 Annual Meeting of Stockholders (Parts I and
III).
1
PATHFINDER BANCORP, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I.
Item 1... . . . .Business 3-11
Item 2... . . . .Properties 12
Item 3... . . . .Legal Proceedings 12
Item 4.. . . .Submission of Matter to a Vote of Security Holders (This
item is omitted since no matters were submitted to a vote of
security holders during the fourth quarter of 2003)
PART II.
Item 5... . . . .Market for Registrant's Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities 13
Item 6... . . . .Selected Financial Data 13
Item 7.. . . . .Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 7A. . . . Quantitative Disclosures about Market Risk 13
Item 8.. . . . Financial Statement and Supplementary Data 13-16
Item 9.. . . . Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 16-17
Item 9A. . . . Controls and Procedures 17
PART III.
Item 10. . . . Directors and Executive Officers of the Registrant 17
Item 11. . . . Executive Compensation 17
Item 12. . . . Security Ownership of Certain Beneficial Owners and Management 17
Item 13. . . . Certain Relationships and Related Transactions 18
Item 14. . . . Principal Accountant Fees and Services 18
PART IV.
Item 15. . . . Exhibits, Financial Statement Schedules and Reports
on Form 8-K 18-19
Signatures 20
2
PART I
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ITEM 1. BUSINESS
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GENERAL
PATHFINDER BANCORP, INC.
Pathfinder Bancorp, Inc. (the "Company") is a Federal corporation. On July
19, 2001, the Company completed its conversion from a Delaware chartered company
to a federal charter. As a result of the charter conversion the Company's
chartering authority and primary federal regulator is the Office of Thrift
Supervision. References to the Company include the Company before or after the
charter conversion. Upon completion of the charter conversion, the outstanding
shares of common stock, par value $0.10 per share of Pathfinder Bancorp, Inc.
become, by operation of law, common stock, par value $0.01 per share of the
Company on a one-for-one basis. The primary business of the Company is its
investment in Pathfinder Bank (the "Bank") and Pathfinder Statutory Trust I.
The Company is majority owned by Pathfinder Bancorp, M.H.C., a
Federally-chartered mutual holding company (the "Mutual Holding Company"). At
December 31, 2003 the Mutual Holding Company held 1,583,239 shares of Common
Stock and the public held 848,860 shares of Common Stock (the "Minority
Shareholders"). At December 31, 2003, Pathfinder Bancorp, Inc. had total assets
of $277.9 million, total deposits of $206.9 million and shareholders' equity of
$21.8 million.
On June 26, 2002, the Company formed a wholly owned subsidiary, Pathfinder
Statutory Trust I, a Connecticut business trust. The trust issued $5,000,000 of
30-year floating rate Company-obligated pooled capital securities of Pathfinder
Statutory Trust I. The Company borrowed the proceeds of the capital securities
from its subsidiary by issuing floating rate junior subordinated deferrable
interest debentures having substantially similar terms. The capital securities
mature in 2032 and qualify as Tier 1 capital by the Federal Deposit Insurance
Company and the Office of Thrift Supervision. The capital securities of the
trust are a pooled trust preferred fund of Preferred Term Securities VI, Ltd.
and are tied to the 3 month LIBOR plus 3.45% with a five year call provision.
These securities are guaranteed by the Company.
The Company's executive office is located at 214 West First Street, Oswego,
New York and the telephone number at that address is (315) 343-0057.
PATHFINDER BANK
The Bank is a New York-chartered savings bank headquartered in Oswego, New
York. The Bank has six full-service offices located in its market area
consisting of Oswego County and the contiguous counties. The Bank's deposits
are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank was
chartered as a New York savings bank in 1859 as Oswego City Savings Bank. The
Bank is a consumer-oriented institution dedicated to providing mortgage loans
and other traditional financial services to its customers. The Bank is
committed to meeting the financial needs of its customers in Oswego County, New
York, the county in which it operates. At December 31, 2003, the Bank had total
assets of $277.5 million, total deposits of $208.4 million, and shareholders'
equity of $24.9 million.
On October 25, 2002, Pathfinder Bank completed the purchase of assets and
the assumption of non-municipal deposits of the Lacona, New York branch of
Cayuga Bank (the "Branch Acquisition"). In addition, Pathfinder Bank formed a
limited purpose commercial bank subsidiary, Pathfinder Commercial Bank.
Pathfinder Commercial Bank was established to serve the depository needs of
public entities in its market area and it assumed the municipal deposit
liabilities acquired as part of the Branch Acquisition. The transaction included
approximately $26.4 million in deposits, $2.3 million in loans and $430,000 in
vault cash and facilities and equipment. The acquisition reflects a premium on
deposit liabilities assumed of approximately $2.4 million. As of December 31,
2003, no impairment has been recognized.
The Bank is primarily engaged in the business of attracting deposits from
the general public in the Bank's market area, and investing such deposits,
together with other sources of funds, in loans secured by one- to four-family
residential real estate. At December 31, 2003, $173.2 million, or 90% of the
Bank's total loan portfolio consisted of loans secured by real estate, of which
$129.0 million, or 67%, were loans secured by one- to four-family residences and
$31.3 million, or 16%, were secured by commercial real estate. Additionally,
$12.9 million, or 7%, of total real estate loans, were secured by second liens
on residential properties that are classified in consumer loans. The Bank also
originates commercial and consumer loans that totaled $15.1 and $3.9 million,
respectively, or 10%, of the Bank's total loan portfolio. The Bank invests a
portion of its assets in securities issued by the United States Government,
state and municipal obligations, corporate debt securities, mutual funds, and
equity securities. The Bank also invests in mortgage-backed securities
3
primarily issued or guaranteed by the United States Government or agencies
thereof. The Bank's principal sources of funds are deposits, principal and
interest payments on loans and borrowings from correspondent financial
institutions. The principal source of income is interest on loans and
investment securities. The Bank's principal expenses are interest paid on
deposits, and employee compensation and benefits.
The Bank's executive office is located at 214 West First Street, Oswego,
New York, and its telephone number at that address is (315) 343-0057.
In April 1999, the Bank established Pathfinder REIT, Inc. as the Bank's
wholly-owned real estate investment trust subsidiary. At December 31, 2003,
Pathfinder REIT, Inc. held $26.7 million in mortgage and mortgage related
assets. All disclosures in the Form 10-K relating to the Bank's loans and
investments include loan and investments that are held by Pathfinder REIT, Inc.
MARKET AREA AND COMPETITION
The economy in the Bank's market area is manufacturing-oriented and is also
significantly dependent upon the State University of New York College at Oswego.
The major manufacturing employers in the Bank's market area are National Grid,
Alcan, Constellation, NRG and Huhtamaki. The Bank is the second largest
financial institution headquartered in Oswego County. However, the Bank
encounters competition from a variety of sources. The Bank's business and
operating results are significantly affected by the general economic conditions
prevalent in its market areas.
The Bank encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks, savings
associations and credit unions in its market area. Competition for loans comes
from such financial institutions as well as mortgage banking companies. The
Bank expects continued strong competition in the foreseeable future, including
increased competition from "super-regional" banks entering the market by
purchasing large banks and savings banks. Many such institutions have greater
financial and marketing resources available to them than does the Bank. The
Bank competes for savings deposits by offering depositors a high level of
personal service and a wide range of competitively priced financial services.
The Bank competes for real estate loans primarily through the interest rates and
loan fees it charges and advertising, as well as by originating and holding in
its portfolio mortgage loans which do not necessarily conform to secondary
market underwriting standards.
REGULATION AND SUPERVISION
REGULATION
GENERAL. The Bank is a New York-chartered stock savings bank and its
deposit accounts are insured up to applicable limits by the FDIC through the
Bank Insurance Fund. The Bank is subject to extensive regulation by the
Department, as its chartering agency, and by the FDIC, as its deposit insurer
and primary federal regulator. The Bank is required to file reports with, and
is periodically examined by, the FDIC and the Superintendent concerning its
activities and financial condition and must obtain regulatory approvals prior to
entering into certain transactions, including, but not limited to, mergers with
or acquisitions of other banking institutions. The Bank is a member of the FHLB
of New York and is subject to certain regulations by the Federal Home Loan Bank
System. On July 19, 2001 the Company and the Mutual Holding Company completed
their conversion to federal charters. Consequently, they are subject to
regulations of the Office of Thrift Supervision ("OTS") as savings and loan
holding companies. Any change in such regulations, whether by the Department,
the FDIC, or the OTS could have a material adverse impact on the Bank, the
Company or the Mutual Holding Company.
Regulatory requirements applicable to the Bank, the Company and the Mutual
Holding Company are referred to below or elsewhere herein.
NEW YORK BANK REGULATION. The exercise by an FDIC-insured savings bank of
the lending and investment powers under the New York State Banking Law is
limited by FDIC regulations and other federal law and regulations. In
particular, the applicable provisions of New York State Banking Law and
regulations governing the investment authority and activities of an FDIC insured
state-chartered savings bank have been substantially limited by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the FDIC
regulations issued pursuant thereto.
4
The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities,
including certain corporate debt securities and obligations of federal, state
and local governments and agencies, certain types of corporate equity securities
and certain other assets. Under the statutory authority for investing in equity
securities, a savings bank may invest up to 7.5% of its assets in corporate
stock, with an overall limit of 5% of its assets invested in common stock.
Investment in the stock of a single corporation is limited to the lesser of 2%
of the outstanding stock of such corporation or 1% of the savings bank's assets,
except as set forth below. Such equity securities must meet certain earnings
ratios and other tests of financial performance. A savings bank's lending
powers are not subject to percentage of assets limitations, although there are
limits applicable to single borrowers. A savings bank may also, pursuant to the
"leeway" power, make investments not otherwise permitted under the New York
State Banking Law. This power permits investments in otherwise impermissible
investments of up to 1% of assets in any single investment, subject to certain
restrictions and to an aggregate limit for all such investments of up to 5% of
assets. Additionally, in lieu of investing in such securities in accordance
with and reliance upon the specific investment authority set forth in the New
York State Banking Law, savings banks are authorized to elect to invest under a
"prudent person" standard in a wider range of investment securities as compared
to the types of investments permissible under such specific investment
authority. However, in the event a savings bank elects to utilize the "prudent
person" standard, it will be unable to avail itself of the other provisions of
the New York State Banking Law and regulations which set forth specific
investment authority. The Bank has not elected to conduct its investment
activities under the "prudent person" standard. A savings bank may also
exercise trust powers upon approval of the Department.
New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment authority. A savings bank may use
this power to invest in corporations that engage in various activities
authorized for savings banks, plus any additional activities which may be
authorized by the Banking Board. Investment by a savings bank in the stock,
capital notes and debentures of its service corporations is limited to 3% of the
bank's assets, and such investments, together with the bank's loans to its
service corporations, may not exceed 10% of the savings bank's assets.
Furthermore, New York banking regulations impose requirements on loans which a
bank may make to its executive officers and directors and to certain
corporations or partnerships in which such persons have equity interests. These
requirements include, but are not limited to, requirements that (i) certain
loans must be approved in advance by a majority of the entire board of trustees
and the interested party must abstain from participating directly or indirectly
in the voting on such loan, (ii) the loan must be on terms that are not more
favorable than those offered to unaffiliated third parties, and (iii) the loan
must not involve more than a normal risk of repayment or present other
unfavorable features.
Under the New York State Banking Law, the Superintendent may issue an order
to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the Department that
any director, trustee or officer of any banking organization has violated any
law, or has continued unauthorized or unsafe practices in conducting the
business of the banking organization after having been notified by the
Superintendent to discontinue such practices, such director, trustee or officer
may be removed from office after notice and an opportunity to be heard.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member of
the BIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the U.S. Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings banks, after giving the Superintendent an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged or is engaging in unsafe or unsound
practices or is in an unsafe or unsound condition.
The FDIC establishes deposit insurance premiums based upon the risks a
particular bank or savings association poses to its deposit insurance funds.
Under the risk-based deposit insurance assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information, as of the reporting period ending six months before the
assessment period, consisting of: (i) well capitalized; (ii) adequately
capitalized; or (iii) undercapitalized and one of three supervisory
subcategories within each capital group. With respect to the capital ratios,
institutions are classified as well capitalized or adequately capitalized using
ratios that are substantially similar to the prompt corrective action capital
ratios discussed above. Any institution that does not meet these two
definitions is deemed to be undercapitalized for this purpose. The supervisory
5
subgroup to which an institution is assigned is based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds (which may
include, if applicable, information provided by the institution's state
supervisor). An institution's assessment rate depends on the capital category
and supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessments rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. The Bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the Bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the earnings
of the Bank.
REGULATORY CAPITAL REQUIREMENTS. The FDIC has adopted risk-based capital
guidelines to which the Bank is subject. The guidelines establish a systematic
analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations. The Bank is
required to maintain certain levels of regulatory capital in relation to
regulatory risk-weighted assets. The ratio of such regulatory capital to
regulatory risk-weighted assets is referred to as the Bank's "risk-based capital
ratio." Risk-based capital ratios are determined by allocating assets and
specified off-balance sheet items to four risk-weighted categories ranging from
0% to 100%, with higher levels of capital being required for the categories
perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of at least 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
FDIC and the other federal banking regulators have proposed amendments to their
minimum capital regulations to provide that the minimum leverage capital ratio
for a depository institution that has been assigned the highest composite rating
of 1 under the Uniform Financial Institutions Rating System will be 3% and that
the minimum leverage capital ratio for any other depository institution will be
4% unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. The FDIC may,
however, set higher leverage and risk-based capital requirements on individual
institutions when particular circumstances warrant. Savings banks experiencing
or anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. The FDIC has the
authority to use its enforcement powers to prohibit a savings bank from paying
dividends if, in its opinion, the payment of dividends would constitute an
unsafe or unsound practice. Federal law also prohibits the payment of dividends
by a bank that will result in the bank failing to meet its applicable capital
requirements on a pro forma basis. New York law also restricts the Bank from
declaring a dividend which would reduce its capital below (i) the amount
required to be maintained by state law and regulation, or (ii) the amount of the
Bank's liquidation account established in connection with the Reorganization.
PROMPT CORRECTIVE ACTION. The federal banking agencies have promulgated
regulations to implement the system of prompt corrective action required by
federal law. Under the regulations, a bank shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to any written capital order or directive; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized"; (iii) "undercapitalized" if it has a
total risk-based capital ratio that is lessthan 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
6
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Federal law and regulations also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution to comply with supervisory actions as if it were in the
next lower category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.
TRANSACTIONS WITH AFFILIATES. Under current federal law, transactions
between depository institutions and their affiliates are governed by Sections
23A and 23B of the Federal Reserve Act and its implementing regulations. An
affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary of the savings bank. In a holding company context, at a minimum, the
parent holding company of a savings bank and any companies which are controlled
by such parent holding company are affiliates of the savings bank. Generally,
Section 23A limits the extent to which the savings bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such savings bank's capital stock and surplus and contains an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus. The term "covered transaction" includes the
making of loans or other extensions of credit to an affiliate; the purchase of
assets from an affiliate, the purchase of, or an investment in, the securities
of an affiliate; the acceptance of securities of an affiliate as collateral for
a loan or extension of credit to any person; or issuance of a guarantee,
acceptance, or letter of credit on behalf of an affiliate. Section 23A also
establishes specific collateral requirements for loans or extensions of credit
to, or guarantees, acceptances on letters of credit issued on behalf of an
affiliate. Section 23B requires that covered transactions and a broad list of
other specified transactions be on terms substantially the same, or no less
favorable, to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act and its implementing
regulations restrict a savings bank with respect to loans to directors,
executive officers, and principal stockholders. Under Section 22(h), loans to
directors, executive officers and stockholders who control, directly or
indirectly, 10% or more of voting securities of a savings bank and certain
related interests of any of the foregoing, may not exceed, together with all
other outstanding loans to such persons and affiliated entities, the savings
bank's total capital and surplus. Section 22(h) also prohibits loans above
amounts prescribed by the appropriate federal banking agency to directors,
executive officers, and stockholders who control 10% or more of voting
securities of a stock savings bank, and their respective related interests,
unless such loan is approved in advance by a majority of the board of directors
of the savings bank. Any "interested" director may not participate in the
voting. The loan amount (which includes all other outstanding loans to such
person) as to which such prior board of director approval is required, is the
greater of $25,000 or 5% of capital and surplus or any loans over $500,000.
Further, pursuant to Section 22(h), loans to directors, executive officers and
principal stockholders must generally be made on terms substantially the same as
offered in comparable transactions to other persons. Section 22(g) of the
Federal Reserve Act places additional limitations on loans to executive
officers.
FEDERAL HOLDING COMPANY REGULATION.
GENERAL. The Company and the Mutual Holding Company are nondiversified
mutual savings and loan holding companies within the meaning of the Home Owners'
Loan Act. As such, the Company and the Mutual Holding Company are registered
with the OTS and are subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over the
Company and the Mutual Holding Company, and their subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings institution.
7
PERMITTED ACTIVITIES. Under OTS regulation and policy, a mutual holding
company and a federally chartered mid-tier holding company such as the Company
may engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company, one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; (x) any activity permissible
for financial holding companies under Section 4(k) of the Bank Holding Company
Act, including securities and insurance underwriting; and (xi) purchasing,
holding, or disposing of stock acquired in connection with a qualified stock
issuance if the purchase of such stock by such savings and loan holding company
is approved by the Director. If a mutual holding company acquires or merges
with another holding company, the holding company acquired or the holding
company resulting from such merger or acquisition may only invest in assets and
engage in activities listed in (i) through (xi) above, and has a period of two
years to cease any nonconforming activities and divest of any nonconforming
investments.
The Home Owners' Loan Act prohibits a savings and loan holding company,
directly or indirectly, or through one or more subsidiaries, from acquiring
another savings association or holding company thereof, without prior written
approval of the OTS. It also prohibits the acquisition or retention of, with
certain exceptions, more than 5% of a nonsubsidiary savings association, a
nonsubsidiary holding company, or a nonsubsidiary company engaged in activities
other than those permitted by the Home Owners' Loan Act; or acquiring or
retaining control of an institution that is not federally insured. In
evaluating applications by holding companies to acquire savings association, the
OTS must consider the financial and managerial resources, future prospects of
the company and association involved, the effect of the acquisition on the risk
to the insurance fund, the convenience and needs of the community and
competitive factors.
The Office of Thrift Supervision is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company
controlling savings association in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
WAIVERS OF DIVIDENDS BY MUTUAL HOLDING COMPANY. Office of Thrift
Supervision regulations require the Mutual Holding Company to notify the OTS of
any proposed waiver of its receipt of dividends from the Company. The OTS
reviews dividend waiver notices on a case-by-case basis, and, in general, does
not object to any such waiver if: (i) the mutual holding company's board of
directors determines that such waiver is consistent with such directors'
fiduciary duties to the mutual holding company's members; (ii) for as long as
the savings association subsidiary is controlled by the mutual holding company,
the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; and (iv) the amount of any
waived dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under OTS capital distribution regulations.
The Mutual Holding Company generally intends to waive dividends paid by the
Company in excess of its operating cash requirements. Under OTS regulations,
our public stockholders would not be diluted because of any dividends waived by
the Mutual Holding Company (and waived dividends would not be considered in
determining an appropriate exchange ratio) in the event the Mutual Holding
Company converts to stock form.
CONVERSION OF THE MUTUAL HOLDING COMPANY TO STOCK FORM. OTS regulations
permit the Mutual Holding Company to convert from the mutual form of
organization to the capital stock form of organization (a "Conversion
Transaction"). There can be no assurance when, if ever, a Conversion
Transaction will occur, and the Board of Directors has no current intention or
plan to undertake a Conversion Transaction. In a Conversion Transaction a new
holding company would be formed as the successor to the Company (the "New
8
Holding Company"), the Mutual Holding Company's corporate existence would end,
and certain depositors of the Bank would receive the right to subscribe for
additional shares of the New Holding Company. In a Conversion Transaction, each
share of common stock held by stockholders other than the Mutual Holding Company
("Minority Stockholders") would be automatically converted into a number of
shares of common stock of the New Holding Company determined pursuant an
exchange ratio that ensures that Minority Stockholders own the same percentage
of common stock in the New Holding Company as they owned in the Company
immediately prior to the Conversion Transaction. Under OTS regulations,
Minority Stockholders would not be diluted because of any dividends waived by
the Mutual Holding Company (and waived dividends would not be considered in
determining an appropriate exchange ratio), in the event the Mutual Holding
Company converts to stock form. The total number of shares held by Minority
Stockholders after a Conversion Transaction also would be increased by any
purchases by Minority Stockholders in the stock offering conducted as part of
the Conversion Transaction.
NEW YORK STATE BANK HOLDING COMPANY REGULATION. In addition to the federal
regulation, a holding company controlling a state chartered savings bank
organized or doing business in New York State also may be subject to regulation
under the New York State Banking Law. The term "bank holding company," for the
purposes of the New York State Banking Law, is defined generally to include any
person, company or trust that directly or indirectly either controls the
election of a majority of the directors or owns, controls or holds with power to
vote more than 10% of the voting stock of a bank holding company or, if the
Company is a banking institution, another banking institution, or 10% or more of
the voting stock of each of two or more banking institutions. In general, a
bank holding company controlling, directly or indirectly, only one banking
institution will not be deemed to be a bank holding company for the purposes of
the New York State Banking Law. Under New York State Banking Law, the prior
approval of the Banking Board is required before: (1) any action is taken that
causes any company to become a bank holding company; (2) any action is taken
that causes any banking institution to become or be merged or consolidated with
a subsidiary of a bank holding company; (3) any bank holding company acquires
direct or indirect ownership or control of more than 5% of the voting stock of a
banking institution; (4) any bank holding company or subsidiary thereof acquires
all or substantially all of the assets of a banking institution; or (5) any
action is taken that causes any bank holding company to merge or consolidate
with another bank holding company. Additionally, certain restrictions apply to
New York State bank holding companies regarding the acquisition of banking
institutions which have been chartered five years or less and are located in
smaller communities. Officers, directors and employees of New York State bank
holding companies are subject to limitations regarding their affiliation with
securities underwriting or brokerage firms and other bank holding companies and
limitations regarding loans obtained from its subsidiaries.
FEDERAL SECURITIES LAW. The common stock of the Company is registered with
the SEC under the Exchange Act, prior to completion of the Offering and
Reorganization. The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
The Company Common Stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain noninterest-bearing reserves at specified levels
against their transaction accounts (primarily checking, money management and
NOW checking accounts). At December 31, 2003, the Bank was in compliance with
these reserve requirements.
FEDERAL REGULATION. Under the Community Reinvestment Act, as amended (the
"CRA"), as implemented by FDIC regulations, a savings bank has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA requires the FDIC to provide a written evaluation
of an institution's CRA performance utilizing a four-tiered descriptive rating
system. The Bank's latest CRA rating was "outstanding."
NEW YORK STATE REGULATION. The Bank is also subject to provisions of the
New York State Banking Law which impose continuing and affirmative obligations
9
upon banking institutions organized in New York State to serve the credit needs
of its local community ("NYCRA") which are substantially similar to those
imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA
report and copies of all federal CRA reports with the Department. The NYCRA
requires the Department to make a biennial written assessment of a bank's
compliance with the NYCRA, utilizing a four-tiered rating system and make such
assessment available to the public. The NYCRA also requires the Superintendent
to consider a bank's NYCRA rating when reviewing a bank's application to engage
in certain transactions, including mergers, asset purchases and the
establishment of branch offices or automated teller machines, and provides that
such assessment may serve as a basis for the denial of any such application.
The Bank's NYCRA rating as of its latest examination was "satisfactory."
THE USA PATRIOT ACT
In response to the events of September 11, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the federal government new powers
to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing and broadened
anti-money laundering requirements. Financial institutions, such as the Bank,
have had a federal anti-money laundering obligations for years. As such, the
Bank does not believe the USA Patriot Act will have a material impact on its
operations.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of
2002 ("Sarbanes-Oxley"), which implemented legislative reforms intended to
address corporate and accounting fraud. In addition to the establishment of a
new accounting oversight board that will enforce auditing, quality control and
independence standards and will be funded by fees from all publicly traded
companies, Sarbanes-Oxley places certain restrictions on the scope of services
that may be provided by accounting firms to their public company audit clients.
Any non-audit services being provided to a public company audit client will
require preapproval by the company's audit committee. In addition,
Sarbanes-Oxley makes certain changes to the requirements for audit partner
rotation after a period of time. Sarbanes-Oxley requires chief executive
officers and chief financial officers, or their equivalent, to certify to the
accuracy of periodic reports filed with the Securities and Exchange Commission,
subject to civil and criminal penalties if they knowingly or willingly violate
this certification requirement. The Company's Chief Executive Officer and Chief
Financial Officer have signed certifications to this Form 10-K as required by
Sarbanes-Oxley. In addition, under Sarbanes-Oxley, counsel will be required to
report evidence of a material violation of the securities laws or a breach of
fiduciary duty by a company to its chief executive officer or its chief legal
officer, and, if such officer does not appropriately respond, to report such
evidence to the audit committee or other similar committee of the board of
directors or the board itself.
Under Sarbanes-Oxley, longer prison terms will apply to corporate
executives who violate federal securities laws; the period during which certain
types of suits can be brought against a company or its officers is extended; and
bonuses issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading the company's
securities during retirement plan "blackout" periods, and loans to company
executives (other than loans by financial institutions permitted by federal
rules and regulations) are restricted. In addition, a provision directs that
civil penalties levied by the Securities and Exchange Commission as a result of
any judicial or administrative action under Sarbanes-Oxley be deposited to a
fund for the benefit of harmed investors. The Federal Accounts for Investor
Restitution provision also requires the Securities and Exchange Commission to
develop methods of improving collection rates. The legislation accelerates the
time frame for disclosures by public companies, as they must immediately
disclose any material changes in their financial condition or operations.
Directors and executive officers must also provide information for most changes
in ownership in a company's securities within two business days of the change.
Sarbanes-Oxley also increases the oversight of, and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit
committee members must be independent and are absolutely barred from accepting
consulting, advisory or other compensatory fees from the issuer. In addition,
companies must disclose whether at least one member of the committee is a
"financial expert" (as such term is defined by the Securities and Exchange
Commission) and if not, why not. Under Sarbanes-Oxley, a company's registered
public accounting firm is prohibited from performing statutorily mandated audit
10
services for a company if such company's chief executive officer, chief
financial officer, comptroller, chief accounting officer or any person serving
in equivalent positions had been employed by such firm and participated in the
audit of such company during the one-year period preceding the audit initiation
date. Sarbanes-Oxley also prohibits any officer or director of a company or any
other person acting under their direction from taking any action to fraudulently
influence, coerce, manipulate or mislead any independent accountant engaged in
the audit of the company's financial statements for the purpose of rendering the
financial statements materially misleading. Sarbanes-Oxley also requires the
Securities and Exchange Commission to prescribe rules requiring inclusion of any
internal control report and assessment by management in the annual report to
shareholders. Sarbanes-Oxley requires the company's registered public
accounting firm that issues the audit report to attest to and report on
management's assessment of the company's internal controls.
Although we anticipate that we will incur additional expense in complying
with the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. The following discussion of federal taxation is intended
only to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Company or the
Bank.
BAD DEBT RESERVES. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use
the small bank experience method in computing its bad debt deduction beginning
with its 1996 Federal tax return. In addition, the federal legislation requires
the recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitionaltests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank cease to retain a bank or thrift charter or make certain non-dividend
distributions.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future years.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997.
The Internal Revenue Service has examined the federal income tax return for
the fiscal year ended 1992; the New York State fiscal year-end tax returns for
1998 through 1999 are currently under examination by the New York State
Department of Taxation and Finance. See Note 13 to the Financial Statements.
STATE TAXATION
NEW YORK TAXATION. The Bank is subject to the New York State Franchise Tax
on Banking Corporations in an annual amount equal to the greater of (i) 8.0% of
the Bank's "entire net income" allocable to New York State during the taxable
year, or (ii) the applicable alternative minimum tax. The alternative minimum
tax is generally the greater of (a) 0.01% of the value of the Bank's assets
allocable to New York State with certain modifications, (b) 3% of the Bank's
"alternative entire net income" allocable to New York State, or (c) $250.
Entire net income is similar to federal taxable income, subject to certain
modifications and alternative entire net income is equal to entire net income
without certain modifications. Net operating losses arising in can be carried
forward to the succeeding 20 taxable years.
The availability of the Company's Annual Report on Form 10-K may be
accessed on the Company's website at WWW.PATHFINDERBANK.COM.
11
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
The Bank conducts its business through its main office located in Oswego,
New York, and five full service branch offices located in Oswego County. The
following table sets forth certain information concerning the main office and
each branch office of the Bank at December 31, 2003. The aggregate net book
value of the Bank's premises and equipment was $6.7 million at December 31,
2003. For additional information regarding the Bank's properties, see Note 8 to
Notes to Financial Statements.
LOCATION OPENING DATE OWNED/LEASED ANNUAL RENT
- ------------------------- ------------ ------------- -----------
Main Office . . . . . . . 1874 Owned -
- -------------------------
214 West First Street
Oswego, New York 13126
Plaza Branch. . . . . . . 1989 Owned (1) -
- -------------------------
Route 104, Ames Plaza
Oswego, New York 13126
Mexico Branch . . . . . . 1978 Owned -
- -------------------------
Norman & Main Streets
Mexico, New York 13114
Oswego East Branch. . . . 1994 Owned -
- -------------------------
34 East Bridge Street
Oswego, New York 13126
Fulton Branch . . . . . . 1994 Owned (2) -
- -------------------------
114 Oneida Street
Fulton, New York 13069
Lacona Branch . . . . . . 2002 Owned -
- -------------------------
1897 Harwood Drive
Lacona, New York 13083
Fulton Branch . . . . . . 2003 Owned (3) -
- -------------------------
5 West First Street South
Fulton, New York 13069
(1) The building is owned; the underlying land is leased paying an annual
rent of $20,000
(2) This branch closed in July of 2003 and the branch was relocated to the
5 West First Street South location in Fulton
(3) The existing Fulton Branch was moved to this location in July of 2003.
The building is owned; the underlying land is leased paying an annual
rent of $21,000
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
There are various claims and lawsuits to which the Company is periodically
involved incident to the Company's business. In the opinion of management such
claims and lawsuits in the aggregate are immaterial to the Company's
consolidated financial condition and results of operations.
12
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
- --------------------------------------------------------------------------------
The "Market for Common Stock" section of the Company's Annual Report to
Stockholders, except for information below, is incorporated herein by reference.
DIVIDENDS AND DIVIDEND HISTORY
The Company has historically paid regular quarterly cash dividends on its
common stock, and the Board of Directors presently intends to continue the
payment of regular quarterly cash dividends, subject to the need for those funds
for debt service and other purposes. Payment of dividends on the common stock is
subject to determination and declaration by the Board of Directors and will
depend upon a number of factors, including capital requirements, regulatory
limitations on the payment of dividends, Pathfinder Bank and its subsidiaries
results of operations and financial condition , tax considerations, and general
economic conditions. The Company's mutual holding company, Pathfinder Bancorp,
M.H.C., may elect to waive or receive dividends each time the Company declares a
dividend. The election to waive the dividend receipt requires prior consent from
the Office of Thrift Supervision.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The selected financial information for the year ended December 31, 2003 is
filed as part of the Company's Annual Report to Stockholders and is incorporated
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report to Stockholders which is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
The financial statements are contained in the Company's Annual Report to
Stockholders and are incorporated herein by reference.
The following supplementary data schedules are not included in the Company's
Annual Report.
LOAN DATA
The following table show the amounts of loans outstanding as of December 31,
2003 which, based on remaining scheduled repayments of principal, are due in the
periods indicated. Demand loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or less.
Adjustable and floating rate loans are included in the period in which interest
rates are next scheduled to adjust rather than the period in which they
contractually mature, and fixed rate loans are included in the period in which
the final contractual repayment is due.
13
Due Under Due 1-5 Due Over
One Year Years Five Years Total
---------- -------- ----------- --------
(In thousands)
Real estate:
Commercial mortgage. . . . . . . . $ 6,703 $ 18,437 $ 6,138 $ 31,278
Construction and land development. 4,375 0 0 4,375
Residential mortgage . . . . . . . 31,254 46,588 43,252 121,094
42,332 65,025 49,390 156,747
---------- -------- ----------- --------
Commercial . . . . . . . . . . . . 1,264 8,862 4,964 15,090
Consumer . . . . . . . . . . . . . 10,557 2,620 3,703 16,880
Total loans. . . . . . . . . . . . $ 54,153 $ 76,507 $ 58,057 $188,717
- ---------------------------------- ---------- -------- ----------- --------
Interest rates:. . . . . . . . . . 0
Fixed. . . . . . . . . . . . . . . 11,770 51,091 55,570 118,431
Variable . . . . . . . . . . . . . 42,383 25,416 2,487 70,286
- ---------------------------------- ---------- -------- ----------- --------
Total Loans. . . . . . . . . . . . $ 54,153 $ 76,507 $ 58,057 $188,717
- ---------------------------------- ---------- -------- ----------- --------
ANALYSIS OF THE RESERVE FOR LOAN LOSSES DATA
The following table sets forth the analysis of the allowance for loan losses at
or for the periods indicated.
2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------
(In thousands)
Balance at beginning of year. . . . . . . . . $1,481 $ 1,679 $1,274 $1,150 $ 939
Provisions charged to operating expenses. . . 598 1,375 708 244 373
- -------------------------------------------------------------------------------------------
Recoveries of loans previously charged-off
Commercial. . . . . . . . . . . . . . . . . . 3 56 53 0 0
Consumer. . . . . . . . . . . . . . . . . . . 17 33 9 19 28
Real estate . . . . . . . . . . . . . . . . . 17 0 0 0 0
- -------------------------------------------------------------------------------------------
Total recoveries. . . . . . . . . . . . . . . 37 89 62 19 28
- -------------------------------------------------------------------------------------------
Loans charged off:
Commercial. . . . . . . . . . . . . . . . . . (128) (1,285) (72) (38) 0
Consumer. . . . . . . . . . . . . . . . . . . (189) (291) (184) (61) (190)
Real estate . . . . . . . . . . . . . . . . . (84) (86) (109) (40) 0
- -------------------------------------------------------------------------------------------
Total charged-off . . . . . . . . . . . . . . (401) (1,662) (365) (139) (190)
- -------------------------------------------------------------------------------------------
Net charge-offs . . . . . . . . . . . . . . . (364) (1,573) (303) (120) (162)
- --------------------------------------------- ------- -------- ------- ------- -------
Balance at end of year. . . . . . . . . . . . $1,715 $ 1,481 $1,679 $1,274 $1,150
===========================================================================================
Net charge-offs to average loans outstanding. 0.19% 0.89% 0.19% 0.08% 0.12%
Allowance for loan losses to year-end loans . 0.91% 0.82% 1.03% 0.86% 0.88%
- --------------------------------------------- ------- -------- ------- ------- -------
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following table sets forth the allocation of allowance for loan losses by
loan category for the periods indicated. The allocation of the allowance by
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
% Gross. . % Gross % Gross % Gross % Gross
Amount . Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ----------------------------------------------------------------------------------------------------------
Commercial loans $1,218 8.0% $1,042 7.3% $1,083 8.8% $ 455 8.6% $ 392 6.5%
Consumer loans . 120 8.9% 136 8.3% 100 7.7% 353 8.6% 318 9.8%
Real estate. . . 377 83.1% 303 84.4% 496 83.5% 466 82.8% 440 83.7%
- ----------------------------------------------------------------------------------------------------------
Total. . . . . . $1,715 100.0% $1,481 100.0% $1,679 100.0% $1,274 100.0% $1,150 100.0%
==========================================================================================================
14
INVESTMENT PORTFOLIO
The following table sets forth the carrying value of the Company's investment
portfolio and Federal Home Loan Bank Stock at the dates indicated.
At December 31,
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
(In Thousands)
Investment Securities:
US Government and agency obligations . . . . . $ 6,354 $ 4,378 $ 5,971
State and municipal obligations. . . . . . . . 7,359 8,549 6,012
Corporate debt issues. . . . . . . . . . . . . 6,421 15,375 20,949
Mortgage-backed securities . . . . . . . . . . 29,734 24,440 14,121
Equity securities. . . . . . . . . . . . . . . 2,932 6,225 3,227
Mutual funds . . . . . . . . . . . . . . . . . 6,200 3,070 3,007
- --------------------------------------------------------------------------------
59,000 62,037 53,287
Unrealized loss on available for sale portfolio. 607 469 135
- --------------------------------------------------------------------------------
Total investments. . . . . . . . . . . . . . $59,607 $62,506 $53,422
================================================================================
SECURITIES PORTFOLIO MATURITIES
The following table sets forth the scheduled maturities, carrying values, market
values and average yields for the Bank's investment securities and Federal Home
Loan Bank ("FHLB") Stock at December 31, 2003. Yield is calculated on the
amortized cost to maturity and adjusted to a fully tax-equivalent basis.
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
- ------------------------------------------------------------------------------------------------------------------------
ANNUALIZED ANNUALIZED ANNUALIZED
CARRYING WEIGHTED CARRYING WEIGHTED CARRYING WEIGHTED
VALUE AVERAGE YIELD VALUE AVERAGE YIELD VALUE AVERAGE YIELD
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Debt investment securities:
U.S. Agency securities . . . . . . . $ 0 0.0% $ 5,590 2.7% $ 744 3.6%
U.S. Treasury securities . . . . . . $ 0 0.0% $ 0 0.0% $ 20 10.8%
State and political subdivision. . . $ 575 5.7% $ 2,661 6.6% $ 1,328 6.2%
Corporate debt issues. . . . . . . . $ 8 2.9% $ 3,791 5.8% $ 497 10.0%
- ------------------------------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . $ 583 5.7% $ 12,042 4.4% $ 2,589 6.2%
Equity and mortgage-backed securities:
Mutual funds . . . . . . . . . . . . $ 6,200 1.0% $ 0 0.0% $ 0 0.0%
Mortgage-backed securities . . . . . $ 0 0.0% $ 2,413 5.8% $ 7,290 3.8%
Common stock and FHLB stock. . . . . $ 2,932 3.7% $ 0 0.0% $ 0 0.0%
- ------------------------------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . $ 9,132 1.9% $ 2,413 5.8% $ 7,290 3.8%
TOTAL INVESTMENT SECURITIES. . . . . . $ 9,715 2.1% $ 14,455 4.8% $ 9,879 4.5%
======================================================================================================================
MORE THAN TEN YEARS TOTAL INVESTMENT SECURITIES
- -----------------------------------------------------------------------------------------------------
ANNUALIZED ANNUALIZED
CARRYING WEIGHTED CARRYING MARKET WEIGHTED
VALUE AVERAGE YIELD VALUE VALUE AVERAGE YIELD
- -----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Debt investment securities:
U.S. Agency securities . . . . . . . . $ - 0.0% $ 6,334 $ 6,304 2.8%
U.S. Treasury securities . . . . . . . - 0.0% 20 22 10.8%
State and political subdivisions . . . 2,795 6.4% 7,359 7,663 6.4%
Corporate debt issues. . . . . . . . . 2,125 1.9% 6,421 6,696 5.0%
- -----------------------------------------------------------------------------------------------------
Total 4,920 4.6% 20,134 20,685 4.8%
Equity and mortgage-backed securities:
Mutual funds . . . . . . . . . . . . . - 0.0% 6,200 5,715 1.0%
Mortgage-backed securities . . . . . . 20,031 4.0% 29,734 29,934 4.1%
Common stock and FHLB stock. . . . . . - 0.0% 2,932 3,273 3.7%
- -----------------------------------------------------------------------------------------------------
Total 20,031 4.0% 38,866 38,922 3.6%
$ 24,951 4.1% $59,000 $59,607 4.0%
===================================================================================================
15
DEPOSIT STRUCTURE
The following table indicates the amount of the Bank's certificates of deposit
of $100,000 or more by time remaining until maturity as of December 31, 2003.
Certificates of
Deposit of
Remaining Maturity $100,000 or more
- -------------------------- ----------------
(In Thousands)
Three Months or less . . . $ 2,336
Three through Six months . 2,987
Six through twelve months. 3,536
Over twelve months . . . . 5,759
- --------------------------------------------
Total. . . . . . . . . $ 14,618
================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
During 2003, the Company analyzed the service provided by and associated
costs of its external auditing firm. After reviewing proposals from a number of
independent accounting firms, the Board of Directors approved the appointment of
Beard Miller Company LLP as auditors for the fiscal year ended December 31,
2003. The Company's previous auditor, PricewaterhouseCoopers, LLP ("PwC") was
engaged for the examination of the first two quarters Form 10-Q filings during
2003. PwC performed audits of the consolidated financial statements for the two
years ended December 31, 2002 and 2001. Their reports on the financial
statements did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope, or accounting
principles. During the two years ended December 31, 2002 and from December 31,
2002 through the effective date of the PwC termination, there have been no
disagreements between the Registrant and PwC on any matter of accounting
principles or practice, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of PwC,
would have caused PwC to make reference to the subject matter of such
disagreements in connection with their reports on the financial statements for
such years.
During the two years ended December 31, 2002, and from December 31, 2002
until the effective date of the dismissal of PwC, PwC did not advise the
Registrant of any of the following matters:
1. That the internal controls necessary for the Registrant to develop
reliable financial statements did not exist.
2. That information had come to PwC's attention that had lead it to no
longer be able to rely on management's representations, or that had
made it unwilling to be associated with the financial statements
prepared by management;
3. That there was a need to expand significantly the scope of the audit
of the Registrant, or that information had come to PwC's attention
that if further investigated: (i) may materially impact the fairness
or reliability of either a previously-issued audit report or
underlying financial statements, or the financial statements issued or
to be issued covering the fiscal periods subsequent to the date of the
most recent financial statement covered by an audit report (including
information that may prevent it from rendering an unqualified audit
report on those financial statements) or (ii) may cause it to be
unwilling to rely on management's representation or be associated with
the Registrant's financial statements and that, due to its dismissal,
PwC did not so expand the scope of its audit or conduct such further
investigation;
4. That information had come to PwC's attention that it had concluded
materially impacted the fairness or reliability of either: (i) a
previously-issued audit report or the underlying financial statements
or (ii) the financial statements issued or to be issued covering the
fiscal period subsequent to the date of the most recent financial
statements covered by an audit report (including information that,
unless resolved to the accountant's satisfaction, would prevent it
from rendering an unqualified report on those financial statements),
or that, due to its dismissal, there were no such unresolved issues as
of the date of its dismissal.
16
During the two years ended December 31, 2002, and from December 31, 2002
through the engagement of Beard Miller Company LLP as the Registrant's
independent accountant, neither the Registrant nor anyone on its behalf had
consulted Beard Miller Company LLP with respect to any accounting, auditing or
financial reporting issues involving the Registrant. In particular, there was
no discussion with the Registrant regarding the application of accounting
principles to a specified transaction, the type of audit opinion that might be
rendered on the financial statement, or any related item.
ITEM 9A. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
Under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
the Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this annual
report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There has been no change in the
Company's internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonable likely to
materially affect, the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
- --------------------------------------------------------------------------------
(a) Information concerning the directors of the Company is incorporated by
reference hereunder in the Company's Proxy Materials for the Annual
Meeting of Stockholders.
(b) Set forth below is information concerning the Executive Officers of
the Company at December 31, 2003.
NAME AGE POSITIONS HELD WITH THE COMPANY
- --------------------------------------------------------------------------------
Thomas W. Schneider 42 President and Chief Executive Officer
James A. Dowd, CPA 36 Vice President, Chief Financial Officer
Edward A. Mervine 47 Vice President, General Counsel
John F. Devlin 39 Vice President, Senior Commercial Lender
Melissa A. Miller 46 Vice President, Operations, Corporate,
Secretary, Compliance Officer
Gregory L. Mills 43 Vice President, Director of Marketing,
Branch Administrator
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
Information with respect to management compensation and transactions
required under this item is incorporated by reference hereunder in the Company's
Proxy Materials for the Annual Meeting of Stockholders under the caption
"Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
The information contained under the sections captioned "Stock Ownership of
Management" is incorporated by reference to the Company's Proxy Materials for
its Annual Meeting of Stockholders.
17
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
The information required by this item is set forth under the caption
"Certain Transactions" in the Definitive Proxy Materials for the Annual Meeting
of Stockholders and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- --------------------------------------------------------------------------------
The information required by this item is set forth under the caption "Audit and
Related Fees" in the Definitive Proxy Materials for the Annual Meeting of
Stockholders and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this Form
10-K are as follows:
(A) Independent Auditors' Report;
(B) Consolidated Statements of Condition - December 31, 2003 and
2002.
(C) Consolidated Statements of Income - years ended December 31,
2003, 2002 and 2001.
(D) Consolidated Statements of Changes in Shareholders' Equity -
years ended December 31, 2003, 2002 and 2001.
(E) Consolidated Statements of Cash Flows - years ended December 31,
2003, 2002 and 2001; and
(F) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(b) Exhibits
3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc. (Incorporated
herein by reference to the Company's Current Report on Form 8-K dated
June 25, 2001)
3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference
to the Company's Current Report on Form 8-K dated June 25, 2001)
4 Form of Stock Certificate of Pathfinder Bancorp, Inc. (Incorporated
herein by reference to the Company's Current Report on Form 8-K dated
June 25, 2001)
10.1 Form of Pathfinder Bank 1997 Stock Option Plan (Incorporated herein by
reference to the Company's S-8 file no. 333-53027)
10.2 Form of Pathfinder Bank 1997 Recognition and Retention Plan
(Incorporated by reference to the Company's S-8 file no. 333-53027)
10.3 Employment Agreement between the Bank and Thomas W. Schneider,
President and Chief Executive Officer (Incorporated by reference to
the Company's S-4 file no. 333-36051)
18
13 Annual Report to Stockholders
14 Code of Ethics for Directors, Officers and Employees
21 Subsidiaries of Company
23.1 Consent of Beard Miller Company LLP
23.2 Consent of Pricewaterhouse Coopers LLP
31.1 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive
Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial
Officer
32.1 Section 1350 Certification of the Chief Executive and Chief Financial
Officer
99.1 Report of PricewaterhouseCoopers LLP
(c) Reports on Form 8-K
----------------------
The Company has two Current Reports on Form 8-K during the fourth quarter
of the fiscal year ended December 31, 2003 dated November 5, 2003 and November
3, 2003 reporting press releases relating to the fourth quarter earnings release
and the Board's approval of a change in auditors, respectively. The 8-K filed
on November 3, 2003 was a duplicate filing of the 8-K filed on August 19, 2003.
19
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PATHFINDER BANCORP, INC.
Date: March 30, 2004 By: /s/ Thomas W. Schneider
-----------------------------
Thomas W. Schneider
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Janette Resnick
--------------------------------------
Janette Resnick, Chairman of the Board
Date: March 30, 2004
By: /s/ Thomas W. Schneider By: /s/ Chris R. Burritt
---------------------------------------- --------------------
Thomas W. Schneider, President and Chief Chris R. Burritt,
Executive Officer Director
Date: March 30, 2004 Date: March 30, 2004
By: /s/ James A. Dowd By: /s/ Raymond W. Jung
---------------------------------------- --------------------
James A. Dowd, Vice President and . . Raymond W. Jung,
Chief Financial Officer Director
Date: March 30, 2004 Date: March 30, 2004
By: /s/ Bruce B. Manwaring By: /s/ George P. Joyce
---------------------------------------- --------------------
Bruce E. Manwaring., . . . . . George P. Joyce,
Director Director
Date: March 30, 2004 Date: March 30, 2004
By: /s/ L. William Nelson, Jr. By: /s/ Corte J. Spencer
---------------------------------------- --------------------
L. William Nelson, Jr., . . . . Corte J. Spencer,
Director Director
Date:.March 30, 2004 Date: March 30, 2004
By: /s/ Steven W. Thomas By: /s/ Chris C. Gagas
---------------------------------------- -------------------
Steven W. Thomas, . . . . . . . Chris C. Gagas,
Director Director
Date:.March 30, 2004 Date: March 30, 2004
20
EXHIBIT 13 ANNUAL REPORT TO STOCKHOLDERS
2003 ANNUAL REPORT
[PHOTOS] IF IT'S IMPORTANT TO YOU,
IT'S IMPORTANT TO US.
[LOGO] PathFinder
BANCORP, INC.
[PHOTOS] [LOGO] PathFinder
BANCORP, INC.
FINANCIAL HIGHLIGHTS
Pathfinder Bancorp, Inc. ("the Company") is the parent company of Pathfinder
Bank and Pathfinder Statutory Trust I. Pathfinder Bank has three operating
subsidiaries - Pathfinder Commercial Bank, Pathfinder REIT Inc., and Whispering
Oaks Development Corporation.
The following table sets forth certain financial highlights of the Company for
the years ended December 31:
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
YEAR END (IN THOUSANDS)
Total assets . . . . . . . . . . . . . . . . . $277,940 $279,056 $244,514 $232,355 $216,324
Loans receivable, net. . . . . . . . . . . . . 187,002 179,001 162,588 148,362 130,063
Deposits . . . . . . . . . . . . . . . . . . . 206,894 204,522 169,589 161,459 152,436
Equity . . . . . . . . . . . . . . . . . . . . 21,785 23,230 22,185 20,962 20,075
FOR THE YEAR (IN THOUSANDS)
Net interest income. . . . . . . . . . . . . . $ 9,337 $ 8,789 $ 7,853 $ 7,393 $ 7,629
Net income . . . . . . . . . . . . . . . . . . 1,652 1,156 1,602 356 930
PER SHARE
Net income (basic) . . . . . . . . . . . . . . $ 0.68 $ 0.45 $ 0.62 $ 0.14 $ 0.35
Book value . . . . . . . . . . . . . . . . . . 8.96 8.90 8.64 8.06 7.61
Cash dividends declared. . . . . . . . . . . . 0.40 0.30 0.26 0.24 0.24
RATIOS
Return on average assets . . . . . . . . . . . 0.59% 0.45% 0.68% 0.16% 0.44%
Return on average equity . . . . . . . . . . . 7.61% 5.01% 7.34% 1.79% 4.33%
Average equity to average assets . . . . . . . 7.77% 8.94% 9.22% 8.91% 10.24%
Dividend payout ratio (a). . . . . . . . . . . 39.41% 36.85% 28.37% 173.62% 67.65%
Net interest rate spread . . . . . . . . . . . 3.53% 3.47% 3.35% 3.34% 3.73%
Allowance for loan losses to loans receivable. 0.91% 0.82% 1.03% 0.86% 0.88%
Noninterest expense to total assets. . . . . . 3.27% 2.85% 2.81% 3.31% 3.30%
Efficiency ratio (b) . . . . . . . . . . . . . 76.13% 73.18% 70.61% 90.64% 80.54%
(a) The dividend payout ratio is calculated using dividends declared and
not waived by the Company's mutual holding company parent, Pathfinder
Bancorp, M.H.C., divided by net income.
(b) The efficiency ratio is calculated as noninterest expense divided by
net interest income plus noninterest income.
MARKET FOR COMMON STOCK
Pathfinder Bancorp, Inc.'s common stock currently trades on the NASDAQ SmallCap
Market under the symbol "PBHC". There were 359 shareholders of record as of
February 20, 2004. The following table sets forth the high and low closing bid
prices and dividends paid per share of common stock for the periods indicated:
DIVIDEND
QUARTER ENDED: HIGH LOW PAID
- ----------------------------------------------
December 31, 2003. $ 18.459 $16.250 $0.100
September 30, 2003 17.000 14.000 0.100
June 30, 2003. . . 15.250 13.685 0.100
March 31, 2003 . . 14.890 13.200 0.100
- ------------------ --------- ------- ------
December 31, 2002. 15.000 11.910 0.080
September 30, 2002 12.850 10.380 0.080
June 30, 2002. . . 14.990 12.750 0.070
March 31, 2002 . . 13.500 12.050 0.070
1
[PHOTOS]
2
[PHOTOS]
LETTER TOSHAREHOLDERS
Janette Resnick, Chairman, Thomas W. Schneider, President and CFO
LETTER TO SHAREHOLDERS
On behalf of the Board of Directors and the employees of Pathfinder Bancorp,
Inc., we are pleased to present our Annual Report to our shareholders. We
invite you to attend our annual meeting on April 28, 2004 at 10:00 a.m. at the
Econo Lodge Riverfront Hotel in Oswego.
2003 REVIEW The Company's activities during 2003 were primarily focused on: 1)
enhancing the breadth and capabilities of our delivery systems, 2) providing
core banking products and services to our customers, and 3) ensuring enhanced
governance processes to meet regulatory and shareholder expectations.
Pathfinder Bank is the leading depository institution in our market with a 41%
deposit market share in the city of Oswego and a 23% deposit market share in
Oswego County. We are strategically focused on retaining and expanding that
leadership position by differentiating ourselves through higher quality service
delivery. To accomplish this we are directing our development efforts toward
what we believe are the core drivers of service delivery and market position:
1) location development, 2) systems enhancements, 3) product diversity and 4)
employee training and education.
Toward that end in 2003, we have done the following:
Relocated our Fulton branch to provide better access, parking, drive-thru
capabilities, and a superior customer experience through design,
state-of-the-art equipment and training.
Redesigned the lobby in our Lacona branch to provide private offices and an
ATM.
Reconfigured and expanded the parking and drive-thru in our Mexico branch.
Acquired prime property in Central Square to locate our 7th branch.
Installed a new Windows based teller/platform system for enhanced customer
service.
Introduced our new deposit services to the municipalities in the county
through our commercial bank subsidiary.
Continued our focus on employee development through Pathfinder University
and other training and education forums.
We strongly believe that our focus in these areas will allow the Company to gain
market share through superior customer service.
Residential mortgage lending dominated our core banking activities in 2003 as
originations exceeded $50 million. Total loans grew $8.2 million with $23.4
million sold into the secondary market. The Company's mortgage servicing
portfolio for loans sold is $47.6 million at December 31, 2003. Deposit growth
for the year was nominal following a 21% increase in the prior year. A stagnant
local economy has precluded the flow of new funds into the market. It is
anticipated that in 2004, deposit growth through branch expansion and municipal
markets will be more robust, while commercial lending production through
Pathfinder Business Services will accelerate as residential mortgage lending
activity slows.
Pathfinder Investment Services had a record year of growth in 2003 with revenues
increasing 22% over the prior year. Our investment services division now serves
over 700 individuals, families, and businesses in our market.
3
The Board of Directors was highly active and engaged in understanding their
evolving responsibilities resultant from adoption of the Sarbanes-Oxley Act of
2002. The Governance/Nominating Committee adopted a comprehensive set of
governance guidelines in 2003. The Audit Committee added meetings specifically
targeted for educational purposes. The Board also successfully transitioned the
Chairman's position as Chris C. Gagas stepped down after 17 years as Chairman
and was replaced by unanimous decision with Janette Resnick as Chairman. Chris
remains on the Board of Directors and the Directors and Company deeply
appreciate his unparalleled leadership. The Board of Directors is comprised of
9 independent directors and one inside director who are committed to ensuring
that the Company represents the best interests of its shareholders, customers,
and community.
SHAREHOLDER VALUE Earnings of $1.7 million in 2003 resulted in a return on
average equity of 7.61% and earnings per share of $.68. Both performance
measures were more than a 50% improvement over the prior year, while EPS
achieved the highest level in the Company's history as a public company.
The Company continued to use share repurchases and increased dividends as a
means to provide return and value to shareholders. The Company repurchased
approximately 18% of the shares of common stock held by public shareholders
during the year and increased the dividend to $.40 per share, a 33% increase
over the prior year.
The Company's common stock performance reflected both this positive trend in
earnings and dividends, as well as the rising values of the bank and thrift
stock sectors. During 2003, the common stock provided a total return of 28%.
LOOKING AHEAD In 2004, our strategic focus remains dedicated to the principles
we have outlined above. Our management team is educated, experienced and well
positioned to execute the Company's business plans and lead our bank through the
turbulent times ahead. In an industry that is constantly changing through
consolidation, competition, and regulation, we believe a consistently improving
bank dedicated to the people, businesses, and organizations in the communities
we serve, will garner the benefits of customer loyalty and the resultant market
share. We look forward to the challenges and opportunities that lay ahead, the
successful implementation of our business plan, and our continued service to the
market.
/s/: Janette Resnick /s/: Thomas W. Schneider
----------------------- -------------------------------
Janette Resnick Thomas W. Schneider
Chairman President and CEO
4
MANAGEMENT DISCUSSION AND ANALYSIS
INTRODUCTION
Throughout the Management's Discussion and Analysis ("MD&A") the term, "the
Company", refers to the consolidated entity of Pathfinder Bancorp, Inc.
Pathfinder Bank and Pathfinder Statutory Trust I are wholly owned subsidiaries
of Pathfinder Bancorp, Inc. Pathfinder Commercial Bank, Pathfinder REIT, Inc.
and Whispering Oaks Development Corp. represent wholly owned subsidiaries of
Pathfinder Bank. At December 31, 2003, Pathfinder Bancorp, M.H.C, the Company's
mutual holding company parent, whose activities are not included in the MD&A,
held 65.1% of the Company's common stock and the public held 34.9%.
When used in this Annual Report the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project" or
similar expression are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market areas and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically declines any obligation, to
publicly release the results of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
The Company's business strategy is to operate as a well-capitalized, profitable
and independent community bank dedicated to providing value-added products and
services to our customers. Generally, the Company has sought to implement this
strategy by emphasizing retail deposits as its primary source of funds and
maintaining a substantial part of its assets in locally-originated residential
first mortgage loans, loans to business enterprises operating in its markets,
and in investment securities. Specifically, the Company's business strategy
incorporates the following elements: (i) operating as an independent
community-oriented financial institution; (ii) maintaining capital in excess of
regulatory requirements; (iii) emphasizing investment in one-to-four family
residential mortgage loans, loans to small businesses and investment securities;
and (iv) maintaining a strong retail deposit base.
The Company's net income is primarily dependent on its net interest income,
which is the difference between interest income earned on its investments in
mortgage and other loans, investment securities and other assets, and its cost
of funds consisting of interest paid on deposits and other borrowings. The
Company's net income also is affected by its provision for loan losses, as well
as by the amount of noninterest income, including income from fees, service
charges and servicing rights, net gains and losses on sales of securities, loans
and foreclosed real estate, and noninterest expense such as employee
compensation and benefits, occupancy and equipment costs, data processing costs
and income taxes. Earnings of the Company also are affected significantly by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, which
events are beyond the control of the Company. In particular, the general level
of market rates tends to be highly cyclical.
On October 25, 2002, Pathfinder Bank completed the purchase of assets and the
assumption of non-municipal deposits of the Lacona, New York branch of Cayuga
Bank (the "Branch Acquisition"). In addition, Pathfinder Bank formed a limited
purpose commercial bank subsidiary, Pathfinder Commercial Bank. Pathfinder
Commercial Bank was established to serve the depository needs of public entities
in its market area and it assumed the municipal deposit liabilities of the
Lacona, New York branch. The transaction included approximately $26.4 million in
deposits, $2.3 million in loans and $430,000 in vault cash and facilities and
equipment. The acquisition reflects a premium on deposit liabilities assumed of
approximately $2.4 million.
On January 13, 2003, the Company completed the purchase of 160,114 shares of
common stock at a price of $2.3 million, or $14.60 per share, from Jewelcor
Management Inc. ("JMI"), which is owned by Mr. Seymour Holtzman ("the
Repurchase"). The Repurchase represented approximately 6.1% of the Company's
outstanding common stock as of December 31, 2002.
As part of the repurchase agreement, Mr. Holtzman and JMI, as well as those
persons and entities who signed the Schedule 13D with Mr. Holtzman with respect
to the Company's common stock, agreed in writing, that neither they nor their
affiliates will purchase shares of the Company's common stock for a period of
five years. JMI also agreed to stipulate to the discontinuance with prejudice
of the lawsuit entitled "Jewelcor Management, Inc. v. Pathfinder Bancorp, Inc.",
and withdrew a shareholder proposal previously submitted by JMI.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow
practices within the banking industry. Application of these principles requires
management to make estimates, assumptions and judgments that affect the amounts
reported in the financial statements and accompanying notes. These estimates,
assumptions and judgments are based on information available as of the date of
the financial statements; accordingly, as this information changes, the
5
financial statements could reflect different estimates, assumptions and
judgments. Certain policies inherently have a greater reliance on the use of
estimates, assumptions and judgments and as such have a greater possibility of
producing results that could be materially different than originally reported.
Estimates, assumptions and judgments are necessary when assets and liabilities
are required to be recorded at fair value or when an asset or liability needs to
be recorded contingent upon a future event. Carrying assets and liabilities at
fair value inherently results in more financial statement volatility. The fair
values and information used to record valuation adjustments for certain assets
and liabilities are based on quoted market prices or are provided by other
third-party sources, when available. When third party information is not
available, valuation adjustments are estimated in good faith by management.
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements. These policies, along with
the disclosures presented in the other financial statement notes and in this
discussion, provide information on how significant assets and liabilities are
valued in the financial statements and how those values are determined. Based
on the valuation techniques used and the sensitivity of financial statement
amounts to the methods, assumptions and estimates underlying those amounts,
management has identified the determination of the allowance for loan losses to
be the accounting area that requires the most subjective and complex judgments,
and as such could be the most subject to revision as new information becomes
available.
The allowance for loan losses represents management's estimate of probable loan
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type
on the consolidated balance sheet. Note 1 to the consolidated financial
statements describes the methodology used to determine the allowance for loan
losses, and a discussion of the factors driving changes in the amount of the
allowance for loan losses is included in this report.
The Company carries all of its investments at fair value with any unrealized
gains or losses reported net of tax as an adjustment to shareholders' equity.
Based on management's assessment, at December 31, 2003, the Company did not hold
any security that had a fair value decline that is currently expected to be
other than temporary. Consequently, any declines in a specific security's fair
value below amortized cost have not been provided for in the income statement.
The Company's ability to fully realize the value of its investment in various
securities, including corporate debt securities, is dependent on the underlying
creditworthiness of the issuing organization.
RESULTS OF OPERATIONS
Net income for 2003 was $1.7 million, an increase of $495,000, or 43%, compared
to net income of $1.2 million for 2002. Basic earnings per share increased to
$0.68 per share for the year ended December 31, 2003 from $0.45 per share for
the year ended December 31, 2002. Return on average equity increased 52% to
7.61% in 2003 from 5.01% in 2002.
In the current low interest rate environment, the Company was able to maintain a
strong net interest margin through growth in average earning assets of 7%,
resulting in an increase in net interest income, on a tax-equivalent basis, of
$530,000, or 6%. Provision for loans losses decreased 57% due to a prior year
charge-off of two significant credit relationships. The Company also
experienced a 21% increase in other income, net of securities gains and losses,
primarily attributable to increased deposit levels, service charges associated
with checking accounts and mortgage servicing fees. Earnings were hampered by
an increase in other expenses of 14% primarily attributable to the operation of
a new branch and an increase in employee pension and healthcare costs.
SELECTED PERFORMANCE MEASURES
Years Ended December 31,
- -----------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------
Return on average assets . . . . . . 0.59% 0.45% 0.68%
Return on average equity . . . . . . 7.61% 5.01% 7.34%
Net interest margin (1). . . . . . . 3.68% 3.73% 3.67%
Noninterest income to total assets . 0.94% 0.75% 0.76%
Noninterest expense to total assets. 3.27% 2.85% 2.81%
(1) net interest margin is calculated on a tax-equivalent basis
NET INTEREST INCOME
Net interest income is the Company's primary source of operating income for
payment of operating expenses and providing for possible loan losses. It is the
amount by which interest earned on interest-earning deposits, loans and
investment securities, exceeds the interest paid on deposits and other
interest-bearing liabilities. Changes in net interest income and net interest
margin ratio result from the interaction between the volume and composition of
earning assets, interest-bearing liabilities, related yields and associated
funding costs.
Net interest income, on a tax-equivalent basis, increased $530,000, or 6%, to
$9.4 million for the year ended December 31, 2003, as compared to the year ended
December 31, 2002. The Company's net interest margin for 2003 decreased
slightly to 3.68% from 3.73% in 2002. The increase in net interest income is
attributable to increased volumes in earning asset and deposit balances and the
maintenance of stable spreads. The average balance of interest-earning assets
grew $17.5 million, or 7%, during 2003 and the average balance of
interest-bearing deposits increased by $24.1 million, or 14%. The increase in
the average balance of interest-bearing deposits is attributable to the Branch
Acquisition. The Company invested the proceeds from the Branch Acquisition into
6
the loan and investment portfolio. The decrease in the average yield on
interest-earning assets by 67 basis points more than offset the increase in
average balance as loans were refinanced or modified and new investment
securities were acquired at lower yields. As a result, interest income, on a
tax-equivalent basis, decreased $544,000 during 2003. Interest expense on
deposits decreased $906,000, or 19%, resulting from a decrease in the cost of
deposits to 1.96% in 2003 from 2.78% in 2002. In addition to the decrease in
the cost of deposits, interest expense on borrowings also decreased by $168,000,
or 7%, from the prior year.
In comparison, net interest income increased $943,000, or 12%, on a
tax-equivalent basis, from 2001 to 2002. The increase in net interest income
was comprised of a decrease in net interest expenses of $1.5 million, or 17%,
partially offset by a decrease in interest income of $519,000, or 3%.
The following table sets forth information concerning average interest-earning
assets and interest-bearing liabilities and the yields and rates thereon.
Interest income and resultant yield information in the table is on a fully
tax-equivalent basis using marginal federal income tax rates of 34%. Averages
are computed on the daily average balance for each month in the period divided
by the number of days in the period. Yields and amounts earned include loan
fees. Non-accrual loans have been included in interest-earning assets for
purposes of these calculations.
For the Years Ended December 31,
2003 2002
Average Average
Average Yield / Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
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INTEREST-EARNING ASSETS
Real estate loans residential . . . . . . . $129,687 $ 8,346 6.44% $117,688 $ 8,194 6.96%
Real estate loans commercial. . . . . . . . 31,122 2,480 7.97% 31,790 2,641 8.31%
Commercial loans. . . . . . . . . . . . . . 14,181 798 5.62% 14,774 984 6.66%
Consumer loans. . . . . . . . . . . . . . . 15,787 1,225 7.76% 12,795 1,117 8.73%
Taxable investment securities . . . . . . . 54,115 2,193 4.05% 46,247 2,437 5.27%
Tax-exempt investment securities. . . . . . 7,869 305 3.87% 6,036 434 7.19%
Interest-earning deposits . . . . . . . . . 3,252 33 0.99% 9,163 117 1.28%
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Total interest-earning assets . . . . . . . $256,013 $ 15,380 6.01% $238,493 $ 15,924 6.68%
Noninterest-earning assets:
Other assets. . . . . . . . . . . . . . . . 24,859 20,987
Allowance for loan losses . . . . . . . . . (1,591) (1,877)
Net unrealized gains
on available for sale securities. . . . . 52 368
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Total Assets . . . . . . . . . . . . . . . $279,333 $257,971
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Interest-bearing liabilities:
N