UNITED
STATES
SECURITIES
EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
T ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
fiscal year ended December 31, 2009.
or
* TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ______________ to ______________.
Commission
file number: 000-23601
PATHFINDER BANCORP, INC.
(Exact
name of registrant as specified in its charter)
Federal 16-1540137
(State or
other jurisdiction of I.R.S.
Employer
incorporation
or organization)
Identification No.)
214
West First Street
Oswego,
NY
13126
(Address
of principal executive offices) (Zip
Code)
Registrant's
telephone number, including area code: (315)
343-0057
Securities
registered pursuant to Section 12(b) of the Act:
Title of each
class
Name of each exchange on
which registered
Common Stock, $0.01 par
value
The NASDAQ Stock Market LLC
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES
* NO
T
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES * NO T
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES T NO
*
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such
files). YES * NO
*
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.T
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer *
Accelerated filer *
Non-accelerated filer *
Smaller reporting
company T
(Do not
check if a smaller reporting company)
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act). YES * NO
T
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the last sale price
on June 30, 2009, as reported by the Nasdaq Capital Market, was approximately
$4.6 million.
As of
March 17, 2010, there were 2,972,119 shares issued and 2,484,832 shares
outstanding of the Registrant’s Common Stock.
DOCUMENTS
INCORPORATED BY REFERENCE:
(1) Proxy Statement for the 2010 Annual
Meeting of Stockholders of the Registrant (Part III).
(2) Annual Report to Stockholders (Part
II and IV).
TABLE OF CONTENTS
FORM 10-K
ANNUAL REPORT
FOR THE
YEAR ENDED
DECEMBER
31, 2009
PATHFINDER
BANCORP, INC.
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Page
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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11
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Item
1B.
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Unresolved
Staff Comments
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11
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Item
2.
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Properties
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12
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Item
3.
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Legal
Proceedings
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12
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Item
4.
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(Removed
and Reserved)
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12
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Item
5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
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13
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Purchases
of Equity Securities
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14
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15
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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32
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33
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Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
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75
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Item
9A(T).
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Controls
and Procedures
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75
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Item
9B.
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Other
Information
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75
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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76
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Item
11.
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Executive
Compensation
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76
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related
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76
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Stockholder
Matters
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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76
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Item
14.
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Principal
Accounting Fees and Services
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76
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Item
15.
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Exhibits
and Financial Statement Schedules
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77
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PART I
FORWARD-LOOKING
STATEMENTS
When used in this Annual
Report the words or phrases “will likely result”, “are expected to”, “will
continue”, “is anticipated”, “estimate”, ”project” or similar 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.By identifying these
forward-looking statements for you in this manner, the Company is alerting you
to the possibility that its actual results and financial condition may differ,
possibly materially, from the anticipated results and financial condition
indicated in these forward-looking statements. Important factors that could
cause the Company’s actual results and financial condition to differ from those
indicated in the forward-looking statements include, among others, those
discussed under “Risk Factors” in Part I, Item 1A of this Annual Report on Form
10-K. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. 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. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and the
Company undertakes no obligation to update any statement in light of new
information or future events.
ITEM
1: BUSINESS
GENERAL
Pathfinder
Bancorp, Inc.
Pathfinder
Bancorp, Inc. (the "Company") is a Federally chartered mid-tier holding company
headquartered in Oswego, New York. The primary business of the
Company is its investment in Pathfinder Bank (the "Bank"). The
Company is majority owned by Pathfinder Bancorp, M.H.C., a federally-chartered
mutual holding company (the "Mutual Holding Company"). At
December 31, 2009, the Mutual Holding Company held 1,583,239 shares of the
Company’s common stock (“Common Stock”) and the public held 901,593 shares of
Common Stock (the "Minority Stockholders"). At December 31, 2009,
Pathfinder Bancorp, Inc. had total assets of $371.7 million, total deposits of
$296.8 million and shareholders' equity of $29.2 million.
The
Company's executive office is located at 214 West First Street, Oswego, New York
and the telephone number at that address is (315) 343-0057.
Pathfinder
Bank
The Bank
is a New York-chartered savings bank headquartered in Oswego, New
York. The Bank operates from its main office as well as six branch
offices located in its market area consisting of Oswego County and the
contiguous counties. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank was chartered as a
New York savings bank in 1859 as Oswego City Savings Bank. The Bank
is a customer-oriented institution dedicated to providing mortgage loans and
other traditional financial services to its customers. The Bank is
committed to meeting the financial needs of its customers in Oswego County, New
York, and the contiguous counties.
The Bank
is primarily engaged in the business of attracting deposits from the general
public in the Bank's market area, and investing such deposits, together with
other sources of funds, in loans secured by one- to four-family residential real
estate and commercial real estate. At December 31, 2009, $196.6
million, or 75% of the Bank's total loan portfolio consisted of loans secured by
real estate, of which $134.3 million, or 68%, were loans secured by one- to
four-family residences and $62.2 million, or 32%, were secured by commercial
real estate. Additionally, $26.1 million, or 10%, of total loans,
were secured by second liens on residential properties that are classified as
consumer loans. The Bank also originates commercial and consumer
loans that totaled $35.4 million and $3.6 million, respectively, or 15%, of the
Bank's total loan portfolio at December 31, 2009. The Bank
invests a
portion of its assets in securities issued by the United States Government and
its agencies and sponsored enterprises, state and municipal obligations,
corporate debt securities, mutual funds, and equity securities. The
Bank also invests in mortgage-backed securities primarily issued or guaranteed
by United States Government sponsored enterprises. The Bank's
principal sources of funds are deposits, principal and interest payments on
loans and investments, as well as borrowings from correspondent financial
institutions. The principal source of income is interest on loans and
investment securities. The Bank's principal expenses are interest
paid on deposits, and employee compensation and benefits.
Pathfinder
Bank formed a New York state chartered limited purpose commercial bank
subsidiary, Pathfinder Commercial Bank, in October of
2002. Pathfinder Commercial Bank was established to serve the
depository needs of public entities in its market area.
In April
1999, the Bank established Pathfinder REIT, Inc., a New York corporation, as the
Bank's wholly-owned real estate investment trust subsidiary. At
December 31, 2009, Pathfinder REIT, Inc. held $17.8 million in mortgages and
mortgage related assets. All disclosures in this Form 10-K relating
to the Bank's loans and investments include loans and investments that are held
by Pathfinder REIT, Inc.
The Bank
also has 100% ownership in Whispering Oaks Development Corp., a New York
corporation, which is retained in case the need to operate or develop foreclosed
real estate emerges. This subsidiary is currently
inactive.
In
addition, the Company has a non-consolidated Delaware statutory trust
subsidiary, Pathfinder Statutory Trust II, of which 100% of the common equity is
owned by the Company. Pathfinder Statutory Trust II was formed in
connection with the issuance of trust preferred securities.
Employees
As of
December 31, 2009, the Bank had 90 full-time employees and 19 part-time
employees. The employees are not represented by a collective
bargaining unit and we consider our relationship with our employees to be
good.
MARKET
AREA AND COMPETITION
The
economy in the Bank's market area is manufacturing-oriented and is also
significantly dependent upon the State University of New York College at
Oswego. The major manufacturing employers in the Bank's market area
are Entergy Nuclear Northeast, Novelis, Constellation, NRG and
Huhtamaki. The Bank is the largest depository institution
headquartered in Oswego County. 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 loans and other loans. Its most direct competition for
deposits has historically come from commercial banks, 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 competes for deposits by offering depositors a
high level of personal service and a wide range of competitively priced
financial services. The Bank competes for real estate loans primarily
through the interest rates and loan fees it charges and advertising, as well as
by originating and holding in its portfolio mortgage loans which do not
necessarily conform to secondary market underwriting standards. The
recent turmoil in the residential mortgage sector of the United States economy
has caused certain competitors to be less effective in the market
place. While Central New York did not experience the level of
speculative lending and borrowing in residential real estate that has adversely
affected other regions on a national basis, certain mortgage brokers and finance
companies in our area are either no longer operating, or have limited aggressive
lending practices. Additionally, as certain money centers and large
regional banks grapple with current economic conditions and the related credit
crisis, their ability to compete as effectively has been
muted. Management believes that these conditions have created a
window of reduced competition for local community and regional banks in
residential loans, and to a lesser extent, commercial real estate
loans.
REGULATION
AND SUPERVISION
General
The Bank
is a New York-chartered stock savings bank and its deposit accounts are insured
up to applicable limits by the FDIC through the Deposit Insurance Fund (“DIF
”). The Bank is subject to extensive regulation by the New York State
Banking Department (the “Department”), as its chartering agency, and by the
FDIC, as its deposit insurer and primary federal regulator. The Bank
is required to file reports with, and is periodically examined by, the FDIC and
the Superintendent of the Department concerning its activities and financial
condition and must obtain regulatory approvals prior to entering into certain
transactions, including, but not limited to, mergers with or acquisitions of
other banking institutions. The Bank is a member of the Federal Home
Loan Bank of New York (“FHLBNY”) and is subject to certain regulations by the
Federal Home Loan Bank System. The Company and the Mutual Holding
Company are federally chartered. Consequently, they are subject to
regulations of the Office of Thrift Supervision ("OTS") as savings and loan
holding companies. Any change in such regulations, whether by the
Department, the FDIC, or the OTS could have a material adverse impact on the
Bank, the Company or the Mutual Holding Company.
Regulatory
requirements applicable to the Bank, the Company and the Mutual Holding Company
are referred to below or elsewhere herein. This description of
statutory and regulatory provisions does not purport to be a complete
description of all such statutes and regulations applicable to the Mutual
Holding Company, the Company, or the Bank.
Recent
Regulatory Developments
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act of
2008 (the “EESA”) was signed into law. EESA provides, among other
things, for a Troubled Assets Relief Program (“TARP”), under which the U.S.
Department of the Treasury has the authority to purchase up to $700 billion of
securities and certain other financial instruments from financial institutions
for the purpose of stabilizing and providing liquidity to the U.S. financial
markets.
See the
discussion relating to the Emergency Economic
Stabilization Act of 2008 and the economic recovery package discussed
under that caption below.
On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
(“TLGP”). This program has two components. One guarantees newly
issued senior unsecured debt of the participating organizations, up to certain
limits established for each institution, issued between October 14, 2008 and
June 30, 2009. The other component of the program provides full FDIC insurance
coverage for non-interest bearing transaction deposit accounts, regardless of
dollar amount, until December 31, 2009. An annualized 10 basis point assessment
on balances in noninterest-bearing transaction accounts that exceed the existing
deposit insurance limit of $250,000 will be assessed on a quarterly basis to
insured depository institutions participating in this component of the
TLGP. The Company has chosen to participate in both components of the
TLGP. The additional expense related to this coverage has not been
significant for Pathfinder Bank.
The
American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as
the economic stimulus or economic recovery package, was signed into law on
February 17, 2009, by President Obama. ARRA includes a wide variety
of programs intended to stimulate the economy and provide for extensive
infrastructure, energy, health, and education needs. In addition,
ARRA imposes certain new executive compensation and corporate expenditure limits
on all current and future CPP recipients until the recipient has repaid the
Treasury.
The
administration of President Obama introduced the Making Home Affordable program
in 2009. This program allows homeowners with loans guaranteed by
Fannie Mae or Freddie Mac an opportunity to refinance into more affordable
monthly payments. Pathfinder Bank services loans that
have been
purchased by Fannie Mae, and therefore the Bank does participate in this
program. The program also encourages banks to voluntarily modify
portfolio loans for borrowers who are eligible. Pathfinder Bank also
participates in that manner. Very few of our borrowers have been
eligible to participate in the program, although participating in the program
has increased our administrative expenses.
The New
York Legislature passed, and the Governor signed into law, Governor’s Program
Bill No. 46. This law, which became effective January 14, 2010,
amends and supplements various existing statues including the Real Property
Actions and Proceedings Law, the Uniform Commercial Code, the Civil Practice Law
and Rules and the Banking Law. In brief, the law imposes additional
foreclosure notice provisions on owners and tenants of 1-4 family residential
premises; additional filing requirements in such foreclosures; mandatory
judicial settlement conferences in residential foreclosures; an obligation on
the bank to maintain premises in foreclosure prior to taking title; and other
miscellaneous requirements. We believe this new law will delay
foreclosures on residential properties and increase foreclosure
cost.
New York State Banking Law and FDIC
Regulation
The Bank
derives its lending, investment and other authority primarily from the
applicable provisions of New York State Banking Law and the regulations of the
Department, as limited by FDIC regulations. In particular, the applicable
provisions of New York State Banking Law and regulations governing the
investment authority and activities of an FDIC insured state-chartered savings
bank have been substantially limited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and the FDIC regulations issued
pursuant thereto. Under these laws and regulations, savings banks,
including the Bank, may invest in real estate mortgages, consumer and commercial
loans, certain types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments and agencies,
certain types of corporate equity securities and certain other
assets. New York State chartered savings banks may also invest in
subsidiaries under their service corporation investment authority. A
savings bank may use this power to invest in corporations that engage in various
activities authorized for savings banks, plus any additional activities, which
may be authorized by the Banking Board. Under FDICIA and the FDIC’s
implementation of regulations, the Bank’s investment and service corporation
activities are limited to activities permissible for a national bank unless the
FDIC otherwise permits it.
The FDIC
and the Superintendent have broad enforcement authority over the
Bank. Under this authority, the FDIC and the Superintendent have the
ability to issue formal or informal orders to correct violations of laws or
unsafe or unsound banking practices.
FDIC
Insurance on Deposits
The Bank
is a member of the DIF, which is administered by the FDIC. Deposits
are insured up to applicable limits by the FDIC and such insurance is backed by
the full faith and credit of the U.S. Government.
The
Federal Deposit Insurance Reform Act of 2005 gives the FDIC increased
flexibility in assessing premiums on banks and savings associations, including
the Bank, to pay for deposit insurance and in managing its deposit insurance
reserves. The reform legislation provided a credit to all insured
institutions, based on the amount of their insured deposits at year-end 1996, to
offset the premiums that they may be assessed; combined the BIF and SAIF to form
a single Deposit Insurance Fund; increased deposit insurance to $250,000 for
Individual Retirement Accounts; and authorized inflation-based increases in
deposit insurance on other accounts every 5 years. In 2008, Congress has
temporarily extended the $250,000 insurance limit to all other depositor
accounts through December 31, 2013.
On December 22, 2008, the
FDIC published a final rule that raises the current deposit insurance assessment
rates uniformly for all institutions by 7 basis points (to a range from 12 to 50
basis points) effective for the first quarter of 2009. On February
27, 2009, the FDIC also issued a final rule that revises the way the FDIC
calculates federal deposit insurance assessment rates beginning in the second
quarter of 2009. Under the new rule, the total base assessment rate
will range from 7 to 77.5 basis points of the institution’s deposits, depending
on the risk category of the institution and
the institution’s levels
of unsecured debt, secured liabilities, and brokered
deposits. On May 22, 2009, the FDIC adopted a final rule
imposing a 5 basis point special assessment on each insured depository
institution's assets minus Tier 1 capital as of June 30, 2009. The impact of the
special assessment was approximately $180,000. Finally, on November
12, 2009, the FDIC adopted a final rule amending the assessment regulations to
require insured depository institutions to prepay their quarterly risk-based
assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012,
on December 30, 2009. The three-year assessment recorded in the
Company’s other assets amounted to $1.7 million. Both the special and regular
assessment changes have been imposed on all FDIC insured institutions for the
year ended December 31, 2009.
The
credit provided by the 2005 Act was determined based on the assessment base of
the institution as of December 31, 1996 as
compared with the combined aggregate assessment base of all eligible
institutions as of that date. Those institutions having credits could use them
to offset up to 100% of the 2007 DIF assessment, and if not completely used in
2007, applied the remaining credits to not more than 90% of each of the
aggregate 2008, 2009 and 2010 DIF assessments. Pathfinder Bank offset 90% of its
DIF assessments with available one-time assessment credits for the first two
quarters of 2008 and took the remaining balance of the credit against the third
quarter assessment. For the first nine months of 2008, credits utilized to
offset amounts assessed for Pathfinder Bank totaled $76,000. Fourth quarter 2008
assessments and 2009 assessments for Pathfinder Bank were not offset by
credits.
See the
discussion of recent regulatory developments relating to the FDIC and its impact
on the Company discussed above under the caption “Recent Regulatory
Developments”.
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%, and a Tier I risk
based capital level of at least 4%.
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 that would reduce its capital
below the amount that is required to be maintained by state law and
regulation. The Company is also subject to the OTS capital
distribution rules by virtue of being an OTS regulated savings and loan holding
company.
Prompt
Corrective Action
The
federal banking agencies have promulgated regulations to implement the system of
prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10% or more, has a Tier I risk-based capital ratio of 6%
or more, has a Tier I leverage capital ratio of 5% or more and is not subject to
any written capital order or directive; (ii) "adequately capitalized" if it has
a total risk based capital ratio of 8% or more, a Tier I risk-based capital
ratio of 4% or more and a Tier I leverage capital ratio of 4% or more (3% under
certain circumstances) and does not meet the definition of "well capitalized";
(iii) "undercapitalized" if it has a total risk-based capital ratio that is
less than
8%, a Tier I risk-based capital ratio that is less than 4% or a Tier I leverage
capital ratio that is less than 4% (3% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6%, a Tier I risk-based capital ratio that is less than 3% or a
Tier I leverage capital ratio that is less than 3%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2%. Federal law and regulations also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution to comply with supervisory actions as if it were in the
next lower category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
The Bank
currently meets the criteria to be classified as a "well capitalized" savings
institution.
Transactions
With Affiliates and Insiders
Under
current federal law, transactions between depository institutions and their
affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and
its implementing regulations. An affiliate of a savings bank is any company or
entity that controls, is controlled by, or is under common control with the
savings bank, other than a subsidiary of the savings bank. In a holding company
context, at a minimum, the parent holding company of a savings bank, and any
companies that are controlled by such parent holding company, are affiliates of
the savings bank. Generally, Section 23A limits the extent to which the savings
bank or its subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such savings bank's capital stock and
surplus and contains an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus. The term
"covered transaction" includes the making of loans or other extensions of credit
to an affiliate; the purchase of assets from an affiliate, the purchase of, or
an investment in, the securities of an affiliate; the acceptance of securities
of an affiliate as collateral for a loan or extension of credit to any person;
or issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate. Section 23A also establishes specific collateral requirements for
loans or extensions of credit to, or guarantees, acceptances on letters of
credit issued on behalf of an affiliate. Section 23B requires that covered
transactions and a broad list of other specified transactions be on terms
substantially the same, or no less favorable, to the savings bank or its
subsidiary as similar transactions with nonaffiliates.
Further,
Section 22(h) of the Federal Reserve Act and its implementing regulations
restrict a savings bank with respect to loans to directors, executive officers,
and principal stockholders. Under Section 22(h), loans to directors, executive
officers and stockholders who control, directly or indirectly, 10% or more of
voting securities of a savings bank and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total unimpaired capital and
unimpaired surplus. Section 22(h)
also
prohibits loans above amounts prescribed by the appropriate federal banking
agency to directors, executive officers, and stockholders who control 10% or
more of voting securities of a stock savings bank, and their respective related
interests, unless such loan is approved in advance by a majority of the board of
directors of the savings bank. Any "interested" director may not participate in
the voting. 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.
Supervisory
Agreement
During
May 2009, the Company entered into a Supervisory Agreement with the
OTS. The agreement was issued in connection with the identification
of certain violations of applicable statutory and regulatory restrictions on
capital distributions and transactions with affiliates. As a result
of the identified violations, the Company recorded $41,000 of income relating to
certain transactions with its unconsolidated parent company Pathfinder Bancorp,
MHC. In addition the Company is prohibited from accepting or
directing Pathfinder Bank to declare or pay a dividend or other capital
distributions without the prior written approval of the Office of Thrift
Supervision. All violations have been corrected and the Company
believes it is in compliance with the Agreement.
Federal
Holding Company Regulation
General. The Company and
the Mutual Holding Company are nondiversified savings and loan holding companies
within the meaning of the Home Owners' Loan Act. The Company and the
Mutual Holding Company are registered with the OTS and are subject to OTS
regulations, examinations, supervision and reporting requirements. As
such, the OTS has enforcement authority over the Company and the Mutual Holding
Company, and their non-savings institution subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings
institution.
Permitted
Activities. Under OTS
regulation and policy, a mutual holding company and a federally chartered
mid-tier holding company, such as the Company, may engage in the following
activities: (i) investing in the stock of a savings association;
(ii) acquiring a mutual association through the merger of such association
into a savings association subsidiary of such holding company or an interim
savings association subsidiary of such holding company; (iii) merging with
or acquiring another holding company, one of whose subsidiaries is a savings
association; (iv) investing in a corporation, the capital stock of which is
available for purchase by a savings association under federal law or under the
law of any state where the subsidiary savings association or associations share
their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings
association subsidiary of such company; (viii) acting as trustee under
deeds of trust; (ix) any other activity (A) that the Federal Reserve
Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act of 1956,
unless the Director of the OTS, by regulation, prohibits or limits any such
activity for savings and loan holding companies; or (B) in which multiple
savings and loan holding companies were authorized (by regulation) to directly
engage on March 5, 1987; (x) any activity permissible for financial holding
companies under Section 4(k) of the Bank Holding Company Act, including
securities and insurance underwriting; and (xi) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with
another holding company, the holding company acquired or the holding company
resulting from such merger or acquisition may only invest in assets and engage
in activities listed in (i) through (xi) above, and has a period of
two years to cease any nonconforming activities and divest of any nonconforming
investments.
The Home
Owners' Loan Act prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
association or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain
exceptions, more than 5% of a nonsubsidiary savings association, a nonsubsidiary
holding company, or a nonsubsidiary company engaged in activities other than
those permitted by the Home Owners' Loan Act; or acquiring or retaining control
of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings associations, the OTS must
consider the financial and managerial resources, future prospects of the company
and association involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.
The OTS
is prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings associations in more than
one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws
of the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit
interstate savings and loan holding company acquisitions.
Waivers of
Dividends by Mutual Holding Company. OTS regulations
require the Mutual Holding Company to notify the OTS of any proposed waiver of
its receipt of dividends from the Company. The OTS may object to such
waivers.
Conversion of the
Mutual Holding Company to Stock Form. OTS regulations
permit the Mutual Holding Company to convert from the mutual form of
organization to the capital stock form of organization (a "Conversion
Transaction"). There can be no assurance when, if ever, a Conversion
Transaction will occur, and the Board of Directors has no current intention or
plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to the
Company (the "New Holding Company"), the Mutual Holding Company's corporate
existence would end, and certain depositors of the Bank would receive the right
to subscribe for additional shares of the New Holding Company. In a
Conversion Transaction, each share of common stock held by stockholders other
than the Mutual Holding Company ("Minority Stockholders") would be automatically
converted into a number of shares of common stock of the New Holding Company
determined pursuant to an exchange ratio (determined by an independent
valuation) 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. 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.
Federal
Securities Law
The
common stock of the Company is registered with the SEC under the Securities
Exchange Act of 1934, as amended (“Exchange Act”). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
The
Company Common Stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Federal
Reserve System
The
Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, money management and NOW checking
accounts). At December 31, 2009, the Bank was in compliance with
these reserve requirements.
Federal
Community Reinvestment Regulation
Under the
Community Reinvestment Act, as amended (the "CRA"), as implemented by FDIC
regulations, a savings bank has a continuing and affirmative obligation,
consistent with its safe and sound operation, to help meet the credit needs of
its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the
CRA. The CRA requires the FDIC, in connection with its examination of
a savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications by such institution. The CRA requires the FDIC
to provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system. The Bank's latest CRA rating
was "satisfactory."
New
York State Community Reinvestment Regulation
The Bank
is subject to provisions of the New York State Banking Law which impose
continuing and affirmative obligations upon banking institutions organized in
New York State to serve the credit needs of its local community ("NYCRA") which
are substantially similar to those imposed by the CRA. Pursuant to
the NYCRA, a bank must file an annual NYCRA report and copies of all federal CRA
reports with the Department. The NYCRA requires the Department to
make a biennial written assessment of a bank's compliance with the NYCRA,
utilizing a four-tiered rating system and make such assessment available to the
public. The NYCRA also requires the Superintendent to consider a
bank's NYCRA rating when reviewing a bank's application to engage in certain
transactions, including mergers, asset purchases and the establishment of branch
offices or automated teller machines, and provides that such assessment may
serve as a basis for the denial of any such application.
The
Bank's NYCRA rating as of its latest examination was
"satisfactory."
The
USA PATRIOT Act
The USA
PATRIOT Act (“the PATRIOT Act”) was signed into law on October 26,
2001. The PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. The PATRIOT Act also requires the federal
banking agencies to take into consideration the effectiveness of controls
designed to combat money laundering activities in determining whether to approve
a merger or other acquisition application of a financial
institution. Accordingly, if the Company were to engage in a merger
or other acquisitions, its controls designed to combat money laundering would be
considered as part of the application process. The Company and the
Bank have established policies, procedures and systems designed to comply with
these regulations.
Sarbanes-Oxley
Act of 2002
The
Sarbanes-Oxley Act of 2002 (“Sarbanes Oxley”) was signed into law on July 30,
2002. Sarbanes-Oxley is a law that addresses, among other issues,
corporate governance, auditing and accounting, executive compensation, and
enhanced and timely disclosure of corporate information. As directed
by Section 302(a) of Sarbanes-Oxley, the Company’s Chief Executive Officer and
Chief Financial Officer are each required to certify that the Company’s
quarterly and annual reports do not contain any untrue statement of a material
fact. The rules have several requirements, including having these
officers certify that: they are responsible for establishing, maintaining and
regularly evaluating the effectiveness of our internal controls; they have made
certain disclosures to our auditors and the audit committee of the Board of
Directors about our internal controls; and they have included information in our
quarterly and annual reports about their evaluation and whether there have been
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the
evaluation. On October 2, 2009, the
SEC granted
another extension for the
outside auditor assessment until fiscal years ending after June 15,
2010. We have existing policies, procedures and systems
designed to comply with these regulations, and are further enhancing and
documenting such policies, procedures and systems to ensure continued compliance
with these regulations.
Emergency
Economic Stabilization Act of 2008
The
Emergency Economic Stabilization Act of 2008 ("EESA") was enacted on
October 3, 2008. EESA enables the federal government, under terms and
conditions to be developed by the Secretary of the Treasury, to insure troubled
assets, including mortgage-backed securities, and collect premiums from
participating financial institutions. EESA includes, among other provisions:
(a) the $700 billion Troubled Assets Relief Program ("TARP"), under
which the Secretary of the Treasury is authorized to purchase, insure, hold, and
sell a wide variety of financial instruments, particularly those that are based
on or related to residential or commercial mortgages originated or issued on or
before March 14, 2008; and (b) an increase in the amount of deposit
insurance provided by the FDIC.
Under the
TARP, the United States Department of Treasury authorized a voluntary Capital
Purchase Program to purchase up to $250 billion of senior preferred shares
of qualifying financial institutions that elected to participate by
November 14, 2008. The program was developed to
attract broad participation by strong financial institutions, to stabilize the
financial system and increase lending to benefit the national economy and
citizens of the United States.The board of directors and management
analyzed the potential merits of participating in the Capital Purchase Program
(“CPP”) of the Treasury Department’s TARP. It was the general view of
the board and management that in the present national economic risk environment,
enhancing the Company’s capital ratios is both prudent, given the current
climate, and potentially opportunistic as we move into the next business
cycle. Additionally, any increase to capital will continue to support
the Company’s lending activities to individuals, families, and businesses in our
community. Companies participating in the CPP are required to adopt
certain standards relating to executive compensation. The terms of
the CPP also limit certain uses of capital by the issuer, including with respect
to repurchases of securities and increases in
dividends.
On
September 11, 2009, the Company entered into a Purchase Agreement with the
Treasury Department pursuant to which the Company has issued and sold to
Treasury: (i) 6,771 shares of the Company’s Series A Preferred Stock,
having a liquidation amount per share equal to $1,000, for a total price of
$6,771,000; and (ii) a Warrant to purchase 154,354 shares of the Company’s
common stock, par value $0.01 per share, at an exercise price per share of
$6.58.
The Chief
Executive Officer and the Chief Financial Officer are required to certify
compliance with the compensation provisions of the CPP program. Our
certifications are appended to this 10-K in Exhibit 99.1 and 99.2.
Securities
and Exchange Commission Reporting
The
Company maintains an Internet website located at www.pathfinderbank.com
on which, among other things, the Company makes available, free of charge,
various reports that it files with or furnishes to the Securities and Exchange
Commission, including its Annual Report on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K. The Company has also made
available on its website its Audit Committee Charter, Compensation Committee
Charter, Governance Guidelines (which serve as the Nominating / Governance
Committee’s charter) and Code of Ethics. These reports are made
available as soon as reasonably practicable after these reports are filed with
or furnished to the Securities and Exchange Commission.
The
Company's Annual Report on Form 10-K may be accessed on the Company's website at
www.pathfinderbank.com/annualmeeting.
FEDERAL
AND STATE TAXATION
Federal
Taxation
The
following discussion of federal taxation is intended only to summarize certain
pertinent federal income tax matters and is not a comprehensive description of
the tax rules applicable to the Company or the Bank.
Bad Debt
Reserves. Prior to the Tax
Reform Act of 1996 (“the 1996 Act”), the Bank was permitted to establish a
reserve for bad debts and to make annual additions to the
reserve. These additions could, within specified formula limits, be
deducted in arriving at the Bank's taxable income. As a result of the
1996 Act, the Bank must use the small bank experience method in computing its
bad debt deduction.
Taxable
Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests. New
federal legislation eliminated these thrift related recapture
rules. However, under current law, pre-1988 reserves remain subject
to recapture should the Bank cease to retain a bank or thrift charter or make
certain non-dividend distributions.
Minimum
Tax. The Internal Revenue Code imposes an alternative
minimum tax ("AMT") at a rate of 20% on a base of regular taxable income plus
certain tax preferences ("alternative minimum taxable income" or
"AMTI"). The AMT is payable to the extent such AMTI is in excess of
an exemption amount. Net operating losses can offset no more than 90%
of AMTI. Certain payments of alternative minimum tax may be used as
credits against regular tax liabilities in future years.
Net Operating
Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years.
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) 7.1% of the Bank's "entire net income" allocable to New York State
during the taxable year, or (ii) the applicable alternative minimum
tax. The alternative minimum tax is generally the greater of
(a) 0.01% of the value of the Bank's assets allocable to New York State
with certain modifications, (b) 3% of the Bank's "alternative entire net
income" allocable to New York State, or (c) $250. Entire net
income is similar to federal taxable income, subject to certain modifications
and alternative entire net income is equal to entire net income without certain
modifications. Net operating losses arising in the current period can
be carried forward to the succeeding 20 taxable years.
Neither
the Internal Revenue Service or New York State have examined our federal or
state tax returns within the past 5 years.
ITEM
1A: RISK FACTORS
Not
required of a smaller reporting company.
ITEM
1B: UNRESOLVED STAFF COMMENTS
None.
ITEM
2: PROPERTIES
The Bank
conducts its business through its main office located in Oswego, New York, and
six branch offices located in Oswego County. The following table sets
forth certain information concerning the main office and each branch office of
the Bank at December 31, 2009. The aggregate net book value of
the Bank's premises and equipment was $7.2 million at December 31,
2009. For additional information regarding the Bank's properties, see
Notes 7 and 15 to the Consolidated Financial Statements.
|
LOCATION
|
OPENING
DATE
|
OWNED/LEASED
|
|
Main
Office
214
West First Street
Oswego,
New York 13126
|
1874
|
Owned
|
|
Plaza
Branch
Route
104, Ames Plaza
Oswego,
New York 13126
|
1989
|
Owned
(1)
|
|
Mexico
Branch
Norman
& Main Streets
Mexico,
New York 13114
|
1978
|
Owned
|
|
Oswego
East Branch
34
East Bridge Street
Oswego,
New York 13126
|
1994
|
Owned
|
|
Lacona
Branch
1897
Harwood Drive
Lacona,
New York 13083
|
2002
|
Owned
|
|
Fulton
Branch
5
West First Street South
Fulton,
New York 13069
Central
Square Branch
3025
East Ave
Central
Square, New York 13036
|
2003
2005
|
Owned
(2)
Owned
|
|
(1)
|
The
building is owned; the underlying land is leased with an annual rent of
$21,000
|
|
(2)
|
The
building is owned; the underlying land is leased with an annual rent of
$30,000
|
ITEM
3: LEGAL PROCEEDINGS
There are
various claims and lawsuits to which the Company is periodically involved
incident to the Company's business. In the opinion of management,
such claims and lawsuits in the aggregate are not expected to have a material
adverse impact on the Company's consolidated financial condition and results of
operations.
ITEM
4: (REMOVED AND RESERVED)
PART II
ITEM
5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Pathfinder
Bancorp, Inc.'s common stock currently trades on the Nasdaq Capital Market under
the symbol "PBHC". There were 510 shareholders of record as of March
17, 2010. 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, 2009
|
$ | 7.000 | $ | 5.550 | $ | 0.0300 | ||||||
|
September
30, 2009
|
7.980 | 5.430 | 0.0300 | |||||||||
|
June
30, 2009
|
8.000 | 4.950 | 0.0600 | |||||||||
|
March
31, 2009
|
8.200 | 4.750 | - | |||||||||
|
December
31, 2008
|
$ | 13.500 | $ | 6.000 | $ | 0.1025 | ||||||
|
September
30, 2008
|
10.250 | 6.890 | 0.1025 | |||||||||
|
June
30, 2008
|
11.250 | 7.000 | 0.1025 | |||||||||
|
March
31, 2008
|
16.550 | 9.720 | 0.1025 | |||||||||
Dividends
and Dividend History
The
Company has historically paid regular quarterly cash dividends on its common
stock, and the Board of Directors presently intends to continue the payment of
regular quarterly cash dividends, subject to the need for those funds for debt
service and other purposes. Payment of dividends on the common stock
is subject to determination and declaration by the Board of Directors and will
depend upon a number of factors, including capital requirements, regulatory
limitations on the payment of dividends, Pathfinder Bank and its subsidiaries
results of operations and financial condition, tax considerations, and general
economic conditions. Given deteriorating economic conditions, and the
Company’s focus on the retention and growth of capital, it is unlikely that
future, near-term dividends will replicate the historical dividend payouts of
2008 and prior years. The Company's mutual holding company,
Pathfinder Bancorp, M.H.C., may elect to waive or receive dividends each time
the Company declares a dividend. The election to waive the dividend
receipt requires prior non-objection of the OTS. The Mutual Holding
Company did not waive the right to receive its portion of the cash dividends
declared during 2009. During 2008, the Mutual Holding Company waived
one quarter’s dividends totaling $163,000.
Since the
Company has chosen to participate in the Treasury’s CPP program, its ability to
increase dividends to its stockholders is limited without prior approval by the
United States Treasury Department.
ITEM 6: SELECTED FINANCIAL DATA
The
Company is the parent company of the Bank and Pathfinder Statutory Trust
I. The Bank has three operating subsidiaries – Pathfinder Commercial
Bank, Pathfinder REIT, Inc., and Whispering Oaks Development Corp.
The
following selected consolidated financial data sets forth certain financial
highlights of the Company and should be read in conjunction with the
consolidated financial statements and related notes, and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this annual report on Form
10-K.
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Year
End (In
thousands)
|
|
|
|
|
|
|||||||||||||||
|
Total
assets
|
$ | 371,692 | $ | 352,760 | $ | 320,691 | $ | 301,382 | $ | 296,948 | ||||||||||
|
Loans
receivable, net
|
259,387 | 247,400 | 221,046 | 201,713 | 187,889 | |||||||||||||||
|
Deposits
|
296,839 | 269,438 | 251,085 | 245,585 | 236,377 | |||||||||||||||
|
Equity
|
29,238 | 19,495 | 21,704 | 20,850 | 20,928 | |||||||||||||||
|
For
the Year (In
thousands)
|
||||||||||||||||||||
|
Net
interest income
|
$ | 11,777 | $ | 10,675 | $ | 8,667 | $ | 8,346 | $ | 8,742 | ||||||||||
|
Core
noninterest income (d)
|
2,724 | 2,786 | 2,622 | 2,396 | 2,333 | |||||||||||||||
|
Net
gains/(losses) on sales of impairment of
|
||||||||||||||||||||
|
investment
securities
|
112 | (2,191 | ) | 378 | 299 | (205 | ) | |||||||||||||
|
Net
gains/(losses) on sales of loans and
|
||||||||||||||||||||
|
foreclosed
real estate
|
54 | (44 | ) | 42 | (80 | ) | (88 | ) | ||||||||||||
|
Noninterest
expense (e)
|
10,381 | 9,882 | 9,799 | 9,646 | 10,023 | |||||||||||||||
|
Regulatory
assessments
|
745 | 53 | 39 | 22 | 37 | |||||||||||||||
|
Net
income
|
1,615 | 368 | 1,122 | 1,028 | 462 | |||||||||||||||
|
Per
Share
|
||||||||||||||||||||
|
Net
income (basic)
|
$ | 0.61 | $ | 0.15 | $ | 0.45 | $ | 0.42 | $ | 0.19 | ||||||||||
|
Book
value per common share
|
9.31 | 8.04 | 8.74 | 8.45 | 8.50 | |||||||||||||||
|
Tangible
book value per common share (a)
|
7.77 | 6.50 | 7.19 | 6.82 | 6.77 | |||||||||||||||
|
Cash
dividends declared
|
0.12 | 0.41 | 0.41 | 0.41 | 0.41 | |||||||||||||||
|
Ratios
|
||||||||||||||||||||
|
Return
on average assets
|
0.45 | % | 0.11 | % | 0.36 | % | 0.34 | % | 0.15 | % | ||||||||||
|
Return
on average equity
|
7.04 | 1.70 | 5.27 | 4.86 | 2.16 | |||||||||||||||
|
Return
on average tangible equity (a)
|
8.45 | 2.07 | 6.47 | 6.04 | 2.72 | |||||||||||||||
|
Average
equity to average assets
|
6.40 | 6.32 | 6.82 | 7.03 | 6.95 | |||||||||||||||
|
Dividend
payout ratio (b)
|
18.45 | 232.61 | 62.03 | 66.73 | 147.84 | |||||||||||||||
|
Allowance
for loan losses to loans receivable
|
1.17 | 0.99 | 0.76 | 0.74 | 0.89 | |||||||||||||||
|
Net
interest rate spread
|
3.40 | 3.22 | 2.81 | 2.92 | 3.07 | |||||||||||||||
|
Noninterest
income to average assets
|
0.81 | 0.16 | 0.98 | 0.87 | 0.66 | |||||||||||||||
|
Noninterest
expense to average assets
|
3.10 | 2.91 | 3.15 | 3.21 | 3.28 | |||||||||||||||
|
Efficiency
ratio (c)
|
76.36 | 73.02 | 85.89 | 88.71 | 89.16 | |||||||||||||||
|
(a)
|
Tangible
equity excludes intangible assets.
|
|
(b)
|
The
dividend payout ratio is calculated using dividends declared and not
waived by the Mutual Holding Company, divided by net
income.
|
|
(c)
|
The
efficiency ratio is calculated as noninterest expense, including
regulatory assessments, divided by the sum of taxable-equivalent net
interest income and noninterest income excluding net gains (losses) on
sales and impairment of investment securities and net gains (losses) on
sales of loans and foreclosed real
estate.
|
|
(d)
|
Exclusive
of net gains (losses) on sales and impairment of investment securities and
net gains (losses) on sales of loans and foreclosed real
estate.
|
|
(e)
|
Exclusive
of regulatory assessments.
|
|
(f)
|
As
calculated in this ratio, noninterest income includes net gains (losses)
on sales and impairment of investment securities and net gains (losses) on
sales of loans and foreclosed real
estate.
|
ITEM 7: MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
Throughout
Management’s Discussion and Analysis (“MD&A”) the term, “the Company”,
refers to the consolidated entity of Pathfinder Bancorp,
Inc. Pathfinder Bank and Pathfinder Statutory Trust II are wholly
owned subsidiaries of Pathfinder Bancorp, Inc., however, Pathfinder Statutory
Trust II is not consolidated for reporting purposes (see Note 10 of the
consolidated financial statements). Pathfinder Commercial Bank,
Pathfinder REIT, Inc. and Whispering Oaks Development Corp. are wholly owned
subsidiaries of Pathfinder Bank. At December 31, 2009, Pathfinder
Bancorp, M.H.C, the Company’s mutual holding company parent, whose activities
are not included in the consolidated financial statements or the MD&A, held
63.7% of the Company’s outstanding common stock and the public held 36.3% of the
outstanding common stock.
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 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, of
which these events are beyond the control of the Company. In
particular, the general level of market rates tends to be highly
cyclical.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
The
Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow
practices within the banking industry. Application of these
principles requires management to make estimates, assumptions and judgments that
affect the amounts reported in the financial statements and accompanying
notes. These estimates, assumptions and judgments are based on
information available as of the date of the financial statements; accordingly,
as this information changes, the financial statements could reflect different
estimates, assumptions and judgments. Certain policies inherently
have a greater reliance on the use of estimates, assumptions and judgments and
as such have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions and
judgments are necessary when assets and liabilities are required to be recorded
at fair value or when an asset or liability needs to be recorded contingent upon
a future event. Carrying assets and liabilities at fair value
inherently results in more financial statement volatility. The fair
values and information used to record valuation adjustments for certain assets
and liabilities are based on quoted market prices or are provided by other
third-party sources, when available. When third party information is
not available, valuation adjustments are estimated in good faith by
management.
The most
significant accounting policies followed by the Company are presented in Note 1
to the consolidated financial statements. These policies, along with
the disclosures presented in the other financial statement notes and in this
discussion, provide information on how significant assets and liabilities are
valued in the consolidated financial statements and how those values are
determined. Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions and
estimates underlying those amounts, management has identified
the
allowance for loan losses, deferred income taxes, pension obligations, the
evaluation of goodwill for impairment, the evaluation of investment securities
for other than temporary impairment and the estimation of fair values for
accounting and disclosure purposes to be the accounting areas that require the
most subjective and complex judgments, and as such, could be the most subject to
revision as new information becomes available.
The
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 statements of condition. Note 1 to the
consolidated financial statements describes the methodology used to determine
the allowance for loan losses, and a discussion of the factors driving changes
in the amount of the allowance for loan losses is included in this
report.
Deferred
income tax assets and liabilities are determined using the liability
method. Under this method, the net deferred tax asset or liability is
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases as well as net operating and capital loss carry
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates applied to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income tax expense in the period that includes the enactment
date. To the extent that current available evidence about the future
raises doubt about the likelihood of a deferred tax asset being realized, a
valuation allowance is established. The judgment about the level of
future taxable income, including that which is considered capital, is inherently
subjective and is reviewed on a continual basis as regulatory and business
factors change. A valuation allowance of
$458,000 was maintained at December 31, 2009, as management believes it may not
generate sufficient capital gains to offset its capital loss carry
forward. The Company’s effective tax rate differs from the statutory
rate due to non-taxable investment securities, and bank owned life
insurance offset by the valuation allowance established on a portion of the
capital loss carry forwards.
Pension
and post-retirement benefit plan liabilities and expenses are based upon
actuarial assumptions of future events, including fair value of plan assets,
interest rates, rate of future compensation increases and the length of time the
Company will have to provide those benefits. The assumptions used by management
are discussed in Note 11 to the consolidated annual financial
statements.
As a
result of deteriorating economic conditions in the financial markets, which
impacted the trading value of the Company’s common stock, management engaged an
independent third party to test the Company’s goodwill for impairment as of
December 31, 2008. Utilizing a three-step valuation approach, the
third party performed testing. Management re-evaluated the prior year testing
results from the valuation and based on the prior year determination and
improvements in Company metrics and general economic trends, management has
determined that the carrying value of goodwill was not impaired as of December
31, 2009. The valuation approach is described in Note 8 to the
consolidated financial statements.
The
Company carries all of its investments at fair value with any unrealized gains
or losses reported net of deferred tax as an adjustment to shareholders' equity,
except for debt security impairment losses, which are charged to earnings when
the loss is credit-related and recognized in other comprehensive income when the
loss is noncredit-related and the security is not expected to be
sold. The Company's ability to fully realize the value of its
investments in various debt securities is dependent on the underlying
creditworthiness of the issuing organization. In evaluating the debt
security portfolio for other-than-temporary impairment losses, management
considers (1) if we intend to sell the security; (2) if it is “more likely than
not” we will be required to sell the security before recovery of its amortized
cost basis; or (3) the present value of expected cash flows is not
sufficient
to recover the entire amortized cost basis. In determining
whether OTTI has occurred for equity securities, the Company considers the
applicable factors described above and the length of time the equity security’s
fair value has been below the carrying amount. Based on management's assessments
during the year ended December 31, 2009, the Company recorded
other-than-temporary impairment charges of $693,000, including a
$298,000 charge associated with its holdings in a senior unsecured note issued
by CIT Group, Inc. after the Company concluded that the liquidation of its
holding at a loss was prudent and the security was sold on July 16,
2009. The remaining impairment charges were capital losses
taken on the AMF Large Cap Equity Fund in the amount of $104,000, $286,000 in
the AMF Ultra Short Mortgage Fund, $1,000 on a stock investment in The Phoenix
Companies and $4,000 on the stock investment in Alliance Financial
Corp. In addition to the impairment charges, the Company’s
available for sale investment portfolio at December 31, 2009 includes unrealized
losses of $842,000. See Note 3 to the consolidated financial
statements for further discussion of the unrealized losses. Management continually
analyzes the portfolio to determine if further impairment has occurred that may
be deemed as other-than-temporary. Further charges are possible
depending on future economic conditions.
The
estimation of fair value is significant to several of our assets, including
investment securities available for sale, intangible assets and foreclosed real
estate, as well as the value of loan collateral when valuing loans. These are
all recorded at either fair value or the lower of cost or fair value. Fair
values are determined based on third party sources, when available. Furthermore,
accounting principles generally accepted in the United States require disclosure
of the fair value of financial instruments as a part of the notes to the
consolidated financial statements. Fair values may be influenced by a number of
factors, including market interest rates, prepayment speeds, discount rates and
the shape of yield curves.
Fair
values for securities available for sale are obtained from an independent third
party pricing service. Where available, fair values are based on
quoted prices on a nationally recognized securities exchange. If
quoted prices are not available, fair values are measured using quoted market
prices for similar benchmark securities. Management made no
adjustments to the fair value quotes that were provided by the pricing
source. The fair values of foreclosed real estate and the underlying
collateral value of impaired loans are typically determined based on appraisals
by third parties, less estimated costs to sell. If necessary, appraisals are
updated to reflect changes in market conditions.
EXECUTIVE SUMMARY
Total
deposits for the Company increased 10.2%, to $296.8 million at December 31,
2009, while the average balance of deposits increased $22.7 million to $288.5
million for the year ended December 31, 2009. The Company will
continue to focus on building market share in the Central Square and Fulton
markets. Overall, in Oswego County, Pathfinder Bank has the majority
of the current deposit market share. Pathfinder continues to develop core
deposit relationships in all markets by developing demand deposit
relationships. Efforts will also be focused on the expansion of
commercial deposit relationships with the Bank’s existing commercial lending
customers.
Total
assets increased 5.4% from December 31, 2008 to December 31, 2009, primarily in
the loan portfolio. The loan portfolio increased 4.8% with net growth
primarily in the commercial loan categories. The Company expects to concentrate
on continued commercial mortgage and commercial loan portfolio growth during
2010. The ratio of non-performing assets to total assets was 0.67% at December
31, 2009 compared to 0.75% in the prior year. The decrease reflects
lower levels of both foreclosed real estate and total non-performing loans
combined with an increase in assets. Non-performing loans
decreased $10,000 and foreclosed real estate decreased $154,000 since December
31, 2008.
Net income for 2009 was $1.6 million, as compared to $368,000 in 2008. Net income available to common shareholders was $1.5 million, or $0.61 per share, compared to $0.15 per share for the previous year. The improvement in income was primarily the result of the Company recording impairment charges on investment security holdings totaling $1.6 million, net of the related tax benefits in 2008 compared to 2009 impairment charges totaling $574,000, net of the related tax benefits. Net income in 2009 also includes $531,000 in net gains on the sale of investment securities after tax.
RESULTS
OF OPERATIONS
Net
income for 2009 was $1.6 million, an increase of $1.2 million, or 339%, compared
to net income of $368,000 for 2008. Basic and diluted earnings per
share increased to $0.61 per share for the year ended December 31, 2009 from
$0.15 per share, for the year ended December 31, 2008. Return on
average equity increased to 7.04% in 2009 from 1.70% in 2008.
Net
interest income, on a tax equivalent basis, increased $1.0 million, or 9.5%,
resulting from the combination of volume increases in all loan categories and
rate decreases applied to all interest-earning liabilities. The
provision for loan losses for the year ended December 31, 2009 increased
$56,000, or 6.8%. The elevated level of provisioning by the Company during the
prior two years reflects management’s assessment of the increased inherent risk
associated with increasing commercial lending activities, the overall growth in
the total loan portfolio and deteriorating economic conditions. The
Company experienced a 425% increase in noninterest
income. Noninterest income decreased 2%, exclusive of securities
gains and losses, primarily attributable to decreased earnings on bank-owned
life insurance. The reduction in impairment charges on investment
securities was the most significant factor in noninterest income
improvement. Noninterest expenses increased 12% primarily due to
increases in personnel expense and FDIC insurance assessments.
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 borrowed
money. Changes in net interest income and the net interest margin
ratio result from the interaction between the volume and composition of earning
assets and interest-bearing liabilities, and their respective yields and funding
costs.
Net
interest income, on a tax-equivalent basis, increased $1.0 million, or 9.5%, to
$11.8 million for the year ended December 31, 2009, as compared to $10.8 million
for the year ended December 31, 2008. The Company's net interest
margin for 2009 increased to 3.56% from 3.43% in 2008. The increase
in net interest income is attributable to a decrease in the cost of
interest-bearing liabilities, partially offset by an increase in the average
balance of interest-bearing liabilities. Although the average balance
of interest-earning assets increased, the decline in the yield on those assets
resulted in a reduction in the interest income earned.
The
average balance of interest-earning assets increased $17.2 million, or 5.4%,
during 2009 and the average balance of interest-bearing liabilities increased by
$14.2 million, or 4.9%. The increase in the average balance of
interest earning assets primarily resulted from a $19.0 million increase in the
average balance of the loan portfolio and a $4.7 million increase in the average
balance of interest earning deposits, offset by a $6.5 million reduction in the
average balance of the security investment portfolio. The increase in the
average balance of interest-bearing liabilities primarily resulted from a $22.1
million, or 9.2%, increase in the average balance of deposits, offset by a $7.9
million, or 15.7%, decrease in the average balance of borrowed
funds. Interest income, on a tax-equivalent basis, decreased
$620,000, or 3.4%, during 2009. The decrease in yield on interest earning assets
to 5.38% in 2009 from 5.87% in 2008 was partially offset by the 5.4% increase in
volume, but the volume increase was not enough to make up for the overall
reduction in yields. Interest expense on deposits decreased $1.2
million, or 21.7%, as the cost of deposits dropped 67 basis points to 1.69% in
2009 from 2.36% in 2008. Interest expense on borrowings decreased
$419,000, or 20.8%, during 2009 as the 15.7% decrease in the average balance of
borrowed funds was combined with a decrease in the cost of borrowed funds to
3.75% in 2009 from 4.00% in 2008.
Average
Balances and Rates
The following
table sets forth information concerning average interest-earning assets and
interest-bearing liabilities and the yields and rates thereon. Interest income
and resultant yield information in the table is on a fully tax-equivalent basis
using marginal federal income tax rates of 34%. Averages are computed on the
daily average balance for each month in the period divided by the number of days
in the period. Yields and amounts earned include loan fees. Non-accrual loans
have been included in interest-earning assets for purposes of these
calculations.
|
For
the Years Ended December 31,
|
||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||||||||||||||
|
|
Average
|
Yield
/
|
Average
|
Yield
/
|
Average
|
Yield
/
|
||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
Balance
|
Interest
|
Cost
|
Balance
|
Interest
|
Cost
|
Balance
|
Interest
|
Cost
|
|||||||||||||||||||||||||||
|
Interest-earning
assets:
|
|
|
|
|||||||||||||||||||||||||||||||||
|
Real
estate loans residential
|
$ | 133,442 | $ | 7,463 | 5.59 | % | $ | 130,702 | $ | 7,527 | 5.76 | % | $ | 120,079 | $ | 6,945 | 5.78 | % | ||||||||||||||||||
|
Real
estate loans commercial
|
58,424 | 4,024 | 6.89 | % | 49,040 | 3,620 | 7.38 | % | 43,573 | 3,309 | 7.59 | % | ||||||||||||||||||||||||
|
Commercial
loans
|
31,665 | 1,607 | 5.08 | % | 27,033 | 1,751 | 6.48 | % | 23,710 | 1,976 | 8.33 | % | ||||||||||||||||||||||||
|
Consumer
loans
|
28,487 | 1,767 | 6.20 | % | 26,291 | 1,915 | 7.28 | % | 23,011 | 1,894 | 8.23 | % | ||||||||||||||||||||||||
|
Taxable
investment securities
|
71,455 | 2,942 | 4.12 | % | 74,105 | 3,365 | 4.54 | % | 66,230 | 2,881 | 4.35 | % | ||||||||||||||||||||||||
|
Tax-exempt
investment securities
|
1,464 | 65 | 4.44 | % | 5,252 | 255 | 4.86 | % | 5,446 | 258 | 4.74 | % | ||||||||||||||||||||||||
|
Interest-earning
deposits
|
7,511 | 6 | 0.08 | % | 2,851 | 61 | 2.14 | % | 5,050 | 211 | 4.18 | % | ||||||||||||||||||||||||
|
Total
interest-earning assets
|
332,448 | 17,874 | 5.38 | % | 315,274 | 18,494 | 5.87 | % | 287,099 | 17,474 | 6.08 | % | ||||||||||||||||||||||||
|
Noninterest-earning
assets:
|
||||||||||||||||||||||||||||||||||||
|
Other
assets
|
29,704 | 30,274 | 27,774 | |||||||||||||||||||||||||||||||||
|
Allowance
for loan losses
|
(2,731 | ) | (2,006 | ) | (1,583 | ) | ||||||||||||||||||||||||||||||
|
Net
unrealized losses
|
||||||||||||||||||||||||||||||||||||
|
on
available for sale securities
|
(620 | ) | (1,690 | ) | (1,372 | ) | ||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 358,801 | $ | 341,852 | $ | 311,918 | ||||||||||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||
|
NOW
accounts
|
$ | 26,055 | $ | 72 | 0.28 | % | $ | 23,762 | $ | 95 | 0.40 | % | $ | 22,235 | $ | 113 | 0.51 | % | ||||||||||||||||||
|
Money
management accounts
|
11,037 | 35 | 0.32 | % | 10,574 | 52 | 0.49 | % | 11,348 | 89 | 0.78 | % | ||||||||||||||||||||||||
|
MMDA
accounts
|
35,571 | 246 | 0.69 | % | 29,181 | 570 | 1.95 | % | 23,682 | 937 | 3.96 | % | ||||||||||||||||||||||||
|
Savings
and club accounts
|
53,726 | 87 | 0.16 | % | 52,482 | 168 | 0.32 | % | 53,359 | 279 | 0.52 | % | ||||||||||||||||||||||||
|
Time
deposits
|
135,965 | 3,994 | 2.94 | % | 124,267 | 4,777 | 3.84 | % | 122,333 | 5,483 | 4.48 | % | ||||||||||||||||||||||||
|
Junior
subordinated debentures
|
5,155 | 149 | 2.89 | % | 5,155 | 257 | 4.99 | % | 6,454 | 511 | 7.81 | % | ||||||||||||||||||||||||
|
Borrowings
|
37,340 | 1,446 | 3.87 | % | 45,239 | 1,756 | 3.88 | % | 25,063 | 1,230 | 4.91 | % | ||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
304,849 | 6,029 | 1.98 | % | 290,660 | 7,675 | 2.64 | % | 264,474 | 8,642 | 3.27 | % | ||||||||||||||||||||||||
|
Noninterest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Demand
deposits
|
26,114 | 25,493 | 22,828 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
4,888 | 4,088 | 3,338 | |||||||||||||||||||||||||||||||||
|
Total
liabilities
|
335,851 | 320,241 | 290,640 | |||||||||||||||||||||||||||||||||
|
Shareholders'
equity
|
22,950 | 21,611 | 21,278 | |||||||||||||||||||||||||||||||||
|
Total
liabilities & shareholders' equity
|
$ | 358,801 | $ | 341,852 | $ | 311,918 | ||||||||||||||||||||||||||||||
|
Net
interest income
|
$ | 11,845 | $ | 10,819 | $ | 8,832 | ||||||||||||||||||||||||||||||
|
Net
interest rate spread
|
3.40 | % | 3.23 | % | 2.81 | % | ||||||||||||||||||||||||||||||
|
Net
interest margin
|
3.56 | % | 3.43 | % | 3.07 | % | ||||||||||||||||||||||||||||||
|
Ratio
of average interest-earning assets
|
||||||||||||||||||||||||||||||||||||
|
to
average interest-bearing liabilities
|
109.05 | % | 108.47 | % | 108.55 | % | ||||||||||||||||||||||||||||||
Interest
Income
Changes
in interest income result from changes in the average balances of loans,
securities and interest-earning deposits and the related yields on those
balances. Interest income on a tax-equivalent basis decreased
$620,000, or 3.4%. Average loans increased 8.1% in 2009, with yields
decreasing 46 basis points to 5.90%. The Company's average residential mortgage
loan portfolio increased $2.7 million, or 2.1%, when comparing 2009 to
2008. The average yield on the residential mortgage loan portfolio
decreased 17 basis points to 5.59% in 2009 from 5.76% in 2008. The average
balance of commercial real estate loans increased $9.4 million, or 19.1%, while
the yield decreased to 6.89% in 2009 from 7.38% in 2008. Average commercial
loans increased 17.1% and the tax-equivalent yield decreased to 5.08% in 2009
compared to 6.48%, in 2008. The average balance of consumer loans
increased $2.2 million, or 8.4% when compared to 2008. The average yield
decreased 108 basis points, to 6.20% from 7.28% in 2008.
Interest
income on investment securities decreased 16.9% from 2008, resulting from a
decrease in the average balance of investment securities (taxable and
tax-exempt) of $6.5 million, or 8.1%, to $72.9 million in 2009 from $79.4
million in 2008. The average yield decreased 43 basis points to 4.13%
in 2009 from 4.56% in 2008.
Interest
Expense
Changes
in interest expense result from changes in the average balances of deposits and
borrowings and the related interest costs on those balances. Interest
expense decreased $1.6 million, or 21.5%, in 2009, when compared to
2008. The decrease in the cost of funds resulted from a decrease in
the average cost of interest-bearing liabilities of 66 basis points, to 1.98% in
2009 from 2.64% in 2008, partially offset by a $14.2 million increase in the
average balance of interest-bearing liabilities during 2009. The
average cost of deposits decreased 67 basis points to 1.69% during 2009 from
2.36% for 2008. The average balance of interest-bearing deposits
increased $22.1 million to $262.4 million in 2009 from $240.3 million in
2008. The increase in the average balance of deposits resulted from
increases in all deposit categories. The largest increases in
average deposits came from a 9.6% increase in interest bearing demand deposit
accounts, a 21.9% increase in MMDA accounts and a 9.4% increase in time
deposits. The cost of junior subordinated debentures underlying our
trust preferred securities decreased 210 basis points, decreasing interest
expense by $108,000, due to the subordinated debentures adjustable rate being
tied to LIBOR. The average balance of borrowed funds decreased $7.9
million to $37.3 million in 2009 from $45.2 million in 2008. The
average cost of borrowed funds decreased one basis point, to 3.87% in 2009 from
3.88% in 2008.
Rate/Volume
Analysis
Net
interest income can also be analyzed in terms of the impact of changing interest
rates on interest-earning assets and interest-bearing liabilities and changes in
the volume or amount of these assets and liabilities. The following table
represents the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have affected
the Company’s interest income and interest expense during the periods indicated.
Information is provided in each category with respect to: (i) changes
attributable to changes in volume (change in volume multiplied by prior rate);
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume); and (iii) total increase or decrease. Changes
attributable to both rate and volume have been allocated ratably.
|
Years
Ended December 31,
|
||||||||||||||||||||||||
|
2009
vs. 2008
|
2008
vs. 2007
|
|||||||||||||||||||||||
|
Increase/(Decrease)
Due to
|
Increase/(Decrease)
Due to
|
|||||||||||||||||||||||
|
Total
|
Total
|
|||||||||||||||||||||||
|
Increase
|
Increase
|
|||||||||||||||||||||||
|
(In
thousands)
|
Volume
|
Rate
|
(Decrease)
|
Volume
|
Rate
|
(Decrease)
|
||||||||||||||||||
|
Interest
Income:
|
|
|
||||||||||||||||||||||
|
Real
estate loans residential
|
$ | 158 | $ | (222 | ) | $ | (64 | ) | $ | 606 | $ | (24 | ) | $ | 582 | |||||||||
|
Real
estate loans commercial
|
657 | (253 | ) | 404 | 405 | (94 | ) | 311 | ||||||||||||||||
|
Commercial
loans
|
281 | (425 | ) | (144 | ) | 252 | (477 | ) | (225 | ) | ||||||||||||||
|
Consumer
loans
|
151 | (299 | ) | (148 | ) | 253 | (232 | ) | 21 | |||||||||||||||
|
Taxable
investment securities
|
(117 | ) | (304 | ) | (421 | ) | 344 | 140 | 484 | |||||||||||||||
|
Tax-exempt
investment securities
|
(170 | ) | (20 | ) | (190 | ) | (9 | ) | 6 | (3 | ) | |||||||||||||
|
Interest-earning
deposits
|
40 | (97 | ) | (57 | ) | (71 | ) | (79 | ) | (150 | ) | |||||||||||||
|
Total
interest income
|
1,000 | (1,620 | ) | (620 | ) | 1,780 | (760 | ) | 1,020 | |||||||||||||||
|
Interest
Expense:
|
||||||||||||||||||||||||
|
NOW
accounts
|
8 | (31 | ) | (23 | ) | 7 | (25 | ) | (18 | ) | ||||||||||||||
|
Money
management accounts
|
2 | (19 | ) | (17 | ) | (6 | ) | (31 | ) | (37 | ) | |||||||||||||
|
MMDA
accounts
|
104 | (428 | ) | (324 | ) | 184 | (551 | ) | (367 | ) | ||||||||||||||
|
Savings
and club accounts
|
4 | (85 | ) | (81 | ) | (5 | ) | (106 | ) | (111 | ) | |||||||||||||
|
Time
deposits
|
417 | (1,200 | ) | (783 | ) | 86 | (792 | ) | (706 | ) | ||||||||||||||
|
Junior
subordinated debentures
|
- | (108 | ) | (108 | ) | (90 | ) | (164 | ) | (254 | ) | |||||||||||||
|
Borrowings
|
(305 | ) | (5 | ) | (310 | ) | 828 | (302 | ) | 526 | ||||||||||||||
|
Total
interest expense
|
230 | (1,876 | ) | (1,646 | ) | 1,004 | (1,971 | ) | (967 | ) | ||||||||||||||
|
Net
change in net interest income
|
$ | 770 | $ | 256 | $ | 1,026 | $ | 776 | $ | 1,211 | $ | 1,987 | ||||||||||||
Provision
for Loan Losses
The
provision for loan losses increased $56,000 to $876,000 for the year ended
December 31, 2009, as compared to the prior year. The increased
provision is reflective of a growing loan portfolio that is more heavily
weighted to commercial term and commercial real estate loans, which have higher
inherent risk characteristics than a traditional consumer real estate
portfolio. The current level of non-performing assets does not fall
significantly outside of the Bank’s historic trend levels, however, the
generally weak economic conditions nationally over the past two years, and the
current strain on consumer discretionary income have caused management to
carefully monitor and react to these trends by increasing the provision for loan
losses, maintaining the Company’s strict loan underwriting standards and
carefully monitoring the performance of the loan portfolio.
Noninterest
Income
The
Company's noninterest income is primarily comprised of fees on deposit account
balances and transactions, loan servicing, commissions, and net gains or losses
on securities, loans and foreclosed real estate.
The
following table sets forth certain information on noninterest income for the
years indicated.
|
For
the Years Ended December 31,
|
||||||||
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Service
charges on deposit accounts
|
$ | 1,496 | $ | 1,492 | ||||
|
Earnings
on bank owned life insurance
|
226 | 293 | ||||||
|
Loan
servicing fees
|
233 | 281 | ||||||
|
Debit
card interchange fees
|
280 | 275 | ||||||
|
Other
charges, commissions and fees
|
489 | 445 | ||||||
|
Noninterest
income before gains (losses)
|
2,724 | 2,786 | ||||||
|
Net
gains (losses) on sales and impairment of investment
securities
|
112 | (2,191 | ) | |||||
|
Net
gains (losses) on sales of loans and foreclosed real
estate
|
54 | (44 | ) | |||||
|
Total
noninterest income
|
$ | 2,890 | $ | 551 | ||||
Noninterest income in 2009
increased 425%, when compared to 2008, primarily as a result of a net gain being
recorded on the sale and impairment of investment securities during 2009 as
compared to the net loss of $2.2 million recorded for the same in the prior
year. Noninterest income before gains and losses decreased $62,000, for
the year ended December 31, 2009. The decrease was comprised of a decrease in
earnings on bank owned life insurance and loan servicing fees, offset by an
increase in other charges, commissions and fees. Earnings on
bank owned life insurance decreased 23%, which is based on the cash surrender
values of the insurance policies. Loan servicing fees decreased 17%,
which is due to the combination of a drop in the volume of rate lock fees and
the collection of non-recurring one time fees during 2008 associated with
various commercial loans. The reduction in fees was offset by
non-recurring administrative income recorded from the Company’s mutual holding
company parent that is not consolidated for financial statement reporting
purposes. Revenue generated by service charges on deposit accounts
was consistent with the prior year, but may be significantly impacted in 2010 by
the implementation of new regulatory restrictions on the extended overdraft
program. These changes apply to all financial institutions
participating in such programs.
The small decrease in
noninterest income before gains and losses was offset by the significant change
from net losses on sales and impairment of investment securities and
loans in the prior year, to a net gain in the current year. The net
gain in sales and impairment of investment securities is a result of gains
generated from the sales of securities through out the year, which were offset
by recording other-than-temporary impairment charges during the fourth quarter.
Net gains on the sale of loans and foreclosed real estate is the result of the
sale of fixed rate loans into the secondary market, offset by the sale of seven
foreclosed real estate properties at a loss and the adjustment to fair value of
one property.
Page
22
Noninterest
Expense
The
following table sets forth certain information on noninterest expense for the
years indicated.
|
For
the Years Ended December 31,
|
||||||||
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Salaries
and employee benefits
|
$ | 5,577 | $ | 5,172 | ||||
|
Building
occupancy
|
1,246 | 1,322 | ||||||
|
Data
processing
|
1,307 | 1,330 | ||||||
|
Professional
and other services
|
844 | 771 | ||||||
|
Regulatory
assessments
|
745 | 53 | ||||||
|
Other
expenses
|
1,407 | 1,287 | ||||||
|
Total
noninterest expense
|
$ | 11,126 | $ | 9,935 | ||||
Noninterest
expenses increased $1.2 million, or 12%, for the year ended December 31, 2009
when compared to 2008. Regulatory assessments increased $692,000 due
to the levying of a 5 basis point special assessment based on the bank’s assets,
the increase in regular assessment rates and the exhausting of available credits
that reduced assessment charges in 2008. Salaries and employee
benefits increased 7.8% in 2009 primarily due to an increase in pension expense
caused by unfavorable plan asset performance in the prior year, combined with
annual merit-based
wage adjustments. A 9.3% increase in other expenses was due to an
increase in both audits and exams combined with the recording of $40,000 in
expenses associated with the Company’s new debit card rewards
program. These increases were offset by a decrease of $76,000 in
building occupancy, which is the result of a reduction in utilities, property
taxes and depreciation on bank facilities.
Income
Tax Expense
In 2009,
the Company reported income tax expense of $1.1 million compared with $103,000
in 2008. The effective tax rate increased to 39% in 2009 compared to
a tax rate of 22% in 2008. The increase in income tax expense
resulted from significantly higher pretax income, which increased $2.2 million,
and the higher tax rate. The Company’s tax rate has increased
primarily as a result of deferred tax asset valuation allowance adjustments and
additional state tax. The benefits from the ownership of tax-exempt
investment securities and bank owned life insurance have decreased from the
prior year due to a reduction of earnings on such assets. See Note 13
to the consolidated financial statements for the reconciliation of the statutory
tax rate to the effective tax rate.
CHANGES
IN FINANCIAL CONDITION
Investment
Securities
The
investment portfolio represents 21% of the Company’s earning assets and is
designed to generate a favorable rate of return consistent with safety of
principal while assisting the Company in meeting its liquidity needs and
interest rate risk strategies. All of the Company’s investments are
classified as available for sale. The Company invests in securities
consisting primarily of securities issued by United States Government agencies
and sponsored enterprises, mortgage-backed securities, state and municipal
obligations, mutual funds, equity securities, investment grade corporate debt
instruments, and common stock issued by the Federal Home Loan Bank of New York
(FHLBNY). By investing in these types of assets, the Company reduces
the credit risk of its asset base, but must accept lower yields than would
typically be available on loan products. Our mortgage backed
securities portfolio is comprised predominantly of pass-through securities
guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and does not, to our
knowledge, include any securities backed by sub-prime or other high-risk
mortgages.
At
December 31, 2009, investment securities were held at the same level, $74.7
million, as they were at December 31, 2008. There were no securities
that exceeded 10% of consolidated shareholders’ equity. See note 3 to
the consolidated financial statements for further discussion on
securities.
The
following table sets forth the carrying value of the Company's investment
portfolio at December 31:
|
At
December 31,
|
||||||||||||
|
(In
Thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Investment
Securities:
|
||||||||||||
|
US
Treasury and agencies
|
$ | 14,528 | $ | 9,126 | $ | 18,672 | ||||||
|
State
and political subdivisions
|
8,989 | 5,020 | 5,342 | |||||||||
|
Corporate
|
5,333 | 12,181 | 6,392 | |||||||||
|
Other
|
2,203 | 2,100 | - | |||||||||
|
Residential
mortgage-backed
|
36,124 | 39,478 | 28,615 | |||||||||
|
Equity
securities and FHLB stock
|
2,271 | 2,861 | 2,706 | |||||||||
|
Mutual
funds
|
4,790 | 5,179 | 6,514 | |||||||||
| $ | 74,238 | $ | 75,945 | $ | 68,241 | |||||||
|
Net
unrealized gains(losses) on available for sale portfolio
|
415 | (1,258 | ) | (1,103 | ) | |||||||
|
Total
investments in securities
|
$ | 74,653 | $ | 74,687 | $ | 67,138 | ||||||
Certain
individual securities have been reclassified in the prior year table above to
conform to the current year presentation. The reclassifications had
no effect on the total investment portfolios previously reported.
The
following table sets forth the scheduled maturities, amortized cost, fair values
and average yields for the Company's investment securities at December 31,
2009. Yield is calculated on the amortized cost to maturity and adjusted to a
fully tax-equivalent basis.
|
One
Year or Less
|
One
to Five Years
|
Five
to Ten Years
|
||||||||||||||||||||||
|
Annualized
|
Annualized
|
Annualized
|
||||||||||||||||||||||
|
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
||||||||||||||||||
|
(Dollars
in thousands)
|
Cost
|
Average
Yield
|
Cost
|
Average
Yield
|
Cost
|
Average
Yield
|
||||||||||||||||||
|
Debt
investment securities:
|
||||||||||||||||||||||||
|
US
Treasury and agencies
|
$ | 1,505 | 3.88 | % | $ | 11,000 | 2.00 | % | $ | 1,023 | 3.01 | % | ||||||||||||
|
State
and political subdivisions
|
96 | 3.25 | % | 2,190 | 3.32 | % | 2,644 | 3.24 | % | |||||||||||||||
|
Corporate
|
- | - | 3,135 | 5.53 | % | - | 0.00 | % | ||||||||||||||||
|
Other
|
2,203 | 4.68 | % | - | 0.00 | % | - | - | ||||||||||||||||
|
Total
|
3,804 | 4.32 | % | 16,325 | 2.85 | % | 3,667 | 3.17 | % | |||||||||||||||
|
Mortgage-backed
securities:
|
||||||||||||||||||||||||
|
Residential
mortgage-backed
|
765 | 4.14 | % | 1,650 | 4.33 | % | 4,085 | 4.89 | % | |||||||||||||||
|
Total
|
765 | 4.14 | % | 1,650 | 4.33 | % | 4,085 | 4.89 | % | |||||||||||||||
|
Other
non-maturity investments:
|
||||||||||||||||||||||||
|
Mutual
funds
|
4,790 | 2.73 | % | - | - | - | - | |||||||||||||||||
|
Equity
securities and FHLB stock
|
2,271 | 4.94 | % | - | - | - | - | |||||||||||||||||
|
Total
|
7,061 | 3.44 | % | - | - | - | - | |||||||||||||||||
|
Total
investment securities
|
$ | 11,630 | 3.77 | % | $ | 17,975 | 2.99 | % | $ | 7,752 | 4.08 | % | ||||||||||||
|
More
Than Ten Years
|
Total
Investment Securities
|
|||||||||||||||||||
|
Annualized
|
Annualized
|
|||||||||||||||||||
|
|
Amortized
|
Weighted
|
Amortized
|
Fair
|
Weighted
|
|||||||||||||||
|
(Dollars
in thousands)
|
Cost
|
Average
Yield
|
Cost
|
Value
|
Average
Yield
|
|||||||||||||||
|
Debt
investment securities:
|
|
|||||||||||||||||||
|
US
Treasury and agencies
|
$ | 1,000 | 5.20 | % | $ | 14,528 | $ | 14,532 | 2.48 | % | ||||||||||
|
State
and political subdivisions
|
4,059 | 4.39 | % | 8,989 | 8,928 | 3.78 | % | |||||||||||||
|
Corporate
|
2,198 | 0.80 | % | 5,333 | 4,965 | 3.58 | % | |||||||||||||
|
Other
|
- | - | 2,203 | 2,203 | 4.68 | % | ||||||||||||||
|
Total
|
7,257 | 3.42 | % | 31,053 | 30,628 | 3.20 | % | |||||||||||||
|
Mortgage-backed
securities:
|
||||||||||||||||||||
|
Residential
mortgage-backed
|
29,624 | 4.87 | % | 36,124 | 36,940 | 4.83 | % | |||||||||||||
|
Total
|
29,624 | 4.87 | % | 36,124 | 36,940 | 4.83 | % | |||||||||||||
|
Other
non-maturity investments:
|
||||||||||||||||||||
|
Mutual
funds
|
- | - | 4,790 | 4,814 | 2.73 | % | ||||||||||||||
|
Equity
securities and FHLB stock
|
- | - | 2,271 | 2,271 | 4.94 | % | ||||||||||||||
|
Total
|
- | - | 7,061 | 7,085 | 3.44 | % | ||||||||||||||
|
Total
investment securities
|
$ | 36,881 | 4.59 | % | $ | 74,238 | $ | 74,653 | 4.03 | % | ||||||||||
The above
noted yield information does not give effect to changes in fair value that are
reflected in accumulated other comprehensive income in consolidated
shareholders’ equity.
Loans
Receivable
Loans
receivable represent 75% of the Company’s earning assets and account for the
greatest portion of total interest income. The Company emphasizes
residential real estate financing and anticipates a continued commitment to
financing the purchase or improvement of residential real estate in its market
area. The Company also extends credit to businesses within its
marketplace secured by commercial real estate, equipment, inventories, and
accounts receivable. It is anticipated that small business lending in
the form of mortgages, term loans, leases, and lines of credit will provide the
most opportunity for balance sheet and revenue growth over the near
term. Commercial and municipal loans comprise 14% of the total loan
portfolio. At December 31, 2009, 75% of the Company’s total loan
portfolio consisted of loans secured by real estate, and 24% of the total loan
portfolio consisted of commercial real estate loans.
|
December
31,
|
||||||||||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Residential
real estate (1)
|
$ | 135,102 | $ | 136,218 | $ | 126,666 | $ | 118,494 | $ | 119,707 | ||||||||||
|
Commercial
real estate
|
62,250 | 55,061 | 45,490 | 40,501 | 31,845 | |||||||||||||||
|
Commercial
and municipal loans
|
35,447 | 30,685 | 25,288 | 23,001 | 18,334 | |||||||||||||||
|
Consumer
loans
|
29,666 | 27,908 | 25,305 | 21,213 | 19,682 | |||||||||||||||
|
Total
loans receivable
|
$ | 262,465 | $ | 249,872 | $ | 222,749 | $ | 203,209 | $ | 189,568 | ||||||||||
(1)
Includes loans held for sale. (None at December 31, 2009, 2008 and
2007.)
The
following table shows the amount of loans outstanding as of December 31, 2009
which, based on remaining scheduled repayments of principal, are due in the
periods indicated. Demand loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as one year or
less. Adjustable and floating rate loans are included in the period
on which interest rates are next scheduled to adjust rather than the period in
which they contractually mature, and fixed rate loans are included in the period
in which the final contractual repayment is due.
|
Due
Under
|
Due
1-5
|
Due
Over
|
||||||||||||||
|
(In
thousands)
|
One
Year
|
Years
|
Five
Years
|
Total
|
||||||||||||
|
Real
estate:
|
||||||||||||||||
|
Commercial
real estate
|
$ | 10,459 | $ | 45,089 | $ | 6,702 | $ | 62,250 | ||||||||
|
Residential
real estate
|
10,228 | 33,417 | 91,457 | 135,102 | ||||||||||||
| 20,687 | 78,506 | 98,159 | 197,352 | |||||||||||||
|
Commercial
and municipal loans
|
20,710 | 12,022 | 2,715 | 35,447 | ||||||||||||
|
Consumer
|
14,423 | 4,082 | 11,161 | 29,666 | ||||||||||||
|
Total
loans
|
$ | 55,820 | $ | 94,610 | $ | 112,035 | $ | 262,465 | ||||||||
|
Interest
rates:
|
||||||||||||||||
|
Fixed
|
$ | 3,734 | $ | 13,849 | $ | 103,766 | $ | 121,349 | ||||||||
|
Variable
|
52,086 | 80,761 | 8,269 | 141,116 | ||||||||||||
|
Total
loans
|
$ | 55,820 | $ | 94,610 | $ | 112,035 | $ | 262,465 | ||||||||
Total loans receivable
increased 5% when compared to the prior year. Residential real
estate loans decreased $1.1 million, or 1%, during 2009. The
residential real estate portfolio consists of 68% fixed-rate mortgages and 32%
adjustable-rate mortgages. There was a 4% shift to fixed rate
mortgages from adjustable rate mortgages when compared to the portfolio
composition as of December 31, 2008. The increase in the fixed rate
mortgage portfolio resulted from increased demand for fixed rate products due to
the historically low interest rate environment that was prevalent during
2009. The Company does not originate sub-prime, Alt-A, negative
amortizing or other higher risk structured residential mortgages.
Commercial
real estate loans increased $7.2 million, or 13%, from the prior year as new
loan products and relationships were added to the portfolio.
Commercial
loans, including loans to municipalities, increased 16% over the prior year to
$35.4 million at December 31, 2009. The increase in commercial loans
was primarily the result of new lending relationships with an expanding
commercial customer base. The Company has continued its efforts to
transform its more traditional thrift balance sheet, which emphasized
residential real estate lending, to a more diversified balance sheet, which
includes a greater proportion of commercial lending products.
Consumer
loans, which include second mortgage loans, home equity lines of credit, direct
installment and revolving credit loans, increased 6% to $29.7 million at
December 31, 2009. The increase resulted from an increase in home
equity lines of credit. The Company has promoted its home equity
products by offering the customer loans with no closing costs at competitive
market rates.
Non-performing
Loans and Assets
The
following table represents information concerning the aggregate amount of
non-performing assets:
|
December
31,
|
||||||||||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Nonaccrual
loans:
|
||||||||||||||||||||
|
Commercial
real estate and commercial
|
$ | 1,021 | $ | 1,455 | $ | 521 | $ | 481 | $ | 757 | ||||||||||
|
Consumer
|
111 | 254 | 150 | 125 | 89 | |||||||||||||||
|
Residential
real estate
|
1,181 | 614 | 920 | 566 | 834 | |||||||||||||||
|
Total
nonaccrual loans
|
2,313 | 2,323 | 1,591 | 1,172 | 1,680 | |||||||||||||||
|
Total
non-performing loans
|
2,313 | 2,323 | 1,591 | 1,172 | 1,680 | |||||||||||||||
|
Foreclosed
real estate
|
181 | 335 | 865 | 471 | 743 | |||||||||||||||
|
Total
non-performing assets
|
$ | 2,494 | $ | 2,658 | $ | 2,456 | $ | 1,643 | $ | 2,423 | ||||||||||
|
Non-performing
loans to total loans
|
0.88 | % | 0.93 | % | 0.71 | % | 0.57 | % | 0.89 | % | ||||||||||
|
Non-performing
assets to total assets
|
0.67 | % | 0.75 | % | 0.77 | % | 0.54 | % | 0.82 | % | ||||||||||
|
Interest
income that would have been recorded
|
||||||||||||||||||||
|
under
the original terms of the loans
|
$ | 113 | $ | 131 | $ | 71 | $ | 53 | $ | 34 | ||||||||||
The asset
quality of the Company has remained relatively unchanged when compared to the
prior year. Total non-performing assets (non-performing loans and
foreclosed real estate) at December 31, 2009 were 0.67% of total assets as
compared to 0.75% of total assets at December 31, 2008. The reduction
in non-performing assets was primarily due to the sale of foreclosed real
estate. Total non-performing loans (past due 90 days or more)
decreased $10,000, or less than 1%, during 2009. Although total
non-performing loans have remained fairly level, the mix in loan type has
shifted from being primarily commercial to being more evenly comprised of
commercial and residential real estate loans. In 2008, approximately
63% of the Company’s non-performing loans were commercial real estate and
commercial loans. At December 31, 2009, the non-performing loan
balance was 44% commercial and 51% residential real estate loans.Management believes the
financial strength of the individual borrowers, combined with the related value
of any underlying collateral, will not result in any significant loss beyond
currently established reserves.
Total
delinquent loans (those 30 days or more delinquent) as a percentage of total
loans were 3.2% at December 31, 2009 as compared to 2.16% at December 31,
2008. Management believes that the increase is being driven by
general economic conditions in the market area. Approximately 81% of
the outstanding delinquent loans are secured by real estate with loss potential
expected to be manageable within the currently established
reserves.
The
Company generally places a loan on nonaccrual status and ceases accruing
interest when loan payment performance is deemed unsatisfactory and the loan is
past due 90 days or more. The Company considers a loan impaired when,
based on current information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan.
The
measurement of impaired loans is generally based upon the present value of
future cash flows discounted at the historical effective interest rate, except
that all collateral-dependent loans are measured for impairment based on the
fair value of the collateral. The Company used the fair value of
collateral to measure impairment on commercial and commercial real estate
loans. At December 31, 2009 and 2008, the Company had $3.2 million
and $2.4 million in loans, which were deemed to be impaired, having valuation
allowances of $79,000 and $141,000, respectively.
Management
has identified additional potential problem loans totaling $5.0 million as of
December 31, 2009. These loans have been internally classified as special
mention or substandard, yet are not currently considered past due or in
nonaccrual status. Management has identified potential credit
problems which may result in the borrowers not being able to comply with the
current loan repayment terms and which may result in it being included in
subsequent past due reporting. Management believes that the current allowance
for loan losses is adequate to cover probable credit losses in the current loan
portfolio.
Allowance
for Loan Losses
The
allowance for loan losses is a reserve established through charges to expense in
the form of a provision for loan losses and reduced by loan charge-offs net of
recoveries. The allowance for loan losses represents the amount
available for probable credit losses in the Company’s loan portfolio as
estimated by management. The Company maintains an allowance for loan
losses based upon a monthly evaluation of known and inherent risks in the loan
portfolio, which includes a review of the balances and composition of the loan
portfolio as well as analyzing the level of delinquencies in each segment of the
loan portfolio. The Company uses a general allocation method for the
residential real estate and consumer loan pools based upon a methodology that
uses loss factors applied to loan balances and reflects actual loss experience,
delinquency trends and current economic conditions. The Company
individually reviews commercial real estate and commercial loans greater than
$150,000 that are not accruing interest and that are risk rated under the
Company’s risk rating system as special mention, substandard, doubtful or loss
to determine if the loans require an impairment reserve. Large
residential real estate loans may also be included in this individual loan
review. If impairment is noted, the Company establishes a specific
reserve allocation. The specific allocation is determined based on
the most recent valuation of the loan’s collateral and the customer’s ability to
pay. For all other commercial real estate and commercial loans, the
Company uses the general allocation method that establishes a reserve for each
risk-rating category. The general allocation method for commercial
real estate and commercial loans considers the same factors that are considered
when evaluating residential real estate and consumer loan pools. The
allowance for loan losses reflects management’s best estimate of probable loan
losses at December 31, 2009.
The
allowance for loan losses was $3.1 million at December 31, 2009, a 25% increase
from December 31, 2008. The allowance for loan losses as a percentage
of total loans increased to 1.17% at December 31, 2009 from 0.99% in the prior
year. Net loan charge-offs were $270,000 during 2009 as compared to
$51,000 in 2008. The majority of the current year charge-off activity
is the result of the write off of small consumer and commercial
relationships.
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.
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||
|
%
Gross
|
%
Gross
|
%
Gross
|
%
Gross
|
%
Gross
|
||||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
Amount
|
Loans
|
||||||||||||||||||||||||||||||
|
Commercial
real estate and loans
|
$ | 1,699 | 37.2 | % | $ | 1,412 | 34.3 | % | $ | 956 | 31.8 | % | $ | 985 | 31.3 | % | $ | 1,282 | 26.5 | % | ||||||||||||||||||||
|
Consumer
loans
|
479 | 11.3 | % | 381 | 11.2 | % | 283 | 11.3 | % | 339 | 10.4 | % | 289 | 10.4 | % | |||||||||||||||||||||||||
|
Residential
real estate
|
900 | 51.5 | % | 679 | 54.5 | % | 464 | 56.9 | % | 172 | 58.3 | % | 108 | 63.1 | % | |||||||||||||||||||||||||
|
Total
|
$ | 3,078 | 100.0 | % | $ | 2,472 | 100.0 | % | $ | 1,703 | 100.0 | % | $ | 1,496 | 100.0 | % | $ | 1,679 | 100.0 | % | ||||||||||||||||||||
The
following table sets forth the allowance for loan losses for the periods
indicated, and related ratios.
|
(In
thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Balance
at beginning of year
|
$ | 2,472 | $ | 1,703 | $ | 1,496 | $ | 1,679 | $ | 1,827 | ||||||||||
|
Provisions
charged to operating expenses
|
876 | 820 | 365 | 23 | 311 | |||||||||||||||
|
Recoveries
of loans previously charged-off:
|
||||||||||||||||||||
|
Commercial
real estate and loans
|
- | 17 | - | - | 25 | |||||||||||||||
|
Consumer
|
20 | 30 | 27 | 18 | 14 | |||||||||||||||
|
Residential
real estate
|
3 | - | 23 | 4 | 10 | |||||||||||||||
|
Total
recoveries
|
23 | 47 | 50 | 22 | 49 | |||||||||||||||
|
Loans
charged-off:
|
||||||||||||||||||||
|
Commercial
real estate and loans
|
(74 | ) | (46 | ) | (85 | ) | (114 | ) | (284 | ) | ||||||||||
|
Consumer
|
(134 | ) | (52 | ) | (77 | ) | (89 | ) | (137 | ) | ||||||||||
|
Residential
real estate
|
(85 | ) | - | (46 | ) | (25 | ) | (87 | ) | |||||||||||
|
Total
charged-off
|
(293 | ) | (98 | ) | (208 | ) | (228 | ) | (508 | ) | ||||||||||
|
Net
charge-offs
|
(270 | ) | (51 | ) | (158 | ) | (206 | ) | (459 | ) | ||||||||||
|
Balance
at end of year
|
$ | 3,078 | $ | 2,472 | $ | 1,703 | $ | 1,496 | $ | 1,679 | ||||||||||
|
Net
charge-offs to average loans outstanding
|
0.11 | % | 0.02 | % | 0.08 | % | 0.11 | % | 0.24 | % | ||||||||||
|
Allowance
for loan losses to year-end loans
|
1.17 | % | 0.99 | % | 0.76 | % | 0.74 | % | 0.89 | % | ||||||||||
Deposits
The
Company’s deposit base is drawn from seven full-service offices in its market
area. The deposit base consists of demand deposits, money management
and money market deposit accounts, savings and time deposits. During 2009, 53%
of the Company's average deposit base of $288.5 million consisted of core
deposits. Core deposits, which exclude time deposits, are considered
to be more stable and provide the Company with a lower cost source of funds than
time deposits. The Company will continue to emphasize retail core
deposits by maintaining its network of full service offices and providing
depositors with a full range of deposit product offerings. In
addition, Pathfinder Commercial Bank, our commercial bank subsidiary, will seek
business growth by focusing on its local identification and service
excellence. Pathfinder Commercial Bank had an average balance of
$40.3 million in municipal deposits in 2009, primarily concentrated in money
market deposit accounts.
Average
deposits increased $22.7 million, or 9%, when compared to 2008. The
increase in average deposits primarily related to a $9.4 million increase in the
average balance of municipal deposits and a $13.3 million increase in retail
deposits.
The
Company's average deposit mix in 2009, as compared to 2008, reflected a similar
product line composition. The Company's average demand
deposits, both interest and noninterest bearing accounts, represented 18% of
total average deposits for 2009 and 19% of total average deposits for
2008. The Company's average MMDA accounts, which grew 22% in 2009,
represented 12% of total deposits for 2009 and 11% for 2008. The Company’s time
deposit accounts represented 47% of total deposits in both 2009 and 2008. The
Company promotes its MMDA and time deposit accounts by offering competitive
rates to retain existing and attract new customers.
At
December 31, 2009, time deposits in excess of $100,000 totaled $53.4 million, or
38%, of time deposits and 18% of total deposits. At December 31,
2008, these deposits totaled $40.7 million, or 31% of time deposits and 15% of
total deposits.
The
following table indicates the amount of the Company’s certificates of deposit of
$100,000 or more by time remaining until maturity as of December 31,
2009:
|
(In
thousands)
|
||||
|
Remaining
Maturity:
|
||||
|
Three
months or less
|
$ | 22,362 | ||
|
Three
through six months
|
9,391 | |||
|
Six
through twelve months
|
7,631 | |||
|
Over
twelve months
|
14,037 | |||
|
Total
|
$ | 53,421 | ||
Borrowings
Short-term
borrowings are comprised primarily of advances and overnight borrowing at the
FHLBNY. There were no short-term borrowings outstanding at December
31, 2009. At December 31, 2008, there were $17.6 million in
short-term borrowings outstanding.
The
following table represents information regarding short-term borrowings during
2009, 2008 and 2007:
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Maximum
outstanding at any month end
|
$ | 1,400 | $ | 23,795 | $ | 18,400 | ||||||
|
Average
amount outstanding during the year
|
1,724 | 14,151 | 4,528 | |||||||||
|
Average
interest rate during the year
|
1.84 | % | 2.85 | % | 5.05 | % | ||||||
Long-term
borrowed funds consist of advances and repurchase agreements from the FHLBNY,
Citi Group repurchase agreements and junior subordinated
debentures. Long-term borrowed funds and junior subordinated
debentures totaled $41.2 million at December 31, 2009 as compared to $39.6
million at December 31, 2008.
Capital
Shareholders'
equity at December 31, 2009, was $29.2 million as compared to $19.5 million at
December 31, 2008. The Company added $1.6 million to retained
earnings through net income. The increase to retained earnings was
combined with a decrease of $1.7 million in accumulated other comprehensive
loss, which decreased to $1.4 million from $3.1 million at December 31, 2008.
Net unrealized holding gains on securities, net of tax, resulted in a decrease
in accumulated other comprehensive loss of $1.3 million. In addition,
$413,000 of amortization of retirement plan losses and transition obligation,
net of tax expense, decreased accumulated other comprehensive loss during
2009. The current common stock dividend level represents an
approximately 71% reduction as compared to 2008 dividend
levels. Common stock dividends declared reduced capital by
$298,000. The Board of Directors and management of the Company
believe it is in the best interest of the shareholders to conserve capital at
this time. The remaining increase to capital was the result of the
Company entering into an agreement with the United States Department of Treasury
pursuant to which Pathfinder Bancorp, Inc. issued and sold 6,771 shares of
preferred stock and warrants to purchase the Company’s common stock for a total
price of $6,771,000. The increase is offset by dividends paid on the
Series A Preferred Stock, described below, of $60,000.
On
September 11, 2009, the Company, entered into a Letter Agreement (the “Purchase
Agreement”), with the United States Department of the Treasury (“Treasury
Department”) pursuant to which the Company has issued and sold to Treasury:
(i) 6,771 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred
Stock, Series A, par value $0.01 per share (the “Series A Preferred
Stock”), having a liquidation amount per share equal to $1,000, for a total
price of $6,771,000; and (ii) a Warrant (the “Warrant”) to purchase 154,354
shares of the Company’s common stock, par value $0.01 per share (the “Common
Stock”), at an exercise price per share of $6.58. The Company
contributed to Pathfinder Bank, its subsidiary, $5,500,000 or 81.23% of the
proceeds of the sale of the Series A Preferred Stock.
The
$6,771,000 of proceeds was allocated to the Series A Preferred Stock and the
Warrant based on their relative fair values at issuance ($6,065,000 was
allocated to the Series A Preferred Stock and $706,000 to the
Warrant). The difference between the initial value allocated to the
Series A Preferred Stock and the liquidation value of $6,771,000, i.e. the
preferred discount, will be charged to retained earnings over the first five
years of the contract as an adjustment to the dividend yield using the effective
yield method.
The
Series A Preferred Stock pays cumulative dividends at a rate of 5% per
annum for the first five years and thereafter at a rate of 9% per
annum. The Series A Preferred Stock is generally
non-voting. Prior to September 11, 2012, and unless the Company has
redeemed all of the Series A Preferred Stock or the Treasury Department has
transferred all of the Series A Preferred Stock to a third party, the
approval of the Treasury Department will be required for the Company to increase
its common stock dividend or repurchase its common stock or other equity or
capital securities, other than in certain circumstances specified in the
Purchase Agreement.
The
Warrant has a ten-year term and is immediately exercisable. The
Warrant provides for the adjustment of the exercise price and the number of
shares of the Company’s common stock issuable upon exercise pursuant to
customary anti-dilution provisions, such as upon stock splits or distributions
of securities or other assets to holders of the Company’s common stock, and upon
certain issuances of the Company’s common stock at or below a specified price
relative to the then current market price of the Company’s common
stock. Pursuant to the Purchase Agreement, the Treasury Department
has agreed not to exercise voting power with respect to any shares of common
stock issued upon exercise of the Warrant.
The
Series A Preferred Stock and the Warrant were issued in a private placement
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended. The Company has agreed to register for resale the
Series A Preferred Stock, the Warrant and the shares of common stock
underlying the Warrant (the “Warrant Shares”), as soon as practicable after the
date of the issuance of the Series A Preferred Stock and the
Warrant. Neither the Series A Preferred Stock nor the Warrant
will be subject to any contractual restrictions on transfer.
Risk-based
capital provides the basis for which all banks are evaluated in terms of capital
adequacy. Capital adequacy is evaluated primarily by the use of
ratios which measure capital against total assets, as well as against total
assets that are weighted based on defined risk characteristics. The
Company’s goal is to maintain a strong capital position, consistent with the
risk profile of its subsidiary banks that supports growth and expansion
activities while at the same time exceeding regulatory standards. At
December 31, 2009, Pathfinder Bank exceeded all regulatory required minimum
capital ratios and met the regulatory definition of a “well-capitalized”
institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based
capital ratio exceeding 6% and a total risk-based capital ratio exceeding
10%.
LIQUIDITY
Liquidity
management involves the Company’s ability to generate cash or otherwise obtain
funds at reasonable rates to support asset growth, meet deposit withdrawals,
maintain reserve requirements, and otherwise operate the Company on an ongoing
basis. The Company's primary sources of funds are deposits, borrowed
funds, amortization and prepayment of loans and maturities of investment
securities and other short-term investments, and earnings and funds provided
from operations. While scheduled principal repayments on loans are a
relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Company manages the pricing of deposits to maintain
a desired deposit balance. In addition, the Company invests excess
funds in short-term interest-earning and other assets, which provide liquidity
to meet lending requirements.
The
Company's liquidity has been enhanced by its membership in the Federal Home Loan
Bank of New York, whose competitive advance programs and lines of credit provide
the Company with a safe, reliable and convenient source of funds. A
significant decrease in deposits in the future
could
result in the Company having to seek other sources of funds for liquidity
purposes. Such sources could include, but are not limited to,
additional borrowings, trust preferred security offerings, brokered deposits,
negotiated time deposits, the sale of "available-for-sale" investment
securities, the sale of securitized loans, or the sale of whole
loans. Such actions could result in higher interest expense costs
and/or losses on the sale of securities or loans.
The
Company has a number of existing credit facilities. Total credit
available under the existing lines is approximately $73 million. At
December 31, 2009, the Company had $36 million outstanding under existing credit
facilities with $37 million available.
The Asset
Liability Management Committee of the Company is responsible for implementing
the policies and guidelines for the maintenance of prudent levels of
liquidity. As of December 31, 2009, management reported to the Board
of Directors that the Company is in compliance with its liquidity policy
guidelines.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company is also a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. At December 31, 2009, the
Company had $25.2 million in outstanding commitments to extend credit and
standby letters of credit. See Note 15 in the accompanying
consolidated financial statements.
ITEM
7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required of a smaller reporting company.
ITEM
8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
to Consolidated Financial Statements
Pathfinder Bancorp,
Inc.
|
|
Page
|
||
|
Management’s
Report On Internal Control Over Financial Reporting
|
34
|
||
|
Report
of Independent Registered Public Accounting Firm
|
35
|
||
|
Consolidated
Statements of Condition – December 31, 2009 and 2008
|
36
|
||
|
Consolidated
Statements of Income – Years ended December 31, 2009 and
2008
|
37
|
||
|
Consolidated
Statements of Changes in Shareholders’ Equity – Years ended December 31,
2009 and 2008
|
38
|
||
|
Consolidated
Statements of Cash Flows – Years ended December 31, 2009 and
2008
|
39
|
||
|
Notes
to Consolidated Financial Statements
|
41
|
||
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate. The Company’s internal control over
financial reporting is a process designed under the supervision of the Company’s
principal executive officer and principal financial officer to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company’s financial statements for external reporting
purposes in accordance with United States generally accepted accounting
principles.
Under the
supervision and with the participation of management, including the Company’s
principal executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of its internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on its evaluation under that framework, management
concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2009. In addition, based on our assessment,
management has determined that there were no material weaknesses in the
Company’s internal controls over financial reporting.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.
|
/s/
Thomas W. Schneider
|
/s/
James A. Dowd
|
|||||
|
Thomas
W. Schneider
|
James
A. Dowd
|
|||||
|
President &
Chief Executive Officer
|
Senior
Vice President and Chief Financial Officer
|
Oswego,
New York
March 24,
2010
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders
Pathfinder
Bancorp, Inc.
Oswego,
New York
We have
audited the accompanying consolidated statements of condition of Pathfinder
Bancorp, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of income, changes in shareholders’ equity and cash
flows for each of the years in the two-year period ended December 31,
2009. Pathfinder Bancorp, Inc.’s management is responsible for these
consolidated financial statements. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pathfinder
Bancorp, Inc. and subsidiaries as of December 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America.
/s/ ParenteBeard
LLC
ParenteBeard
LLC
Syracuse,
New York
March 24,
2010
|
CONSOLIDATED STATEMENTS OF
CONDITION
|
|
December
31,
|
|
(In
thousands, except share data)
|
2009
|
2008
|
||||||
|
ASSETS:
|
||||||||
|
Cash
and due from banks
|
$ | 8,678 | $ | 7,365 | ||||
|
Interest
earning deposits
|
5,953 | 313 | ||||||
|
Total
cash and cash equivalents
|
14,631 | 7,678 | ||||||
|
Investment
securities, at fair value
|
72,754 | 72,138 | ||||||
|
Federal
Home Loan Bank stock, at cost
|
1,899 | 2,549 | ||||||
|
Loans
|
262,465 | 249,872 | ||||||
|
Less:
Allowance for loan losses
|
3,078 | 2,472 | ||||||
|
Loans
receivable, net
|
259,387 | 247,400 | ||||||
|
Premises
and equipment, net
|
7,173 | 7,450 | ||||||
|
Accrued
interest receivable
|
1,482 | 1,678 | ||||||
|
Foreclosed
real estate
|
181 | 335 | ||||||
|
Goodwill
|
3,840 | 3,840 | ||||||
|
Bank
owned life insurance
|
6,956 | 6,731 | ||||||
|
Other
assets
|
3,389 | 2,961 | ||||||
|
Total
assets
|
$ | 371,692 | $ | 352,760 | ||||
|
LIABILITIES AND SHAREHOLDERS'
EQUITY:
|
||||||||
|
Deposits:
|
||||||||
|
Interest-bearing
|
$ | 269,539 | $ | 243,288 | ||||
|
Noninterest-bearing
|
27,300 | 26,150 | ||||||
|
Total
deposits
|
296,839 | 269,438 | ||||||
|
Short-term
borrowings
|
- | 17,575 | ||||||
|
Long-term
borrowings
|
36,000 | 34,400 | ||||||
|
Junior
subordinated debentures
|
5,155 | 5,155 | ||||||
|
Other
liabilities
|
4,460 | 6,697 | ||||||
|
Total
liabilities
|
342,454 | 333,265 | ||||||
|
Shareholders'
equity:
|
||||||||
|
Preferred
stock, par value $0.01 per share; $1,000 liquidation
preference;
|
||||||||
|
1,000,000
shares authorized; 6,771 shares issued and outstanding as of December
31,
|
||||||||
|
2009;
0 shares issued and outstanding as of December 31, 2008
|
6,101 | - | ||||||
|
Common
stock, par value $0.01; authorized 10,000,000 shares;
|
||||||||
|
2,972,119
and 2,484,832 shares issued and outstanding respectively
|
30 | 30 | ||||||
|
Additional
paid in capital
|
8,615 | 7,909 | ||||||
|
Retained
earnings
|
22,419 | 21,198 | ||||||
|
Accumulated
other comprehensive loss
|
(1,425 | ) | (3,140 | ) | ||||
|
Treasury
stock, at cost; 487,287 shares
|
(6,502 | ) | (6,502 | ) | ||||
|
Total
shareholders' equity
|
29,238 | 19,495 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 371,692 | $ | 352,760 | ||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
||||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|||
|
|
|||
|
Years
Ended December 31,
|
|
(In
thousands, except per share data)
|
2009
|
2008
|
||||||
|
Interest
and dividend income:
|
||||||||
|
Loans,
including fees
|
$ | 14,815 | $ | 14,756 | ||||
|
Debt
securities:
|
||||||||
|
Taxable
|
2,603 | 2,956 | ||||||
|
Tax-exempt
|
43 | 171 | ||||||
|
Dividends
|
339 | 406 | ||||||
|
Federal
funds sold and interest earning deposits
|
6 | 61 | ||||||
|
Total
interest income
|
17,806 | 18,350 | ||||||
|
Interest
expense:
|
||||||||
|
Interest
on deposits
|
4,434 | 5,661 | ||||||
|
Interest
on short-term borrowings
|
32 | 403 | ||||||
|
Interest
on long-term borrowings
|
1,563 | 1,611 | ||||||
|
Total
interest expense
|
6,029 | 7,675 | ||||||
|
Net
interest income
|
11,777 | 10,675 | ||||||
|
Provision
for loan losses
|
876 | 820 | ||||||
|
Net
interest income after provision for loan losses
|
10,901 | 9,855 | ||||||
|
Noninterest
income:
|
||||||||
|
Service
charges on deposit accounts
|
1,496 | 1,492 | ||||||
|
Earnings
on bank owned life insurance
|
225 | 293 | ||||||
|
Loan
servicing fees
|
233 | 281 | ||||||
|
Losses
on impairment of investment securities
|
(693 | ) | (2,253 | ) | ||||
|
Net
gains (losses) on sales of investment securities
|
805 | 62 | ||||||
|
Net
gains (losses) on sales of loans and foreclosed real
estate
|
54 | (44 | ) | |||||
|
Debit
card interchange fees
|
280 | 275 | ||||||
|
Other
charges, commissions & fees
|
490 | 445 | ||||||
|
Total
noninterest income
|
2,890 | 551 | ||||||
|
Noninterest
expense:
|
||||||||
|
Salaries
and employee benefits
|
5,577 | 5,172 | ||||||
|
Building
occupancy
|
1,246 | 1,322 | ||||||
|
Data
processing expenses
|
1,307 | 1,330 | ||||||
|
Professional
and other services
|
844 | 771 | ||||||
|
FDIC
assessment
|
745 | 53 | ||||||
|
Other
expenses
|
1,407 | 1,287 | ||||||
|
Total
noninterest expenses
|
11,126 | 9,935 | ||||||
|
Income
before income taxes
|
2,665 | 471 | ||||||
|
Provision
for income taxes
|
1,050 | 103 | ||||||
|
Net
income
|
1,615 | 368 | ||||||
|
Preferred
stock dividends and discount accretion
|
96 | - | ||||||
|
Net
income available to common shareholders
|
$ | 1,519 | $ | 368 | ||||
|
Earnings
per common share - basic
|
$ | 0.61 | $ | 0.15 | ||||
|
Earnings
per common share - diluted
|
$ | 0.61 | $ | 0.15 | ||||
|
Dividends
per common share
|
$ | 0.12 | 0.41 | |||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
||||||||
|
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY
|
|
Accumulated
|
||||||||||||||||||||||||||||
|
Additional
|
Other
Com-
|
|||||||||||||||||||||||||||
|
Preferred
|
Common
|
Paid
in
|
Retained
|
prehensive
|
Treasury
|
|||||||||||||||||||||||
|
(In
thousands, except share data)
|
Stock
|
Stock
|
Capital
|
Earnings
|
Loss
|
Stock
|
Total
|
|||||||||||||||||||||
|
Balance,
January 1, 2009
|
- | $ | 30 | $ | 7,909 | $ | 21,198 | $ | (3,140 | ) | $ | (6,502 | ) | $ | 19,495 | |||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
1,615 | 1,615 | ||||||||||||||||||||||||||
|
Other
comprehensive income, net of tax:
|
||||||||||||||||||||||||||||
|
Unrealized
holding gains on securities
|
||||||||||||||||||||||||||||
|
available
for sale (net of $371 tax expense)
|
1,302 | 1,302 | ||||||||||||||||||||||||||
|
Retirement
plan net gains and transition
|
||||||||||||||||||||||||||||
|
obligation
not recognized in plan expenses
|
||||||||||||||||||||||||||||
|
(net
of $275 tax expense)
|
413 | 413 | ||||||||||||||||||||||||||
|
Total
Comprehensive income
|
3,330 | |||||||||||||||||||||||||||
|
Preferred
stock and
|
||||||||||||||||||||||||||||
|
common
stock warrants issued
|
6,065 | 706 | 6,771 | |||||||||||||||||||||||||
|
Preferred
stock discount accretion
|
36 | (36 | ) | - | ||||||||||||||||||||||||
|
Preferred
stock dividends
|
(60 | ) | (60 | ) | ||||||||||||||||||||||||
|
Common
stock dividends declared ($0.12 per share)
|
(298 | ) | (298 | ) | ||||||||||||||||||||||||
|
Balance,
December 31, 2009
|
$ | 6,101 | $ | 30 | $ | 8,615 | $ | 22,419 | $ | (1,425 | ) | $ | (6,502 | ) | $ | 29,238 | ||||||||||||
|
Balance,
January 1, 2008
|
- | $ | 30 | $ | 7,899 | $ | 21,734 | $ | (1,457 | ) | $ | (6,502 | ) | $ | 21,704 | |||||||||||||
|
Cumulative
effect of a change in accounting
|
||||||||||||||||||||||||||||
|
principle
upon the change in defined
|
||||||||||||||||||||||||||||
|
employee
benefit plans' measurement date
|
||||||||||||||||||||||||||||
|
(net
of $8 tax expense)
|
(48 | ) | 13 | (35 | ) | |||||||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||||||
|
Net
income
|
368 | 368 | ||||||||||||||||||||||||||
|
Other
comprehensive loss, net of tax:
|
||||||||||||||||||||||||||||
|
Unrealized
holding losses on securities
|
||||||||||||||||||||||||||||
|
available
for sale (net of $237 tax expense)
|
(392 | ) | (392 | ) | ||||||||||||||||||||||||
|
Retirement
plan net losses and transition
|
||||||||||||||||||||||||||||
|
obligation
not recognized in plan expenses
|
||||||||||||||||||||||||||||
|
(net
of $869 tax benefit)
|
(1,304 | ) | (1,304 | ) | ||||||||||||||||||||||||
|
Total
Comprehensive loss
|
(1,328 | ) | ||||||||||||||||||||||||||
|
Stock
options exercised
|
10 | 10 | ||||||||||||||||||||||||||
|
Common
stock dividends declared ($0.41 per share)
|
(856 | ) | (856 | ) | ||||||||||||||||||||||||
|
Balance,
December 31, 2008
|
- | $ | 30 | $ | 7,909 | $ | 21,198 | $ | (3,140 | ) | $ | (6,502 | ) | $ | 19,495 | |||||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
|
|
Years
Ended December 31,
|
|||||||
|
(In
thousands)
|
2009
|
2008
|
||||||
|
OPERATING
ACTIVITIES
|
||||||||
|
Net
income
|
$ | 1,615 | $ | 368 | ||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Provision
for loan losses
|
876 | 820 | ||||||
|
Deferred
income tax expense (benefit)
|
441 | (388 | ) | |||||
|
Proceeds
from sales of loans
|
9,659 | 174 | ||||||
|
Originations
of loans held-for-sale
|
(9,540 | ) | (172 | ) | ||||
|
Realized
losses (gains) on sales of:
|
||||||||
|
Real
estate acquired through foreclosure
|
65 | 46 | ||||||
|
Premises
and equipment
|
2 | - | ||||||
|
Loans
|
(119 | ) | (2 | ) | ||||
|
Available-for-sale
investment securities
|
(805 | ) | (62 | ) | ||||
|
Impairment
write-down on available-for-sale securities
|
693 | 2,253 | ||||||
|
Depreciation
|
657 | 698 | ||||||
|
Amortization
of mortgage servicing rights
|
32 | 28 | ||||||
|
Amortization
of deferred loan costs
|
240 | 218 | ||||||
|
Earnings
on bank owned life insurance
|
(225 | ) | (293 | ) | ||||
|
Net
amortization of premiums and discounts on investment
securities
|
254 | 112 | ||||||
|
Decrease
(increase) in accrued interest receivable
|
196 | (5 | ) | |||||
|
Net
change in other assets and liabilities
|
(2,940 | ) | (299 | ) | ||||
|
Net
cash provided by operating activities
|
1,101 | 3,496 | ||||||
|
INVESTING
ACTIVITIES
|
||||||||
|
Purchase
of investment securities available-for-sale
|
(43,666 | ) | (31,756 | ) | ||||
|
Net
proceeds from the redemption of (purchase of) Federal Home Loan Bank
stock
|
650 | (421 | ) | |||||
|
Proceeds
from maturities and principal reductions of
|
||||||||
|
investment
securities available-for-sale
|
22,151 | 18,633 | ||||||
|
Proceeds
from sale of:
|
||||||||
|
Available-for-sale
investment securities
|
22,430 | 3,531 | ||||||
|
Real
estate acquired through foreclosure
|
498 | 979 | ||||||
|
Premises
and equipment
|
1 | - | ||||||
|
Net
increase in loans
|
(13,488 | ) | (27,890 | ) | ||||
|
Purchase
of premises and equipment
|
(383 | ) | (341 | ) | ||||
|
Net
cash used in investing activities
|
(11,807 | ) | (37,265 | ) | ||||
|
FINANCING
ACTIVITIES
|
||||||||
|
Net
increase in demand deposits, NOW accounts, savings
accounts,
|
||||||||
|
money
management deposit accounts, MMDA accounts and escrow
deposits
|
18,129 | 6,003 | ||||||
|
Net
increase in time deposits
|
9,272 | 12,350 | ||||||
|
Net
repayments on short-term borrowings
|
(17,575 | ) | (825 | ) | ||||
|
Payments
on long-term borrowings
|
(5,400 | ) | (11,610 | ) | ||||
|
Proceeds
from long-term borrowings
|
7,000 | 26,000 | ||||||
|
Proceeds
from the issuance of preferred stock and common stock
warrants
|
6,771 | - | ||||||
|
Proceeds
from exercise of stock options
|
- | 10 | ||||||
|
Cash
dividends paid to preferred shareholders
|
(60 | ) | - | |||||
|
Cash
dividends paid to common shareholders
|
(478 | ) | (694 | ) | ||||
|
Net
cash provided by financing activities
|
17,659 | 31,234 | ||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
|
|
Years
Ended December 31,
|
|||||||
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Increase
(decrease) in cash and cash equivalents
|
6,953 | (2,535 | ) | |||||
|
Cash
and cash equivalents at beginning of period
|
7,678 | 10,213 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 14,631 | $ | 7,678 | ||||
|
CASH
PAID DURING THE PERIOD FOR:
|
||||||||
|
Interest
|
$ | 6,051 | $ | 7,714 | ||||
|
Income
taxes
|
524 | 162 | ||||||
|
NON-CASH
INVESTING ACTIVITY
|
||||||||
|
Transfer
of loans to foreclosed real estate
|
385 | 498 | ||||||
|
|
||||||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations
The
accompanying consolidated financial statements include the accounts of
Pathfinder Bancorp, Inc. (the “Company”) and its wholly owned subsidiary,
Pathfinder Bank (the “Bank”). The Bank has three wholly owned operating
subsidiaries, Pathfinder Commercial Bank, Whispering Oaks Development Corp. and
Pathfinder REIT, Inc. All inter-company accounts and activity have been
eliminated in consolidation. The Company has seven offices located in
Oswego County. The Company is primarily engaged in the business of
attracting deposits from the general public in the Company’s market area, and
investing such deposits, together with other sources of funds, in loans secured
by one-to-four family residential real estate, commercial real estate, business
assets and in investment securities.
Pathfinder
Bancorp, M.H.C., (the “Holding Company”) a mutual holding company whose activity
is not included in the accompanying financial statements, owns approximately
63.7% of the outstanding common stock of the Company. Salaries and
employee benefits approximating $113,000 and $152,000 were allocated from the
Company to the Holding Company during 2009 and 2008,
respectively. The Holding Company recorded $15,000 as rental income
from the Bank for each year presented. As of December 31, 2009, the
Bank had a loan receivable from the Holding Company of $1,274,000.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Management has identified the allowance for loan losses,
deferred income taxes, pension obligations, the evaluation of goodwill for
impairment and the evaluation of investment securities for other than temporary
impairment to be the accounting areas that require the most subjective and
complex judgments, and as such, could be the most subject to revision as new
information becomes available.
The
Company is subject to the regulations of various governmental
agencies. The Company also undergoes periodic examinations by the
regulatory agencies which may subject it to further changes with respect to
asset valuations, amounts of required loss allowances, and operating
restrictions resulting from the regulators' judgments based on information
available to them at the time of their examinations.
Significant
Group Concentrations of Credit Risk
Most of
the Company’s activities are with customers located primarily in Oswego and
parts of Onondaga counties of New York State. Note 3 discusses the
types of securities that the Company invests in. Note 4 discusses the
types of lending that the Company engages in. The Company does not
have any significant concentrations to any one industry or
customer.
Advertising
The
Company follows the policy of charging the costs of advertising to expense as
incurred. Advertising costs included in other operating expenses were
$353,000 and $264,000 for the years ended December 31, 2009 and 2008,
respectively. The increase in advertising expenses is directly
attributable to marketing efforts associated with the Bank’s celebration of 150
years of operation.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash on hand, amounts due from banks and
interest-bearing deposits (with original maturity of three months or
less).
Investment
Securities
The
Company classifies investment securities as
available-for-sale. Available-for-sale securities are reported at
fair value, with net unrealized gains and losses reflected as a separate
component of shareholders’ equity, net of the applicable income tax effect. None
of the Company’s investment securities have been classified as trading or
held-to-maturity.
Gains or
losses on investment security transactions are based on the amortized cost of
the specific securities sold. Premiums and discounts on securities
are amortized and accreted into income using the interest method over the period
to maturity.
Note 3 to
the consolidated financial statements includes additional information about the
Company’s accounting policies with respect to the impairment of investment
securities.
Federal
Home Loan Bank Stock
Federal
law requires a member institution of the Federal Home Loan Bank (“FHLB”) system
to hold stock of its district FHLB according to a predetermined
formula. The stock is carried at cost.
Mortgage
Loans Held-for-Sale
Mortgage
loans held-for-sale are carried at the lower of cost or fair
value. Fair value is determined in the aggregate. There
were no loans held-for-sale or forward commitments outstanding as of December
31, 2009 and 2008.
Transfers
of Financial Assets
Transfers
of financial assets, including sales of loans and loan participations, are
accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Loans
The
Company grants mortgage, commercial and consumer loans to
customers. Loans that management has the intent and ability to hold
for the foreseeable future or until maturity or pay-off, generally are stated at
unpaid principal balances, less the allowance for loan losses and plus net
deferred loan origination costs. The ability of the Company’s debtors to honor
their contracts is dependent upon the real estate and general economic
conditions in the market area. Interest income is generally
recognized when income is earned using the interest method. Nonrefundable loan
fees received and related direct origination costs incurred are deferred and
amortized over the life of the loan using the interest method, resulting in a
constant effective yield over the loan term. Deferred fees are recognized into
income and deferred costs are charged to income immediately upon prepayment of
the related loan.
Allowance
for Loan Losses
The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance. The Company periodically evaluates the adequacy of the
allowance for loan losses in order to maintain the allowance at a level that is
sufficient to absorb probable and estimable credit losses.
The
allowance consists of specific, general and unallocated
components. It includes amounts specifically allocated to impaired
loans. A loan is considered impaired, based on current information
and events, if it is probable the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Specific reserves are
established based on the fair value of underlying collateral or discounted cash
flows, as appropriate, when those values are lower than the carrying value of
the loan. The allowance is also comprised of general reserves, which
are established by applying loss factors to the aggregate balance of major loan
categories or pools of smaller balance homogeneous loans. The loss
factors are determined by management based on an evaluation of historical loss
experience, delinquency trends, volume and type of lending conducted, and the
impact of current economic conditions in the market area. An
unallocated component of the allowance may be maintained to cover uncertainties
that could affect management’s estimate of probable losses. The
unallocated component reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating specific and
general losses in the portfolio. While management uses the best
information available to make evaluations, future adjustments to the allowance
may be necessary if conditions differ substantially from the assumptions used in
making the evaluation.
Income
Recognition on Impaired and Non-accrual Loans
Loans,
including impaired loans, are generally classified as non-accrual if they are
past due as to maturity or payment of principal or interest for a period of more
than 90 days. When a loan is classified as non-accrual and the future
collectibility of the recorded loan balance is doubtful, collections of interest
and principal are generally applied as a reduction to principal
outstanding.
When
future collectibility of the recorded loan balance is expected, interest income
may be recognized on a cash basis. In the case where a non-accrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior charge-offs
have been fully recovered.
Off-Balance
Sheet Credit Related Financial Instruments
In the
ordinary course of business, the Company has entered into commitments to extend
credit, including commitments under standby letters of credit. Such
financial instruments are recorded when they are funded.
Premises
and Equipment
Premises
and equipment are stated at cost, less accumulated depreciation. Depreciation is
computed on a straight-line basis over the estimated useful lives of the related
assets, ranging up to 40 years for premises and 10 years for equipment.
Maintenance and repairs are charged to operating expenses as
incurred. The asset cost and accumulated depreciation are removed
from the accounts for assets sold or retired and any resulting gain or loss is
included in the determination of income.
Foreclosed
Real Estate
Properties
acquired through foreclosure, or by deed in lieu of foreclosure, are recorded at
their fair value less estimated disposal costs. Fair value is determined based
on a current appraisal and inspection. Costs incurred in connection
with preparing the foreclosed real estate for disposition are capitalized to the
extent that they enhance the overall fair value of the property. Write downs of,
and expenses related to, foreclosed real estate holdings are included in
noninterest expense and were $90,000 and $133,000 in 2009 and 2008,
respectively.
Goodwill
Goodwill
represents the excess cost of an acquisition over the fair value of the net
assets acquired. Goodwill is not amortized but is evaluated annually
for impairment.
Mortgage
Servicing Rights
Originated
mortgage servicing rights are recorded at their fair value at the time of
transfer and are amortized in proportion to and over the period of estimated net
servicing income or loss. The carrying value of the originated
mortgage servicing rights is periodically evaluated for impairment.
Stock-Based
Compensation
Compensation
costs related to share-based payment transactions are recognized based on the
grant-date fair value of the stock-based compensation issued. Compensation costs
are recognized over the period that an employee provides service in exchange for
the award. No options were granted during 2009 or 2008, and all
outstanding options were fully vested on January 1, 2006 and, accordingly, there
was no impact on the Company’s results of operations for the periods
presented.
Retirement
Benefits
The
Company has established tax qualified retirement plans covering substantially
all full-time employees and certain part-time employees. Pension
expense under these plans is charged to current operations and consists of
several components of net pension cost based on various actuarial assumptions
regarding future experience under the plans.
Gains and
losses, prior service costs and credits, and any remaining transition amounts
that have not yet been recognized through net periodic benefit cost are
recognized in accumulated other comprehensive loss, net of tax effects, until
they are amortized as a component of net periodic cost. On January 1,
2008, the Company recorded a $48,000 charge to retained earnings, representing
the cumulative effect adjustment upon adopting the measurement date transition
rule for the Company’s pension plan and post retirement benefit
plan. Plan assets and obligations are to be measured as of the
employer’s balance sheet date. The Company previously measured its
pension plan as of October 1 of each year. As a result of the
measurement date provisions, the Company decreased its pension plan asset with a
corresponding charge to retained earnings, representing the net periodic benefit
cost for the period between the October 1, 2007 measurement date and January 1,
2008.
In
addition, the Company has unfunded deferred compensation and supplemental
executive retirement plans for selected current and former employees and
officers that provide benefits that cannot be paid from a qualified retirement
plan due to Internal Revenue Code restrictions. These plans are nonqualified
under the Internal Revenue Code, and assets used to fund benefit payments are
not segregated from other assets of the Company, therefore, in general, a
participant's or beneficiary's claim to benefits under these plans is as a
general creditor.
Derivatives
are recorded on the statement of condition as assets and liabilities measured at
their fair value. The accounting for increases and decreases in the value of
derivatives depends upon the use of derivatives and whether the derivatives
qualify for hedge accounting. The Company currently has one interest
rate swap, which has been determined to be a cash flow hedge. The
fair value of cash-flow hedging instruments (“Cash Flow Hedge”) is recorded in
either other assets or other liabilities. On an ongoing basis, the statement of
condition is adjusted to reflect the then current fair value of the Cash Flow
Hedge. The related gains or losses are reported in other comprehensive income
and are subsequently reclassified into earnings, as a yield adjustment in the
same period in which the related interest on the hedged item (primarily a
variable-rate debt obligation) affect earnings. To the extent that the Cash Flow
Hedge is not effective, the ineffective portion of the Cash Flow Hedge is
immediately recognized as interest expense.
Income
Taxes
Provisions
for income taxes are based on taxes currently payable or refundable and deferred
income taxes on temporary differences between the tax basis of assets and
liabilities and their reported amounts in the consolidated financial statements.
Deferred tax assets and liabilities are reported in the consolidated financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled.
Earnings
per Common Share
Basic
earnings per common share are computed by dividing net income, after the
preferred stock dividends and preferred stock discount accretion, by the
weighted average number of common shares outstanding throughout each
year. Diluted earnings per share gives effect to weighted average
shares that would be outstanding assuming the exercise of issued stock options
using the treasury stock method.
Other
Comprehensive (Loss) Income
Accounting
principles generally accepted in the United States of America, require that
recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, the effective
portion of cash-flow hedges, and unrecognized gains and losses, prior service
costs and transition assets or obligations for defined benefit pension and
post-retirement plans are reported as a separate component of the shareholders’
equity section of the consolidated statements of condition, such items, along
with net income, are components of comprehensive (loss) income.
The
components of other comprehensive income (loss) and the related tax effect at
and for the years ended December 31, are as follows:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Unrealized
holding gains (losses) on securities available for sale:
|
||||||||
|
Unrealized
holding gains (losses) arising during the year
|
$ | 1,785 | $ | (2,346 | ) | |||
|
Reclassification
adjustment for (gains) losses included in net income
|
(112 | ) | 2,191 | |||||
|
Net
unrealized gains (losses) on securities available for sale
|
1,673 | (155 | ) | |||||
|
Defined
benefit pension and post retirement plans:
|
||||||||
|
Additional
plan gains (losses)
|
409 | (2,257 | ) | |||||
|
Reclassification
adjustment for amortization of benefit plans'
|
||||||||
|
net
loss and prior service liability recognized in net
|
||||||||
|
periodic
expense
|
279 | 84 | ||||||
|
Net
change in defined benefit plan assets and obligations
|
688 | (2,173 | ) | |||||
|
Other
comprehensive income (loss) before tax
|
2,361 | (2,328 | ) | |||||
|
Tax
effect
|
(646 | ) | 632 | |||||
|
Other
comprehensive income (loss)
|
$ | 1,715 | $ | (1,696 | ) | |||
The
components of accumulated other comprehensive loss, net of related tax effects,
at December 31, are as follows:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Unrealized
gains (losses) on securities available for sale (net of
tax
|
||||||||
|
expense
2009 - $166; and tax benefit 2008 - $205)
|
$ | 249 | $ | (1,053 | ) | |||
|
Net
pension losses and past service liability (net of tax
|
||||||||
|
benefit
2009 - $1,100; 2008 - $1,352)
|
(1,649 | ) | (2,027 | ) | ||||
|
Net
post-retirement losses and past service liability (net of
tax
|
||||||||
|
benefit
2009 - $17; 2008 - $40)
|
(25 | ) | (60 | ) | ||||
| $ | (1,425 | ) | $ | (3,140 | ) | |||
Reclassifications
Certain
amounts in the 2008 consolidated financial statements have been reclassified to
conform to the current year presentation. These reclassifications had
no effect on net income as previously reported.
NOTE
2: NEW ACCOUNTING PRONOUNCEMENTS
In April
2009, the FASB issued ASC 320-10-65-1 (formerly FASB Staff Position (“FSP”)
No. 115-2 and No. 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments”). This standard amends existing guidance for
determining whether impairment is other-than-temporary for debt securities and
requires an entity to assess whether it intends to sell, or it is more likely
than not that it will be required to sell a security in an unrealized loss
position before recovery of its amortized cost basis. If either of these
criteria is met, the entire difference between amortized cost and fair value is
recognized in earnings. For debt securities that do not meet the aforementioned
criteria, the amount of impairment recognized in earnings is limited to the
amount related to credit losses, while impairment related to other factors is
recognized in other comprehensive income.
Additionally,
this standard expands and increases the frequency of existing disclosures about
other-than-temporary impairments for debt and equity securities. This standard
was effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of this standard did not result in a change to
the amounts recorded for OTTI in earnings or other comprehensive
income. The only OTTI charges recorded on debt securities in 2009
were based on a sale that subsequently occurred and therefore the entire amount
was recorded against earnings.
In April
2009, the FASB issued ASC 820-10-65-4 (formerly FSP No. 157-4, “Determining
Fair Value When the Volume and Level of Activity for the Asset and Liability
Have Significantly Decreased and Identifying Transactions That Are Not
Orderly”). This standard emphasizes that even if there has been a significant
decrease in the volume and level of activity, the objective of a fair value
measurement remains the same. Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction (that
is, not a forced liquidation or distressed sale) between market participants.
This standard provides a number of factors to consider when evaluating whether
there has been a significant decrease in the volume and level of activity for an
asset or liability in relation to normal market activity. In addition, when
transactions or quoted prices are not considered orderly, adjustments to those
prices based on the weight of available information may be needed to determine
the appropriate fair value. This standard was effective for interim and annual
reporting periods ending after June 15, 2009. The adoption of this standard
did not have a material effect on our consolidated financial statements.
In May
2009, the FASB issued ASC 855 “Subsequent Events” (formerly
SFAS No. 165, “Subsequent Events”). This standard establishes general
standards of accounting for and disclosure of events that occur after the
statement of condition date but before financial statements are issued or are
available to be issued. This standard was effective for financial statements
issued for interim or annual periods ending after June 15, 2009. We adopted
this statement during the second quarter of 2009. The Company has evaluated
subsequent events and transactions occurring through the date of issuance of the
financial data included herein.
In June
2009, the FASB issued ASC 860 –“Accounting for Transfers of Financial
Assets”. This
statement prescribes the information that a reporting entity must provide in its
financial reports about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance and cash flows; and a
transferor’s continuing involvement in transferred financial
assets. Specifically, among other aspects, Topic 860 amends the
previous Statement of Financial Standard No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, by
removing the concept of a qualifying special-purpose entity and removing the
exception from applying FIN 46(R) to variable interest entities that are
qualifying special-purpose entities. It also modifies the
financial-components approach previously used. FASB ASC 860 is effective for
fiscal years beginning after November 15, 2009 and will not have a material
impact on the Company’s consolidated financial position.
The FASB
issued ASU 2009-5, “Fair Value Measurements and Disclosures (Topic 820) –
Measuring Liabilities at Fair Value” in August 2009, to provide guidance when
estimating the fair value of a liability. When a quoted price in an
active market for the identical liability is not available, fair value should be
measured using (a) the quoted price of an identical liability when traded as an
asset; (b) quoted prices for similar liabilities or similar liabilities traded
as assets; or (c) another valuation technique consistent with the principles of
Topic 820 such as an income approach or a market approach. If a
restriction exists that prevents the transfer of the liability, a separate
adjustment related to the restriction is not required when estimating fair
value. The ASU was effective October 1, 2009 and does not have a
material impact on the Company’s consolidated financial position.
ASU
2009-12, “Fair Value Measurements and Disclosure (Topic 820) – Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),”
issued in September 2009, allows a company to measure the fair value of an
investment that has no readily determinable fair market value on the basis of
the investee’s net asset value per share as provided by the
investee. This allowance assumes that the investee has calculated net
asset value in accordance with the GAAP measurement principles of Topic 946 as
of the reporting entity’s measurement date. Examples of such
investments include investments in hedge funds, private equity funds, real
estate funds and venture capital funds. The update also provides
guidance on how the investment should be classified within the fair value
hierarchy based on the value for which the investment can be
redeemed. The amendment is effective for interim and annual periods
after December 15, 2009 with early adoption permitted. The Company
does not expect this guidance to have a material impact to our consolidated
financial statements.
In
October 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing” was issued to
amend ASC Topic 470 and provides guidance for accounting and reporting for
own-share lending arrangements issued in contemplation of a convertible debt
issuance. At the date of issuance, a share-lending arrangement
entered into on an entity’s own shares should be measured at fair value in
accordance with Topic 820 and recognized as an issuance cost, with an offset to
additional paid in capital. Loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs. The amendment also requires several disclosures including a
description and the terms of the arrangement and the reason for entering into
the arrangement. The effective dates of the amendment are dependent
upon the date the share-lending arrangement was entered into and include
retrospective application for arrangements outstanding as of the beginning of
fiscal years beginning on or after December 15, 2009. The Company has
no plans to issue convertible debt and, therefore, does not expect the update to
have an impact on its consolidated financial statements.
NOTE
3: INVESTMENT SECURITIES – AVAILABLE-FOR-SALE
The
amortized cost and estimated fair value of investment securities are summarized
as follows:
|
December
31, 2009
|
||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
(In
thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Bond investment securities:
|
||||||||||||||||
|
US
Treasury and agencies
|
$ | 14,528 | $ | 30 | $ | (26 | ) | $ | 14,532 | |||||||
|
State
and political subdivisions
|
8,989 | 20 | (81 | ) | 8,928 | |||||||||||
|
Corporate
|
5,333 | 194 | (562 | ) | 4,965 | |||||||||||
|
Residential
mortgage-backed
|
36,124 | 989 | (173 | ) | 36,940 | |||||||||||
|
Total
|
64,974 | 1,233 | (842 | ) | 65,365 | |||||||||||
|
Equity investment
securities:
|
||||||||||||||||
|
Mutual
funds
|
4,790 | 24 | - | 4,814 | ||||||||||||
|
Common
stock
|
372 | - | - | 372 | ||||||||||||
|
Total
|
5,162 | 24 | - | 5,186 | ||||||||||||
|
Other
investments
|
2,203 | - | - | 2,203 | ||||||||||||
|
Total
investment securities
|
$ | 72,339 | $ | 1,257 | $ | (842 | ) | $ | 72,754 | |||||||
|
December
31, 2008
|
||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
(In
thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
|
Bond investment
securities:
|
||||||||||||||||
|
US
Treasury and agencies
|
$ | 9,126 | $ | 342 | $ | - | $ | 9,468 | ||||||||
|
State
and political subdivisions
|
5,020 | 23 | (70 | ) | 4,973 | |||||||||||
|
Corporate
|
12,181 | 117 | (1,472 | ) | 10,826 | |||||||||||
|
Residential
mortgage-backed
|
39,478 | 707 | (155 | ) | 40,030 | |||||||||||
|
Total
|
65,805 | 1,189 | (1,697 | ) | 65,297 | |||||||||||
|
Equity investment
securities:
|
||||||||||||||||
|
Mutual
funds
|
5,179 | - | (744 | ) | 4,435 | |||||||||||
|
Common
stock
|
312 | - | (6 | ) | 306 | |||||||||||
|
Total
|
5,491 | - | (750 | ) | 4,741 | |||||||||||
|
Other
investments
|
2,100 | - | - | 2,100 | ||||||||||||
|
Total
investment securities
|
$ | 73,396 | $ | 1,189 | $ | (2,447 | ) | $ | 72,138 | |||||||
The
amortized cost and estimated fair value of debt investments at December 31, 2009
by contractual maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without penalties.
|
Amortized
|
Estimated
|
|||||||
|
Cost
|
Fair
Value
|
|||||||
|
(In
thousands)
|
||||||||
|
Due
in one year or less
|
$ | 1,601 | $ | 1,607 | ||||
|
Due
after one year through five years
|
16,325 | 16,526 | ||||||
|
Due
after five years through ten years
|
3,667 | 3,659 | ||||||
|
Due
after ten years
|
7,257 | 6,633 | ||||||
|
Residential
mortgage-backed
|
36,124 | 36,940 | ||||||
|
Totals
|
$ | 64,974 | $ | 65,365 | ||||
The
Company’s investment securities’ gross unrealized losses and fair value,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, is as follows:
|
December
31, 2009
|
||||||||||||||||||||||||
|
|
Less
than Twelve Months
|
Twelve
Months or More
|
Total
|
|||||||||||||||||||||
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
|||||||||||||||||||
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
|||||||||||||||||||
|
(In
thousands)
|
|
|||||||||||||||||||||||
|
US
Treasury and Agencies
|
$ | (26 | ) | $ | 4,996 | $ | - | $ | - | $ | (26 | ) | $ | 4,996 | ||||||||||
|
State
and political subdivisions
|
(81 | ) | 2,988 | - | - | (81 | ) | 2,988 | ||||||||||||||||
|
Corporate
|
- | - | (562 | ) | 1,402 | (562 | ) | 1,402 | ||||||||||||||||
|
Mortgage-backed
|
(149 | ) | 9,665 | (24 | ) | 545 | (173 | ) | 10,210 | |||||||||||||||
|
Equity
and other investments
|
- | - | - | - | - | - | ||||||||||||||||||
| $ | (256 | ) | $ | 17,649 | $ | (586 | ) | $ | 1,947 | $ | (842 | ) | $ | 19,596 | ||||||||||
|
December
31, 2008
|
||||||||||||||||||||||||
|
|
Less
than Twelve Months
|
Twelve
Months or More
|
Total
|
|||||||||||||||||||||
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
|||||||||||||||||||
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
|||||||||||||||||||
|
(In
thousands)
|
|
|||||||||||||||||||||||
|
State
and political subdivisions
|
$ | (70 | ) | $ | 2,134 | $ | - | $ | - | $ | (70 | ) | $ | 2,134 | ||||||||||
|
Corporate
|
(327 | ) | 5,349 | (1,145 | ) | 2,805 | (1,472 | ) | 8,154 | |||||||||||||||
|
Mortgage-backed
|
(150 | ) | 7,491 | (5 | ) | 734 | (155 | ) | 8,225 | |||||||||||||||
|
Equity
and other investments
|
(744 | ) | 4,251 | (6 | ) | 21 | (750 | ) | 4,272 | |||||||||||||||
| $ | (1,291 | ) | $ | 19,225 | $ | (1,156 | ) | $ | 3,560 | $ | (2,447 | ) | $ | 22,785 | ||||||||||
We
conduct a formal review of investment securities on a quarterly basis for the
presence of other-than-temporary impairment (“OTTI”). In the second quarter of
2009, we adopted the updated guidance on determining OTTI on debt securities. We
assess whether OTTI is present when the fair value of a debt security is less
than its amortized cost basis at the balance sheet date. Under these
circumstances, OTTI is considered to have occurred (1) if we intend to sell the
security; (2) if it is “more likely than not” we will be required to sell the
security before recovery of its amortized cost basis; or (3) the present value
of expected cash flows is not sufficient to recover the entire amortized cost
basis. The “more likely than not” criteria is a lower threshold than the
“probable” criteria used under previous guidance. The guidance
requires that credit-related OTTI is recognized in earnings while
noncredit-related OTTI on securities not expected to be sold is recognized in
other comprehensive income (“OCI”). Noncredit-related OTTI is based on other
factors, including illiquidity. Presentation of OTTI is made in the statement of
income on a gross basis, including both the portion recognized in earnings as
well as the portion recorded in OCI. Normally, the gross OTTI would then be
offset by the amount of noncredit-related OTTI, showing the net as the impact on
earnings. All OTTI charges have been credit-related to date, and
therefore no offset or cumulative effect adjustment was presented on the
financial statements. Additional disclosures are also required by
this guidance.
For debt
security types discussed below, where no OTTI is considered necessary at
December 31, 2009, we do not intend to sell the securities and it is not “more
likely than not” that we will be required to sell the securities before recovery
of their amortized cost basis.
At
December 31, 2009, 2 corporate securities were in unrealized loss
positions. The two securities in unrealized loss positions represent
trust-preferred issuances from large money center financial
institutions. The JP Morgan Chase floating rate trust-preferred
security has a carrying value of $984,000 and a fair value of $712,000. The Bank
of America floating rate trust-preferred security has a carrying value of
$980,000 and a fair value of $690,000. The securities are rated A1
and Baa3 by Moody’s respectively. The securities are both floating
rate notes that adjust quarterly to LIBOR. These securities reflect
net unrealized losses due to the fact that current similar issuances are being
originated at higher spreads to LIBOR, as the market currently demands a greater
pricing premium for the associated risk in the current economic
environment. Management has performed a detailed credit analysis on
the underlying companies and has concluded that each issue is not credit
impaired. Due to the fact that each security has approximately 18
years until final maturity, and management has determined that there is no
related credit impairment, the associated pricing risk is managed similar to
long-term, low yielding, 15 and 30 year fixed rate residential mortgages carried
in the Company’s loan portfolio. The risk is managed through the
Company’s extensive interest rate risk management procedures. The
Company expects the present value of expected cash flows will be sufficient to
recover the amortized cost basis. Thus, the securities are not deemed
to be other-than-temporarily impaired.
At
December 31, 2009, a total of 4 Government Agency Bonds are in unrealized loss
positions. All losses are 1% or less of the current carrying value
and each holding has been in an unrealized loss position for only one
month. No other-than-temporary impairment is deemed present on these
securities.
A total
of 12 residential mortgage-backed security holdings have unrealized losses as of
December 31, 2009. Seven of these securities were issued by
government agencies or government sponsored enterprises. All seven
securities are currently “AAA” rated by Moody’s and S&P. These
unrealized losses relate principally to changes in interest rates subsequent to
the acquisition of the specific securities. None of the seven
securities have unrealized losses that exceed 4%. No
other-than-temporary impairment is deemed present on these
securities. The remaining 5 securities in this classification
represent private label CMO’s, all of which have current unrealized losses of
less than $10,000 each. All five securities are currently “AAA” rated by Moody’s
or S&P. Management reviewed the underlying credit score information and the
concentration risk associated with the states that the majority of the
underlying mortgage collateral resides in. No other-than-temporary
impairment is deemed present on these securities.
At
December 31, 2009, 9 state and political subdivision securities are in
unrealized loss positions. All 9 holdings have unrealized losses that
are less than 4% of their related book values. None of the securities
have been in unrealized loss positions for more than 5 months. These unrealized
losses relate principally to changes in interest rates subsequent to the
acquisition of the specific securities. All of the securities are AA
rated or better by S&P, with the exception of 4 securities issued by the
Oswego, NY City School District, which are unrated. No other-than-temporary
impairment is deemed present on these securities.
In
determining whether OTTI has occurred for equity securities, the Company
considers the applicable factors described above and the length of time the
equity security’s fair value has been below the carrying amount. Management has
determined that we have the intent and ability to retain the equity securities
for a sufficient period of time to allow for recovery however, due to the amount
of time the fair value has been below the carrying value, the Company recorded
other-than-temporary impairment charges during 2009.
The
Company presently holds a no-load mutual fund, which invests primarily in
mortgage-related instruments. The fund holds mortgage-backed bonds
and securities issued by government-sponsored mortgage entities and by private
companies. The underlying assets are comprised of variable rate,
adjustable rate and fixed-rate residential mortgage and home equity
loans. As a result of the recent problems in the real estate and
mortgage securities markets, the fair value of the fund had declined and,
accordingly, the Company’s recorded other-than-temporary impairment charges of
18% of the value during 2008. Although the overall value of the fund
has continued to improve since early 2009, the value of the investment in the
fund was still below its cost basis by approximately $286,000 as of December 31,
2009. Based on the length of time the equity security’s value was
less than the carrying value, an other-than-temporary charge for $286,000 was
recorded.
The
Company also holds an investment in a mutual fund consisting of investment
grade, dividend paying common stocks of large capitalization companies
(companies with market capitalization in excess of $5
billion). Management recorded an other-than-temporary impairment
charge of 24% of the Fund’s value in 2008. Although the overall value
of the fund has continued to improve since early 2009, the value of the
investment in the fund was still below its cost basis by approximately $104,000
as of December 31, 2009. Based on the length of time the equity
security’s value was less than the carrying value, an other-than-temporary
charge for $104,000 was recorded.
The
Company held two other equity securities that had fair values less than the
carrying value and, due to the length of time they remained in this position,
were written down with other-than-temporary impairment charges during the fourth
quarter. A small common stock investment in Alliance Financial Corp
was written down $4,000 and a small common stock investment in The Phoenix
Companies was similarly written down by $1,000. The Phoenix stock
investment had also been adjusted as a result of other-than-temporary impairment
in 2008.
During
the second quarter of 2009, the Company recorded an other than temporary
impairment charge of $298,000 associated with its holdings in a senior unsecured
note issued by CIT Group, Inc. (“CIT”). As current concerns grew relating to
CIT’s ability to meet its current short-term obligations, combined with the
belief that other government programs were not going to be made available to
CIT, the Company concluded that the liquidation of its current holding at a loss
was prudent, and the security was sold on July 16, 2009. The
impairment charge recorded in the second quarter was based on the sale proceeds
as compared to the amortized cost basis of the security.
The
following table presents a roll-forward of the amount related to credit losses
on debt securities recognized in earnings for the year ended December 31,
2009.
|
(In
thousands)
|
Total
|
|||
|
Beginning
balance – January 1, 2009
|
$ | 875 | ||
|
Initial
credit impairment
|
298 | |||
|
Subsequent
credit impairments
|
- | |||
|
Reductions
for amounts recognized in earnings due to intent or requirement to
sell
|
- | |||
|
Reductions
for securities sold
|
(298 | ) | ||
|
Reductions
for increases in cash flows expected to be collected
|
- | |||
|
Ending
balance - December 31, 2009
|
$ | 875 | ||
Gross
realized gains (losses) on sales of available-for-sale securities and
other-than-temporary impairment charges for the year ended December 31 are
detailed below:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Realized
gains
|
$ | 814 | $ | 85 | ||||
|
Realized
losses
|
(9 | ) | (23 | ) | ||||
|
Other
than temporary impairment
|
(693 | ) | (2,253 | ) | ||||
| $ | 112 | $ | (2,191 | ) | ||||
As of
December 31, 2009 and December 31, 2008, securities with an amortized cost of
$45.7 million and $37.8 million, respectively, were pledged to collateralize
certain deposit and borrowing arrangements.
Management
has reviewed its mortgage-backed securities portfolio and determined that, to
the best of its knowledge, little or no exposure exists to sub-prime or other
high-risk residential mortgages. The Company is not in the practice
of investing in these types of loans.
NOTE
4: LOANS
Major
classifications of loans at December 31, are as follows:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Real
estate mortgages:
|
||||||||
|
Residential
|
$ | 131,929 | $ | 132,825 | ||||
|
Construction
|
2,399 | 2,508 | ||||||
|
Commercial
|
62,229 | 55,061 | ||||||
| 196,557 | 190,394 | |||||||
|
Other
loans:
|
||||||||
|
Consumer
|
3,580 | 3,516 | ||||||
|
Home
equity/second mortgage
|
26,086 | 24,392 | ||||||
|
Lease
financing
|
3,711 | 2,308 | ||||||
|
Commercial
|
28,082 | 25,215 | ||||||
|
Municipal
loans
|
3,654 | 3,162 | ||||||
| 65,113 | 58,593 | |||||||
|
Total
loans
|
261,670 | 248,987 | ||||||
|
Net
deferred loan costs
|
795 | 885 | ||||||
|
Less
allowance for loan losses
|
(3,078 | ) | (2,472 | ) | ||||
|
Loans
receivable, net
|
$ | 259,387 | $ | 247,400 | ||||
The
Company grants mortgage and consumer loans to customers throughout Oswego and
parts of Onondaga counties. Although the Company has a diversified loan
portfolio, a substantial portion of its debtors’ abilities to honor their
contracts is dependent upon the counties’ employment and economic
conditions.
The
following represents the activity associated with loans to executive officers
and directors and their affiliated entities during the year ended December 31,
2009:
|
(In
thousands)
|
||||
|
Balance
at the beginning of the year
|
$ | 6,270 | ||
|
Originations
|
709 | |||
|
Principal
payments
|
(1,097 | ) | ||
|
Balance
at the end of the year
|
$ | 5,882 | ||
Management
has reviewed its loan portfolio and determined that, to the best of its
knowledge, little or no exposure exists to sub-prime or other high-risk
residential mortgages. The Company is not in the practice of
originating these types of loans.
NOTE
5: ALLOWANCE FOR LOAN LOSSES
Changes
in the allowance for loan losses for the years ended December 31, are summarized
as follows:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Balance
at beginning of year
|
$ | 2,472 | $ | 1,703 | ||||
|
Recoveries
credited:
|
||||||||
|
Commercial
|
- | 17 | ||||||
|
Mortgage
|
3 | - | ||||||
|
Consumer
|
20 | 30 | ||||||
|
Total
recoveries
|
23 | 47 | ||||||
|
Loans
charged-off:
|
||||||||
|
Commercial
|
(74 | ) | (46 | ) | ||||
|
Mortgage
|
(85 | ) | - | |||||
|
Consumer
|
(134 | ) | (52 | ) | ||||
|
Total
charged-off
|
(293 | ) | (98 | ) | ||||
|
Net
charge-offs
|
(270 | ) | (51 | ) | ||||
|
Provision
for loan losses
|
876 | 820 | ||||||
|
Balance
at end of year
|
$ | 3,078 | $ | 2,472 | ||||
|
Ratio
of net charge-offs to average loans outstanding
|
0.11 | % | 0.02 | % | ||||
The
following is a summary of information pertaining to impaired loans for the years
ended December 31:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Impaired
loans without a valuation allowance
|
$ | 2,254 | $ | 2,020 | ||||
|
Impaired
loans with a valuation allowance
|
986 | 436 | ||||||
|
Total
impaired loans
|
$ | 3,240 | $ | 2,456 | ||||
|
Valuation
allowance related to impaired loans
|
$ | 79 | $ | 141 | ||||
|
Average
investment in impaired loans
|
$ | 2,921 | $ | 2,252 | ||||
|
Interest
income recognized on impaired loans
|
$ | 159 | $ | 176 | ||||
|
Interest
income recognized on a cash basis on
|
||||||||
|
impaired
loans
|
$ | - | $ | - | ||||
The amount of loans on which the Company has ceased accruing interest aggregated approximately $2,313,000 and $2,323,000 at December 31, 2009 and 2008, respectively. There were no loans past due ninety days or more and still accruing interest at December 31, 2009 or 2008.
NOTE
6: SERVICING
Loans
serviced for others are not included in the accompanying consolidated statements
of condition. The unpaid principal balances of mortgage and other
loans serviced for others were $46,225,000 and $46,095,000 at December 31, 2009
and 2008, respectively.
The
balance of capitalized servicing rights included in other assets at December 31,
2009 and 2008, was $61,000 and $15,000, respectively.
The
following summarizes mortgage-servicing rights capitalized and
amortized:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Mortgage
servicing rights capitalized
|
$ | 78 | $ | - | ||||
|
Mortgage
servicing rights amortized
|
$ | 32 | $ | 28 | ||||
NOTE
7: PREMISES AND EQUIPMENT
A summary
of premises and equipment at December 31, is as follows:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Land
|
$ | 1,226 | $ | 1,226 | ||||
|
Buildings
|
7,100 | 7,007 | ||||||
|
Furniture,
fixture and equipment
|
7,342 | 7,090 | ||||||
|
Construction
in progress
|
155 | 134 | ||||||
| 15,823 | 15,457 | |||||||
|
Less:
Accumulated depreciation
|
8,650 | 8,007 | ||||||
| $ | 7,173 | $ | 7,450 | |||||
NOTE
8: GOODWILL
As a
result of deteriorating economic conditions in the financial markets, which
impacted the trading value of the Company’s common stock, management engaged an
independent third party to test the Company’s goodwill for impairment as of
December 31, 2008. Management considers the Company, which includes
all banking operations on a consolidated basis, as the “reporting unit” for the
purpose of testing for goodwill impairment. Testing was performed by
utilizing a three-step valuation approach using a measurement date of December
31, 2008:
|
(1)
|
The
estimated fair value of the Company as of the measurement date was
determined utilizing three valuation methodologies including the
Comparable Transactions approach, the Control Premium approach and the
Discounted Cash Flow approach. All approaches were considered
in the final estimate of fair value, with the results of the approaches
weighted based upon their level within the fair value hierarchy and
management’s comfort level with each approach. In the final determination,
the greatest emphasis was placed on approaches utilizing primarily Level 2
inputs (the Comparable Transaction and Control Premium approaches), and
less weight was placed on the Discounted Cash Flow approach due to the
number of Level 3 inputs that were
utilized.
|
|
(2)
|
The
amount of goodwill that would be generated if the Company were to be sold
at a price equal to its estimated fair value was
calculated.
|
|
(3)
|
A
comparison of the estimated fair value of goodwill, determined in steps
(1) and (2) above, to the current carrying value of goodwill on the
Company’s books as of the measurement date was
performed.
|
The
resulting calculations determined the estimated fair value of the goodwill to be
$6.8 million, which greatly exceeded the Company’s carrying value of
approximately $3.8 million and thus, there was no goodwill impairment at
December 31, 2008.
Since the
date of the third party evaluation, the Company has experienced improvement in
its book value per common share and tangible book value per common
share. Total assets, total deposits, and the percentage of core
deposits to total deposits have all increased since the prior valuation
date. There has been no significant deterioration in the fair value
of the Company’s stock and projected future earnings levels and dividend paying
capacity have both significantly improved since the last valuation
period. Given its evaluation of goodwill, which considered these
factors, management has determined that the current carrying value of goodwill
is not impaired at December 31, 2009.
NOTE
9: DEPOSITS
A summary
of deposits at December 31, is as follows:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Savings
accounts
|
$ | 52,663 | $ | 49,550 | ||||
|
Time
accounts
|
87,805 | 91,223 | ||||||
|
Time
accounts over $100,000
|
53,421 | 40,731 | ||||||
|
Money
management accounts
|
11,327 | 10,300 | ||||||
|
MMDA
accounts
|
35,788 | 27,594 | ||||||
|
Demand
deposit interest-bearing
|
25,367 | 20,916 | ||||||
|
Demand
deposit noninterest-bearing
|
27,300 | 26,150 | ||||||
|
Mortgage
escrow funds
|
3,168 | 2,974 | ||||||
| $ | 296,839 | $ | 269,438 | |||||
At
December 31, 2009, the scheduled maturities of time deposits are as
follows:
|
(In
thousands)
|
||||
|
Year
of Maturity:
|
|
|||
|
2010
|
$ | 96,281 | ||
|
2011
|
19,500 | |||
|
2012
|
7,565 | |||
|
2013
|
11,712 | |||
|
2014
|
2,623 | |||
|
Thereafter
|
3,545 | |||
| $ | 141,226 | |||
NOTE
10: BORROWED FUNDS
The
composition of borrowings (excluding junior subordinated debentures) at December
31, is as follows:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Short-term:
|
|
|||||||
|
FHLB
Advances
|
$ | - | $ | 4,000 | ||||
|
Overnight
Line of Credit with FHLB
|
- | 13,575 | ||||||
|
Total
short-term borrowings
|
$ | - | $ | 17,575 | ||||
|
Long-term:
|
||||||||
|
FHLB
repurchase agreements
|
$ | - | $ | 2,400 | ||||
|
FHLB
advances
|
31,000 | 27,000 | ||||||
|
Citigroup
Repurchase agreements
|
5,000 | 5,000 | ||||||
|
Total
long-term borrowings
|
$ | 36,000 | $ | 34,400 | ||||
The
principal balances, interest rates and maturities of the above fixed rate
borrowings at December 31, 2009 is as follows:
|
Term
|
Principal
|
Rates
|
||||||
|
(Dollars
in thousands)
|
||||||||
|
Long-term:
|
||||||||
|
Repurchase
agreements (due in 2013)
|
5,000 | 2.95 | % | |||||
|
Advances
with FHLB
|
||||||||
|
due
within 1 year
|
12,000 | 2.42%-4.39 | % | |||||
|
due
within 2 years
|
6,000 | 2.33%-4.19 | % | |||||
|
due
within 3 years
|
4,000 | 2.70%-4.91 | % | |||||
|
due
within 4 years
|
4,000 | 4.46%-4.53 | % | |||||
|
due
within 5 years
|
5,000 | 2.85%-3.07 | % | |||||
|
Total
advances with FHLB
|
$ | 31,000 | ||||||
|
Total
long-term borrowings
|
$ | 36,000 | ||||||
The
repurchase agreement with Citi Group is collateralized by certain investment
securities having a carrying value of $6,148,000 at December 31,
2009. The collateral is under the Company’s control. The
overnight line of credit agreement with the FHLB is used for liquidity
purposes. Interest on this line is determined at the time of
borrowing. The average rate paid on the overnight line during 2009
approximated 0.52%. As a companion to the overnight line
with the FHLB, the Company also has access to a One-Month Overnight Repricing
Line of Credit. This allows the Company to borrow funds for a term of
one month, which reprices daily over the term, thus freeing up the overnight
line for daily liquidity needs. The Company has $36,148,000 available
under this facility, yet has never accessed the one-month overnight repricing
line. In addition to the overnight line of credit program, the Company also has
access to the FHLB’s Term Advance Program under which it can borrow at various
terms and interest rates. Residential mortgage loans with a carrying
value of $65,406,000 and FHLB stock with a carrying value of $1,899,400 have
been pledged by the Company under a blanket collateral agreement to secure the
Company’s line of credit and term borrowings. The total outstanding
indebtedness under all three borrowing facilities with the FHLB cannot exceed
the total value of the assets pledged under the blanket collateral
agreement. The
Company
also has a $6.5 million line of credit available at December 31, 2009 with
the Federal Reserve Bank of New York through its Discount Window and has pledged
various corporate and municipal securities against the line. The Company has an
$11.0 million line of credit available with three other correspondent banks.
$4.0 million of that line of credit is available on an unsecured basis and the
remaining $7.0 million must be collateralized with marketable investment
securities. Interest on the lines is determined at the time of
borrowing.
The
Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust II,
of which the Company owns 100% of the common equity. The Trust issued
$5,000,000 of 30 year floating rate Company-obligated pooled capital securities
of Pathfinder Statutory Trust II. The Company borrowed the proceeds
of the capital securities from its subsidiary by issuing floating rate junior
subordinated deferrable interest debentures having substantially similar
terms. The capital securities mature in 2037 and are treated as Tier
1 capital by the Federal Deposit Insurance Corporation and the Office of Thrift
Supervision. The capital securities of the trust are a pooled trust
preferred fund of Preferred Term Securities VI, Ltd. and are tied to the 3-month
LIBOR plus 1.65% (1.90% at December 31, 2009) with a five-year call
provision. The Company guarantees all of these
securities.
The
Company's equity interest in the trust subsidiary of $155,000 is reported in
"Other assets". For regulatory reporting purposes, the Federal
Reserve Board has indicated that the preferred securities will continue to
qualify as Tier 1 Capital subject to previously specified limitations, until
further notice. If regulators make a determination that Trust Preferred
Securities can no longer be considered in regulatory capital, the securities
become callable and the Company may redeem them.
NOTE
11: EMPLOYEE BENEFITS AND DEFERRED COMPENSATION AND
SUPPLEMENTAL RETIREMENT PLANS
The
Company has a noncontributory defined benefit pension plan covering
substantially all employees. The plan provides defined benefits based on years
of service and final average salary. In addition, the Company provides certain
health and life insurance benefits for eligible retired
employees. The healthcare plan is contributory with participants’
contributions adjusted annually; the life insurance plan is
noncontributory. Employees with less than 14 years of service as of
January 1, 1995, are not eligible for the health and life insurance retirement
benefits.
The
following tables set forth the changes in the plans’ benefit obligations, fair
value of plan assets and the plans’ funded status as of December
31:
|
Pension
Benefits
|
Postretirement
Benefits
|
|||||||||||||||
|
(In
thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
Change
in benefit obligations:
|
||||||||||||||||
|
Benefit
obligations at beginning of year
|
$ | 5,493 | $ | 4,843 | $ | 369 | $ | 335 | ||||||||
|
Adjustment
for measurement date change
|
- | 132 | - | 6 | ||||||||||||
|
Service
cost
|
228 | 214 | 3 | 3 | ||||||||||||
|
Interest
cost
|
332 | 316 | 22 | 21 | ||||||||||||
|
Actuarial
loss (gain)
|
188 | 174 | (38 | ) | 32 | |||||||||||
|
Benefits
paid
|
(146 | ) | (186 | ) | (24 | ) | (28 | ) | ||||||||
|
Benefit
obligations at end of year
|
6,095 | 5,493 | 332 | 369 | ||||||||||||
|
Change
in plan assets:
|
||||||||||||||||
|
Fair
value of plan assets at beginning of year
|
3,461 | 4,977 | - | - | ||||||||||||
|
Actual
return on plan assets
|
937 | (1,493 | ) | - | - | |||||||||||
|
Benefits
paid
|
(146 | ) | (186 | ) | (24 | ) | (28 | ) | ||||||||
|
Employer
contributions
|
2,000 | 163 | 24 | 28 | ||||||||||||
|
Fair
value of plan assets at end of year
|
6,252 | 3,461 | - | - | ||||||||||||
|
Funded
Status - asset (liability)
|
$ | 157 | $ | (2,032 | ) | $ | (332 | ) | $ | (369 | ) | |||||
Amounts
recognized in accumulated other comprehensive loss as of December
31:
|
(In
thousands)
|
2009
|
2008
|
||
|
Unrecognized
transition obligation
|
$ |
38
|
$ 56
|
|
|
Net
loss
|
2,753
|
3,423
|
||
|
2,791
|
3,479
|
|||
|
Tax
Effect
|
1,117
|
1,392
|
||
| $ |
1,674
|
$ 2,087
|
The
accumulated benefit obligation for the defined benefit pension plan was
$5,026,000 and $4,537,000 at December 31, 2009 and 2008,
respectively. The postretirement plan had an accumulated benefit
obligation of $332,000 and $369,000 at December 31, 2009 and 2008,
respectively.
The
significant assumptions used in determining the benefit obligations as of
December 31, 2009 and 2008 are as follows:
|
Pension
Benefits
|
Postretirement
Benefits
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Weighted
average discount rate
|
6.25 | % | 6.13 | % | 6.25 | % | 6.13 | % | ||||||||
|
Rate
of increase in future compensation levels
|
3.50 | % | 3.50 | % | - | - | ||||||||||
Assumed
health care cost trend rates have a significant effect on the amounts reported
for the postretirement health care plan. The annual rates of
increase in the per capita cost of covered medical and prescription drug
benefits for year-end calculations were assumed to be 9.00% for each
year. The rates were assumed to decrease gradually to 5.00% in 2014
and remain at that level thereafter. A one-percentage point change in
the health care cost trend rates would have the following effects:
|
1
Percentage
|
1
Percentage
|
|||||||
|
Point
|
Point
|
|||||||
|
(In
thousands)
|
Increase
|
Decrease
|
||||||
|
Effect
on total of service and interest
|
|
|
||||||
|
cost
components
|
$ | 1 | $ | (1 | ) | |||
|
Effect
on post retirement benefit obligation
|
7 | (7 | ) | |||||
The
composition of the net periodic benefit plan cost for the years ended December
31, 2009 and 2008 is as follows:
|
Pension
Benefits
|
Postretirement
Benefits
|
|||||||||||||||
|
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Service
cost
|
$ | 228 | $ | 214 | $ | 3 | $ | 3 | ||||||||
|
Interest
cost
|
332 | 316 | 22 | 21 | ||||||||||||
|
Amortization
of transition obligation
|
- | - | 18 | 18 | ||||||||||||
|
Amortization
of net losses
|
260 | 66 | 1 | - | ||||||||||||
|
Expected
return on plan assets
|
(378 | ) | (447 | ) | - | - | ||||||||||
|
Net
periodic benefit plan cost
|
$ | 442 | $ | 149 | $ | 44 | $ | 42 | ||||||||
The
significant assumptions used in determining the net periodic benefit plan cost
for years ended December 31 were as follows:
|
Pension
Benefits
|
Postretirement
Benefits
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Weighted
average discount rate
|
6.13 | % | 6.63 | % | 6.13 | % | 6.63 | % | ||||||||
|
Expected
long term rate of return on plan assets
|
8.00 | % | 9.00 | % | - | - | ||||||||||
|
Rate
of increase in future compensation levels
|
3.50 | % | 4.00 | % | - | - | ||||||||||
The
long-term rate-of-return-on-assets assumption was set based on historical
returns earned by equities and fixed income securities, adjusted to reflect
expectations of future returns as applied to the plan’s target allocation of
asset classes. Equities and fixed income securities were assumed to
earn real rates of return in the ranges of 5.0%-9.0% and 2.0%-6.0%,
respectively. The long-term inflation rate was estimated to be
3.0%. When these overall return expectations are applied to the
plan’s target allocation, the expected rate of return was determined to be in
the range of 7.0% to 11.0%. Management has chosen to use an 8%
expected long-term rate of return to reflect current economic conditions and
expected returns.
The
expected long-term rate of return for 2010 will continue to be
8.0%. The estimated net actuarial loss that will be amortized from
accumulated other comprehensive loss into net periodic benefit plan cost during
2010 is $200,000. The estimated amortization of the unrecognized
transition obligation in 2010 is $18,000. Based on these factors, and
a lower expected rate of return on plan assets, the expected net periodic
benefit plan cost for 2010 is estimated at $371,000.
Plan
assets are invested in diversified investment funds of the RSI Retirement Trust
(the “Trust”), a private placement investment fund. The investment
funds include a series of equity and bond mutual funds or commingled trust
funds, each with its own investment objectives, investment strategies and risks,
as detailed in the Statement of Investment Objectives and
Guidelines. The Trust has been given discretion by the Plan Sponsor
to determine the appropriate strategic asset allocation versus plan liabilities,
as governed by the Trust’s Statement of Investment Objectives and Guidelines
(the “Guidelines”).
The
long-term investment objectives are to maintain plan assets at a level that will
sufficiently cover long-term obligations and to generate a return on plan assets
that will meet or exceed the rate at which long-term obligations will
grow. A broadly diversified combination of equity and fixed income
portfolios and various risk management techniques are used to help achieve these
objectives.
In
addition, significant consideration is paid to the plan’s funding levels when
determining the overall asset allocation. If the plan is considered
to be well-funded, approximately 65% of the plan’s assets are allocated to
equities and approximately 35% allocated to fixed-income. If the
plan
does not
satisfy the criteria for a well-funded plan, approximately 50% of the plan’s
assets are allocated to equities and approximately 50% allocated to
fixed-income. Asset rebalancing normally occurs when the equity and
fixed-income allocations vary by more than 10% from their respective targets
(i.e., a 20% policy range guideline).
The
investment goal is to achieve investment results that will contribute to the
proper funding of the pension plan by exceeding the rate of inflation over the
long-term. In addition, investment managers for the Trust are
expected to provide above average performance when compared to their peer
managers. Performance volatility is also
monitored. Risk/volatility is further managed by the distinct
investment objectives of each of the Trust funds and the diversification within
each fund.
Beginning
in 2009, disclosures for the plan must include increased detail on the major
categories of assets, including a disclosure of which fair values are based on
assets traded in active markets (Level 1), determined using significant
observable inputs (Level 2), or are estimated based on significant unobservable
inputs (Level 3).
Pension
plan assets measured at fair value are summarized below:
|
At
December 31, 2009
|
||||||||||||||||
|
Total
Fair
|
||||||||||||||||
|
(In
thousands)
|
Level
1
|
Level
2
|
Level
3
|
Value
|
||||||||||||
|
Asset
Category:
|
||||||||||||||||
|
Mutual
funds - equity
|
||||||||||||||||
|
Large-cap
value (a)
|
$ | 556 | $ | - | $ | - | $ | 556 | ||||||||
|
Small-cap
Core (b)
|
657 | - | - | 657 | ||||||||||||
|
Common/collective
trusts - equity
|
||||||||||||||||
|
Large-cap
core (c)
|
- | 625 | - | 625 | ||||||||||||
|
Large-cap
value (d)
|
- | 311 | - | 311 | ||||||||||||
|
Large-cap
growth (e)
|
- | 915 | - | 915 | ||||||||||||
|
International
Core (f)
|
- | 884 | - | 884 | ||||||||||||
|
Common/collective
trusts - fixed income
|
||||||||||||||||
|
Market
duration fixed (g)
|
- | 2,304 | - | 2,304 | ||||||||||||
|
Total
|
$ | 1,213 | $ | 5,039 | $ | - | $ | 6,252 | ||||||||
|
(a)
|
This
category contains large-cap stocks with above average
yield. The portfolio typically holds between 60 and 70
stocks.
|
|
(b)
|
This
category contains stocks whose sector weightings are maintained within a
narrow band around those of the Russell 2000 index. The
portfolio will typically hold more than 150
stocks.
|
|
(c)
|
This
fund tracks the performance of the S&P 500 Index by purchasing the
securities represented in the Index in approximately the same weightings
as the Index.
|
|
(d)
|
This
category consists of investments whose sector and industry exposures are
maintained within a narrow band around Russell 1000 index. The
portfolio holds approximately 150
stocks.
|
|
(e)
|
This
category consists of a portfolio of between 45 and 65 stocks that will
typically overweight technology and health
care.
|
|
(f)
|
This
category consists of a broadly diversified portfolio of non-U.S. domiciled
stocks. The portfolio will typically hold more than 200 stocks,
with 0% - 35% invested in emerging markets
securities.
|
|
(g)
|
This
category consists of an index fund that tracks the Lehman Brothers U.S.
Aggregate Bond Index. The fund invests in Treasury,
agency, corporate, mortgage-backed and asset-backed
securities.
|
For the
fiscal year ending December 31, 2010, the Bank expects to contribute
approximately $258,000 to the pension plan and $24,000 to the postretirement
plan.
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
|
Years
ending December 31:
|
||||
|
(In
thousands)
|
||||
|
2010
|
$ | 176 | ||
|
2011
|
184 | |||
|
2012
|
198 | |||
|
2013
|
215 | |||
|
2014
|
248 | |||
|
Years
2015 - 2019
|
1,536 | |||
The
Company also offers a 401(k) plan to its employees. Contributions to
this plan by the Company were $188,000 and $116,000 for 2009 and 2008,
respectively.
The
Company maintains optional deferred compensation plans for its directors, and
certain executive officers, whereby fees and income normally received are
deferred and paid by the Company based upon a payment schedule commencing at age
65 and continuing monthly for 10 years. Directors must serve on the board for a
minimum of 5 years to be eligible for the Plan. At December 31, 2009 and 2008,
other liabilities include approximately $1,806,000 and $1,741,000, respectively,
relating to deferred compensation. Deferred compensation expense for the years
ended December 31, 2009 and 2008 amounted to approximately $209,000 and
$225,000, respectively.
The
Company has a supplemental executive retirement plan for the benefit of certain
executive officers. At December 31, 2009 and 2008, other liabilities
included approximately $298,000 and $333,000 accrued under this plan.
Compensation expense includes approximately $50,000 relating to the supplemental
executive retirement plan for the year ended December 31, 2009 and $49,000 for
the year ended December 31, 2008.
To fund
the benefits under these plans, the Company is the owner of single premium life
insurance policies on participants in the non-qualified retirement
plans. At December 31, 2009 and 2008, the cash surrender values of
these policies were $6,956,000 and $6,731,000, respectively.
NOTE
12: STOCK BASED COMPENSATION PLAN
In
February 1997, the Board of Directors approved an option plan and granted
options thereunder with an exercise price equal to the market value of the
Company’s shares at the date of grant. Under the Stock Option Plan,
up to 132,249 options had been authorized for grant of incentive stock options
and nonqualified stock options. None of the original options granted
remain at December 31, 2009.
In July
2001, the Board approved the issuance of 38,499 stock options remaining in the
1997 Stock Option Plan. The exercise price was equal to the market
value of the Company's shares at the date of grant ($8.34). The
options granted under the issuance have a 10-year term with one-third vesting
upon grant date and the remaining vesting and becoming exercisable ratably over
a 2-year period.
Activity
in the Stock Option Plan is as follows:
|
Weighted
|
||||||||||||
|
Options
|
Average
|
Shares
|
||||||||||
|
(Shares
in thousands)
|
Outstanding
|
Exercise
Price
|
Exercisable
|
|||||||||
|
Outstanding
at January 1, 2008
|
20 | $ | 8.34 | 20 | ||||||||
|
Exercised
|
(1 | ) | 8.34 | |||||||||
|
Expired
|
- | - | ||||||||||
|
Outstanding
at December 31, 2008
|
19 | $ | 8.34 | 19 | ||||||||
|
Exercised
|
- | - | ||||||||||
|
Expired
|
- | - | ||||||||||
|
Outstanding
at December 31, 2009
|
19 | $ | 8.34 | 19 | ||||||||
The
aggregate intrinsic value of a stock option represents the total pre-tax
intrinsic value (the amount by which the current market value of the underlying
stock exceeds the exercise price of the option) that would have been received by
the option holders had all option holders exercised their options on December
31, 2009. The intrinsic value changes based on fluctuations in the
market value of the Company’s stock. At December 31, 2009, the market
value of the Company’s stock was less than the stock option price, and
therefore, the outstanding and exercisable stock options had no aggregate
intrinsic value.
There
were no stock options exercised during 2009.
At
December 31, 2009, the 18,850 options outstanding all had an exercise price of
$8.34 and an average remaining contractual life of 1.5 years.
NOTE
13: INCOME TAXES
The
provision for income taxes for the years ended December 31, is as
follows:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Current
|
$ | 346 | $ | 491 | ||||
|
Deferred
|
704 | (388 | ) | |||||
| $ | 1,050 | $ | 103 | |||||
The
provision for income taxes includes the following:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Federal
Income Tax
|
$ | 993 | $ | 191 | ||||
|
New
York State Franchise Tax
|
57 | (88 | ) | |||||
| $ | 1,050 | $ | 103 | |||||
The
components of the net deferred tax asset, included in other assets as of
December 31, are as follows:
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Assets:
|
||||||||
|
Deferred
compensation
|
$ | 814 | $ | 802 | ||||
|
Allowance
for loan losses
|
1,191 | 956 | ||||||
|
Postretirement
benefits
|
128 | 144 | ||||||
|
Pension
liability
|
- | 786 | ||||||
|
Mortgage
recording tax credit carryforward
|
417 | 417 | ||||||
|
Investment
securities
|
- | 503 | ||||||
|
Impairment
losses on investment securities
|
686 | 505 | ||||||
|
Other
|
245 | 336 | ||||||
| 3,481 | 4,449 | |||||||
|
Liabilities:
|
||||||||
|
Pension
asset
|
(61 | ) | - | |||||
|
Depreciation
|
(420 | ) | (475 | ) | ||||
|
Accretion
|
(48 | ) | (45 | ) | ||||
|
Loan
origination fees
|
(308 | ) | (349 | ) | ||||
|
Intangible
assets
|
(1,030 | ) | (841 | ) | ||||
|
Investment
securities
|
(166 | ) | - | |||||
|
Prepaid
expenses
|
(318 | ) | (177 | ) | ||||
| (2,351 | ) | (1,887 | ) | |||||
| 1,130 | 2,562 | |||||||
|
Less:
deferred tax asset valuation allowance
|
(458 | ) | (540 | ) | ||||
|
Net
deferred tax asset
|
$ | 672 | $ | 2,022 | ||||
Realization
of deferred tax assets is dependent upon the generation of future taxable income
or the existence of sufficient taxable income within the carry back
period. A valuation allowance is provided when it is more likely than
not that some portion, or all of the deferred tax assets, will not be
realized. In assessing the need for a valuation allowance, management
considers the scheduled reversal of the deferred tax liabilities, the level of
historical taxable income and the projected future level of taxable income over
the periods in which the temporary differences comprising the deferred tax
assets will be deductible. The judgment about the level of future
taxable income is inherently subjective and is reviewed on a continual basis as
regulatory and business factors change. The valuation allowance of $458,000
represents the portion of the deferred tax asset that management
believes may not be realizable, as the Company may not generate sufficient
capital gains to offset its capital loss carry forward.
A
reconciliation of the federal statutory income tax rate to the effective income
tax rate for the years ended December 31, is as follows:
|
2009
|
2008
|
|||||||
|
Federal
statutory income tax rate
|
34.0 | % | 34.0 | % | ||||
|
State
tax, net of federal benefit
|
2.1 | (12.5 | ) | |||||
|
Tax-exempt
interest income, net of TEFRA
|
(1.5 | ) | (17.7 | ) | ||||
|
Increase
in value of life insurance
|
(2.5 | ) | (19.2 | ) | ||||
|
Deferred
tax valuation allowance
|
7.1 | 45.2 | ||||||
|
Other
|
0.2 | (7.9 | ) | |||||
|
Effective
income tax rate
|
39.4 | % | 21.9 | % | ||||
At
December 31, 2009 and 2008, the Company did not have any uncertain tax
positions. The Company’s policy is to recognize interest and
penalties on unrecognized tax benefits, if any, in income tax expense in the
Consolidated Statements of Income. The tax years subject to
examination by the taxing authorities are the years ended December 31, 2009,
2008, 2007 and 2006.
NOTE
14: EARNINGS PER SHARE
The
following is a reconciliation of basic to diluted earnings per share for the
years ended December 31:
|
(In
thousands, except per share data)
|
Earnings
|
Shares
|
EPS
|
|||||||||
|
2009 Net
income
|
$ | 1,615 | ||||||||||
|
Preferred
stock dividends and discount accretion
|
96 | |||||||||||
|
Net
income available to common shareholders
|
1,519 | |||||||||||
|
Basic
EPS
|
1,519 | 2,485 | $ | 0.61 | ||||||||
|
Effect
of dilutive securities
|
||||||||||||
|
Stock
options
|
- | - | - | |||||||||
|
Diluted
EPS
|
$ | 1,519 | 2,485 | $ | 0.61 | |||||||
|
2008 Net
income
|
$ | 368 | ||||||||||
|
Basic
EPS
|
368 | 2,484 | $ | 0.15 | ||||||||
|
Effect
of dilutive securities
|
||||||||||||
|
Stock
options
|
- | 1 | - | |||||||||
|
Diluted
EPS
|
$ | 368 | 2,485 | $ | 0.15 | |||||||
NOTE
15: COMMITMENTS AND CONTINGENCIES
The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Such commitments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated statement of
condition. The contractual amount of those commitments to extend credit reflects
the extent of involvement the Company has in this particular class of financial
instrument. The Company’s exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
is represented by the contractual amount of the instrument. The
Company uses the same credit policies in making commitments as it does for
on-balance sheet instruments.
At
December 31, 2009 and 2008, the following financial instruments were outstanding
whose contract amounts represent credit risk:
|
Contract
Amount
|
||||||||
|
(In
thousands)
|
2009
|
2008
|
||||||
|
Commitments
to grant loans
|
$ | 7,187 | $ | 8,723 | ||||
|
Unfunded
commitments under lines of credit
|
16,411 | 15,710 | ||||||
|
Standby
letters of credit
|
1,606 | 1,639 | ||||||
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since some of the commitment amounts are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer’s creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company upon extension of credit, is based on management’s credit
evaluation of the counter party. Collateral held varies but may include
residential real estate and income-producing commercial
properties. Loan commitments outstanding at December 31, 2009 with
fixed interest rates amounted to approximately $2.3 million. Loan commitments,
including unused lines of credit and standby letters of credit, outstanding at
December 31, 2009 with variable interest rates amounted to approximately $22.9
million. These outstanding loan commitments carry current market
rates.
Unfunded
commitments under standby letters of credit, revolving credit lines and
overdraft protection agreements are commitments for possible future extensions
of credit to existing customers. These lines of credit usually do not
contain a specified maturity date and may not be drawn upon to the total extent
to which the Company is committed.
Outstanding
letters of credit written are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The
majority of these standby letters of credit expire within the next twelve
months. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending other loan
commitments. The Bank requires collateral supporting these letters of
credit as deemed necessary. Management believes that the proceeds
obtained through a liquidation of such collateral would be sufficient to cover
the maximum potential amount of future payments required under the corresponding
guarantees. The amount of the liability as of December 31, 2009 and
2008 for guarantees under standby letters of credit issued is not
material.
The
Company leases land and leasehold improvements under agreements that expire in
various years with renewal options over the next 30 years. Rental
expense, included in building occupancy expense, amounted to $66,000 for each
year presented. In October 2002, the Company entered into a land
lease with one of its directors on an arms-length basis. In January 2006, the
Company entered into a lease with Pathfinder Bancorp, MHC for the use of a
training facility. This lease was also executed on an arms-length
basis. The rent expense paid to the related parties during 2009 and
2008 was $45,000 for each year. Approximate minimum rental commitments for
noncancelable operating leases are as follows:
|
Years
Ending December 31:
|
||||
|
(In
thousands)
|
||||
|
2010
|
$ | 66 | ||
|
2011
|
52 | |||
|
2012
|
43 | |||
|
2013
|
21 | |||
|
2014
|
- | |||
|
Thereafter
|
- | |||
|
Total
minimum lease payments
|
$ | 182 | ||
NOTE
16: DIVIDENDS AND RESTRICTIONS
The Board
of Directors of Pathfinder Bancorp, M.H.C., determines whether the Holding
Company will waive or receive dividends declared by the Company each time the
Company declares a dividend, which is expected to be on a quarterly basis. The
Holding Company may elect to receive dividends and utilize such funds to pay
expenses or for other allowable purposes. The Office of Thrift Supervision
(“OTS”) has indicated that (i) the Holding Company shall provide the OTS
annually with written notice of its intent to waive its dividends prior to the
proposed date of the dividend and the OTS shall have the authority to approve or
deny any dividend waiver request; (ii) if a waiver is granted, dividends waived
by the Holding Company will be excluded from the Company’s capital accounts for
purposes of calculating dividend payments to minority
shareholders. During 2009, the Company paid or accrued dividends
totaling $190,000 to the Holding Company. The Holding Company did not waive the
right to receive its portion of the cash dividends declared during
2009. During 2008, the Holding Company waived one quarter’s dividends
totaling $163,000.
The
Company's ability to pay dividends to its shareholders is largely dependent on
the Bank's ability to pay dividends to the Company. In addition to
state law requirements and the capital requirements discussed in Note 17,
federal statutes, regulations and policies limit the circumstances under which
the Bank may pay dividends. The amount of retained earnings legally
available under these regulations approximated $1,494,000 as of December 31,
2009. Dividends paid by the Bank to the Company would be prohibited
if the effect thereof would cause the Bank’s capital to be reduced below
applicable minimum capital requirements. The Company is prohibited
from accepting or directing Pathfinder Bank to declare or pay a dividend or
other capital distributions without prior written approval of the
OTS.
NOTE
17: REGULATORY MATTERS
The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of its assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain amounts and ratios (set forth in the table below) of total and Tier
1 capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital (as defined) to average assets (as defined).
As of
December 31, 2009, the Bank’s most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as “well-capitalized”, under the
regulatory framework for prompt corrective action. To be categorized
as “well-capitalized”, the Bank must maintain total risk based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the tables below. There
are no conditions or events since that notification that management believes
have changed the Bank’s category.
The
Bank’s actual capital amounts and ratios as of December 31, 2009 and 2008 are
presented in the following table.
|
Minimum
|
||||||||||||||||||||||||
|
To
Be "Well-
|
||||||||||||||||||||||||
|
Minimum
|
Capitalized"
|
|||||||||||||||||||||||
|
For
Capital
|
Under
Prompt
|
|||||||||||||||||||||||
|
|
Actual
|
Adequacy
Purposes
|
Corrective
Provisions
|
|||||||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
As
of December 31, 2009:
|
||||||||||||||||||||||||
|
Total
Core Capital (to Risk-Weighted Assets)
|
$ | 33,405 | 14.0 | % | $ | 19,163 | 8.0 | % | $ | 23,954 | 10.0 | % | ||||||||||||
|
Tier
1 Capital (to Risk-Weighted Assets)
|
$ | 30,399 | 12.7 | % | $ | 9,582 | 4.0 | % | $ | 14,372 | 6.0 | % | ||||||||||||
|
Tier
1 Capital (to Average Assets)
|
$ | 30,399 | 8.4 | % | $ | 14,517 | 4.0 | % | $ | 18,146 | 5.0 | % | ||||||||||||
|
As
of December 31, 2008:
|
||||||||||||||||||||||||
|
Total
Core Capital (to Risk-Weighted Assets)
|
$ | 25,625 | 10.8 | % | $ | 18,944 | 8.0 | % | $ | 23,680 | 10.0 | % | ||||||||||||
|
Tier
1 Capital (to Risk-Weighted Assets)
|
$ | 23,152 | 9.8 | % | $ | 9,472 | 4.0 | % | $ | 14,208 | 6.0 | % | ||||||||||||
|
Tier
1 Capital (to Average Assets)
|
$ | 23,152 | 6.8 | % | $ | 13,702 | 4.0 | % | $ | 17,128 | 5.0 | % | ||||||||||||
On
September 11, 2009, the Company entered into the Purchase Agreement with the
United States Department of the Treasury pursuant to which the Company has
issued and sold to Treasury: (i) 6,771 shares of the Company’s Fixed Rate
Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share,
having a liquidation amount per share equal to $1,000, for a total price of
$6,771,000; and (ii) a Warrant to purchase 154,354 shares of the Company’s
common stock, par value $0.01 per share, at an exercise price per share of
$6.58. The Company contributed to Pathfinder Bank, its subsidiary,
$5,500,000 or 81.23% of the proceeds of the sale of the Series A Preferred
Stock.
The
$6,771,000 of proceeds was allocated to the Series A Preferred Stock and the
Warrant based on their relative fair values at issuance ($6,065,000 was
allocated to the Series A Preferred Stock and $706,000 to the
Warrant). The difference between the initial value allocated to the
Series A Preferred Stock and the liquidation value of $6,771,000, i.e. the
preferred discount, will be charged to retained earnings over the first five
years of the contract as an adjustment to the dividend yield using the effective
yield method.
The
Series A Preferred Stock pays cumulative dividends at a rate of 5% per
annum for the first five years and thereafter at a rate of 9% per
annum. The Series A Preferred Stock is generally
non-voting. Prior to September 11, 2012, and unless the Company has
redeemed all of the Series A Preferred Stock or the Treasury Department has
transferred all of the Series A Preferred Stock to a third party, the
approval of the Treasury Department will be required for the Company to increase
its common stock dividend or repurchase its common stock or other equity or
capital securities, other than in certain circumstances specified in the
Purchase Agreement.
The
Warrant has a ten-year term and is immediately exercisable. The
Warrant provides for the adjustment of the exercise price and the number of
shares of the Company’s common stock issuable upon exercise pursuant to
customary anti-dilution provisions, such as upon stock splits or distributions
of securities or other assets to holders of the Company’s common stock, and upon
certain issuances of the Company’s common stock at or below a specified price
relative to the then current market price of the Company’s common
stock. Pursuant to the Purchase Agreement, the Treasury Department
has agreed not to exercise voting power with respect to any shares of common
stock issued upon exercise of the Warrant.
The
Series A Preferred Stock and the Warrant were issued in a private placement
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended. The Company has agreed to register for resale the
Series A Preferred Stock, the Warrant and the shares of common stock
underlying the Warrant (the “Warrant Shares”), as soon as practicable after the
date of the issuance of the Series A Preferred Stock and the
Warrant. Neither the Series A Preferred Stock nor the Warrant
will be subject to any contractual restrictions on transfer.
The
Company’s goal is to maintain a strong capital position, consistent with the
risk profile of its subsidiary banks that supports growth and expansion
activities while at the same time exceeding regulatory standards. At
December 31, 2009, Pathfinder Bank exceeded all regulatory required minimum
capital ratios and met the regulatory definition of a “well-capitalized”
institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based
capital ratio exceeding 6% and a total risk-based capital ratio exceeding
10%.
The Bank
is required to maintain average balances on hand or with the Federal Reserve
Bank. At December 31, 2009 and 2008, these reserve balances amounted
to $2,070,000 and $2,306,000, respectively.
NOTE 18: INTEREST RATE
DERIVATIVE
Derivative
instruments are entered into primarily as a risk management tool of the Company.
Financial derivatives are recorded at fair value as other assets and other
liabilities. The accounting for changes in the fair value of a derivative
depends on whether it has been designated and qualifies as part of a hedging
relationship. For a fair value hedge, changes in the fair value of the
derivative instrument and changes in the fair value of the hedged asset or
liability are recognized currently in earnings. For a cash flow hedge, changes
in the fair value of the derivative instrument, to the extent that it is
effective, are recorded in other comprehensive income and subsequently
reclassified to earnings as the hedged transaction impacts net income. Any
ineffective portion of a cash flow hedge is recognized currently in
earnings.
During
the fourth quarter of fiscal 2009, the Company entered into an interest rate
swap agreement with a $2 million notional amount to convert a portion of the
variable-rate junior subordinated debentures to a fixed rate for a term of
approximately 7 years at a rate of 4.96%. The derivative is designated as
a cash flow hedge. The fair value of the derivative instrument was approximately
$1,000 at December 31, 2009, and is included in other assets.
No gain
or loss was recognized in earnings for the year ended December 31, 2009
related to the interest rate swap. The Company posted cash, of $100,000,
under collateral arrangements to satisfy collateral requirements associated with
the interest rate swap contract.
NOTE
19: FAIR VALUE MEASUREMENTS AND DISCLOSURES
Accounting
guidance related to fair value measurements and disclosures specifies a
hierarchy of valuation techniques based on whether the inputs to those valuation
techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect our market
assumptions. These two types of inputs have created the following fair value
hierarchy:
|
·
|
Level
1 – Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the
measurement date.
|
|
·
|
Level
2 – Quoted prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets or liabilities in markets
that are not active; and model-derived valuations in which all significant
inputs and significant value drivers are observable in active
markets.
|
|
·
|
Level
3 – Model derived valuations in which one or more significant inputs or
significant value drivers are
unobservable.
|
An
asset’s or liability’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
The
Company used the following methods and significant assumptions to estimate fair
value:
Investment
securities: The fair values of securities available for sale are
obtained from an independent third party and are based on quoted prices on
nationally recognized exchange (Level 1), where available. If quoted
prices are not available, fair values are measured by utilizing matrix pricing,
which is a mathematical technique used widely in the industry to value debt
securities without relying exclusively on quoted prices for specific securities
but rather by relying on the securities’ relationship to other benchmark quoted
securities (Level 2). Management made no adjustment to the fair value
quotes that were received from the independent third party pricing
service.
Impaired
loans: Impaired loans are those loans in which the Company has measured
impairment generally based on the fair value of the loan’s
collateral. Fair value is generally determined based upon independent
third party appraisals of the properties, or discounted cash flows based upon
expected proceeds. These assets are included as Level 3 fair values,
based upon the lowest level of input that is significant to the fair value
measurements. The fair value consists of loan balances less their
valuation allowances.
Foreclosed
real estate: Properties acquired through foreclosure, or by deed in
lieu of foreclosure, are initially recorded at their fair value less estimated
disposal costs. Subsequent to foreclosure, foreclosed real estate is
carried at the lower of carrying value or fair value, with the difference
charged to earnings. Fair value is generally determined based upon
independent third party appraisals of the properties, or discounted cash flows
based upon expected proceeds. These assets are included as
Level 3 fair values, based upon the lowest level of input that is significant to
the fair value measurements.
The
following tables summarize assets measured at fair value on a recurring basis as
of December 31, segregated by the level of valuation inputs within
the hierarchy utilized to measure fair value:
|
At
December 31, 2009
|
||||||||||||||||
|
Total
Fair
|
||||||||||||||||
|
(In
thousands)
|
Level
1
|
Level
2
|
Level
3
|
Value
|
||||||||||||
|
Investment
securities available for sale
|
$ | 2,088 | $ | 70,666 | $ | - | $ | 72,754 | ||||||||
|
At
December 31, 2008
|
||||||||||||||||
|
Total
Fair
|
||||||||||||||||
|
(In
thousands)
|
Level
1
|
Level
2
|
Level
3
|
Value
|
||||||||||||
|
Investment
securities available for sale
|
$ | 1,918 | $ | 70,220 | $ | - | $ | 72,138 | ||||||||
Certain
assets and liabilities are measured at fair value on a nonrecurring basis; that
is, the instruments are not measured at fair value on an ongoing basis but are
subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment).
The
following tables summarize assets measured at fair value on a nonrecurring basis
as of December 31, segregated by the level of valuation inputs within the
hierarchy utilized to measure fair value:
|
At
December 31, 2009
|
||||||||||||||||
|
Total
Fair
|
||||||||||||||||
|
(In
thousands)
|
Level
1
|
Level
2
|
Level
3
|
Value
|
||||||||||||
|
Impaired
loans
|
$ | - | $ | - | $ | 907 | $ | 907 | ||||||||
|
At
December 31, 2008
|
||||||||||||||||
|
Total
Fair
|
||||||||||||||||
|
(In
thousands)
|
Level
1
|
Level
2
|
Level
3
|
Value
|
||||||||||||
|
Impaired
loans
|
$ | - | $ | - | $ | 295 | $ | 295 | ||||||||
|
Foreclosed
real estate
|
- | - | 26 | 26 | ||||||||||||
Required
disclosures include fair value information of financial instruments, whether or
not recognized in the consolidated statement of condition, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument.
Management
uses its best judgment in estimating the fair value of the Company’s financial
instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Company could have realized in a sales transaction on the dates
indicated. The estimated fair value amounts have been measured as of
their respective year-ends, and have not been re-evaluated or updated for
purposes of these financial statements subsequent to those respective
dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year-end.
The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Company’s assets and liabilities. Due to a
wide range of valuation techniques and the degree of subjectivity used in making
the estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful. The Company, in estimating its fair
value disclosures for financial instruments, used the following methods and
assumptions:
Cash and cash equivalents –
The carrying amounts of these assets approximate their fair value.
Investment securities – The
fair values of securities available for sale are obtained from an independent
third party and are based on quoted prices on nationally recognized exchange
(Level 1), where available. If quoted prices are not available, fair
values are measured by utilizing matrix pricing, which is a mathematical
technique used widely in the industry to value debt securities without relying
exclusively on quoted prices for specific securities, but rather by relying on
the securities’ relationship to other benchmark quoted securities (Level
2). Management made no adjustment to the fair value quotes that were
received from the independent third party pricing service.
Loans – The fair values of
portfolio loans, excluding impaired loans, are estimated using an option
adjusted discounted cash flow model that discounts future cash flows using
recent market interest rates, market volatility and credit spread
assumptions.
Federal Home Loan Bank stock –
The carrying amount of these assets approximates their fair value.
Mortgage servicing rights -
The carrying amount of these assets approximates their fair value.
Accrued interest receivable and
payable – The carrying amount of these assets approximates their fair
value.
Deposit liabilities – The fair
values disclosed for demand deposits (e.g., interest-bearing and
noninterest-bearing checking, passbook savings and certain types of money
management accounts) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., their carrying amounts). Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered in the market on
certificates of deposits to a schedule of aggregated expected monthly maturities
on time deposits.
Borrowings – Fixed/variable
term “bullet” structures are valued using a replacement cost of funds
approach. These borrowings are discounted to the FHLBNY advance
curve. Option structured borrowings’ fair values are determined by
the FHLB for borrowings that include a call or conversion option. If
market pricing is not available from this source, current market indications
from the FHLBNY are obtained and the borrowings are discounted to the FHLBNY
advance curve less an appropriate spread to adjust for the option.
Junior subordinated debentures
– Current economic conditions have rendered the market for this liability
inactive. As such, we are unable to determine a good estimate of fair
value. Since the rate paid on the debentures held is lower than what
would be required to secure an interest in the same debt at year end, and we are
unable to obtain a current fair value, we have disclosed that the carrying value
approximates the fair value.
Off-balance sheet instruments
– Fair values for the Company’s off-balance sheet instruments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties’ credit
standing. Such fees were not material at December 31, 2009 and
2008.
The
carrying amounts and fair values of the Company’s financial instruments as of
December 31 are presented in the following table:
|
2009
|
2008
|
|||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
|
(Dollars
in thousands)
|
Amounts
|
Fair
Values
|
Amounts
|
Fair
Values
|
||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 14,631 | $ | 14,631 | $ | 7,678 | $ | 7,678 | ||||||||
|
Investment
securities
|
72,754 | 72,754 | 72,138 | 72,138 | ||||||||||||
|
Net
loans
|
259,387 | 266,290 | 247,400 | 250,020 | ||||||||||||
|
Federal
Home Loan Bank stock
|
1,899 | 1,899 | 2,549 | 2,549 | ||||||||||||
|
Accrued
interest receivable
|
1,482 | 1,482 | 1,678 | 1,678 | ||||||||||||
|
Mortgage
servicing rights
|
61 | 61 | 15 | 15 | ||||||||||||
|
Interest
rate swap derivative
|
1 | 1 | - | - | ||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Deposits
|
$ | 296,839 | $ | 299,613 | $ | 269,438 | $ | 272,207 | ||||||||
|
Borrowed
funds
|
36,000 | 37,116 | 51,975 | 53,777 | ||||||||||||
|
Junior
subordinated debentures
|
5,155 | 5,155 | 5,155 | 5,155 | ||||||||||||
|
Accrued
interest payable
|
189 | 189 | 211 | 211 | ||||||||||||
|
Off-balance
sheet instruments:
|
||||||||||||||||
|
Standby
letters of credit
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Commitments
to extend credit
|
- | - | - | - | ||||||||||||
NOTE
20: PARENT COMPANY – FINANCIAL INFORMATION
The
following represents the condensed financial information of Pathfinder Bancorp,
Inc. as of and for the years ended December 31:
|
Statements
of Condition
|
2009
|
2008
|
||||||
|
(In
thousands)
|
||||||||
|
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,242 | $ | 10 | ||||
|
Investments
|
20 | 18 | ||||||
|
Investment
in bank subsidiary
|
32,820 | 24,603 | ||||||
|
Investment
in non-bank subsidiary
|
155 | 155 | ||||||
|
Other
assets
|
257 | 149 | ||||||
|
Total
assets
|
$ | 34,494 | $ | 24,935 | ||||
|
Liabilities
and Shareholders' Equity
|
||||||||
|
Accrued
liabilities
|
$ | 101 | $ | 285 | ||||
|
Junior
subordinated debentures
|
5,155 | 5,155 | ||||||
|
Shareholders'
equity
|
29,238 | 19,495 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 34,494 | $ | 24,935 | ||||
|
Statements
of Income
|
2009 | 2008 | ||||||
|
(In
thousands)
|
||||||||
|
Income
|
||||||||
|
Dividends
from bank subsidiary
|
$ | 825 | $ | 900 | ||||
|
Dividends
from non-bank subsidiary
|
5 | 7 | ||||||
|
Losses
on impairment of investment security
|
(4 | ) | - | |||||
|
Total
income
|
826 | 907 | ||||||
|
Expenses
|
||||||||
|
Interest
|
157 | 257 | ||||||
|
Operating
|
162 | 126 | ||||||
|
Total
expenses
|
319 | 383 | ||||||
|
Income
before taxes and equity in (excess of) undistributed
|
||||||||
|
net
income of subsidiaries
|
507 | 524 | ||||||
|
Tax
benefit
|
101 | 100 | ||||||
|
Income
before equity in (excess of) undistributed net income
|
||||||||
|
of
subsidiaries
|
608 | 624 | ||||||
|
Equity
in (excess of) undistributed net income of subsidiaries
|
1,007 | (256 | ) | |||||
|
Net
income
|
$ | 1,615 | $ | 368 | ||||
|
Statements
of Cash Flows
|
2009
|
2008
|
||||||
|
(In
thousands)
|
||||||||
|
Operating
Activities
|
||||||||
|
Net
income
|
$ | 1,615 | $ | 368 | ||||
|
(Equity
in) excess of undistributed earnings of subsidiaries
|
(1,007 | ) | 256 | |||||
|
Impairment
write-down on investment security
|
4 | - | ||||||
|
Other
operating activities
|
(113 | ) | (108 | ) | ||||
|
Net
cash provided by operating activities
|
499 | 516 | ||||||
|
Investing
Activities
|
||||||||
|
Capital
contributed to wholly owned bank subsidiary
|
(5,500 | ) | - | |||||
|
Net
cash used in investing activities
|
(5,500 | ) | - | |||||
|
Financing
activities
|
||||||||
|
Proceeds
from exercise of stock options
|
- | 10 | ||||||
|
Proceeds
from the issuance of preferred stock and common stock
warrants
|
6,771 | - | ||||||
|
Cash
dividends paid to preferred shareholders
|
(60 | ) | - | |||||
|
Cash
dividends paid to common shareholders
|
(478 | ) | (694 | ) | ||||
|
Net
cash provided by (used in) financing activities
|
6,233 | (684 | ) | |||||
|
Increase
(decrease) in cash and cash equivalents
|
1,232 | (168 | ) | |||||
|
Cash
and cash equivalents at beginning of year
|
10 | 178 | ||||||
|
Cash
and cash equivalents at end of year
|
$ | 1,242 | $ | 10 | ||||
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A(T): CONTROLS AND PROCEDURES
REPORT
OF MANAGEMENT’S RESPONSIBILITY
The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the
“Exchange Act”). Based upon their evaluation, the principal executive officer
and principal financial officer concluded that, as of the end of the period
covered by this report, the Company’s disclosure controls and procedures were
effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required
disclosure.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s
report on internal control over financial reporting is contained in “Item 8 –
Financial Statements and Supplementary Data” in this annual report in Form
10-K.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
were no changes in the Company’s internal control over financial reporting that
occurred during the Company’s last fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
ITEM
9B: OTHER INFORMATION
None
PART III
ITEM
10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE, COMPLIANCE WITH SECTIONS 16 (A) OF EXCHANGE ACT
|
(a)
|
Information
concerning the directors of the Company is incorporated by reference
hereunder in the Company's Proxy Materials for the Annual Meeting of
Stockholders.
|
|
(b)
|
Set
forth below is information concerning the Executive Officers of the
Company at December 31, 2009.
|
|
Name
|
Age
|
Positions
Held With the Company
|
|
Thomas
W. Schneider
|
48
|
President
and Chief Executive Officer
|
|
James
A. Dowd, CPA
|
42
|
Senior
Vice President, Chief Financial Officer
|
|
Edward
A. Mervine
|
53
|
Senior
Vice President, General Counsel
|
|
Melissa
A. Miller
|
52
|
Senior
Vice President, Chief Operating Officer
|
|
Ronald
Tascarella
|
51
|
Senior
Vice President, Chief Credit
Officer
|
ITEM
11: EXECUTIVE COMPENSATION
Information
with respect to management compensation and transactions required under this
item is incorporated by reference hereunder in the Company's Proxy Materials for
the Annual Meeting of Stockholders under the caption "Compensation
Committee".
ITEM
12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
information required by this item is incorporated by reference hereunder in the
Company’s Proxy Materials for the Annual Meeting of Stockholders under the
caption "Voting Securities and Principal Holders Thereof".
ITEM
13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information required by this item is incorporated by reference hereunder in the
Company’s Proxy Materials for the Annual Meeting of Stockholders under the
caption "Transactions with Certain Related Persons".
ITEM
14: PRINCIPAL ACCOUNTING FEES AND SERVICES
The
information required by this item is incorporated by reference hereunder in the
Company’s Proxy Materials for the Annual Meeting of Stockholders under the
caption "Audit and Related Fees".
PART IV
ITEM
15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a)(1)
|
Financial
Statements - The Company’s consolidated financial statements, for the
years ended December 31, 2009 and 2008, together with the Report of
Independent Registered Public Accounting Firm are filed as part of this
Form 10-K report. See “Item 8: Financial Statements and
Supplementary Data.”
|
|
(a)(2)
|
Financial
Statement Schedules - All financial statement schedules have been omitted
as the required information is inapplicable or has been included in “Item
7: Management Discussion and Analysis.”
|
|
(b)
|
Exhibits
|
|
3.1
|
Certificate
of Incorporation of Pathfinder Bancorp, Inc. (Incorporated herein by
reference to the Company's Current Report on Form 8-K filed on June 25,
2001)
|
|
3.2
|
Bylaws
of Pathfinder Bancorp, Inc. (Incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q filed on August 15, 2005 and
November 28, 2007)
|
|
4
|
Form
of Stock Certificate of Pathfinder Bancorp, Inc. (Incorporated herein by
reference to the Company's Current Report on Form 8-K dated June 25,
2001)
|
|
10.1
|
Form
of Pathfinder Bank 1997 Stock Option Plan (Incorporated herein by
reference to the Company's S-8 file no. 333-53027)
|
|
10.2
|
Form
of Pathfinder Bank 1997 Recognition and Retention Plan (Incorporated by
reference to the Company's S-8 file no. 333-53027)
|
|
10.3
|
2003
Executive Deferred Compensation Plan (Incorporated herein by reference to
the Company’s Annual Report on Form 10-K for the year ended December 31,
2008 file no. 000-23601)
|
|
10.4
|
2003
Trustee Deferred Fee Plan (Incorporated herein by reference to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2008
file no. 000-23601)
|
|
10.5
|
Employment
Agreement between the Bank and Thomas W. Schneider, President and Chief
Executive Officer (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2008 file no.
000-23601)
|
|
10.6
|
Employment
Agreement between the Bank and Edward A. Mervine, Vice President, General
Counsel and Secretary (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2008 file no.
000-23601)
|
|
10.7
10.8
|
Change
of Control Agreement between the Bank and Ronald Tascarella (Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008 file no. 000-23601)
Change
of Control Agreement between the Bank and James A. Dowd (Incorporated by
reference to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008 file no. 000-23601)
|
|
10.9
10.10
10.11
|
Change
of Control Agreement between the Bank and Melissa A. Miller (Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008 file no. 000-23601)
Executive
Supplemental Retirement Agreement between the Bank and Chris C. Gagas
(Incorporated by reference to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008 file no. 000-23601)
Executive
Supplemental Retirement Agreement between the Bank and Thomas W. Schneider
(Incorporated by reference to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008 file no. 000-23601
|
|
|
14
|
Code
of Ethics (Incorporated by reference to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2003)
|
|
|
21
|
Subsidiaries
of Company
|
|
|
23
|
Consent
of ParenteBeard LLC
|
|
|
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
|
Certification of Chief Executive Officer Pursuant to Section 111(b)(4) of
the Emergency Economic
|
Stabilization
Act of 2008
|
99.2
|
Certification of Chief Financial Officer Pursuant to Section 111(b)(4) of
the Emergency Economic Stabilization Act of
2008
|
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
24, 2010
|
By:
|
/s/
Thomas W. Schneider
Thomas
W. Schneider
President
and Chief Executive Officer
|
|
Pursuant
to the requirements of the Securities Exchange of 1934, this report has
been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
|
|||
|
By:
|
/s/
Thomas W. Schneider
|
By:
|
/s/
James A. Dowd
|
||
|
Thomas
W. Schneider, President and
|
James
A. Dowd, Senior Vice President and
|
||||
|
Chief
Executive Officer
|
Chief
Financial Officer
|
||||
|
(Principal
Executive Officer)
|
(Principal
Financial Officer)
|
||||
|
Date:
|
March
24, 2010
|
Date:
|
March
24, 2010
|
||
|
By:
|
/s/
Janette Resnick
|
By:
|
/s/
Shelley J. Tafel
|
||
|
Janette
Resnick, Director
|
Shelley
J. Tafel, Vice President and
|
||||
|
Chairman
of the Board
|
Controller
|
||||
|
(Principal
Accounting Officer)
|
|||||
|
Date:
|
March
24, 2010
|
Date:
|
March
24, 2010
|
||
|
By:
|
/s/
Bruce E. Manwaring
|
By:
|
/s/
Steven W. Thomas
|
||
|
Bruce
E. Manwaring, Director
|
Steven
W. Thomas, Director
|
||||
|
Date:
|
March
24, 2010
|
Date:
|
March
24, 2010
|
||
|
By:
|
/s/
L. William Nelson
|
By:
|
/s/
Chris R. Burritt
|
||
|
L.
William Nelson, Director
|
Chris
R. Burritt, Director
|
||||
|
Date:
|
March
24, 2010
|
Date:
|
March
24, 2010
|
||
|
By:
|
/s/
Corte J. Spencer
|
By:
|
/s/
George P. Joyce
|
||
|
Corte
J. Spencer, Director
|
George
P. Joyce, Director
|
||||
|
Date:
|
March
24, 2010
|
Date:
|
March
24, 2010
|
||
|
By:
|
/s/
Lloyd Stemple
|
||||
|
Lloyd
Stemple, Director
|
|||||
|
Date:
|
March
24, 2010
|
EXHIBIT
21: SUBSIDIARIES OF THE COMPANY
|
Company
|
Percent
Owned
|
Jurisdiction
or State of Incorporation
|
|
Pathfinder
Bank
|
100%
|
New
York
|
|
Pathfinder
Statutory Trust II
|
100%
|
Delaware
|
|
Pathfinder
Commercial Bank (1)
|
100%
|
New
York
|
|
Pathfinder
REIT, Inc. (1)
|
100%
|
New
York
|
|
Whispering
Oaks Development Corp. (1)
|
100%
|
New
York
|
(1)
Wholly owned subsidiary of Pathfinder Bank.
EXHIBIT
23: CONSENT OF PARENTEBEARD LLC
|
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
|
Pathfinder
Bancorp, Inc.
Oswego,
New York
|
|
|
We
hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-53027) of Pathfinder Bancorp, Inc. of our
report dated March 24, 2010, relating to the consolidated financial
statements, which appear in this Form 10-K.
|
|
|
ParenteBeard
LLC
Syracuse,
New York
March
24, 2010
|
/s/
PARENTEBEARD LLC
|
EXHIBIT
31.1: Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive
Officer
|
Certification
of Chief Executive Officer
Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
|
|||
|
I,
Thomas W. Schneider, President and Chief Executive Officer, certify
that:
|
|||
|
1. I
have reviewed this Annual report on Form 10-K of Pathfinder Bancorp,
Inc.;
|
|||
|
2. Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|||
|
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|||
|
4. The
registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
|||
|
(a) Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Designed
such internal control over financial reporting, or caused such internal
control over financial reporting, to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|||
|
(c) Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
|||
|
(d) Disclosed
in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
|
|||
|
5. The
registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's
board of directors:
|
|||
|
(a) All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
|
|||
|
(b) Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
|
|||
|
March
24, 2010
|
/s/
Thomas W. Schneider
Thomas
W. Schneider
President
and Chief Executive Officer
|
||
EXHIBIT
31.2: Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial
Officer
|
Certification
of Chief Financial Officer
Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
|
|||
|
I, James
A. Dowd, Senior Vice President and Chief Financial Officer, certify
that:
|
|||
|
1. I
have reviewed this Annual report on Form 10-K of Pathfinder Bancorp,
Inc.;
|
|||
|
2. Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
|
|||
|
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|||
|
4. The
registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
|||
|
(a) Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) Designed
such internal control over financial reporting, or caused such internal
control over financial reporting, to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|||
|
(c) Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
|||
|
(d) Disclosed
in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
|
|||
|
5. The
registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's
board of directors:
|
|||
|
(a) All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
|
|||
|
(b) Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
|
|||
|
March
24, 2010
|
/s/
James A. Dowd
James
A. Dowd
Senior
Vice President and Chief Financial Officer
|
||
EXHIBIT
32.1 Section 1350 Certification of the Chief Executive and Chief
Financial Officer
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
Thomas
W. Schneider, President and Chief Executive Officer, and James A. Dowd,
Senior Vice President and Chief Financial Officer of Pathfinder Bancorp,
Inc. (the "Company"), each certify in his capacity as an officer of the
Company that he has reviewed the Annual Report of the Company on Form 10-K
for the year ended December 31, 2009 and that to the best of his
knowledge:
|
|
|
1. the
report fully complies with the requirements of Sections 13(a) of the
Securities Exchange Act of 1934; and
|
|
|
2. the
information contained in the report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
|
|
The
purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
March
24, 2010
|
/s/
Thomas W. Schneider
Thomas
W. Schneider
President
and Chief Executive Officer
|
|
March
24, 2010
|
/s/
James A. Dowd
James
A. Dowd
Senior
Vice President and Chief Financial
Officer
|
EXHIBIT
99.1 Certification of Chief Executive Officer Pursuant to Section
111(b)(4) of the Emergency Economic Stabilization Act of 2008
I, Thomas
W. Schneider, certify, based on my knowledge, that:
(i) The
compensation committee of Pathfinder Bancorp, Inc. has discussed, reviewed, and
evaluated with senior risk officers at least every six months during the period
beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of
Pathfinder Bancorp, Inc.’s fiscal year containing that date, senior executive
officer (SEO) compensation plans and employee compensation plans and the risks
these plans pose to Pathfinder Bancorp, Inc.;
(ii) The
compensation committee of Pathfinder Bancorp, Inc. has identified and limited
during the period beginning on the later of the closing date of the agreement
between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with
the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date, the
features in the SEO compensation plans that could lead SEOs to take unnecessary
and excessive risks that could threaten the value of Pathfinder Bancorp, Inc.
and identified any features in the employee compensation plans that pose risks
to Pathfinder Bancorp, Inc. and limited those features to ensure that Pathfinder
Bancorp, Inc. is not unnecessarily exposed to risks;
(iii) The
compensation committee has reviewed at least every six months during the period
beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of
Pathfinder Bancorp, Inc.’s fiscal year containing that date, the terms of each
employee compensation plan and identified the features in the plan that could
encourage the manipulation of reported earnings of Pathfinder Bancorp, Inc. to
enhance the compensation of an employee and has limited those
features;
(iv) The
compensation committee of Pathfinder Bancorp, Inc. will certify to the reviews
of the SEO compensation plans and employee compensation plans required under (i)
and (iii) above;
(v) The
compensation committee of Pathfinder Bancorp, Inc. will provide a narrative
description of how it limited during any part of the most recently completed
fiscal year that included a TARP period the features in (A) SEO compensation
plans that could lead SEOs to take unnecessary and excessive risks that could
threaten the value of Pathfinder Bancorp, Inc.; (B) Employee compensation plans
that unnecessarily expose Pathfinder Bancorp, Inc. to risks; and (C) Employee
compensation plans that could encourage the
manipulation
of reported earnings of Pathfinder Bancorp, Inc. to enhance the compensation of
an employee;
(vi)
Pathfinder Bancorp, Inc. has required that bonus payments, as defined in the
regulations and guidance established under section 111 of EESA (bonus payments),
of the SEOs and twenty next most highly compensated employees be subject to a
recovery or ‘‘clawback’’ provision during any part of the most recently
completed fiscal year that was a TARP period if the bonus payments were based on
materially inaccurate financial statements or any other materially inaccurate
performance metric criteria;
(vii)
Pathfinder Bancorp, Inc. has prohibited any golden parachute payment, as defined
in the regulations and guidance established under section 111 of EESA, to an SEO
or any of the next five most highly compensated employees during the period
beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of
Pathfinder Bancorp, Inc.’s fiscal year containing that date;
(viii)
Pathfinder Bancorp, Inc. has limited bonus payments to its applicable employees
in accordance with section 111 of EESA and the regulations and guidance
established thereunder during the period beginning on the later of the closing
date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15,
2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year
containing that date;
(ix) The
board of directors of Pathfinder Bancorp, Inc. has established an excessive or
luxury expenditures policy, as defined in the regulations and guidance
established under section 111 of EESA, has provided this policy to Treasury and
its primary regulatory agency, and Pathfinder Bancorp, Inc. and its employees
have complied with this policy during the period beginning on the later of the
closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or
June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal
year containing that date, and that any expenses requiring approval of the board
of directors, a committee of the board of directors, an SEO, or an executive
officer with a similar level of responsibility, were properly
approved;
(x)
Pathfinder Bancorp, Inc. will permit a non-binding shareholder resolution in
compliance with any applicable Federal securities rules and regulations on the
disclosures provided under the Federal securities laws related to SEO
compensation paid or accrued during the period beginning on the later of the
closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or
June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal
year containing that date;
(xi)
Pathfinder Bancorp, Inc. will disclose the amount, nature, and justification for
the offering during the period beginning on the later of the closing date of the
agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and
ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing
that date of any perquisites, as defined in the regulations and guidance
established under section 111 of EESA, whose total value exceeds $25,000 for
each employee subject to the bonus payment limitations identified in paragraph
(vii);
(xii)
Pathfinder Bancorp, Inc. will disclose whether Pathfinder Bancorp, Inc., the
board of directors of Pathfinder Bancorp, Inc., or the compensation committee of
Pathfinder Bancorp, Inc. has engaged during the period beginning on the later of
the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury
or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s
fiscal year containing that date, a compensation consultant; and the services
the compensation consultant or any affiliate of the compensation consultant
provided during this period;
(xiii)
Pathfinder Bancorp, Inc. has prohibited the payment of any grossups, as defined
in the regulations and established under section 111 of EESA, to the SEOs and
the next twenty most highly compensated employees during the period beginning on
the later of the closing date of the agreement between Pathfinder Bancorp, Inc.
and Treasury or June 15, 2009 and ending with the last day of Pathfinder
Bancorp, Inc.’s fiscal year containing that date;
(xiv)
Pathfinder Bancorp, Inc. has substantially complied with all other requirements
related to employee compensation that are provided in the agreement between
Pathfinder Bancorp, Inc. and Treasury, including any amendments;
(xv) The
following employees are the SEOs and the twenty next most highly compensated
employees for the current fiscal year and the most recently completed fiscal
year, with the non-SEOs ranked in order of level of annual compensation starting
with the greatest amount:
|
Name
|
Title
|
Employer
|
|
SEOs:
|
||
|
Thomas
Schneider
|
President
& Chief Executive Officer
|
Pathfinder
Bank
|
|
Edward
Mervine
|
Senior
Vice President, General Counsel & Corporate
Secretary
|
Pathfinder
Bank
|
|
James
Dowd
|
Senior
Vice President & Chief Financial Officer
|
Pathfinder
Bank
|
|
Ron
Tascarella
|
Senior
Vice President & Chief Credit Officer
|
Pathfinder
Bank
|
|
Melissa
Miller
|
Senior
Vice President & Chief Operating Officer
|
Pathfinder
Bank
|
|
Name
|
Title
|
Employer
|
|
Non-SEOs:
|
||
|
Daniel
Phillips
|
Vice
President & Chief Information Officer
|
Pathfinder
Bank
|
|
Shelley
Tafel
|
Vice
President & Controller
|
Pathfinder
Bank
|
|
Michael
Quenville
|
Vice
President & Business Development Officer
|
Pathfinder
Bank
|
|
Rhonda
Hutchins
|
Vice
President, Compliance
|
Pathfinder
Bank
|
|
William
O'Brien
|
Vice
President & Business Relationship Manager
|
Pathfinder
Bank
|
|
Craig
Nessel
|
Branch
Manager
|
Pathfinder
Bank
|
|
Laurie
Lockwood
|
Assistant
Vice President & Assistant Controller
|
Pathfinder
Bank
|
|
Michele
Torbitt
|
Assistant
Vice President & Electronic Commerce Manager
|
Pathfinder
Bank
|
|
Joseph
McManus
|
Computer
Operation Manager
|
Pathfinder
Bank
|
|
Roberta
Davis
|
Assistant
Vice President & Financial Analyst
|
Pathfinder
Bank
|
|
Cynthia
Claflin
|
Assistant
Vice President & Branch Manager
|
Pathfinder
Bank
|
|
Barbara
Cowles
|
Branch
Manager
|
Pathfinder
Bank
|
|
Denise
Lyga
|
Branch
Manager
|
Pathfinder
Bank
|
|
Pamela
Knox
|
Assistant
Vice President & Building Loan Specialist
|
Pathfinder
Bank
|
|
Deana
Michaels
|
Branch
Manager
|
Pathfinder
Bank
|
|
Lisa
Kimball
|
Assistant
Vice President & Internal Audit Manager
|
Pathfinder
Bank
|
|
Beth
Alfieri
|
Assistant
Vice President & Account Manager
|
Pathfinder
Bank
|
|
Anita
Austin
|
Internal
Auditor
|
Pathfinder
Bank
|
|
Reyne
Pierce
|
Assistant
Vice President & Retail Lending Manager
|
Pathfinder
Bank
|
|
Crystal
Rafte
|
Assistant
Vice President & Operations Manager
|
Pathfinder
Bank
|
|
Susan
Cahill
|
Branch
Manager
|
Pathfinder
Bank
|
(xvi) I
understand that a knowing and willful false or fraudulent statement made in
connection with this certification may be punished by fine, imprisonment, or
both. (See, for
example, 18 U.S.C. 1001.)
Date: March
24,
2010 /s/
Thomas W. Schneider
Thomas W. Schneider,
President and Chief Executive
Officer
EXHIBIT
99.2 Certification of Chief Financial Officer Pursuant to Section 111(b)(4) of
the Emergency Economic Stabilization Act of 2008
I, James
A. Dowd, certify, based on my knowledge, that:
(i) The
compensation committee of Pathfinder Bancorp, Inc. has discussed, reviewed, and
evaluated with senior risk officers at least every six months during the period
beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of
Pathfinder Bancorp, Inc.’s fiscal year containing that date, senior executive
officer (SEO) compensation plans and employee compensation plans and the risks
these plans pose to Pathfinder Bancorp, Inc.;
(ii) The
compensation committee of Pathfinder Bancorp, Inc. has identified and limited
during the period beginning on the later of the closing date of the agreement
between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with
the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date, the
features in the SEO compensation plans that could lead SEOs to take unnecessary
and excessive risks that could threaten the value of Pathfinder Bancorp, Inc.
and identified any features in the employee compensation plans that pose risks
to Pathfinder Bancorp, Inc. and limited those features to ensure that Pathfinder
Bancorp, Inc. is not unnecessarily exposed to risks;
(iii) The
compensation committee has reviewed at least every six months during the period
beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of
Pathfinder Bancorp, Inc.’s fiscal year containing that date, the terms of each
employee compensation plan and identified the features in the plan that could
encourage the manipulation of reported earnings of Pathfinder Bancorp, Inc. to
enhance the compensation of an employee and has limited those
features;
(iv) The
compensation committee of Pathfinder Bancorp, Inc. will certify to the reviews
of the SEO compensation plans and employee compensation plans required under (i)
and (iii) above;
(v) The
compensation committee of Pathfinder Bancorp, Inc. will provide a narrative
description of how it limited during any part of the most recently completed
fiscal year that included a TARP period the features in (A) SEO compensation
plans that could lead SEOs to take unnecessary and excessive risks that could
threaten the value of Pathfinder Bancorp, Inc.; (B) Employee compensation plans
that unnecessarily expose Pathfinder Bancorp, Inc. to risks; and (C) Employee
compensation plans that could encourage the
manipulation
of reported earnings of Pathfinder Bancorp, Inc. to enhance the compensation of
an employee;
(vi)
Pathfinder Bancorp, Inc. has required that bonus payments, as defined in the
regulations and guidance established under section 111 of EESA (bonus payments),
of the SEOs and twenty next most highly compensated employees be subject to a
recovery or ‘‘clawback’’ provision during any part of the most recently
completed fiscal year that was a TARP period if the bonus payments were based on
materially inaccurate financial statements or any other materially inaccurate
performance metric criteria;
(vii)
Pathfinder Bancorp, Inc. has prohibited any golden parachute payment, as defined
in the regulations and guidance established under section 111 of EESA, to an SEO
or any of the next five most highly compensated employees during the period
beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of
Pathfinder Bancorp, Inc.’s fiscal year containing that date;
(viii)
Pathfinder Bancorp, Inc. has limited bonus payments to its applicable employees
in accordance with section 111 of EESA and the regulations and guidance
established thereunder during the period beginning on the later of the closing
date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15,
2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year
containing that date;
(ix) The
board of directors of Pathfinder Bancorp, Inc. has established an excessive or
luxury expenditures policy, as defined in the regulations and guidance
established under section 111 of EESA, has provided this policy to Treasury and
its primary regulatory agency, and Pathfinder Bancorp, Inc. and its employees
have complied with this policy during the period beginning on the later of the
closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or
June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal
year containing that date, and that any expenses requiring approval of the board
of directors, a committee of the board of directors, an SEO, or an executive
officer with a similar level of responsibility, were properly
approved;
(x)
Pathfinder Bancorp, Inc. will permit a non-binding shareholder resolution in
compliance with any applicable Federal securities rules and regulations on the
disclosures provided under the Federal securities laws related to SEO
compensation paid or accrued during the period beginning on the later of the
closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or
June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal
year containing that date;
(xi)
Pathfinder Bancorp, Inc. will disclose the amount, nature, and justification for
the offering during the period beginning on the later of the closing date of the
agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and
ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing
that date of any perquisites, as defined in the regulations and guidance
established under section 111 of EESA, whose total value exceeds $25,000 for
each employee subject to the bonus payment limitations identified in paragraph
(vii);
(xii)
Pathfinder Bancorp, Inc. will disclose whether Pathfinder Bancorp, Inc., the
board of directors of Pathfinder Bancorp, Inc., or the compensation committee of
Pathfinder Bancorp, Inc. has engaged during the period beginning on the later of
the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury
or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s
fiscal year containing that date, a compensation consultant; and the services
the compensation consultant or any affiliate of the compensation consultant
provided during this period;
(xiii)
Pathfinder Bancorp, Inc. has prohibited the payment of any grossups, as defined
in the regulations and established under section 111 of EESA, to the SEOs and
the next twenty most highly compensated employees during the period beginning on
the later of the closing date of the agreement between Pathfinder Bancorp, Inc.
and Treasury or June 15, 2009 and ending with the last day of Pathfinder
Bancorp, Inc.’s fiscal year containing that date;
(xiv)
Pathfinder Bancorp, Inc. has substantially complied with all other requirements
related to employee compensation that are provided in the agreement between
Pathfinder Bancorp, Inc. and Treasury, including any amendments;
(xv) The
following employees are the SEOs and the twenty next most highly compensated
employees for the current fiscal year and the most recently completed fiscal
year, with the non-SEOs ranked in order of level of annual compensation starting
with the greatest amount:
|
Name
|
Title
|
Employer
|
|
SEOs:
|
||
|
Thomas
Schneider
|
President
& Chief Executive Officer
|
Pathfinder
Bank
|
|
Edward
Mervine
|
Senior
Vice President, General Counsel & Corporate
Secretary
|
Pathfinder
Bank
|
|
James
Dowd
|
Senior
Vice President & Chief Financial Officer
|
Pathfinder
Bank
|
|
Ron
Tascarella
|
Senior
Vice President & Chief Credit Officer
|
Pathfinder
Bank
|
|
Melissa
Miller
|
Senior
Vice President & Chief Operating Officer
|
Pathfinder
Bank
|
|
Name
|
Title
|
Employer
|
|
Non-SEOs:
|
||
|
Daniel
Phillips
|
Vice
President & Chief Information Officer
|
Pathfinder
Bank
|
|
Shelley
Tafel
|
Vice
President & Controller
|
Pathfinder
Bank
|
|
Michael
Quenville
|
Vice
President & Business Development Officer
|
Pathfinder
Bank
|
|
Rhonda
Hutchins
|
Vice
President, Compliance
|
Pathfinder
Bank
|
|
William
O'Brien
|
Vice
President & Business Relationship Manager
|
Pathfinder
Bank
|
|
Craig
Nessel
|
Branch
Manager
|
Pathfinder
Bank
|
|
Laurie
Lockwood
|
Assistant
Vice President & Assistant Controller
|
Pathfinder
Bank
|
|
Michele
Torbitt
|
Assistant
Vice President & Electronic Commerce Manager
|
Pathfinder
Bank
|
|
Joseph
McManus
|
Computer
Operation Manager
|
Pathfinder
Bank
|
|
Roberta
Davis
|
Assistant
Vice President & Financial Analyst
|
Pathfinder
Bank
|
|
Cynthia
Claflin
|
Assistant
Vice President & Branch Manager
|
Pathfinder
Bank
|
|
Barbara
Cowles
|
Branch
Manager
|
Pathfinder
Bank
|
|
Denise
Lyga
|
Branch
Manager
|
Pathfinder
Bank
|
|
Pamela
Knox
|
Assistant
Vice President & Building Loan Specialist
|
Pathfinder
Bank
|
|
Deana
Michaels
|
Branch
Manager
|
Pathfinder
Bank
|
|
Lisa
Kimball
|
Assistant
Vice President & Internal Audit Manager
|
Pathfinder
Bank
|
|
Beth
Alfieri
|
Assistant
Vice President & Account Manager
|
Pathfinder
Bank
|
|
Anita
Austin
|
Internal
Auditor
|
Pathfinder
Bank
|
|
Reyne
Pierce
|
Assistant
Vice President & Retail Lending Manager
|
Pathfinder
Bank
|
|
Crystal
Rafte
|
Assistant
Vice President & Operations Manager
|
Pathfinder
Bank
|
|
Susan
Cahill
|
Branch
Manager
|
Pathfinder
Bank
|
(xvi) I
understand that a knowing and willful false or fraudulent statement made in
connection with this certification may be punished by fine, imprisonment, or
both. (See, for
example, 18 U.S.C. 1001.)
Date: March
24,
2010 /s/
James A. Dowd
James A. Dowd,
Senior Vice President and Chief
Financial Officer
Page
89