SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transaction period from ___________________ to ______________________
Commission File Number: 000-23601
PATHFINDER BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Federal. . . . . . . . . . . . . . 16-1540137
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
214 West First Street, Oswego, NY. . . . . 13126
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Address of Principal Executive Office). . . . (Zip Code)
(315) 343-0057
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been
subject to such requirements for the past 90 days.
YES [X] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendments to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
YES NO [X]
As of March 18, 2003, there were 2,914,669 shares issued and 2,441,882 shares outstanding of the Registrant's Common Stock. The aggregate
value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average bid and asked prices of the Common
Stock as of March 18, 2003 ($14.35) was $12,321,517.
The Form 10-K contains 38 pages. The Exhibit Index is located on page 38.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended December 31, 2002 (Parts II and IV).
2. Proxy Statement for the 2002 Annual Meeting of Stockholders (Parts I and
III).
1
PART I
ITEM 1. BUSINESS
GENERAL
PATHFINDER BANCORP, INC.
Pathfinder Bancorp, Inc. (the "Company") is a Federal corporation. On July 19, 2001, the Company completed its conversion from a Delaware
chartered company to a federal charter. As a result of the charter conversion the Company's chartering authority and primary federal regulator
is the Office of Thrift Supervision. References to the Company include the Company before or after the charter conversion. The only business
of the Company is its investment in Pathfinder Bank (the "Bank") and Pathfinder Statutory Trust 1. The Company is majority owned by
Pathfinder Bancorp, MHC, a Federal-chartered mutual holding company (the "Mutual Holding Company"). On December 30, 1997 the
Company acquired all of the issued and outstanding common stock of the Bank in connection with the Bank's reorganization into the two-tier
form of mutual holding company ownership. At that time, each share of outstanding Bank common stock was automatically converted into one
share of Company common stock, par value $.10 per share (the "Common Stock"). At February 28, 2003, the Mutual Holding Company held
1,583,239 shares of Common Stock and the public held 1,027,257 shares of Common Stock (the "Minority Shareholders").
On June 26, 2002, the Company formed a wholly owned subsidiary, Pathfinder Statutory Trust I, a Connecticut business trust. The trust issued
$5,000,000 of 30-year floating rate Company-obligated pooled capital securities of Pathfinder Statutory Trust I. The Company borrowed the
proceeds of the capital securities from its subsidiary by issuing floating rate junior subordinated deferrable interest debentures having
substantially similar terms. The capital securities mature in 2032 and qualify as Tier 1 capital by the Federal Deposit Insurance Company and
the Office of Thrift Supervision. The capital securities of the trust are a pooled trust preferred fund of Preferred Term Securities VI, Ltd. and
are tied to the 3 month LIBOR plus 3.45% with a five year call provision. These securities are guaranteed by the Company.
The Company's executive office is located at 214 West First Street, Oswego, New York and the telephone number at that address is (315) 343-
0057.
PATHFINDER BANK
The Bank is a New York-chartered savings bank headquartered in Oswego, New York. The Bank has six full-service offices located in its
market area consisting of Oswego County and the contiguous counties. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank was chartered as a New York savings bank in 1859 as Oswego City Savings Bank. The Bank is a consumer-
oriented institution dedicated to providing mortgage loans and other traditional financial services to its customers. The Bank is committed to
meeting the financial needs of its customers in Oswego County, New York, the county in which it operates. At December 31, 2002, the Bank
had total assets of $279.1 million, total deposits of $204.5 million, and shareholders' equity of $23.2 million.
On October 25, 2002, Pathfinder Bank completed the purchase of assets and the assumption of non-municipal deposits of the Lacona, New
York branch of Cayuga Bank (the "Branch Acquisition"). In addition, Pathfinder Bank formed a limited purpose commercial bank subsidiary,
Pathfinder Commercial Bank. Pathfinder Commercial Bank was established to serve the depository needs of public entities in its market area
and it assumed the municipal deposit liabilities acquired as part of the Branch Acquisition. The transaction included approximately $26.4
million in deposits, $2.3 million in loans and $430,000 in vault cash and facilities and equipment. The acquisition reflects a premium on
deposit liabilities assumed of approximately $2.4 million.
The Bank is primarily engaged in the business of attracting deposits from the general public in the Bank's market area, and investing such
deposits, together with other sources of funds, in loans secured by one- to four-family residential real estate. At December 31, 2002, $167.0
million, or 91.4% of the Bank's total loan portfolio consisted of loans secured by real estate, of which $123.2 million, or 73.8 %, were loans
secured by one- to four-family residences,
2
$31.7 million, or 19.0%, were secured by commercial real estate and $973,000, or .5%, were secured by multi-family properties. Additionally,
$11.2 million, or 6.7 %, of total real estate loans, were secured by second liens on residential properties that are classified in consumer loans.
The Bank also originates commercial and consumer loans that totaled $13.2 and $3.9 million, respectively, or 9.4%, of the Bank's total loan
portfolio. The Bank invests a portion of its assets in securities issued by the United States Government, state and municipal obligations,
corporate debt securities, mutual funds, and equity securities. The Bank also invests in mortgage-backed securities primarily issued or
guaranteed by the United States Government or agencies thereof. The Bank's principal sources of funds are deposits, principal and interest
payments on loans and borrowings from correspondent financial institutions. The principal source of income is interest on loans and investment
securities. The Bank's principal expenses are interest paid on deposits, and employee compensation and benefits.
The Bank's executive office is located at 214 West First Street, Oswego, New York, and its telephone number at that address is (315) 343-0057.
In April 1999, the Bank established Pathfinder REIT, Inc. as the Bank's wholly-owned real estate investment trust subsidiary. At December 31,
2002 Pathfinder REIT, Inc. held $27.8 million in mortgage and mortgage related assets. All disclosures in the Form 10-K relating to the Bank's
loans and investments include loan and investments that are held by Pathfinder REIT, Inc.
MARKET AREA AND COMPETITION
The economy in the Bank's market area is manufacturing-oriented and is also significantly dependent upon the State University of New York
College at Oswego. The major manufacturing employers in the Bank's market area are National Grid, Alcan, Constellation, NRG and
Huhtamaki. The Bank is the second largest financial institution headquartered in Oswego County. However, the Bank encounters competition
from a variety of sources. The Bank's business and operating results are significantly affected by the general economic conditions prevalent in
its market areas.
The Bank encounters strong competition both in attracting deposits and in originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks, savings associations and credit unions in its market area. Competition for
loans comes from such financial institutions as well as mortgage banking companies. The Bank expects continued strong competition in the
foreseeable future, including increased competition from "super-regional" banks entering the market by purchasing large banks and savings
banks. Many such institutions have greater financial and marketing resources available to them than does the Bank. The Bank competes for
savings deposits by offering depositors a high level of personal service and a wide range of competitively priced financial services. The Bank
competes for real estate loans primarily through the interest rates and loan fees it charges and advertising, as well as by originating and holding
in its portfolio mortgage loans which do not necessarily conform to secondary market underwriting standards.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio primarily consists of one-to-four family mortgage loans secured by
residential and investment properties, as well as mortgage loans secured by multi-family residences and commercial real estate. To a lesser
extent the Bank's loan portfolio also includes consumer and business loans. The Bank generally originates loans for retention in its portfolio
and for sale in the secondary market. During 2002, the Bank sold approximately $19.4 million of loans in the secondary market. The loan sales
resulted in approximately $152,000 in capitalized servicing rights. At December 31, 2002, $3.6 million, or 3.0%, of the Bank's total one-to-four
family real estate portfolio consisted of loans held for sale. In recent years, the Bank has not purchased loans originated by other lenders.
3
ANALYSIS OF LOAN PORTFOLIO. The following table sets forth the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the portfolio at the dates indicated.
Years Ended December 31,
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2002 2001 2000
Amount Percent Amount Percent Amount Percent
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(Dollars in Thousands)
Real estate loans:
First mortgage loans/(1)//(3)/. ..$155,835 85.3% $141,710 84.8% $124,636 83.6%
Second mortgage loans/(2)/. . . 11,151 6.1 9,262 5.5 9,978 6.7
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Total real estate loans . . . . 166,986 91.4 150,972 90.3 134,614 90.3
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Commercial and consumer loans:
Consumer. . . . . . . . . . . . 3,917 2.2 3,353 2.0 3,009 2.0
Lease financing . . . . . . . . 431 0.2 244 0.2 237 0.2
Commercial business loans . . . 12,765 7.0 14,113 8.4 12,636 8.5
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Total commercial and
consumer loans. . . . . . . . . 17,113 9.4 17,710 10.6 15,882 10.7
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Total loans receivable. . . . . 184,099 100.8 168,682 100.9 150,496 101.0
Less:
Unearned premium and
origination costs/(fees). . . . - - 38 - (120) (0.1)
Allowance for loan losses . . . (1,481) (0.8) (1,679) (0.9) (1,274) (0.9)
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Total loans receivable, net . . $182,618 100.0% $167,041 100.0% $149,102 100.0%
==========================================================================================
1999 1998
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Amount Percent Amount Percent
===========================================================================
Real estate loans:
First mortgage loans $110,374 84.4% $109,372 85.3%
Second mortgage loans 9,492 7.3 9,631 7.5
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Total real estate loans 119,866 91.7 119,003 92.8
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Commercial and consumer loans:
Consumer 3,494 2.7 4,085 3.2
Lease financing 278 0.2 350 0.3
Commercial business loans 8,357 6.4 5,900 4.6
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Total commercial and
consumer loans 12,129 9.3 10,335 8.1
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Total loans receivable 131,995 101.0 129,338 100.9
Less:
Unearned premium and
origination costs/(fees) (84) (0.1) (199) (0.2)
Allowance for loan losses (1,150) 0.9) (939) (0.7)
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Total loans receivable, net $130,761 100.0% $128,200 100.0%
===========================================================================
/(1)/Includes $123.2 million, $31.7 million and $973,000 thousand of one- to four-family residential loans, commercial real estate and multi-
family loans, respectively, at December 31, 2002.
/(2)/Includes $4.4 million and $6.7 million of home equity line of credit loans and home equity fixed rate, fixed term loans, respectively at
December 31, 2002.
/(3)/Includes $3.6 million of mortgage loans held-for-sale at December 31, 2002.
4
LOAN MATURITY SCHEDULE. The following table sets forth certain information as of December 31, 2002 regarding the dollar amount of
loans maturing in the Bank's portfolio based on their contractual terms to maturity. Demand loans having no stated schedule of repayments and
no stated maturity, and overdrafts are reported as due in one year or less. Adjustable and floating rate loans are included in the period in which
interest rates are next scheduled to adjust rather than the period in which they contractually mature, and fixed rate loans are included in the
period in which the final contractual repayment is due.
One Three Five
Through Through Through
Within Three Five Ten
One Year Years Years Years
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(In Thousands)
Real estate loans:
First mortgage loans . . . . . $ 32,455 $19,494 $27,451 $13,955
Second mortgage loans. . . . . 4,478 454 1,096 3,560
Commercial and consumer loans. 11,403 1,488 2,722 1,196
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Total loans. . . . . . . . . . $ 48,336 $21,436 $31,269 $18,711
=====================================================================
Ten
Through Beyond
Twenty Twenty
Years Years Total
----------------------------------------------------------
Real estate loans:
First mortgage loans. . . . . $48,005 $14,475 $155,835
Second mortgage loans . . . . 1,563 0 11,151
Commercial and consumer loans 304 0 17,113
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Total loans . . . . . . . . . $49,872 $14,475 $184,099
==========================================================
The following table sets forth at December 31, 2002, the dollar amount of all fixed rate and adjustable rate loans due or repricing after
December 31, 2003:
Fixed Adjustable Total
----------------------------------------------------------------
(In Thousands)
Real estate loans:
First mortgage loans . . . . . $ 95,559 $ 27,820 $123,379
Second mortgage loans. . . . . 6,673 - 6,673
Commercial and consumer loans. 5,712 - 5,712
----------------------------------------------------------------
Total loans. . . . . . . . . . $107,944 $ 27,820 $135,764
================================================================
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LOANS. The Bank's primary lending activity is the origination of first mortgage
loans secured by one- to four-family residential properties. A portion of one- to four-family mortgage loans originated by the Bank are secured
by non-owner occupied homes which are primarily used to furnish housing to students attending the SUNY College at Oswego. The Bank
generally retains in its portfolio all ARM loans that it originates. However, the Bank generally underwrites its loans so as to be eligible for
resale in the secondary mortgage market. At December 31, 2002, approximately 76.7% of the Bank's one- to four-family residential real estate
loans were secured by owner-occupied properties.
Fixed-rate one- to four-family residential mortgage loans originated by the Bank are originated with terms of up to 30 years (although fixed rate
loans held in portfolio are generally limited to terms of 20 years or less), amortize on a monthly basis, and have principal and interest due each
month. Such real estate loans often remain outstanding for significantly shorter periods than their contractual terms to maturity, particularly in a
declining interest rate environment. Borrowers may refinance or prepay loans at their option. One- to
5
four-family residential mortgage loans originated by the Bank customarily contain "due-on-sale" clauses which permit the Bank to accelerate
the indebtedness of the loan upon transfer of ownership of the mortgaged property. Due-on-sale clauses are an important means of increasing
the interest rate on existing mortgage loans during periods of rising interest rates. An origination fee of up to 1% is charged on fixed-rate
mortgage loans. As a result of the low interest rate environment that has existed in recent years, many of the Bank's borrowers have refinanced
their mortgage loans with the Bank at lower interest rates. During years ended December 31, 2002 and 2001, 60.3% and 72.0%, respectively, of
the Bank's one-to-four-family mortgage loan originations consisted of fixed-rate loan.
The Bank also originates ARM loans which serve to reduce interest rate risk. The Bank currently originates 3/1 ARM and 5/1 ARM loans;
mortgage loans in which the interest rate is fixed for the first three or five years and adjusts annually thereafter. This loan product typically is
originated with terms up to 30 years. ARM loans are originated with terms ranging from 5 to 30 years. ARM loans originated by the Bank
provide for maximum periodic interest rate adjustment of 2 percent per year and an overall maximum interest rate increase which is determined
at the time the loan is originated. However, ARM loans may not adjust to a level below the initial rate. ARMs may be offered at an initial rate
below the prevailing market rate. The Bank's one- to four-family ARM loan originations totaled $6.9 million, $9.1 million, and $2.0 million,
during the years 2002, 2001 and 2000, respectively. The Bank requires that borrowers qualify for ARM loans based upon the loan's fully
indexed rate.
At December 31, 2002, $58.5 million, or 49.2 %, of the Bank's one- to four-family loan portfolio consisted of ARM loans. ARM loans
generally pose a credit risk in that as interest rates rise, the amount of a borrower's monthly loan payment also rises, thereby increasing the
potential for delinquencies and loan losses. At the same time, the marketability of such loans may be adversely affected by higher rates.
The Bank also originates loans to finance the construction of one- to four-family owner-occupied residences. Funds are disbursed as
construction progresses. Loans to finance one- to four-family construction typically provide for a six-month construction phase during which
interest accrues and which is deducted from the funds disbursed. Upon completion of the construction phase the loan automatically converts to
permanent financing. At December 31, 2002, the Bank held $4.4 million of one- to four-family construction loans.
The Bank's lending policies require private mortgage insurance for loan to value ratios in excess of 80%.
COMMERCIAL REAL ESTATE LOANS. Loans secured by commercial real estate constituted approximately $31.7 million, or 17.2%, of the
Bank's total loan portfolio at December 31, 2002. At December 31, 2002, substantially all of the Bank's commercial real estate loans were
secured by properties located within the Bank's market area. At December 31, 2002, the Bank's commercial real estate loans had an average
principal balance of $173,000. At that date, the largest commercial real estate loan had a principal balance of $1.3 million, and was secured by
five retail business properties located in Oswego County. This loan is currently performing in accordance with its original terms. Commercial
real estate loans are generally offered with adjustable interest rates tied to a market index which currently is the adjusted six month moving
average of the six month Treasury bill auction discount rate, with an overall interest rate cap which is determined at the time the loan is
originated. Commercial real estate loans may not adjust to a level below the initial rate. The Bank generally offers commercial real estate loans
with from one to five year adjustment periods. The Bank generally makes commercial real estate loans up to 75% of the appraised value of the
property securing the loan. An origination fee of up to 2% of the principal balance of the loan is typically charged on commercial real estate
loans. Commercial real estate loans originated by the Bank generally are underwritten to mature between 5 and 20 years with an amortization
schedule of between 10 and 30 years. The Bank has in the past sold loan participations to other financial institutions and expects to do so in the
future as opportunities arise.
In underwriting commercial real estate loans the Bank reviews the expected net operating income generated by the real estate to support debt
service, the age and condition of the collateral, the financial resources and income level of the borrower and the borrower's experience in
owning or managing similar properties. The Bank generally obtains personal guarantees from all commercial borrowers. Loans secured by
commercial real estate generally involve a greater degree of risk than one- to four-family residential mortgage loans and carry larger loan
balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and
6
borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate. If the cash flow from the property is reduced, the borrower's ability to repay the loan may be
impaired.
MULTI-FAMILY REAL ESTATE LOANS. Loans secured by multi-family real estate (real estate containing five or more dwellings)
constituted approximately $973,000, or .5%, of the Bank's total loan portfolio at December 31, 2002. At December 31, 2002, the Bank had a
total of 8 loans secured by multi-family real estate properties. The Bank's multi-family real estate loans are secured by multi-family rental
properties (primarily townhouses and walk-up apartments). At December 31, 2002, substantially all of the Bank's multi-family real estate loans
were secured by properties located within the Bank's market area. At December 31, 2002, the Bank's multi-family real estate loans had an
average principal balance of approximately $122,000 and the largest multi-family real estate loan had a principal balance of $352,000, and was
performing in accordance with its terms. Multi-family real estate loans generally are offered with adjustable interest rates tied to the adjusted
six month moving average of the six month Treasury Bill auction discount rate index with an overall interest rate cap which is determined at
the time the loan is originated. Multi-family real estate loans may not adjust below the initial rate. Multi-family real estate loans are
underwritten to mature between 5 and 20 years, and to amortize over 10 to 30 years. An origination fee of 1% is generally charged on multi-
family real estate loans.
In underwriting multi-family real estate loans, the Bank reviews the expected net operating income generated by the real estate to support the
debt service, the age and condition of the collateral, the financial resources and income level of the borrower and the borrower's experience in
owning or managing similar properties. The Bank generally requires a debt service coverage ratio of at least 120% (net of operating expenses)
of the monthly loan payment. The Bank makes multi-family real estate loans up to 75% of the appraised value of the property securing the
loan. The Bank generally obtains personal guarantees from all multi-family real estate borrowers.
Loans secured by multi-family real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans
and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family real estate and commercial real
estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
SECOND MORTGAGE LOANS. The Bank also offers home equity loans and equity lines of credit collateralized by a second mortgage on the
borrower's principal residence. The Bank's home equity lines of credit are secured by the borrower's principal residence with a maximum loan-
to-value ratio, including the principal balances of both the first and second mortgage loans of 80%, or up to 90% where the Bank has made the
first mortgage loan. At December 31, 2002, the disbursed portion of home equity lines of credit totaled $4.4 million. Home equity lines of
credit are offered on an adjustable rate basis with interest rates tied to the prime rate as published in The Wall Street Journal, plus up to 50 basis
points and with terms of up to 15 years.
Home equity loans are fixed rate loans with terms generally up to 10 years, although on occasion the Bank may originate a home equity loan
with a term of up to 15 years.
CONSUMER LOANS. As of December 31, 2002, consumer loans totaled $3.9 million, or 2.1%, of the Bank's total loan portfolio. The
principal types of consumer loans offered by the Bank are unsecured personal loans, and loans secured by deposit accounts. Other consumer
loans are offered on a fixed rate basis with maturities generally of less than five years.
The underwriting standards employed by the Bank for consumer loans include a determination of the applicant's credit history and an
assessment of ability to meet existing obligations and payments on the proposed loan. The stability of the applicant's monthly income may be
determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income.
Creditworthiness and the employment history of the applicant are of primary consideration in originating consumer loans, and in the case of
home equity lines of credit, the Bank obtains a title guarantee, title search, or an opinion as to the validity of title.
7
COMMERCIAL BUSINESS LOANS. The Bank currently offers commercial business loans to businesses in its market area and to deposit
account holders. At December 31, 2002, the Bank had commercial business loans outstanding with an aggregate balance of $12.8 million, of
which $8.1 million consisted of commercial lines of credit. The average commercial line of credit balance was approximately $80,000.
Commercial lines of credit generally have variable rates of interest tied to the prime rate and adjust monthly. The lines of credit are generally
collateralized by current assets of the borrower and renewed on an annual basis. The average commercial business loan balance was
approximately $39,000. Commercial business loans generally have fixed rates of interest. The loans are generally of short duration with
average terms of five years, but which may range up to 15 years. Lease financing arrangements are loans which are secured by pools of leases
for medical or dental equipment or leases to finance the acquisition of business equipment.
Underwriting standards employed by the Bank for commercial business loans include a determination of the applicant's ability to meet existing
obligations and payments on the proposed loan from normal cash flows generated by the applicant's business. The financial strength of each
applicant also is assessed through a review of financial statements provided by the applicant.
Commercial business loans generally bear higher interest rates than residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the borrower's business. The Bank generally obtains guarantees from the
borrower, a third party, or the Small Business Administration, as a condition to originating its commercial business loans.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, AND COMMITMENTS. Loan originations are derived from a number of sources
such as existing customers, developers, walk-in customers, real estate broker referrals, and commissioned mortgage loan originators. Upon
receiving a loan application, the Bank obtains a credit report and employment verification to verify specific information relating to the
applicant's employment, income, and credit standing. In the case of a real estate loan, an independent appraiser approved by the Bank appraises
the real estate intended to secure the proposed loan. A loan processor in the Bank's loan department checks the loan application file for
accuracy and completeness, and verifies the information provided. Mortgage loans of up to $275,000 may be approved by any designated loan
officer; mortgage loans in excess of $325,000 must be approved by the Board of Directors. Commercial loans of up to $50,000 unsecured, or
$75,000 (if secured by other than real estate) may be approved by the Bank's President, the Executive Vice President and Senior Commercial
Lender. These individuals may join their limits to a total approval amount of $225,000 unsecured, and $325,000 secured. Loans in excess of
these limits must be approved by either the entire Board of Directors, or a subcommittee of the Board of Directors. The Board of Directors, at
their monthly meeting, will review and verify that management's approvals of loans are made within the scope of management's authority.
After the loan is approved, a loan commitment letter is promptly issued to the borrower. At December 31, 2002, the Bank had commitments to
originate $15.3 million of loans.
If the loan is approved, the commitment letter specifies the terms and conditions of the proposed loan including the amount of the loan, interest
rate, amortization term, a brief description of the required collateral, and required insurance coverage. The borrower must provide proof of fire
and casualty insurance on the property (and, as required, flood insurance) serving as collateral, which insurance must be maintained during the
full term of the loan. Title insurance, title search, or an opinion of counsel as to the validity of title are required on all loans secured by real
property. In recent years, the Bank has not purchased loans originated by other lenders.
8
ORIGINATION, REPAYMENT AND SALE OF LOANS. The table below shows the Bank's loan origination, repayment and sales activity for
the periods indicated.
Year Ended December 31,
--------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------
(In Thousands)
Loan receivable, beginning of period . . $169,538 $150,496 $131,995 $129,338 $122,727
Originations:
Real estate:
First mortgage/(1)//(3) . . . . . . . . 73,778 44,510 30,627 26,987 34,908
Second mortgage/(2). . . . . . . . . . . 2,645 1,871 2,721 1,408 1,516
Commercial and consumer loans:
Consumer loans . . . . . . . . . . . . . 1,697 1,960 1,784 1,299 2,412
Lease financing. . . . . . . . . . . . . - - - - -
Commercial . . . . . . . . . . . . . . . 3,004 6,003 3,812 5,210 6,849
--------------------------------------------------------------------------------------------
Total originations . . . . . . . . . . 81,124 54,344 38,944 34,904 45,685
Transfer of mortgage loans to
foreclosed real estate . . . . . . . . . 1,138 348 638 93 563
Repayments . . . . . . . . . . . . . . . 45,984 20,979 18,930 26,161 29,969
Loan sales . . . . . . . . . . . . . . . 19,441 13,975 875 5,993 8,542
--------------------------------------------------------------------------------------------
Net loan activity. . . . . . . . . . . . 14,561 19,042 18,501 2,657 6,611
--------------------------------------------------------------------------------------------
Total loans receivable at end of period. $184,099 $169,538 $150,496 $131,995 $129,338
============================================================================================
/(1)/Includes $10.7 million in commercial real estate loans for the year ended December 31, 2002.
/(2)/Includes $2.6 million in home equity loans and a net change of $l.1 million in home equity lines of credit for year ended December 31,
2002. /(3)/Includes $12.1 million of mortgage loans held-for-sale originated during the year ended December 31, 2002.
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned on loans, the Bank generally receives loan origination
fees. To the extent that loans are originated or acquired for the Bank's portfolio, SFAS 91 requires that the Bank defer loan origination fees and
costs and amortize such amounts as an adjustment of yield over the life of the loan by use of the level yield method. ARM loans originated
below the fully indexed interest rate will have a substantial portion of the deferred amount recognized as income in the initial adjustment
period. Fees deferred under SFAS 91 are recognized into income immediately upon prepayment or the sale of the related loan. At December
31, 2002, the Bank had $259,000 of net deferred loan origination costs. Loan origination fees vary with the volume and type of loans and
commitments made and purchased, principal repayments, and competitive conditions in the mortgage markets, which in turn respond to the
demand for and availability of money.
In addition to loan origination fees, the Bank also receives other fees, service charges, and other income that consist primarily of deposit
transaction account service charges, late charges and income from REO operations. The Bank recognized fees and service charges of $1.1
million, $934,000 and $853,000, for the fiscal years ended December 31, 2002, 2001 and 2000, respectively.
LOANS-TO-ONE BORROWER. Savings banks are subject to the same loans-to-one borrower limits as those applicable to national banks,
which under current regulations restrict loans to one borrower to an amount equal to 15% of unimpaired net worth on an unsecured basis. If the
loan is secured by readily marketable collateral, the bank is allowed to apply an additional amount equal to 10% of unimpaired net worth. At
December 31, 2002, the Bank's largest lending relationship totaled $3.8 million and consisted of loans secured by a retail business property and
residence. The Bank's second largest lending relationship totaled $3.5 million and consisted of loans secured by commercial retail businesses
and residential properties. The Bank's third largest lending relationship totaled $3.2 million and consisted of loans secured by business assets,
equipment and real estate. The Bank's fourth largest lending relationship totaled $2.8 million and was secured by retail business property. The
Bank's fifth largest lending relationship totaled $1.8 million and consisted of loans secured by retail business property, retail office plaza and
one-to four- family residential properties. All of the above loans are also secured by underlying personal guarantees. At December 31, 2002,
the aforementioned loans were performing in accordance with their terms with the exception of one credit relationship which was delinquent at
December 31, 2002. Subsequent to year end, this credit relationship was modified and is now performing in accordance with those terms.
9
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENCIES. The Bank's collection procedures provide that when a loan is 15 days past due, a courtesy phone call is made to the
borrower. If the delinquency continues, at 35 days a delinquent notice is sent and immediate payment is demanded. If a loan becomes 40 days
past due, and no progress has been made in resolving the delinquency, the Bank will send a notice of foreclosure or notice to commence
another legal proceeding, if it is not a mortgagee. When a loan continues in a delinquent status for 70 days or more, and a repayment schedule
has not been made or kept by the borrower, generally foreclosure proceedings or other appropriate legal actions are initiated to minimize any
potential loss.
NON-PERFORMING ASSETS. Loans are reviewed on a regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Loans are placed on non-accrual status when either principal or interest is 90 days
or more past due or less than 90 days, in the event the loan has been referred to the Bank's legal counsel for foreclosure or other colletions.
Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. At December 31, 2002, the
Bank had non-performing assets of $3.1 million, and a ratio of non-performing loans and real estate owned ("REO") of 1.11% total assets.
Non-performing assets increased $355,000, or 12.9%, from $2.8 million in 2001.
Real estate acquired by the Bank as a result of foreclosure or by the deed in lieu of foreclosure is classified as REO until such time as it is sold.
These properties are carried at the lower of their recorded amount or estimated fair value less estimated costs to sell the property. REO totaled
$1.4 million, $632,000 and $884,000 at December 31, 2002, 2001 and 2000, respectively.
A component of REO consists of a real estate development project which had a net book value of $297,000 at December 31, 2002. The Bank
originally entered into a $570,000 commercial real estate loan in 1988 for the development of 49 single family residences. This loan was made
under the "leeway provision" of the New York State Banking Law. Under this provision of the Banking Law the lending relationship was
originally structured so that the Bank held title to the property securing the loan subject to the fulfillment of the borrower's obligations under
the loan. In 1990, the developer became insolvent, was unable to satisfy the terms of the loan and the Bank assumed control of the project. In
1998, the Bank established a wholly-owned subsidiary, whose sole business is the ownership and final development of the Whispering Oaks
real estate subdivision in Baldwinsville, New York. This subsidiary was initially capitalized with $50,000 in cash. It is anticipated that this
capitalization, together with interim financing to be provided by the Bank, will be sufficient to complete and liquidate this asset. At December
31, 2002, the Bank had 10 lots remaining to be sold. The proceeds from the sale of the lots are used to reduce the outstanding balance of REO.
The Bank believes it will fully recover its investment in this property.
DELINQUENT LOANS AND NON-PERFORMING ASSETS
The following table sets forth information regarding the Bank's loans delinquent 90 days or more, and real estate acquired or deemed acquired
by foreclosure at the dates indicated. When a loan is delinquent 90 days or more, the Bank reverses all accrued interest thereon and ceases to
accrue interest thereafter. For all the dates indicated, the Bank did not have any material restructured loans within the meaning of SFAS 15 and
SFAS 114.
At December 31,
-------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Loans delinquent, 90 days or more:
Real estate loans . . . . . . . . . . . $ 1,483 $ 1,576 $ 1,594 $ 2,284 $ 1,298
Commercial and consumer loans . . . . . 228 543 234 270 534
-------------------------------------------------------------------------------------------------
Total delinquent loans. . . . . . . . . 1,711 2,119 1,828 2,554 1,832
Total REO . . . . . . . . . . . . . . . 1,396 632 884 641 742
-------------------------------------------------------------------------------------------------
Total nonperforming assets/(1)/ . . . . $ 3,107 $ 2,751 $ 2,712 $ 3,195 $ 2,574
=================================================================================================
Total loans delinquent 90 days or more
to total loans receivable/(2)/ . . . . . 0.9% 1.3% 1.2% 2.0% 1.4%
Total loans delinquent 90 days or more
to total assets . . . . . . . . . . . . 0.6% 0.9% 0.8% 1.2% 0.9%
Total nonperforming assets to total
assets. . . . . . . . . . . . . . . . 1.1% 1.1% 1.2% 1.5% 1.3%
Net loans receivable/(3)/. . . . . . . . 182,618 167,041 149,102 130,761 128,200
-------------------------------------------------------------------------------------------------
Total assets. . . . . . . . . . . . . . $279,055 $244,366 $231,847 $216,324 $203,252
=================================================================================================
10
/(1)/Net of specific valuation allowances.
/(2)/Net of unearned discount, and the allowance for loan losses. /(3)/Includes $3.6 million of mortgage loans held-for-sale.
During the year ended December 31, 2002 and 2001, respectively, additional gross interest income of $141,000 and $118,000 would have been
recorded on loans accounted for on a non-accrual basis if the loans had been current throughout the period. No interest income on non-accrual
loans was included in income during the same periods.
The following table sets forth information with respect to loans past due 30-89 days in the Bank's portfolio at the dates indicated.
At December 31,
-------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------------------------------
(In Thousands)
Loans past due 30-89 days:
Real estate loans. . . . . . . $2,234 $3,476 $2,493 $1,619 $2,010
Commercial and consumer loans. 2,156 994 147 161 126
-------------------------------------------------------------------------
Total past due 30-89 days. . . $4,390 $4,470 $2,640 $1,780 $2,136
=========================================================================
The following table sets forth information regarding the Bank's delinquent loans 60 days and greater and REO at December 31, 2002.
At December 31, 2002
-----------------------------------------------------------
Balance Number
-----------------------------------------------------------
(Dollars in Thousands)
Residential real estate:
Loans 60 to 89 days delinquent. . . . . $ 368 6
Loans more than 90 days delinquent. . . 1,483 24
Consumer and commercial business loans
60 days or more delinquent. . . . . . . 1,577 22
Real estate owned . . . . . . . . . . . 1,396 7
-----------------------------------------------------------
Total . . . . . . . . . . . . . . . . . $ 4,824 59
===========================================================
CLASSIFICATION OF ASSETS. Federal regulations provide for the classification of loans and other assets such as debt and equity securities
considered to be of lesser quality as "substandard," "doubtful," or "loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the savings institution will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated "special mention" by
management.
When a savings institution classifies problem assets as either substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. General allowances represent loss allowances that have been established to recognize the
inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets.
When a savings institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of
the amount of the assets so classified, or to charge off such amount. A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by federal and state regulatory authorities, which can order the establishment of
additional general or specific loss allowances. The Bank regularly reviews the problem loans in its portfolio to determine whether any loans
require classification in accordance with applicable regulations.
11
The following table sets forth the aggregate amount of the Bank's internally classified assets at the dates indicated.
At December 31,
------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------
(In Thousands)
Substandard assets/(1)/. $2,828 $2,395 $1,770 $2,668 $2,482
Doubtful assets. . . . . 26 30 34 110 103
Loss assets. . . . . . . 70 33 44 7 90
------------------------------------------------------------------
Total classified assets. $2,924 $2,458 $1,848 $2,785 $2,675
==================================================================
/(1)/Includes $297,000 $297,000, $458,000, $510,000, and $638,000 for a real estate development project classified as REO at December 31,
2002, 2001, 2000, 1999 and 1998, respectively.
ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for estimated losses on the Bank's loan portfolio based on
management's evaluation of the potential losses that may be incurred. The Bank reviews on a quarterly basis the loans in its portfolio which
have demonstrated delinquencies, including problem loans, to determine whether any loans require classification or the establishment of
appropriate reserves or allowances for losses. Such evaluation, which includes a review of all loans of which full collectibility of interest and
principal may not be reasonably assured, considers, among other matters, past loss experience, present economic conditions and other factors
deemed relevant by management. Management calculates the general allowance for loan losses on past experience as well as current
delinquencies and the composition of the Bank's loan portfolio. While both general and specific loss allowances are charged against earnings,
general loan loss allowances are included, subject to certain limitations, as capital in computing risk-based capital under federal regulations.
In accordance with SFAS 114, a loan is considered impaired when each of the following criteria are met: the loan is of a material size, the loan
is considered to be non-performing, and a loss is probable. The measurement of impaired loans is generally based upon the present value of
expected future cash flows discounted at the historic effective interest rate, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. There were no impaired loans as of December 31, 2002.
Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loan loss provisions
may be deemed necessary. Management believes that the Bank's current allowance for loan losses is adequate, however, there can be no
assurance that the allowance for loan losses will be adequate to cover losses that may in fact be realized in the future or that additional
provisions for loan losses will not be required.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth the analysis of the allowance for loan losses at or
for the periods indicated.
At or for the Period Ended December 31,
--------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Total loans receivable, net. . . . . . . . . $182,618 $167,041 $149,102 $130,761 $128,200
Average loans outstanding. . . . . . . . . . 177,047 155,653 139,258 130,728 126,931
Allowance balance (at beginning of period) . 1,679 1,274 1,150 939 828
Provision for losses:
Real estate. . . . . . . . . . . . . . . . . 254 139 65 135 83
Commercial and consumer loans. . . . . . . . 1,122 569 179 238 298
Charge offs:
Real estate. . . . . . . . . . . . . . . . . 85 109 40 0 141
Commercial and consumer loans. . . . . . . . 1,578 256 99 190 140
Recoveries:
Commercial and consumer loans. . . . . . . . 89 62 19 28 11
--------------------------------------------------------------------------------------------------
Allowance balance (at end of period) . . . . $ 1,481 $ 1,679 $ 1,274 $ 1,150 $ 939
==================================================================================================
12
Allowance for loan losses as a percent of
net loans receivable at end of period. . . . 0.8% 1.0% 0.9% 0.9% 0.7%
Loans charged off as a percent of average
loans outstanding. . . . . . . . . . . . . . 0.9% 0.2% 0.1% 0.1% 0.2%
Ratio of allowance for loan losses to total
nonperforming loans at end of period . 86.6% 79.2% 69.7% 45.0% 51.3%
Ratio of allowance for loan losses to total
nonperforming assets at end of period . 47.7% 61.0% 47.0% 36.0% 36.5%
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth the allocation of allowance for loan losses by loan
category for the periods indicated. The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
At December 31,
------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------------------------------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------- ------------ ------- ------------ ------- ------------
(Dollars in Thousands)
Balance at end of period applicable to:
Real estate loans. . . . . . . . . . . . $ 303 90.52% $ 496 89.50% $ 466 89.39%
Commercial and consumer loans. . . . . . 1,178 9.48 1,183 10.50 808 10.61
------------------------------------------------------------------------------------------------------------
Total allowance for loan losses/(1)/ . . $ 1,481 100.00% $ 1,679 100.00% $ 1,274 100.00%
=============================================================================================================
1999 1998
--------------------------------------------------------------------------------------
% of Loans % of Loans
In Each In Each
Category to Category to
Amount Total Loans Amount Total Loans
--------------------------------------------------------------------------------------
Balance at end of period applicable to:
Real estate loans. . . . . . . . . . . . $ 440 90.81% $ 380 92.01%
Commercial and consumer loans. . . . . . 710 9.19 559 7.99
--------------------------------------------------------------------------------------
Total allowance for loan losses/(1)/ . . .$ 1,150 100.00% $ 939 100.00%
======================================================================================
/(1)/ Percentages include unearned discount and origination fees.
INVESTMENT ACTIVITIES
The investment policy of the Bank established by the Board of Directors attempts to provide for the overall asset/liability management needs of
the Bank, and maintain liquidity, maintain a high quality diversified investment portfolio in order to obtain a favorable return on investment
without incurring undue interest rate and credit risk, provide collateral for pledging requirements, and to complement the Bank's lending
activities. At December 31, 2002, the Bank had investment securities with an aggregate amortized cost of $62.0 million and a market value of
$62.5 million. At December 31, 2002, the Bank's amortized cost value of investment securities consisted of $15.4 million of corporate debt
issues and $12.9 million of securities issued or guaranteed by the United States Government or agencies thereof and state and municipal
obligations. The corporate debt issues primarily consist of financial corporation debt and industrial debentures (the largest single issuer was
$3.0 million). These issues generally have maturities ranging up to 20 years. All corporate debt investments have been rated as investment
grade by either Moody's or Standard & Poor's. Typically, such investments yield 60-70 basis points more than Treasury securities with
comparable maturities. To a lesser extent, the Bank also invests in mutual funds and equity securities. At December 31, 2002, the Bank held
$6.2 million in common stock, of which $2.2 million was Federal Home Loan Bank Stock. The Bank's mutual fund investments at December
31, 2002 consisted of $3.1 million in an equity mutual fund and $3.0 million in an adjustable rate mortgage fund. At December 31, 2002, the
Bank had invested $25.2 million in mortgage-backed securities, net. Mortgage-backed securities, like mortgage loans, amortize over the life of
the security as the underlying mortgages are paid down. The speed at which principal payments above normally scheduled amortization occurs,
is generally unpredictable. Historically, the
13
securities have paid down more rapidly in a falling interest rate environment, thereby shortening the life of the security. Likewise, in a rising
interest rate environment, the life of the mortgage-backed security tends to extend. The result is that, generally, the Bank will receive more
investable funds in lower interest rate environments and less investable funds during periods of higher interest rates. The embedded option on
the part of the underlying mortgagee to prepay the loan, therefore, tends to impact the value of the security and can adversely impact the Bank's
net interest margin. The Bank's investments are, generally, liquid, and therefore allow the Bank to respond more readily to changing market
conditions. The investment portfolio is accounted for in accordance with FASB Statement 115.
The Bank generally has maintained a portfolio of liquid assets that exceeds regulatory requirements. Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then
available in relation to other opportunities and its expectation of the yield that will be available in the future, as well as management's
projections as to the short term demand for funds to be used in the Bank's loan origination and other activities. For further information
regarding the Bank's investments see Note 2 to the Notes to Financial Statements.
At December 31, 2002, the Company holds the following corporate debt investments which exceed 10% of total capital.
Issuer Book Value Fair Market Value
CNA Financial $2,999,626 $2,920,704
INVESTMENT PORTFOLIO. The following table sets forth the carrying value of the Bank's investment portfolio at the dates indicated. At
December 31, 2002, the market value of the Bank's investments was approximately $62.5 million. The market value of investments includes
interest-earning deposits, and mortgage-backed securities.
At December 31,
------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------------
(In Thousands)
Investment securities:
US Government and agency obligations . . . . . . $ 4,378 $ 5,971 $ 9,667
State and municipal obligations. . . . . . . . . 8,549 6,012 6,405
Corporate debt issues. . . . . . . . . . . . . . 15,375 20,949 23,027
Equity securities. . . . . . . . . . . . . . . . 6,225 3,227 2,340
Mutual funds . . . . . . . . . . . . . . . . . . 3,070 3,007 2,861
------------------------------------------------------------------------------
37,597 39,166 44,300
Unrealized loss on available for sale portfolio. (251) (293) (26)
------------------------------------------------------------------------------
Total investment securities. . . . . . . . . . . 37,346 38,873 44,274
------------------------------------------------------------------------------
Total investments. . . . . . . . . . . . . . . . $37,346 $38,873 $44,274
==============================================================================
Mortgage-backed securities, net:
Adjustable rate. . . . . . . . . . . . . . . . . 3,423 633 1,284
Fixed rate . . . . . . . . . . . . . . . . . . . 21,017 13,488 18,122
------------------------------------------------------------------------------
24,440 14,121 19,406
Unrealized gain on available for sale portfolio. 720 428 78
------------------------------------------------------------------------------
Total mortgage-backed securities, net. . . . . . $25,160 $14,549 $19,484
==============================================================================
14
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth the amortized cost, market value, average life in years, and
annualized weighted average yield of the Bank's investment portfolio at December 31, 2002.
Annualized
Average Weighted
Amortized Market Life Average
Cost Value Years Yield
-----------------------------------------------------------------------------------
(Dollars in Thousands)
Investment securities:
U.S. Government treasury . . . . . . . . . . . . $ 19 $ 18 6.88 10.9%
U.S. Government agency . . . . . . . . . . . . . 4,359 4,447 2.22 3.5%
State and municipal obligations. . . . . . . . . 8,549 8,864 6.87 5.1%
Corporate debt issues. . . . . . . . . . . . . . 15,375 15,270 8.11 6.3%
Marketable equity securities . . . . . . . . . . 9,295 8,747
-----------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . .$37,597 $37,346
---------------------------------------------------------- =======
Unrealized loss on available for sale portfolio. (251)
----------------------------------------------------------
Carrying value of investment securities. . . . . $37,346
==========================================================
SECURITIES PORTFOLIO MATURITIES. The following table sets forth the scheduled maturities, carrying values, market values and
average yields for the Bank's investment securities at December 31, 2002. Yield is calculated on the amortized cost to maturity, and does not
reflect adjustments to a fully tax-equivalent basis.
December 31, 2002
----------------------------------------------------------------------------------------------
One year One to Five to
or less five years Ten Years
----------------------------------------------------------------------------------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
------- ------ ------- ------ ------- -------
(Dollars in Thousands)
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Debt investment securities:
------------------------------------------
U.S. Agency securities . . . . . . . . . . $ 2,014 3.505% $ 2,327 3.495% $ 18 6.626%
U.S. Government securities . . . . . . . . - - - - 19 10.853
State and municipal obligations. . . . . . 937 7.860 3,388 4.923 1,330 4.287
Corporate debt issues. . . . . . . . . . . 783 7.024 7,603 6.336 3,217 7.200
----------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . $ 3,734 5.336% $13,318 5.478% $ 4,584 6.373%
----------------------------------------------------------------------------------------------
Equity and mortgage-backed securities:
------------------------------------------
Mutual funds . . . . . . . . . . . . . . . $ 6,118 1.401% - - - -
Mortgage-backed securities . . . . . . . . - - 2,031 6.464 6,684 4.224
Common stock . . . . . . . . . . . . . . . 3,117 3.977 - - - -
----------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . $ 9,295 2.277 2,031 6.464% $ 6,684 4.224%
----------------------------------------------------------------------------------------------
Total investment securities. . . . . . . . $13,029 3.164% $15,349 5.606% $11,268 5.105%
==============================================================================================
15
More Than Total
Ten Years Investment Securities
-------------------------------------------------------------------------------------
Annualized Annualized
Weighted Weighted
Carrying Average Carrying Market Average
Value Yield Value Value Yield
-------------------------------------------------------------------------------------
(Dollars in Thousands)
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Debt investment securities:
------------------------------------------
U.S. Agency securities . . . . . . . . . . $ - -% $ 4,359 $ 4,446 3.512%
U.S. Government securities . . . . . . . . - - 19 18 10.854
State and municipal obligations. . . . . . 2,894 4.430 8,549 8,864 4.979
Corporate debt issues. . . . . . . . . . . 3,770 4.911 15,375 15,270 6.277
-------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . $ 6,664 4.673% $28,302 $28,598 5.079%
-------------------------------------------------------------------------------------
Equity and mortgage-backed securities:
------------------------------------------
Mutual funds . . . . . . . . . . . . . . . $ - -% $ 6,118 $ 5,280 1.401%
Mortgage-backed securities . . . . . . . . 15,723 5.349 24,438 25,160 5.079
Common stock . . . . . . . . . . . . . . . 0 - 3,177 3,468 3.977
-------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . $15,723 5.349% $33,735 $33,908 4.307%
-------------------------------------------------------------------------------------
Total investment securities. . . . . . . . $22,527 5.146% $62,037 $62,506 5.268%
=========================================================== ================
Unrealized gain on available
for sale portfolio 469
-------
Total carrying value $62,506 5.268%
======= =======
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for lending and other investment purposes. In addition to deposits, the Bank
derives funds from the amortization and prepayment of loans and mortgage-backed securities, the maturity of investment securities and
operations and from other borrowings. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest rates and market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from other sources or on a longer term basis for general business
purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally from within the Bank's market area through the offering of a broad
selection of deposit instruments including noninterest-bearing demand accounts, NOW accounts, passbook and club accounts, money market
deposit, term certificate accounts and individual retirement accounts. While the Bank accepts deposits of $100,000 or more, it generally does
not currently offer premium rates for such deposits. Deposit account terms vary according to the minimum balance required, the period of time
during which the funds must remain on deposit, and the interest rate, among other factors. The Bank has a committee which meets weekly to
evaluate the Bank's internal cost of funds, surveys rates offered by competing institutions, reviews the Bank's cash flow requirements for
lending and liquidity and the number of certificates of deposit maturing in the upcoming week. This committee executes rate changes when
deemed appropriate. The Bank does not obtain funds through brokers, nor does it solicit funds outside its market area.
16
DEPOSIT PORTFOLIO. The following table sets forth information regarding interest rates, terms, minimum amounts and balances of the
Bank's savings and other deposits as of December 31, 2002:
Weighted Percentage
Average Checking and Savings Minimum of Total
Interest Rate. Minimum Term Deposits Amount Balance Deposits
-----------------------------------------------------------------------------------------------
(Balance in thousands)
0.000% . . . . None Non-interest demand account $ 50 $ 15,764 7.77%
0.768% . . . . None NOW accounts 500 15,404 7.59%
1.050% . . . . None Savings accounts - fixed 100 46,658 23.00%
1.320% . . . . None Savings accounts - tiered 100 18,859 9.30%
1.497% . . . . None Money management accounts 1,500 19,765 9.74%
Certificates of deposit:
1.793% . . . . 30-day Fixed term, fixed rate 2,500 2,332 1.15%
1.457% . . . . 3 months Fixed term, fixed rate 1,000 150 0.07%
1.896% . . . . 6 months Fixed term, fixed rate 2,500 8,046 3.97%
2.254% . . . . 9 months Fixed term, fixed rate 1,000 29 0.01%
2.976% . . . . 11 months Fixed term, fixed rate 1,000 527 0.26%
2.729% . . . . 12 months Fixed term, fixed rate 1,000 23,279 11.47%
3.142% . . . . 15 months Fixed term, fixed rate 1,000 3,841 1.89%
2.101% . . . . 18 months Fixed term, variable rate 1,000 1,201 0.59%
3.330% . . . . 18 months Fixed term, fixed rate 1,000 4,792 2.36%
4.166% . . . . 24 months Fixed term, fixed rate 1,000 5,839 2.88%
3.883% . . . . 30 months Fixed term, fixed rate 1,000 2,347 1.16%
5.088% . . . . 36 months Fixed term, fixed rate/(1)/ 1,000 14,336 7.07%
5.050% . . . . 48 months Fixed term, fixed rate/(1)/ 1,000 7,593 3.74%
5.968% . . . . 60 months Fixed term, fixed rate 1,000 2,665 1.31%
5.904% . . . . 84 months Fixed term, fixed rate 1,000 9,450 4.66%
3.045% . . . . 60-120 months Fixed term, fixed rate 1,000 4 0.01%
-----------------------------------------------------------------------------------------------
Total $202,881/(2)/ 100.00%
===============================================================================================
/(1)/This deposit product allows the depositor to elect to adjust the interest rate paid once during the initial term of the deposit to the the
prevailing rate.
/(2)/Excludes escrow accounts totalling $1,640,784 at December 31, 2002.
The following table sets forth the change in dollar amount of savings deposits in the various types of savings accounts offered by the Bank
between the dates indicated.
Balance Percent Balance Percent
At of Incr. At of Incr.
12/31/02 Deposits (Decr) 12/31/01 Deposits (Decr)
------------------------------------------------------------------------------------------
(Dollars in Thousands)
Club Accounts . . . . . . . $ 1,135 0.56% $ 161 $ 974 0.58% $ 16
Noninterest accounts. . . . 15,764 7.77 2,728 13,036 7.75 3,140
NOW accounts. . . . . . . . 15,404 7.59 173 15,231 9.06 (280)
Passbooks . . . . . . . . . 64,382 31.74 4,540 59,842 35.59 2,968
Money management accounts . 19,765 9.74 15,348 4,417 2.63 4,417
Time deposits which mature
Within 12 months. . . . . . 48,721 24.01 (2,450) 51,172 30.43 (604)
Within 12-36 months . . . . 24,622 12.14 7,909 16,713 9.94 (1,557)
Beyond 36 months. . . . . . 13,088 6.45 6,329 6,759 4.02 (320)
------------------------------------------------------------------------------------------
Total . . . . . . . . . . . $ 202,881/(1)/100.00% $34,737 $ 168,144 100.00% $ 7,783
==========================================================================================
17
Balance Percent Balance Percent Balance
at of Incr. At of Incr. At
12/31/00 Deposits (Decr) 12/31/99 Deposits (Decr) 12/31/98
-------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Club Accounts . . . . . . . $ 958 0.60% $ (44) $ 1,002 0.66% $ 94 $ 908
Noninterest accounts. . . . 9,893 6.17 147 9,746 6.43 273 9,473
NOW accounts. . . . . . . . 15,511 9.67 1,515 13,996 9.24 (2,331) 16,327
Passbooks . . . . . . . . . 56,874 35.47 (1,555) 58,429 38.56 (4,893) 63,322
Time deposits which mature
Within 12 months. . . . . . 51,776 32.29 5,688 46,088 30.41 (5,716) 51,804
Within 12-36 months . . . . 18,270 11.39 2,080 16,190 10.68 2,799 13,391
Beyond 36 months. . . . . . 7,079 4.41 994 6,085 4.02 1,801 4,284
--------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . $160,361 100.00% $ 8,825 $ 151,536 100.00% $(7,973) $ 159,509
========================================================================================================
/(1)/ Excludes escrow accounts totalling $1,640,784 at December 31, 2002.
The following table sets forth the certificates of deposit in the Bank classified by rates as of the dates indicated:
At December 31,
-----------------------------------------
2002 2001 2000
-----------------------------------------
(In Thousands)
RATE
-----------------------------------------
3.00% or less. $36,659 $ 7,169 $ 6
3.01 - 3.99% . 14,776 13,701 14
4.00 - 4.99% . 16,334 17,331 1,133
5.00 - 5.99% . 8,168 17,284 20,353
6.00 - 6.99% . 10,198 18,000 54,324
7.00 - 7.99% . 296 1,159 1,169
-----------------------------------------
$86,431 $74,644 $76,999
=========================================
The following table sets forth the amount and maturities of certificates of deposit at December 31, 2002.
Amount due
---------------------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
One Year Years Years Years Years Years Total
---------------------------------------------------------------------------------------
(Dollars in Thousands)
3.00% or less. . . . . $ 31,539 $ 4,597 $ 202 $ 307 $ 13 $ 0 $36,659
3.01 - 3.99% . . . . . 6,867 4,190 2,284 828 323 284 14,776
4.00 - 4.99% . . . . . 3,720 1,608 6,297 2,839 434 1,436 16,334
5.00 - 5.99% . . . . . 1,989 1,665 757 1,217 173 2,367 8,168
6.00 - 6.99% . . . . . 4,443 1,946 943 1,060 1,665 141 10,198
7.00 and above . . . . 163 96 37 0 0 0 296
---------------------------------------------------------------------------------------
$ 48,721 $14,102 $10,520 $6,252 $2,608 $ 4,228 $86,431
=======================================================================================
The following table indicates the amount of the Bank's certificates of deposit of $100,000 or more by time remaining until maturity as of
December 31, 2002.
Certificates
Of Deposit
Of $100,000
Remaining Maturity or More
------------------------------------------
(In thousands)
Three months or less. . . $ 4,149
Three through six months. 3,317
Six through twelve months 3,223
Over twelve months. . . . 5,139
------------------------------------------
Total . . . . . . . . . . $ 15,828
==========================================
18
The following table sets forth the net changes in the deposit activities of the Bank for the periods indicated:
At December 31
-------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------
(In Thousands)
Balance at beginning of period . . . $168,144 $160,364 $151,536
Net deposits . . . . . . . . . . . . 30,081 1,680 2,975
Interest credited. . . . . . . . . . 4,656 6,100 5,853
-------------------------------------------------------------------
Ending Balance . . . . . . . . . . . $202,881 168,144 160,364
-------------------------------------------------------------------
Net increase/(decrease) in deposits. $ 34,737 $ 7,780 $ 8,828
==================================================================
BORROWINGS
Savings deposits are the primary source of funds of the Bank's lending and
investment activities and for its general business purposes. At December 31,
2002, the Bank had $3.4 million in funds obtained from repurchase agreements
outstanding, $29.8 million in long-term term advances and $5.0 million in a
pooled trust preferred security obligation. The Bank is a member of the Federal Home Loan Bank System.
The following table summarizes the outstanding balance of short-term borrowing of the Bank for the years indicated.
At December 31
--------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------
(In Thousands)
Overnight Line of Credit . . . . . . . $ - $ - $ 5,600
Term borrowings (original term)
90 days or less. . . . . . . . . . . . 2,700 10,718 16,407
1 year . . . . . . . . . . . . . . . . 7,000 8,500 11,000
2 year - 1,000 -
--------------------------------------------------------------------
Balance at end of period . . . . . . . $ 9,700 $20,218 $33,007
====================================================================
Daily average during the year. . . . . 13,716 15,240 32,911
Maximum month-end balance. . . . . . . 23,580 20,218 40,388
Weighted average rate during the year. 3.75% 4.56% 6.29%
Year-end average rate. . . . . . . . . 4.65% 4.19% 6.50%
PERSONNEL
As of December 31, 2002, the Bank had 94 full-time and 17 part-time employees. None of the Bank's employees is represented by a collective
bargaining group. The Bank believes its relationship with its employees to be good.
REGULATION AND SUPERVISION
REGULATION
GENERAL. The Bank is a New York-chartered stock savings bank and its deposit accounts are insured up to applicable limits by the FDIC
through the Bank Insurance Fund. The Bank is subject to extensive regulation by the Department, as its chartering agency, and by the FDIC, as
its deposit insurer. The Bank is required to file reports with, and is periodically examined by, the FDIC and the Superintendent concerning its
activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to,
mergers with or acquisitions of other banking institutions. The Bank is a member of the FHLB of New York and is
19
subject to certain regulations by the Federal Home Loan Bank System. On July 19, 2001 the Company and the Mutual Holding Company
completed their conversion to federal charters. Consequently, they are subject to regulations of the Office of Thrift Supervision ("OTS") as
savings and loan holding companies. Any change in such regulations, whether by the Department, the FDIC, or the OTS could have a material
adverse impact on the Bank, the Company or the Mutual Holding Company.
Regulatory requirements applicable to the Bank, the Company and the Mutual Holding Company are referred to below or elsewhere herein.
NEW YORK BANK REGULATION. The exercise by an FDIC-insured savings bank of the lending and investment powers under the New
York State Banking Law is limited by FDIC regulations and other federal law and regulations. In particular, the applicable provisions of New
York State Banking Law and regulations governing the investment authority and activities of an FDIC insured state-chartered savings bank
have been substantially limited by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the FDIC regulations
issued pursuant thereto.
The Bank derives its lending, investment and other authority primarily from the applicable provisions of New York State Banking Law and the
regulations of the Department, as limited by FDIC regulations. Under these laws and regulations, savings banks, including the Bank, may
invest in real estate mortgages, consumer and commercial loans, certain types of debt securities, including certain corporate debt securities and
obligations of federal, state and local governments and agencies, certain types of corporate equity securities and certain other assets. Under the
statutory authority for investing in equity securities, a savings bank may invest up to 7.5% of its assets in corporate stock, with an overall limit
of 5% of its assets invested in Common Stock. Investment in the stock of a single corporation is limited to the lesser of 2% of the outstanding
stock of such corporation or 1% of the savings bank's assets, except as set forth below. Such equity securities must meet certain earnings ratios
and other tests of financial performance. A savings bank's lending powers are not subject to percentage of assets limitations, although there are
limits applicable to single borrowers. A savings bank may also, pursuant to the "leeway" power, make investments not otherwise permitted
under the New York State Banking Law. This power permits investments in otherwise impermissible investments of up to 1% of assets in any
single investment, subject to certain restrictions and to an aggregate limit for all such investments of up to 5% of assets. Additionally, in lieu of
investing in such securities in accordance with and reliance upon the specific investment authority set forth in the New York State Banking
Law, savings banks are authorized to elect to invest under a "prudent person" standard in a wider range of investment securities as compared to
the types of investments permissible under such specific investment authority. However, in the event a savings bank elects to utilize the
"prudent person" standard, it will be unable to avail itself of the other provisions of the New York State Banking Law and regulations which set
forth specific investment authority. The Bank has not elected to conduct its investment activities under the "prudent person" standard. A
savings bank may also exercise trust powers upon approval of the Department.
New York State chartered savings banks may also invest in subsidiaries under their service corporation investment authority. A savings bank
may use this power to invest in corporations that engage in various activities authorized for savings banks, plus any additional activities which
may be authorized by the Banking Board. Investment by a savings bank in the stock, capital notes and debentures of its service corporations is
limited to 3% of the bank's assets, and such investments, together with the bank's loans to its service corporations, may not exceed 10% of the
savings bank's assets. Furthermore, New York banking regulations impose requirements on loans which a bank may make to its executive
officers and directors and to certain corporations or partnerships in which such persons have equity interests. These requirements include, but
are not limited to, requirements that (i) certain loans must be approved in advance by a majority of the entire board of trustees and the
interested party must abstain from participating directly or indirectly in the voting on such loan, (ii) the loan must be on terms that are not more
favorable than those offered to unaffiliated third parties, and (iii) the loan must not involve more than a normal risk of repayment or present
other unfavorable features.
Under the New York State Banking Law, the Superintendent may issue an order to a New York State chartered banking institution to appear
and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and
20
to keep prescribed books and accounts. Upon a finding by the Department that any director, trustee or officer of any banking organization has
violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been
notified by the Superintendent to discontinue such practices, such director, trustee or officer may be removed from office after notice and an
opportunity to be heard. The Bank does not know of any past or current practice, condition or violation that might lead to any proceeding by
the Superintendent or the Department against the Bank or any of its directors, trustees or officers.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the U.S. Government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings banks, after giving the
Superintendent an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC establishes deposit insurance premiums based upon the risks a particular bank or savings association poses to its deposit insurance
funds. Under the risk-based deposit insurance assessment system, the FDIC assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending six months before the assessment period, consisting of: (i) well capitalized;
(ii) adequately capitalized; or (iii) undercapitalized and one of three supervisory subcategories within each capital group. With respect to the
capital ratios, institutions are classified as well capitalized or adequately capitalized using ratios that are substantially similar to the prompt
corrective action capital ratios discussed above. Any institution that does not meet these two definitions is deemed to be undercapitalized for
this purpose. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by
theinstitution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds (which may include, if applicable, information provided by the institution's state supervisor). An
institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which
different assessment rates are applied. Assessments rates for deposit insurance currently range from 0 basis points to 27 basis points. The
capital and supervisory subgroup to which an institution is assigned by the FDIC is confidential and may not be disclosed. The Bank's rate of
deposit insurance assessments will depend upon the category and subcategory to which the Bank is assigned by the FDIC. Any increase in
insurance assessments could have an adverse effect on the earnings of the Bank.
REGULATORY CAPITAL REQUIREMENTS. The FDIC has adopted risk-based capital guidelines to which the Bank is subject. The
guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations. The Bank is required to maintain certain levels of regulatory capital in relation to regulatory risk-weighted
assets. The ratio of such regulatory capital to regulatory risk-weighted assets is referred to as the Bank's "risk-based capital ratio." Risk-based
capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0% to
100%, with higher levels of capital being required for the categories perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first tier ("Tier I") includes common equity, retained earnings, certain non-
cumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory
convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain
limitations, less required deductions. Savings banks are required to maintain a total risk-based capital ratio of at least 8%, of which at least 4%
must be Tier I capital.
21
In addition, the FDIC has established regulations prescribing a minimum Tier I leverage ratio (Tier I capital to adjusted total assets as specified
in the regulations). These regulations provide for a minimum Tier I leverage ratio of 3% for banks that meet certain specified criteria, including
that they have the highest examination rating and are not experiencing or anticipating significant growth. All other banks are required to
maintain a Tier I leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The FDIC and the other federal banking
regulators have proposed amendments to their minimum capital regulations to provide that the minimum leverage capital ratio for a depository
institution that has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Rating System will be 3% and that
the minimum leverage capital ratio for any other depository institution will be 4% unless a higher leverage capital ratio is warranted by the
particular circumstances or risk profile of the depository institution. The FDIC may, however, set higher leverage and risk-based capital
requirements on individual institutions when particular circumstances warrant. Savings banks experiencing or anticipating significant growth
are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. The FDIC has the authority to use its enforcement powers to
prohibit a savings bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice.
Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a
pro forma basis. New York law also restricts the Bank from declaring a dividend which would reduce its capital below (i) the amount required
to be maintained by state law and regulation, or (ii) the amount of the Bank's liquidation account established in connection with the
Reorganization.
PROMPT CORRECTIVE ACTION. The federal banking agencies have promulgated regulations to implement the system of prompt corrective
action required by federal law. Under the regulations, a bank shall be deemed to be (i) "well capitalized" if it has total risk-based capital of
10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not subject to any
written capital order or directive; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital
ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based capital ratio that is lessthan 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under certain circumstances); (iv) "significantly undercapitalized"
if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I leverage capital
ratio that is less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than
2.0%. Federal law and regulations also specify circumstances under which a federal banking agency may reclassify a well capitalized
institution as adequately capitalized and may require an adequately capitalized institution to comply with supervisory actions as if it were in the
next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized).
Based on the foregoing, the Bank is currently classified as a "well capitalized" savings institution.
TRANSACTIONS WITH AFFILIATES. Under current federal law, transactions between depository institutions and their affiliates are
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a subsidiary of the savings bank. In a holding company context, at
a minimum, the parent holding company of a savings bank and any companies which are controlled by such parent holding company are
affiliates of the savings bank. Generally, Section 23A limits the extent to which the savings bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such savings bank's capital stock and surplus and contains an aggregate limit
on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. The term "covered transaction" includes
the making of loans or other extensions of credit to an affiliate; the purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate; the acceptance of securities of an affiliate as collateral for a loan or extension of credit to any person; or issuance of a
guarantee, acceptance, or letter of credit on behalf of an affiliate. Section 23A also establishes specific collateral requirements for loans or
extensions of credit to, or guarantees, acceptances on letters of credit issued on behalf of an affiliate. Section 23B requires that covered
transactions and a broad list of other specified transactions be on terms substantially the same, or no less favorable, to the savings bank or its
subsidiary as similar transactions with nonaffiliates.
22
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and stockholders who control, directly or indirectly, 10% or more of
voting securities of a savings bank and certain related interests of any of the foregoing, may not exceed, together with all other outstanding
loans to such persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and
stockholders who control 10% or more of voting securities of a stock savings bank, and their respective related interests, unless such loan is
approved in advance by a majority of the board of directors of the savings bank. Any "interested" director may not participate in the voting.
The loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required, is the
greater of $25,000 or 5% of capital and surplus or any loans over $500,000. Further, pursuant to Section 22(h), loans to directors, executive
officers and principal stockholders must generally be made on terms substantially the same as offered in comparable transactions to other
persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans to executive officers.
FEDERAL HOLDING COMPANY REGULATION.
GENERAL. The Company and the Mutual Holding Company are nondiversified mutual savings and loan holding companies within the
meaning of the Home Owners' Loan Act. As such, the Company and the Mutual Holding Company are registered with the OTS and are subject
to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company
and the Mutual Holding Company, and their subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to the subsidiary savings institution.
PERMITTED ACTIVITIES. Under OTS regulation and policy, a mutual holding company and a federally chartered mid-tier holding company
such as the Company may engage in the following activities: (i) investing in the stock of a savings association; (ii) acquiring a mutual
association through the merger of such association into a savings association subsidiary of such holding company or an interim savings
association subsidiary of such holding company; (iii) merging with or acquiring another holding company, one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal
law or under the law of any state where the subsidiary savings association or associations share their home offices; (v) furnishing or performing
management services for a savings association subsidiary of such company; (vi) holding, managing or liquidating assets owned or acquired
from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association subsidiary of such company; (viii) acting as trustee under deeds
of trust; (ix) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies
under Section 4(c) of the Bank Holding Company Act of 1956, unless the Director, by regulation, prohibits or limits any such activity for
savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly
engage on March 5, 1987; (x) any activity permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act,
including securities and insurance underwriting; and (xi) purchasing, holding, or disposing of stock acquired in connection with a qualified
stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Director. If a mutual holding
company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger
or acquisition may only invest in assets and engage in activities listed in (i) through (xi) above, and has a period of two years to cease any
nonconforming activities and divest of any nonconforming investments.
The Home Owners' Loan Act prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from
acquiring another savings association or holding company thereof, without prior written approval of the OTS. It also prohibits the acquisition
or retention of, with certain exceptions, more than 5% of a nonsubsidiary savings association, a nonsubsidiary holding company, or a
nonsubsidiary company engaged in activities other than those permitted by the Home Owners' Loan Act; or acquiring or retaining control of an
institution that is not federally insured. In evaluating applications by holding companies to acquire savings association, the OTS must consider
the financial and managerial resources, future prospects of the company and association involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive factors.
23
The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company
controlling savings association in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by
savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company
acquisitions.
WAIVERS OF DIVIDENDS BY MUTUAL HOLDING COMPANY. Office of Thrift Supervision regulations require the Mutual Holding
Company to notify the OTS of any proposed waiver of its receipt of dividends from the Company. The OTS reviews dividend waiver notices
on a case-by-case basis, and, in general, does not object to any such waiver if: (i) the mutual holding company's board of directors determines
that such waiver is consistent with such directors' fiduciary duties to the mutual holding company's members; (ii) for as long as the savings
association subsidiary is controlled by the mutual holding company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association, which restriction, if material, is disclosed in the public financial
statements of the savings association as a note to the financial statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding company, and, in accordance with SFAS 5, where the savings
association determines that the payment of such dividend to the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; and (iv) the amount of any waived dividend is considered as having been paid by the savings association in evaluating any
proposed dividend under OTS capital distribution regulations. The Mutual Holding Company generally intends to waive dividends paid by the
Company in excess of its operating cash requirements. Under OTS regulations, our public stockholders would not be diluted because of any
dividends waived by the Mutual Holding Company (and waived dividends would not be considered in determining an appropriate exchange
ratio) in the event the Mutual Holding Company converts to stock form.
CONVERSION OF THE MUTUAL HOLDING COMPANY TO STOCK FORM. OTS regulations permit the Mutual Holding Company to
convert from the mutual form of organization to the capital stock form of organization (a "Conversion Transaction"). There can be no assurance
when, if ever, a Conversion Transaction will occur, and the Board of Directors has no current intention or plan to undertake a Conversion
Transaction. In a Conversion Transaction a new holding company would be formed as the successor to the Company (the "New Holding
Company"), the Mutual Holding Company's corporate existence would end, and certain depositors of the Bank would receive the right to
subscribe for additional shares of the New Holding Company. In a Conversion Transaction, each share of common stock held by stockholders
other than the Mutual Holding Company ("Minority Stockholders") would be automatically converted into a number of shares of common
stock of the New Holding Company determined pursuant an exchange ratio that ensures that Minority Stockholders own the same percentage
of common stock in the New Holding Company as they owned in the Company immediately prior to the Conversion Transaction. Under OTS
regulations, Minority Stockholders would not be diluted because of any dividends waived by the Mutual Holding Company (and waived
dividends would not be considered in determining an appropriate exchange ratio), in the event the Mutual Holding Company converts to stock
form. The total number of shares held by Minority Stockholders after a Conversion Transaction also would be increased by any purchases by
Minority Stockholders in the stock offering conducted as part of the Conversion Transaction.
24
NEW YORK STATE BANK HOLDING COMPANY REGULATION. In addition to the federal regulation, a holding company controlling a
state chartered savings bank organized or doing business in New York State also may be subject to regulation under the New York State
Banking Law. The term "bank holding company," for the purposes of the New York State Banking Law, is defined generally to include any
person, company or trust that directly or indirectly either controls the election of a majority of the directors or owns, controls or holds with
power to vote more than 10% of the voting stock of a bank holding company or, if the Company is a banking institution, another banking
institution, or 10% or more of the voting stock of each of two or more banking institutions. In general, a bank holding company controlling,
directly or indirectly, only one banking institution will not be deemed to be a bank holding company for the purposes of the New York State
Banking Law. Under New York State Banking Law, the prior approval of the Banking Board is required before: (1) any action is taken that
causes any company to become a bank holding company; (2) any action is taken that causes any banking institution to become or be merged or
consolidated with a subsidiary of a bank holding company; (3) any bank holding company acquires direct or indirect ownership or control of
more than 5% of the voting stock of a banking institution; (4) any bank holding company or subsidiary thereof acquires all or substantially all
of the assets of a banking institution; or (5) any action is taken that causes any bank holding company to merge or consolidate with another
bank holding company. Additionally, certain restrictions apply to New York State bank holding companies regarding the acquisition of
banking institutions which have been chartered five years or less and are located in smaller communities. Officers, directors and employees of
New York State bank holding companies are subject to limitations regarding their affiliation with securities underwriting or brokerage firms
and other bank holding companies and limitations regarding loans obtained from its subsidiaries.
FINANCIAL SERVICES MODERNIZATION ACT. On November 12, 1999, the Gramm-Leach-Bliley Act was signed into law, repealing
provisions of the depression-era Glass-Steagall Act, which prohibited commercial banks, securities firms, and insurance companies from
affiliating with each other and engaging in each other's businesses. The major provisions of the Act took effect on March 12, 2000.
The Act creates a new type of financial services company called a "Financial Holding Company" (an "FHC"), a bank holding company with
dramatically expanded powers. FHCs may offer virtually any type of financial service, including banking, securities underwriting, insurance
(both agency and underwriting) and merchant banking. The Federal Reserve serves as the primary "umbrella" regulator of FHCs. Balanced
against the attractiveness of these expanded powers are higher standards for capital adequacy and management, with heavy penalties for
noncompliance.
Bank holding companies that wish to engage in expanded activities but do not wish to become financial holding companies may elect to
establish "financial subsidiaries," which are subsidiaries of national banks with expanded powers. The Act permits financial subsidiaries to
engage in the same types of activities permissible for nonbank subsidiaries of financial holding companies, with the exception of merchant
banking, insurance underwriting and real estate investment and development. Merchant banking may be permitted after a five-year waiting
period under certain regulatory circumstances.
The Company has implemented all the provisions of this Act. The Company expects to remain a bank holding company for the time being and
access its options as circumstances change.
FEDERAL SECURITIES LAW. The Common Stock of the Company is registered with the SEC under the Exchange Act, prior to completion
of the Offering and Reorganization. The Company is subject to the information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
The Company Common Stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may
not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in
any three-month period.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository institutions to maintain noninterest-bearing reserves at
specified levels against their transaction accounts (primarily checking, money management and NOW checking accounts). At December 31,
2002, the Bank was in compliance with these reserve requirements.
25
FEDERAL REGULATION. Under the Community Reinvestment Act, as amended (the "CRA"), as implemented by FDIC regulations, a
savings bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examination of a savings institution, to
assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain
applications by such institution. The CRA requires the FDIC to provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system. The Bank's latest CRA rating was "outstanding."
NEW YORK STATE REGULATION. The Bank is also subject to provisions of the New York State Banking Law which impose continuing
and affirmative obligations upon banking institutions organized in New York State to serve the credit needs of its local community ("NYCRA")
which are substantially similar to those imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA report and copies of
all federal CRA reports with the Department. The NYCRA requires the Department to make a biennial written assessment of a bank's
compliance with the NYCRA, utilizing a four-tiered rating system and make such assessment available to the public. The NYCRA also
requires the Superintendent to consider a bank's NYCRA rating when reviewing a bank's application to engage in certain transactions,
including mergers, asset purchases and the establishment of branch offices or automated teller machines, and provides that such assessment
may serve as a basis for the denial of any such application.
The Bank's NYCRA rating as of its latest examination was "satisfactory."
THE USA PATRIOT ACT
In response to the events of September 11, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on October 26, 2001. The USA PATRIOT Act gives the
federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers,
increased information sharing and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of
the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts,
brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions:
Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies,
procedures, and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs;
and (iv) an independent audit function to test the anti-money laundering program.
Section 326 authorizes the Secretary of the Department of Treasury, in conjunction with other bank regulators, to issue regulations by October
26, 2002 that provide for minimum standards with respect to customer identification at the time new accounts are opened.
26
Section 312 requires financial institutions that establish, maintain, administer, or manage private banking accounts or correspondence accounts
in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish
appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money
laundering.
Financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks
(foreign banks that do not have a physical presence in any country), and will be subject to certain record keeping obligations with respect to
correspondent accounts of foreign banks.
Bank regulators are directed to consider a holding company's effectiveness in combating money laundering when ruling on Federal Reserve
Act and Bank Merger Act applications.
27
The federal banking agencies have begun to propose and implement regulations pursuant to the USA PATRIOT Act. These proposed and
interim regulations would require financial institutions to adopt the policies and procedures contemplated by the USA PATRIOT Act.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), which implemented legislative reforms
intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board that will enforce
auditing, quality control and independence standards and will be funded by fees from all publicly traded companies, Sarbanes-Oxley places
certain restrictions on the scope of services that may be provided by accounting firms to their public company audit clients. Any non-audit
services being provided to a public company audit client will require preapproval by the company's audit committee. In addition, Sarbanes-
Oxley makes certain changes to the requirements for audit partner rotation after a period of time. Sarbanes-Oxley requires chief executive
officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the Securities and Exchange
Commission, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement. The Company's Chief
Executive Officer and Chief Financial Officer have signed certifications to this Form 10-K as required by Sarbanes-Oxley. In addition, under
Sarbanes-Oxley, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a
company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to
the audit committee or other similar committee of the board of directors or the board itself.
Under Sarbanes-Oxley, longer prison terms will apply to corporate executives who violate federal securities laws; the period during which
certain types of suits can be brought against a company or its officers is extended; and bonuses issued to top executives prior to restatement of a
company's financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also
prohibited from trading the company's securities during retirement plan "blackout" periods, and loans to company executives (other than loans
by financial institutions permitted by federal rules and regulations) are restricted. In addition, a provision directs that civil penalties levied by
the Securities and Exchange Commission as a result of any judicial or administrative action under Sarbanes-Oxley be deposited to a fund for
the benefit of harmed investors. The Federal Accounts for Investor Restitution provision also requires the Securities and Exchange Commission
to develop methods of improving collection rates. The legislation accelerates the time frame for disclosures by public companies, as they must
immediately disclose any material changes in their financial condition or operations. Directors and executive officers must also provide
information for most changes in ownership in a company's securities within two business days of the change.
Sarbanes-Oxley also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how
they interact with the company's "registered public accounting firm." Audit committee members must be independent and are absolutely barred
from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies must disclose whether at least one
member of the committee is a "financial expert" (as such term is defined by the Securities and Exchange Commission) and if not, why not.
Under Sarbanes-Oxley, a company's registered public accounting firm is prohibited from performing statutorily mandated audit services for a
company if such company's chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in
equivalent positions had been employed by such firm and participated in the audit of such company during the one-year period preceding the
audit initiation date. Sarbanes-Oxley also prohibits any officer or director of a company or any other person acting under their direction from
taking any action to fraudulently influence, coerce, manipulate or mislead any independent accountant engaged in the audit of the company's
financial statements for the purpose of rendering the financial statements materially misleading. Sarbanes-Oxley also requires the Securities
and Exchange Commission to prescribe rules requiring inclusion of any internal control report and assessment by management in the annual
report to shareholders. Sarbanes-Oxley requires the company's registered public accounting firm that issues the audit report to attest to and
report on management's assessment of the company's internal controls.
28
Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting
regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax
matters and is not a comprehensive description of the tax rules applicable to the Company or the Bank.
BAD DEBT RESERVES. Prior to the 1996 Act, the Bank was permitted to establish a reserve for bad debts and to make annual additions to
the reserve. These additions could, within specified formula limits, be deducted in arriving at the Bank's taxable income. As a result of the 1996
Act, the Bank must use the small bank experience method in computing its bad debt deduction beginning with its 1996 Federal tax return. In
addition, the federal legislation requires the recapture (over a six year period) of the excess of tax bad debt reserves at December 31, 1995 over
those established as of December 31, 1987.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to
recapture into taxable income should the Bank fail to meet certain thrift asset and 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 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. In 2002, net operating losses can offset 100% of AMTI. Going forward, net operating losses can offset no more than 90%
of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net operating losses to the preceding two taxable years and
forward to the succeeding 20 taxable years. This provision applies to losses incurred in taxable years beginning after August 5, 1997.
The Internal Revenue Service has examined the federal income tax return for the fiscal year ended 1992; the New York State fiscal year-end
tax returns for 1998 through 1999 are currently under examination by the New York State Department of Taxation and Finance. See Note 13 to
the Financial Statements.
STATE TAXATION
NEW YORK TAXATION. The Bank is subject to the New York State Franchise Tax on Banking Corporations in an annual amount equal to
the greater of (i) 8.0% of the Bank's "entire net income" allocable to New York State during the taxable year, or (ii) the applicable alternative
minimum tax. The alternative minimum tax is generally the greater of (a) 0.01% of the value of the Bank's assets allocable to New York State
with certain modifications, (b) 3% of the Bank's "alternative entire net income" allocable to New York State, or (c) $250. Entire net income is
similar to federal taxable income, subject to certain modifications and alternative entire net income is equal to entire net income without certain
modifications. Net operating losses arising in 2001 and 2002 can be carried forward to the succeeding 20 taxable years.
The availability of Annual Report on Form 10-K may be accessed on the Bank's website at www.pathfinderbank.com.
29
ITEM 2. PROPERTIES
The Bank conducts its business through its main office located in Oswego, New York, and five full service branch offices located in Oswego
County. The following table sets forth certain information concerning the main office and each branch office of the Bank at December 31,
2002. The aggregate net book value of the Bank's premises and equipment was $5.6 million at December 31, 2002. For additional information
regarding the Bank's properties, see Note 5 to Notes to Financial Statements.
LOCATION OPENING DATE OWNED/LEASED ANNUAL RENT
--------------------------------------------------------------------
Main Office . . . . . . . 1874 Owned -
-------------------------
214 West First Street
Oswego, New York 13126
Plaza Branch. . . . . . . 1989 Owned (1) -
-------------------------
Route 104, Ames Plaza
Oswego, New York 13126
Mexico Branch . . . . . . 1978 Owned -
-------------------------
Norman & Main Streets
Mexico, New York 13114
Oswego East Branch. . . . 1994 Owned -
-------------------------
34 East Bridge Street
Oswego, New York 13126
Fulton Branch . . . . . . 1994 Owned -
-------------------------
114 Oneida Street
Fulton, New York 13069
Lacona Branch . . . . . . 2002 Owned -
-------------------------
1897 Harwood Drive
Lacona, New York 13083
Fulton Branch . . . . . . 2003 Owned (2) -
-------------------------
5 West First Street South
Fulton, New York 13069
(1) The building is owned; the underlying land is leased paying an annual rent of $17,300
(2) The existing Fulton Branch will be moved to this location in 2003. The building is owned; the underlying land is leased paying an annual
rent of $21,000
ITEM 3. LEGAL PROCEEDINGS
There are various claims and lawsuits to which the Company is periodically
involved incident to the Company's business. In the opinion of management,
except as set forth below, such claims and lawsuits in the aggregate are
immaterial to the Company's consolidated financial condition and results of
operations.
On November 28, 2001, the Company and its Board of Directors were named as defendants in Jewelcor Management, Inc. ("Jewelcor") v.
Pathfinder Bancorp, Inc., et al. This action was filed in the United States District Court, Northern District. In its complaint, Jewelcor alleged
that the Company's directors breached their fiduciary duties to the Company by failing to consider an offer from Fulton Savings Bank for the
sale of the Company. Jewelcor was seeking damages in excess of $1 million, punitive damages in excess of $10 million and equitable relief.
30
On January 13, 2003, the Company completed the purchase of 160,114 shares of common stock at a price of $2.3 million, or $14.60 per share,
from Jewelcor, which is owned by Mr. Seymour Holtzman ("the Repurchase"). The Repurchase represents approximately 6.1% of the
Company's outstanding common stock as of December 31, 2002. As part of the repurchase agreement, Jewelcor agreed to stipulate to the
discontinuance with prejudice of the lawsuit entitled "Jewelcor Management, Inc. v. Pathfinder Bancorp, Inc.", and withdrew a shareholder
proposal previously submitted by Jewelcor. In addition, Mr. Holtzman and Jewelcor, as well as those persons and entities who signed the
Schedule 13D with Mr. Holtzman with respect to the Company's common stock, agreed in writing, that neither they nor their affiliates will
purchase shares of the Company's common stock for a period of five years.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter of the year under report.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The "Market for Common Stock" section of the Company's Annual Report to Stockholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information for the year ended December 31, 2002 is filed as part of the Company's Annual Report to Stockholders and
is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's Annual Report to
Stockholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in the Annual Report to Stockholders which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are contained in the Company's Annual Report to Stockholders and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
31
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
PART III
(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 Principal Officers of the Company at December 31, 2002.
NAME AGE POSITIONS HELD WITH THE COMPANY
--------------------- --- -----------------------------------------------------------
Chris C. Gagas. . . . 72 Chairman of the Board
Thomas W. Schneider . 40 President and Chief Executive Officer
W. David Schermerhorn 42 Executive Vice President-Lending
James A. Dowd, CPA. . 35 Vice President, Chief Financial Officer and Trust Officer
Edward A. Mervine . . 46 Vice President, General Counsel
John Devlin . . . . . 38 Vice President, Senior Commercial Lender
Melissa A. Miller . . 45 Vice President, Secretary
Gregory L. Mills. . . 42 Vice President, Director of Marketing, Branch Administrator
Annette L. Burns, CPA 30 Controller
Anita J. Austin . . . 53 Internal Auditor
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to management compensation and transactions required under this item is incorporated by reference hereunder in the
Company's Proxy Materials for the Annual Meeting of Stockholders under the caption "Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the sections captioned "Stock Ownership of Management" is incorporated by reference to the Company's
Proxy Materials for its Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption "Certain Transactions" in the Definitive Proxy Materials for the Annual
Meeting of Stockholders and is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of a date (the "Evaluation Date") within 90
days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that,
as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to
us (or our consolidated subsidiaries) required to be included in our periodic SEC filings.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes made in our internal controls during the period covered by
this report or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation.
See the Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, which immediately precedes the signature page.
32
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this Form 10-K are as follows:
(A) Independent Auditors' Report;
(B) Consolidated Statements of Condition - December 31, 2002 and 2001.
(C) Consolidated Statements of Income - years ended December 31, 2002, 2001 and 2000.
(D) Consolidated Statements of Stockholders' Equity - years ended December 31, 2002, 2001 and 2000.
(E) Consolidated Statements of Cash Flows - years ended December 31, 2002, 2001 and 2000; and
(F) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to
Consolidated Financial Statements.
(b) Exhibits
3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc. (Incorporated herein by reference to the Company's Current Report on Form 8-K
dated June 25, 2001)
3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference to the Company's Current Report on Form 8-K dated June 25, 2001)
4 Form of Stock Certificate of Pathfinder Bancorp, Inc. (Incorporated herein by reference to the Company's Current Report on Form 8-K dated
June 25, 2001)
10.1 Form of Pathfinder Bank 2001 Stock Option Plan (Incorporated herein by reference to the Company's S-4 file no. 333-36051)
10.2 Form of Pathfinder Bank 2001 Recognition and Retention Plan (Incorporated by reference to the Company's S-4 file no. 333-36051)
10.3 Employment Agreement between the Bank and Thomas W. Schneider, President and Chief Executive Officer (Incorporated by reference
to the Company's S-4 file no. 333-36051)
10.4 Employment Agreement between the Bank and W. David Schermerhorn, Executive Vice President -Loan Administration (Incorporated by
reference to the Company's S-4 file no. 333-36051)
13 Annual Report to Stockholders
21 Subsidiaries of Company
33
99.1 Officers' Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(c) Reports on Form 8-K
The Company has two Current Reports on Form 8-K during the fourth quarter of the fiscal year ended December 31, 2002 dated October 28,
2002 and December 20, 2002 reporting press releases relating to the completion of the acquisition of the Lacona Branch of Cayuga Bank and
the announcement of its Commercial Bank subsidiary and the announcement of a stock repurchase program and a dividend declaration.
34
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 quarterly report on Form 10-K of Pathfinder Bancorp, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.
March 28, 2003 /s/Thomas W. Schneider
--------------------------------------------------------------------------------
Date Thomas W. Schneider
President and Chief Executive Officer
35
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James A. Dowd, Vice President and Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-K of Pathfinder Bancorp, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.
March 28, 2003 /s/James A. Dowd
--------------------------------------------------------------------------------
Date James A. Dowd
Vice President and Chief Financial Officer
36
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PATHFINDER BANCORP, INC.
March 28, 2003 /s/Thomas W. Schneider
--------------------------------------------------------------------------------
Date 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/ Chris C. Gagas
---------------------
Chris C. Gagas, Chairman of the Board
Date: March 28, 2003
-------------
By: . /s/ Thomas W. Schneider By: /s/ Chris Burritt
----------------------------------------- -------------------------------
Thomas W. Schneider, President and Chris Burritt
Chief Executive Officer Director
Date: March 28, 2003 Date: March 28, 2003
By: /s/ James A. Dowd By: /s/ Raymond W. Jung
----------------------------------------- -------------------------------
James A. Dowd, Vice President, Chief Raymond W. Jung
Financial Officer and Trust Officer Director
Date: March 28, 2003 Date: March 28, 2003
By: . /s/ Bruce Manwaring By: /s/ George W. Joyce
----------------------------------------- -------------------------------
Bruce Manwaring George W. Joyce
Director Director
Date: March 28, 2003 Date: March 28, 2003
By: . /s/ L. William Nelson, Jr. By: /s/ Corte Spencer
----------------------------------------- -------------------------------
L. William Nelson, Jr. Corte Spencer
Director Director
Date: March 28, 2003 Date: March 28, 2003
By: . /s/ Steven W. Thomas By: /s/ Janette Resnick
----------------------------------------- -------------------------------
Steven W. Thomas Janette Resnick
Director Director
Date: March 28, 2003 Date: March 28, 2003
37
Exhibit Index
3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc. (Incorporated
herein by reference to the Company's Current Report on Form 8-K dated June
25, 2001)
3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference to
the Company's Current Report on Form 8-K dated June 25, 2001)
4 Form of Stock Certificate of Pathfinder Bancorp, Inc. (Incorporated herein
by reference to the Company's Current Report on Form 8-K dated June 25,
2001)
10.1 Form of Pathfinder Bank 2001 Stock Option Plan (Incorporated herein by
reference to the Company's S-4 file no. 333-36051)
10.2 Form of Pathfinder Bank 2001 Recognition and Retention Plan (Incorporated
herein by reference to the Company's S-4 file no. 333-36051)
10.3 Employment Agreement between the Bank and Thomas W. Schneider, President
and Chief Executive Officer (Incorporated herein by reference to the
Company's S-4 file no. 333-36051)
10.4 Employment Agreement between the Bank and W. David Schermerhorn, Executive
Vice President - Loan Administration (Incorporated herein by reference to
the Company's S-4 file no. 333-36051)
13 Annual Report to Stockholders
21 Subsidiaries of Company
99.1 Officers' Certification Pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
38
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
[PHOTOS]
[LOGO] PathFinder
BANCORP, INC.
2002 Annual Report
A Community Partner,
A Friend
Mission Statement PathFinder Bank is an independent community bank. Our mission is to foster relationships with individuals and businesses
within our communities to be the financial provider of choice. Our goal is to continually enhance the value of the bank for the benefit of our
shareholders, customers, employees and communities.
[Photo]
FINANCIAL HIGHLIGHTS
Pathfinder Bancorp, Inc. is the parent company of Pathfinder Bank and Pathfinder Statutory Trust I. Pathfinder Bank has three operating
subsidiaries - Pathfinder Commercial Bank, Pathfinder REIT Inc., and Whispering Oaks Development Corporation.
Pathfinder Bancorp, Inc.'s common stock currently trades on the NASDAQ Small Cap Market under the symbol "PBHC".
The following table sets forth certain financial highlights of the consolidated entity for the years ended December 31:
2002 2001 2000 1999 1998
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FOR THE YEAR (In Thousands)
Interest income . . . . . . . . . . . . . . .$ 15,812 $ 16,338 $ 15,925 $ 14,664 $ 14,027
Interest expense. . . . . . . . . . . . . . . 7,023 8,485 8,532 7,035 6,969
Net interest income . . . . . . . . . . . . . 8,789 7,853 7,393 7,629 7,057
Net income. . . . . . . . . . . . . . . . . . 1,156 1,602 356 930 1,209
PER COMMON SHARE
Earnings - basic. . . . . . . . . . . . . . . $0.45 $ 0.62 $ 0.14 $ 0.35 $ 0.44
Book value. . . . . . . . . . . . . . . . . . 8.90 8.64 8.06 7.61 8.12
Cash dividends declared . . . . . . . . . . . 0.30 0.26 0.24 0.24 0.20
Stock price:
High. . . . . . . . . . . . . . . . . . . . . 15.00 14.15 9.63 12.00 26.13
Low . . . . . . . . . . . . . . . . . . . . . 10.38 5.50 5.38 7.50 9.13
Close . . . . . . . . . . . . . . . . . . . . 14.71 13.18 6.19 8.88 9.13
YEAR END (In Thousands)
Total assets. . . . . . . . . . . . . . . . .$279,056 $244,514 $232,355 $216,324 $203,252
Investment securities . . . . . . . . . . . . 62,506 53,422 44,274 43,049 32,665
Loans receivable, net 179,001 162,588 148,362 130,063 125,358
Intangible assets . . . . . . . . . . . . . . 4,913 2,342 2,658 2,973 3,289
Deposits. . . . . . . . . . . . . . . . . . . 204,522 169,589 161,459 152,436 160,219
Borrowed funds. . . . . . . . . . . . . . . . 42,860 49,441 47,230 42,880 18,691
Trust preferred security obligation . . . . . 5,000 - - - -
Equity. . . . . . . . . . . . . . . . . . . . 23,230 22,185 20,962 20,075 22,287
SELECTED PERFORMANCE RATIOS
Return on average assets. . . . . . . . . . . 0.45% 0.68% 0.16% 0.44% 0.62%
Return on average equity. . . . . . . . . . . 5.01 7.34 1.79 4.33 5.12
Average equity to average assets. . . . . . . 8.94 9.22 8.91 10.24 12.05
Dividend payout ratio (a) . . . . . . . . . . 36.85 28.37 173.62 67.65 45.07
Net interest rate spread. . . . . . . . . . . 3.47 3.35 3.34 3.73 3.73
Noninterest expense to total assets . . . . . 2.85 2.81 3.31 3.30 3.24
Efficiency ratio. . . . . . . . . . . . . . . 73.18 70.61 90.64 80.54 75.96
Nonperforming loans to
net loans receivable. . . . . . . . . . . . . 0.95 1.30 1.23 1.96 1.46
Nonperforming assets to
total assets. . . . . . . . . . . . . . . . . 1.11 1.13 1.17 1.48 1.27
Allowance for loan losses
to net loans receivable . . . . . . . . . . . 0.82 1.03 0.86 0.88 0.75
Number of full service offices. . . . . . . . 6 5 5 5 5
SELECTED CASH EARNINGS PERFORMANCE RATIOS (b)
Cash earnings (in thousands). . . . . . . . . $ 1,249 $ 1,908 $ 859 $ 1,532 $ 1,850
Cash earnings per share - basic . . . . . . . 0.48 0.74 0.34 0.58 0.67
Return on average assets (cash basis) . . . . 0.48% 0.81% 0.38% 0.73% 0.94%
Return on average equity (cash basis) . . . . 5.41 8.74 4.32 7.13 7.84
Noninterest expense to average
assets (cash basis) . . . . . . . . . . . . 2.82 2.72 3.13 2.99 2.89
Efficiency ratio (cash basis) . . . . . . . . 72.33 66.41 82.21 70.84 65.42
(a) The dividend payout ratio is calculated using dividends declared and not waived by the holding company divided by net income.
(b) Cash earnings exclude non cash charges for the amortization of intangible assets and the allocation of ESOP stock.
1
Letter to Shareholders
On behalf of the Board of Directors and employees of Pathfinder Bancorp, Inc., I am pleased to present our Annual Report to our shareholders.
We invite you to attend our Annual Meeting on April 30, 2003, at 10:00 a.m. at the Econo Lodge Riverfront Hotel in Oswego.
2002 REVIEW
The past year has been both challenging and rewarding. Challenging in that economic conditions adversely impacted credit quality leading to
significant charge-offs during the year. The credit quality deterioration, although primarily limited to a few larger commercial loans, resulted in
a re-examination of our underwriting and administrative capabilities in commercial lending. The resultant changes and enhancements to
personnel, policy and procedures have created a stronger platform with which to deliver products and services to our commercial market. We
consider this an integral market segment in the growth of the Company's assets and revenues.
The year has also been rewarding, as we were able to expand our product base and geographical reach. In October 2002, the Company
simultaneously completed the acquisition of a new branch office location in Lacona, New York, providing greater access to northern Oswego
markets, and chartered a limited-purpose commercial bank subsidiary. The commercial bank subsidiary provides a platform to conduct deposit
business with local governments and municipalities, a business segment unavailable to a savings bank. We look forward to serving this market
segment and leveraging our local knowledge and relationships into significant growth opportunities.
The Company experienced strong growth in loans and deposits during 2002. Fueled by demand in the residential sector the total loan portfolio
grew by $16.2 million, or 10%. The historically low level of interest rates lead to significant refinancing activity. Loan originations exceeded
$50 million, making Pathfinder Bank the number one originator of residential mortgage loans in Oswego County in 2002.
Deposits grew by $35 million, or 21%, as a result of a number of factors including the branch acquisition, the successful introduction of free
checking and money management products, and the consumers' flight from equity markets to the safety of fixed-rate, FDIC insured products.
Interest rates are at 40-year lows, and now more than ever asset selection and portfolio structure are critical decision points for future
profitability. The Company is carefully considering the impact on net interest margin an eventual rise in interest rates may have and is
positioning its investments to mitigate that impact. Generally, the Company's current asset allocation strategy is to forego wide spreads
available in longer-term, interest insensitive investments, in favor of lower yielding assets that management believes will respond more
favorably in a rising rate environment. Management is also seeking to extend, where appropriate, the terms of its borrowings and is
encouraging deposit holders to diversify their interest rate risk through laddered time deposit portfolios.
Financial performance for 2002 was mixed. Revenues grew by 12% as both net interest income and noninterest income rose proportionally.
These increases, however, were more than offset by a 94% increase in the provision for loan losses and a 16% increase in operating expenses.
There were a number of expenses in 2002, which are not expected to recur, and asset quality has improved significantly. Net income of $1.2
million, or $.45 per share, is disappointing to management and the Board of Directors. It is anticipated that performance in 2003 will be more
representative of the strengths of the Company's balance sheet.
SHAREHOLDER VALUE
The Company's common stock continues to be significantly influenced by the valuations and price performance of newly formed mutual
holding company subsidiaries, re-mutualizations and second-step conversions. These segments have performed favorably as investors seek the
consistent earnings, transparent balance sheets, and regulated environments associated with thrift stocks.
The Board of Directors recognize the unique structure of a mutual holding company subsidiary and the limitations on the liquidity of the
Company's stock. The Board of Directors of the Company are committed to operating Pathfinder Bank as an independent community bank,
deriving improved earnings through core banking activities. The Board of Directors believe that a strong balance sheet, improved earnings, a
consistent dividend payout ratio, and liquidity support through share repurchase programs provide for continued enhancement to the value of
our common stock.
BUSINESS STRATEGY
Pathfinder Bank is committed to being the leading provider of financial services in Oswego County. The Company is focused on differentiating
itself from its competitors in the delivery of its products and services. Toward that end the Company's strategy remains focused on our
understanding our customers' needs, putting customers' interests first, and developing our employees to be responsive to our customers. We are
examining our points of contact with customers to ensure service delivery in an effective, efficient and consistent manner that provides added
value to our customers.
Specifically, during 2003, we will:
Examine our existing branch network to ensure that the locations meet the needs of the market and the facilities meet or exceed our banking
consumers' expectations. Part of this examination has resulted in the decision to re-locate our Fulton, New York branch to provide improved
access and
drive-through capabilities, expanded parking, and enhanced operational
efficiency. The new branch is expected to open in June 2003.
Develop new branch locations to extend our geographic reach and serve more
customers in the central New York market.
Upgrade and expand our electronic delivery services including enhanced
funds transfer capabilities and cash management. We will also be installing a call center platform to improve responsiveness to customers and
efficiency in operations.
Devote significant resources to the development of our front-line employees to be a leader in the quality of service we offer to our customers.
In January 2003, the Company inaugurated Pathfinder University to provide extensive educational and training opportunities for our
employees.
Develop our commercial bank subsidiary to extend deposit services to the local governments and municipalities of Oswego County.
We look forward to the successful execution of our strategies, realizing that challenges from competition, the economy, the regulatory
environment, and unforeseen forces will always confront us. It is our ability to adapt to changing environments and respond to these
challenges, while remaining focused on our customers, which will ensure our success.
/s/Thomas W. Schneider
President and Chief Executive Officer
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2
GENERAL
MANAGEMENT'S DISCUSSION AND ANALYSIS
Throughout the Management's Discussion and Analysis the term, "the Company", refers to the consolidated entity of Pathfinder Bancorp, Inc.
Pathfinder Bank and Pathfinder Statutory Trust I are wholly owned subsidiaries of Pathfinder Bancorp, Inc. Pathfinder Commercial Bank,
Pathfinder REIT, Inc. and Whispering Oaks Development Corp. represent wholly owned subsidiaries of Pathfinder Bank. At December 31,
2002, Pathfinder Bancorp, Inc.'s only business was the 100% ownership of Pathfinder Bank and Pathfinder Statutory Trust I. At December 31,
2002, 1,583,239 shares, or 60.6%, of the Company's common stock were held by Pathfinder Bancorp, MHC, the Company's mutual holding
company parent and 1,027,257 shares, or 39.4%, were held by the public.
On June 26,2002, the Company formed a wholly owned subsidiary, Pathfinder Statutory Trust I, a Connecticut business trust. The trust issued
$5,000,000 of 30-year floating rate Company-obligated pooled capital securities of Pathfinder Statutory Trust I. The Company borrowed the
proceeds of the capital securities from its subsidiary by issuing floating rate junior subordinated deferrable interest debentures having
substantially similar terms. The capital securities mature in 2032 and qualify as Tier 1 capital by the Federal Deposit Insurance Company and
the Office of Thrift Supervision. The capital securities of the trust are a pooled trust preferred fund of Preferred Term Securities VI, Ltd. and
are tied to the 3 month LIBOR plus 3.45% with a five year call provision. These securities are guaranteed by the Company.
On October 25, 2002, Pathfinder Bank completed the purchase of assets and the assumption of non-municipal deposits of the Lacona, New
York branch of Cayuga Bank (the "Branch Acquisition"). In addition, Pathfinder Bank formed a limited purpose commercial bank subsidiary,
Pathfinder Commercial Bank. Pathfinder Commercial Bank was established to serve the depository needs of public entities in its market area
and it assumed the municipal deposit liabilities of the Lacona, New York branch. The transaction included approximately $26.4 million in
deposits, $2.3 million in loans and $430,000 in vault cash and facilities and equipment. The acquisition reflects a premium on deposit liabilities
assumed of approximately $2.4 million.
When used in this Annual Report the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expression are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic
conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market areas and competition, that could cause actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which
speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial
performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically declines any obligation, to publicly release the results of any revisions which may be made
to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated
or unanticipated events.
The Company's net income is primarily dependent on its net interest income, which is the difference between interest income earned on its
investments in mortgage and other loans, investment securities and other assets, and its cost of funds consisting of interest paid on deposits and
other borrowings. The Company's net income also is affected by its provision for loan losses, as well as by the amount of noninterest income,
including income from fees, service charges and servicing rights, net gains and losses on sales of securities, loans and other real estate, and
Noninterest expense such as employee compensation and benefits, occupancy and equipment costs, data processing costs and income taxes.
Earnings of the Company also are affected significantly by general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, which events are beyond the control of the Company. In particular, the
general level of market rates tends to be highly cyclical.
3
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
NEW ACCOUNTING PRONOUNCEMENTS
On October 1, 2002, Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 147,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions." Statement 147 changes how the Company accounts for goodwill
arising from branch acquisitions. Under previous FASB rulings, the goodwill arising from branch acquisitions was classified as an
"unidentifiable intangible asset" and therefore subject to amortization. Statement 147 now classifies this intangible as goodwill. In accordance
with the provisions of Statement 147, previously issued statements were restated to remove the amortization expense recorded on the goodwill
since January 1, 2002. Goodwill is not subject to amortization, but will be reviewed annually for impairment.
As of December 31, 2002, no impairment adjustment has been made to goodwill. The impact of the pronouncement on the financial statements
is as follows:
For the Twelve Months Ended December 31:
------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------
(in thousands except Earnings per Share Data)
Reported net income . . . . . . . . . . . . . . $1,156 $1,602 $ 356
Add back: goodwill amortization, net of tax . . - 193 193
----------------------------------------------------------------------
Adjusted net income . . . . . . . . . . . . . . $1,156 $1,795 $ 549
======================================================================
Basic earnings per share:
Reported net income . . . . . . . . . . . . . . $ 0.45 $ 0.62 $0.14
Goodwill amortization, net of tax . . . . . . . - 0.08 0.08
----------------------------------------------------------------------
Adjusted net income . . . . . . . . . . . . . . $ 0.45 $ 0.70 $0.22
======================================================================
Diluted earnings per share:
Reported net income . . . . . . . . . . . . . . $ 0.44 $ 0.62 $0.14
Goodwill amortization, net of tax . . . . . . . - 0.07 0.08
----------------------------------------------------------------------
Adjusted net income . . . . . . . . . . . . . . $ 0.44 $ 0.69 $0.22
======================================================================
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which provides
alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of FASB Statement No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. This statement also amends
APB Opinion No. 28, "Interim Financial Reporting", to require disclosure about those effects in interim financial information. The Company
will continue to account for stock-based compensation in accordance with Accounting Principles Board (APB) Opinion 25, "Accounting for
Stock Issued to Employees".
SUBSEQUENT EVENT
On January 13, 2003, the Company completed the purchase of 160,114 shares of common stock at a price of $2.3 million, or $14.60 per share,
from Jewelcor Management Inc. ("JMI"), which is owned by Mr. Seymour Holtzman ("the Repurchase"). The Repurchase represents
approximately 6.1% of the Company's outstanding common stock as of December 31, 2002. The repurchase of these shares is expected to be
accretive to the Company's earnings per share and return on equity and will help accomplish capital management objectives.
As part of the repurchase agreement, Mr. Holtzman and JMI, as well as those persons and entities who signed the Schedule 13D with Mr.
Holtzman with respect to the Company's common stock, agreed in writing, that neither they nor their affiliates will purchase shares of the
Company's common stock for a period of five years. JMI also agreed to stipulate to the discontinuance with prejudice of the lawsuit entitled
"Jewelcor Management, Inc. v. Pathfinder Bancorp, Inc.", and withdrew a shareholder proposal previously submitted by JMI.
4
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
BUSINESS STRATEGY
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, maintaining a strong customer base;
(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.
HIGHLIGHTS OF THE COMPANY'S BUSINESS STRATEGY ARE AS FOLLOWS:
COMMUNITY-ORIENTED INSTITUTION
The Company is committed to meeting the financial needs of its customers in Oswego County, New York, the county in which it operates. The
Company believes it is large enough to provide a full range of personal and business financial services, and yet is small enough to be able to
provide such services on a personalized, adaptable and responsive basis. Management believes that the Company can be more effective in
servicing its customers than many of its non-locally headquartered competitors because of the Company's ability to quickly and effectively
provide senior management responses to customer needs and inquiries. The Company's ability to provide these services is enhanced by the
stability of the Company's senior management, which has an average tenure with the Company of over 11 years.
Management believes that the following actions over the past several years have helped to enhance and preserve its presence as a community
bank: the 1994 acquisition of two branches of the former Columbia Federal Savings located in the cities of Oswego and Fulton; the public
offering and subsequent reorganization into the two-tier holding company structure to further enhance growth and independence; the ability to
access the secondary mortgage market while retaining customer servicing; and the expansion of the Company's small business lending services
to further serve the community needs and provide additional revenue sources. During 2002, the Company expanded its service area by
acquiring a branch in Lacona, New York. In addition, the Company chartered Pathfinder Commercial Bank, a limited purpose commercial
bank subsidiary of Pathfinder Bank. Pathfinder Commercial Bank was established to serve the depository needs of public entities in the market
area and has assumed the existing public deposit liabilities of the Lacona branch. The Company is committed to exploring additional lines of
business and the formation of strategic alliances to maintain its independence and enhance its profitability in a competitive, consolidating
industry.
CAPITAL AND ASSET LEVELS
The Company's shareholders' equity was $23.2 million at December 31, 2002, which represents a $1.0 million, or 5%, increase from December
31, 2001. The Company's ratio of shareholders' equity to total assets was 8.32% at December 31, 2002. The Repurchase reduced shareholders'
equity by $2.3 million. If the Repurchase had occurred on December 31, 2002, the Company's ratio of shareholders' equity to total assets would
have been 7.49%. Total assets have increased by $34.6 million, or 14%, from the prior year. The Company's capital levels exceed all regulatory
capital requirements (see footnote #17 of the consolidated financial statements for Pathfinder Bancorp, Inc.). Dividends declared and not
waived by the Mutual Holding Company during 2002 and 2001 were $426,000 and $446,000, respectively. The Company's dividend payout
ratio was 36.85% for 2002 and 28.37% for 2001.
EMPHASIS ON RESIDENTIAL MORTGAGE AND SMALL BUSINESS LENDING AND INVESTMENT SECURITIES
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. Historically, the Company has not been an active purchaser of loans or loan participations. The
Company has expanded its service to the small business community in its marketplace through deposit and lending services. To supplement
local mortgage and commercial loan originations, the Company invests in investment securities consisting primarily of investment grade
corporate debt instruments, securities issued by the United States
5
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
Government, state and municipal obligations, mutual funds, equity securities, and mortgage-backed securities. By investing in these types of
assets, the Company reduces the credit risk of its asset base but must accept lower yields than would typically be available on commercial real
estate loans and multi-family real estate loans. At December 31, 2002, 90% of the Company's total loan portfolio consisted of loans secured by
real estate, of which 20% consisted of commercial real estate loans. In addition, at December 31, 2002, 22% of the Company's total assets
consisted of investment securities.
STRONG RETAIL DEPOSIT BASE
The Company has a relatively strong retail deposit base drawn from the six full-service offices in its market area. At December 31, 2002, 58%
of the Company's deposit base of $204.5 million consisted of core deposits, which included noninterest-bearing demand accounts, NOW
accounts, passbook and club savings accounts and money management deposit accounts. Core deposits are considered to be a more stable and
lower cost source of funds than certificates of deposit or outside borrowings. The Company will continue to emphasize retail deposits by
maintaining its network of full service offices and providing depositors with a full range of accounts. Pathfinder Commercial Bank
("Commercial Bank"), the limited-purpose commercial banking subsidiary of Pathfinder Bank, assumed $11.6 million in municipal deposits as
part of the Branch Acquisition. The Commercial Bank will allow the Company to serve the depository needs of the various municipalities,
school districts, and other public funding sources throughout its market area. The Commercial Bank expects that its affiliation with its parent,
an institution recognized for its service quality and community commitment, will provide it with valuable competitive advantages.
Accordingly, the Commercial Bank will seek business growth by focusing on its local identification and service excellence. At December 31,
2002, the Commercial Bank had $9.7 million of municipal deposits.
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
judgements that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgements
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 judgements. Certain policies inherently have a greater reliance on the use of estimates,
assumptions and judgements and as such have a greater possibility of producing results that could be materially different than originally
reported. Estimates, assumptions and judgements are necessary when assets and liabilities are required to be recorded at fair value or when an
asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more
financial statement volatility. The fair values and information used to record valuation adjustments for certain assets and liabilities are based on
quoted market prices or are provided by other third-party sources, when available. When third party information is not available, valuation
adjustments are estimated in good faith by management.
The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These
policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how
significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques
used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has
identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective and complex judgments,
and as such could be the most subject to revision as new information becomes available.
The allowance for loan losses represents management's estimate of probable loan losses inherent in the loan portfolio. Determining the amount
of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgement and the use of estimates
related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on
historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.
The loan portfolio also represents the largest asset type on the consolidated balance sheet. Note 1 to the consolidated financial statements
describes the methodology used to determine the allowance for loan losses, and a discussion of the factors driving changes in the amount of the
allowance for loan losses is included in this report.
6
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
CHANGES IN FINANCIAL CONDITION
COMPARISON AT DECEMBER 31, 2002 AND DECEMBER 31, 2001.
Total assets increased $34.6 million, or 14%, to $279.1 million at December 31, 2002 from $244.5 million at December 31, 2001. The increase
in assets is primarily attributable to a $6.1 million increase in cash and cash equivalents, an increase in investment securities of $9.1 million, an
increase of $16.4 million, or 10%, in net loans receivable to $179.0 million from $162.6 million and a $2.6 million increase in goodwill and
intangible assets. This increase was partially offset by a $1.7 million decrease in mortgage loans held-for-sale. The increase in total assets was
primarily the result of the $26.4 million Branch Acquisition and the Company's continued emphasis on residential real estate financing.
Total liabilities increased $33.5 million, or 15%, to $255.8 million at December 31, 2002 from $222.3 million at the end of the prior fiscal year.
The increase was primarily attributable to a $34.9 million, or 21%, increase in deposits to $204.5 million at December 31, 2002 from $169.6
million at December 31, 2001, and the issuance of $5.0 million of subordinated debt securities, issued in connection with the Company's
participation in a pooled trust preferred transaction. These increases were partially offset by a decrease in borrowed funds of $6.6 million to
$42.9 million at December 31, 2002 from $49.4 million at December 31, 2001. The increase in deposits was primarily comprised of an increase
in money management accounts of $15.3 million, an $11.5 million, or 15%, increase in time deposits, a $5.0 million, or 8%, increase in savings
accounts, and an increase of $2.7 million, or 21%, in noninterest-bearing demand accounts. The increase in deposit accounts primarily resulted
from the Branch Acquisition, which included $26.4 million in deposits, and the successful introduction of a free checking and a money
management checking account.
Shareholders' equity increased $1.0 million, or 5%, to $23.2 million at December 31, 2002 from $22.2 million at December 31, 2001. The
increase is attributable to net income of $1.2 million, an increase in accumulated other comprehensive income of $200,000, combined with a
$49,000 decrease in unearned ESOP shares, and an additional paid in capital increase of $196,000. These increases were partially offset by
dividends declared of $426,000 and the repurchase of 11,000 shares of the Company's common stock totaling $130,000.
COMPARISON AT DECEMBER 31, 2001 AND DECEMBER 31, 2000.
Total assets increased $12.1 million, or 5%, to $244.5 million at December 31, 2001 from $232.4 million at December 31, 2000. The increase
in assets is primarily attributable to a $3.4 million increase in cash and cash equivalents, a $4.5 million increase in mortgage loans held-for-sale
and an increase of $14.2 million, or 10%, in net loans receivable to $162.6 million from $148.4 million. This increase was partially offset by a
decrease in investment securities of $10.3 million, or 16%, to $53.4 million at December 31, 2001 from $63.8 million at December 31, 2000.
The increase in total assets was primarily the result of the Company's continued emphasis on residential real estate financing as well as growth
in the Company's commercial loan portfolio.
Total liabilities increased $10.9 million, or 5%, to $222.3 million at December 31, 2001 from $211.4 million at the end of the prior fiscal year.
The increase was primarily attributable to an $8.1 million, or 5%, increase in deposits to $169.6 million at December 31, 2001 from $161.5
million at December 31, 2000, an increase in borrowed funds of $2.2 million to $49.4 million at December 31, 2001 from $47.2 million at
December 31, 2000 and a $596,000 increase in other liabilities to $3.3 million at December 31, 2001 from $2.7 million at December 31, 2000.
The increase in deposits was comprised of a $2.9 million, or 5%, increase in savings accounts, an increase of $3.1 million, or 32%, in
noninterest-bearing demand accounts, an increase in money management accounts of $4.4 million, partially offset by a $2.4 million, or 3%,
decrease in time deposits and a $280,000, or 2%, decrease in interest-bearing demand accounts.
Shareholders' equity increased $1.2 million, or 6%, to $22.2 million at December 31, 2001 from $21.0 million at December 31, 2000. The
increase is attributable to net income of $1.6 million, an increase in accumulated other comprehensive income of $50,000, combined with a
$54,000 decrease in unearned ESOP shares, and an additional paid in capital increase of $356,000. These increases were partially offset by
dividends declared of $446,000 and the repurchase of 10,000 shares of the Company's common stock totaling $134,000.
7
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
RESULTS OF OPERATIONS
GENERAL
The Company had net income of $1.2 million, $1.6 million and $356,000, for the fiscal years ended December 31, 2002, 2001, and 2000,
respectively. The decrease in net income for the year ended December 31, 2002, compared to 2001 resulted primarily from a $1.1 million, or
16%, increase in operating expenses and a $667,000, or 94%, increase in the provision for loan losses, partially offset by a $936,000, or 12%,
increase in net interest income, a $231,000, or 12%, increase in other income, and a $156,000 reduction in the provision for income taxes.
Earnings per share, basic was $0.45, $0.62 and $0.14 for the years ended December 31, 2002, 2001 and 2000, respectively. The decrease in
earnings per share for the year ended 2002 compared to 2001 resulted primarily from the decrease in net income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
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. Net interest income is the amount by which interest earned on interest-earning deposits, loans, and investment securities, exceeds
interest paid on deposits, borrowings, and the trust preferred debt obligation. Net interest income is directly affected by changes in the volume
and mix of interest-earning assets and interest-bearing liabilities as well as the changing interest rates of the underlying assets and liabilities and
their respective sensitivity to repricing.
Net interest income increased $944,000, or 12%, on a tax equivalent basis, for the year ended December 31, 2002 as compared to the year
ended December 31, 2001 primarily due to an increase in interest- earning assets. The increase in net interest income was comprised of a
decrease in interest expense of $1.5 million, or 17%, partially offset by a decrease in interest income of $519,000, or 3%. The decrease in
interest expense resulted from a decrease in the average cost of funds to 3.21% from 4.24%, partially offset by an increase in the average
balance of interest-bearing liabilities of $18.7 million, or 9%. The decrease in interest income resulted from a decrease in the yield on interest-
earning assets to 6.68% from 7.58%, partially offset by an increase in the average balance of interest-earning assets of $21.6 million, or 10%.
AVERAGE BALANCE SHEET
The following table sets forth certain 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 for the three years ended December
31, 2002, 2001 and 2000, 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.
Years Ended December 31,
--------------------------------------------------------------------------------------------------------
2002 2001
--------------------------------------------------------------------------------------------------------
Average Average
Average Yield / Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost
--------------------------------------------------------------------------------------------------------
Interest Earning Assets:
Real estate loans residential . . . . . . $117,688 $ 8,194 6.96% $101,363 $ 7,678 7.58%
Real estate loans commercial. . . . . . . 31,790 2,641 8.31% 27,847 2,487 8.93%
Commercial loans. . . . . . . . . . . . . 14,774 984 6.66% 13,843 1,170 8.45%
Consumer loans. . . . . . . . . . . . . . 12,795 1,117 8.73% 12,600 1,220 9.69%
Mortgage-backed securities. . . . . . . . 16,916 948 5.60% 20,237 1,293 6.39%
Taxable investment securities . . . . . . 29,331 1,489 5.08% 33,344 2,089 6.26%
Non-taxable investment securities . . . . 6,036 434 7.19% 6,192 441 7.12%
Interest-earning deposits . . . . . . . . 9,163 117 1.28% 1,418 65 4.58%
---------------------------------------------------------------------------------------------------------
Total interest-earning assets . . . . . . $238,493 $ 15,924 6.68% $216,844 $ 16,443 7.58%
Non interest-earning assets:
Other assets. . . . . . . . . . . . . . . 20,987 20,796
Allowance for loan losses . . . . . . . . (1,877) (1,431)
Net unrealized gains
on available for sale securities. . . . 368 605
Total Assets . . . . . . . . . . . . . . $257,971 $236,814
=========================================================================================================
Interest-bearing liabilities:
Now accounts. . . . . . . . . . . . . . . $ 15,850 $ 168 1.06% $ 16,064 $ 228 1.42%
Money management accounts . . . . . . . . 11,571 242 2.09% 1,080 41 3.80%
Savings and club accounts . . . . . . . . 62,494 948 1.52% 60,936 1,435 2.35%
Time deposits . . . . . . . . . . . . . . 77,701 3,299 4.25% 77,681 4,396 5.66%
Trust preferred debt. . . . . . . . . . . 2,635 138 5.24% - - -
Borrowings . . . . . . . . . . . . . . . 48,626 2,228 4.58% 44,458 2,385 5.36%
Total Interest-bearing liabilities. . . . $218,877 $ 7,023 3.21% $200,219 $ 8,485 4.24%
---------------------------------------------------------------------------------------------------------
Non-interest bearing liabilities:
Demand deposits . . . . . . . . . . . . . 13,154 11,175
Other liabilities . . . . . . . . . . . . 2,873 3,592
----------------------------------------------------------------------------------------------------------
Total liabilities . . . . . . . . . . . . 234,904 214,986
Shareholders' equity. . . . . . . . . . . 23,067 21,828
----------------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity. $257,971 $236,814
==========================================================================================================
Net interest income $ 8,901 $ 7,958
==========================================================================================================
Net interest rate spread 3.47% 3.35%
==========================================================================================================
Net interest margin 3.73% 3.67%
==========================================================================================================
Ratio of average interest-earning assets
to average interest-bearing liabilities 108.96% 108.30%
==========================================================================================================
2000
--------------------------------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
--------------------------------------------------------------------------------
Interest Earning Assets:
Real estate loans residential. . . . . . $ 90,153 $ 6,898 7.65%
Real estate loans commercial . . . . . . 25,137 2,285 9.09%
Commercial loans . . . . . . . . . . . . 10,837 1,100 10.15%
Consumer loans . . . . . . . . . . . . . 13,129 1,311 9.99%
Mortgage-backed securities . . . . . . . 21,868 1,477 6.75%
Taxable investment securities. . . . . . 38,177 2,482 6.50%
Non-taxable investment securities. . . . 6,604 548 8.30%
Interest-earning deposits. . . . . . . . 147 9 6.12%
--------------------------------------------------------------------------------
Total interest-earning assets. . . . . . $206,052 $ 16,110 7.82%
Non interest-earning assets:
Other assets . . . . . . . . . . . . . . 20,010
Allowance for loan losses. . . . . . . . (1,143)
Net unrealized gains
on available for sale securities . . . (1,726)
Total Assets. . . . . . . . . . . . . . $223,193
================================================================================
Interest-bearing liabilities:
Now accounts . . . . . . . . . . . . . . $ 15,144 $ 249 1.64%
Money management accounts. . . . . . . . - - -
Savings and club accounts. . . . . . . . 59,833 1,450 2.42%
Time deposits. . . . . . . . . . . . . . 71,837 4,154 5.78%
Trust preferred debt . . . . . . . . . . - - -
Borrowings. . . . . . . . . . . . . . . 43,718 2,679 6.13%
Total Interest-bearing liabilities . . . $190,532 $ 8,532 4.48%
--------------------------------------------------------------------------------
Non-interest bearing liabilities:
Demand deposits. . . . . . . . . . . . . 10,497
Other liabilities. . . . . . . . . . . . 2,268
--------------------------------------------------------------------------------
Total liabilities. . . . . . . . . . . . 203,297
Shareholders' equity . . . . . . . . . . 19,896
--------------------------------------------------------------------------------
Total liabilities & shareholders' equity $223,193
================================================================================
Net interest income $ 7,578
================================================================================
Net interest rate spread 3.34%
================================================================================
Net interest margin 3.68%
================================================================================
Ratio of average interest-earning assets
to average interest-bearing liabilities 108.15%
================================================================================
8
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing interest rates on Interest-earning assets and interest-bearing
liabilities and changing the volume or amount of these assets and liabilities. The following table represents the extent to which changes in
interest rates and changes in the volume of Interest-earning assets and interest-bearing liabilities have affected the Company's interest income
and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes
in volume (change in volume multiplied by prior rate);
(ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) total increase or decrease. Changes attributable
to both rate and volume have been allocated ratably.
Years Ended December 31,
--------------------------------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
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 $ 1,176 $ (659) $ 517 $ 843 $ (64) $ 779
Real estate loans commercial 334 (181) 153 244 (41) 203
Commercial loans 75 (261) (186) 273 (203) 70
Consumer loans 19 (122) (103) (52) (39) (91)
Mortgage-backed securities (197) (148) (345) (107) (77) (184)
Taxable investment securities (234) (366) (600) (304) (89) (393)
Non-taxable investment securities (11) 4 (7) (33) (74) (107)
Interest-earning deposits 129 (77) 52 60 (4) 56
-------------------------------------------------------------------------------------------------
Total interest income 1,291 (1,810) (519) 924 (591) 333
Interest Expense:
NOW and escrow accounts (3) (58) (61) 2 (23) (21)
Money management accounts 227 (26) 201 41 - 41
Savings and club accounts 35 (522) (487) 12 (27) (15)
Time deposits 1 (1,098) (1,097) 330 (88) 242
Trust preferred debt obligation 138 - 138 - - -
Borrowings 210 (367) (157) 43 (337) (294)
-------------------------------------------------------------------------------------------------
Total interest expense 608 (2,071) (1,463) 428 (475) (47)
-------------------------------------------------------------------------------------------------
Net change in interest income $ 683 $ 261 $ 944 $ 496 $(116) $ 380
=================================================================================================
9
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
INTEREST INCOME
Interest income, on a tax equivalent basis, totaled $15.9 million for the year ended December 31, 2002, as compared to $16.4 million for the
year ended December 31, 2001, a decrease of $519,000, or 3%. The decrease in interest income was principally attributable to a decrease in the
tax equivalent yield on Interest-earning assets to 6.68% from 7.58%, partially offset by an increase of $21.6 million in the average balance of
interest-earning assets to $238.5 million from $216.8 million. The increase in average interest-earning assets occurred as a result of the growth
in the loan portfolio and $21.6 million in cash received from the assumption of deposits in the Branch Acquisition. Average loans increased
$21.4 million, or 14%. The decrease in the average yield on Interest-earning assets is principally the result of decreases in the overall interest
rate environment throughout the year. The declining interest rate environment resulted in repricing of the existing real estate loan portfolio, as
well as new originations occurring at lower rates than in prior periods. The Company's net interest margin compressed during the last quarter of
2002, as cash received from the Branch Acquisition was initially held in overnight deposit accounts earning interest at an average yield of
1.28%. During the last two months of 2002, the excess liquidity was reinvested in higher yielding assets. Approximately $9.0 million of
investment securities, with an average yield of 3.99%, were acquired and the remaining liquidity was used to fund loan portfolio growth.
Interest income on real estate loans totaled $10.8 million and $10.2 million for the years ended December 31, 2002 and 2001, respectively. The
$670,000, or 7%, increase resulted from a $20.3 million increase in the average balance of real estate loans to $149.5 million from $129.2
million at December 31, 2002 and 2001, respectively, partially offset by a decrease in the average yield on real estate loans of 62 basis points,
to 7.25% for 2002 from 7.87% for 2001. The increase in the average balance on real estate loans was principally due to the increase in
originations of 15-year fixed rate residential real estate and certain 30-year fixed rate mortgages. The decrease in the yield is primarily due to
refinancing existing residential loans and new originations at rates lower than the existing portfolio during 2002.
Interest income on commercial loans decreased to $984,000 from $1.2 million for the year ended December 31, 2002 as compared to the prior
year. The decrease primarily resulted from a decrease in the average yield to 6.66% from 8.45% when compared to the prior year, partially
offset by an increase in the average balance of commercial loans by $931,000, or 7%, to $14.8 million from $13.8 million in the prior year. The
decrease in the yield primarily resulted from $134,000 of interest not being recognized associated with two significant commercial lending
relationships due to their delinquent status during 2002.
Interest income on consumer loans decreased $103,000, or 8%, to $1.1 million for the year ended December 31, 2002 from $1.2 million for the
year ended December 31, 2001. The decrease was due to a decrease in the average yield on consumer loans to 8.73% from 9.69%, partially
offset by an increase in the average balance of consumer loans of $195,000, or 2%, to $12.8 million from $12.6 million when compared to the
prior year.
Interest income on mortgage-backed securities decreased by $345,000, or 27%, to $948,000 from $1.3 million for the years ended December
31, 2002 and 2001, respectively. The decrease in interest income on mortgage-backed securities resulted from a decrease in the average balance
of mortgage-backed securities of $3.3 million, or 16%, combined with a decrease in the yield to 5.60% from 6.39%. The decrease in the
average balance of mortgage-backed securities was caused by the acceleration of prepayments speed reflecting refinancing activity in the
underlying loans.
Interest income on investment securities, on a tax equivalent basis, decreased $607,000, or 24%, for the year ended December 31, 2002 to $1.9
million from $2.5 million for the same period in 2001. The decrease resulted from a decrease in
10
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
the average balance of investment securities of $4.1 million, or 11%, to $35.4 million at December 31, 2002 from $39.5 million at December
31, 2001, combined with a decrease in the average yield on investment securities, on a tax equivalent basis, to 5.44% from 6.40% for the years
ended December 31, 2002 and 2001, respectively. The decrease in the average balance of investment securities resulted primarily from the
proceeds from calls and maturities of investment securities. These proceeds were utilized primarily to fund the Company's loan growth.
Interest income on interest-earning deposits increased $52,000 to $117,000 for the year ended December 31, 2002 from $65,000 for the prior
year. The increase was due to a $7.7 million increase in the average balance on interest-earning deposits, partially offset by a decrease in the
average yield on such deposits to 1.28% from 4.58%. The increase in the average balance of interest-earning deposits resulted from the cash
received from assumption of deposits in the Branch Acquisition.
INTEREST EXPENSE
Interest expense decreased $1.5 million, or 17%, to $7.0 million for the year ended December 31, 2002. The decrease in interest expense was
principally the result of a decrease in the average cost of funds to 3.21% in 2002 from 4.24% in the prior year. The decrease in the average cost
is primarily attributable to a decrease in the overall interest rate environment during the twelve months ended December 31, 2002. The average
balance of interest-bearing liabilities increased $18.7 million, or 9%, to $218.9 million at December 31, 2002 as compared to $200.2 million at
the end of the prior year.
Interest expense on interest-bearing deposits decreased $1.4 million, or 24%, to $4.7 million for the year ended December 31, 2002 from $6.1
million in the prior year. The decrease in interest expense on deposits resulted from a decrease in the average cost of deposits to 2.78% from
3.92%, partially offset by an increase in the average balance of interest-bearing deposits of $11.8 million, or 7%, to $167.6 from $155.8
million. Interest expense on time deposits decreased $1.1 million, or 25%, to $3.3 million from $4.4 million when comparing the twelve
months ended December 31, 2002 with the same period in the prior year. The average balance of time deposits remained consistent at $77.7
million while the average cost of time deposits decreased to 4.25% from 5.66%. Interest expense on savings and club accounts decreased
$487,000, or 34%, resulting from a decrease in the average cost of savings and club accounts to 1.52% from 2.35%, partially offset by a $1.6
million increase in the average balance of savings and club accounts. Interest expense on money management accounts increased $201,000 due
to a $10.5 million increase in the average balance of money management deposit accounts, partially offset by a decrease in the average cost of
money management accounts to 2.09% from 3.80%.
The Company's borrowings consist of term and overnight advances from the Federal Home Loan Bank of New York and funds obtained
through repurchase agreements ("repos"). Interest expense on borrowed funds decreased $157,000, or 7%, to $2.2 million for the year ended
December 31, 2002 from $2.4 million at the prior year end. This decrease was primarily the result of a decrease in the average cost of borrowed
funds to 4.58% from 5.36%, partially offset by an increase in the average balance of the borrowings of $4.1 million, to $48.6 million from
$44.5 million for 2002 and 2001, respectively.
In the second quarter of 2002, the Company issued $5.0 million of subordinated debt securities, in connection with Company's participation in
a pooled trust preferred transaction. Interest expense associated with the trust preferred debt obligation for the year ended December 31, 2002
was $138,000 with an average cost of funds of 5.24%. The trust preferred security is priced at 345 basis points over the London InterBank
Offered Rate ("LIBOR") and adjusts quarterly.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
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 allowance for loan losses is based upon a methodology that uses loss factors applied to loan balances and
reflects actual loss experience, delinquency trends, current economic conditions, and individual customer conditions, as well as standards
applied by the Federal Deposit Insurance Corporation. The allowance for loan losses reflects management's best estimate of probable loan
losses at December 31, 2002. The allowance for loan losses decreased $198,000, or 12%, to $1.5 million at December 31, 2002, versus $1.7
million in 2001. As a percent of total loans, the allowance ratio decreased to 0.82% from 1.03% in 2001. Loan charge-offs were $1.7 million
during 2002.
11
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
Management addressed the deterioration of the credit quality of two significant commercial lending relationships during the second half of
2002. During the third quarter of 2002, the Company foreclosed on the assets of one of these borrowers, charging-off $598,000 of the
outstanding loan balance and transferring the net realizable value of the assets to other real estate owned. The remaining commercial credit
concern was charged-off in the fourth quarter of 2002. As a result, the Company's allowance for loan losses to nonperforming loans ratio has
improved to 86.57% at December 31, 2002 from 63.66% at December 31, 2001.
Nonperforming loans (past due 90 days or more) decreased $400,000, or 19%, to $1.7 million at December 31, 2002 from $2.1 million at the
end of the prior year. Charge-offs, net of recoveries, increased $1.2 million to $1.7 million, or 0.90%, of average loans compared to $302,000,
or 0.19% of average loans in the prior year. Total delinquencies (past due 30 days or more) to total loans receivable at December 31, 2002 are
2.28% compared to 4.03% at December 31, 2001, a decrease of 43.4%.
The Company established a provision for loan losses for the year ended December 31, 2002 of $1.4 million as compared to a provision of
$708,000 for the year ended December 31, 2001. The increase in the provision for loan losses is attributable to an increase in loans charged off
in 2002 and an increase in the loans receivable balance. Net charge-offs in 2002 exceeded the provision for loan losses by $255,000 as a
portion of the charge-offs was provided for at December 31, 2001.
NONINTEREST INCOME
The Company's noninterest income is principally comprised of fees on deposit accounts and transactions, loan servicing, commissions, and net
gains on securities, loans and other real estate. Noninterest income, exclusive of net gains on securities, loans and other real estate, increased
$157,000, or 12%, to $1.5 million for the year ended December 31, 2002, when compared to the same period in the prior year.
The increase in noninterest income primarily resulted from a $108,000 increase in service charges on deposit accounts, a $91,000 increase in
loan servicing fees and a $25,000 increase in other charges, commissions and fees. These increases were partially offset by a $67,000 decrease
in the value of bank owned life insurance. The increase in the service charges on deposit accounts is due to the introduction of new services to
depositors as well as an increase in the number of deposit accounts. The increase in loan servicing fees is due to the increase in our servicing
portfolio to $41.4 million at December 31, 2002 from $29.1 million in the prior year.
Net gain on securities, loans and other real estate increased $74,000 for the year ended December 31, 2002 when compared to the 2001 period.
The Company recognized a $573,000 gain from the sale of its holdings in an equity security. This gain was partially offset by a $275,000
impairment loss recognized on a corporate debt security in the fourth quarter of 2002.
NONINTEREST EXPENSE
Noninterest expense increased $1.1 million, or 16%, to $8.0 million for the year ended December 31, 2002 from $6.9 million for the prior year.
Salaries and employee benefits increased $774,000, or 26%, primarily resulting from the hiring of a senior commercial credit officer and chief
legal counsel and staff, an increase in branch hours, an increase in the cost of health insurance, an increase in pension expense, and an increase
in personnel expenses associated with the Branch Acquisition. An increase in data processing expenses of $139,000, or 18%, primarily resulted
from nonrecurring costs associated with the Branch Acquisition. Professional and other services increased $139,000, or 19%, resulting
primarily from additional legal costs relating to the Jewelcor litigation and an increase in outside consultants related to enhancing the
Company's compliance program. Other expenses increased $351,000, or 28%, primarily resulting from additional costs associated with the
operations of an other real estate owned property, an increase in training costs, and an increase in mortgage recording tax expense. These
increases were partially offset by a decrease in the amortization of intangible assets of $276,000. The decrease in amortization expense resulted
from the adoption of Financial Accounting Standard No. 147, "Accounting for Certain Acquisition of Banking or Thrift Institutions". The
Company is no longer amortizing goodwill arising from branch acquisitions.
12
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
The Company's overhead (noninterest expense to average assets) and efficiency ratios for the year ended December 31, 2002 were 2.85% and
73.18%, respectively. The stock based compensation plan expense and the Company's amortization of the core deposit intangible represent
noncash expenses in that they do not decrease tangible capital. If these noncash expenses were deducted from the Company's overhead and
efficiency ratios, those adjusted ratios for the year ended December 31, 2002 would be 2.82% and 72.33%, respectively.
INCOME TAX EXPENSE
Income tax expense decreased $156,000 to $388,000 for the year ended December 31, 2002 as compared to $544,000 in the prior year. The
decrease in income tax expense reflected lower pre-tax income during the year. The Company's effective tax rate remained consistent at 25%
for the year ended December 31, 2002 and 2001. The Company has reduced its tax rate primarily through the ownership of tax exempt
investment securities and other tax saving strategies.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NET INTEREST INCOME
Net interest income increased $380,000, or 5%, on a tax equivalent basis, for the year ended December 31, 2001 as compared to December 31,
2000. The increase in net interest income was comprised of an increase in interest income of $333,000 or 2%, and a decrease in interest
expense of $47,000, or 1%. The increase occurred due to an increase in the average balance of Interest-earning assets of $10.8 million, or 5%,
and a decrease in the average cost of interest-bearing liabilities to 4.24% from 4.48%, partially offset by a decrease in the average yield of
interest-earning assets to 7.58% from 7.82% and a $9.7 million, or 5%, increase in the average balance of interest-bearing liabilities. The
increase in net interest income reflects the impact of falling interest rates on the Company's liability sensitive balance sheet. The Company's
deposits and borrowed funds tend to reprice faster than the Company's investments in loans and securities. This is best illustrated by the
increase in net interest rate spread in the fourth quarter of 3.59%, compared to 3.06% for the same period in 2000.
INTEREST INCOME
Interest income totaled $16.3 million for the year ended December 31, 2001, as compared to $15.9 million for the year ended December 31,
2000, an increase of $413,000, or 3%. The increase in interest income was principally attributable to an increase of $10.8 million in the average
balance of interest-earning assets to $216.8 million from $206.1 million, offset by a decrease in the tax equivalent yield on interest-earning
assets to 7.58% from 7.82%. The increase in average interest-earning assets occurred as a result of growth in the loan portfolio. Average loans
increased $16.4 million, or 12%. The decrease in the average yield on interest-earning assets is principally the result of decreases in the overall
interest rate environment throughout the year. The declining interest rate environment resulted in repricing of the existing real estate loan
portfolio as well as new originations occurring at lower rates than in prior periods.
Interest income on real estate loans totaled $10.2 million and $9.2 million for the years ended December 31, 2001 and 2000, respectively. The
$982,000, or 11%, increase resulted from a $13.9 million increase in the average balance of real estate loans to $129.2 million from $115.3 at
December 31, 2001 and 2000, respectively, partially offset by a decrease in the average yield on real estate loans of 10 basis points, to 7.87%
for 2001 from 7.97% for 2000. The increase in the average balance on real estate loans was principally due to the increase in originations of 15-
year fixed rate residential real estate. The decrease in the yield is primarily due to residential loans originating at lower rates during 2001.
Interest income on commercial loans remained relatively consistent at $1.1 million for the year ended December 31, 2001 as compared to the
prior year. The average balance of commercial loans increased $3.0 million, or 28%, to $13.8 million from $10.8 million in the prior year. The
increase in the average balance of commercial loans was offset by a decrease in the average yield to 8.45% from 10.15% when compared to the
prior year. The increase in the average balance of commercial loans reflects the Company's continuing efforts to provide lending to qualified
local businesses. The decrease in the yield on commercial loans is primarily due to the 475 basis point decline in the Company's prime rate
which has affected the yield on prime-based commercial lending.
13
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
Interest income on consumer loans decreased $91,000, or 7%, to $1.2 million for the year ended December 31, 2001 from $1.3 million for the
year ended December 31, 2000. The decrease was due to a decrease in the average balance of consumer loans of $529,000, or 4%, to $12.6
million from $13.1 million combined with a decrease in the average yield on consumer loans to 9.69% from 9.99% when compared to the prior
year.
Interest income on mortgage-backed securities decreased by $184,000, or 13%, to $1.3 million from $1.5 million for the years ended December
31, 2001 and 2000, respectively. The decrease in interest income on mortgage-backed securities resulted from a decrease in the average balance
of mortgage-backed securities of $1.6 million, or 8%.
Interest income on investment securities, on a tax equivalent basis, decreased $500,000, or 17%, for the year ended December 31, 2001 to $2.5
million from $3.0 million for the same period in 2000. The decrease resulted from a decrease in the average balance of investment securities of
$5.2 million, or 12%, to $39.5 million at December 31, 2001 from $44.8 million at December 31, 2000, combined with a decrease in the
average yield on investment securities, on a tax equivalent basis, to 6.40% from 6.77% for the years ended December 31, 2001 and 2000,
respectively. The decrease in the average balance of investment securities resulted primarily from the proceeds from calls and maturities of
investment securities. These proceeds were utilized to fund the Company's loan growth.
Interest income on interest-earning deposits increased $56,000 to $65,000 for the year ended December 31, 2001 from $9,000 for the prior
year. The increase was due to a $1.3 million increase in the average balance on interest-earning deposits, partially offset by a decrease in the
average yield on such deposits to 4.58% from 6.80%.
INTEREST EXPENSE
Interest expense decreased $47,000, or 1%, to $8.5 million for the year ended December 31 2001. The decrease in interest expense was
principally the result of a decrease in the average cost of funds to 4.24% in 2001 from 4.48% in the prior year. The decrease in the average cost
is primarily attributable to a decrease in the overall interest rate environment during the twelve months ended December 31, 2001. The average
balance of interest-bearing liabilities increased $9.7 million, or 5%, to $200.2 million at December 31, 2001 as compared to $190.5 million at
the end of the prior year. Interest expense on time deposits increased $242,000, or 6%, to $4.4 million from $4.2 million when comparing the
twelve months ended December 31, 2001 with the same period in the prior year. Interest expense on NOW and savings accounts decreased
$36,000, or 2%. The average balance on savings and club accounts increased $1.1 million, or 2%, to $60.9 million for the year ended
December 31, 2001 from $59.8 for the prior year, while the average cost of such deposits decreased to 2.35% from 2.42%. The average balance
on time deposits increased $5.8 million, or 8%, to $77.7 million for the year ended December 31, 2001, from $71.8 million for the prior year.
The average cost of time deposits decreased to 5.66% from 5.78%.
Interest expense on borrowed funds decreased $294,000, or 11%, to $2.4 million for the year ended December 31, 2001 from $2.7 million at
the prior year end. This decrease was primarily the result of a decrease in the average cost of borrowed funds to 5.36% from 6.13%, partially
offset by an increase in the average balance of the borrowings of $740,000, to $44.5 million, from $43.7 million for 2001 and 2000
respectively.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses reflects management's best estimate of probable loan losses at December 31, 2001. The allowance for loan losses
was increased to $1.7 million at December 31, 2001, versus $1.3 million in 2000. As a percent of total loans, the allowance ratio increased to
1.03% from 0.86% in 2000. The increase in provision reflects management's concern of recessionary pressures on the credit quality of the
Company's loan portfolio.
14
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
Nonperforming loans (past due 90 days or more) increased $292,000, or 16.0%, to $2.1 million at December 31, 2001, from $1.8 million at the
end of the prior year. The nonperforming loans to total loans ratio at December 31, 2001 was 1.3% compared to 1.2% at December 31, 2000.
Charge-offs, net of recoveries, increased $182,000 to $302,000, or 0.19% of average loans compared to $120,000, or 0.09% of average loans in
the prior year. Total delinquencies (past due 30 days or more) to total loans receivable at December 31, 2001 are 4.03% compared to 2.70% at
December 31, 2000, an increase of 49.3%.
The Company established a provision for loan losses for the year ended December 31, 2001 of $708,000 as compared to a provision of
$244,000 for the year ended December 31, 2000. The increase in the provision for loan losses is attributable to an increase in loans charged off
in 2001, an increase in the loans receivable balance, an increase in the risk rating of a commercial loan relationship, and an increase in the
overall level of delinquencies in the loan portfolio.
NONINTEREST INCOME
Noninterest income exclusive of net gains on securities and loans increased $225,000, or 20%, to $1.4 million for the year ended December 31,
2001, when compared to the same period in the prior year.
The increase in noninterest income primarily results from an $81,000 increase in income recognized on the cash value of bank owned life
insurance, a $66,000 increase in service charges on deposit accounts and a $63,000 increase in loan servicing fees. Net gain on securities, loans
and other real estate increased $540,000 for the year ended December 31, 2001 when compared to the 2000 period.
NONINTEREST EXPENSE
Noninterest expense decreased $832,000, or 11%, to $6.9 million for the year ended December 31, 2001 from $7.7 million for the prior year.
Noninterest expense for the first quarter of 2000 was adversely impacted by unusual items and nonrecurring charges of approximately
$789,000. Exclusive of the unusual and nonrecurring charges, noninterest expense remained relatively consistent from year to year decreasing
by 1%.
The Company's overhead (noninterest expense to average assets) and efficiency ratios for the year ended December 31, 2001 were 2.81% and
70.61%, respectively. The stock based compensation plan expense and the Company's amortization of goodwill represent noncash expenses in
that they do not decrease the generation of tangible capital. If these noncash expenses were deducted from the Company's overhead and
efficiency ratios, those adjusted ratios for the year ended December 31, 2000 would be 2.72% and 66.41%, respectively.
INCOME TAX EXPENSE
Income tax expense increased $347,000 to $544,000 for the year ended December 31, 2001 as compared to $196,000 in the prior year. The
increase in income tax expense reflected higher pre-tax income during the year.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign
currency exchange rates, commodity prices, and equity prices. The Company's most significant form of market risk is interest rate risk, as the
majority of the Company's assets and liabilities are sensitive to changes in interest rates. The Company's mortgage loan portfolio consists
primarily of loans on residential real property located in Oswego County, and is therefore subject to risks associated with the local economy.
The Company's interest rate risk management program focuses primarily on evaluating and managing the composition of the Company's assets
and liabilities in the context of various interest rate scenarios. Factors beyond management's control, such as market interest rates and
competition, also have an impact on interest income and interest expense. Included within the Company's investment portfolio are certain
securities that are subject to the default risk of the issuer. The current portfolio includes
15
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
securities issued by various corporations, government agencies and municipalities. Management monitors this potential risk by analyzing the
credit ratings of the issuing organizations and takes appropriate actions when these ratings fall below investment grade. Other types of market
risks stated above do not arise in the normal course of the Company's business activities.
The extent to which such assets and liabilities are "interest rate sensitive" can be measured by an institution's interest rate sensitivity "gap". An
asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest
rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income while a positive gap would tend to positively affect net interest income. Conversely, during a period of
falling interest rates, a negative gap would tend to positively affect net interest income while a positive gap would tend to adversely affect net
interest income.
The Company does not generally maintain in its portfolio fixed interest rate loans with terms exceeding 20 years. However, beginning in the
fourth quarter of 2002, 30-year fixed rate mortgages meeting a minimum credit score rating will be held in portfolio. The Company's current
policy allows for maintaining in portfolio qualifying 30-year fixed rate mortgages up to a maximum level of 5% of the total loan portfolio. 30-
year fixed rate loans that do not meet the minimum credit standard or exceed 5% of the loan portfolio will be held for sale into the secondary
market. The Company manages interest rate and credit risk associated with the mortgage loans held for sale and outstanding loan commitments
through utilization of forward sale commitments of mortgage-backed securities for the purpose of passing along these risks to acceptable third
parties. Management generally enters into forward sale commitments to minimize the exposure to longer term fixed rate mortgages in mortgage
loans held for sale and mortgage commitments where interest rate locks have been granted. At December 31, 2002, there were no outstanding
forward sale commitments. To manage interest rate risk within the loan portfolio, ARM loans are originated with terms that provide that the
interest rate on such loans cannot adjust below the initial rate. Generally, the Company tends to fund longer term loans and mortgage-backed
securities with shorter term time deposits, repurchase agreements, and advances. The impact of this asset/liability mix creates an inherent risk
to earnings in a rising interest rate environment. In a rising interest rate environment, the Company's cost of shorter term deposits may rise
faster than its earnings on longer term loans and investments. Additionally, the prepayment of principal on real estate loans and mortgage-
backed securities tends to decrease as rates rise, providing less available funds to invest in the higher rate environment. Conversely, as interest
rates decrease the prepayment of principal on real-estate loans and mortgage-backed securities tends to increase, causing the Company to invest
funds in a lower rate environment. The potential impact on earnings from this mismatch, is mitigated to a large extent by the size and stability
of the Company's savings accounts. Savings accounts have traditionally provided a source of relatively low cost funding that has demonstrated
historically a low sensitivity to interest rate changes. The Company generally matches a percentage of these, which are deemed core, against
longer term loans and investments.
During 2002 and 2001, the Federal Reserve lowered interest rates twelve times by a total of 525 basis points. These interest rate reductions
have caused significant repricing of the bank's interest-earning assets and interest-bearing liabilities. With the overnight borrowing rate at a 40
year low, the Company is positioning itself for anticipated interest rate increases in the future. Efforts are being made to shorten the repricing
duration of its rate sensitive assets by originating one year ARM loans, "3/1 ARM" loans, and "5/1 ARM" loans (mortgage loans which are
fixed rate for the first three to five years and adjustable annually thereafter). In the current interest rate environment the Company is also
extending the duration of its rate sensitive liabilities by lengthening the maturities of its existing borrowings and offering certificates of deposit
with three and four year terms which allow depositors to make a one-time election, at any time during the term of the certificate of deposit, to
adjust the rate of the instrument to the then prevailing rate for the certificate of deposit with the same term.
The Company manages its interest rate sensitivity by monitoring (through simulation and net present value techniques) the impact on its GAP
position, net interest income (earnings at risk), net portfolio value (value at risk) and net portfolio value ratio to changes in interest rates on its
current and forecast mix of assets and liabilities. The Company has an Asset-Liability Management
16
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
Committee which is responsible for reviewing the Company's assets and liability policies, setting prices and terms on rate-sensitive products,
and monitoring and measuring the impact of interest rate changes on the Company's earnings. The Committee meets monthly on a formal basis
and reports to the Board of Directors on interest rate risks and trends, as well as liquidity and capital ratios and requirements. The Company
does not have a targeted gap range, rather the Board of Directors has set parameters of percentage change by which net interest margin and the
net portfolio value are affected by changing interest rates. The Board and management deem these measures to be a more significant and
realistic means of measuring interest rate risk. The results of the interest rate measurement techniques are outlined below in the GAP table and
the table on percentage changes in net interest income and net portfolio value.
GAP TABLE
The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2002, which
are expected to reprice or mature based upon certain assumptions in each of the future time periods shown.
Amounts Maturing or Repricing
-----------------------------------------------------------------------------------------------------------
Within 3 to 12 1 to 3 3 to 5 5 to 10
(Dollars in thousands) 3 Months Months Years Years Years
----------------------------------------------------- ---------- --------- -------- -------- ---------
Interest-earning assets:
Real estate loans:
Residential one-to-four family:
Market index ARM's. . . . . . . . . . . . . . . . . . $ 17,358 $ 20,064 $12,813 $ 1,054 $ -
Fixed rate. . . . . . . . . . . . . . . . . . . . . . 1,822 8,436 30,935 15,873 9,874
Commercial and multi-family:
ARM's . . . . . . . . . . . . . . . . . . . . . . . . 2,992 4,847 4,627 10,793 1,307
Fixed rate. . . . . . . . . . . . . . . . . . . . . . 401 1,244 2,004 568 1,670
Home equity fixed rate loans. . . . . . . . . . . . . 137 431 1,296 1,541 3,321
Home equity line of credit. . . . . . . . . . . . . . 4,425 - - - -
Consumer loans. . . . . . . . . . . . . . . . . . . . 328 1,046 2,543 - -
Commercial business loans . . . . . . . . . . . . . . 170 1,175 5,667 3,674 2,291
Mortgage-backed securities. . . . . . . . . . . . . . 1,390 5,496 5,607 8,167 4,219
Investment securities . . . . . . . . . . . . . . . . 23,177 3,506 2,664 2,515 8,538
-----------------------------------------------------------------------------------------------------------
Total interest-earning assets. . . . . . . . . . . . $ 52,200 $ 46,245 $68,156 $44,185 $ 31,220
===========================================================================================================
WEIGHTED AVERAGE YIELD. . . . . . . . . . . . . . . . 5.37% 6.74% 6.92% 6.84% 6.86%
Interest-bearing liabilities:
Passbook accounts (1) . . . . . . . . . . . . . . . . 1,498 9,205 15,548 13,561 13,511
NOW accounts (1). . . . . . . . . . . . . . . . . . . 2,542 7,625 5,238 - -
Money management accounts (1) . . . . . . . . . . . . 19,765 - - - -
Certificate accounts. . . . . . . . . . . . . . . . . 15,282 33,695 24,847 8,405 4,201
Borrowings. . . . . . . . . . . . . . . . . . . . . . 7,700 7,000 8,500 12,350 7,310
Trust preferred obligations . . . . . . . . . . . . . 5,000 - - - -
-----------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities. . . . . . . . . . $ 51,787 $ 57,525 $54,133 $34,316 $ 25,022
===========================================================================================================
WEIGHTED AVERAGE COST . . . . . . . . . . . . . . . . 2.47% 2.70% 3.00% 3.35% 2.98%
Interest-earning assets less interest-
bearing liabilities ("interest rate sensitivity gap") $ 413 $(11,280) $14,023 $ 9,869 $ 6,198
Cumulative excess (deficiency) of interest-
sensitive assets over interest-sensitive liabilities. $ 413 $(10,867) $ 3,156 $13,025 $ 19,223
Interest sensitivity gap to total assets. . . . . . . 0.15% -4.04% 5.03% 3.54% 2.22%
Cumulative interest sensitivity gap to total assets . 0.15% -3.89% 1.13% 4.67% 6.89%
Ratio of interest-earning assets to interest-
bearing liabilities . . . . . . . . . . . . . . . . . 100.80% 80.39% 125.90% 128.76% 124.77%
Cumulative ratio of interest-earning assets to
interest-bearing liabilities. . . . . . . . . . . . . 100.80% 90.06% 101.93% 106.59% 108.63%
===========================================================================================================
More than
(Dollars in thousands) 10 Years Total
---------------------------------------------------------------------------
Interest-earning assets:
Real estate loans:
Residential one-to-four family:
Market index ARM's. . . . . . . . . . . . . . . . . . $ - $ 51,289
Fixed rate. . . . . . . . . . . . . . . . . . . . . . 4,949 71,889
Commercial and multi-family:
ARM's . . . . . . . . . . . . . . . . . . . . . . . . - 24,566
Fixed rate. . . . . . . . . . . . . . . . . . . . . . 2,204 8,091
Home equity fixed rate loans. . . . . . . . . . . . . - 6,726
Home equity line of credit. . . . . . . . . . . . . . - 4,425
Consumer loans. . . . . . . . . . . . . . . . . . . . - 3,917
Commercial business loans . . . . . . . . . . . . . . 219 13,196
Mortgage-backed securities. . . . . . . . . . . . . . 281 25,160
Investment securities . . . . . . . . . . . . . . . . 3,660 44,060
---------------------------------------------------------------------------
Total interest-earning assets. . . . . . . . . . . . $ 11,313 $253,319
=============================================================================
WEIGHTED AVERAGE YIELD. . . . . . . . . . . . . . . . 6.00% 6.52%
Interest-bearing liabilities:
Passbook accounts (1) . . . . . . . . . . . . . . . . 13,835 67,158
NOW accounts (1). . . . . . . . . . . . . . . . . . . - 15,405
Money management accounts (1) . . . . . . . . . . . . - 19,765
Certificate accounts. . . . . . . . . . . . . . . . . - 86,430
Borrowings. . . . . . . . . . . . . . . . . . . . . . - 42,860
Trust preferred obligations . . . . . . . . . . . . . - 5,000
---------------------------------------------------------------------------
Total interest-bearing liabilities. . . . . . . . . . $ 13,835 $236,618
=============================================================================
WEIGHTED AVERAGE COST . . . . . . . . . . . . . . . . 0.84% 2.73%
Interest-earning assets less interest-
bearing liabilities ("interest rate sensitivity gap") $ (2,522)
Cumulative excess (deficiency) of interest-
sensitive assets over interest-sensitive liabilities. $ 16,701
Interest sensitivity gap to total assets. . . . . . . -0.90%
Cumulative interest sensitivity gap to total assets . 5.98%
Ratio of interest-earning assets to interest-
bearing liabilities . . . . . . . . . . . . . . . . . 81.77%
Cumulative ratio of interest-earning assets to
interest-bearing liabilities. . . . . . . . . . . . . 107.06%
=============================================================================
(1) The following assumptions have been used when analyzing nonmaturity deposits for GAP Table purposes: 16% of passbook account
balances are assumed to reprice or mature within one year, 23% within 1 to 3 years and 20% within each of the remaining time periods. 66% of
the NOW account balances are assumed to reprice or mature within one year, and the remaining 34% is assumed to reprice or mature within the
1 to 3 year time frame. 100% of the money management accounts are assumed to reprice within the first three months.
17
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
At December 31, 2002, the total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing
or repricing in the same period by $10.9 million, representing a cumulative one-year gap ratio of a negative 3.89%.
The above assumptions are annual percentage rates based on remaining balances and should not be regarded as indicative of the actual
withdrawals that may be experienced by the Company. Moreover, certain shortcomings are inherent in the analysis presented by the foregoing
tables. For example, interest rates on certain types of liabilities may fluctuate in advance of or lag behind changes in market interest rates.
Moreover, in the event of a change in interest rates, withdrawal levels would likely deviate significantly from those assumed in calculating the
tables.
CHANGES IN NET INTEREST INCOME AND NET PORTFOLIO VALUE
The following table measures the Company's interest rate risk exposure in terms of the percentage change in its net interest income and net
portfolio value as a result of hypothetical changes in 100 basis point increments in market interest rates. Net portfolio value represents the fair
value of net assets (determined as the market value of assets minus the market value of liabilities using a discounted cash flow technique). The
table quantifies the changes in net interest income and net portfolio value to parallel shifts in the yield curve. The column "Percentage Change
in Net Interest Income" measures the change to the next twelve month's projected net interest income, due to parallel shifts in the yield curve.
The column "Percentage Change in Net Portfolio Value" measures changes in the current fair value of assets and liabilities due to parallel shifts
in the yield curve. The column "NPV Capital Ratio" measures the ratio of the fair value of net assets to the fair value of total assets at the base
case and in incremental interest rate shocks up and down 300 basis points. The Company uses these percentage changes as a means to measure
interest rate risk exposure and quantifies those changes against guidelines set by the Board of Directors as part of the Company's Interest Rate
Risk policy.
Simulation and net present value analysis demonstrate percentage changes to net interest income and net portfolio value of a negative 5.82%
and a negative 11.39%, respectively, in an upward 200 basis point parallel shift in the yield curve.
The Company's current interest rate risk exposure is within those guidelines set forth.
2002 2001
---------------------------------------------------------------------------------------------------
Change Percentage Percentage Change Percentage Percentage
In NPV Change in Change in In NPV Change in Change in
Interest Capital Net Interest Net Portfolio Interest Capital Net Interest Net Portfolio
Rates Ratio Income Value Rates Ratio Income Value
---------------------------------------------------------------------------------------------------
-300 . . 11.82% -5.05% 1.19% -300 11.60% 0.46% 4.14%
-200 . . 11.99% 0.17% 0.64% -200 11.83% 2.08% 4.31%
-100 . . 12.37% 0.92% 1.90% -100 12.21% 2.09% 5.83%
0. . . . 12.36% - - 0 11.78% - -
100. . . 12.12% -2.41% -3.84% 100 10.91% -3.99% -9.62%
200. . . 11.44% -5.82% -11.39% 200 10.01% -8.63% -19.04%
300. . . 10.58% -9.66% -20.10% 300 9.11% -13.45% -28.00%
LIQUIDITY AND CAPITAL RESOURCES
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. For additional
information about cash flows from the Company's operating, financing, and investing activities, see "Statements of Cash Flows" included in the
Financial Statements. The Company adjusts its liquidity levels in order to meet funding needs of deposit outflows, payment of real estate taxes
on mortgage
18
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
loans and loan commitments. The Company also adjusts liquidity as appropriate to meet its asset and liability management objectives. 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 major portion of the Company's liquidity consists of cash and cash equivalents, which are a product of operating, investing, and financing
activities. The primary sources of cash were net income, principal repayments on loans and increases in deposit accounts and borrowed funds.
The fluctuations in savings account deposits have caused the Company to rely, at times, on overnight borrowings for liquidity purposes. 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's primary liquidity measurement tool is its liquidity position report, a static report used to identify the Company's current
liquidity position. The report identifies the Company's liquid and short-term assets and short-term liabilities. Short-term liabilities are deducted
from liquid/short term assets to derive available liquidity. Available liquidity is compared as a percentage of core deposits and total assets. In
accordance with policy, available liquidity as a percentage of core deposits must exceed 8%, and availability liquidity as a percentage of total
assets must exceed 3%. At December 31, 2002, these ratios were 12.4% and 5.2% respectively, excluding the Company's capacity to borrow
additional funds from the Federal Home Loan Bank.
At December 31, 2002, the Company had outstanding loan commitments of $16.1 million. This amount includes the unfunded portion of loans
in process. Certificates of deposit scheduled to mature in less that one year at December 31, 2002 totaled $48.4 million. Based on prior
experience, management believes that a significant portion of such deposits will remain with the Company.
TWO YEAR SELECTED QUARTERLY DATA
For the Quarters Ended
---------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
(In Thousands Except Per Share Data) 2002 2002 2002 2002
--------------------------------------------------------------------------------------
Interest Income . . . . . . . . . . . . . $ 3,991 $ 3,918 $ 3,913 $ 3,989
Interest Expense. . . . . . . . . . . . . 1,735 1,768 1,729 1,790
Net Interest Income . . . . . . . . . . . 2,256 2,150 2,184 2,199
Net (Loss) Income (1) . . . . . . . . . . (110) 349 360 550
Net (Loss) Income Per Share (Basic) (1). $ (0.04) $ 0.11 $ 0.14 $ 0.22
Net (Loss) Income Per Share (Diluted) (1) $ (0.04) $ 0.11 $ 0.14 $ 0.21
(1) The quarters ending June 30, 2002 and March 31, 2002 were restated with adoption of FAS Statement No. 147. The results of the
restatement increased net income $48,000 for each quarter and increased basic and diluted earning per share $0.02 for each quarter.
For the Quarters Ended
---------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
(In Thousands Except Per Share Data) 2001 2001 2001 2001
--------------------------------------------------------------------------------------
Interest Income. . . . . . . . . . . $ 4,031 $ 4,074 $ 4,075 $ 4,157
Interest Expense . . . . . . . . . . 1,898 2,097 2,181 2,309
Net Interest Income. . . . . . . . . 2,133 1,977 1,894 1,849
Net Income . . . . . . . . . . . . . 537 443 356 267
Net Income Per Share (Basic). . . . $ 0.21 $ 0.17 $ 0.14 $ 0.10
Net Income Per Share (Diluted) . . . $ 0.21 $ 0.17 $ 0.14 $ 0.10
19
MANAGEMENT'S DISCUSSION AND ANALYIS
(continued)
The following table presents 2001 quarterly data on an adjusted basis with the affects of FASB Statement No. 147 shown as if the Statement
was adopted January 1, 2001:
For the Quarters Ended
-----------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31,
(In Thousands Except Per Share Data) 2001 2001 2001 2001
-----------------------------------------------------------------------------------------
Reported net income. . . . . . . . . . . . . $ 537 $ 443 $ 356 $ 267
Add back: goodwill amortization, net of tax. 48 48 48 48
-----------------------------------------------------------------------------------------
Adjusted net income . . . . . . . . . . . . $ 585 $ 491 $ 404 $ 315
=========================================================================================
Basic earnings per share:
Reported net income. . . . . . . . . . . . . $ 0.21 $ 0.17 $ 0.14 $ 0.10
Goodwill amortization, net of tax. . . . . . 0.02 0.02 0.02 0.02
-----------------------------------------------------------------------------------------
Adjusted net income . . . . . . . . . . . . $ 0.23 $ 0.19 $ 0.16 $ 0.12
=========================================================================================
Diluted earnings per share:
Reported net income. . . . . . . . . . . . . $ 0.20 $ 0.17 $ 0.14 $ 0.10
Goodwill amortization, net of tax. . . . . . 0.02 0.02 0.02 0.02
-----------------------------------------------------------------------------------------
Adjusted net income . . . . . . . . . . . . $ 0.22 $ 0.19 $ 0.16 $ 0.12
=========================================================================================
COMMON STOCK AND RELATED MATTERS
The common stock trades and is listed on The Nasdaq SmallCap Stock Market under the symbol "PBHC" and the short name PathBcp. The
common stock was issued on November 15, 1995 at $5.00 per share (adjusted for the three for two stock split on February 5, 1998). As of
February 14, 2003, there were 525 shareholders of record and 2,441,882 outstanding shares of common stock.
SHARE REPURCHASES
On December 19, 2002, the Company announced its third share repurchase program for the purchase of up to 102,000 shares. At December 31,
2002, no shares have been repurchased as part of the program.
The following table sets forth the high and low closing bid prices and dividends paid per share of common stock for the periods indicated.
Dividends
Quarter Ended High Low Paid
----------------------------------------------------------
December 31, 2002. $15.000 $11.910 $.0800
September 30, 2002 12.850 10.380 .0800
June 30, 2002. . . 14.990 12.750 .0700
March 31, 2002 . . 13.500 12.050 .0700
December 31, 2001. 14.000 12.100 .0700
September 30, 2001 14.150 7.840 .0700
June 30, 2001. . . 9.000 6.000 .0600
March 31, 2001 . . 6.750 5.500 .0600
Payment of dividends on the common stock is subject to determination and declaration by the Board of Directors and will depend upon a
number of factors, including capital requirements, regulatory limitations on the payment of dividends, Pathfinder Bank and its subsidiaries
results of operations and financial condition, tax considerations, and general economic conditions. The Company's mutual holding company,
Pathfinder Bancorp. M.H.C., may elect to waive or receive dividends each time the Company declares a dividend. The election to waive the
dividend receipt requires prior consent from the Office of Thrift Supervision.
20
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Pathfinder Bancorp, Inc.
Oswego, New York
In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of income, changes in
shareholders' equity and cash flows present fairly, in all material respects, the financial position of Pathfinder Bancorp, Inc. at December 31,
2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 147, "Accounting for Certain Acquisitions of Bank or Thrift Institutions".
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Syracuse, New York
January 31, 2003
21
STATEMENTS OF CONDITION
December 31,
------------------------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,026,126 $ 5,433,029
Interest earning deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,714,279 2,160,927
------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,740,405 7,593,956
Investment securities, at fair value. . . . . . . . . . . . . . . . . . . . . . . . . 62,505,544 53,422,149
Mortgage loans held-for-sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,616,711 5,270,999
Loans:
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,560,715 106,839,162
Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,657,177 30,454,798
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,068,204 12,615,168
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,196,188 14,357,635
------------------------------------------------------------------------------------------------------------------
Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,482,284 164,266,763
Less: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,480,874 1,679,215
------------------------------------------------------------------------------------------------------------------
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,001,410 162,587,548
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,622,171 4,929,433
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,334,126 1,465,347
Other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,395,714 632,465
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,840,226 2,341,854
Intangible asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,073,182 -
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,926,378 6,270,671
------------------------------------------------------------------------------------------------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $279,055,867 $244,514,422
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $188,757,723 $156,553,658
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,764,382 13,035,489
------------------------------------------------------------------------------------------------------------------
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,522,105 169,589,147
Borrowed funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,860,000 49,440,500
Company obligated mandatorily redeemable preferred securities of subsidiary,
Pathfinder Statutory Trust I, holding solely junior subordinated debentures of
the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 -
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,443,740 3,300,026
------------------------------------------------------------------------------------------------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255,825,845 222,329,673
Shareholders' equity:
Preferred stock, authorized shares 1,000,000; no shares issued or outstanding
Common stock, par value $.01 per share; authorized 10,000,000 shares;
2,914,669 and 2,894,220 shares issued; and 2,610,496 and
2,600,995 shares outstanding, respectively. . . . . . . . . . . . . . . . . . . . . . 29,146 28,942
Additional paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,113,811 6,917,817
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,745,651 19,015,639
Accumulated other comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . 280,905 80,652
Unearned ESOP shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (124,467) (173,142)
Treasury Stock, at cost; 304,173 and 293,225 shares, respectively . . . . . . . . . . (3,815,024) (3,685,159)
------------------------------------------------------------------------------------------------------------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,230,022 22,184,749
------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity. . . . . . . . . . . . . . . . . . . . . . $279,055,867 $244,514,422
==================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
22
STATEMENTS OF INCOME
December 31,
-------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . $12,935,710 $12,555,321 $11,594,887
Interest and dividends on investments:
U.S. Treasury and agencies. . . . . . . . . . . . . . . . 165,468 374,859 769,857
State and political subdivisions. . . . . . . . . . . . . 322,091 335,619 362,565
Corporate obligations . . . . . . . . . . . . . . . . . . 1,142,979 1,533,398 1,530,415
Marketable equity securities. . . . . . . . . . . . . . . 180,494 181,099 181,337
Mortgage-backed securities. . . . . . . . . . . . . . . . 948,103 1,293,062 1,476,828
Federal funds sold and interest-earning deposits. . . . . 116,927 64,585 9,201
-------------------------------------------------------------------------------------------------
Total interest income . . . . . . . . . . . . . . . . . . 15,811,772 16,337,943 15,925,090
INTEREST EXPENSE:
Interest on deposits. . . . . . . . . . . . . . . . . . . 4,656,015 6,099,776 5,852,737
Interest on borrowed funds. . . . . . . . . . . . . . . . 2,366,554 2,385,163 2,679,658
-------------------------------------------------------------------------------------------------
Total interest expense. . . . . . . . . . . . . . . . . . 7,022,569 8,484,939 8,532,395
Net interest income . . . . . . . . . . . . . . . . . . . 8,789,203 7,853,004 7,392,695
PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . 1,374,989 707,899 244,380
-------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses . . . 7,414,214 7,145,105 7,148,315
-------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts . . . . . . . . . . . 628,633 520,483 454,923
Increase in value of bank owned life insurance. . . . . . 179,246 245,909 165,288
Loan servicing fees . . . . . . . . . . . . . . . . . . . 265,465 174,784 111,597
Net gains on sale and impairment of investment securities 389,779 749,237 2,176
Net gains (losses) on sale of loans and other real estate 192,853 (240,241) (33,549)
Other charges, commissions & fees . . . . . . . . . . . . 438,394 413,589 398,426
-------------------------------------------------------------------------------------------------
Total other income. . . . . . . . . . . . . . . . . . . . 2,094,370 1,863,761 1,098,861
-------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits. . . . . . . . . . . . . . 3,756,961 2,982,879 2,913,683
Building occupancy. . . . . . . . . . . . . . . . . . . . 795,957 820,085 821,703
Data processing expenses. . . . . . . . . . . . . . . . . 920,364 781,495 812,917
Professional and other services . . . . . . . . . . . . . 857,866 719,122 653,004
Amortization. . . . . . . . . . . . . . . . . . . . . . . 39,258 315,756 315,756
Other expenses. . . . . . . . . . . . . . . . . . . . . . 1,593,838 1,243,300 1,599,768
Unusual items . . . . . . . . . . . . . . . . . . . . . . - - 578,176
-------------------------------------------------------------------------------------------------
Total other expenses. . . . . . . . . . . . . . . . . . . 7,964,244 6,862,637 7,695,007
Income before income taxes. . . . . . . . . . . . . . . . 1,544,340 2,146,229 552,169
Provision for income taxes. . . . . . . . . . . . . . . . 388,061 543,739 196,287
-------------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . $ 1,156,279 $ 1,602,490 $ 355,882
=================================================================================================
NET INCOME PER SHARE - BASIC. . . . . . . . . . . . . . . $ 0.45 $ 0.62 $ 0.14
=================================================================================================
NET INCOME PER SHARE - DILUTED. . . . . . . . . . . . . . $ 0.44 $ 0.62 $ 0.14
=================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
23
STATEMENT OF CHANGES IN OWNERS EQUITY
Additional Unearned
Common Stock Issued Paid in Retained Stock-Based
Shares Amount Capital Earnings Compensation
--------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999. . . . . . . 2,884,720 $ 288,472 $6,912,580 $18,121,372 $ (981,125)
Comprehensive income:
Net income 355,882
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising
during period
Reclassification adjustment for
gains included in net income
Other comprehensive income, before tax
Income tax provision
Other comprehensive income, net of tax
Comprehensive income:
ESOP shares earned 9,468
Treasury stock purchased
Rescission of stock-based
compensation awards (359,963) 648,188
Stock based compensation earned 332,937
Dividends declared ($.24 per share) (617,866)
--------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000. . . . . . . 2,884,720 288,472 6,562,085 17,859,388 -
Comprehensive income:
Net income 1,602,490
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising
during period
Reclassification adjustment for
gains included in net income
Other comprehensive income, before tax
Income tax provision
Other comprehensive income, net of tax
Comprehensive income:
Reduction in par value of common stock (259,625) 259,625
ESOP shares earned 33,692
Stock option exercised. . . . . . . . . 9,500 95 62,415
Treasury stock purchased
Dividends declared ($.26 per share) (446,239)
--------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001. . . . . . . 2,894,220 28,942 6,917,817 19,015,639 -
Comprehensive income:
Net income 1,156,279
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising
during period
Reclassification adjustment for
gains included in net income
Other comprehensive income, before tax
Income tax provision
Other comprehensive income, net of tax
Comprehensive income:
ESOP shares earned 57,340
Stock option exercised. . . . . . . . . 20,449 204 138,654
Treasury stock purchased
Dividends declared ($.30 per share) (426,267)
--------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002. . . . . . . 2,914,669 $ 29,146 $7,113,811 $19,745,651 $ -
========================================================================================================
Other Com- Unearned
Comprehensive prehensive ESOP Treasury
Income(Loss) Income(Loss) Shares Stock Total
----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ (895,894) $(287,609) $(3,083,184) $20,074,612
Comprehensive income:
Net income. . . . . . . . . . . . . . . $ 355,882 355,882
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising
during period . . . . . . . . . . . . . 1,542,512
Reclassification adjustment for
gains included in net income. . . . . . 2,175
-------------
Other comprehensive income, before tax. 1,544,687
Income tax provision. . . . . . . . . . (617,874)
-------------
Other comprehensive income, net of tax. 926,813 926,813 926,813
-------------
Comprehensive income: . . . . . . . . . $ 1,282,695
=============
ESOP shares earned 60,379 69,847
Treasury stock purchased (179,750) (179,750)
Rescission of stock-based
compensation awards (288,225) -
Stock based compensation earned 332,937
Dividends declared ($.24 per share) (617,866)
--------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 30,919 (227,230) (3,551,159) 20,962,475
Comprehensive income:
Net income. . . . . . . . . . . . . . . $ 1,602,490 1,602,490
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising
during period . . . . . . . . . . . . . 832,429
Reclassification adjustment for
gains included in net income. . . . . . (749,237)
-------------
Other comprehensive income, before tax. 83,192
Income tax provision. . . . . . . . . . (33,459)
-------------
Other comprehensive income, net of tax. 49,733 49,733 49,733
-------------
Comprehensive income: . . . . . . . . . $ 1,652,223
=============
Reduction in par value of common stock -
ESOP shares earned 54,088 87,780
Stock option exercised 62,510
Treasury stock purchased (134,000) (134,000)
Dividends declared ($.26 per share) (446,239)
-------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 80,652 (173,142) (3,685,159) 22,184,749
Comprehensive income:
Net income. . . . . . . . . . . . . . . $ 1,156,279 1,156,279
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising
during period . . . . . . . . . . . . . 723,235
Reclassification adjustment for
gains included in net income. . . . . . (389,779)
-------------
Other comprehensive income, before tax. 333,456
Income tax provision. . . . . . . . . . (133,203)
-------------
Other comprehensive income, net of tax. 200,253 200,253 200,253
-------------
Comprehensive income: . . . . . . . . . $ 1,356,532
=============
ESOP shares earned 48,675 106,015
Stock option exercised 138,858
Treasury stock purchased (129,865) (129,865)
Dividends declared ($.30 per share) (426,267)
-------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ 280,905 $(124,467) $(3,815,024) $23,230,022
=============================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
24
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Income. . . . . . . . . . . . . . . . . . . . . . . . $ 1,156,279 $ 1,602,490 $ 355,882
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . 1,374,989 707,899 244,380
ESOP and other stock-based compensation earned. . . . . . 106,015 87,780 402,784
Deferred income tax expense (benefit) . . . . . . . . . . 292,546 (296,228) (60,553)
Proceeds from sale of loans . . . . . . . . . . . . . . . 19,448,121 14,095,351 898,658
Originations of loans held-for-sale . . . . . . . . . . . (17,759,391) (20,102,155) (946,608)
Realized loss/(gain) on:
Sale of real estate loans acquired through foreclosure. . 5,283 133,451 13,717
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . (34,442) 120,482 6,010
Available-for-sale investment securities. . . . . . . . . (389,779) (749,237) (2,175)
Depreciation. . . . . . . . . . . . . . . . . . . . . . . 469,474 465,591 475,328
Amortization of intangible assets . . . . . . . . . . . . 39,259 315,755 315,756
Amortization of deferred financing costs. . . . . . . . . 15,100 - -
Increase in surrender value of life insurance . . . . . . (179,246) (245,908) (119,288)
Net accretion of premiums and discounts
on investment securities. . . . . . . . . . . . . . . . . (27,369) (4,185) 3,577
Decrease (increase) in interest receivable. . . . . . . . 131,221 213,242 (247,338)
Net change in other assets and liabilities. . . . . . . . (624,018) 426,771 1,608,477
-----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities. . . . 4,024,042 (3,228,901) 2,948,607
======================================================================================================
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale. . . (21,452,772) (2,152,878) (8,729,396)
Purchase of investment securities held-to-maturity. . . . - - (15,987)
Proceeds from maturities and principle reductions of
investment securities available-for-sale. . . . . . . . . 11,272,921 5,078,515 2,551,005
Proceeds from sale:
Available-for-sale investment securities. . . . . . . . . 1,847,060 9,601,934 10,377,141
Real estate acquired through foreclosure. . . . . . . . . 369,768 466,517 380,980
Sale of premises and equipment. . . . . . . . . . . . . . - - 96,626
Net cash received in branch acquisition . . . . . . . . . 21,324,109 - -
Net increase in loans . . . . . . . . . . . . . . . . . . (16,723,674) (15,281,529) (19,998,621)
Purchase of premises and equipment. . . . . . . . . . . . (911,275) (783,326) (314,099)
-----------------------------------------------------------------------------------------------------
Net cash used in investing activities. . . . . . . . . . . (4,273,863) (3,070,767) (15,652,351)
======================================================================================================
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts
savings accounts, money management deposit accounts
and escrow deposits . . . . . . . . . . . . . . . . . . . 6,423,999 10,485,060 (31,330)
Net increase (decrease) in time deposits. . . . . . . . . 2,109,923 (2,355,203) 9,054,524
Net repayments from borrowings. . . . . . . . . . . . . . (6,580,500) 2,211,000 4,350,000
Net proceeds from issuance of trust preferred securities. 4,849,000 - -
Proceeds from exercise of stock options . . . . . . . . . 138,858 62,510 -
Cash dividends. . . . . . . . . . . . . . . . . . . . . . (415,145) (531,086) (614,612)
Treasury stock purchased. . . . . . . . . . . . . . . . . (129,865) (134,000) (179,750)
-----------------------------------------------------------------------------------------------------
Net cash provided by financing activities. . . . . . . . . 6,396,270 9,738,281 12,578,832
=======================================================================================================
Increase in cash and cash equivalents. . . . . . . . . . . 6,146,449 3,438,613 (124,912)
Cash and cash equivalents at beginning of period . . . . . 7,593,956 4,155,343 4,280,255
-------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period . . . . . . . . $ 13,740,405 $ 7,593,956 $ 4,155,343
=======================================================================================================
CASH PAID DURING THE PERIOD FOR:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . $ 7,122,065 $ 8,555,605 $ 8,463,078
Income taxes paid . . . . . . . . . . . . . . . . . . . . 850,000 632,500 73,000
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate. . . . . . . . . . 1,138,300 348,113 637,633
Increase in unrealized gains and losses on
available-for-sale investments securities . . . . . . . . (333,456) (83,192) 1,544,687
Securitization of loans held as an investment security. . - 1,355,095 -
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid . . . . . . . . . . . . . . 82,365 71,243 156,090
The accompanying notes are an integral part of the consolidated financial statements.
25
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The accompanying consolidated financial statements include the accounts of Pathfinder Bancorp, Inc. (the "Company") and its wholly owned
subsidiaries, Pathfinder Bank (the "Bank") and Pathfinder Statutory Trust I. Pathfinder Statutory Trust I was formed in 2002 for the purpose of
issuing mandatorily redeemable convertible securities which are considered Tier I capital under regulatory capital adequacy requirements (See
Note 17). The Bank has three wholly owned operating subsidiaries, Pathfinder Commercial Bank, Whispering Oaks Development Inc. and
Pathfinder REIT, Inc. All inter-company accounts and activity have been eliminated in consolidation. The Company has six full service offices
located in Oswego County. The Company is primarily engaged in the business of attracting deposits from the general public in the Company's
market area, and investing such deposits, together with other sources of funds, in loans secured by one-to-four family residential real estate,
commercial real estate, business assets and investment securities.
Pathfinder Bancorp, M.H.C., (the "Holding Company") a mutual holding company whose activity is not included in the accompanying
financial statements, owns approximately 60.6% of the outstanding common stock of the Company. Salaries, employee benefits and rent
approximating $163,000, $160,000 and $141,000 were allocated from the Company to Pathfinder Bancorp, M.H.C. during 2002, 2001 and
2000, respectively.
During July 2001, Pathfinder Bancorp, Inc. completed its conversion to a federal charter. The charter conversion was completed pursuant to
plans of charter conversion which were approved by the Office of Thrift Supervision. Upon completion of the conversion, authorized shares
were increased from 9,000,000 to 10,000,000 with a change in par value of the outstanding shares of common stock from $0.10 per share to
$0.01 per share on a one-for-one basis. The change in par value did not affect any of the existing rights of shareholders and has been recorded
as an adjustment to additional paid-in-capital and common stock. In addition, 1,000,000 shares of preferred stock have been authorized, none of
which are outstanding.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Management has identified the allowance for loan losses to be the accounting area that requires the most
subjective and complex judgements, 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' judgements based on information available to them at the time of their examinations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits (with original maturity of three months or
less) and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. The estimated fair value of cash and cash
equivalents approximates carrying value.
INVESTMENT SECURITIES
The Company classifies investment securities as held-to-maturity or available-for-sale. Held to maturity securities are those that the Company
has the positive intent and ability to hold to maturity, and are reported at cost, adjusted for amortization of premiums and accretion of
discounts. 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
securities. In conjunction with the adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", on January 1, 2001, the Company reclassified its held-to-maturity securities with a cost and fair value of $129,000
into available-for-sale.
26
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
Gains or losses on investment security transactions are based on the amortized cost of the specific securities sold. Fair values for investment
securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments. Premiums and discounts on securities are amortized and accreted into income using the straight-line method
over the period to first call or maturity.
The Company monitors investment securities for impairment on a quarterly basis by analyzing security credit ratings and related fair market
values. When significant declines in fair market values or credit ratings are determined to be other than temporary, appropriate action is taken.
MORTGAGE LOANS HELD-FOR-SALE
Mortgage loans held-for-sale are carried at the lower of cost or fair value. Fair value is determined in the aggregate. As of December 31, 2002,
the Company had no outstanding mortgage loan forward commitments. As of December 31, 2001, the Company had approximately $6,800,000
of mortgage loan forward commitments outstanding to hedge interest rate risk on certain committed and originated loans. In 2001, the
Company recognized a loss of $187,000 on contracts settled in 2002.
LOANS
Loans are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan origination fees and costs. Interest income
is generally recognized when income is earned using the interest method. Nonrefundable loan fees received and related direct origination costs
incurred are deferred and amortized over the life of the loan using the interest method, resulting in a constant effective yield over the loan term.
Deferred fees are recognized into income and deferred costs are charged to income immediately upon prepayment of the related loan.
For variable rate loans that reprice frequently and with no significant credit risk, fair values approximate carrying values. Fair values for fixed
rate loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value.
ALLOWANCE FOR LOAN LOSSES
The Company periodically evaluates the adequacy of the allowance for loan losses in order to maintain the allowance at a level that is sufficient
to absorb probable credit losses. Management's evaluation of the adequacy of the allowance is based on a review of the Company's historical
loss experience, known and inherent risks in the loan portfolio and an analysis of the levels and trends of delinquencies and charge-offs.
A loan is considered impaired, based on current information and events, if it is probable the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is
generally based upon the present value of future cash flows discounted at the historical effective rate, except that all collateral-dependent loans
are measured for impairment based on fair values of collateral.
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.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated
useful lives of the related assets, ranging up to 39 years for premises and 10 years for equipment. Maintenance and repairs are charged to
operating expenses as incurred. The asset cost and accumulated depreciation are removed from the accounts for assets sold or retired and any
resulting gain or loss is included in the determination of income.
27
OTHER REAL ESTATE
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
Properties acquired through foreclosure, or by deed in lieu of foreclosure, are carried at the lower of cost (fair value at the date of foreclosure)
or fair value less estimated disposal costs. Write downs of, and expenses related to other real estate holdings included in noninterest expense
were $155,000, $99,000 and $201,000 in 2002, 2001 and 2000, respectively.
INTANGIBLE ASSETS
Intangible assets represent core deposit intangibles and goodwill arising from acquisitions. Core deposit intangibles represent the premium the
Company has paid for deposits acquired in excess of the cost incurred had the funds been purchased in the capital markets. Core deposit
intangibles are amortized on a straight-line basis over a period of five years. Goodwill represents the excess cost of an acquisition over the fair
value of the net assets acquired. On January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other Intangible Assets," and SFAS 147,
"Accounting for Certain Acquisitions of Banking and Thrift Institutions." Under the provisions of SFAS 142 and SFAS 147, goodwill is no
longer ratably amortized into the income statement over an estimated life, but rather is tested at least annually for impairment using fair value
methodologies. Prior to the adoption of SFAS 142 and SFAS 147, the Company's goodwill was amortized on a straight-line basis over 15
years.
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 Company uses a valuation model that calculates the present value of future cash flows to
determine the fair value of servicing rights. In using this valuation method, the Company incorporated assumptions that market participants
would use in estimating future net servicing income, which included estimates of the cost of servicing per loan, the discount rate, and
prepayment speeds. The carrying value of the originated mortgage servicing rights is periodically evaluated for impairment using these same
market assumptions.
DEPOSITS
Interest on deposits is accrued and paid to the depositors or credited to the depositors accounts monthly.
Fair values disclosed for demand, variable rate money management accounts and certificates of deposit approximate their carrying values at the
reporting date. Fair values for fixed rate time deposits and savings are estimated using a discounted cash flow calculation that applies interest
rates currently being offered on similar certificates to a schedule of aggregated expected monthly maturities on time deposits. The carrying
value of accrued interest approximates fair value.
STOCK-BASED COMPENSATION
The Company accounts for stock awards issued to directors, officers and key employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25. This method requires that compensation expense be recognized to the extent that the fair value of
the stock exceeds the exercise price of the stock award at the grant date. The Company generally does not recognize compensation expense
related to stock awards because the stock awards generally have fixed terms and exercise prices that are equal to or greater than the fair value
of the Company's common stock at the grant date.
Pro forma amounts of net income and earnings per share under Statement of Financial Accounting Standards No. 123 are as follows:
2002 2001 2000
-----------------------------------------------------------------------------
Net Income:
As reported $1,156,279 $1,602,490 $355,882
Pro forma $1,047,513 $1,456,481 $228,764
Earnings per share: Basic Diluted Basic Diluted Basic Diluted
------------------------------------------------------------------------------
As reported . . . . $ 0.45 $ 0.44 $ 0.62 $ 0.62 $ 0.14 $ 0.14
Pro forma . . . . . $ 0.41 $ 0.40 $ 0.57 $ 0.56 $ 0.09 $ 0.09
28
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
The fair value of these options was estimated at the date of grant using a Black-Scholes options pricing model with the following assumptions:
risk free interest rate - 5.0% in 2002 and 2001 and 4.6% in 2000; dividend yield - 2.0% in 2002 and 2001 and 2.2% in 2000; market price
volatility - 52.4% in 2002 and 2001 and 93.6% in 2000. An assumed weighted average option life of 6 years has been utilized for each year.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
Therefore, the foregoing pro forma results are not likely to be representative of the effects of reported net income of future periods due to
additional years of vesting. The weighted-average fair value per share of discounted options during 2001 is $15.38. No options were granted
during 2002.
RETIREMENT BENEFITS
The Company has established tax qualified retirement plans covering substantially all full-time employees and certain part-time employees.
Pension expense under these plans is charged to current operations and consists of several components of net pension cost based on various
actuarial assumptions regarding future experience under the plans. In addition, the Company has unfunded deferred compensation and
supplemental executive retirement plans for selected current and former employees and officers that provide benefits that cannot be paid from a
qualified retirement plan due to Internal Revenue Code restrictions. These plans are nonqualified under the Internal Revenue Code, and assets
used to fund benefit payments are not segregated from other assets of the Company, therefore, in general, a participant's or beneficiary's claim
to benefits under these plans is as a general creditor.
TREASURY STOCK
Treasury stock purchases are recorded at cost. In 2002 and 2001, the Company purchased 11,000 and 10,000 shares of treasury stock at an
average cost of $11.86 and $13.40 per share, respectively. On December 19, 2002, the Company announced its fourth share repurchase
program for the purchase of up to 102,000 shares. The Company considers the common stock to be an attractive investment in view of the
current price at which the common stock is trading relative to the Company's earnings per share, book value per share, and general market and
economic factors.
INCOME TAXES
Provisions for income taxes are based on taxes currently payable or refundable and deferred income taxes on temporary differences between
the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are reported in the
financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to
be realized or settled.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding throughout each
year. Diluted earnings per share gives effect to weighted average shares which would be outstanding assuming the exercise of issued stock
options using the treasury stock method.
FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," requires disclosure of fair value information of financial instruments,
whether or not recognized in the consolidated statement of condition, for which it is practicable to estimate that value. In cases where quoted
market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair
values estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. The carrying amounts and estimated fair values of financial instruments at December 31, are as follows:
29
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
2002 2001
-----------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amounts Fair Values Amounts Fair Values
------------------------------------------------------------------------------------
Cash and cash equivalents. . $ 13,740,000 $ 13,740,000 $ 7,594,000 $ 7,594,000
Investment securities. . . . 62,506,000 62,506,000 53,422,000 53,422,000
Mortgage loans held-for-sale 3,617,000 4,004,000 5,271,000 5,450,000
Loans. . . . . . . . . . . . 180,482,000 188,459,000 164,267,000 162,458,000
Accrued interest receivable. 1,334,000 1,334,000 1,465,000 1,465,000
Deposits . . . . . . . . . . 204,522,000 198,005,000 169,589,000 163,297,000
Borrowed funds . . . . . . . 42,860,000 45,361,000 49,441,000 49,763,000
Trust preferred obligation . 5,000,000 5,793,000 - -
====================================================================================
RECLASSIFICATION
Certain amounts from 2001 and 2000 have been reclassified to conform to the current year presentation. These reclassifications had no affect
on net income as previously reported.
NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS
On October 1, 2002, Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 147,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions." Statement 147 changes how the Company accounts for goodwill
arising from branch acquisitions. Under previous FASB rulings, the goodwill arising from branch acquisitions was classified as an
"unidentifiable intangible asset" and therefore subject to amortization. Statement 147 now classifies this intangible as goodwill. In accordance
with the provisions of Statement 147, previously issued statements were restated to remove the amortization expense recorded on the goodwill
since January 1, 2002. Goodwill is not subject to amortization, but will be reviewed annually for impairment.
The impact of the pronouncement on the financial statements is as follows:
For the Twelve Months Ended December 31:
-------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------------------------------------------------
(in thousands except for Earnings per Share Data)
Reported net income . . . . . . . . . . . . . . . $1,156 $1,602 $ 356
Add back: goodwill amortization, net of tax . . . - 193 193
-------------------------------------------------------------------------------------------
Adjusted net income . . . . . . . . . . . . . . . $1,156 $1,795 $ 549
===========================================================================================
Basic earnings per share:
Reported net income . . . . . . . . . . . . . . . $ 0.45 $ 0.62 $0.14
Goodwill amortization, net of tax . . . . . . . . - 0.08 0.08
-------------------------------------------------------------------------------------------
Adjusted net income . . . . . . . . . . . . . . . $ 0.45 $ 0.70 $0.22
===========================================================================================
Diluted earnings per share:
Reported net income . . . . . . . . . . . . . . . $ 0.44 $ 0.62 $0.14
Goodwill amortization, net of tax . . . . . . . . - 0.07 0.08
-------------------------------------------------------------------------------------------
Adjusted net income . . . . . . . . . . . . . . . $ 0.44 $ 0.69 $0.22
===========================================================================================
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which provides
alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of FASB Statement No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. This statement also amends
APB Opinion No. 28, "Interim Financial Reporting", to require disclosure about those effects in interim financial information. The Company
will continue to account for stock-based compensation in accordance with Accounting Principles Board (APB) Opinion 25, "Accounting for
Stock Issued to Employees".
30
NOTE 3: ACQUISITION
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
On October 25, 2002, the Company's subsidiary, Pathfinder Bank, acquired the Lacona, New York branch of Cayuga Bank. In conjunction
with the acquisition, the Bank formed a limited-purpose commercial bank subsidiary, Pathfinder Commercial Bank, to serve the depository
needs of public entities in its market area and to assume the municipal deposit liabilities of the Lacona branch. The transaction included
approximately $26,400,000 in deposits, $2,300,000 in loans and $430,000 in vault cash and facilities and equipment. The acquisition reflects a
premium on deposits liabilities assumed of approximately $2,400,000. The results of the Lacona branch operation have been included in the
consolidated financial statements since the date of acquisition. As a result of the acquisition, the Company has expanded its service area and
now has the ability to serve the needs of public entities in the market area.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date:
December 31, 2002
------------------------------------------------
Cash. . . . . . . . . . . . $ 21,558,800
Loans receivable. . . . . . 2,260,000
Reserve for loans . . . . . (56,500)
------------------------------------------------
Net loans receivable. . . . 2,203,500
Bank premises and equipment 251,000
Other assets. . . . . . . . 9,700
Intangible assets . . . . . 2,376,000
------------------------------------------------
Total assets. . . . . . . . 26,399,000
===============================================
Deposits. . . . . . . . . . 26,399,000
------------------------------------------------
Total liabilities. . . . . $ 26,399,000
===============================================
Intangible assets include $1,100,000 in core deposit intangibles amortized over a weighted-average useful life of 5 years. Accumulated
amortization approximated $39,000 at December 31, 2002. The remaining $1,300,000 in intangible assets represents goodwill. Goodwill and
the core deposit intangible will be deductible for tax purposes.
NOTE 4: INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are summarized as follows:
December 31, 2002
--------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------------------------
Available-for-Sale:
Bond investments:
US Treasury and Agencies. . . . . . . . . $ 4,378,243 $ 87,728 $ (1,514) $ 4,464,457
State and Political Subdivisions. . . . . 8,549,215 337,409 (22,719) 8,863,905
Corporate . . . . . . . . . . . . . . . . 15,375,316 429,445 (534,501) 15,270,260
Mortgage-backed . . . . . . . . . . . . . 24,439,493 727,012 (6,676) 25,159,829
---------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . 52,742,267 1,581,594 (565,410) 53,758,451
Stock investments:
Federal Home Loan Bank and Other. . . . . 9,295,102 - (548,009) 8,747,093
---------------------------------------------------------------------------------------------
Total Available-for-Sale. . . . . . . . . 62,037,369 $1,581,594 $(1,113,419) $62,505,544
====================================
Net unrealized gain on available-for-Sale 468,175
-------------------------------------------------------
Grand Total Carrying Value. . . . . . . . $62,505,544
=======================================================
31
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
December 31, 2001
--------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------------------
Available-for-Sale:
Bond investments:
US Treasury and Agencies. . . . . . . . . $ 5,970,651 $ 86,809 $ (1,447) $ 6,056,013
State and Political Subdivisions. . . . . 6,011,590 250,502 (28,360) 6,233,732
Corporate . . . . . . . . . . . . . . . . 20,949,051 286,489 (1,121,445) 20,114,095
Mortgage-backed . . . . . . . . . . . . . 14,121,236 438,535 (11,000) 14,548,771
--------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . 47,052,528 1,062,335 (1,162,252) 46,952,611
Stock investments:
Federal Home Loan Bank and Other. . . . . 6,234,902 234,636 - 6,469,538
--------------------------------------------------------------------------------------------
Total Available-for-Sale. . . . . . . . . 53,287,430 $1,296,971 $(1,162,252) $53,422,149
=====================================
Net unrealized gain on available-for-Sale 134,719
------------------------------------------------------
Grand Total Carrying Value. . . . . . . . $53,422,149
=======================================================
Gross gains of $665,000, $759,000 and $230,000 for 2002, 2001 and 2000, respectively and gross losses of $9,000 and $228,000 for 2001 and
2000, respectively were realized on sales and calls of securities. In 2002, the Company recognized a $275,000 impairment loss on a corporate
debt security.
Investment securities with a carrying value of $11,700,000 and cash and cash equivalents with a carrying value of $4,410,000 at December 31,
2002 were pledged to collateralize certain deposit and borrowing arrangements.
The amortized cost and estimated fair value of debt investments at December 31, 2002 by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
Amortized Estimated
Cost Fair Value
----------------------------------------------------------------
Due in one year or less. . . . . . . . $ 3,734,989 $ 3,796,142
Due after one year through five years. 13,317,470 13,814,737
Due after five years through ten years 4,859,722 4,764,354
Due after ten years. . . . . . . . . . 6,390,593 6,223,390
Mortgage-backed securities . . . . . . 24,439,493 25,159,828
----------------------------------------------------------------
Totals . . . . . . . . . . . . . . . . $52,742,267 $53,758,451
================================================================
NOTE 5: LOANS
Major classifications of loans at December 31, are as follows:
2002 2001
-------------------------------------------------------
Real estate mortgages:
Conventional. . . . . . . $115,171,923 $102,955,313
Construction. . . . . . . 4,388,792 3,883,849
Commercial. . . . . . . . 32,657,177 30,454,798
-------------------------------------------------------
152,217,892 137,293,960
-------------------------------------------------------
32
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
Other loans:
Consumer. . . . . . . . . 3,718,774 3,223,780
Home Equity/2nd Mortgage. 11,151,317 9,262,035
Passbook loans. . . . . . 198,113 129,353
Lease financing . . . . . 431,555 244,230
Commercial. . . . . . . . 12,764,633 14,113,405
-------------------------------------------------------
28,264,392 26,972,803
-------------------------------------------------------
Total loans . . . . . . . 180,482,284 164,266,763
-------------------------------------------------------
Less:
Allowance for loan losses (1,480,874) (1,679,215)
-------------------------------------------------------
Loans receivable, net . . $179,001,410 $162,587,548
=======================================================
The Company grants mortgage and consumer loans to customers throughout Oswego and parts of Onondaga counties. Although the Company
has a diversified loan portfolio, a substantial portion of its debtor's ability to honor their contracts is dependent upon the county's employment
and economic conditions.
The amount of loans on which the Company has ceased accruing interest aggregated approximately $1,711,000 and $2,120,000 at December
31, 2002 and 2001, respectively. The amount of interest not recorded related to these loans was approximately $141,000, $118,000 and
$132,000 for 2002, 2001 and 2000, respectively.
The following represents the approximate activity associated with loans to officers and directors during the fiscal year ending December 31,
2002:
Balance at beginning of year $3,614,000
Originations 4,157,000
Principal payments (2,430,000)
------------------------------------------------
Balance at end of year $5,341,000
================================================
Mortgage loans serviced for others are not included in the accompanying consolidated statements of condition. The unpaid principal balances
of mortgage loans serviced for others was approximately $41,428,000 and $29,056,000 at December 31, 2002 and 2001, respectively. Included
in other assets is approximately $200,000 and $132,000 of mortgage servicing rights at December 31, 2002 and 2001, respectively.
NOTE 6: ALLOWANCES FOR LOAN LOSSES
Changes in the allowance for loan losses for the year ended December 31, are summarized as follows:
2002 2001 2000
--------------------------------------------------------------------
Balance at beginning of year $ 1,679,215 $1,273,707 $1,149,677
Recoveries credited. . . . . 31,916 62,330 19,615
Provision for loan losses. . 1,374,989 707,899 244,380
Reserve on acquired loans. . 56,500 - -
Loans charged off. . . . . . (1,661,746) (364,721) (139,965)
--------------------------------------------------------------------
Balance at end of year . . . $ 1,480,874 $1,679,215 $1,273,707
====================================================================
At December 31, 2002, 2001 and 2000, the Company had no impaired loans for which specific valuation allowances were recorded.
33
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
NOTE 7: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, is as follows:
2002 2001
--------------------------------------------------------
Land . . . . . . . . . . . . . . $ 674,773 $ 631,773
Buildings. . . . . . . . . . . . 4,287,046 3,997,368
Furniture, fixture and equipment 4,606,257 3,643,165
Construction in progress . . . . 309,279 442,286
--------------------------------------------------------
9,877,355 8,714,592
Less: Accumulated depreciation . 4,255,184 3,785,159
--------------------------------------------------------
$5,622,171 $4,929,433
========================================================
NOTE 8: DEPOSITS
A summary of amounts due to depositors at December 31, is shown as follows:
2002 2001
---------------------------------------------------------------
Savings accounts . . . . . . . . . $ 65,517,057 $ 60,816,000
Time accounts. . . . . . . . . . . 86,430,445 74,644,437
Money management accounts. . . . . 19,765,014 4,416,928
Demand deposit interest-bearing. . 15,404,423 15,231,309
Demand deposit noninterest-bearing 15,764,382 13,035,489
Mortgage escrow funds. . . . . . . 1,640,784 1,444,984
--------------------------------------------------------------
$204,522,105 $169,589,147
==============================================================
Time deposits with balances in excess of $100,000 amounted to approximately $15,828,000 and $10,214,000 at December 31, 2002 and 2001,
respectively. The approximate maturity of time deposits at December 31, is as follows:
2002 2001
------------------ --------------------------------------------
Year of Maturity Amount Percent Amount Percent
---------------------------------------------------------------
1. . . . . . . . $48,721,000 56.4% $51,172,000 68.5%
2. . . . . . . . 14,101,000 16.3% 11,500,000 15.4%
3. . . . . . . . 10,520,000 12.2% 5,213,000 7.0%
4. . . . . . . . 6,252,000 7.2% 2,295,000 3.1%
5. . . . . . . . 2,608,000 3.0% 1,998,000 2.7%
Thereafter . . . 4,228,000 4.9% 2,466,000 3.3%
---------------------------------------------------------------
$86,430,000 100.0% $74,644,000 100.0%
===============================================================
NOTE 9: BORROWED FUNDS
The composition of borrowings at December 31 are as follows:
2002 2001
-------------------------------------------------------------------------------
Short-term:
Repurchase agreements, Morgan Stanley . . . . . . . . $ - $ 2,668,000
FHLB advances . . . . . . . . . . . . . . . . . . . . 9,700,000 17,550,000
--------------------------------------------------------------------------------
Total short-term. . . . . . . . . . . . . . . . . . . 9,700,000 20,218,000
--------------------------------------------------------------------------------
Long-term:
FHLB Repurchase agreements. . . . . . . . . . . . . . 3,400,000 912,500
Advances. . . . . . . . . . . . . . . . . . . . . . . 29,760,000 28,310,000
--------------------------------------------------------------------------------
Total long-term . . . . . . . . . . . . . . . . . . . 33,160,000 29,222,500
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures of the Company. . . . . . . . 5,000,000 -
--------------------------------------------------------------------------------
Total borrowings. . . . . . . . . . . . . . . . . . . $47,860,000 $49,440,500
================================================================================
34
The principal balance, interest rate and maturity of the above borrowings at December 31, 2002 is as follows:
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
Term Principal Rates
--------------------------------------------------------------------------------
Short-term:
Advances with FHLB
due within 3 months . . . . . . . . . . . . . . . . . $ 2,700,000 2.52%-5.61%
due within 3-6 months . . . . . . . . . . . . . . . . 2,000,000 3.82%-4.76%
due within 6 months to 1 year . . . . . . . . . . . . 5,000,000 3.65%-7.13%
--------------------------------------------------------------------------------
Total short-term borrowings . . . . . . . . . . . . . $ 9,700,000
================================================================================
Long-term:
Repurchase agreements with FHLB . . . . . . . . . . . $ 3,400,000 5.56%-5.85%
--------------------------------------------------------------------------------
Advances with FHLB
due within 2 years. . . . . . . . . . . . . . . . . . 5,500,000 3.53%-5.43%
due within 3 years. . . . . . . . . . . . . . . . . . 3,000,000 4.15%-5.00%
due within 4 years. . . . . . . . . . . . . . . . . . 7,000,000 4.13%-5.32%
due after 5 years . . . . . . . . . . . . . . . . . . 14,260,000 4.70%-6.00%
--------------------------------------------------------------------------------
Total advances with FHLB. . . . . . . . . . . . . . . 29,760,000
--------------------------------------------------------------------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures of the Company. . . . . . . . 5,000,000 LIBOR +3.45%
--------------------------------------------------------------------------------
Total long-term borrowings. . . . . . . . . . . . . . $38,160,000
================================================================================
Other information related to short term borrowings is as follows:
2002 2001
---------------------------------------------------------------------
Maximum outstanding at any month end . . . $ 9,700,000 $20,218,000
Average amount outstanding during the year 13,716,000 15,240,000
Average interest rate during the year. . . 3.75% 4.56%
The repurchase agreements with the Federal Home Loan Bank ("FHLB") are collateralized by certain investment securities, real estate
mortgages and cash which had a carrying value of $3,401,000 at December 31, 2002. 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 2002
approximated 1.64%. At December 31, 2002, $12,466,000 was available under the line of credit. In addition to the overnight line of credit
program, the Company also has access to the FHLB's Term Advance Program under which it can borrow at various terms and interest rates.
Residential mortgage loans with a carrying value of $91,324,000 have been pledged by the Company under a blanket collateral agreement to
secure the Company's line of credit and term borrowings.
On June 26, 2002, the Company formed a wholly owned subsidiary, Pathfinder Statutory Trust I, a Connecticut business trust. The Trust issued
$5,000,000 of 30 year floating rate Company-obligated pooled capital securities of Pathfinder Statutory Trust I. The Company borrowed the
proceeds of the capital securities from its subsidiary by issuing floating rate junior subordinated deferrable interest debentures having
substantially similar terms. The capital securities mature in 2032 and are treated as Tier 1 capital by the Federal Deposit Insurance Company
and the Office of Thrift Supervision. The capital securities of the trust are a pooled trust preferred fund of Preferred Term Securities VI, Ltd.
and are tied to the 3 month LIBOR plus 3.45% (4.85% at December 31, 2002) with a five year call provision. All of these securities are
guaranteed by the Company. The Company capitalized $151,000 of deferred financing costs associated with the debt issuance which is being
amortized on a straight line basis over the 5 year period to call date.
35
NOTE 10: EMPLOYEE BENEFITS
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
The Company has a noncontributory defined benefit pension plan covering substantially all employees. In addition, the Company provides
certain health and life insurance benefits for eligible retired employees. 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 plan's benefit obligation, fair value of plan assets and prepaid (accrued) benefit (cost) as of
December 31, 2002 and 2001:
Pension Benefits Postretirement Benefits
------------------------------------------------
2002 2001 2002 2001
------------------------------------------------
Change in benefit obligations:
Benefit obligation at beginning of year . . . . $2,479,215 $2,206,887 $ 362,456 $ 372,018
Service cost. . . . . . . . . . . . . . . . . . 118,697 85,697 1,708 1,538
Interest cost . . . . . . . . . . . . . . . . . 183,781 171,492 22,461 21,323
Actuarial gain. . . . . . . . . . . . . . . . . 402,687 161,168 14,762 5,715
Benefit paid. . . . . . . . . . . . . . . . . . (157,424) (146,029) (33,811) (31,750)
Plan amendment. . . . . . . . . . . . . . . . . 4,140 - - (6,388)
-------------------------------------------------------------------------------------------------
Benefit obligation at end of year . . . . . . . $3,031,096 $2,479,215 $ 367,576 $ 362,456
-------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year. $2,598,427 $3,187,163 $ - $ -
Actual loss on plan assets. . . . . . . . . . . (328,553) (442,707) - -
Benefits paid . . . . . . . . . . . . . . . . . (157,424) (146,029) - -
Employer contributions. . . . . . . . . . . . . 380,074 - - -
-------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year. . . . $2,492,524 $2,598,427 $ - $ -
-------------------------------------------------------------------------------------------------
Components of prepaid/accrued benefit cost
Funded (unfunded) status. . . . . . . . . . . . $ (538,572) $ 119,212 $(367,576) $(362,456)
Unrecognized prior service cost . . . . . . . . 121 1,080 - -
Unrecognized transition obligation. . . . . . . - - 173,546 192,065
Unrecognized actuarial net loss . . . . . . . . 1,380,111 436,512 45,604 30,309
-------------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit/(cost). . . . . . . . $ 841,660 $ 556,804 $(148,426) $(140,082)
=================================================================================================
The increase in unrecognized net actuarial loss in 2002 compared with 2001 primarily resulted from the actual return on plan assets being less
than the expected return on plan assets in 2002, combined with the reduction of the discount rate to 6.50% from 7.25% in 2001.
The significant assumptions used in determining the benefit obligation as of December 31, 2002 and 2001 is as follows:
Weighted average discount rate . . . . . . . . . 6.50% 7.25% 6.00% 6.50%
Expected long term rate of return on plan assets 9.00% 9.00% - -
Rate of increase in future compensation levels . 4.00% 4.50% - -
Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plans. The annual rates
of increase in the per capita cost of covered medical and prescription drug benefits for year-end calculations were assumed to be 9.0% and
13.0%, respectively. This rate was assumed to decrease gradually to 5.0% in 2010 and remain at that level thereafter. A one-percentage point
change in the health care cost trend rates would have the following effects:
36
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
1 Percentage 1 Percentage
Point Point
Increase Decrease
-----------------------------------------------------------------------
Effect on total of service and interest
cost components . . . . . . . . . . . . . . $ 2,005 $ (1,818)
Effect on postretirement benefit obligation 29,122 (26,706)
Pension plan assets consist primarily of temporary cash investments and listed stocks and bonds.
The composition of the net periodic benefit plan cost (benefit) for the years ended December 31, 2002, 2001 and 2000 is as follows:
Pension Benefits
----------------------------------------------------------------------------------
2002 2001 2000
----------------------------------------------------------------------------------
Service cost. . . . . . . . . . . . . . . . . . $ 118,697 $ 85,697 $ 96,079
Interest cost . . . . . . . . . . . . . . . . . 183,781 171,492 201,808
Amortization of transition obligation . . . . . - - -
Amortization of unrecognized prior service cost 959 959 1,050
Amortization of gains and losses. . . . . . . . 26,542 (11,922) (4,696)
Expected return on plan assets. . . . . . . . . (234,761) (280,516) (274,813)
Net affect of special termination benefits. . . - - (28,282)
-----------------------------------------------------------------------------------
Net periodic benefit plan cost. . . . . . . . . $ 95,218 $ (34,290) $ (8,854)
===================================================================================
Postretirement Benefits
----------------------------------------------------------------------------------
2002 2001 2000
----------------------------------------------------------------------------------
Service cost. . . . . . . . . . . . . . . . . . $ 1,705 $ 1,538 $ 3,287
Interest cost . . . . . . . . . . . . . . . . . 22,461 21,323 23,536
Amortization of transition obligation . . . . . 18,522 18,522 18,978
Amortization of unrecognized prior service cost - - -
Amortization of gains and losses. . . . . . . . 162 158 247
Expected return on plan assets. . . . . . . . . - - -
Net affect of special termination benefits. . . - - -
----------------------------------------------------------------------------------
Net periodic benefit plan cost. . . . . . . . . $42,850 $41,541 $46,048
===================================================================================
During the first quarter of 2000, the Company offered early retirement benefits for all employees satisfying the established provisions. Total
plan expense for 2000 includes a one time charge of $360,000 to reflect the early retirements benefits, as well as, one time credits for plan
curtailment of $189,000 and plan settlement of $199,000 resulting from the settlement of the related participants' obligations.
The Company also offers a 401(k) plan to its employees. Contributions to this plan were $74,000, $52,000 and $41,000 for 2002, 2001 and
2000, respectively.
NOTE 11: DEFERRED COMPENSATION AND SUPPLEMENTAL RETIREMENT PLANS
The Company maintains optional deferred compensation plans for its directors whereby fees normally received are deferred and paid by the
Company based upon a payment schedule commencing at age 65 and continue monthly for 10 years. Directors must serve on the board for a
minimum of 5 years to be eligible for the Plan. At December 31, 2002 and 2001, other liabilities include approximately $1,143,000 and
$1,116,000, respectively, relating to deferred compensation. Deferred compensation expense for the years ended December 31, 2002, 2001 and
2000 amounted to approximately $113,00, $94,000 and $68,000, respectively.
The Company has a supplemental executive retirement plan for the benefit of certain executive officers. At December 31, 2002 and 2001, other
liabilities include approximately $495,000 and $515,000 accrued under these plans. Compensation expense includes approximately $74,000,
$110,000 and $187,000 relating to the supplemental executive retirement plan for 2002, 2001 and 2000, respectively.
NOTE 12: STOCK BASED COMPENSATION PLANS
In February 1997, the Board of Directors approved an option plan and granted options there under with an exercise price equal to the market
value of the Company's shares at the date of grant, subject to shareholder approval. Upon shareholder approval of the plans in December 1997,
the excess of market value over exercise price ($6.583) for granted options approximated $1,330,000. This amount was recorded as unearned
stock-based compensation within the shareholders' equity section of the consolidated statement of condition and was recognized as
compensation expense ratably over the 6-year vesting period through 2001. Under the Stock Option Plan, up to 132,249 options have been
authorized for grant of incentive stock options and nonqualified stock options.
37
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
All options have a 10-year term and vest and become exercisable ratably over a 6-year period. On December 19, 2000, the Board of Directors
accepted the voluntary rescission of all issued and unvested incentive stock options and nonstatutory stock options under the Pathfinder Bank
1997 Stock Option Plan. As a result of the voluntary rescission of the unvested portion of the stock option grants, unearned stock based
compensation was reduced by $386,000 during December of 2000. Compensation expense for the year ended December 31, 2000
approximated $204,000.
In July 2001, the Board approved the re-issuance of 38,499 stock options remaining in the 1997 Stock Option Plan. The exercise price is equal
to the market value of the Company's shares at the date of grant ($8.335). The options granted under the re-issuance will have a 10-year term
with one-third vesting upon grant date and the remaining vesting and becoming exercisable ratably over a 2-year period.
Activity in the Stock Option Plan is as follows:
Weighted
Options Average Shares
Outstanding Exercise Price Exercisable
----------------------------------------------------------------------------
Outstanding at December 31, 1999 122,250 $ 6.583 44,250
Exercised. . . . . . . . . . . . - - -
Forfeited. . . . . . . . . . . . (2,250) - -
Awards Rescinded . . . . . . . . (36,000) - -
----------------------------------------------------------------------------
Outstanding at December 31, 2000 84,000 $ 6.583 84,000
Granted. . . . . . . . . . . . . 38,499 8.335 -
Exercised. . . . . . . . . . . . (9,500) - -
----------------------------------------------------------------------------
Outstanding at December 31, 2001 112,999 $ 7.180 87,333
Exercised. . . . . . . . . . . . (20,449) 6.790 -
----------------------------------------------------------------------------
Outstanding at December 31, 2002 92,550 - 79,717
=============================================================================
During 2002, the exercise price ranged from $6.583 to $8.335. The weighted average exercise price of exercisable options was $7.093, $6.840
and $6.583 as of December 31, 2002, 2001 and 2000, respectively.
During 1997, the Company awarded 52,350 shares (52,950 authorized) of restricted stock under the Management Recognition and Retention
Plan. The market value of shares awarded at the date of grant approximated $873,000 and has been recognized in the accompanying statement
of condition as unearned stock-based compensation. Compensation expense for the year ended December 31, 2000 was $128,000. On
December 19, 2000, the Board of Directors accepted the voluntary rescission of all issued and unvested awards under the 1997 Recognition and
Retention Plan. Accordingly, the shares, which would have been earned by participants in the years 2000, 2001 and 2002 will be retained by
the Recognition Plan. The Recognition Plan currently holds 15,750 shares as non-granted. As a result of the voluntary rescission of the
unvested portion of the recognition plan grants, unearned stock based compensation was reduced by $263,000 during December of 2000.
The Bank sponsors an Employee Stock Ownership Plan (ESOP) for employees who have attained the age of 21 and who have completed a 12
month period of employment with the Bank during which they worked at least 1,000 hours. The Bank purchased 92,574 shares of common
stock on behalf of the ESOP. The purchase of the shares was funded by a loan from the Company and the unearned shares are pledged as
collateral for the borrowing. As the loan is repaid, earned shares are released from collateral and are allocated to the participants. As shares are
earned, the Bank records compensation expense at the average market price of the shares during the period. Cash dividends received on
unearned shares are allocated among the participants and are reported as compensation expense. ESOP compensation expense approximated
$113,000, $88,000 and $70,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Total earned shares at December 31,
2002, 2001 and 2000 were 71,478, 63,228 and 53,878, respectively. The estimated fair value of the remaining 21,096 unearned shares at
December 31, 2002 is $310,000. Unearned ESOP shares are not considered outstanding for purposes of computing earnings per share.
38
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
NOTE 13: INCOME TAXES
The provision for income taxes for the years ended December 31, is as follows:
2002 2001 2000
-------------------------------------------------------------
Current . . . . . . . . . . . $ 95,515 $ 839,967 $256,840
Change in valuation allowance 86,708 - -
Deferred. . . . . . . . . . . 205,838 (296,228) (60,553)
-------------------------------------------------------------
$388,061 $ 543,739 $196,287
==============================================================
The provision for income taxes includes the following:
2002 2001 2000
-------------------------------
Federal Income Tax . . . . . $388,061 $520,379 $178,388
New York State Franchise Tax - 23,360 17,899
-------------------------------------------------------------
$388,061 $543,739 $196,287
==============================================================
The components of net deferred tax asset (liability), included in other liabilities for the years ended December 31, are as follows:
2002 2001
---------------------------------------------------------------------
Assets:
Deferred compensation. . . . . . . . . . . $ 637,607 $ 643,049
Allowance for loan losses. . . . . . . . . 576,801 633,770
Postretirement benefits. . . . . . . . . . 59,904 55,211
AMT tax credit carryforward. . . . . . . . 71,079 -
Mortgage recording tax credit carryforward 202,111 73,082
NOL carryforward . . . . . . . . . . . . . 101,523 -
Valuation reserve on loans held for sale . - 81,335
Investment impairment loss . . . . . . . . 107,113 -
Other. . . . . . . . . . . . . . . . . . . 16,266 83,397
---------------------------------------------------------------------
1,772,404 1,569,844
Liabilities:
Prepaid pension. . . . . . . . . . . . . . (327,826) (220,550)
IIMF reserve . . . . . . . . . . . . . . . (190,235) (193,459)
Depreciation . . . . . . . . . . . . . . . (194,022) (92,320)
Accretion. . . . . . . . . . . . . . . . . (65,267) (48,019)
Loan origination fees. . . . . . . . . . . (100,715) (38,206)
Intangible assets. . . . . . . . . . . . . (123,071) -
Investment securities. . . . . . . . . . . (187,270) (54,070)
---------------------------------------------------------------------
(1,188,406) (646,624)
---------------------------------------------------------------------
Net deferred tax asset
before valuation allowance . . . . . . . . $ 583,998 $ 923,220
---------------------------------------------------------------------
Less: valuation allowance. . . . . . . . . (86,708) -
---------------------------------------------------------------------
Net deferred tax asset . . . . . . . . . . $ 497,290 $ 923,220
======================================================================
The Company's net operating loss can be carried back 5 years and carried forward 20 years. In addition, the Company has a New York State
mortgage recording tax credit which has no carried forward limitations. As of December 31, 2002, the Company has recognized a 100%
valuation allowance on a New York State net operating loss carryforward in the amount of $187,000. The valuation has been provided to
account for the potential limitations on the utilization of these tax benefits. For all other deferred tax assets, the Company has determined that
no valuation allowance is necessary as it is more likely than not deferred tax assets will be realized through carryback to taxable income in
prior years, future reversals of existing temporary differences and through future taxable income.
39
A reconciliation of the federal statutory income tax rate to the effective income tax rate at December 31, is as follows:
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
2002 2001 2000
-------------------------------------------------------
Federal statutory income tax rate 34.0% 34.0% 34.0%
State tax . . . . . . . . . . . . (5.1) (2.4) (17.4)
Tax-exempt interest income
and other, net. . . . . . . . . . (9.4) (6.3) 18.9
Change in valuation allowance . . 5.6 - -
-------------------------------------------------------
Effective income tax rate . . . . 25.1% 25.3% 35.5%
=======================================================
NOTE 14: EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average shares outstanding. Diluted earnings per share is computed based on the
weighted average shares outstanding adjusted for the dilutive effect of the assumed exercise of stock options during the year. The following is a
reconciliation of basic to diluted earnings per share for the years ended December 31:
Earnings Shares EPS
--------------------------------------------------------------
2002 Net Income. . . . . . . $1,156,279
Basic EPS . . . . . . . . . . 1,156,279 2,577,857 $0.45
--------------------------------------------------------------
Effect of dilutive securities
Stock options . . . . . . . . - 45,491
Diluted EPS . . . . . . . . . $1,156,279 2,623,348 $0.44
===============================================================
2001 Net Income. . . . . . . $1,602,490
Basic EPS . . . . . . . . . . 1,602,490 2,567,048 $0.62
--------------------------------------------------------------
Effect of dilutive securities
Stock options . . . . . . . . - 28,358
Diluted EPS . . . . . . . . . $1,602,490 2,595,406 $0.62
===============================================================
2000 Net Income. . . . . . . $ 355,882
Basic EPS . . . . . . . . . . 355,882 2,556,493 $0.14
--------------------------------------------------------------
Effect of dilutive securities
Stock options . . . . . . . . - 6,684
Diluted EPS . . . . . . . . . $ 355,882 2,563,177 $0.14
===============================================================
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 consist primarily of commitments to extend credit, which involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated statement of condition. The contract amount of those commitments to extend
credit reflects the extent of involvement the commitment has in this particular class of financial instrument. The Company's exposure to credit
loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the
contractual amount of the instrument.
The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.
Contract Amount
-----------------------------
Financial instruments whose contract
amounts represent credit risk at December 31, 2002 2001
-----------------------------------------------------------------------------
Commitments to extend credit . . . . . . . . . $16,085,000 $34,028,000
40
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
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. $6,200,000 and $16,800,000 of the outstanding commitments
at December 31, 2002 and 2001, respectively, represent commitments to make residential real estate and consumer loans. The fair value of
these commitments as of December 31, 2002, 2001 and 2000, approximates the contract value.
The Company leases land and leasehold improvements under agreements that expire in various years with renewal options over the next 30
years. Rental expense, included in operating expenses, amounted to $21,000, $18,000 and $16,000 in 2002, 2001 and 2000, respectively. In
October 2002, the Company entered into a land lease with one of its directors on an arms-length basis. The rent expense paid to the related
party during 2002 was $5,250. Approximate minimum rental commitments for the noncancelable operating lease is as follows:
Years Ending December 31:
---------------------------------------
2003 . . . . . . . . . . . . $ 42,000
2004 . . . . . . . . . . . . 43,000
2005 . . . . . . . . . . . . 44,500
2006 . . . . . . . . . . . . 49,000
2007 . . . . . . . . . . . . 49,750
Thereafter . . . . . . . . . 282,500
--------------------------------------
Total minimum lease payments $510,750
======================================
NOTE 16: DIVIDENDS AND RESTRICTIONS
The board of directors of Pathfinder Bancorp, M.H.C., determines whether the Holding Company will waive or receive dividends declared by
the Company each time the Company declares a dividend, which is expected to be on a quarterly basis. The Holding Company may elect to
receive dividends and utilize such funds to pay expenses or for other allowable purposes. The Office of Thrift Supervision ("OTS") has
indicated that (i) the Holding Company shall provide the OTS annually with written notice of its intent to waive its dividends prior to the
proposed date of the dividend, and the OTS shall have the authority to approve or deny any dividend waiver request; (ii) if a waiver is granted,
dividends waived by the Holding Company will be excluded from the Company's capital accounts for purposes of calculating dividend
payments to minority shareholders; (iii) the Company shall establish a restricted capital account in the amount of any dividends waived by the
Holding Company, and the amount of any dividend waived by the Holding Company shall be available for declaration as a dividend solely to
the Holding Company. During 2002, the Company paid cash dividends totaling $127,000 to the Holding Company. For the first, second and
fourth quarters ending March 31, 2002, June 30, 2002 and December 31, 2002, respectively, the Holding Company waived the right to receive
its portion of the cash dividends declared on March 19, 2002, June 18, 2002 and December 17, 2002, respectively. The Company maintains a
restricted capital account with a $570,000 balance, representing the Holding Company's portion of dividends waived as of December 31, 2002.
The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company. In
addition to state law requirements and the capital requirements discussed in Note 17, the circumstances under which the Bank may pay
dividends are limited by federal statutes, regulations and policies. The amount of retained earnings legally available under these regulations
approximated $1,800,000 as of December 31, 2002.
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 Bank's financial statements. Under capital adequacy guideline and the regulatory
41
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 2002, that the Bank meets all capital adequacy requirements to which it
is subject.
As of June 30, 2002, 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 institution's category.
To Be "Well-
Capitalized"
For Capital Under Prompt
Actual Adequacy Purposes Corrective Provisions
------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------
As of December 31, 2002:
Total Core Capital (to Risk-Weighted Assets) $24,516,853 13.6% $14,442,840 8.0% $18,053,550 10.0%
Tier 1 Capital (to Risk-Weighted Assets) . . $23,035,709 12.8% $ 7,221,422 4.0% $10,832,130 6.0%
Tier 1 Capital (to Average Assets) . . . . . $23,035,709 8.8% $10,504,140 4.0% $13,130,175 5.0%
------------------------------------------------------------------------------------------------------------
As of December 31, 2001:
Total Core Capital (to Risk-Weighted Assets) $21,441,458 12.9% $13,246,640 8.0% $16,558,300 10.0%
Tier 1 Capital (to Risk-Weighted Assets) . . $19,762,243 11.9% $ 6,623,320 4.0% $ 9,934,980 6.0%
Tier 1 Capital (to Average Assets) . . . . . $19,762,243 8.3% $ 9,534,422 4.0% $11,918,028 5.0%
------------------------------------------------------------------------------------------------------------
NOTE 18: SUBSEQUENT EVENT
On January 13, 2003, the Company reported the purchase of 160,114 shares of common stock at a price of $2.3 million, or $14.60 per share,
from Jewelcor Management Inc. ("JMI"), which is owned by Mr. Seymour Holtzman. The repurchase represents approximately 6.1% of the
Company's outstanding common stock as of December 31, 2002. At the close of trading on January 10, 2003, the trade date prior to entering
the agreement, the bid for the Company's common stock was $14.55 and the ask was $14.95. The privately negotiated transaction with JMI is
not part of the share repurchase program previously announced by the Company.
As part of the repurchase agreement, Mr. Holtzman and JMI, as well as those persons and entities who signed the Schedule 13D with Mr.
Holtzman with respect to the Company's common stock, have agreed in writing, that neither they nor their affiliates will purchase shares of the
Company's common stock for a period of five years. JMI has also agreed to stipulate to the discontinuance with prejudice of the lawsuit entitled
"Jewlecor Management, Inc. v. Pathfinder Bancorp, Inc.", and to withdraw a shareholder proposal previously submitted by JMI.
42
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
NOTE 19: PARENT COMPANY - FINANCIAL INFORMATION
The following represents the condensed financial information of Pathfinder Bancorp, Inc. for years ended December 31:
STATEMENTS OF CONDITION 2002 2001
--------------------------------------------------------------------
ASSETS
Cash . . . . . . . . . . . . . . . . . . . $ 3,185,445 $ 797,274
Investments. . . . . . . . . . . . . . . . 450,450 150,000
Receivable from bank subsidiary. . . . . . 152,415 207,912
Investment in subsidiaries . . . . . . . . 24,616,171 21,138,562
Due from subsidiaries. . . . . . . . . . . 63,608 -
Other assets . . . . . . . . . . . . . . . 46,775 73,819
--------------------------------------------------------------------
Total assets . . . . . . . . . . . . . . . $28,514,864 $22,367,567
====================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued liabilities. . . . . . . . . . . . 129,842 106,761
Due to subsidiary. . . . . . . . . . . . . - 76,057
Trust preferred debt . . . . . . . . . . . 5,155,000 -
Shareholders' equity . . . . . . . . . . . 23,230,022 22,184,749
--------------------------------------------------------------------
Total liabilities and shareholders' equity $28,514,864 $22,367,567
====================================================================
STATEMENTS OF INCOME 2002 2001 2000
---------------------------------------------------------------------------------------
Interest income. . . . . . . . . . . . . . . . . . $ 45,641 $ 42,436 $76,724
Interest expense . . . . . . . . . . . . . . . . . 142,400 - -
---------------------------------------------------------------------------------------
(Loss) income from operations. . . . . . . . . . . (96,759) 42,436 76,724
Operating expense. . . . . . . . . . . . . . . . . 71,703 65,369 72,691
Amortization of deferred financing costs . . . . . 15,100 - -
---------------------------------------------------------------------------------------
(Loss) income before tax benefit and equity in
undistributed net income of subsidiaries . . . . . (183,562) (22,933) 4,033
---------------------------------------------------------------------------------------
Tax (benefit) provision. . . . . . . . . . . . . . (71,589) (8,944) 1,573
---------------------------------------------------------------------------------------
(Loss) income before equity in undistributed net
income of subsidiaries . . . . . . . . . . . . . . $ (111,973) $ (13,989) $ 2,460
---------------------------------------------------------------------------------------
Equity in undistributed net income of subsidiaries $1,268,252 $1,616,479 $353,422
---------------------------------------------------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . $1,156,279 $1,602,490 $355,882
=======================================================================================
43
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2002 (continued)
STATEMENTS OF CASH FLOW 2002 2001 2000
---------------------------------------------------------------------------------------
Operating Activities
Net Income. . . . . . . . . . . . . . . . $ 1,156,279 $ 1,602,490 $ 355,882
Equity in undistributed
earnings of subsidiary. . . . . . . . . . (1,268,252) (1,616,479) (353,422)
ESOP and other stock-based
compensation earned . . . . . . . . . . . 106,015 87,780 402,784
Amortization of deferred financing costs. 15,100 - -
Other operating activities. . . . . . . . (123,486) (842,750) (95,803)
---------------------------------------------------------------------------------------
Net cash (used in)/provided
by operating activities . . . . . . . . . (114,344) (768,959) 309,441
---------------------------------------------------------------------------------------
Investing Activities
Repayment of loan to
subsidiary. . . . . . . . . . . . . . . . 55,497 55,497 55,497
Dividends receivable. . . . . . . . . . . 4,170 - -
Purchase of investments . . . . . . . . . (155,000) - -
---------------------------------------------------------------------------------------
Net cash (used in)/provided by
investing activities. . . . . . . . . . . (95,333) 55,497 55,497
---------------------------------------------------------------------------------------
Financing activities
Proceeds from exercise of
stock option plan . . . . . . . . . . . . 138,858 62,510 -
Proceeds from trust preferred obligation. 5,004,000 - -
Investment in Bank subsidiary . . . . . . (2,000,000) - -
Cash dividends. . . . . . . . . . . . . . (415,145) (531,086) (614,612)
Treasury stock purchased. . . . . . . . . (129,865) (134,000) (179,750)
---------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities. . . . . . . . . . . 2,597,848 (602,576) (794,362)
---------------------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents. . . . . . . . . . . . . 2,388,171 (1,316,038) (429,424)
Cash and cash equivalents at
beginning of year . . . . . . . . . . . . 797,274 2,113,312 2,542,736
---------------------------------------------------------------------------------------
Cash and cash equivalents
at end of year. . . . . . . . . . . . . . $ 3,185,445 $ 797,274 $2,113,312
=======================================================================================
44
CORPORATE INFORMATION
Pathfinder Bancorp, Inc. . . . . . . . . . Pamela S. Knox
BOARD OF DIRECTORS . . . . . . . . . . . . Assistant Vice President, Lending
Chris C. Gagas, Chairman
Chris R. Burritt . . . . . . . . . . . . . Laurie L. Lockwood
George P. Joyce. . . . . . . . . . . . . . Assistant Vice President,
Raymond W. Jung. . . . . . . . . . . . . . Assistant Controller,
Bruce E. Manwaring . . . . . . . . . . . . Human Resource Officer
L. William Nelson
Janette Resnick. . . . . . . . . . . . . . Will O'Brien
Thomas W. Schneider. . . . . . . . . . . . Assistant Vice President,
Corte J. Spencer . . . . . . . . . . . . . Business Relationship Manager
Steven W. Thomas
Daniel R. Phillips
DIRECTORS EMERITUS . . . . . . . . . . . . Assistant Vice President, MIS
Victor S. Oakes
Lawrence W. O'Brien. . . . . . . . . . . . Shane R. Stepien
Assistant Vice President,
PATHFINDER OFFICERS: . . . . . . . . . . . Marketing Manager
Thomas W. Schneider
President, Chief Executive Officer . . . Michele C. Torbitt
Assistant Vice President,
W. David Schermerhorn. . . . . . . . . . . Electronic Commerce
Executive Vice President,
Loan Administration. . . . . . . . . . . Anita J. Austin
Auditor
John Devlin
Vice President, Senior Commercial Lender PATHFINDER BRANCH MANAGERS
James A. Dowd, CPA . . . . . . . . . . . . Tara FitzGibbons, Main Office
Vice President, Chief Financial Officer, Craig J. Nessel, Plaza and
Trust Officer. . . . . . . . . . . . . . Eastside Offices
Cynthia L. Claflin, Mexico Office
Edward Mervine, Esq. . . . . . . . . . . . Tona L. Kempston, Fulton Office
Vice President, General Counsel. . . . . Denise M. Lyga, Lacona Office
Melissa A. Miller. . . . . . . . . . . . . CORPORATE HEADQUARTERS
Vice President, Operations,. . . . . . . 214 West First Street
Corporate Secretary. . . . . . . . . . . Oswego, NY 13126
(315) 343-0057
Gregory L. Mills
Vice President, Marketing, . . . . . . . ANNUAL MEETING
Branch Administration. . . . . . . . . . Wednesday, April 30, 2003, 10:00 AM
Econo Lodge Riverfront Hotel
Annette L. Burns, CPA. . . 70 East First Street
Controller . . . . . . . . . . . . . . . Oswego, NY 13126
Cynthia L. Claflin . . . . . . . . . . . . STOCK LISTING
Assistant Vice President,. . . . . . . . The Nasdaq Small Cap Market (SM)
Mexico Branch Manager. . . . . . . . . . Symbol: PBHC Listing: PathBcp
Roberta Davis. . . . . . . . . . . . . . . SPECIAL COUNSEL
Assistant Treasurer. . . . . . . . . . . Luse Lehman Gorman
Pomerenk & Schick
Rhonda Hutchins. . . . . . . . . . . . . . 5335 Wisconsin Avenue N.W.
Assistant Vice President, Sales Manager. Suite 400
Washington, D.C. 20015
INDEPENDENT AUDITORS
PricewaterhouseCoopers L.L.P.
One Lincoln Center
Syracuse, NY 13202
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
INVESTOR RELATIONS
Thomas W. Schneider
President, Chief Executive
Officer
James A. Dowd, CPA
Vice President, Chief Financial
Officer, Trust Officer
214 West First Street
Oswego, NY 13126
(315) 343-0057
GENERAL INQUIRIES AND REPORTS
A copy of the Bank's 2002 Annual
Report to the Securities and Exchange
Commission, Form 10-K, may be
obtained without charge by written
request of shareholders to:
Melissa A. Miller
Vice President, Operations,
Corporate Secretary
Pathfinder Bank
214 West First Street
Oswego, NY 13126
The public may read and copy any mate-
rials the Company files with the SEC
at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, DC
20549. The public may obtain informa-
tion on the operation of the Public Ref-
erence Room by calling the SEC at
1-800-SEC-0330. The Company's
filings are also available electronically
free of charge at the SEC website:
http://www.sec.gov and at their
website:http://www.pathfinderbank.com
FDIC DISCLAIMER
This Annual Report has not been
reviewed, or confirmed for accuracy
or relevance, by the FDIC.
[LOGO] PathFinder
Bancorp, Inc.
214 West First Street
Oswego, New York 13126
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Percent Owned
Pathfinder Bank (1) 100%
Pathfinder Statutory Trust 100%
(1) Pathfinder Commercial Bank, Pathfinder REIT, Inc. and Whispering Oaks Development Corporation, 100% owned by Pathfinder Bank
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Thomas W. Schneider, President and Chief Executive Officer, and James A. Dowd, Vice President and Chief Financial Officer of Pathfinder
Bancorp, Inc. (the "Company"), each certify in his/her capacity as an officer of the Company that he/she has reviewed the Quarterly Report of
the Company on Form 10-K for the quarter ended December 31, 2002 and that to the best of his/her 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 28, 2003 /s/Thomas W. Schneider
--------------------------------------------------------------------------------
Date Thomas W. Schneider
President and Chief Executive Officer
March 28, 2003 /s/James A. Dowd
--------------------------------------------------------------------------------
Date James A. Dowd
Vice President and Chief Financial Officer