UNITED STATES
SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
T
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009.
or
* TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.
PATHFINDER BANCORP, INC .
(Exact name of registrant as specified in its charter)
Commission file number: 000-23601
Federal
16-1540137
(State or other jurisdiction of
incorporation or organization)
214 West First Street
Oswego, NY
(Address of principal executive offices)
I.R.S. Employer
Identification No.)
13126
(Zip Code)
Registrant's telephone number, including area code: (315) 343-0057
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each
exchange on which registered
Common Stock, $0.01 par
value The
NASDAQ Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES * NO T
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES * NO T
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES
T NO *
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). YES * NO *
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
T
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer * Accelerated filer * Non-accelerated filer * Smaller
reporting company T
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES * NO T
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on June 30, 2009, as
reported by the Nasdaq Capital Market, was approximately $4.6 million.
As of March 17, 2010, there were 2,972,119 shares issued and 2,484,832 shares outstanding of the Registrant’s Common Stock.
(1) Proxy Statement for the 2010 Annual Meeting of Stockholders of the Registrant (Part III).
(2) Annual Report to Stockholders (Part II and IV).
DOCUMENTS INCORPORATED BY REFERENCE:
TAB LE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2009
PATHFINDER BANCORP, INC.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A(T).
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
(Removed and Reserved)
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
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PA RT I
FORWARD-LOOKING STATEMENTS
When used in this Annual Report the words or phrases “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, ”project” or similar expression are
intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties. By identifying these forward-looking statements for you in this manner, the Company is alerting you to the possibility that its actual results and financial condition may
differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause the Company’s actual
results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed under “Risk Factors” in Part I, Item 1A of this
Annual Report on Form 10-K. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such
statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ
materially from any opinions or statements expressed with respect to future periods in any current statements. Additionally, all statements in this document, including forward-
looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
ITEM 1: BUSINESS
GENERAL
Pathfinder Bancorp, Inc.
Pathfinder Bancorp, Inc. (the "Company") is a Federally chartered mid-tier holding company headquartered in Oswego, New York. The primary business of the Company is its
investment in Pathfinder Bank (the "Bank"). The Company is majority owned by Pathfinder Bancorp, M.H.C., a federally-chartered mutual holding company (the "Mutual Holding
Company"). At December 31, 2009, the Mutual Holding Company held 1,583,239 shares of the Company’s common stock (“Common Stock”) and the public held 901,593 shares
of Common Stock (the "Minority Stockholders"). At December 31, 2009, Pathfinder Bancorp, Inc. had total assets of $371.7 million, total deposits of $296.8 million and
shareholders' equity of $29.2 million.
The Company's executive office is located at 214 West First Street, Oswego, New York and the telephone number at that address is (315) 343-0057.
Pathfinder Bank
The Bank is a New York-chartered savings bank headquartered in Oswego, New York. The Bank operates from its main office as well as six branch offices located in its market
area consisting of Oswego County and the contiguous counties. The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank was chartered as
a New York savings bank in 1859 as Oswego City Savings Bank. The Bank is a customer-oriented institution dedicated to providing mortgage loans and other traditional financial
services to its customers. The Bank is committed to meeting the financial needs of its customers in Oswego County, New York, and the contiguous counties.
The Bank is primarily engaged in the business of attracting deposits from the general public in the Bank's market area, and investing such deposits, together with other sources of
funds, in loans secured by one- to four-family residential real estate and commercial real estate. At December 31, 2009, $196.6 million, or 75% of the Bank's total loan portfolio
consisted of loans secured by real estate, of which $134.3 million, or 68%, were loans secured by one- to four-family residences and $62.2 million, or 32%, were secured by
commercial real estate. Additionally, $26.1 million, or 10%, of total loans, were secured by second liens on residential properties that are classified as consumer loans. The Bank
also originates commercial and consumer loans that totaled $35.4 million and $3.6 million, respectively, or 15%, of the Bank's total loan portfolio at December 31, 2009. The Bank
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invests a portion of its assets in securities issued by the United States Government and its agencies and sponsored enterprises, state and municipal obligations, corporate debt
securities, mutual funds, and equity securities. The Bank also invests in mortgage-backed securities primarily issued or guaranteed by United States Government sponsored
enterprises. The Bank's principal sources of funds are deposits, principal and interest payments on loans and investments, as well as borrowings from correspondent financial
institutions. The principal source of income is interest on loans and investment securities. The Bank's principal expenses are interest paid on deposits, and employee compensation
and benefits.
Pathfinder Bank formed a New York state chartered limited purpose commercial bank subsidiary, Pathfinder Commercial Bank, in October of 2002. Pathfinder Commercial Bank
was established to serve the depository needs of public entities in its market area.
In April 1999, the Bank established Pathfinder REIT, Inc., a New York corporation, as the Bank's wholly-owned real estate investment trust subsidiary. At December 31, 2009,
Pathfinder REIT, Inc. held $17.8 million in mortgages and mortgage related assets. All disclosures in this Form 10-K relating to the Bank's loans and investments include loans and
investments that are held by Pathfinder REIT, Inc.
The Bank also has 100% ownership in Whispering Oaks Development Corp., a New York corporation, which is retained in case the need to operate or develop foreclosed real estate
emerges. This subsidiary is currently inactive.
In addition, the Company has a non-consolidated Delaware statutory trust subsidiary, Pathfinder Statutory Trust II, of which 100% of the common equity is owned by the
Company. Pathfinder Statutory Trust II was formed in connection with the issuance of trust preferred securities.
Employees
As of December 31, 2009, the Bank had 90 full-time employees and 19 part-time employees. The employees are not represented by a collective bargaining unit and we consider our
relationship with our employees to be good.
MARKET AREA AND COMPETITION
The economy in the Bank's market area is manufacturing-oriented and is also significantly dependent upon the State University of New York College at Oswego. The major
manufacturing employers in the Bank's market area are Entergy Nuclear Northeast, Novelis, Constellation, NRG and Huhtamaki. The Bank is the largest depository institution
headquartered in Oswego County. The Bank's business and operating results are significantly affected by the general economic conditions prevalent in its market areas.
The Bank encounters strong competition both in attracting deposits and in originating real estate loans and other loans. Its most direct competition for deposits has historically come
from commercial banks, savings banks, savings associations and credit unions in its market area. Competition for loans comes from such financial institutions as well as mortgage
banking companies. The Bank competes for deposits by offering depositors a high level of personal service and a wide range of competitively priced financial services. The Bank
competes for real estate loans primarily through the interest rates and loan fees it charges and advertising, as well as by originating and holding in its portfolio mortgage loans which
do not necessarily conform to secondary market underwriting standards. The recent turmoil in the residential mortgage sector of the United States economy has caused certain
competitors to be less effective in the market place. While Central New York did not experience the level of speculative lending and borrowing in residential real estate that has
adversely affected other regions on a national basis, certain mortgage brokers and finance companies in our area are either no longer operating, or have limited aggressive lending
practices. Additionally, as certain money centers and large regional banks grapple with current economic conditions and the related credit crisis, their ability to compete as
effectively has been muted. Management believes that these conditions have created a window of reduced competition for local community and regional banks in residential loans,
and to a lesser extent, commercial real estate loans.
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REGULATION AND SUPERVISION
General
The Bank is a New York-chartered stock savings bank and its deposit accounts are insured up to applicable limits by the FDIC through the Deposit Insurance Fund (“DIF ”). The
Bank is subject to extensive regulation by the New York State Banking Department (the “Department”), as its chartering agency, and by the FDIC, as its deposit insurer and primary
federal regulator. The Bank is required to file reports with, and is periodically examined by, the FDIC and the Superintendent of the Department concerning its activities and
financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other banking
institutions. The Bank is a member of the Federal Home Loan Bank of New York (“FHLBNY”) and is subject to certain regulations by the Federal Home Loan Bank System. The
Company and the Mutual Holding Company are federally chartered. Consequently, they are subject to regulations of the Office of Thrift Supervision ("OTS") as savings and loan
holding companies. Any change in such regulations, whether by the Department, the FDIC, or the OTS could have a material adverse impact on the Bank, the Company or the
Mutual Holding Company.
Regulatory requirements applicable to the Bank, the Company and the Mutual Holding Company are referred to below or elsewhere herein. This description of statutory and
regulatory provisions does not purport to be a complete description of all such statutes and regulations applicable to the Mutual Holding Company, the Company, or the Bank.
Recent Regulatory Developments
In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3,
2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. EESA provides, among other things, for a Troubled Assets Relief Program (“TARP”),
under which the U.S. Department of the Treasury has the authority to purchase up to $700 billion of securities and certain other financial instruments from financial institutions for
the purpose of stabilizing and providing liquidity to the U.S. financial markets.
See the discussion relating to the Emergency Economic Stabilization Act of 2008 and the economic recovery package discussed under that caption below.
On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (“TLGP”). This program has two components. One guarantees newly issued senior
unsecured debt of the participating organizations, up to certain limits established for each institution, issued between October 14, 2008 and June 30, 2009. The other component of
the program provides full FDIC insurance coverage for non-interest bearing transaction deposit accounts, regardless of dollar amount, until December 31, 2009. An annualized 10
basis point assessment on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000 will be assessed on a quarterly basis to
insured depository institutions participating in this component of the TLGP. The Company has chosen to participate in both components of the TLGP. The additional expense
related to this coverage has not been significant for Pathfinder Bank.
The American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus or economic recovery package, was signed into law on
February 17, 2009, by President Obama. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and
education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future CPP recipients until the recipient has
repaid the Treasury.
The administration of President Obama introduced the Making Home Affordable program in 2009. This program allows homeowners with loans guaranteed by Fannie Mae or
Freddie Mac an opportunity to refinance into more affordable monthly payments. Pathfinder Bank services loans that
have been purchased by Fannie Mae, and therefore the Bank does participate in this program. The program also encourages banks to voluntarily modify portfolio loans for
borrowers who are eligible. Pathfinder Bank also participates in that manner. Very few of our borrowers have been eligible to participate in the program, although participating in
the program has increased our administrative expenses.
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The New York Legislature passed, and the Governor signed into law, Governor’s Program Bill No. 46. This law, which became effective January 14, 2010, amends and supplements
various existing statues including the Real Property Actions and Proceedings Law, the Uniform Commercial Code, the Civil Practice Law and Rules and the Banking Law. In brief,
the law imposes additional foreclosure notice provisions on owners and tenants of 1-4 family residential premises; additional filing requirements in such foreclosures; mandatory
judicial settlement conferences in residential foreclosures; an obligation on the bank to maintain premises in foreclosure prior to taking title; and other miscellaneous
requirements. We believe this new law will delay foreclosures on residential properties and increase foreclosure cost.
New York State Banking Law and FDIC Regulation
The Bank derives its lending, investment and other authority primarily from the applicable provisions of New York State Banking Law and the regulations of the Department, as
limited by FDIC regulations. In particular, the applicable provisions of New York State Banking Law and regulations governing the investment authority and activities of an FDIC
insured state-chartered savings bank have been substantially limited by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the FDIC regulations
issued pursuant thereto. Under these laws and regulations, savings banks, including the Bank, may invest in real estate mortgages, consumer and commercial loans, certain types of
debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies, certain types of corporate equity securities and certain
other assets. New York State chartered savings banks may also invest in subsidiaries under their service corporation investment authority. A savings bank may use this power to
invest in corporations that engage in various activities authorized for savings banks, plus any additional activities, which may be authorized by the Banking Board. Under FDICIA
and the FDIC’s implementation of regulations, the Bank’s investment and service corporation activities are limited to activities permissible for a national bank unless the FDIC
otherwise permits it.
The FDIC and the Superintendent have broad enforcement authority over the Bank. Under this authority, the FDIC and the Superintendent have the ability to issue formal or
informal orders to correct violations of laws or unsafe or unsound banking practices.
FDIC Insurance on Deposits
The Bank is a member of the DIF, which is administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the U.S. Government.
The Federal Deposit Insurance Reform Act of 2005 gives the FDIC increased flexibility in assessing premiums on banks and savings associations, including the Bank, to pay for
deposit insurance and in managing its deposit insurance reserves. The reform legislation provided a credit to all insured institutions, based on the amount of their insured deposits at
year-end 1996, to offset the premiums that they may be assessed; combined the BIF and SAIF to form a single Deposit Insurance Fund; increased deposit insurance to $250,000 for
Individual Retirement Accounts; and authorized inflation-based increases in deposit insurance on other accounts every 5 years. In 2008, Congress has temporarily extended the
$250,000 insurance limit to all other depositor accounts through December 31, 2013.
On December 22, 2008, the FDIC published a final rule that raises the current deposit insurance assessment rates uniformly for all institutions by 7 basis points (to a range from 12 to
50 basis points) effective for the first quarter of 2009. On February 27, 2009, the FDIC also issued a final rule that revises the way the FDIC calculates federal deposit insurance
assessment rates beginning in the second quarter of 2009. Under the new rule, the total base assessment rate will range from 7 to 77.5 basis points of the institution’s deposits,
depending on the risk category of the institution and
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the institution’s levels of unsecured debt, secured liabilities, and brokered deposits . On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on
each insured depository institution's assets minus Tier 1 capital as of June 30, 2009. The impact of the special assessment was approximately $180,000. Finally, on November 12,
2009, the FDIC adopted a final rule amending the assessment regulations to require insured depository institutions to prepay their quarterly risk-based assessments for the fourth
quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009. The three-year assessment recorded in the Company’s other assets amounted to $1.7 million. Both the
special and regular assessment changes have been imposed on all FDIC insured institutions for the year ended December 31, 2009.
The credit provided by the 2005 Act was determined based on the assessment base of the institution as of December 31, 1996 as compared with the combined aggregate assessment
base of all eligible institutions as of that date. Those institutions having credits could use them to offset up to 100% of the 2007 DIF assessment, and if not completely used in 2007,
applied the remaining credits to not more than 90% of each of the aggregate 2008, 2009 and 2010 DIF assessments. Pathfinder Bank offset 90% of its DIF assessments with available
one-time assessment credits for the first two quarters of 2008 and took the remaining balance of the credit against the third quarter assessment. For the first nine months of 2008,
credits utilized to offset amounts assessed for Pathfinder Bank totaled $76,000. Fourth quarter 2008 assessments and 2009 assessments for Pathfinder Bank were not offset by credits.
See the discussion of recent regulatory developments relating to the FDIC and its impact on the Company discussed above under the caption “ Recent Regulatory Developments ”.
Regulatory Capital Requirements
The FDIC has adopted risk-based capital guidelines to which the Bank is subject. The guidelines establish a systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among banking organizations. The Bank is required to maintain certain levels of regulatory capital in relation to regulatory
risk-weighted assets. The ratio of such regulatory capital to regulatory risk-weighted assets is referred to as the Bank's "risk-based capital ratio." Risk-based capital ratios are
determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0% to 100%, with higher levels of capital being required for the
categories perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first tier ("Tier I") includes common equity, retained earnings, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations). Supplementary ("Tier II") capital includes, among other items, cumulative perpetual and long-term limited-life
preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations,
less required deductions. Savings banks are required to maintain a total risk-based capital ratio of at least 8%, and a Tier I risk based capital level of at least 4%.
In addition, the FDIC has established regulations prescribing a minimum Tier I leverage ratio (Tier I capital to adjusted total assets as specified in the regulations). These regulations
provide for a minimum Tier I leverage ratio of 3% for banks that meet certain specified criteria, including that they have the highest examination rating and are not experiencing or
anticipating significant growth. All other banks are required to maintain a Tier I leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The FDIC and the
other federal banking regulators have proposed amendments to their minimum capital regulations to provide that the minimum leverage capital ratio for a depository institution that
has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Rating System will be 3% and that the minimum leverage capital ratio for any other
depository institution will be 4% unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. The FDIC may,
however, set higher leverage and risk-based capital requirements on individual institutions when particular circumstances warrant. Savings banks experiencing or anticipating
significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
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Limitations on Dividends and Other Capital Distributions
The FDIC has the authority to use its enforcement powers to prohibit a savings bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or
unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma
basis. New York law also restricts the Bank from declaring a dividend that would reduce its capital below the amount that is required to be maintained by state law and
regulation. The Company is also subject to the OTS capital distribution rules by virtue of being an OTS regulated savings and loan holding company.
Prompt Corrective Action
The federal banking agencies have promulgated regulations to implement the system of prompt corrective action required by federal law. Under the regulations, a bank shall be
deemed to be (i) "well capitalized" if it has total risk-based capital of 10% or more, has a Tier I risk-based capital ratio of 6% or more, has a Tier I leverage capital ratio of 5% or
more and is not subject to any written capital order or directive; (ii) "adequately capitalized" if it has a total risk based capital ratio of 8% or more, a Tier I risk-based capital ratio of
4% or more and a Tier I leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of "well capitalized"; (iii) "undercapitalized" if it has
a total risk-based capital ratio that is less than 8%, a Tier I risk-based capital ratio that is less than 4% or a Tier I leverage capital ratio that is less than 4% (3% under certain
circumstances); (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6%, a Tier I risk-based capital ratio that is less than 3% or a Tier I leverage
capital ratio that is less than 3%; and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2%. Federal law and regulations also
specify circumstances under which a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized
institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically
undercapitalized).
The Bank currently meets the criteria to be classified as a "well capitalized" savings institution.
Transactions With Affiliates and Insiders
Under current federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and its implementing
regulations. An affiliate of a savings bank is any company or entity that controls, is controlled by, or is under common control with the savings bank, other than a subsidiary of the
savings bank. In a holding company context, at a minimum, the parent holding company of a savings bank, and any companies that are controlled by such parent holding company,
are affiliates of the savings bank. Generally, Section 23A limits the extent to which the savings bank or its subsidiaries may engage in "covered transactions" with any one affiliate to
an amount equal to 10% of such savings bank's capital stock and surplus and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus. The term "covered transaction" includes the making of loans or other extensions of credit to an affiliate; the purchase of assets from an affiliate, the
purchase of, or an investment in, the securities of an affiliate; the acceptance of securities of an affiliate as collateral for a loan or extension of credit to any person; or issuance of a
guarantee, acceptance, or letter of credit on behalf of an affiliate. Section 23A also establishes specific collateral requirements for loans or extensions of credit to, or guarantees,
acceptances on letters of credit issued on behalf of an affiliate. Section 23B requires that covered transactions and a broad list of other specified transactions be on terms substantially
the same, or no less favorable, to the savings bank or its subsidiary as similar transactions with nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act and its implementing regulations restrict a savings bank with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and stockholders who control, directly or indirectly, 10% or more of voting securities of a savings bank and
certain related interests of any of the foregoing, may not exceed, together with all other outstanding loans to such persons and affiliated entities, the savings bank's total unimpaired
capital and unimpaired surplus. Section 22(h)
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also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and stockholders who control 10% or more of voting
securities of a stock savings bank, and their respective related interests, unless such loan is approved in advance by a majority of the board of directors of the savings bank. Any
"interested" director may not participate in the voting. Further, pursuant to Section 22(h), loans to directors, executive officers and principal stockholders must generally be made on
terms substantially the same as offered in comparable transactions to other persons. Section 22(g) of the Federal Reserve Act places additional limitations on loans to executive
officers.
Supervisory Agreement
During May 2009, the Company entered into a Supervisory Agreement with the OTS. The agreement was issued in connection with the identification of certain violations of
applicable statutory and regulatory restrictions on capital distributions and transactions with affiliates. As a result of the identified violations, the Company recorded $41,000 of
income relating to certain transactions with its unconsolidated parent company Pathfinder Bancorp, MHC. In addition the Company is prohibited from accepting or directing
Pathfinder Bank to declare or pay a dividend or other capital distributions without the prior written approval of the Office of Thrift Supervision. All violations have been corrected
and the Company believes it is in compliance with the Agreement.
Federal Holding Company Regulation
General . The Company and the Mutual Holding Company are nondiversified savings and loan holding companies within the meaning of the Home Owners' Loan Act. The
Company and the Mutual Holding Company are registered with the OTS and are subject to OTS regulations, examinations, supervision and reporting requirements. As such, the
OTS has enforcement authority over the Company and the Mutual Holding Company, and their non-savings institution subsidiaries. Among other things, this authority permits the
OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.
Permitted Activities . Under OTS regulation and policy, a mutual holding company and a federally chartered mid-tier holding company, such as the Company, may engage in the
following activities: (i) investing in the stock of a savings association; (ii) acquiring a mutual association through the merger of such association into a savings association subsidiary
of such holding company or an interim savings association subsidiary of such holding company; (iii) merging with or acquiring another holding company, one of whose subsidiaries
is a savings association; (iv) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state
where the subsidiary savings association or associations share their home offices; (v) furnishing or performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company; (vii) holding or managing properties used or occupied by a
savings association subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by regulation, has determined
to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Director of the OTS, by regulation, prohibits or limits any
such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5,
1987; (x) any activity permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act, including securities and insurance underwriting; and
(xi) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is
approved by the Director. If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from
such merger or acquisition may only invest in assets and engage in activities listed in (i) through (xi) above, and has a period of two years to cease any nonconforming activities and
divest of any nonconforming investments.
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The Home Owners' Loan Act prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings association or
holding company thereof, without prior written approval of the OTS. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary
savings association, a nonsubsidiary holding company, or a nonsubsidiary company engaged in activities other than those permitted by the Home Owners' Loan Act; or acquiring or
retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings associations, the OTS must consider the financial
and managerial resources, future prospects of the company and association involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings associations in more than one state,
subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another
state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Waivers of Dividends by Mutual Holding Company . OTS regulations require the Mutual Holding Company to notify the OTS of any proposed waiver of its receipt of dividends
from the Company. The OTS may object to such waivers.
Conversion of the Mutual Holding Company to Stock Form . OTS regulations permit the Mutual Holding Company to convert from the mutual form of organization to the capital
stock form of organization (a "Conversion Transaction"). There can be no assurance when, if ever, a Conversion Transaction will occur, and the Board of Directors has no current
intention or plan to undertake a Conversion Transaction. In a Conversion Transaction a new holding company would be formed as the successor to the Company (the "New Holding
Company"), the Mutual Holding Company's corporate existence would end, and certain depositors of the Bank would receive the right to subscribe for additional shares of the New
Holding Company. In a Conversion Transaction, each share of common stock held by stockholders other than the Mutual Holding Company ("Minority Stockholders") would be
automatically converted into a number of shares of common stock of the New Holding Company determined pursuant to an exchange ratio (determined by an independent valuation)
that ensures that Minority Stockholders own the same percentage of common stock in the New Holding Company as they owned in the Company immediately prior to the
Conversion Transaction. The total number of shares held by Minority Stockholders after a Conversion Transaction also would be increased by any purchases by Minority
Stockholders in the stock offering conducted as part of the Conversion Transaction.
Federal Securities Law
The common stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (“Exchange Act”). The Company is subject to the
information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act.
The Company Common Stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or
unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain noninterest-bearing reserves at specified levels against their transaction accounts (primarily checking,
money management and NOW checking accounts). At December 31, 2009, the Bank was in compliance with these reserve requirements.
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Federal Community Reinvestment Regulation
Under the Community Reinvestment Act, as amended (the "CRA"), as implemented by FDIC regulations, a savings bank has a continuing and affirmative obligation, consistent with
its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examination of a savings institution, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA requires the FDIC to provide a written
evaluation of an institution's CRA performance utilizing a four-tiered descriptive rating system. The Bank's latest CRA rating was "satisfactory."
New York State Community Reinvestment Regulation
The Bank is subject to provisions of the New York State Banking Law which impose continuing and affirmative obligations upon banking institutions organized in New York State
to serve the credit needs of its local community ("NYCRA") which are substantially similar to those imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual
NYCRA report and copies of all federal CRA reports with the Department. The NYCRA requires the Department to make a biennial written assessment of a bank's compliance with
the NYCRA, utilizing a four-tiered rating system and make such assessment available to the public. The NYCRA also requires the Superintendent to consider a bank's NYCRA
rating when reviewing a bank's application to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices or automated teller machines,
and provides that such assessment may serve as a basis for the denial of any such application.
The Bank's NYCRA rating as of its latest examination was "satisfactory."
The USA PATRIOT Act
The USA PATRIOT Act (“the PATRIOT Act”) was signed into law on October 26, 2001. The PATRIOT Act gives the federal government new powers to address terrorist threats
through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The PATRIOT Act
also requires the federal banking agencies to take into consideration the effectiveness of controls designed to combat money laundering activities in determining whether to approve a
merger or other acquisition application of a financial institution. Accordingly, if the Company were to engage in a merger or other acquisitions, its controls designed to combat
money laundering would be considered as part of the application process. The Company and the Bank have established policies, procedures and systems designed to comply with
these regulations.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (“Sarbanes Oxley”) was signed into law on July 30, 2002. Sarbanes-Oxley is a law that addresses, among other issues, corporate governance,
auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by Section 302(a) of Sarbanes-Oxley, the Company’s
Chief Executive Officer and Chief Financial Officer are each required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material
fact. The rules have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of
our internal controls; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal controls; and they have included
information in our quarterly and annual reports about their evaluation and whether there have been significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the evaluation. On October 2, 2009, the SEC granted
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another extension for the outside auditor assessment until fiscal years ending after June 15, 2010. We have existing policies, procedures and systems designed to comply with these
regulations, and are further enhancing and documenting such policies, procedures and systems to ensure continued compliance with these regulations.
Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 ("EESA") was enacted on October 3, 2008. EESA enables the federal government, under terms and conditions to be developed
by the Secretary of the Treasury, to insure troubled assets, including mortgage-backed securities, and collect premiums from participating financial institutions. EESA includes,
among other provisions: (a) the $700 billion Troubled Assets Relief Program ("TARP"), under which the Secretary of the Treasury is authorized to purchase, insure, hold, and sell a
wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages originated or issued on or before March 14, 2008; and
(b) an increase in the amount of deposit insurance provided by the FDIC.
Under the TARP, the United States Department of Treasury authorized a voluntary Capital Purchase Program to purchase up to $250 billion of senior preferred shares of qualifying
financial institutions that elected to participate by November 14, 2008. The program was developed to attract broad participation by strong financial institutions, to stabilize the
financial system and increase lending to benefit the national economy and citizens of the United States. The board of directors and management analyzed the potential merits of
participating in the Capital Purchase Program (“CPP”) of the Treasury Department’s TARP. It was the general view of the board and management that in the present national
economic risk environment, enhancing the Company’s capital ratios is both prudent, given the current climate, and potentially opportunistic as we move into the next business
cycle. Additionally, any increase to capital will continue to support the Company’s lending activities to individuals, families, and businesses in our community. Companies
participating in the CPP are required to adopt certain standards relating to executive compensation. The terms of the CPP also limit certain uses of capital by the issuer, including
with respect to repurchases of securities and increases in dividends.
On September 11, 2009, the Company entered into a Purchase Agreement with the Treasury Department pursuant to which the Company has issued and sold to Treasury: (i) 6,771
shares of the Company’s Series A Preferred Stock, having a liquidation amount per share equal to $1,000, for a total price of $6,771,000; and (ii) a Warrant to purchase 154,354
shares of the Company’s common stock, par value $0.01 per share, at an exercise price per share of $6.58.
The Chief Executive Officer and the Chief Financial Officer are required to certify compliance with the compensation provisions of the CPP program. Our certifications are
appended to this 10-K in Exhibit 99.1 and 99.2.
Securities and Exchange Commission Reporting
The Company maintains an Internet website located at www.pathfinderbank.com on which, among other things, the Company makes available, free of charge, various reports that it
files with or furnishes to the Securities and Exchange Commission, including its Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-
K. The Company has also made available on its website its Audit Committee Charter, Compensation Committee Charter, Governance Guidelines (which serve as the Nominating /
Governance Committee’s charter) and Code of Ethics. These reports are made available as soon as reasonably practicable after these reports are filed with or furnished to the
Securities and Exchange Commission.
The Company's Annual Report on Form 10-K may be accessed on the Company's website at www.pathfinderbank.com /annualmeeting .
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FEDERAL AND STATE TAXATION
Federal Taxation
The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules
applicable to the Company or the Bank.
Bad Debt Reserves . Prior to the Tax Reform Act of 1996 (“the 1996 Act”), the Bank was permitted to establish a reserve for bad debts and to make annual additions to the
reserve. These additions could, within specified formula limits, be deducted in arriving at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the small bank
experience method in computing its bad debt deduction.
Taxable Distributions and Recapture . Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income should the Bank fail to
meet certain thrift asset and definitional tests. New federal legislation eliminated these thrift related recapture rules. However, under current law, pre-1988 reserves remain subject
to recapture should the Bank cease to retain a bank or thrift charter or make certain non-dividend distributions.
Minimum Tax . The Internal Revenue Code imposes an alternative minimum tax ("AMT") at a rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the extent such AMTI is in excess of an exemption amount. Net operating losses can offset no more
than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years.
Net Operating Loss Carryovers . A financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years.
State Taxation
New York Taxation . The Bank is subject to the New York State Franchise Tax on Banking Corporations in an annual amount equal to the greater of (i) 7.1% of the Bank's "entire
net income" allocable to New York State during the taxable year, or (ii) the applicable alternative minimum tax. The alternative minimum tax is generally the greater of (a) 0.01% of
the value of the Bank's assets allocable to New York State with certain modifications, (b) 3% of the Bank's "alternative entire net income" allocable to New York State, or
(c) $250. Entire net income is similar to federal taxable income, subject to certain modifications and alternative entire net income is equal to entire net income without certain
modifications. Net operating losses arising in the current period can be carried forward to the succeeding 20 taxable years.
Neither the Internal Revenue Service or New York State have examined our federal or state tax returns within the past 5 years.
ITEM 1A: RISK FACTORS
Not required of a smaller reporting company.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
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ITEM 2: PROPERTIES
The Bank conducts its business through its main office located in Oswego, New York, and six branch offices located in Oswego County. The following table sets forth certain
information concerning the main office and each branch office of the Bank at December 31, 2009. The aggregate net book value of the Bank's premises and equipment was $7.2
million at December 31, 2009. For additional information regarding the Bank's properties, see Notes 7 and 15 to the Consolidated Financial Statements.
LOCATION
Main Office
214 West First Street
Oswego, New York 13126
Plaza Branch
Route 104, Ames Plaza
Oswego, New York 13126
Mexico Branch
Norman & Main Streets
Mexico, New York 13114
Oswego East Branch
34 East Bridge Street
Oswego, New York 13126
Lacona Branch
1897 Harwood Drive
Lacona, New York 13083
Fulton Branch
5 West First Street South
Fulton, New York 13069
Central Square Branch
3025 East Ave
Central Square, New York 13036
OPENING DATE
1874
OWNED/LEASED
Owned
1989
1978
1994
2002
2003
2005
Owned (1)
Owned
Owned
Owned
Owned (2)
Owned
(1) The building is owned; the underlying land is leased with an annual rent of $21,000
(2) The building is owned; the underlying land is leased with an annual rent of $30,000
ITEM 3: LEGAL PROCEEDINGS
There are various claims and lawsuits to which the Company is periodically involved incident to the Company's business. In the opinion of management, such claims and lawsuits in
the aggregate are not expected to have a material adverse impact on the Company's consolidated financial condition and results of operations .
ITEM 4: (REMOVED AND RESERVED)
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PA RT II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Pathfinder Bancorp, Inc.'s common stock currently trades on the Nasdaq Capital Market under the symbol "PBHC". There were 510 shareholders of record as of March 17,
2010. The following table sets forth the high and low closing bid prices and dividends paid per share of common stock for the periods indicated:
Quarter Ended:
December 31, 2009
September 30, 2009
June 30, 2009
March 31, 2009
December 31, 2008
September 30, 2008
June 30, 2008
March 31, 2008
Dividends and Dividend History
High Low
$ 7.000 $ 5.550 $
7.980 5.430
8.000 4.950
8.200 4.750
$ 13.500 $ 6.000 $
10.250 6.890
11.250 7.000
16.550 9.720
Dividend
Paid
0.0300
0.0300
0.0600
-
0.1025
0.1025
0.1025
0.1025
The Company has historically paid regular quarterly cash dividends on its common stock, and the Board of Directors presently intends to continue the payment of regular quarterly
cash dividends, subject to the need for those funds for debt service and other purposes. Payment of dividends on the common stock is subject to determination and declaration by the
Board of Directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, Pathfinder Bank and its subsidiaries
results of operations and financial condition, tax considerations, and general economic conditions. Given deteriorating economic conditions, and the Company’s focus on the
retention and growth of capital, it is unlikely that future, near-term dividends will replicate the historical dividend payouts of 2008 and prior years. The Company's mutual holding
company, Pathfinder Bancorp, M.H.C., may elect to waive or receive dividends each time the Company declares a dividend. The election to waive the dividend receipt requires prior
non-objection of the OTS. The Mutual Holding Company did not waive the right to receive its portion of the cash dividends declared during 2009. During 2008, the Mutual Holding
Company waived one quarter’s dividends totaling $163,000.
Since the Company has chosen to participate in the Treasury’s CPP program, its ability to increase dividends to its stockholders is limited without prior approval by the United States
Treasury Department.
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ITE M 6: SELECTED FINANCIAL DATA
The Company is the parent company of the Bank and Pathfinder Statutory Trust I. The Bank has three operating subsidiaries – Pathfinder Commercial Bank, Pathfinder REIT, Inc.,
and Whispering Oaks Development Corp.
The following selected consolidated financial data sets forth certain financial highlights of the Company and should be read in conjunction with the consolidated financial statements
and related notes, and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this annual report on Form 10-K.
Year End ( In thousands )
Total assets
Loans receivable, net
Deposits
Equity
For the Year ( In thousands )
Net interest income
Core noninterest income (d)
Net gains/(losses) on sales of impairment of
investment securities
Net gains/(losses) on sales of loans and
foreclosed real estate
Noninterest expense (e)
Regulatory assessments
Net income
Per Share
Net income (basic)
Book value per common share
Tangible book value per common share (a)
Cash dividends declared
Ratios
Return on average assets
Return on average equity
Return on average tangible equity (a)
Average equity to average assets
Dividend payout ratio (b)
Allowance for loan losses to loans receivable
Net interest rate spread
Noninterest income to average assets
Noninterest expense to average assets
Efficiency ratio (c)
$
$
$
2009
2008
2007
2006
2005
371,692 $
259,387
296,839
29,238
352,760 $
247,400
269,438
19,495
320,691 $
221,046
251,085
21,704
301,382 $
201,713
245,585
20,850
296,948
187,889
236,377
20,928
11,777 $
2,724
10,675 $
2,786
8,667 $
2,622
8,346 $
2,396
112
(2,191 )
378
299
54
10,381
745
1,615
0.61 $
9.31
7.77
0.12
0.45 %
7.04
8.45
6.40
18.45
1.17
3.40
0.81
3.10
76.36
(44 )
9,882
53
368
0.15 $
8.04
6.50
0.41
0.11 %
1.70
2.07
6.32
232.61
0.99
3.22
0.16
2.91
73.02
42
9,799
39
1,122
0.45 $
8.74
7.19
0.41
0.36 %
5.27
6.47
6.82
62.03
0.76
2.81
0.98
3.15
85.89
(80 )
9,646
22
1,028
0.42 $
8.45
6.82
0.41
0.34 %
4.86
6.04
7.03
66.73
0.74
2.92
0.87
3.21
88.71
8,742
2,333
(205 )
(88 )
10,023
37
462
0.19
8.50
6.77
0.41
0.15 %
2.16
2.72
6.95
147.84
0.89
3.07
0.66
3.28
89.16
(a) Tangible equity excludes intangible assets.
(b) The dividend payout ratio is calculated using dividends declared and not waived by the Mutual Holding Company, divided by net income.
(c) The efficiency ratio is calculated as noninterest expense, including regulatory assessments, divided by the sum of taxable-equivalent net interest income and noninterest
income excluding net gains (losses) on sales and impairment of investment securities and net gains (losses) on sales of loans and foreclosed real estate.
(d) Exclusive of net gains (losses) on sales and impairment of investment securities and net gains (losses) on sales of loans and foreclosed real estate.
(e) Exclusive of regulatory assessments.
(f) As calculated in this ratio, noninterest income includes net gains (losses) on sales and impairment of investment securities and net gains (losses) on sales of loans and
foreclosed real estate.
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ITE M 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Throughout Management’s Discussion and Analysis (“MD&A”) the term, “the Company”, refers to the consolidated entity of Pathfinder Bancorp, Inc. Pathfinder Bank and
Pathfinder Statutory Trust II are wholly owned subsidiaries of Pathfinder Bancorp, Inc., however, Pathfinder Statutory Trust II is not consolidated for reporting purposes (see Note
10 of the consolidated financial statements). Pathfinder Commercial Bank, Pathfinder REIT, Inc. and Whispering Oaks Development Corp. are wholly owned subsidiaries of
Pathfinder Bank. At December 31, 2009, Pathfinder Bancorp, M.H.C, the Company’s mutual holding company parent, whose activities are not included in the consolidated financial
statements or the MD&A, held 63.7% of the Company’s outstanding common stock and the public held 36.3% of the outstanding common stock.
The Company's business strategy is to operate as a well-capitalized, profitable and independent community bank dedicated to providing value-added products and services to our
customers. Generally, the Company has sought to implement this strategy by emphasizing retail deposits as its primary source of funds and maintaining a substantial part of its assets
in locally-originated residential first mortgage loans, loans to business enterprises operating in its markets, and in investment securities. Specifically, the Company's business
strategy incorporates the following elements: (i) operating as an independent community-oriented financial institution; (ii) maintaining capital in excess of regulatory requirements;
(iii) emphasizing investment in one-to-four family residential mortgage loans, loans to small businesses and investment securities; and (iv) maintaining a strong retail deposit base.
The Company's net income is primarily dependent on its net interest income, which is the difference between interest income earned on its investments in mortgage and other loans,
investment securities and other assets, and its cost of funds consisting of interest paid on deposits and borrowings. The Company's net income also is affected by its provision for
loan losses, as well as by the amount of noninterest income, including income from fees, service charges and servicing rights, net gains and losses on sales of securities, loans and
foreclosed real estate, and noninterest expense such as employee compensation and benefits, occupancy and equipment costs, data processing costs and income taxes. Earnings of
the Company also are affected significantly by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of
regulatory authorities, of which these events are beyond the control of the Company. In particular, the general level of market rates tends to be highly cyclical.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow practices within the
banking industry. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information
changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions
and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are
necessary when assets and liabilities are required to be recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and
liabilities at fair value inherently results in more financial statement volatility. The fair values and information used to record valuation adjustments for certain assets and liabilities
are based on quoted market prices or are provided by other third-party sources, when available. When third party information is not available, valuation adjustments are estimated in
good faith by management.
The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures
presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements
and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying
those amounts, management has identified
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the allowance for loan losses, deferred income taxes, pension obligations, the evaluation of goodwill for impairment, the evaluation of investment securities for other than temporary
impairment and the estimation of fair values for accounting and disclosure purposes to be the accounting areas that require the most subjective and complex judgments, and as such,
could be the most subject to revision as new information becomes available.
The allowance for loan losses represents management's estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is
considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired
loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be
susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated statements of condition. Note 1 to the consolidated financial statements
describes the methodology used to determine the allowance for loan losses, and a discussion of the factors driving changes in the amount of the allowance for loan losses is included
in this report.
Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net operating and
capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the
enactment date. To the extent that current available evidence about the future raises doubt about the likelihood of a deferred tax asset being realized, a valuation allowance is
established. The judgment about the level of future taxable income, including that which is considered capital, is inherently subjective and is reviewed on a continual basis as
regulatory and business factors change. A valuation allowance of $458,000 was maintained at December 31, 2009, as management believes it may not generate sufficient capital
gains to offset its capital loss carry forward. The Company’s effective tax rate differs from the statutory rate due to non-taxable investment securities, and bank owned life insurance
offset by the valuation allowance established on a portion of the capital loss carry forwards.
Pension and post-retirement benefit plan liabilities and expenses are based upon actuarial assumptions of future events, including fair value of plan assets, interest rates, rate of future
compensation increases and the length of time the Company will have to provide those benefits. The assumptions used by management are discussed in Note 11 to the consolidated
annual financial statements.
As a result of deteriorating economic conditions in the financial markets, which impacted the trading value of the Company’s common stock, management engaged an independent
third party to test the Company’s goodwill for impairment as of December 31, 2008. Utilizing a three-step valuation approach, the third party performed testing. Management re-
evaluated the prior year testing results from the valuation and based on the prior year determination and improvements in Company metrics and general economic trends,
management has determined that the carrying value of goodwill was not impaired as of December 31, 2009. The valuation approach is described in Note 8 to the consolidated
financial statements.
The Company carries all of its investments at fair value with any unrealized gains or losses reported net of deferred tax as an adjustment to shareholders' equity, except for debt
security impairment losses, which are charged to earnings when the loss is credit-related and recognized in other comprehensive income when the loss is noncredit-related and the
security is not expected to be sold. The Company's ability to fully realize the value of its investments in various debt securities is dependent on the underlying creditworthiness of the
issuing organization. In evaluating the debt security portfolio for other-than-temporary impairment losses, management considers (1) if we intend to sell the security; (2) if it is
“more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not
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sufficient to recover the entire amortized cost basis. In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above
and the length of time the equity security’s fair value has been below the carrying amount. Based on management's assessments during the year ended December 31, 2009, the
Company recorded other-than-temporary impairment charges of $693,000, including a $298,000 charge associated with its holdings in a senior unsecured note issued by CIT Group,
Inc. after the Company concluded that the liquidation of its holding at a loss was prudent and the security was sold on July 16, 2009. The remaining impairment charges were
capital losses taken on the AMF Large Cap Equity Fund in the amount of $104,000, $286,000 in the AMF Ultra Short Mortgage Fund, $1,000 on a stock investment in The Phoenix
Companies and $4,000 on the stock investment in Alliance Financial Corp. In addition to the impairment charges, the Company’s available for sale investment portfolio at
December 31, 2009 includes unrealized losses of $842,000. See Note 3 to the consolidated financial statements for further discussion of the unrealized losses. Management
continually analyzes the portfolio to determine if further impairment has occurred that may be deemed as other-than-temporary. Further charges are possible depending on future
economic conditions.
The estimation of fair value is significant to several of our assets, including investment securities available for sale, intangible assets and foreclosed real estate, as well as the value of
loan collateral when valuing loans. These are all recorded at either fair value or the lower of cost or fair value. Fair values are determined based on third party sources, when
available. Furthermore, accounting principles generally accepted in the United States require disclosure of the fair value of financial instruments as a part of the notes to the
consolidated financial statements. Fair values may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates and the shape of yield
curves.
Fair values for securities available for sale are obtained from an independent third party pricing service. Where available, fair values are based on quoted prices on a nationally
recognized securities exchange. If quoted prices are not available, fair values are measured using quoted market prices for similar benchmark securities. Management made no
adjustments to the fair value quotes that were provided by the pricing source. The fair values of foreclosed real estate and the underlying collateral value of impaired loans are
typically determined based on appraisals by third parties, less estimated costs to sell. If necessary, appraisals are updated to reflect changes in market conditions.
EXECUTIVE SUMMARY
Total deposits for the Company increased 10.2%, to $296.8 million at December 31, 2009, while the average balance of deposits increased $22.7 million to $288.5 million for the
year ended December 31, 2009. The Company will continue to focus on building market share in the Central Square and Fulton markets. Overall, in Oswego County, Pathfinder
Bank has the majority of the current deposit market share. Pathfinder continues to develop core deposit relationships in all markets by developing demand deposit
relationships. Efforts will also be focused on the expansion of commercial deposit relationships with the Bank’s existing commercial lending customers.
Total assets increased 5.4% from December 31, 2008 to December 31, 2009, primarily in the loan portfolio. The loan portfolio increased 4.8% with net growth primarily in the
commercial loan categories. The Company expects to concentrate on continued commercial mortgage and commercial loan portfolio growth during 2010. The ratio of non-
performing assets to total assets was 0.67% at December 31, 2009 compared to 0.75% in the prior year. The decrease reflects lower levels of both foreclosed real estate and total
non-performing loans combined with an increase in assets. Non-performing loans decreased $10,000 and foreclosed real estate decreased $154,000 since December 31, 2008.
Net income for 2009 was $1.6 million, as compared to $368,000 in 2008. Net income available to common shareholders was $1.5 million, or $0.61 per share, compared to $0.15 per
share for the previous year. The improvement in income was primarily the result of the Company recording impairment charges on investment security holdings totaling $1.6
million, net of the related tax benefits in 2008 compared to 2009 impairment charges totaling $574,000, net of the related tax benefits. Net income in 2009 also includes $531,000 in
net gains on the sale of investment securities after tax.
Page 17
Table of Contents
RESULTS OF OPERATIONS
Net income for 2009 was $1.6 million, an increase of $1.2 million, or 339%, compared to net income of $368,000 for 2008. Basic and diluted earnings per share increased to $0.61
per share for the year ended December 31, 2009 from $0.15 per share, for the year ended December 31, 2008. Return on average equity increased to 7.04% in 2009 from 1.70% in
2008.
Net interest income, on a tax equivalent basis, increased $1.0 million, or 9.5%, resulting from the combination of volume increases in all loan categories and rate decreases applied to
all interest-earning liabilities. The provision for loan losses for the year ended December 31, 2009 increased $56,000, or 6.8%. The elevated level of provisioning by the Company
during the prior two years reflects management’s assessment of the increased inherent risk associated with increasing commercial lending activities, the overall growth in the total
loan portfolio and deteriorating economic conditions. The Company experienced a 425% increase in noninterest income. Noninterest income decreased 2%, exclusive of securities
gains and losses, primarily attributable to decreased earnings on bank-owned life insurance. The reduction in impairment charges on investment securities was the most significant
factor in noninterest income improvement. Noninterest expenses increased 12% primarily due to increases in personnel expense and FDIC insurance assessments.
Net Interest Income
Net interest income is the Company's primary source of operating income for payment of operating expenses and providing for possible loan losses. It is the amount by which
interest earned on interest-earning deposits, loans and investment securities, exceeds the interest paid on deposits and borrowed money. Changes in net interest income and the net
interest margin ratio result from the interaction between the volume and composition of earning assets and interest-bearing liabilities, and their respective yields and funding costs.
Net interest income, on a tax-equivalent basis, increased $1.0 million, or 9.5%, to $11.8 million for the year ended December 31, 2009, as compared to $10.8 million for the year
ended December 31, 2008. The Company's net interest margin for 2009 increased to 3.56% from 3.43% in 2008. The increase in net interest income is attributable to a decrease in
the cost of interest-bearing liabilities, partially offset by an increase in the average balance of interest-bearing liabilities. Although the average balance of interest-earning assets
increased, the decline in the yield on those assets resulted in a reduction in the interest income earned.
The average balance of interest-earning assets increased $17.2 million, or 5.4%, during 2009 and the average balance of interest-bearing liabilities increased by $14.2 million, or
4.9%. The increase in the average balance of interest earning assets primarily resulted from a $19.0 million increase in the average balance of the loan portfolio and a $4.7 million
increase in the average balance of interest earning deposits, offset by a $6.5 million reduction in the average balance of the security investment portfolio. The increase in the average
balance of interest-bearing liabilities primarily resulted from a $22.1 million, or 9.2%, increase in the average balance of deposits, offset by a $7.9 million, or 15.7%, decrease in the
average balance of borrowed funds. Interest income, on a tax-equivalent basis, decreased $620,000, or 3.4%, during 2009. The decrease in yield on interest earning assets to 5.38%
in 2009 from 5.87% in 2008 was partially offset by the 5.4% increase in volume, but the volume increase was not enough to make up for the overall reduction in yields. Interest
expense on deposits decreased $1.2 million, or 21.7%, as the cost of deposits dropped 67 basis points to 1.69% in 2009 from 2.36% in 2008. Interest expense on borrowings
decreased $419,000, or 20.8%, during 2009 as the 15.7% decrease in the average balance of borrowed funds was combined with a decrease in the cost of borrowed funds to 3.75% in
2009 from 4.00% in 2008.
Page 18
Table of Contents
Average Balances and Rates
The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Interest income and
resultant yield information in the table is on a fully tax-equivalent basis using marginal federal income tax rates of 34%. Averages are computed on the daily average balance for each
month in the period divided by the number of days in the period. Yields and amounts earned include loan fees. Non-accrual loans have been included in interest-earning assets for purposes
of these calculations.
(Dollars in thousands)
Interest-earning assets:
Average
Balance
Interest
Yield /
Cost
Average
Balance
Interest
2009
Average
For the Years Ended December 31,
2008
2007
Average
Yield /
Cost
Average
Balance
Interest
Average
Yield /
Cost
7,463
4,024
1,607
1,767
2,942
65
6
Real estate loans residential
Real estate loans commercial
Commercial loans
Consumer loans
Taxable investment securities
Tax-exempt investment
$ 133,442
58,424
31,665
28,487
71,455
$
securities
Interest-earning deposits
Total interest-earning
assets
Noninterest-earning assets:
Other assets
Allowance for loan losses
Net unrealized losses
on available for sale
securities
Total assets
Interest-bearing liabilities:
1,464
7,511
332,448
17,874
29,704
(2,731 )
(620 )
$ 358,801
NOW accounts
Money management accounts
MMDA accounts
Savings and club accounts
Time deposits
Junior subordinated
$ 26,055
11,037
35,571
53,726
135,965
$
debentures
Borrowings
Total interest-bearing
5,155
37,340
72
35
246
87
3,994
149
1,446
liabilities
304,849
6,029
Noninterest-bearing liabilities:
Demand deposits
Other liabilities
26,114
4,888
Total liabilities
335,851
Shareholders' equity
22,950
Total liabilities &
shareholders' equity
$ 358,801
5.59 %
6.89 %
5.08 %
6.20 %
4.12 %
4.44 %
0.08 %
5.38 %
0.28 %
0.32 %
0.69 %
0.16 %
2.94 %
2.89 %
3.87 %
1.98 %
$
$
130,702
49,040
27,033
26,291
74,105
5,252
2,851
7,527
3,620
1,751
1,915
3,365
255
61
5.76 %
7.38 %
6.48 %
7.28 %
4.54 %
4.86 %
2.14 %
$
$
120,079
43,573
23,710
23,011
66,230
5,446
5,050
6,945
3,309
1,976
1,894
2,881
258
211
5.78 %
7.59 %
8.33 %
8.23 %
4.35 %
4.74 %
4.18 %
315,274
18,494
5.87 %
287,099
17,474
6.08 %
30,274
(2,006 )
(1,690 )
$
341,852
$
$
23,762
10,574
29,181
52,482
124,267
5,155
45,239
27,774
(1,583 )
(1,372 )
$
311,918
95
52
570
168
4,777
257
1,756
0.40 %
0.49 %
1.95 %
0.32 %
3.84 %
4.99 %
3.88 %
$
$
22,235
11,348
23,682
53,359
122,333
6,454
25,063
113
89
937
279
5,483
511
1,230
0.51 %
0.78 %
3.96 %
0.52 %
4.48 %
7.81 %
4.91 %
290,660
7,675
2.64 %
264,474
8,642
3.27 %
25,493
4,088
320,241
21,611
22,828
3,338
290,640
21,278
$
341,852
$
311,918
Net interest income
Net interest rate spread
Net interest margin
Ratio of average interest-earning
assets
to average interest-bearing
liabilities
$
11,845
$
10,819
$
8,832
3.40 %
3.56 %
3.23 %
3.43 %
2.81 %
3.07 %
109.05 %
108.47 %
108.55 %
Page 19
Table of Contents
Interest Income
Changes in interest income result from changes in the average balances of loans, securities and interest-earning deposits and the related yields on those balances. Interest income on
a tax-equivalent basis decreased $620,000, or 3.4%. Average loans increased 8.1% in 2009, with yields decreasing 46 basis points to 5.90%. The Company's average residential
mortgage loan portfolio increased $2.7 million, or 2.1%, when comparing 2009 to 2008. The average yield on the residential mortgage loan portfolio decreased 17 basis points to
5.59% in 2009 from 5.76% in 2008. The average balance of commercial real estate loans increased $9.4 million, or 19.1%, while the yield decreased to 6.89% in 2009 from 7.38% in
2008. Average commercial loans increased 17.1% and the tax-equivalent yield decreased to 5.08% in 2009 compared to 6.48%, in 2008. The average balance of consumer loans
increased $2.2 million, or 8.4% when compared to 2008. The average yield decreased 108 basis points, to 6.20% from 7.28% in 2008.
Interest income on investment securities decreased 16.9% from 2008, resulting from a decrease in the average balance of investment securities (taxable and tax-exempt) of $6.5
million, or 8.1%, to $72.9 million in 2009 from $79.4 million in 2008. The average yield decreased 43 basis points to 4.13% in 2009 from 4.56% in 2008.
Interest Expense
Changes in interest expense result from changes in the average balances of deposits and borrowings and the related interest costs on those balances. Interest expense decreased $1.6
million, or 21.5%, in 2009, when compared to 2008. The decrease in the cost of funds resulted from a decrease in the average cost of interest-bearing liabilities of 66 basis points, to
1.98% in 2009 from 2.64% in 2008, partially offset by a $14.2 million increase in the average balance of interest-bearing liabilities during 2009. The average cost of deposits
decreased 67 basis points to 1.69% during 2009 from 2.36% for 2008. The average balance of interest-bearing deposits increased $22.1 million to $262.4 million in 2009 from
$240.3 million in 2008. The increase in the average balance of deposits resulted from increases in all deposit categories. The largest increases in average deposits came from a 9.6%
increase in interest bearing demand deposit accounts, a 21.9% increase in MMDA accounts and a 9.4% increase in time deposits. The cost of junior subordinated debentures
underlying our trust preferred securities decreased 210 basis points, decreasing interest expense by $108,000, due to the subordinated debentures adjustable rate being tied to
LIBOR. The average balance of borrowed funds decreased $7.9 million to $37.3 million in 2009 from $45.2 million in 2008. The average cost of borrowed funds decreased one
basis point, to 3.87% in 2009 from 3.88% in 2008.
Page 20
Table of Contents
Rate/Volume Analysis
Net interest income can also be analyzed in terms of the impact of changing interest rates on interest-earning assets and interest-bearing liabilities and changes in the volume or
amount of these assets and liabilities. The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-
bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i)
changes attributable to changes in volume (change in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and
(iii) total increase or decrease. Changes attributable to both rate and volume have been allocated ratably.
(In thousands)
Interest Income:
Real estate loans residential
Real estate loans commercial
Commercial loans
Consumer loans
Taxable investment securities
Tax-exempt investment securities
Interest-earning deposits
Total interest income
Interest Expense:
NOW accounts
Money management accounts
MMDA accounts
Savings and club accounts
Time deposits
Junior subordinated debentures
Borrowings
Total interest expense
Net change in net interest income
Provision for Loan Losses
Years Ended December 31,
2009 vs. 2008
2008 vs. 2007
Increase/(Decrease) Due to Increase/(Decrease) Due to
Total
Increase
Volume Rate (Decrease) Volume Rate (Decrease)
Total
Increase
$
$
158 $ (222 ) $
(253 )
657
(425 )
281
(299 )
151
(304 )
(117 )
(20 )
(170 )
(97 )
40
1,000 (1,620 )
8
2
104
4
(31 )
(19 )
(428 )
(85 )
417 (1,200 )
(108 )
-
(305 )
(5 )
230 (1,876 )
770 $ 256 $
(64 ) $
404
(144 )
(148 )
(421 )
(190 )
(57 )
(620 )
606 $
405
252
253
344
(9 )
(71 )
1,780
(24 ) $
(94 )
(477 )
(232 )
140
6
(79 )
(760 )
(23 )
(17 )
(324 )
(81 )
(783 )
(108 )
(310 )
(1,646 )
1,026 $
7
(6 )
184
(5 )
86
(90 )
828
(25 )
(31 )
(551 )
(106 )
(792 )
(164 )
(302 )
1,004 (1,971 )
776 $ 1,211 $
582
311
(225 )
21
484
(3 )
(150 )
1,020
(18 )
(37 )
(367 )
(111 )
(706 )
(254 )
526
(967 )
1,987
The provision for loan losses increased $56,000 to $876,000 for the year ended December 31, 2009, as compared to the prior year. The increased provision is reflective of a growing
loan portfolio that is more heavily weighted to commercial term and commercial real estate loans, which have higher inherent risk characteristics than a traditional consumer real
estate portfolio. The current level of non-performing assets does not fall significantly outside of the Bank’s historic trend levels, however, the generally weak economic conditions
nationally over the past two years, and the current strain on consumer discretionary income have caused management to carefully monitor and react to these trends by increasing the
provision for loan losses, maintaining the Company’s strict loan underwriting standards and carefully monitoring the performance of the loan portfolio.
Page 21
Table of Contents
Noninterest Income
The Company's noninterest income is primarily comprised of fees on deposit account balances and transactions, loan servicing, commissions, and net gains or losses on securities,
loans and foreclosed real estate.
The following table sets forth certain information on noninterest income for the years indicated.
(In thousands)
Service charges on deposit accounts
Earnings on bank owned life insurance
Loan servicing fees
Debit card interchange fees
Other charges, commissions and fees
Noninterest income before gains (losses)
Net gains (losses) on sales and impairment of investment securities
Net gains (losses) on sales of loans and foreclosed real estate
Total noninterest income
For the Years Ended December 31,
2008
$ 1,492
293
281
275
445
2,786
(2,191 )
(44 )
551
2009
$ 1,496
226
233
280
489
2,724
112
54
$ 2,890
$
Noninterest income in 2009 increased 425%, when compared to 2008, primarily as a result of a net gain being recorded on the sale and impairment of investment securities during
2009 as compared to the net loss of $2.2 million recorded for the same in the prior year. Noninterest income before gains and losses decreased $62,000, for the year ended December
31, 2009. The decrease was comprised of a decrease in earnings on bank owned life insurance and loan servicing fees, offset by an increase in other charges, commissions and
fees. Earnings on bank owned life insurance decreased 23%, which is based on the cash surrender values of the insurance policies. Loan servicing fees decreased 17%, which is due
to the combination of a drop in the volume of rate lock fees and the collection of non-recurring one time fees during 2008 associated with various commercial loans. The reduction
in fees was offset by non-recurring administrative income recorded from the Company’s mutual holding company parent that is not consolidated for financial statement reporting
purposes. Revenue generated by service charges on deposit accounts was consistent with the prior year, but may be significantly impacted in 2010 by the implementation of new
regulatory restrictions on the extended overdraft program. These changes apply to all financial institutions participating in such programs.
The small decrease in noninterest income before gains and losses was offset by the significant change from net losses on sales and impairment of investment securities and loans in
the prior year, to a net gain in the current year. The net gain in sales and impairment of investment securities is a result of gains generated from the sales of securities through out the
year, which were offset by recording other-than-temporary impairment charges during the fourth quarter. Net gains on the sale of loans and foreclosed real estate is the result of the
sale of fixed rate loans into the secondary market, offset by the sale of seven foreclosed real estate properties at a loss and the adjustment to fair value of one property.
Page 22
Noninterest Expense
The following table sets forth certain information on noninterest expense for the years indicated.
(In thousands)
Salaries and employee benefits
Building occupancy
Data processing
Professional and other services
Regulatory assessments
Other expenses
Total noninterest expense
For the Years Ended December 31,
2008
$ 5,172
1,322
1,330
771
53
1,287
$ 9,935
2009
$ 5,577
1,246
1,307
844
745
1,407
$ 11,126
Noninterest expenses increased $1.2 million, or 12%, for the year ended December 31, 2009 when compared to 2008. Regulatory assessments increased $692,000 due to the levying
of a 5 basis point special assessment based on the bank’s assets, the increase in regular assessment rates and the exhausting of available credits that reduced assessment charges in
2008. Salaries and employee benefits increased 7.8% in 2009 primarily due to an increase in pension expense caused by unfavorable plan asset performance in the prior year,
combined with annual merit- based wage adjustments. A 9.3% increase in other expenses was due to an increase in both audits and exams combined with the recording of $40,000 in
expenses associated with the Company’s new debit card rewards program. These increases were offset by a decrease of $76,000 in building occupancy, which is the result of a
reduction in utilities, property taxes and depreciation on bank facilities.
Income Tax Expense
In 2009, the Company reported income tax expense of $1.1 million compared with $103,000 in 2008. The effective tax rate increased to 39% in 2009 compared to a tax rate of 22%
in 2008. The increase in income tax expense resulted from significantly higher pretax income, which increased $2.2 million, and the higher tax rate. The Company’s tax rate has
increased primarily as a result of deferred tax asset valuation allowance adjustments and additional state tax. The benefits from the ownership of tax-exempt investment securities
and bank owned life insurance have decreased from the prior year due to a reduction of earnings on such assets. See Note 13 to the consolidated financial statements for the
reconciliation of the statutory tax rate to the effective tax rate.
CHANGES IN FINANCIAL CONDITION
Investment Securities
The investment portfolio represents 21% of the Company’s earning assets and is designed to generate a favorable rate of return consistent with safety of principal while assisting the
Company in meeting its liquidity needs and interest rate risk strategies. All of the Company’s investments are classified as available for sale. The Company invests in securities
consisting primarily of securities issued by United States Government agencies and sponsored enterprises, mortgage-backed securities, state and municipal obligations, mutual funds,
equity securities, investment grade corporate debt instruments, and common stock issued by the Federal Home Loan Bank of New York (FHLBNY). By investing in these types of
assets, the Company reduces the credit risk of its asset base, but must accept lower yields than would typically be available on loan products. Our mortgage backed securities
portfolio is comprised predominantly of pass-through securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and does not, to our knowledge, include any securities
backed by sub-prime or other high-risk mortgages.
Page 23
Table of Contents
At December 31, 2009, investment securities were held at the same level, $74.7 million, as they were at December 31, 2008. There were no securities that exceeded 10% of
consolidated shareholders’ equity. See note 3 to the consolidated financial statements for further discussion on securities.
The following table sets forth the carrying value of the Company's investment portfolio at December 31:
(In Thousands)
Investment Securities:
US Treasury and agencies
State and political subdivisions
Corporate
Other
Residential mortgage-backed
Equity securities and FHLB stock
Mutual funds
Net unrealized gains(losses) on available for sale portfolio
Total investments in securities
At December 31,
2009
2008
2007
$ 14,528 $ 9,126 $ 18,672
8,989 5,020 5,342
5,333 12,181 6,392
-
2,203 2,100
36,124 39,478 28,615
2,271 2,861 2,706
4,790 5,179 6,514
$ 74,238 $ 75,945 $ 68,241
415 (1,258 ) (1,103 )
$ 74,653 $ 74,687 $ 67,138
Certain individual securities have been reclassified in the prior year table above to conform to the current year presentation. The reclassifications had no effect on the total
investment portfolios previously reported.
The following table sets forth the scheduled maturities, amortized cost, fair values and average yields for the Company's investment securities at December 31, 2009. Yield is
calculated on the amortized cost to maturity and adjusted to a fully tax-equivalent basis.
(Dollars in thousands)
Debt investment securities:
US Treasury and agencies
State and political subdivisions
Corporate
Other
Total
Mortgage-backed securities:
Residential mortgage-backed
Total
Other non-maturity investments:
Mutual funds
Equity securities and FHLB stock
Total
Total investment securities
One Year or Less
One to Five Years
Five to Ten Years
Annualized
Annualized
Amortized Weighted
Average
Yield
Cost
Amortized Weighted
Average
Yield
Cost
Annualized
Amortized Weighted
Average
Yield
Cost
$
1,505
96
-
2,203
3,804
765
765
4,790
2,271
7,061
11,630
$
3.88 %
3.25 %
-
4.68 %
4.32 %
4.14 %
4.14 %
2.73 %
4.94 %
3.44 %
3.77 %
$
$
11,000
2,190
3,135
-
16,325
1,650
1,650
-
-
-
17,975
2.00 %
3.32 %
5.53 %
0.00 %
2.85 %
4.33 %
4.33 %
-
-
-
2.99 %
$
$
1,023
2,644
-
-
3,667
4,085
4,085
-
-
-
7,752
3.01 %
3.24 %
0.00 %
-
3.17 %
4.89 %
4.89 %
-
-
-
4.08 %
Page 24
Table of Contents
(Dollars in thousands)
Debt investment securities:
US Treasury and agencies
State and political subdivisions
Corporate
Other
Total
Mortgage-backed securities:
Residential mortgage-backed
Total
Other non-maturity investments:
Mutual funds
Equity securities and FHLB stock
Total
Total investment securities
Total
Investment
Securities
More Than Ten Years
Annualized
Amortized Weighted
Average
Yield
Cost
Amortized
Cost
Annualized
Fair Weighted
Average
Yield
Value
$
$
1,000
4,059
2,198
-
7,257
29,624
29,624
-
-
-
36,881
5.20 % $
4.39 %
0.80 %
-
3.42 %
14,528 $
8,989
5,333
2,203
31,053
14,532
8,928
4,965
2,203
30,628
4.87 %
4.87 %
36,124
36,124
36,940
36,940
-
-
-
4.59 % $
4,790
2,271
7,061
74,238 $
4,814
2,271
7,085
74,653
2.48 %
3.78 %
3.58 %
4.68 %
3.20 %
4.83 %
4.83 %
2.73 %
4.94 %
3.44 %
4.03 %
The above noted yield information does not give effect to changes in fair value that are reflected in accumulated other comprehensive income in consolidated shareholders’ equity.
Loans Receivable
Loans receivable represent 75% of the Company’s earning assets and account for the greatest portion of total interest income. The Company emphasizes residential real estate
financing and anticipates a continued commitment to financing the purchase or improvement of residential real estate in its market area. The Company also extends credit to
businesses within its marketplace secured by commercial real estate, equipment, inventories, and accounts receivable. It is anticipated that small business lending in the form of
mortgages, term loans, leases, and lines of credit will provide the most opportunity for balance sheet and revenue growth over the near term. Commercial and municipal loans
comprise 14% of the total loan portfolio. At December 31, 2009, 75% of the Company’s total loan portfolio consisted of loans secured by real estate, and 24% of the total loan
portfolio consisted of commercial real estate loans.
December 31,
(In thousands)
Residential real estate (1)
Commercial real estate
Commercial and municipal loans
Consumer loans
Total loans receivable
(1) Includes loans held for sale. (None at December 31, 2009, 2008 and 2007.)
Page 25
2008
2006
2009
2007
2005
$ 135,102 $ 136,218 $ 126,666 $ 118,494 $ 119,707
62,250 55,061 45,490 40,501 31,845
35,447 30,685 25,288 23,001 18,334
29,666 27,908 25,305 21,213 19,682
$ 262,465 $ 249,872 $ 222,749 $ 203,209 $ 189,568
Table of Contents
The following table shows the amount of loans outstanding as of December 31, 2009 which, based on remaining scheduled repayments of principal, are due in the periods
indicated. Demand loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as one year or less. Adjustable and floating rate loans are
included in the period on which interest rates are next scheduled to adjust rather than the period in which they contractually mature, and fixed rate loans are included in the period
in which the final contractual repayment is due.
(In thousands)
Real estate:
Commercial real estate
Residential real estate
Commercial and municipal loans
Consumer
Total loans
Interest rates:
Fixed
Variable
Total loans
Due Under
Due 1-5
One Year
Years
Due Over
Five
Years
Total
$
$
$
$
10,459
10,228
20,687
20,710
14,423
55,820
3,734
52,086
55,820
$
$
$
$
45,089
33,417
78,506
12,022
4,082
94,610
$
6,702
91,457
98,159
2,715
11,161
$ 112,035
$ 62,250
135,102
197,352
35,447
29,666
$ 262,465
13,849
80,761
94,610
$ 103,766
8,269
$ 112,035
$ 121,349
141,116
$ 262,465
Total loans receivable increased 5% when compared to the prior year. Residential real estate loans decreased $1.1 million, or 1%, during 2009. The residential real estate portfolio
consists of 68% fixed-rate mortgages and 32% adjustable-rate mortgages. There was a 4% shift to fixed rate mortgages from adjustable rate mortgages when compared to the
portfolio composition as of December 31, 2008. The increase in the fixed rate mortgage portfolio resulted from increased demand for fixed rate products due to the historically low
interest rate environment that was prevalent during 2009. The Company does not originate sub-prime, Alt-A, negative amortizing or other higher risk structured residential
mortgages.
Commercial real estate loans increased $7.2 million, or 13%, from the prior year as new loan products and relationships were added to the portfolio.
Commercial loans, including loans to municipalities, increased 16% over the prior year to $35.4 million at December 31, 2009. The increase in commercial loans was primarily the
result of new lending relationships with an expanding commercial customer base. The Company has continued its efforts to transform its more traditional thrift balance sheet, which
emphasized residential real estate lending, to a more diversified balance sheet, which includes a greater proportion of commercial lending products.
Consumer loans, which include second mortgage loans, home equity lines of credit, direct installment and revolving credit loans, increased 6% to $29.7 million at December 31,
2009. The increase resulted from an increase in home equity lines of credit. The Company has promoted its home equity products by offering the customer loans with no closing
costs at competitive market rates.
Page 26
Table of Contents
Non-performing Loans and Assets
The following table represents information concerning the aggregate amount of non-performing assets:
(In thousands)
Nonaccrual loans:
Commercial real estate and commercial
Consumer
Residential real estate
Total nonaccrual loans
Total non-performing loans
Foreclosed real estate
Total non-performing assets
Non-performing loans to total loans
Non-performing assets to total assets
Interest income that would have been recorded
under the original terms of the loans
2009
2008
2006
2005
December 31,
2007
$ 1,455
254
614
2,323
2,323
335
$ 2,658
$ 521
$ 1,021
150
111
920
1,181
1,591
2,313
1,591
2,313
865
181
$ 2,494
$ 2,456
0.88 % 0.93 % 0.71 % 0.57 % 0.89 %
0.67 % 0.75 % 0.77 % 0.54 % 0.82 %
$ 481
125
566
1,172
1,172
471
$ 1,643
$ 757
89
834
1,680
1,680
743
$ 2,423
$ 113
$ 131
$
71
$
53
$
34
The asset quality of the Company has remained relatively unchanged when compared to the prior year. Total non-performing assets (non-performing loans and foreclosed real
estate) at December 31, 2009 were 0.67% of total assets as compared to 0.75% of total assets at December 31, 2008. The reduction in non-performing assets was primarily due to
the sale of foreclosed real estate. Total non-performing loans (past due 90 days or more) decreased $10,000, or less than 1%, during 2009. Although total non-performing loans
have remained fairly level, the mix in loan type has shifted from being primarily commercial to being more evenly comprised of commercial and residential real estate loans. In
2008, approximately 63% of the Company’s non-performing loans were commercial real estate and commercial loans. At December 31, 2009, the non-performing loan balance was
44% commercial and 51% residential real estate loans. Management believes the financial strength of the individual borrowers, combined with the related value of any underlying
collateral, will not result in any significant loss beyond currently established reserves.
Total delinquent loans (those 30 days or more delinquent) as a percentage of total loans were 3.2% at December 31, 2009 as compared to 2.16% at December 31,
2008. Management believes that the increase is being driven by general economic conditions in the market area. Approximately 81% of the outstanding delinquent loans are
secured by real estate with loss potential expected to be manageable within the currently established reserves.
The Company generally places a loan on nonaccrual status and ceases accruing interest when loan payment performance is deemed unsatisfactory and the loan is past due 90 days or
more. The Company considers a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of
principal and interest when due according to the contractual terms of the loan.
The measurement of impaired loans is generally based upon the present value of future cash flows discounted at the historical effective interest rate, except that all collateral-
dependent loans are measured for impairment based on the fair value of the collateral. The Company used the fair value of collateral to measure impairment on commercial and
commercial real estate loans. At December 31, 2009 and 2008, the Company had $3.2 million and $2.4 million in loans, which were deemed to be impaired, having valuation
allowances of $79,000 and $141,000, respectively.
Page 27
Table of Contents
Management has identified additional potential problem loans totaling $5.0 million as of December 31, 2009. These loans have been internally classified as special mention or
substandard, yet are not currently considered past due or in nonaccrual status. Management has identified potential credit problems which may result in the borrowers not being able
to comply with the current loan repayment terms and which may result in it being included in subsequent past due reporting. Management believes that the current allowance for loan
losses is adequate to cover probable credit losses in the current loan portfolio.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through charges to expense in the form of a provision for loan losses and reduced by loan charge-offs net of recoveries. The
allowance for loan losses represents the amount available for probable credit losses in the Company’s loan portfolio as estimated by management. The Company maintains an
allowance for loan losses based upon a monthly evaluation of known and inherent risks in the loan portfolio, which includes a review of the balances and composition of the loan
portfolio as well as analyzing the level of delinquencies in each segment of the loan portfolio. The Company uses a general allocation method for the residential real estate and
consumer loan pools based upon a methodology that uses loss factors applied to loan balances and reflects actual loss experience, delinquency trends and current economic
conditions. The Company individually reviews commercial real estate and commercial loans greater than $150,000 that are not accruing interest and that are risk rated under the
Company’s risk rating system as special mention, substandard, doubtful or loss to determine if the loans require an impairment reserve. Large residential real estate loans may also
be included in this individual loan review. If impairment is noted, the Company establishes a specific reserve allocation. The specific allocation is determined based on the most
recent valuation of the loan’s collateral and the customer’s ability to pay. For all other commercial real estate and commercial loans, the Company uses the general allocation method
that establishes a reserve for each risk-rating category. The general allocation method for commercial real estate and commercial loans considers the same factors that are considered
when evaluating residential real estate and consumer loan pools. The allowance for loan losses reflects management’s best estimate of probable loan losses at December 31, 2009.
The allowance for loan losses was $3.1 million at December 31, 2009, a 25% increase from December 31, 2008. The allowance for loan losses as a percentage of total loans
increased to 1.17% at December 31, 2009 from 0.99% in the prior year. Net loan charge-offs were $270,000 during 2009 as compared to $51,000 in 2008. The majority of the
current year charge-off activity is the result of the write off of small consumer and commercial relationships.
The following table sets forth the allocation of allowance for loan losses by loan category for the periods indicated. The allocation of the allowance by category is not necessarily
indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
2009
2008
2007
2006
2005
(Dollars in thousands)
Commercial real estate and loans
Consumer loans
Residential real estate
Total
Amount
1,699
$
479
900
3,078
$
% Gross
Loans
Amount
1,412
381
679
2,472
37.2 % $
11.3 %
51.5 %
100.0 % $
% Gross
Loans
Amount
985
339
172
1,496
31.8 % $
11.3 %
56.9 %
100.0 % $
% Gross
Loans
Amount
956
283
464
1,703
34.3 % $
11.2 %
54.5 %
100.0 % $
Page 28
% Gross
Loans
Amount
1,282
289
108
1,679
31.3 % $
10.4 %
58.3 %
100.0 % $
% Gross
Loans
26.5 %
10.4 %
63.1 %
100.0 %
Table of Contents
The following table sets forth the allowance for loan losses for the periods indicated, and related ratios.
(In thousands)
Balance at beginning of year
Provisions charged to operating expenses
Recoveries of loans previously charged-off:
Commercial real estate and loans
Consumer
Residential real estate
Total recoveries
Loans charged-off:
Commercial real estate and loans
Consumer
Residential real estate
Total charged-off
Net charge-offs
Balance at end of year
Net charge-offs to average loans outstanding
Allowance for loan losses to year-end loans
Deposits
$
2009
2,472
876
$
2008
1,703
820
$
2007
1,496
365
$
2006
1,679
23
$
2005
1,827
311
-
20
3
23
(74 )
(134 )
(85 )
(293 )
(270 )
3,078
0.11 %
1.17 %
$
17
30
-
47
(46 )
(52 )
-
(98 )
(51 )
2,472
0.02 %
0.99 %
$
-
27
23
50
(85 )
(77 )
(46 )
(208 )
(158 )
1,703
0.08 %
0.76 %
$
-
18
4
22
(114 )
(89 )
(25 )
(228 )
(206 )
1,496
0.11 %
0.74 %
$
25
14
10
49
(284 )
(137 )
(87 )
(508 )
(459 )
1,679
0.24 %
0.89 %
$
The Company’s deposit base is drawn from seven full-service offices in its market area. The deposit base consists of demand deposits, money management and money market
deposit accounts, savings and time deposits. During 2009, 53% of the Company's average deposit base of $288.5 million consisted of core deposits. Core deposits, which exclude
time deposits, are considered to be more stable and provide the Company with a lower cost source of funds than time deposits. The Company will continue to emphasize retail core
deposits by maintaining its network of full service offices and providing depositors with a full range of deposit product offerings. In addition, Pathfinder Commercial Bank, our
commercial bank subsidiary, will seek business growth by focusing on its local identification and service excellence. Pathfinder Commercial Bank had an average balance of $40.3
million in municipal deposits in 2009, primarily concentrated in money market deposit accounts.
Average deposits increased $22.7 million, or 9%, when compared to 2008. The increase in average deposits primarily related to a $9.4 million increase in the average balance of
municipal deposits and a $13.3 million increase in retail deposits.
The Company's average deposit mix in 2009, as compared to 2008, reflected a similar product line composition. The Company's average demand deposits, both interest and
noninterest bearing accounts, represented 18% of total average deposits for 2009 and 19% of total average deposits for 2008. The Company's average MMDA accounts, which grew
22% in 2009, represented 12% of total deposits for 2009 and 11% for 2008. The Company’s time deposit accounts represented 47% of total deposits in both 2009 and 2008. The
Company promotes its MMDA and time deposit accounts by offering competitive rates to retain existing and attract new customers.
At December 31, 2009, time deposits in excess of $100,000 totaled $53.4 million, or 38%, of time deposits and 18% of total deposits. At December 31, 2008, these deposits totaled
$40.7 million, or 31% of time deposits and 15% of total deposits.
Page 29
Table of Contents
The following table indicates the amount of the Company’s certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2009:
(In thousands)
Remaining Maturity:
Three months or less
Three through six months
Six through twelve months
Over twelve months
Total
Borrowings
$ 22,362
9,391
7,631
14,037
$ 53,421
Short-term borrowings are comprised primarily of advances and overnight borrowing at the FHLBNY. There were no short-term borrowings outstanding at December 31, 2009. At
December 31, 2008, there were $17.6 million in short-term borrowings outstanding.
The following table represents information regarding short-term borrowings during 2009, 2008 and 2007:
(Dollars in thousands)
Maximum outstanding at any month end
Average amount outstanding during the year
Average interest rate during the year
2009
$ 1,400
1,724
1.84 %
2008
$ 23,795
14,151
2007
$ 18,400
4,528
2.85 %
5.05 %
Long-term borrowed funds consist of advances and repurchase agreements from the FHLBNY, Citi Group repurchase agreements and junior subordinated debentures. Long-term
borrowed funds and junior subordinated debentures totaled $41.2 million at December 31, 2009 as compared to $39.6 million at December 31, 2008.
Capital
Shareholders' equity at December 31, 2009, was $29.2 million as compared to $19.5 million at December 31, 2008. The Company added $1.6 million to retained earnings through net
income. The increase to retained earnings was combined with a decrease of $1.7 million in accumulated other comprehensive loss, which decreased to $1.4 million from $3.1 million
at December 31, 2008. Net unrealized holding gains on securities, net of tax, resulted in a decrease in accumulated other comprehensive loss of $1.3 million. In addition, $413,000 of
amortization of retirement plan losses and transition obligation, net of tax expense, decreased accumulated other comprehensive loss during 2009. The current common stock
dividend level represents an approximately 71% reduction as compared to 2008 dividend levels. Common stock dividends declared reduced capital by $298,000. The Board of
Directors and management of the Company believe it is in the best interest of the shareholders to conserve capital at this time. The remaining increase to capital was the result of the
Company entering into an agreement with the United States Department of Treasury pursuant to which Pathfinder Bancorp, Inc. issued and sold 6,771 shares of preferred stock and
warrants to purchase the Company’s common stock for a total price of $6,771,000. The increase is offset by dividends paid on the Series A Preferred Stock, described below, of
$60,000.
On September 11, 2009, the Company, entered into a Letter Agreement (the “Purchase Agreement”), with the United States Department of the Treasury (“Treasury Department”)
pursuant to which the Company has issued and sold to Treasury: (i) 6,771 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per
share (the “Series A Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total price of $6,771,000; and (ii) a Warrant (the “Warrant”) to purchase 154,354
shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), at an exercise price per share of $6.58. The Company contributed to Pathfinder Bank, its
subsidiary, $5,500,000 or 81.23% of the proceeds of the sale of the Series A Preferred Stock.
Page 30
Table of Contents
The $6,771,000 of proceeds was allocated to the Series A Preferred Stock and the Warrant based on their relative fair values at issuance ($6,065,000 was allocated to the Series A
Preferred Stock and $706,000 to the Warrant). The difference between the initial value allocated to the Series A Preferred Stock and the liquidation value of $6,771,000, i.e. the
preferred discount, will be charged to retained earnings over the first five years of the contract as an adjustment to the dividend yield using the effective yield method.
The Series A Preferred Stock pays cumulative dividends at a rate of 5% per annum for the first five years and thereafter at a rate of 9% per annum. The Series A Preferred Stock is
generally non-voting. Prior to September 11, 2012, and unless the Company has redeemed all of the Series A Preferred Stock or the Treasury Department has transferred all of the
Series A Preferred Stock to a third party, the approval of the Treasury Department will be required for the Company to increase its common stock dividend or repurchase its common
stock or other equity or capital securities, other than in certain circumstances specified in the Purchase Agreement.
The Warrant has a ten-year term and is immediately exercisable. The Warrant provides for the adjustment of the exercise price and the number of shares of the Company’s common
stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of the Company’s
common stock, and upon certain issuances of the Company’s common stock at or below a specified price relative to the then current market price of the Company’s common
stock. Pursuant to the Purchase Agreement, the Treasury Department has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of
the Warrant.
The Series A Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The
Company has agreed to register for resale the Series A Preferred Stock, the Warrant and the shares of common stock underlying the Warrant (the “Warrant Shares”), as soon as
practicable after the date of the issuance of the Series A Preferred Stock and the Warrant. Neither the Series A Preferred Stock nor the Warrant will be subject to any contractual
restrictions on transfer.
Risk-based capital provides the basis for which all banks are evaluated in terms of capital adequacy. Capital adequacy is evaluated primarily by the use of ratios which measure
capital against total assets, as well as against total assets that are weighted based on defined risk characteristics. The Company’s goal is to maintain a strong capital position,
consistent with the risk profile of its subsidiary banks that supports growth and expansion activities while at the same time exceeding regulatory standards. At December 31, 2009,
Pathfinder Bank exceeded all regulatory required minimum capital ratios and met the regulatory definition of a “well-capitalized” institution, i.e. a leverage capital ratio exceeding
5%, a Tier 1 risk-based capital ratio exceeding 6% and a total risk-based capital ratio exceeding 10%.
LIQUIDITY
Liquidity management involves the Company’s ability to generate cash or otherwise obtain funds at reasonable rates to support asset growth, meet deposit withdrawals, maintain
reserve requirements, and otherwise operate the Company on an ongoing basis. The Company's primary sources of funds are deposits, borrowed funds, amortization and prepayment
of loans and maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans
are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company
manages the pricing of deposits to maintain a desired deposit balance. In addition, the Company invests excess funds in short-term interest-earning and other assets, which provide
liquidity to meet lending requirements.
The Company's liquidity has been enhanced by its membership in the Federal Home Loan Bank of New York, whose competitive advance programs and lines of credit provide the
Company with a safe, reliable and convenient source of funds. A significant decrease in deposits in the future
Page 31
Table of Contents
could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could include, but are not limited to, additional borrowings, trust preferred
security offerings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment securities, the sale of securitized loans, or the sale of whole loans. Such
actions could result in higher interest expense costs and/or losses on the sale of securities or loans.
The Company has a number of existing credit facilities. Total credit available under the existing lines is approximately $73 million. At December 31, 2009, the Company had $36
million outstanding under existing credit facilities with $37 million available.
The Asset Liability Management Committee of the Company is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity. As of
December 31, 2009, management reported to the Board of Directors that the Company is in compliance with its liquidity policy guidelines.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is also a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit. At December 31, 2009, the Company had $25.2 million in outstanding commitments to extend credit
and standby letters of credit. See Note 15 in the accompanying consolidated financial statements.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required of a smaller reporting company.
Page 32
Table of Contents
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Pathfinder Bancorp, Inc.
Management’s Report On Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Condition – December 31, 2009 and 2008
Consolidated Statements of Income – Years ended December 31, 2009 and 2008
Consolidated Statements of Changes in Shareholders’ Equity – Years ended December 31, 2009 and 2008
Consolidated Statements of Cash Flows – Years ended December 31, 2009 and 2008
Notes to Consolidated Financial Statements
Page 33
Page
34
35
36
37
38
39
41
Table of Contents
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-
15(f) of the Securities Exchange Act of 1934, as amended. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with policies or procedures may deteriorate. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s
principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s
financial statements for external reporting purposes in accordance with United States generally accepted accounting principles.
Under the supervision and with the participation of management, including the Company’s principal executive officer and principal financial officer, the Company conducted an
evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on its evaluation under that framework, management concluded that the Company’s internal control over financial
reporting was effective as of December 31, 2009. In addition, based on our assessment, management has determined that there were no material weaknesses in the Company’s
internal controls over financial reporting.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting pursuant
to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
/s/ Thomas W. Schneider
Thomas W. Schneider
President & Chief Executive Officer
Oswego, New York
March 24, 2010
/s/ James A. Dowd
James A. Dowd
Senior Vice President and Chief Financial Officer
Page 34
Table of Contents
To the Board of Directors and Shareholders
Pathfinder Bancorp, Inc.
Oswego, New York
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated statements of condition of Pathfinder Bancorp, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of income, changes in shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2009. Pathfinder Bancorp, Inc.’s
management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pathfinder Bancorp, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December
31, 2009 in conformity with accounting principles generally accepted in the United States of America.
ParenteBeard LLC
Syracuse, New York
March 24, 2010
/s/ ParenteBeard LLC
Page 35
Table of Contents
CONS OLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
ASSETS:
Cash and due from banks
Interest earning deposits
Total cash and cash equivalents
Investment securities, at fair value
Federal Home Loan Bank stock, at cost
Loans
Less: Allowance for loan losses
Loans receivable, net
Premises and equipment, net
Accrued interest receivable
Foreclosed real estate
Goodwill
Bank owned life insurance
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing
Noninterest-bearing
Total deposits
Short-term borrowings
Long-term borrowings
Junior subordinated debentures
Other liabilities
Total liabilities
Shareholders' equity:
Preferred stock, par value $0.01 per share; $1,000 liquidation preference;
1,000,000 shares authorized; 6,771 shares issued and outstanding as of December 31,
2009; 0 shares issued and outstanding as of December 31, 2008
Common stock, par value $0.01; authorized 10,000,000 shares;
2,972,119 and 2,484,832 shares issued and outstanding respectively
Additional paid in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost; 487,287 shares
Total shareholders' equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
Page 36
December 31,
2009
2008
3,078
1,899
$ 8,678 $ 7,365
313
5,953
14,631
7,678
72,754 72,138
2,549
262,465 249,872
2,472
259,387 247,400
7,450
1,678
335
3,840
6,731
2,961
$ 371,692 $ 352,760
7,173
1,482
181
3,840
6,956
3,389
$ 269,539 $ 243,288
27,300 26,150
296,839 269,438
- 17,575
36,000 34,400
5,155
6,697
342,454 333,265
5,155
4,460
6,101
-
30
8,615
30
7,909
22,419 21,198
(3,140 )
(6,502 )
29,238 19,495
$ 371,692 $ 352,760
(1,425 )
(6,502 )
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Interest and dividend income:
Loans, including fees
Debt securities:
Taxable
Tax-exempt
Dividends
Federal funds sold and interest earning deposits
Total interest income
Interest expense:
Interest on deposits
Interest on short-term borrowings
Interest on long-term borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Earnings on bank owned life insurance
Loan servicing fees
Losses on impairment of investment securities
Net gains (losses) on sales of investment securities
Net gains (losses) on sales of loans and foreclosed real estate
Debit card interchange fees
Other charges, commissions & fees
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Building occupancy
Data processing expenses
Professional and other services
FDIC assessment
Other expenses
Total noninterest expenses
Income before income taxes
Provision for income taxes
Net income
Preferred stock dividends and discount accretion
Net income available to common shareholders
Earnings per common share - basic
Earnings per common share - diluted
Dividends per common share
The accompanying notes are an integral part of the consolidated financial statements.
Page 37
Years Ended December 31,
2008
2009
$ 14,815 $ 14,756
2,603 2,956
171
43
406
339
61
6
17,806 18,350
4,434 5,661
403
32
1,563 1,611
6,029 7,675
11,777 10,675
820
10,901 9,855
876
1,496 1,492
293
225
233
281
(693 ) (2,253 )
62
805
(44 )
54
275
280
445
490
551
2,890
844
745
5,577 5,172
1,246 1,322
1,307 1,330
771
53
1,407 1,287
11,126 9,935
471
2,665
103
1,050
368
1,615
-
96
368
$ 1,519 $
$ 0.61 $ 0.15
$ 0.61 $ 0.15
0.41
$ 0.12
Table of Contents
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data)
Balance, January 1, 2009
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Unrealized holding gains on securities
available for sale (net of $371 tax expense)
Retirement plan net gains and transition
obligation not recognized in plan expenses
(net of $275 tax expense)
Total Comprehensive income
Preferred stock and
common stock warrants issued
Preferred stock discount accretion
Preferred stock dividends
Common stock dividends declared ($0.12 per share)
Balance, December 31, 2009
Balance, January 1, 2008
Cumulative effect of a change in accounting
principle upon the change in defined
employee benefit plans' measurement date
(net of $8 tax expense)
Comprehensive loss:
Net income
Other comprehensive loss, net of tax:
Unrealized holding losses on securities
available for sale (net of $237 tax expense)
Retirement plan net losses and transition
obligation not recognized in plan expenses
(net of $869 tax benefit)
Total Comprehensive loss
Stock options exercised
Common stock dividends declared ($0.41 per share)
Balance, December 31, 2008
The accompanying notes are an integral part of the consolidated financial statements.
Page 38
Additional
Accumulated
Other Com-
Preferred Common
Paid in Retained prehensive Treasury
Stock
- $
Stock Capital Earnings
30 $
7,909 $ 21,198 $
Loss Stock Total
(3,140 ) $ (6,502 ) $ 19,495
1,615
1,615
1,302
1,302
413
413
3,330
6,065
36
$ 6,101 $
30 $
706
(36 )
(60 )
(298 )
8,615 $ 22,419 $
6,771
-
(60 )
(298 )
(1,425 ) $ (6,502 ) $ 29,238
- $
30 $
7,899 $ 21,734 $
(1,457 ) $ (6,502 ) $ 21,704
13
(48 )
368
(35 )
368
(392 )
(392 )
(1,304 )
(1,304 )
(1,328 )
10
(856 )
(3,140 ) $ (6,502 ) $ 19,495
- $
30 $
10
(856 )
7,909 $ 21,198 $
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Deferred income tax expense (benefit)
Proceeds from sales of loans
Originations of loans held-for-sale
Realized losses (gains) on sales of:
Real estate acquired through foreclosure
Premises and equipment
Loans
Available-for-sale investment securities
Impairment write-down on available-for-sale securities
Depreciation
Amortization of mortgage servicing rights
Amortization of deferred loan costs
Earnings on bank owned life insurance
Net amortization of premiums and discounts on investment securities
Decrease (increase) in accrued interest receivable
Net change in other assets and liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale
Net proceeds from the redemption of (purchase of) Federal Home Loan Bank stock
Proceeds from maturities and principal reductions of
investment securities available-for-sale
Proceeds from sale of:
Available-for-sale investment securities
Real estate acquired through foreclosure
Premises and equipment
Net increase in loans
Purchase of premises and equipment
Net cash used in investing activities
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts, savings accounts,
money management deposit accounts, MMDA accounts and escrow deposits
Net increase in time deposits
Net repayments on short-term borrowings
Payments on long-term borrowings
Proceeds from long-term borrowings
Proceeds from the issuance of preferred stock and common stock warrants
Proceeds from exercise of stock options
Cash dividends paid to preferred shareholders
Cash dividends paid to common shareholders
Net cash provided by financing activities
Page 39
Years Ended
December 31,
2009
2008
$ 1,615 $
368
876
441
9,659
(9,540 )
820
(388 )
174
(172 )
46
65
-
2
(2 )
(119 )
(62 )
(805 )
693 2,253
698
657
28
32
218
240
(293 )
(225 )
112
254
(5 )
196
(2,940 )
(299 )
1,101 3,496
(43,666 ) (31,756 )
(421 )
650
22,151 18,633
22,430 3,531
979
498
1
-
(13,488 ) (27,890 )
(341 )
(11,807 ) (37,265 )
(383 )
18,129 6,003
9,272 12,350
(17,575 )
(825 )
(5,400 ) (11,610 )
7,000 26,000
-
6,771
10
-
-
(60 )
(694 )
(478 )
17,659 31,234
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
CASH PAID DURING THE PERIOD FOR:
Interest
Income taxes
NON-CASH INVESTING ACTIVITY
Transfer of loans to foreclosed real estate
The accompanying notes are an integral part of the consolidated financial statements.
Page 40
Years Ended
December 31,
2008
2009
6,953 (2,535 )
7,678 10,213
$ 14,631 $ 7,678
$ 6,051 $ 7,714
162
524
385
498
Table of Contents
NO TES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The accompanying consolidated financial statements include the accounts of Pathfinder Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Pathfinder Bank (the
“Bank”). The Bank has three wholly owned operating subsidiaries, Pathfinder Commercial Bank, Whispering Oaks Development Corp. and Pathfinder REIT, Inc. All inter-company
accounts and activity have been eliminated in consolidation. The Company has seven offices located in Oswego County. The Company is primarily engaged in the business of
attracting deposits from the general public in the Company’s market area, and investing such deposits, together with other sources of funds, in loans secured by one-to-four family
residential real estate, commercial real estate, business assets and in investment securities.
Pathfinder Bancorp, M.H.C., (the “Holding Company”) a mutual holding company whose activity is not included in the accompanying financial statements, owns approximately
63.7% of the outstanding common stock of the Company. Salaries and employee benefits approximating $113,000 and $152,000 were allocated from the Company to the Holding
Company during 2009 and 2008, respectively. The Holding Company recorded $15,000 as rental income from the Bank for each year presented. As of December 31, 2009, the
Bank had a loan receivable from the Holding Company of $1,274,000.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management has identified the allowance for loan losses, deferred income
taxes, pension obligations, the evaluation of goodwill for impairment and the evaluation of investment securities for other than temporary impairment to be the accounting areas that
require the most subjective and complex judgments, and as such, could be the most subject to revision as new information becomes available.
The Company is subject to the regulations of various governmental agencies. The Company also undergoes periodic examinations by the regulatory agencies which may subject it to
further changes with respect to asset valuations, amounts of required loss allowances, and operating restrictions resulting from the regulators' judgments based on information
available to them at the time of their examinations.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located primarily in Oswego and parts of Onondaga counties of New York State. Note 3 discusses the types of securities that
the Company invests in. Note 4 discusses the types of lending that the Company engages in. The Company does not have any significant concentrations to any one industry or
customer.
Advertising
The Company follows the policy of charging the costs of advertising to expense as incurred. Advertising costs included in other operating expenses were $353,000 and $264,000 for
the years ended December 31, 2009 and 2008, respectively. The increase in advertising expenses is directly attributable to marketing efforts associated with the Bank’s celebration
of 150 years of operation.
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Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks and interest-bearing deposits (with original maturity of three months or less).
Investment Securities
The Company classifies investment securities as available-for-sale. Available-for-sale securities are reported at fair value, with net unrealized gains and losses reflected as a separate
component of shareholders’ equity, net of the applicable income tax effect. None of the Company’s investment securities have been classified as trading or held-to-maturity.
Gains or losses on investment security transactions are based on the amortized cost of the specific securities sold. Premiums and discounts on securities are amortized and accreted
into income using the interest method over the period to maturity.
Note 3 to the consolidated financial statements includes additional information about the Company’s accounting policies with respect to the impairment of investment securities.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of its district FHLB according to a predetermined formula. The stock is
carried at cost.
Mortgage Loans Held-for-Sale
Mortgage loans held-for-sale are carried at the lower of cost or fair value. Fair value is determined in the aggregate. There were no loans held-for-sale or forward commitments
outstanding as of December 31, 2009 and 2008.
Transfers of Financial Assets
Transfers of financial assets, including sales of loans and loan participations, are accounted for as sales when control over the assets has been surrendered. Control over transferred
assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to
repurchase them before their maturity.
Loans
The Company grants mortgage, commercial and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or
pay-off, generally are stated at unpaid principal balances, less the allowance for loan losses and plus net deferred loan origination costs. The ability of the Company’s debtors to
honor their contracts is dependent upon the real estate and general economic conditions in the market area. Interest income is generally recognized when income is earned using the
interest method. Nonrefundable loan fees received and related direct origination costs incurred are deferred and amortized over the life of the loan using the interest method, resulting
in a constant effective yield over the loan term. Deferred fees are recognized into income and deferred costs are charged to income immediately upon prepayment of the related loan.
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Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Company periodically
evaluates the adequacy of the allowance for loan losses in order to maintain the allowance at a level that is sufficient to absorb probable and estimable credit losses.
The allowance consists of specific, general and unallocated components. It includes amounts specifically allocated to impaired loans. A loan is considered impaired, based on
current information and events, if it is probable the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of
the loan agreement. Specific reserves are established based on the fair value of underlying collateral or discounted cash flows, as appropriate, when those values are lower than the
carrying value of the loan. The allowance is also comprised of general reserves, which are established by applying loss factors to the aggregate balance of major loan categories or
pools of smaller balance homogeneous loans. The loss factors are determined by management based on an evaluation of historical loss experience, delinquency trends, volume and
type of lending conducted, and the impact of current economic conditions in the market area. An unallocated component of the allowance may be maintained to cover uncertainties
that could affect management’s estimate of probable losses. The unallocated component reflects the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the portfolio. While management uses the best information available to make evaluations, future adjustments to the
allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluation.
Income Recognition on Impaired and Non-accrual Loans
Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days. When
a loan is classified as non-accrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to
principal outstanding.
When future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a non-accrual loan had been partially
charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest
receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under standby letters of credit. Such financial instruments
are recorded when they are funded.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets,
ranging up to 40 years for premises and 10 years for equipment. Maintenance and repairs are charged to operating expenses as incurred. The asset cost and accumulated depreciation
are removed from the accounts for assets sold or retired and any resulting gain or loss is included in the determination of income.
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Foreclosed Real Estate
Properties acquired through foreclosure, or by deed in lieu of foreclosure, are recorded at their fair value less estimated disposal costs. Fair value is determined based on a current
appraisal and inspection. Costs incurred in connection with preparing the foreclosed real estate for disposition are capitalized to the extent that they enhance the overall fair value of
the property. Write downs of, and expenses related to, foreclosed real estate holdings are included in noninterest expense and were $90,000 and $133,000 in 2009 and 2008,
respectively.
Goodwill
Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. Goodwill is not amortized but is evaluated annually for impairment.
Mortgage Servicing Rights
Originated mortgage servicing rights are recorded at their fair value at the time of transfer and are amortized in proportion to and over the period of estimated net servicing income or
loss. The carrying value of the originated mortgage servicing rights is periodically evaluated for impairment.
Stock-Based Compensation
Compensation costs related to share-based payment transactions are recognized based on the grant-date fair value of the stock-based compensation issued. Compensation costs are
recognized over the period that an employee provides service in exchange for the award. No options were granted during 2009 or 2008, and all outstanding options were fully vested
on January 1, 2006 and, accordingly, there was no impact on the Company’s results of operations for the periods presented.
Retirement Benefits
The Company has established tax qualified retirement plans covering substantially all full-time employees and certain part-time employees. Pension expense under these plans is
charged to current operations and consists of several components of net pension cost based on various actuarial assumptions regarding future experience under the plans.
Gains and losses, prior service costs and credits, and any remaining transition amounts that have not yet been recognized through net periodic benefit cost are recognized in
accumulated other comprehensive loss, net of tax effects, until they are amortized as a component of net periodic cost. On January 1, 2008, the Company recorded a $48,000 charge
to retained earnings, representing the cumulative effect adjustment upon adopting the measurement date transition rule for the Company’s pension plan and post retirement benefit
plan. Plan assets and obligations are to be measured as of the employer’s balance sheet date. The Company previously measured its pension plan as of October 1 of each year. As a
result of the measurement date provisions, the Company decreased its pension plan asset with a corresponding charge to retained earnings, representing the net periodic benefit cost
for the period between the October 1, 2007 measurement date and January 1, 2008.
In addition, the Company has unfunded deferred compensation and supplemental executive retirement plans for selected current and former employees and officers that provide
benefits that cannot be paid from a qualified retirement plan due to Internal Revenue Code restrictions. These plans are nonqualified under the Internal Revenue Code, and assets
used to fund benefit payments are not segregated from other assets of the Company, therefore, in general, a participant's or beneficiary's claim to benefits under these plans is as a
general creditor.
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Derivative Financial Instruments
Derivatives are recorded on the statement of condition as assets and liabilities measured at their fair value. The accounting for increases and decreases in the value of derivatives
depends upon the use of derivatives and whether the derivatives qualify for hedge accounting. The Company currently has one interest rate swap, which has been determined to be a
cash flow hedge. The fair value of cash-flow hedging instruments (“Cash Flow Hedge”) is recorded in either other assets or other liabilities. On an ongoing basis, the statement of
condition is adjusted to reflect the then current fair value of the Cash Flow Hedge. The related gains or losses are reported in other comprehensive income and are subsequently
reclassified into earnings, as a yield adjustment in the same period in which the related interest on the hedged item (primarily a variable-rate debt obligation) affect earnings. To the
extent that the Cash Flow Hedge is not effective, the ineffective portion of the Cash Flow Hedge is immediately recognized as interest expense.
Income Taxes
Provisions for income taxes are based on taxes currently payable or refundable and deferred income taxes on temporary differences between the tax basis of assets and liabilities and
their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are reported in the consolidated financial statements at currently enacted income tax
rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.
Earnings per Common Share
Basic earnings per common share are computed by dividing net income, after the preferred stock dividends and preferred stock discount accretion, by the weighted average number
of common shares outstanding throughout each year. Diluted earnings per share gives effect to weighted average shares that would be outstanding assuming the exercise of issued
stock options using the treasury stock method.
Other Comprehensive (Loss) Income
Accounting principles generally accepted in the United States of America, require that recognized revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, the effective portion of cash-flow hedges, and unrecognized gains and losses,
prior service costs and transition assets or obligations for defined benefit pension and post-retirement plans are reported as a separate component of the shareholders’ equity section
of the consolidated statements of condition, such items, along with net income, are components of comprehensive (loss) income.
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The components of other comprehensive income (loss) and the related tax effect at and for the years ended December 31, are as follows:
(In thousands)
Unrealized holding gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the year
Reclassification adjustment for (gains) losses included in net income
Net unrealized gains (losses) on securities available for sale
Defined benefit pension and post retirement plans:
Additional plan gains (losses)
Reclassification adjustment for amortization of benefit plans'
net loss and prior service liability recognized in net
periodic expense
Net change in defined benefit plan assets and obligations
Other comprehensive income (loss) before tax
Tax effect
Other comprehensive income (loss)
The components of accumulated other comprehensive loss, net of related tax effects, at December 31, are as follows:
(In thousands)
Unrealized gains (losses) on securities available for sale (net of tax
expense 2009 - $166; and tax benefit 2008 - $205)
Net pension losses and past service liability (net of tax
benefit 2009 - $1,100; 2008 - $1,352)
Net post-retirement losses and past service liability (net of tax
benefit 2009 - $17; 2008 - $40)
Reclassifications
2009
2008
$ 1,785
(112 )
1,673
$ (2,346 )
2,191
(155 )
409
(2,257 )
279
688
2,361
(646 )
$ 1,715
84
(2,173 )
(2,328 )
632
$ (1,696 )
2009
2008
$ 249
$ (1,053 )
(1,649 ) (2,027 )
(25 )
(60 )
$ (1,425 ) $ (3,140 )
Certain amounts in the 2008 consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on net income
as previously reported.
NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS
In April 2009, the FASB issued ASC 320-10-65-1 (formerly FASB Staff Position (“FSP”) No. 115-2 and No. 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”). This standard amends existing guidance for determining whether impairment is other-than-temporary for debt securities and requires an entity to assess whether it
intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria
is met, the entire difference between amortized cost and fair value is recognized in earnings. For debt securities that do not meet the aforementioned criteria, the amount of
impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income.
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Additionally, this standard expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This standard was
effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not result in a change to the amounts recorded for OTTI in earnings or
other comprehensive income. The only OTTI charges recorded on debt securities in 2009 were based on a sale that subsequently occurred and therefore the entire amount was
recorded against earnings.
In April 2009, the FASB issued ASC 820-10-65-4 (formerly FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly”). This standard emphasizes that even if there has been a significant decrease in the volume and level of
activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between market participants. This standard provides a number of factors to consider when evaluating whether there has
been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not
considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. This standard was effective for
interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material effect on our consolidated financial statements.
In May 2009, the FASB issued ASC 855 “Subsequent Events” (formerly SFAS No. 165, “Subsequent Events”). This standard establishes general standards of accounting for and
disclosure of events that occur after the statement of condition date but before financial statements are issued or are available to be issued. This standard was effective for financial
statements issued for interim or annual periods ending after June 15, 2009. We adopted this statement during the second quarter of 2009. The Company has evaluated subsequent
events and transactions occurring through the date of issuance of the financial data included herein.
In June 2009, the FASB issued ASC 860 –“Accounting for Transfers of Financial Assets”. This statement prescribes the information that a reporting entity must provide in its
financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement
in transferred financial assets. Specifically, among other aspects, Topic 860 amends the previous Statement of Financial Standard No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities , by removing the concept of a qualifying special-purpose entity and removing the exception from applying FIN 46(R) to variable
interest entities that are qualifying special-purpose entities. It also modifies the financial-components approach previously used. FASB ASC 860 is effective for fiscal years
beginning after November 15, 2009 and will not have a material impact on the Company’s consolidated financial position.
The FASB issued ASU 2009-5, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value” in August 2009, to provide guidance when estimating
the fair value of a liability. When a quoted price in an active market for the identical liability is not available, fair value should be measured using (a) the quoted price of an identical
liability when traded as an asset; (b) quoted prices for similar liabilities or similar liabilities traded as assets; or (c) another valuation technique consistent with the principles of Topic
820 such as an income approach or a market approach. If a restriction exists that prevents the transfer of the liability, a separate adjustment related to the restriction is not required
when estimating fair value. The ASU was effective October 1, 2009 and does not have a material impact on the Company’s consolidated financial position.
ASU 2009-12, “Fair Value Measurements and Disclosure (Topic 820) – Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” issued in
September 2009, allows a company to measure the fair value of an investment that has no readily determinable fair market value on the basis of the investee’s net asset value per
share as provided by the investee. This allowance assumes that the investee has calculated net asset value in accordance with the GAAP measurement principles of Topic 946 as of
the reporting entity’s measurement date. Examples of such investments include investments in hedge funds, private equity funds, real estate funds and venture capital funds. The
update also provides guidance on how the investment should be classified within the fair value hierarchy based on the value for which the investment can be redeemed. The
amendment is effective for interim and annual periods after December 15, 2009 with early adoption permitted. The Company does not expect this guidance to have a material impact
to our consolidated financial statements.
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In October 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” was issued to amend ASC
Topic 470 and provides guidance for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance. At the date of issuance, a
share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with Topic 820 and recognized as an issuance cost, with an offset to
additional paid in capital. Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs. The amendment also
requires several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement. The effective dates of the amendment are
dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years
beginning on or after December 15, 2009. The Company has no plans to issue convertible debt and, therefore, does not expect the update to have an impact on its consolidated
financial statements.
NOTE 3: INVESTMENT SECURITIES – AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of investment securities are summarized as follows:
December 31, 2009
(In thousands)
Bond investment securities:
US Treasury and agencies
State and political subdivisions
Corporate
Residential mortgage-backed
Total
Equity investment securities:
Mutual funds
Common stock
Total
Other investments
Total investment securities
Amortized Unrealized Unrealized
Losses
Gains
Cost
Gross Estimated
Fair
Value
Gross
$
$
14,528 $
8,989
5,333
36,124
64,974
4,790
372
5,162
2,203
72,339 $
30 $
20
194
989
1,233
24
-
24
-
1,257 $
(26 ) $
(81 )
(562 )
(173 )
(842 )
-
-
-
-
(842 ) $
14,532
8,928
4,965
36,940
65,365
4,814
372
5,186
2,203
72,754
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(In thousands)
Bond investment securities:
US Treasury and agencies
State and political subdivisions
Corporate
Residential mortgage-backed
Total
Equity investment securities:
Mutual funds
Common stock
Total
Other investments
Total investment securities
December 31, 2008
Gross
Amortized Unrealized Unrealized
Losses
Gains
Cost
Gross Estimated
Fair
Value
$
$
9,126 $
5,020
12,181
39,478
65,805
5,179
312
5,491
2,100
73,396 $
342 $
23
117
707
1,189
-
-
-
-
1,189 $
- $
(70 )
(1,472 )
(155 )
(1,697 )
(744 )
(6 )
(750 )
-
(2,447 ) $
9,468
4,973
10,826
40,030
65,297
4,435
306
4,741
2,100
72,138
The amortized cost and estimated fair value of debt investments at December 31, 2009 by contractual maturity are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without penalties.
(In thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Residential mortgage-backed
Totals
Amortized Estimated
Fair
Value
Cost
$
1,601 $
1,607
16,325 16,526
3,659
3,667
7,257
6,633
36,124 36,940
$ 64,974 $ 65,365
The Company’s investment securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, is as follows:
Less than Twelve
Months
Unrealized
December 31, 2009
Twelve Months or
More
Total
Fair Unrealized Fair Unrealized
Losses Value
Losses Value
Fair
Losses Value
(In thousands)
US Treasury and Agencies
State and political subdivisions
Corporate
Mortgage-backed
Equity and other investments
$
$
Page 49
-
(26 ) $ 4,996 $
(81 ) 2,988
-
(149 ) 9,665
-
(256 ) $ 17,649 $
-
- $
-
- $
-
(562 ) 1,402
(24 ) 545
-
(586 ) $ 1,947 $
-
(26 ) $ 4,996
(81 ) 2,988
(562 ) 1,402
(173 ) 10,210
-
(842 ) $ 19,596
-
Table of Contents
(In thousands)
State and political subdivisions
Corporate
Mortgage-backed
Equity and other investments
Less than Twelve
Months
Unrealized
December 31, 2008
Twelve Months or
More
Total
Fair Unrealized Fair Unrealized
Losses Value
Losses Value
Fair
Losses Value
$
$
(70 ) $ 2,134 $
(327 ) 5,349
(150 ) 7,491
(744 ) 4,251
(1,291 ) $ 19,225 $
- $
- $
(1,145 ) 2,805
(5 ) 734
21
(6 )
(1,156 ) $ 3,560 $
(70 ) $ 2,134
(1,472 ) 8,154
(155 ) 8,225
(750 ) 4,272
(2,447 ) $ 22,785
We conduct a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment (“OTTI”). In the second quarter of 2009, we adopted
the updated guidance on determining OTTI on debt securities. We assess whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the
balance sheet date. Under these circumstances, OTTI is considered to have occurred (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell
the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. The “more likely
than not” criteria is a lower threshold than the “probable” criteria used under previous guidance. The guidance requires that credit-related OTTI is recognized in earnings while
noncredit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”). Noncredit-related OTTI is based on other factors, including
illiquidity. Presentation of OTTI is made in the statement of income on a gross basis, including both the portion recognized in earnings as well as the portion recorded in OCI.
Normally, the gross OTTI would then be offset by the amount of noncredit-related OTTI, showing the net as the impact on earnings. All OTTI charges have been credit-related to
date, and therefore no offset or cumulative effect adjustment was presented on the financial statements. Additional disclosures are also required by this guidance.
For debt security types discussed below, where no OTTI is considered necessary at December 31, 2009, we do not intend to sell the securities and it is not “more likely than not” that
we will be required to sell the securities before recovery of their amortized cost basis.
At December 31, 2009, 2 corporate securities were in unrealized loss positions. The two securities in unrealized loss positions represent trust-preferred issuances from large money
center financial institutions. The JP Morgan Chase floating rate trust-preferred security has a carrying value of $984,000 and a fair value of $712,000. The Bank of America floating
rate trust-preferred security has a carrying value of $980,000 and a fair value of $690,000. The securities are rated A1 and Baa3 by Moody’s respectively. The securities are both
floating rate notes that adjust quarterly to LIBOR. These securities reflect net unrealized losses due to the fact that current similar issuances are being originated at higher spreads to
LIBOR, as the market currently demands a greater pricing premium for the associated risk in the current economic environment. Management has performed a detailed credit analysis
on the underlying companies and has concluded that each issue is not credit impaired. Due to the fact that each security has approximately 18 years until final maturity, and
management has determined that there is no related credit impairment, the associated pricing risk is managed similar to long-term, low yielding, 15 and 30 year fixed rate residential
mortgages carried in the Company’s loan portfolio. The risk is managed through the Company’s extensive interest rate risk management procedures. The Company expects the
present value of expected cash flows will be sufficient to recover the amortized cost basis. Thus, the securities are not deemed to be other-than-temporarily impaired.
At December 31, 2009, a total of 4 Government Agency Bonds are in unrealized loss positions. All losses are 1% or less of the current carrying value and each holding has been in an
unrealized loss position for only one month. No other-than-temporary impairment is deemed present on these securities.
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A total of 12 residential mortgage-backed security holdings have unrealized losses as of December 31, 2009. Seven of these securities were issued by government agencies or
government sponsored enterprises. All seven securities are currently “AAA” rated by Moody’s and S&P. These unrealized losses relate principally to changes in interest rates
subsequent to the acquisition of the specific securities. None of the seven securities have unrealized losses that exceed 4%. No other-than-temporary impairment is deemed present
on these securities. The remaining 5 securities in this classification represent private label CMO’s, all of which have current unrealized losses of less than $10,000 each. All five
securities are currently “AAA” rated by Moody’s or S&P. Management reviewed the underlying credit score information and the concentration risk associated with the states that the
majority of the underlying mortgage collateral resides in. No other-than-temporary impairment is deemed present on these securities.
At December 31, 2009, 9 state and political subdivision securities are in unrealized loss positions. All 9 holdings have unrealized losses that are less than 4% of their related book
values. None of the securities have been in unrealized loss positions for more than 5 months. These unrealized losses relate principally to changes in interest rates subsequent to the
acquisition of the specific securities. All of the securities are AA rated or better by S&P, with the exception of 4 securities issued by the Oswego, NY City School District, which are
unrated. No other-than-temporary impairment is deemed present on these securities.
In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the length of time the equity security’s fair value
has been below the carrying amount. Management has determined that we have the intent and ability to retain the equity securities for a sufficient period of time to allow for recovery
however, due to the amount of time the fair value has been below the carrying value, the Company recorded other-than-temporary impairment charges during 2009.
The Company presently holds a no-load mutual fund, which invests primarily in mortgage-related instruments. The fund holds mortgage-backed bonds and securities issued by
government-sponsored mortgage entities and by private companies. The underlying assets are comprised of variable rate, adjustable rate and fixed-rate residential mortgage and home
equity loans. As a result of the recent problems in the real estate and mortgage securities markets, the fair value of the fund had declined and, accordingly, the Company’s recorded
other-than-temporary impairment charges of 18% of the value during 2008. Although the overall value of the fund has continued to improve since early 2009, the value of the
investment in the fund was still below its cost basis by approximately $286,000 as of December 31, 2009. Based on the length of time the equity security’s value was less than the
carrying value, an other-than-temporary charge for $286,000 was recorded.
The Company also holds an investment in a mutual fund consisting of investment grade, dividend paying common stocks of large capitalization companies (companies with market
capitalization in excess of $5 billion). Management recorded an other-than-temporary impairment charge of 24% of the Fund’s value in 2008. Although the overall value of the fund
has continued to improve since early 2009, the value of the investment in the fund was still below its cost basis by approximately $104,000 as of December 31, 2009. Based on the
length of time the equity security’s value was less than the carrying value, an other-than-temporary charge for $104,000 was recorded.
The Company held two other equity securities that had fair values less than the carrying value and, due to the length of time they remained in this position, were written down with
other-than-temporary impairment charges during the fourth quarter. A small common stock investment in Alliance Financial Corp was written down $4,000 and a small common
stock investment in The Phoenix Companies was similarly written down by $1,000. The Phoenix stock investment had also been adjusted as a result of other-than-temporary
impairment in 2008.
During the second quarter of 2009, the Company recorded an other than temporary impairment charge of $298,000 associated with its holdings in a senior unsecured note issued by
CIT Group, Inc. (“CIT”). As current concerns grew relating to CIT’s ability to meet its current short-term obligations, combined with the belief that other government programs were
not going to be made available to CIT, the Company concluded that the liquidation of its current holding at a loss was prudent, and the security was sold on July 16, 2009. The
impairment charge recorded in the second quarter was based on the sale proceeds as compared to the amortized cost basis of the security.
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The following table presents a roll-forward of the amount related to credit losses on debt securities recognized in earnings for the year ended December 31, 2009.
(In thousands)
Beginning balance – January 1, 2009
Initial credit impairment
Subsequent credit impairments
Reductions for amounts recognized in earnings due to intent or requirement to sell
Reductions for securities sold
Reductions for increases in cash flows expected to be collected
Ending balance - December 31, 2009
Total
$ 875
298
-
-
(298 )
-
$ 875
Gross realized gains (losses) on sales of available-for-sale securities and other-than-temporary impairment charges for the year ended December 31 are detailed below:
(In thousands)
Realized gains
Realized losses
Other than temporary impairment
2009
$ 814
(9 )
(693 )
$ 112
$
2008
85
(23 )
(2,253 )
$ (2,191 )
As of December 31, 2009 and December 31, 2008, securities with an amortized cost of $45.7 million and $37.8 million, respectively, were pledged to collateralize certain deposit
and borrowing arrangements.
Management has reviewed its mortgage-backed securities portfolio and determined that, to the best of its knowledge, little or no exposure exists to sub-prime or other high-risk
residential mortgages. The Company is not in the practice of investing in these types of loans.
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NOTE 4: LOANS
Major classifications of loans at December 31, are as follows:
(In thousands)
Real estate mortgages:
Residential
Construction
Commercial
Other loans:
Consumer
Home equity/second mortgage
Lease financing
Commercial
Municipal loans
Total loans
Net deferred loan costs
Less allowance for loan losses
Loans receivable, net
2009
2008
2,399
$ 131,929 $ 132,825
2,508
62,229 55,061
196,557 190,394
3,654
3,711
3,580
3,516
26,086 24,392
2,308
28,082 25,215
3,162
65,113 58,593
261,670 248,987
885
(2,472 )
$ 259,387 $ 247,400
795
(3,078 )
The Company grants mortgage and consumer loans to customers throughout Oswego and parts of Onondaga counties. Although the Company has a diversified loan portfolio, a
substantial portion of its debtors’ abilities to honor their contracts is dependent upon the counties’ employment and economic conditions.
The following represents the activity associated with loans to executive officers and directors and their affiliated entities during the year ended December 31, 2009:
(In thousands)
Balance at the beginning of the year
Originations
Principal payments
Balance at the end of the year
$ 6,270
709
(1,097 )
$ 5,882
Management has reviewed its loan portfolio and determined that, to the best of its knowledge, little or no exposure exists to sub-prime or other high-risk residential mortgages. The
Company is not in the practice of originating these types of loans.
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NOTE 5: ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, are summarized as follows:
(In thousands)
Balance at beginning of year
Recoveries credited:
Commercial
Mortgage
Consumer
Total recoveries
Loans charged-off:
Commercial
Mortgage
Consumer
Total charged-off
Net charge-offs
Provision for loan losses
Balance at end of year
Ratio of net charge-offs to average loans outstanding
The following is a summary of information pertaining to impaired loans for the years ended December 31:
(In thousands)
Impaired loans without a valuation allowance
Impaired loans with a valuation allowance
Total impaired loans
Valuation allowance related to impaired loans
Average investment in impaired loans
Interest income recognized on impaired loans
Interest income recognized on a cash basis on
impaired loans
2009
$ 2,472
2008
$ 1,703
-
3
20
23
17
-
30
47
(74 )
(85 )
(134 )
(293 )
(270 )
876
$ 3,078
0.11 % 0.02 %
(46 )
-
(52 )
(98 )
(51 )
820
$ 2,472
2009
$ 2,254
986
$ 3,240
79
$
2008
$ 2,020
436
$ 2,456
$ 141
$ 2,921
$ 159
$ 2,252
$ 176
$
-
$
-
The amount of loans on which the Company has ceased accruing interest aggregated approximately $2,313,000 and $2,323,000 at December 31, 2009 and 2008, respectively. There
were no loans past due ninety days or more and still accruing interest at December 31, 2009 or 2008.
NOTE 6: SERVICING
Loans serviced for others are not included in the accompanying consolidated statements of condition. The unpaid principal balances of mortgage and other loans serviced for others
were $46,225,000 and $46,095,000 at December 31, 2009 and 2008, respectively.
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The balance of capitalized servicing rights included in other assets at December 31, 2009 and 2008, was $61,000 and $15,000, respectively.
The following summarizes mortgage-servicing rights capitalized and amortized:
(In thousands)
Mortgage servicing rights capitalized
Mortgage servicing rights amortized
NOTE 7: PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, is as follows:
(In thousands)
Land
Buildings
Furniture, fixture and equipment
Construction in progress
Less: Accumulated depreciation
NOTE 8: GOODWILL
2009
78
$
32
$
2008
-
$
28
$
2009
2008
$ 1,226 $ 1,226
7,100 7,007
7,342 7,090
134
15,823 15,457
8,650 8,007
$ 7,173 $ 7,450
155
As a result of deteriorating economic conditions in the financial markets, which impacted the trading value of the Company’s common stock, management engaged an independent
third party to test the Company’s goodwill for impairment as of December 31, 2008. Management considers the Company, which includes all banking operations on a consolidated
basis, as the “reporting unit” for the purpose of testing for goodwill impairment. Testing was performed by utilizing a three-step valuation approach using a measurement date of
December 31, 2008:
(1) The estimated fair value of the Company as of the measurement date was determined utilizing three valuation methodologies including the Comparable Transactions
approach, the Control Premium approach and the Discounted Cash Flow approach. All approaches were considered in the final estimate of fair value, with the results
of the approaches weighted based upon their level within the fair value hierarchy and management’s comfort level with each approach. In the final determination, the
greatest emphasis was placed on approaches utilizing primarily Level 2 inputs (the Comparable Transaction and Control Premium approaches), and less weight was
placed on the Discounted Cash Flow approach due to the number of Level 3 inputs that were utilized.
(2) The amount of goodwill that would be generated if the Company were to be sold at a price equal to its estimated fair value was calculated.
(3) A comparison of the estimated fair value of goodwill, determined in steps (1) and (2) above, to the current carrying value of goodwill on the Company’s books as of the
measurement date was performed.
The resulting calculations determined the estimated fair value of the goodwill to be $6.8 million, which greatly exceeded the Company’s carrying value of approximately $3.8
million and thus, there was no goodwill impairment at December 31, 2008.
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Since the date of the third party evaluation, the Company has experienced improvement in its book value per common share and tangible book value per common share. Total assets,
total deposits, and the percentage of core deposits to total deposits have all increased since the prior valuation date. There has been no significant deterioration in the fair value of the
Company’s stock and projected future earnings levels and dividend paying capacity have both significantly improved since the last valuation period. Given its evaluation of
goodwill, which considered these factors, management has determined that the current carrying value of goodwill is not impaired at December 31, 2009.
NOTE 9: DEPOSITS
A summary of deposits at December 31, is as follows:
(In thousands)
Savings accounts
Time accounts
Time accounts over $100,000
Money management accounts
MMDA accounts
Demand deposit interest-bearing
Demand deposit noninterest-bearing
Mortgage escrow funds
At December 31, 2009, the scheduled maturities of time deposits are as follows:
(In thousands)
Year of Maturity:
2010
2011
2012
2013
2014
Thereafter
Page 56
2009
2008
$ 52,663 $ 49,550
87,805 91,223
53,421 40,731
11,327 10,300
35,788 27,594
25,367 20,916
27,300 26,150
2,974
$ 296,839 $ 269,438
3,168
$ 96,281
19,500
7,565
11,712
2,623
3,545
$ 141,226
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NOTE 10: BORROWED FUNDS
The composition of borrowings (excluding junior subordinated debentures) at December 31, is as follows:
(In thousands)
Short-term:
FHLB Advances
Overnight Line of Credit with FHLB
Total short-term borrowings
Long-term:
FHLB repurchase agreements
FHLB advances
Citigroup Repurchase agreements
Total long-term borrowings
The principal balances, interest rates and maturities of the above fixed rate borrowings at December 31, 2009 is as follows:
Term
(Dollars in thousands)
Long-term:
Repurchase agreements (due in 2013)
Advances with FHLB
due within 1 year
due within 2 years
due within 3 years
due within 4 years
due within 5 years
Total advances with FHLB
Total long-term borrowings
2009
2008
$
$
- $ 4,000
- 13,575
- $ 17,575
- $ 2,400
$
31,000 27,000
5,000 5,000
$ 36,000 $ 34,400
Principal
Rates
5,000
2.95 %
2.42%-
12,000
4.39 %
2.33%-
6,000
4.19 %
2.70%-
4,000
4.91 %
4.46%-
4,000
4.53 %
2.85%-
3.07 %
5,000
$ 31,000
$ 36,000
The repurchase agreement with Citi Group is collateralized by certain investment securities having a carrying value of $6,148,000 at December 31, 2009. The collateral is under the
Company’s control. The overnight line of credit agreement with the FHLB is used for liquidity purposes. Interest on this line is determined at the time of borrowing. The average
rate paid on the overnight line during 2009 approximated 0.52%. As a companion to the overnight line with the FHLB, the Company also has access to a One-Month Overnight
Repricing Line of Credit. This allows the Company to borrow funds for a term of one month, which reprices daily over the term, thus freeing up the overnight line for daily liquidity
needs. The Company has $36,148,000 available under this facility, yet has never accessed the one-month overnight repricing line. In addition to the overnight line of credit program,
the Company also has access to the FHLB’s Term Advance Program under which it can borrow at various terms and interest rates. Residential mortgage loans with a carrying value
of $65,406,000 and FHLB stock with a carrying value of $1,899,400 have been pledged by the Company under a blanket collateral agreement to secure the Company’s line of credit
and term borrowings. The total outstanding indebtedness under all three borrowing facilities with the FHLB cannot exceed the total value of the assets pledged under the blanket
collateral agreement. The
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Company also has a $6.5 million line of credit available at December 31, 2009 with the Federal Reserve Bank of New York through its Discount Window and has pledged various
corporate and municipal securities against the line. The Company has an $11.0 million line of credit available with three other correspondent banks. $4.0 million of that line of credit
is available on an unsecured basis and the remaining $7.0 million must be collateralized with marketable investment securities. Interest on the lines is determined at the time of
borrowing.
The Company has a non-consolidated subsidiary trust, Pathfinder Statutory Trust II, of which the Company owns 100% of the common equity. The Trust issued $5,000,000 of 30
year floating rate Company-obligated pooled capital securities of Pathfinder Statutory Trust II. The Company borrowed the proceeds of the capital securities from its subsidiary by
issuing floating rate junior subordinated deferrable interest debentures having substantially similar terms. The capital securities mature in 2037 and are treated as Tier 1 capital by
the Federal Deposit Insurance Corporation and the Office of Thrift Supervision. The capital securities of the trust are a pooled trust preferred fund of Preferred Term Securities VI,
Ltd. and are tied to the 3-month LIBOR plus 1.65% (1.90% at December 31, 2009) with a five-year call provision. The Company guarantees all of these securities.
The Company's equity interest in the trust subsidiary of $155,000 is reported in "Other assets". For regulatory reporting purposes, the Federal Reserve Board has indicated that the
preferred securities will continue to qualify as Tier 1 Capital subject to previously specified limitations, until further notice. If regulators make a determination that Trust Preferred
Securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them.
NOTE 11: EMPLOYEE BENEFITS AND DEFERRED COMPENSATION AND SUPPLEMENTAL RETIREMENT PLANS
The Company has a noncontributory defined benefit pension plan covering substantially all employees. The plan provides defined benefits based on years of service and final
average salary. In addition, the Company provides certain health and life insurance benefits for eligible retired employees. The healthcare plan is contributory with participants’
contributions adjusted annually; the life insurance plan is noncontributory. Employees with less than 14 years of service as of January 1, 1995, are not eligible for the health and life
insurance retirement benefits.
The following tables set forth the changes in the plans’ benefit obligations, fair value of plan assets and the plans’ funded status as of December 31:
(In thousands)
Change in benefit obligations:
Benefit obligations at beginning of year
Adjustment for measurement date change
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Benefit obligations at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Benefits paid
Employer contributions
Fair value of plan assets at end of year
Funded Status - asset (liability)
Page 58
Pension Benefits
2009
2008
Postretirement
Benefits
2009
2008
$ 5,493
-
228
332
188
(146 )
6,095
$ 4,843
132
214
316
174
(186 )
5,493
$ 369
-
3
22
(38 )
(24 )
332
$ 335
6
3
21
32
(28 )
369
3,461
937
(146 )
2,000
6,252
$ 157
4,977
(1,493 )
(186 )
163
3,461
$ (2,032 )
-
-
(24 )
24
-
$ (332 )
-
-
(28 )
28
-
$ (369 )
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Amounts recognized in accumulated other comprehensive loss as of December 31:
(In thousands)
Unrecognized transition obligation
Net loss
Tax Effect
2009
2008
$
38 $ 56
2,753 3,423
2,791 3,479
1,117 1,392
1,674 $ 2,087
$
The accumulated benefit obligation for the defined benefit pension plan was $5,026,000 and $4,537,000 at December 31, 2009 and 2008, respectively. The postretirement plan had
an accumulated benefit obligation of $332,000 and $369,000 at December 31, 2009 and 2008, respectively.
The significant assumptions used in determining the benefit obligations as of December 31, 2009 and 2008 are as follows:
Weighted average discount rate
Rate of increase in future compensation levels
Postretirement
Benefits
Pension Benefits
2009
6.25 % 6.13 % 6.25 % 6.13 %
3.50 % 3.50 %
2008
2009
2008
-
-
Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plan. The annual rates of increase in the per capita cost of
covered medical and prescription drug benefits for year-end calculations were assumed to be 9.00% for each year. The rates were assumed to decrease gradually to 5.00% in 2014
and remain at that level thereafter. A one-percentage point change in the health care cost trend rates would have the following effects:
(In thousands)
Effect on total of service and interest
cost components
Effect on post retirement benefit obligation
Page 59
1
Percentage
Point
Increase
1
Percentage
Point
Decrease
$
$
1
7
(1 )
(7 )
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The composition of the net periodic benefit plan cost for the years ended December 31, 2009 and 2008 is as follows:
Pension Benefits
2009
2008
Postretirement
Benefits
2009
2008
(In thousands)
Service cost
Interest cost
Amortization of transition obligation
Amortization of net losses
Expected return on plan assets
Net periodic benefit plan cost
$ 228
332
-
260
(378 )
$ 442
$ 214
316
-
66
(447 )
$ 149
$
$
3
22
18
1
-
44
$
$
3
21
18
-
-
42
The significant assumptions used in determining the net periodic benefit plan cost for years ended December 31 were as follows:
Weighted average discount rate
Expected long term rate of return on plan assets
Rate of increase in future compensation levels
Postretirement
Benefits
2008
Pension Benefits
2009
6.13 % 6.63 % 6.13 % 6.63 %
8.00 % 9.00 %
3.50 % 4.00 %
2008
2009
-
-
-
-
The long-term rate-of-return-on-assets assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns
as applied to the plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn real rates of return in the ranges of 5.0%-9.0% and 2.0%-6.0%,
respectively. The long-term inflation rate was estimated to be 3.0%. When these overall return expectations are applied to the plan’s target allocation, the expected rate of return was
determined to be in the range of 7.0% to 11.0%. Management has chosen to use an 8% expected long-term rate of return to reflect current economic conditions and expected returns.
The expected long-term rate of return for 2010 will continue to be 8.0%. The estimated net actuarial loss that will be amortized from accumulated other comprehensive loss into net
periodic benefit plan cost during 2010 is $200,000. The estimated amortization of the unrecognized transition obligation in 2010 is $18,000. Based on these factors, and a lower
expected rate of return on plan assets, the expected net periodic benefit plan cost for 2010 is estimated at $371,000.
Plan assets are invested in diversified investment funds of the RSI Retirement Trust (the “Trust”), a private placement investment fund. The investment funds include a series of
equity and bond mutual funds or commingled trust funds, each with its own investment objectives, investment strategies and risks, as detailed in the Statement of Investment
Objectives and Guidelines. The Trust has been given discretion by the Plan Sponsor to determine the appropriate strategic asset allocation versus plan liabilities, as governed by the
Trust’s Statement of Investment Objectives and Guidelines (the “Guidelines”).
The long-term investment objectives are to maintain plan assets at a level that will sufficiently cover long-term obligations and to generate a return on plan assets that will meet or
exceed the rate at which long-term obligations will grow. A broadly diversified combination of equity and fixed income portfolios and various risk management techniques are used
to help achieve these objectives.
In addition, significant consideration is paid to the plan’s funding levels when determining the overall asset allocation. If the plan is considered to be well-funded, approximately
65% of the plan’s assets are allocated to equities and approximately 35% allocated to fixed-income. If the plan
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does not satisfy the criteria for a well-funded plan, approximately 50% of the plan’s assets are allocated to equities and approximately 50% allocated to fixed-income. Asset
rebalancing normally occurs when the equity and fixed-income allocations vary by more than 10% from their respective targets (i.e., a 20% policy range guideline).
The investment goal is to achieve investment results that will contribute to the proper funding of the pension plan by exceeding the rate of inflation over the long-term. In addition,
investment managers for the Trust are expected to provide above average performance when compared to their peer managers. Performance volatility is also
monitored. Risk/volatility is further managed by the distinct investment objectives of each of the Trust funds and the diversification within each fund.
Beginning in 2009, disclosures for the plan must include increased detail on the major categories of assets, including a disclosure of which fair values are based on assets traded in
active markets (Level 1), determined using significant observable inputs (Level 2), or are estimated based on significant unobservable inputs (Level 3).
Pension plan assets measured at fair value are summarized below:
(In thousands)
Asset Category:
Mutual funds - equity
Large-cap value (a)
Small-cap Core (b)
Common/collective trusts - equity
Large-cap core (c)
Large-cap value (d)
Large-cap growth (e)
International Core (f)
Common/collective trusts - fixed income
Market duration fixed (g)
Total
At December 31, 2009
Total
Fair
Level
1
Level
2
Level
3
Value
$ 556
657
$
$
-
-
-
-
-
-
625
311
915
884
-
$ 1,213
2,304
$ 5,039
$
-
-
-
-
-
-
-
-
$ 556
657
625
311
915
884
2,304
$ 6,252
(a) This category contains large-cap stocks with above average yield. The portfolio typically holds between 60 and 70 stocks.
(b) This category contains stocks whose sector weightings are maintained within a narrow band around those of the Russell 2000 index. The portfolio will typically hold more
than 150 stocks.
(c) This fund tracks the performance of the S&P 500 Index by purchasing the securities represented in the Index in approximately the same weightings as the Index.
(d) This category consists of investments whose sector and industry exposures are maintained within a narrow band around Russell 1000 index. The portfolio holds
approximately 150 stocks.
(e) This category consists of a portfolio of between 45 and 65 stocks that will typically overweight technology and health care.
(f) This category consists of a broadly diversified portfolio of non-U.S. domiciled stocks. The portfolio will typically hold more than 200 stocks, with 0% - 35% invested in
emerging markets securities.
(g) This category consists of an index fund that tracks the Lehman Brothers U.S. Aggregate Bond Index. The fund invests in Treasury, agency, corporate, mortgage-backed
and asset-backed securities.
For the fiscal year ending December 31, 2010, the Bank expects to contribute approximately $258,000 to the pension plan and $24,000 to the postretirement plan.
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The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Years ending December 31:
(In thousands)
2010
2011
2012
2013
2014
Years 2015 - 2019
$ 176
184
198
215
248
1,536
The Company also offers a 401(k) plan to its employees. Contributions to this plan by the Company were $188,000 and $116,000 for 2009 and 2008, respectively.
The Company maintains optional deferred compensation plans for its directors, and certain executive officers, whereby fees and income normally received are deferred and paid by
the Company based upon a payment schedule commencing at age 65 and continuing monthly for 10 years. Directors must serve on the board for a minimum of 5 years to be eligible
for the Plan. At December 31, 2009 and 2008, other liabilities include approximately $1,806,000 and $1,741,000, respectively, relating to deferred compensation. Deferred
compensation expense for the years ended December 31, 2009 and 2008 amounted to approximately $209,000 and $225,000, respectively.
The Company has a supplemental executive retirement plan for the benefit of certain executive officers. At December 31, 2009 and 2008, other liabilities included approximately
$298,000 and $333,000 accrued under this plan. Compensation expense includes approximately $50,000 relating to the supplemental executive retirement plan for the year ended
December 31, 2009 and $49,000 for the year ended December 31, 2008.
To fund the benefits under these plans, the Company is the owner of single premium life insurance policies on participants in the non-qualified retirement plans. At December 31,
2009 and 2008, the cash surrender values of these policies were $6,956,000 and $6,731,000, respectively.
NOTE 12: STOCK BASED COMPENSATION PLAN
In February 1997, the Board of Directors approved an option plan and granted options thereunder with an exercise price equal to the market value of the Company’s shares at the
date of grant. Under the Stock Option Plan, up to 132,249 options had been authorized for grant of incentive stock options and nonqualified stock options. None of the original
options granted remain at December 31, 2009.
In July 2001, the Board approved the issuance of 38,499 stock options remaining in the 1997 Stock Option Plan. The exercise price was equal to the market value of the Company's
shares at the date of grant ($8.34). The options granted under the issuance have a 10-year term with one-third vesting upon grant date and the remaining vesting and becoming
exercisable ratably over a 2-year period.
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Activity in the Stock Option Plan is as follows:
(Shares in thousands)
Outstanding at January 1, 2008
Exercised
Expired
Outstanding at December 31, 2008
Exercised
Expired
Outstanding at December 31, 2009
Weighted
Options Average
Shares
Exercise
Outstanding
20 $
(1 )
-
19 $
-
-
19 $
Price Exercisable
8.34
20
8.34
-
8.34
-
-
8.34
19
19
The aggregate intrinsic value of a stock option represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise
price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2009. The intrinsic value changes based on
fluctuations in the market value of the Company’s stock. At December 31, 2009, the market value of the Company’s stock was less than the stock option price, and therefore, the
outstanding and exercisable stock options had no aggregate intrinsic value.
There were no stock options exercised during 2009.
At December 31, 2009, the 18,850 options outstanding all had an exercise price of $8.34 and an average remaining contractual life of 1.5 years.
NOTE 13: INCOME TAXES
The provision for income taxes for the years ended December 31, is as follows:
(In thousands)
Current
Deferred
The provision for income taxes includes the following:
(In thousands)
Federal Income Tax
New York State Franchise Tax
Page 63
2009
$ 346
704
$ 1,050
2008
$ 491
(388 )
$ 103
2009
$ 993
57
$ 1,050
2008
$ 191
(88 )
$ 103
Table of Contents
The components of the net deferred tax asset, included in other assets as of December 31, are as follows:
(In thousands)
Assets:
Deferred compensation
Allowance for loan losses
Postretirement benefits
Pension liability
Mortgage recording tax credit carryforward
Investment securities
Impairment losses on investment securities
Other
Liabilities:
Pension asset
Depreciation
Accretion
Loan origination fees
Intangible assets
Investment securities
Prepaid expenses
Less: deferred tax asset valuation allowance
Net deferred tax asset
2009
2008
$ 814
1,191
128
-
417
-
686
245
3,481
$ 802
956
144
786
417
503
505
336
4,449
(61 )
(420 )
(48 )
(308 )
(1,030 )
(166 )
(318 )
-
(475 )
(45 )
(349 )
(841 )
-
(177 )
(2,351 ) (1,887 )
2,562
1,130
(540 )
$ 2,022
$ 672
(458 )
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the carry back period. A valuation
allowance is provided when it is more likely than not that some portion, or all of the deferred tax assets, will not be realized. In assessing the need for a valuation allowance,
management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income and the projected future level of taxable income over the periods in
which the temporary differences comprising the deferred tax assets will be deductible. The judgment about the level of future taxable income is inherently subjective and is reviewed
on a continual basis as regulatory and business factors change. The valuation allowance of $458,000 represents the portion of the deferred tax asset that management believes may
not be realizable, as the Company may not generate sufficient capital gains to offset its capital loss carry forward.
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A reconciliation of the federal statutory income tax rate to the effective income tax rate for the years ended December 31, is as follows:
Federal statutory income tax rate
State tax, net of federal benefit
Tax-exempt interest income, net of TEFRA
Increase in value of life insurance
Deferred tax valuation allowance
Other
Effective income tax rate
2009
34.0 % 34.0 %
2008
2.1
(1.5 )
(2.5 )
7.1
0.2
(12.5 )
(17.7 )
(19.2 )
45.2
(7.9 )
39.4 % 21.9 %
At December 31, 2009 and 2008, the Company did not have any uncertain tax positions. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits, if
any, in income tax expense in the Consolidated Statements of Income. The tax years subject to examination by the taxing authorities are the years ended December 31, 2009, 2008,
2007 and 2006.
NOTE 14: EARNINGS PER SHARE
The following is a reconciliation of basic to diluted earnings per share for the years ended December 31:
(In thousands, except per share data)
2009 Net income
Preferred stock dividends and discount accretion
Net income available to common shareholders
Basic EPS
Effect of dilutive securities
Stock options
Diluted EPS
2008 Net income
Basic EPS
Effect of dilutive securities
Stock options
Diluted EPS
NOTE 15: COMMITMENTS AND CONTINGENCIES
Earnings
$ 1,615
Shares
EPS
96
1,519
1,519
-
$ 1,519
368
$
368
2,485
$ 0.61
-
2,485
-
$ 0.61
2,484
$ 0.15
-
368
1
2,485
-
$ 0.15
$
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the
consolidated statement of condition. The contractual amount of those commitments to extend credit reflects the extent of involvement the Company has in this particular class of
financial instrument. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of the instrument. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.
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At December 31, 2009 and 2008, the following financial instruments were outstanding whose contract amounts represent credit risk:
(In thousands)
Commitments to grant loans
Unfunded commitments under lines of credit
Standby letters of credit
2009
Contract Amount
2008
$ 7,187 $ 8,723
16,411 15,710
1,606 1,639
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since some of the commitment amounts are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter party. Collateral held varies but may
include residential real estate and income-producing commercial properties. Loan commitments outstanding at December 31, 2009 with fixed interest rates amounted to
approximately $2.3 million. Loan commitments, including unused lines of credit and standby letters of credit, outstanding at December 31, 2009 with variable interest rates
amounted to approximately $22.9 million. These outstanding loan commitments carry current market rates.
Unfunded commitments under standby letters of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing
customers. These lines of credit usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.
Outstanding letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The majority of these standby
letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan
commitments. The Bank requires collateral supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such
collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The amount of the liability as of December
31, 2009 and 2008 for guarantees under standby letters of credit issued is not material.
The Company leases land and leasehold improvements under agreements that expire in various years with renewal options over the next 30 years. Rental expense, included in
building occupancy expense, amounted to $66,000 for each year presented. In October 2002, the Company entered into a land lease with one of its directors on an arms-length basis.
In January 2006, the Company entered into a lease with Pathfinder Bancorp, MHC for the use of a training facility. This lease was also executed on an arms-length basis. The rent
expense paid to the related parties during 2009 and 2008 was $45,000 for each year. Approximate minimum rental commitments for noncancelable operating leases are as follows:
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Years Ending December 31:
(In thousands)
2010
2011
2012
2013
2014
Thereafter
Total minimum lease payments
NOTE 16: DIVIDENDS AND RESTRICTIONS
$
66
52
43
21
-
-
$ 182
The Board of Directors of Pathfinder Bancorp, M.H.C., determines whether the Holding Company will waive or receive dividends declared by the Company each time the Company
declares a dividend, which is expected to be on a quarterly basis. The Holding Company may elect to receive dividends and utilize such funds to pay expenses or for other allowable
purposes. The Office of Thrift Supervision (“OTS”) has indicated that (i) the Holding Company shall provide the OTS annually with written notice of its intent to waive its dividends
prior to the proposed date of the dividend and the OTS shall have the authority to approve or deny any dividend waiver request; (ii) if a waiver is granted, dividends waived by the
Holding Company will be excluded from the Company’s capital accounts for purposes of calculating dividend payments to minority shareholders. During 2009, the Company paid
or accrued dividends totaling $190,000 to the Holding Company. The Holding Company did not waive the right to receive its portion of the cash dividends declared during
2009. During 2008, the Holding Company waived one quarter’s dividends totaling $163,000.
The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company. In addition to state law requirements and the
capital requirements discussed in Note 17, federal statutes, regulations and policies limit the circumstances under which the Bank may pay dividends. The amount of retained
earnings legally available under these regulations approximated $1,494,000 as of December 31, 2009. Dividends paid by the Bank to the Company would be prohibited if the effect
thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. The Company is prohibited from accepting or directing Pathfinder Bank to
declare or pay a dividend or other capital distributions without prior written approval of the OTS.
NOTE 17: REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets,
liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
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As of December 31, 2009, the Bank’s most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as “well-capitalized”, under the regulatory
framework for prompt corrective action. To be categorized as “well-capitalized”, the Bank must maintain total risk based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the tables below. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Bank’s actual capital amounts and ratios as of December 31, 2009 and 2008 are presented in the following table.
Minimum
(Dollars in thousands)
As of December 31, 2009:
Total Core Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Average Assets)
As of December 31, 2008:
Total Core Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Average Assets)
Minimum
For Capital
Adequacy
Purposes
Amount Ratio
To Be "Well-
Capitalized"
Under Prompt
Corrective
Provisions
Amount Ratio
Actual
Amount Ratio
$ 33,405 14.0 % $ 19,163 8.0 % $ 23,954 10.0 %
$ 30,399 12.7 % $ 9,582 4.0 % $ 14,372 6.0 %
$ 30,399 8.4 % $ 14,517 4.0 % $ 18,146 5.0 %
$ 25,625 10.8 % $ 18,944 8.0 % $ 23,680 10.0 %
$ 23,152 9.8 % $ 9,472 4.0 % $ 14,208 6.0 %
$ 23,152 6.8 % $ 13,702 4.0 % $ 17,128 5.0 %
On September 11, 2009, the Company entered into the Purchase Agreement with the United States Department of the Treasury pursuant to which the Company has issued and sold to
Treasury: (i) 6,771 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, having a liquidation amount per share equal to
$1,000, for a total price of $6,771,000; and (ii) a Warrant to purchase 154,354 shares of the Company’s common stock, par value $0.01 per share, at an exercise price per share of
$6.58. The Company contributed to Pathfinder Bank, its subsidiary, $5,500,000 or 81.23% of the proceeds of the sale of the Series A Preferred Stock.
The $6,771,000 of proceeds was allocated to the Series A Preferred Stock and the Warrant based on their relative fair values at issuance ($6,065,000 was allocated to the Series A
Preferred Stock and $706,000 to the Warrant). The difference between the initial value allocated to the Series A Preferred Stock and the liquidation value of $6,771,000, i.e. the
preferred discount, will be charged to retained earnings over the first five years of the contract as an adjustment to the dividend yield using the effective yield method.
The Series A Preferred Stock pays cumulative dividends at a rate of 5% per annum for the first five years and thereafter at a rate of 9% per annum. The Series A Preferred Stock is
generally non-voting. Prior to September 11, 2012, and unless the Company has redeemed all of the Series A Preferred Stock or the Treasury Department has transferred all of the
Series A Preferred Stock to a third party, the approval of the Treasury Department will be required for the Company to increase its common stock dividend or repurchase its common
stock or other equity or capital securities, other than in certain circumstances specified in the Purchase Agreement.
The Warrant has a ten-year term and is immediately exercisable. The Warrant provides for the adjustment of the exercise price and the number of shares of the Company’s common
stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of the Company’s
common stock, and upon certain issuances of the Company’s common stock at or below a specified price relative to the then current market price of the Company’s common
stock. Pursuant to the Purchase Agreement, the Treasury Department has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of
the Warrant.
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The Series A Preferred Stock and the Warrant were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The
Company has agreed to register for resale the Series A Preferred Stock, the Warrant and the shares of common stock underlying the Warrant (the “Warrant Shares”), as soon as
practicable after the date of the issuance of the Series A Preferred Stock and the Warrant. Neither the Series A Preferred Stock nor the Warrant will be subject to any contractual
restrictions on transfer.
The Company’s goal is to maintain a strong capital position, consistent with the risk profile of its subsidiary banks that supports growth and expansion activities while at the same
time exceeding regulatory standards. At December 31, 2009, Pathfinder Bank exceeded all regulatory required minimum capital ratios and met the regulatory definition of a “well-
capitalized” institution, i.e. a leverage capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6% and a total risk-based capital ratio exceeding 10%.
The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2009 and 2008, these reserve balances amounted to $2,070,000 and
$2,306,000, respectively.
NOTE 18: INTEREST RATE DERIVATIVE
Derivative instruments are entered into primarily as a risk management tool of the Company. Financial derivatives are recorded at fair value as other assets and other liabilities. The
accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For a fair value hedge, changes in
the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability are recognized currently in earnings. For a cash flow hedge, changes in the fair
value of the derivative instrument, to the extent that it is effective, are recorded in other comprehensive income and subsequently reclassified to earnings as the hedged transaction
impacts net income. Any ineffective portion of a cash flow hedge is recognized currently in earnings.
During the fourth quarter of fiscal 2009, the Company entered into an interest rate swap agreement with a $2 million notional amount to convert a portion of the variable-rate junior
subordinated debentures to a fixed rate for a term of approximately 7 years at a rate of 4.96%. The derivative is designated as a cash flow hedge. The fair value of the derivative
instrument was approximately $1,000 at December 31, 2009, and is included in other assets.
No gain or loss was recognized in earnings for the year ended December 31, 2009 related to the interest rate swap. The Company posted cash, of $100,000, under collateral
arrangements to satisfy collateral requirements associated with the interest rate swap contract.
NOTE 19: FAIR VALUE MEASUREMENTS AND DISCLOSURES
Accounting guidance related to fair value measurements and disclosures specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are
observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of
inputs have created the following fair value hierarchy:
• Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
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• Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-
derived valuations in which all significant inputs and significant value drivers are observable in active markets.
• Level 3 – Model derived valuations in which one or more significant inputs or significant value drivers are unobservable.
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The Company used the following methods and significant assumptions to estimate fair value:
Investment securities: The fair values of securities available for sale are obtained from an independent third party and are based on quoted prices on nationally recognized exchange
(Level 1), where available. If quoted prices are not available, fair values are measured by utilizing matrix pricing, which is a mathematical technique used widely in the industry to
value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities
(Level 2). Management made no adjustment to the fair value quotes that were received from the independent third party pricing service.
Impaired loans: Impaired loans are those loans in which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally
determined based upon independent third party appraisals of the properties, or discounted cash flows based upon expected proceeds. These assets are included as Level 3 fair values,
based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of loan balances less their valuation allowances.
Foreclosed real estate: Properties acquired through foreclosure, or by deed in lieu of foreclosure, are initially recorded at their fair value less estimated disposal costs. Subsequent to
foreclosure, foreclosed real estate is carried at the lower of carrying value or fair value, with the difference charged to earnings. Fair value is generally determined based upon
independent third party appraisals of the properties, or discounted cash flows based upon expected proceeds. These assets are included as Level 3 fair values, based upon the lowest
level of input that is significant to the fair value measurements.
The following tables summarize assets measured at fair value on a recurring basis as of December 31, segregated by the level of valuation inputs within the hierarchy utilized to
measure fair value:
(In thousands)
Investment securities available for sale
(In thousands)
Investment securities available for sale
At December 31, 2009
Total
Fair
Level
1
$ 2,088
Level 2
$ 70,666
Level
3
-
$
Value
$ 72,754
At December 31, 2008
Total
Fair
Level
1
$ 1,918
Level 2
$ 70,220
Level
3
-
$
Value
$ 72,138
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value
adjustments in certain circumstances (for example, when there is evidence of impairment).
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The following tables summarize assets measured at fair value on a nonrecurring basis as of December 31, segregated by the level of valuation inputs within the hierarchy utilized to
measure fair value:
(In thousands)
Impaired loans
(In thousands)
Impaired loans
Foreclosed real estate
At December 31, 2009
Total
Fair
Level
1
-
$
Level
2
-
$
Level
3
$ 907
Value
$ 907
At December 31, 2008
Level
1
-
-
$
Level
2
-
-
$
Level
3
$ 295
26
Total
Fair
Value
$ 295
26
Required disclosures include fair value information of financial instruments, whether or not recognized in the consolidated statement of condition, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a
sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends, and have not been re-evaluated or updated for
purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at each year-end.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the
Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s
disclosures and those of other companies may not be meaningful. The Company, in estimating its fair value disclosures for financial instruments, used the following methods and
assumptions:
Cash and cash equivalents – The carrying amounts of these assets approximate their fair value.
Investment securities – The fair values of securities available for sale are obtained from an independent third party and are based on quoted prices on nationally recognized
exchange (Level 1), where available. If quoted prices are not available, fair values are measured by utilizing matrix pricing, which is a mathematical technique used widely in the
industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted
securities (Level 2). Management made no adjustment to the fair value quotes that were received from the independent third party pricing service.
Loans – The fair values of portfolio loans, excluding impaired loans, are estimated using an option adjusted discounted cash flow model that discounts future cash flows using recent
market interest rates, market volatility and credit spread assumptions.
Federal Home Loan Bank stock – The carrying amount of these assets approximates their fair value.
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Mortgage servicing rights - The carrying amount of these assets approximates their fair value.
Accrued interest receivable and payable – The carrying amount of these assets approximates their fair value.
Deposit liabilities – The fair values disclosed for demand deposits (e.g., interest-bearing and noninterest-bearing checking, passbook savings and certain types of money
management accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit
are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates of deposits to a schedule of aggregated expected
monthly maturities on time deposits.
Borrowings – Fixed/variable term “bullet” structures are valued using a replacement cost of funds approach. These borrowings are discounted to the FHLBNY advance
curve. Option structured borrowings’ fair values are determined by the FHLB for borrowings that include a call or conversion option. If market pricing is not available from this
source, current market indications from the FHLBNY are obtained and the borrowings are discounted to the FHLBNY advance curve less an appropriate spread to adjust for the
option.
Junior subordinated debentures – Current economic conditions have rendered the market for this liability inactive. As such, we are unable to determine a good estimate of fair
value. Since the rate paid on the debentures held is lower than what would be required to secure an interest in the same debt at year end, and we are unable to obtain a current fair
value, we have disclosed that the carrying value approximates the fair value.
Off-balance sheet instruments – Fair values for the Company’s off-balance sheet instruments are based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties’ credit standing. Such fees were not material at December 31, 2009 and 2008.
The carrying amounts and fair values of the Company’s financial instruments as of December 31 are presented in the following table:
2009
2008
(Dollars in thousands)
Financial assets:
Cash and cash equivalents
Investment securities
Net loans
Federal Home Loan Bank stock
Accrued interest receivable
Mortgage servicing rights
Interest rate swap derivative
Financial liabilities:
Deposits
Borrowed funds
Junior subordinated debentures
Accrued interest payable
Off-balance sheet instruments:
Standby letters of credit
Commitments to extend credit
Carrying Estimated Carrying Estimated
Fair
Values
Values Amounts
Amounts
Fair
7,678
$ 14,631 $ 14,631 $ 7,678 $
72,754
72,138
72,754 72,138
259,387 266,290 247,400 250,020
2,549
1,678
15
-
1,899
1,482
61
1
2,549
1,678
15
-
1,899
1,482
61
1
$ 296,839 $ 299,613 $ 269,438 $ 272,207
53,777
36,000
5,155
5,155
211
189
37,116 51,975
5,155
211
5,155
189
$
- $
-
- $
-
- $
-
-
-
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NOTE 20: PARENT COMPANY – FINANCIAL INFORMATION
The following represents the condensed financial information of Pathfinder Bancorp, Inc. as of and for the years ended December 31:
Statements of Condition
(In thousands)
Assets
Cash and cash equivalents
Investments
Investment in bank subsidiary
Investment in non-bank subsidiary
Other assets
Total assets
Liabilities and Shareholders' Equity
Accrued liabilities
Junior subordinated debentures
Shareholders' equity
Total liabilities and shareholders' equity
Statements of Income
(In thousands)
Income
Dividends from bank subsidiary
Dividends from non-bank subsidiary
Losses on impairment of investment security
Total income
Expenses
Interest
Operating
Total expenses
Income before taxes and equity in (excess of) undistributed
net income of subsidiaries
Tax benefit
Income before equity in (excess of) undistributed net income
of subsidiaries
Equity in (excess of) undistributed net income of subsidiaries
Net income
Page 73
2009
2008
10
$ 1,242 $
20
18
32,820 24,603
155
149
$ 34,494 $ 24,935
155
257
101 $
$
285
5,155 5,155
29,238 19,495
$ 34,494 $ 24,935
2009 2008
$
825 $
5
(4 )
826
157
162
319
507
101
900
7
-
907
257
126
383
524
100
608
1,007
$ 1,615 $
624
(256 )
368
Table of Contents
Statements of Cash Flows
(In thousands)
Operating Activities
Net income
(Equity in) excess of undistributed earnings of subsidiaries
Impairment write-down on investment security
Other operating activities
Net cash provided by operating activities
Investing Activities
Capital contributed to wholly owned bank subsidiary
Net cash used in investing activities
Financing activities
Proceeds from exercise of stock options
Proceeds from the issuance of preferred stock and common stock warrants
Cash dividends paid to preferred shareholders
Cash dividends paid to common shareholders
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Page 74
2009
2008
$ 1,615
(1,007 )
4
(113 )
499
$ 368
256
-
(108 )
516
(5,500 )
(5,500 )
-
-
-
6,771
(60 )
(478 )
6,233
1,232
10
$ 1,242
10
-
-
(694 )
(684 )
(168 )
178
10
$
Table of Contents
IT EM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T): CONTROLS AND PROCEDURES
REPORT OF MANAGEMENT’S RESPONSIBILITY
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure
controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their
evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and
procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the
Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is
accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding
required disclosure.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s report on internal control over financial reporting is contained in “Item 8 – Financial Statements and Supplementary Data” in this annual report in Form 10-K.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting pursuant
to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
None
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PA RT III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE, COMPLIANCE WITH SECTIONS
16 (A) OF EXCHANGE ACT
(a) Information concerning the directors of the Company is incorporated by reference hereunder in the Company's Proxy Materials for the Annual Meeting of Stockholders.
(b) Set forth below is information concerning the Executive Officers of the Company at December 31, 2009.
Name
Thomas W. Schneider
James A. Dowd, CPA
Edward A. Mervine
Melissa A. Miller
Ronald Tascarella
Age
48
42
53
52
51
Positions Held With the Company
President and Chief Executive Officer
Senior Vice President, Chief Financial Officer
Senior Vice President, General Counsel
Senior Vice President, Chief Operating Officer
Senior Vice President, Chief Credit Officer
ITEM 11: EXECUTIVE COMPENSATION
Information with respect to management compensation and transactions required under this item is incorporated by reference hereunder in the Company's Proxy Materials for the
Annual Meeting of Stockholders under the caption "Compensation Committee".
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference hereunder in the Company’s Proxy Materials for the Annual Meeting of Stockholders under the caption "Voting
Securities and Principal Holders Thereof".
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference hereunder in the Company’s Proxy Materials for the Annual Meeting of Stockholders under the caption
"Transactions with Certain Related Persons".
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference hereunder in the Company’s Proxy Materials for the Annual Meeting of Stockholders under the caption "Audit and
Related Fees".
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PAR T IV
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
(a)(2)
(b)
3.1
3.2
4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Financial Statements - The Company’s consolidated financial statements, for the years ended December 31, 2009 and 2008, together with the Report of Independent
Registered Public Accounting Firm are filed as part of this Form 10-K report. See “Item 8: Financial Statements and Supplementary Data.”
Financial Statement Schedules - All financial statement schedules have been omitted as the required information is inapplicable or has been included in “Item 7:
Management Discussion and Analysis.”
Exhibits
Certificate of Incorporation of Pathfinder Bancorp, Inc. (Incorporated herein by reference to the Company's Current Report on Form 8-K filed on June 25, 2001)
Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q filed on August 15, 2005 and November 28,
2007)
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)
Form of Pathfinder Bank 1997 Stock Option Plan (Incorporated herein by reference to the Company's S-8 file no. 333-53027)
Form of Pathfinder Bank 1997 Recognition and Retention Plan (Incorporated by reference to the Company's S-8 file no. 333-53027)
2003 Executive Deferred Compensation Plan (Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008
file no. 000-23601)
2003 Trustee Deferred Fee Plan (Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 file no. 000-
23601)
Employment Agreement between the Bank and Thomas W. Schneider, President and Chief Executive Officer (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2008 file no. 000-23601)
Employment Agreement between the Bank and Edward A. Mervine, Vice President, General Counsel and Secretary (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2008 file no. 000-23601)
Change of Control Agreement between the Bank and Ronald Tascarella (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008 file no. 000-23601)
Change of Control Agreement between the Bank and James A. Dowd (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008 file no. 000-23601)
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10.9
10.10
10.11
14
21
23
Change of Control Agreement between the Bank and Melissa A. Miller (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008 file no. 000-23601)
Executive Supplemental Retirement Agreement between the Bank and Chris C. Gagas (Incorporated by reference to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008 file no. 000-23601)
Executive Supplemental Retirement Agreement between the Bank and Thomas W. Schneider (Incorporated by reference to the Company’s Annual Report on Form
10-K for the year ended December 31, 2008 file no. 000-23601
Code of Ethics (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003)
Subsidiaries of Company
Consent of ParenteBeard LLC
31.1
Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial Officer
32.1 Section 1350 Certification of the Chief Executive and Chief Financial Officer
99.1
Stabilization Act of 2008
Certification of Chief Executive Officer Pursuant to Section 111(b)(4) of the Emergency Economic
99.2
Certification of Chief Financial Officer Pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008
Page 78
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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.
Date:
March 24, 2010
Pathfinder Bancorp, Inc.
By:
/s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
By: /s/ Thomas W. Schneider
Thomas W. Schneider, President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 24, 2010
By: /s/ Janette Resnick
Janette Resnick, Director
Chairman of the Board
Date: March 24, 2010
By: /s/ Bruce E. Manwaring
Bruce E. Manwaring, Director
Date: March 24, 2010
By: /s/ L. William Nelson
L. William Nelson, Director
Date: March 24, 2010
By: /s/ Corte J. Spencer
Corte J. Spencer, Director
Date: March 24, 2010
By: /s/ Lloyd Stemple
Lloyd Stemple, Director
Date: March 24, 2010
By: /s/ James A. Dowd
James A. Dowd, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: March 24, 2010
By: /s/ Shelley J. Tafel
Shelley J. Tafel, Vice President and
Controller
(Principal Accounting Officer)
Date: March 24, 2010
By: /s/ Steven W. Thomas
Steven W. Thomas, Director
Date: March 24, 2010
By: /s/ Chris R. Burritt
Chris R. Burritt, Director
Date: March 24, 2010
By: /s/ George P. Joyce
George P. Joyce, Director
Date: March 24, 2010
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EXHIBIT 21: SUBSIDIARIES OF THE COMPANY
Company
Pathfinder Bank
Pathfinder Statutory Trust II
Pathfinder Commercial Bank (1)
Pathfinder REIT, Inc. (1)
Whispering Oaks Development Corp. (1)
(1) Wholly owned subsidiary of Pathfinder Bank.
EXHIBIT 23: CONSENT OF PARENTEBEARD LLC
Percent Owned
100%
100%
100%
100%
100%
Jurisdiction or State of Incorporation
New York
Delaware
New York
New York
New York
Pathfinder Bancorp, Inc.
Oswego, New York
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-53027) of Pathfinder Bancorp, Inc. of our report dated March 24, 2010,
relating to the consolidated financial statements, which appear in this Form 10-K.
ParenteBeard LLC
Syracuse, New York
March 24, 2010
/s/ PARENTEBEARD LLC
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EXHIBIT 31.1: Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Thomas W. Schneider, President and Chief Executive Officer, certify that:
1.
I have reviewed this Annual report on Form 10-K of Pathfinder Bancorp, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
2.
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
3.
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
4.
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting, to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c)
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
5.
auditors and the audit committee of the registrant's board of directors:
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
(a)
adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
reporting.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial
March 24, 2010
/s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
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EXHIBIT 31.2: Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial Officer
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James A. Dowd, Senior Vice President and Chief Financial Officer, certify that:
1.
I have reviewed this Annual report on Form 10-K of Pathfinder Bancorp, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
2.
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
3.
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
4.
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting, to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c)
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
5.
auditors and the audit committee of the registrant's board of directors:
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
(a)
adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
reporting.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial
March 24, 2010
/s/ James A. Dowd
James A. Dowd
Senior Vice President and Chief Financial Officer
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EXHIBIT 32.1 Section 1350 Certification of the Chief Executive and Chief Financial Officer
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Thomas W. Schneider, President and Chief Executive Officer, and James A. Dowd, Senior Vice President and Chief Financial Officer of Pathfinder Bancorp, Inc. (the "Company"),
each certify in his capacity as an officer of the Company that he has reviewed the Annual Report of the Company on Form 10-K for the year ended December 31, 2009 and that to
the best of his knowledge:
1.
the report fully complies with the requirements of Sections 13(a) of the Securities Exchange Act of 1934; and
2.
the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.
The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2002.
March 24, 2010
March 24, 2010
/s/ Thomas W. Schneider
Thomas W. Schneider
President and Chief Executive Officer
/s/ James A. Dowd
James A. Dowd
Senior Vice President and Chief Financial Officer
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EXHIBIT 99.1 Certification of Chief Executive Officer Pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008
I, Thomas W. Schneider, certify, based on my knowledge, that:
(i) The compensation committee of Pathfinder Bancorp, Inc. has discussed, reviewed, and evaluated with senior risk officers at least every six months during the period beginning on
the later of the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year
containing that date, senior executive officer (SEO) compensation plans and employee compensation plans and the risks these plans pose to Pathfinder Bancorp, Inc.;
(ii) The compensation committee of Pathfinder Bancorp, Inc. has identified and limited during the period beginning on the later of the closing date of the agreement between
Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date, the features in the SEO
compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Pathfinder Bancorp, Inc. and identified any features in the employee
compensation plans that pose risks to Pathfinder Bancorp, Inc. and limited those features to ensure that Pathfinder Bancorp, Inc. is not unnecessarily exposed to risks;
(iii) The compensation committee has reviewed at least every six months during the period beginning on the later of the closing date of the agreement between Pathfinder Bancorp,
Inc. and Treasury or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date, the terms of each employee compensation plan and
identified the features in the plan that could encourage the manipulation of reported earnings of Pathfinder Bancorp, Inc. to enhance the compensation of an employee and has limited
those features;
(iv) The compensation committee of Pathfinder Bancorp, Inc. will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii)
above;
(v) The compensation committee of Pathfinder Bancorp, Inc. will provide a narrative description of how it limited during any part of the most recently completed fiscal year that
included a TARP period the features in (A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Pathfinder
Bancorp, Inc.; (B) Employee compensation plans that unnecessarily expose Pathfinder Bancorp, Inc. to risks; and (C) Employee compensation plans that could encourage the
manipulation of reported earnings of Pathfinder Bancorp, Inc. to enhance the compensation of an employee;
(vi) Pathfinder Bancorp, Inc. has required that bonus payments, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), of the SEOs and
twenty next most highly compensated employees be subject to a recovery or ‘‘clawback’’ provision during any part of the most recently completed fiscal year that was a TARP
period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;
(vii) Pathfinder Bancorp, Inc. has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to an SEO or any of
the next five most highly compensated employees during the period beginning on the later of the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or
June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date;
(viii) Pathfinder Bancorp, Inc. has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established
thereunder during the period beginning on the later of the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day
of Pathfinder Bancorp, Inc.’s fiscal year containing that date;
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(ix) The board of directors of Pathfinder Bancorp, Inc. has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under
section 111 of EESA, has provided this policy to Treasury and its primary regulatory agency, and Pathfinder Bancorp, Inc. and its employees have complied with this policy during
the period beginning on the later of the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of Pathfinder
Bancorp, Inc.’s fiscal year containing that date, and that any expenses requiring approval of the board of directors, a committee of the board of directors, an SEO, or an executive
officer with a similar level of responsibility, were properly approved;
(x) Pathfinder Bancorp, Inc. will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided
under the Federal securities laws related to SEO compensation paid or accrued during the period beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date;
(xi) Pathfinder Bancorp, Inc. will disclose the amount, nature, and justification for the offering during the period beginning on the later of the closing date of the agreement between
Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date of any perquisites, as defined in the
regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for each employee subject to the bonus payment limitations identified in
paragraph (vii);
(xii) Pathfinder Bancorp, Inc. will disclose whether Pathfinder Bancorp, Inc., the board of directors of Pathfinder Bancorp, Inc., or the compensation committee of Pathfinder
Bancorp, Inc. has engaged during the period beginning on the later of the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending
with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date, a compensation consultant; and the services the compensation consultant or any affiliate of the
compensation consultant provided during this period;
(xiii) Pathfinder Bancorp, Inc. has prohibited the payment of any grossups, as defined in the regulations and established under section 111 of EESA, to the SEOs and the next twenty
most highly compensated employees during the period beginning on the later of the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009
and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date;
(xiv) Pathfinder Bancorp, Inc. has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Pathfinder
Bancorp, Inc. and Treasury, including any amendments;
(xv) The following employees are the SEOs and the twenty next most highly compensated employees for the current fiscal year and the most recently completed fiscal year, with the
non-SEOs ranked in order of level of annual compensation starting with the greatest amount:
Name
SEOs:
Thomas Schneider
Edward Mervine
James Dowd
Ron Tascarella
Melissa Miller
Title
President & Chief Executive Officer
Senior Vice President, General Counsel & Corporate Secretary
Senior Vice President & Chief Financial Officer
Senior Vice President & Chief Credit Officer
Senior Vice President & Chief Operating Officer
Page 85
Employer
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Table of Contents
Name
Non-SEOs:
Daniel Phillips
Shelley Tafel
Michael Quenville
Rhonda Hutchins
William O'Brien
Craig Nessel
Laurie Lockwood
Michele Torbitt
Joseph McManus
Roberta Davis
Cynthia Claflin
Barbara Cowles
Denise Lyga
Pamela Knox
Deana Michaels
Lisa Kimball
Beth Alfieri
Anita Austin
Reyne Pierce
Crystal Rafte
Susan Cahill
Title
Vice President & Chief Information Officer
Vice President & Controller
Vice President & Business Development Officer
Vice President, Compliance
Vice President & Business Relationship Manager
Branch Manager
Assistant Vice President & Assistant Controller
Assistant Vice President & Electronic Commerce Manager
Computer Operation Manager
Assistant Vice President & Financial Analyst
Assistant Vice President & Branch Manager
Branch Manager
Branch Manager
Assistant Vice President & Building Loan Specialist
Branch Manager
Assistant Vice President & Internal Audit Manager
Assistant Vice President & Account Manager
Internal Auditor
Assistant Vice President & Retail Lending Manager
Assistant Vice President & Operations Manager
Branch Manager
Employer
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. ( See, for
example, 18 U.S.C. 1001.)
Date: March 24, 2010 /s/ Thomas W. Schneider
Thomas W. Schneider,
President and Chief Executive Officer
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EXHIBIT 99.2 Certification of Chief Financial Officer Pursuant to Section 111(b)(4) of the Emergency Economic Stabilization Act of 2008
I, James A. Dowd, certify, based on my knowledge, that:
(i) The compensation committee of Pathfinder Bancorp, Inc. has discussed, reviewed, and evaluated with senior risk officers at least every six months during the period beginning on
the later of the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year
containing that date, senior executive officer (SEO) compensation plans and employee compensation plans and the risks these plans pose to Pathfinder Bancorp, Inc.;
(ii) The compensation committee of Pathfinder Bancorp, Inc. has identified and limited during the period beginning on the later of the closing date of the agreement between
Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date, the features in the SEO
compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Pathfinder Bancorp, Inc. and identified any features in the employee
compensation plans that pose risks to Pathfinder Bancorp, Inc. and limited those features to ensure that Pathfinder Bancorp, Inc. is not unnecessarily exposed to risks;
(iii) The compensation committee has reviewed at least every six months during the period beginning on the later of the closing date of the agreement between Pathfinder Bancorp,
Inc. and Treasury or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date, the terms of each employee compensation plan and
identified the features in the plan that could encourage the manipulation of reported earnings of Pathfinder Bancorp, Inc. to enhance the compensation of an employee and has limited
those features;
(iv) The compensation committee of Pathfinder Bancorp, Inc. will certify to the reviews of the SEO compensation plans and employee compensation plans required under (i) and (iii)
above;
(v) The compensation committee of Pathfinder Bancorp, Inc. will provide a narrative description of how it limited during any part of the most recently completed fiscal year that
included a TARP period the features in (A) SEO compensation plans that could lead SEOs to take unnecessary and excessive risks that could threaten the value of Pathfinder
Bancorp, Inc.; (B) Employee compensation plans that unnecessarily expose Pathfinder Bancorp, Inc. to risks; and (C) Employee compensation plans that could encourage the
manipulation of reported earnings of Pathfinder Bancorp, Inc. to enhance the compensation of an employee;
(vi) Pathfinder Bancorp, Inc. has required that bonus payments, as defined in the regulations and guidance established under section 111 of EESA (bonus payments), of the SEOs and
twenty next most highly compensated employees be subject to a recovery or ‘‘clawback’’ provision during any part of the most recently completed fiscal year that was a TARP
period if the bonus payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria;
(vii) Pathfinder Bancorp, Inc. has prohibited any golden parachute payment, as defined in the regulations and guidance established under section 111 of EESA, to an SEO or any of
the next five most highly compensated employees during the period beginning on the later of the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or
June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date;
(viii) Pathfinder Bancorp, Inc. has limited bonus payments to its applicable employees in accordance with section 111 of EESA and the regulations and guidance established
thereunder during the period beginning on the later of the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day
of Pathfinder Bancorp, Inc.’s fiscal year containing that date;
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(ix) The board of directors of Pathfinder Bancorp, Inc. has established an excessive or luxury expenditures policy, as defined in the regulations and guidance established under
section 111 of EESA, has provided this policy to Treasury and its primary regulatory agency, and Pathfinder Bancorp, Inc. and its employees have complied with this policy during
the period beginning on the later of the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of Pathfinder
Bancorp, Inc.’s fiscal year containing that date, and that any expenses requiring approval of the board of directors, a committee of the board of directors, an SEO, or an executive
officer with a similar level of responsibility, were properly approved;
(x) Pathfinder Bancorp, Inc. will permit a non-binding shareholder resolution in compliance with any applicable Federal securities rules and regulations on the disclosures provided
under the Federal securities laws related to SEO compensation paid or accrued during the period beginning on the later of the closing date of the agreement between Pathfinder
Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date;
(xi) Pathfinder Bancorp, Inc. will disclose the amount, nature, and justification for the offering during the period beginning on the later of the closing date of the agreement between
Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date of any perquisites, as defined in the
regulations and guidance established under section 111 of EESA, whose total value exceeds $25,000 for each employee subject to the bonus payment limitations identified in
paragraph (vii);
(xii) Pathfinder Bancorp, Inc. will disclose whether Pathfinder Bancorp, Inc., the board of directors of Pathfinder Bancorp, Inc., or the compensation committee of Pathfinder
Bancorp, Inc. has engaged during the period beginning on the later of the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009 and ending
with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date, a compensation consultant; and the services the compensation consultant or any affiliate of the
compensation consultant provided during this period;
(xiii) Pathfinder Bancorp, Inc. has prohibited the payment of any grossups, as defined in the regulations and established under section 111 of EESA, to the SEOs and the next twenty
most highly compensated employees during the period beginning on the later of the closing date of the agreement between Pathfinder Bancorp, Inc. and Treasury or June 15, 2009
and ending with the last day of Pathfinder Bancorp, Inc.’s fiscal year containing that date;
(xiv) Pathfinder Bancorp, Inc. has substantially complied with all other requirements related to employee compensation that are provided in the agreement between Pathfinder
Bancorp, Inc. and Treasury, including any amendments;
(xv) The following employees are the SEOs and the twenty next most highly compensated employees for the current fiscal year and the most recently completed fiscal year, with the
non-SEOs ranked in order of level of annual compensation starting with the greatest amount:
Name
SEOs:
Thomas Schneider
Edward Mervine
James Dowd
Ron Tascarella
Melissa Miller
Title
President & Chief Executive Officer
Senior Vice President, General Counsel & Corporate Secretary
Senior Vice President & Chief Financial Officer
Senior Vice President & Chief Credit Officer
Senior Vice President & Chief Operating Officer
Employer
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
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Name
Non-SEOs:
Daniel Phillips
Shelley Tafel
Michael Quenville
Rhonda Hutchins
William O'Brien
Craig Nessel
Laurie Lockwood
Michele Torbitt
Joseph McManus
Roberta Davis
Cynthia Claflin
Barbara Cowles
Denise Lyga
Pamela Knox
Deana Michaels
Lisa Kimball
Beth Alfieri
Anita Austin
Reyne Pierce
Crystal Rafte
Susan Cahill
Title
Vice President & Chief Information Officer
Vice President & Controller
Vice President & Business Development Officer
Vice President, Compliance
Vice President & Business Relationship Manager
Branch Manager
Assistant Vice President & Assistant Controller
Assistant Vice President & Electronic Commerce Manager
Computer Operation Manager
Assistant Vice President & Financial Analyst
Assistant Vice President & Branch Manager
Branch Manager
Branch Manager
Assistant Vice President & Building Loan Specialist
Branch Manager
Assistant Vice President & Internal Audit Manager
Assistant Vice President & Account Manager
Internal Auditor
Assistant Vice President & Retail Lending Manager
Assistant Vice President & Operations Manager
Branch Manager
Employer
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
Pathfinder Bank
(xvi) I understand that a knowing and willful false or fraudulent statement made in connection with this certification may be punished by fine, imprisonment, or both. ( See, for
example, 18 U.S.C. 1001.)
Date: March 24, 2010 /s/ James A. Dowd
James A. Dowd,
Senior Vice President and Chief Financial Officer
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