UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending June 30, 2007
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 000-23601
---------
PATHFINDER BANCORP, INC.
------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
FEDERAL 16-1540137
-------------------------------- -------------------
(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification Number
214 West First Street, Oswego, NY 13126
---------------------------------------
(Address of Principal Executive Office) (Zip Code)
(315) 343-0057
--------------
(Issuer's Telephone Number Including Area Code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the issuer was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ].
Indicate by check mark whether the small business issuer is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 10, 2007, there were
2,970,819 shares issued and 2,483,532 shares outstanding of the Small Business
Issuer's Common Stock.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X ]
PATHFINDER BANCORP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Financial Statements
Consolidated Statements of Condition 1
Consolidated Statements of Income 2-3
Consolidated Statements of Changes in
Shareholders' Equity 4
Consolidated Statements of Cash Flows 5-6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis or Plan
of Operation 11-19
Item 3. Controls and Procedures 20
PART II OTHER INFORMATION 21-22
Item 1. Legal proceedings
Item 2. Unregistered sales of equity securities
and use of proceeds
Item 3. Defaults upon senior securities
Item 4. Submission of matters to a vote of
security holders
Item 5. Other information
Item 6. Exhibits
SIGNATURES 23
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
JUNE 30, 2007 AND DECEMBER 31, 2006
(UNAUDITED)
June 30, December 31,
(In thousands, except share data) 2007 2006
---------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 7,037 $ 7,068
Interest earning deposits 351 6,655
---------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 7,388 13,723
Investment securities, at fair value 69,625 62,640
Federal Home Loan Bank stock, at cost 1,318 1,579
Loans 205,726 203,209
Less: Allowance for loan losses 1,561 1,496
--------------------------------------------------------------------------------------------------------------
Loans receivable, net 204,165 201,713
Premises and equipment, net 7,585 7,597
Accrued interest receivable 1,759 1,694
Foreclosed real estate 449 471
Goodwill 3,840 3,840
Intangible asset, net 70 181
Bank owned life insurance 6,325 6,212
Other assets 2,032 1,732
---------------------------------------------------------------------------------------------------------------
Total assets $ 304,556 $ 301,382
===============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest-bearing $ 232,401 $ 225,003
Noninterest-bearing 22,424 20,582
---------------------------------------------------------------------------------------------------------------
Total deposits 254,825 245,585
Short-term borrowings 3,400 0
Long-term borrowings 17,010 26,360
Junior subordinated debentures 5,155 5,155
Other liabilities 3,405 3,432
---------------------------------------------------------------------------------------------------------------
Total liabilities 283,795 280,532
Shareholders' equity:
Preferred stock, authorized shares 1,000,000; no shares issued or outstanding
Common stock, par value $0.01; authorized 10,000,000 shares;
2,970,819 and 2,953,619 shares issued; and 2,483,532 and 2,466,332
shares outstanding, respectively 30 29
Additional paid in capital 7,899 7,786
Retained earnings 21,288 21,307
Accumulated other comprehensive loss (1,954) (1,770)
Treasury Stock, at cost; 487,287 shares (6,502) (6,502)
---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 20,761 20,850
---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 304,556 $ 301,382
===============================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-1-
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three For the three
months ended months ended
(In thousands, except per share data) June 30, 2007 June 30, 2006
-----------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees $ 3,434 $ 3,137
Debt securities:
Taxable 676 626
Tax-exempt 42 98
Dividends 85 67
Interest earning deposits 100 4
-----------------------------------------------------------------------------------------------
Total interest income 4,337 3,932
-----------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 1,760 1,279
Interest on short-term borrowings 12 116
Interest on long-term borrowings 451 458
-----------------------------------------------------------------------------------------------
Total interest expense 2,223 1,853
-----------------------------------------------------------------------------------------------
Net interest income 2,114 2,079
Provision for loan losses 75 1
-----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,039 2,078
-----------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 375 350
Earnings on bank owned life insurance 57 51
Loan servicing fees 81 58
Net losses on sales of investment securities - (7)
Net gains on sales of loans and foreclosed real estate 7 2
Debit card interchange fees 68 47
Other charges, commissions and fees 103 105
-----------------------------------------------------------------------------------------------
Total noninterest income 691 606
-----------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,274 1,183
Building occupancy 312 306
Data processing expenses 352 306
Professional and other services 226 116
Amortization of intangible asset 55 55
Other expenses 308 344
-----------------------------------------------------------------------------------------------
Total noninterest expenses 2,527 2,310
-----------------------------------------------------------------------------------------------
Income before income taxes 203 374
Provision for income taxes 37 71
-----------------------------------------------------------------------------------------------
NET INCOME $ 166 $ 303
===============================================================================================
NET INCOME PER SHARE - BASIC $ 0.07 $ 0.12
===============================================================================================
NET INCOME PER SHARE - DILUTED $ 0.07 $ 0.12
===============================================================================================
DIVIDENDS PER SHARE $ 0.1025 $ 0.1025
===============================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-2-
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the six For the six
months ended months ended
(In thousands, except per share data) June 30, 2007 June 30, 2006
------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees $ 6,847 $ 6,194
Debt securities:
Taxable 1,314 1,267
Tax-exempt 86 196
Dividends 166 128
Interest earning deposits 193 12
------------------------------------------------------------------------------------------------
Total interest income 8,606 7,797
------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 3,495 2,528
Interest on short-term borrowings 12 177
Interest on long-term borrowings 864 896
------------------------------------------------------------------------------------------------
Total interest expense 4,371 3,601
------------------------------------------------------------------------------------------------
Net interest income 4,235 4,196
PROVISION FOR LOAN LOSSES 125 23
------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,110 4,173
------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 708 721
Earnings on bank owned life insurance 113 100
Loan servicing fees 145 105
Net losses on sales of securities (3) (9)
Net losses on sales of loans/real estate - (5)
Debit card interchange fees 116 89
Other charges, commissions & fees 203 198
------------------------------------------------------------------------------------------------
Total noninterest income 1,282 1,199
------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 2,501 2,458
Building occupancy 630 622
Data processing expenses 694 630
Professional and other services 463 231
Amortization of intangible asset 111 111
Other expenses 586 669
------------------------------------------------------------------------------------------------
Total noninterest expenses 4,985 4,721
------------------------------------------------------------------------------------------------
Income before income taxes 407 651
Provision for income taxes 76 108
------------------------------------------------------------------------------------------------
NET INCOME $ 331 $ 543
================================================================================================
NET INCOME PER SHARE - BASIC $ 0.13 $ 0.22
================================================================================================
NET INCOME PER SHARE - DILUTED $ 0.13 $ 0.22
================================================================================================
DIVIDENDS PER SHARE $ 0.205 $ 0.205
================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND JUNE 30, 2006
(unaudited)
Accumulated
Additional Other Com-
Common Issued Paid in Retained prehensive Treasury
(Dollars in thousands, except share data Shares Amount Capital Earnings (Loss) Stock
---------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2006 2,953,619 $ 29 $ 7,786 $ 21,307 $ (1,770) $ (6,502)
Comprehensive income
Net income 331
Other comprehensive loss, net of tax
Unrealized net losses on securities (184)
Total Comprehensive income
Stock options exercised 17,200 1 113
Dividends declared ($.2050 per share) (350)
----------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2007 2,970,819 $ 30 $ 7,899 $ 21,288 $ (1,954) $ (6,502)
============================================================================================================================
BALANCE, DECEMBER 31, 2005 2,950,419 $ 29 $ 7,721 $ 20,965 $ (1,285) $ (6,502)
Comprehensive income
Net income 543
Other comprehensive loss, net of tax
Unrealized net losses on securities (550)
Total Comprehensive loss
Dividends declared ($.2050 per share) (342)
---------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2006 2,950,419 $ 29 $ 7,721 $ 21,166 $ (1,835) $ (6,502)
===========================================================================================================================
Total
------------------------------------------------------
(Dollars in thousands, except per share data)
BALANCE, DECEMBER 31, 2006 $20,850
Comprehensive income
Net income 331
Other comprehensive loss, net of tax
Unrealized net losses on securities (184)
-------------------------------------------------------
Total Comprehensive income 147
Stock options exercised 114
Dividends declared ($.2050 per share) (350)
-------------------------------------------------------
BALANCE, JUNE 30, 2007 $20,761
=======================================================
BALANCE, DECEMBER 31, 2005 $20,928
Comprehensive income
Net income 543
Other comprehensive loss, net of tax
Unrealized net losses on securities (550)
-------------------------------------------------------
Total Comprehensive loss (7)
Dividends declared ($.2050 per share) (342)
-------------------------------------------------------
BALANCE, JUNE 30, 2006 $20,579
=======================================================
The accompanying notes are an integral part of the consolidated financial
statements
-4-
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six For the six
months ended months ended
(In thousands) June 30, 2007 June 30, 2006
-------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 331 $ 543
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 125 23
Proceeds from sales of loans 3,000 -
Originations of loans held-for-sale (3,006) -
Realized (gains) losses on sale of:
Foreclosed real estate (6) 5
Loans 6 -
Available-for-sale investment securities 3 9
Premises and equipment - (8)
Depreciation 380 377
Amortization of intangible asset 111 111
Amortization of deferred financing costs 15 15
Amortization of mortgage servicing rights 26 55
Increase in value of bank owned life insurance (113) (100)
Net amortization of premiums on investment securities 49 65
(Increase) decrease in accrued interest receivable (65) 28
Net change in other assets and liabilities (241) 1,267
------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 615 2,390
------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (13,270) (10,943)
Net redemption (purchases) of FHLB stock 261 (219)
investment securities available-for-sale 5,927 9,930
Proceeds from sale:
Available-for-sale investment securities - 1,941
Foreclosed real estate 132 50
Premises and equipment 33 145
Net increase in loans (2,686) (3,523)
Purchase of premises and equipment (401) (215)
-------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (10,004) (2,834)
-------------------------------------------------------------------------------------
-5-
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six For the six
months ended months ended
(In thousands) June 30, 2007 June 30, 2006
--------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts
savings accounts, money market deposit accounts
and escrow deposits 4,322 (10,435)
Net increase in time deposits 4,918 6,129
Net proceeds from short term borrowings 3,400 5,900
Payments on long-term borrowings (10,350) (1,000)
Proceeds from long-term borrowings 1,000 -
Proceeds from trust preferred obligation 5,000 -
Payments on trust preferred obligation (5,000) -
Proceeds from exercise of stock options 114 -
Cash dividends paid (350) (342)
--------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,054 252
--------------------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (6,335) (192)
Cash and cash equivalents at beginning of period 13,723 7,895
--------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,388 $ 7,703
======================================================================================
NON-CASH INVESTING ACTIVITY
Transfer of loans to foreclosed real estate $ 109 $ -
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
PATHFINDER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Pathfinder
Bancorp, Inc. and its wholly owned subsidiaries have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial
information and the instructions for Form 10-QSB and Regulation S-B.
Accordingly, they do not include all of the information and footnotes necessary
for a complete presentation of consolidated financial position, results of
operations, and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation have been
included. Certain amounts in the 2006 consolidated financial statements have
been reclassified to conform to the current period presentation. These
reclassifications had no effect on net income as previously reported. In the
opinion of management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included.
The following material under the heading "Management's Discussion and Analysis
or Plan of Operation" is written with the presumption that the users of the
interim financial statements have read, or have access to, the Company's latest
audited financial statements and notes thereto, together with Management's
Discussion and Analysis or Plan of Operation as of December 31, 2006 and for the
three year period then ended. Therefore, only material changes in financial
condition and results of operations are discussed in the remainder of Part 1.
Operating results for the three and six months ended June 30, 2007 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2007.
(2) EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income by the
weighted average number of common shares outstanding throughout the three months
and six months ended June 30, 2007 and 2006, using 2,483,532 and 2,463,132
weighted average common shares outstanding for the three months ended and
2,482,557 and 2,463,132 for the six months ended, respectively. Diluted
earnings per share for the three months and six months ended June 30, 2007 and
2006 have been computed using 2,490,116 and 2,480,947 for the three months ended
and 2,490,085 and 2,481,360 for the six months ended, respectively. 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.
(3) PENSION BENEFITS
The composition of net periodic benefit plan cost for the three months and six
months ended June 30, is as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(IN THOUSANDS) 2007 2006 2007 2006
----------------------------------------------------------------------------
Service cost $ 49 $ 48 $ 98 $ 96
Interest cost 68 63 136 126
Expected return on plan assets (98) (92) (196) (184)
Amortization of net losses 22 28 44 56
----------------------------------------------------------------------------
NET PERIODIC COST $ 41 $ 47 $ 82 $ 94
============================================================================
-7-
The Company previously disclosed in its consolidated financial statements for
the year ended December 31, 2006, that it expected to contribute $190,000 to its
pension plan in 2007. As of June 30, 2007, $89,000 had been contributed to the
pension plan.
(4) OTHER COMPREHENSIVE LOSS
The components of other comprehensive loss and related tax effects are as
follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(IN THOUSANDS) 2007 2006 2007 2006
-----------------------------------------------------------------------------------
Gross change in unrealized losses
on securities available for sale $ (406) $(829) $ (309) $(917)
Reclassification adjustment for
losses included in net income - 7 3 9
----------------------------------------------------------------------------------
(406) (822) (306) (908)
Tax effect 162 329 122 358
----------------------------------------------------------------------------------
NET OF TAX AMOUNT $ (244) $ (493) $ (184) $(550)
==================================================================================
The components of accumulated other comprehensive loss, net of related tax
effects are as follows:
JUNE 30, DECEMBER 31,
(IN THOUSANDS) 2007 2006
-------------------------------------------------------------------------------
Unrealized losses on available for sale securities $ (1,033) $ (849)
Unrecognized pension and other postretirement
benefit losses (921) (921)
-------------------------------------------------------------------------------
$ (1,954) $ (1,770)
===============================================================================
(5) GUARANTEES
The Company does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit written are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Generally, all
letters of credit, when issued have expiration dates within one year. The
credit risk involved in issuing letters of credit is essentially the same as
those that are involved in extending loan facilities to customers. The Company,
generally, holds collateral and/or personal guarantees supporting these
commitments. The Company had $818,000 of standby letters of credit as of June
30, 2007. Management believes that the proceeds obtained through a liquidation
of collateral and the enforcement of guarantees would be sufficient to cover the
potential amount of future payments required under the corresponding guarantees.
The current amount of the liability as of June 30, 2007 for guarantees under
standby letters of credit issued is not material.
(6) NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109" ("FIN
48"), which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that companies recognize in their financial statements
the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. In May 2007,
the FASB issued FASB Staff Position ("FSP") FIN 48-1 "Definition of Settlement
in FASB Interpretation No 48" (FSP FIN 48-1). FSP FIN 48-1 provides guidance on
how to determine whether a tax position is effectively settled for the purpose
of recognizing previously unrecognized tax benefits. The provision of FIN 48
and FSP FIN 48-1 are effective
-8-
for years beginning after December 15, 2006, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained
earnings. The Company adopted the provisions of FIN 48 and FSP FIN 48-1, as
required, on January 1, 2007, with no impact on the Company's consolidated
financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, ("SFAS
157") which defines fair value, establishes a framework for measuring fair value
under GAAP, and expands disclosures about fair value measurements. SFAS 157
applies to other accounting pronouncements that require or permit fair value
measurements. The new guidance is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and for interim periods within
those fiscal years. We are currently evaluating the potential impact, if any, of
the adoption of SFAS 157 on our consolidated financial position, results of
operations and cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115, ("SFAS 159"). This standard permits an entity to choose to
measure many financial instruments and certain other items at fair value. Most
of the provisions in SFAS 159 are elective; however, the amendment to SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities, applies to all
entities with available-for-sale and trading securities. The fair value option
established by SFAS 159 permits all entities to choose to measure eligible items
at fair value at specified election dates. A business entity will report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. The fair value option:
(a) may be applied instrument by instrument, with a few exceptions, such as
investments otherwise accounted for by the equity method; (b) is irrevocable
(unless a new election date occurs); and (c) is applied only to entire
instruments and not to portions of instruments. SFAS 159 is effective for the
Company as of January 1, 2008, unless early adoption is elected. The Company is
currently analyzing the effects of this interpretation but does not expect its
implementation will have a significant impact on the Company's consolidated
financial condition or results of operations.
EITF 06-4
In September 2006, the FASB's Emerging Issues Task Force (EITF) issued EITF
Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance Arrangements" ("EITF 06-4").
EITF 06-4 requires the recognition of a liability related to the postretirement
benefits covered by an endorsement split-dollar life insurance arrangement. The
consensus highlights that the employer (who is also the policyholder) has a
liability for the benefit it is providing to its employee. As such, if the
policyholder has agreed to maintain the insurance policy in force for the
employee's benefit during his or her retirement, then the liability recognized
during the employee's active service period should be based on the future cost
of insurance to be incurred during the employee's retirement. Alternatively, if
the policy holder has agreed to provide the employee with a death benefit, then
the liability for the future death benefit should be recognized by following the
guidance in SFAS No. 106 or Accounting Principles Board (APB) Opinion No. 12, as
appropriate. For transition, an entity can choose to apply the guidance using
either of the following approaches: (a) a change in accounting principle through
retrospective application to all periods presented or (b) a change in accounting
principle through a cumulative-effect adjustment to the balance in retained
earnings at the beginning of the year of adoption. The EITF is effective in
fiscal years beginning after December 15, 2007, with early adoption permitted.
The Company does not believe that the implementation of this guidance will have
a material impact on the Company's consolidated financial statements.
-9-
EITF 06-5
On September 7, 2006, the Task Force reached a conclusion on EITF Issue No.
06-5, "Accounting for Purchases of Life Insurance - Determining the Amount That
Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance" ("EITF 06-5"). The scope of EITF
06-5 consists of six separate issues relating to accounting for life insurance
policies purchased by entities protecting against the loss of "key persons." The
six issues are clarifications of previously issued guidance on FASB Technical
Bulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. The adoption of EITF 06-5 did not have a material impact on
the Company's consolidated financial statements.
EITF 06-10
In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10
"Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements"
(EITF 06-10). EITF 06-10 provides guidance for determining a liability for the
postretirement benefit obligation as well as recognition and measurement of the
associated asset on the basis of the terms of the collateral assignment
agreement. EITF 06-10 is effective for fiscal years beginning after December 15,
2007. The Company is currently assessing the impact of EITF 06-10 on its
consolidated financial position and results of operations.
-10-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Throughout the Management's Discussion and Analysis ("MD&A") the term, "the
Company", refers to the consolidated entity of Pathfinder Bancorp, Inc and its
wholly owned subsidiary, Pathfinder Bank. Pathfinder Commercial Bank,
Pathfinder REIT, Inc. and Whispering Oaks Development, Inc. represent wholly
owned subsidiaries of Pathfinder Bank. At June 30, 2007, Pathfinder Bancorp,
M.H.C., the Company's mutual holding company parent, whose activities are not
included in the MD&A, held 63.7% of the Company's common stock and the public
held 36.3%.
The following discussion reviews the Company's financial condition at June 30,
2007 and the results of operations for the three months and six months ended
June 30, 2007 and June 30, 2006.
This Quarterly Report contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market areas and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically declines any obligation, to
publicly release the result of any revisions that may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
The Company's net income is primarily dependent on its net interest income,
which is the difference between interest income earned on its investments in
mortgage loans, investment securities and other loans, and its cost of funds
consisting of interest paid on deposits and borrowed funds. The Company's net
income is also affected by its provision for loan losses, as well as by the
amount of other income, including income from fees and service charges on
deposit accounts, net gains and losses on sales of securities, loans and
foreclosed real estate, and other expenses such as salaries and employee
benefits, building occupancy and equipment costs, data processing and income
taxes. Earnings of the Company also are affected significantly by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory authorities, which events
are beyond the control of the Company. In particular, the general level of
market interest rates which tend to be highly cyclical have a significant impact
on our earnings.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America 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 consolidated 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
-11-
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 included in the 2006 Annual
Report on Form 10-K ("the Consolidated Financial Statements"). Beginning with
its quarterly report for the March 31, 2007 quarter, the Company has elected to
file its Exchange Act reports under the rules and regulations applicable to
small business issuers.
These policies, along with the disclosures presented in the other financial
statement notes and in this discussion, provide information on how significant
assets and liabilities are valued in the consolidated financial statements and
how those values are determined. Based on the valuation techniques used and the
sensitivity of financial statement amounts to the methods, assumptions and
estimates underlying those amounts, management has identified the determination
of the allowance for loan losses to be the accounting area that requires the
most subjective and complex judgments, and as such could be the most subject to
revision as new information becomes available.
The allowance for loan losses represents management's estimate of probable loan
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type
on the consolidated balance sheet. Note 1 to the Consolidated Financial
Statements describes the methodology used to determine the allowance for loan
losses, and a discussion of the factors driving changes in the amount of the
allowance for loan losses is included in this report.
The Company carries all of its investments at fair value with any unrealized
gains or losses reported net of tax as an adjustment to shareholders' equity.
Based on management's assessment, at June 30, 2007, the Company did not hold any
security that had a fair value decline that is currently expected to be other
than temporary. Consequently, any declines in a specific security's fair value
below amortized cost have not been provided for in the consolidated income
statement. The Company's ability to fully realize the value of its investment
in various securities, including corporate debt securities, is dependent on the
underlying creditworthiness of the issuing organization.
OVERVIEW
Net income was $166,000, or $0.07 per share, for the three months ended June 30,
2007, as compared to $303,000, or $0.12 per share, for the same period in 2006.
During the second quarter of 2007, the Company continued its efforts toward
transforming its more traditional thrift balance sheet with mostly residential
loans as earning assets, toward that of a community bank with a more diverse mix
of residential, consumer and commercial loans. On an average balance basis,
total commercial loans comprised 30.1% of the total gross loan portfolio for the
quarter ended June 30, 2007, as compared to 28.3% of the portfolio for the year
ended December 31, 2006. For the six months ended June 30, 2007, the Company
reported net income of $331,000, or $0.13 per diluted share as compared to
$543,000, or $0.22 per diluted share, for the same period in 2006.
On March 22, 2007, the Company entered into a junior subordinated debenture for
$5.0 million, with interest adjustable quarterly at a 1.65% spread over the
3-month LIBOR. The Company used the proceeds from that issuance to retire its
original junior subordinated debenture on June 27, 2007, at its first call date.
The original obligation was for $5.0 million, adjustable quarterly at a spread
of 3.45% over the 3-month LIBOR. The new issuance and retirement of the
original junior subordinated debenture will result in an approximate pre-tax
annual savings of $90,000 to the Company.
-12-
Short-term borrowings increased $3.4 million during the first half of 2007.
Long-term borrowings decreased $9.4 million, or 36%, when compared to December
31, 2006, as excess liquidity was used to pay off long-term advances as they
matured.
RESULTS OF OPERATIONS
The return on average assets and return on average shareholders' equity were
0.21% and 3.15%, respectively, for the three months ended June 30, 2007,
compared with 0.40% and 5.85%, respectively, for the three months ended June 30,
2006. During the second quarter of 2007, when compared to the second quarter of
2006, net interest income and core noninterest income increased $35,000 and
$73,000, respectively, offset by increases in provision for loan losses and
noninterest expenses of $74,000 and $217,000, respectively.
For the six months ended June 30, 2007, net interest income increased $39,000
and core noninterest income increased $72,000 when compared to the six months
ended June 30, 2006. These increases were offset by increased provision for
loan losses and noninterest expenses of $102,000 and $264,000, respectively.
NET INTEREST INCOME
Net interest income is the Company's primary source of operating income for
payment of operating expenses and providing for loan losses. It is the amount
by which interest earned on loans, interest-earning deposits and investment
securities, exceeds the interest paid on deposits and other interest-bearing
liabilities. Changes in net interest income and net interest margin result from
the interaction between the volume and composition of interest-earning assets,
interest-bearing liabilities, related yields and associated funding costs.
Net interest income, on a tax-equivalent basis remained relatively constant at
$2.1 million for the three months ended June 30, 2007 when compared to the same
period of 2006. The Company's net interest margin for the second quarter of
2007 decreased to 2.99% from 3.11% when compared to the same quarter in 2006.
Management expects continued margin compression to adversely impact earnings as
we expect the yield curve will continue to be flat or inverted over the near
term. Average interest-earning assets increased 5% to $286.6 million for the
three months ended June 30, 2007 as compared to $273.5 million for the three
months ended June 30, 2006 and the yield on interest-earning assets increased 28
basis points to 6.09% from 5.81% for the comparable periods. The increase in
average interest-earning assets was primarily attributable to an $11.3 million
increase in loans receivable and a $7.6 million increase in interest earning
deposits, offset by a $5.7 million decrease in investment securities. For the
three months ended June 30, 2007, average interest-bearing liabilities increased
$8.1 million, or 3%, and the cost of funds increased 47 basis points to 3.35%
from 2.88% for the same period in 2006. The increase in the average balance of
interest-bearing liabilities resulted primarily from a $19.8 million, or 9%,
increase in deposits, and a $5.1 million increase in junior subordinated debt,
offset by a $16.8 million, or 44%, reduction in borrowed funds.
For the six months ended June 30, 2007, net interest income, on a tax-equivalent
basis, remained constant at $4.3 million when compared to the same period of
2006. Net interest margin decreased 12 basis points, to 3.00% at June 30, 2007
from 3.12% at June 30, 2006. Average interest-earning assets increased 4% to
$285.9 million for the six months ended June 30, 2007 as compared to $274.8
million for the six months ended June 30, 2006, and the yield on
interest-earning assets increased 32 basis points to 6.06% from 5.74% for the
comparable period. The increase in average interest-earning assets was
primarily attributable to a $12.5 million increase in loans receivable and a
$7.1 million increase in interest earning deposits, partially offset by an $8.4
million decrease in investment securities. Average interest-bearing liabilities
increased $6.4 million and the cost of funds increased 52 basis points to 3.30%
for the six months ended June 30, 2007, from 2.78% for the same period in
2006. The increase in the average balance of interest-bearing liabilities
resulted primarily from a $16.8 million, or 8%, increase in average deposits and
a $2.6 million increase in junior subordinated debt, partially offset by a $12.9
million, or 36%, reduction in borrowed funds.
-13-
INTEREST INCOME
Total interest income, on a tax-equivalent basis, for the quarter ended June 30,
2007, increased $390,000, or 10%, to $4.4 million from $4.0 million for the
quarter ended June 30, 2006.
The average balance of loans increased $11.3 million to $203.2 million, with
yields increasing 23 basis points to 6.78% for the second quarter of 2007.
Average commercial real estate loans increased $7.8 million, and the yield on
those loans increased to 7.89% from 7.69% from the year earlier period. Average
commercial loans increased $2.8 million, and experienced an increase in the
average tax-equivalent yield of 24 basis points, to 8.42% for the quarter ended
June 30, 2007, from 8.18%, in the quarter ended June 30, 2006. The increase in
the yield on commercial loans was primarily the result of new commercial loan
originations occurring at market rates higher than the weighted average
existing portfolio rate as well as the adjustable rate portions of the
portfolios repricing upward in connection with upward adjustments in the prime
rate. Average consumer loans increased $2.4 million, or 12%, and experienced an
increase in yield of 37 basis points. The Company's municipal loan portfolio
increased $272,000, or 10%, when comparing the second quarter of 2007 to the
same period in 2006. The average yield on the municipal loan portfolio
increased to 6.18% in the second quarter of 2007 from 5.56% for the same period
in 2006. Offsetting the above increases, was a $2.1 million, or 2%, decrease in
the average balance of residential real estate loans.
Average investment securities (taxable and tax-exempt) for the quarter ended
June 30, 2007 decreased by $5.7 million, with a decrease in tax-equivalent
interest income from investments of $11,000, or 1%, when compared to the second
quarter of 2006. The average tax-equivalent yield of the portfolio increased 25
basis points, to 4.32% from 4.07%. The decrease in average investment securities
was primarily due to the 4th quarter 2006 sale of municipal securities which was
used to pay down long-term borrowings.
For the quarter ended June 30, 2007, interest income on interest earning
deposits increased $99,000, as the average balance of interest earning deposits
increased $7.7 million and the yield on those deposits increased to 5.22% from
4.00%, when compared to the same quarter of 2006. The increase was primarily
due to the short-term investment of the proceeds from the second junior
subordinated debenture combined with liquidity generated from deposit growth out
pacing general loan demand.
Total interest income, on a tax-equivalent basis, for the six months ended June
30, 2007 increased $775,000, or 10%, when compared to the six months ended June
30, 2006.
Average loans increased $12.5 million, with yields increasing 24 basis points to
6.73% from 6.49%. The average balance of commercial real estate loans increased
$8.0 million, with yields increasing to 7.75% from 7.63%, average commercial
loans increased $4.2 million, with yields increasing to 8.49% from 8.09% and
average consumer loans increased $1.9 million, with yields increasing to 8.36%
from 7.87% for the six months ended June 30, 2007, as compared to the same
period in 2006. These increases were offset by decreases in the average balance
of residential real estate loans of $1.6 million.
For the six months ended June 30, 2007, tax-equivalent interest income from
investment securities decreased $67,000, or 4%, compared to the same period in
2006. The average tax-equivalent yield of the portfolio increased 28 basis
points, to 4.30% from 4.02%, offset by an $8.4 million decrease in the average
balance of investment securities, due to the sale of municipal investment
securities mentioned above.
For the six months ended June 30, 2007, interest income on interest earning
deposits increased $184,000, as the average balance of interest earning deposits
increased $7.1 million and the yield on those deposits increased to 5.01% from
2.97%, when compared to the same period of 2006. The increase was primarily
due to the short-term investment of the proceeds from the second junior
subordinated debenture combined with liquidity generated from deposit growth out
pacing general loan demand.
-14-
INTEREST EXPENSE
Total interest expense increased $370,000 for the three months ended June 30,
2007 compared to the same quarter in 2006, as the cost of funds increased 47
basis points to 3.35% in 2007 from 2.88% in 2006. Average time deposits
increased $23.0 million, combined with a 63 basis point increase to 4.55% from
3.91%. Average MMDA accounts increased $3.5 million, combined with a 41 basis
point increase to 4.13% from 3.72%. These increases were offset by decreases in
average money management accounts to $11.7 million in 2007 from $13.6 million in
2006, and average savings accounts to $54.2 million in 2007 from $60.3 million
in 2006. Interest expense on borrowings decreased by $111,000, or 19%, from the
prior period. The decrease in interest expense on borrowings was the result of a
$16.8 million decrease in the average balance of borrowed funds. This decrease
was offset by a $5.1 million increase in average debt from a second junior
subordinated debenture entered into in March 2007. The new $5.1 million issuance
has an interest rate which adjusts quarterly at a 1.65% spread over the 3-month
LIBOR. The original debenture was for $5.1 million, adjustable quarterly at a
spread of 3.45% over the 3-month LIBOR. During the second quarter of 2007, the
Company had carried both of these junior subordinated debentures until the
original issuance was retired on June 27, 2007 at its first call date. The cost
of funds for the new junior subordinated debenture decreased 77 basis points to
7.81% for the three months ended June 30, 2007, as compared to the original
junior subordinated debenture cost of 8.58% for the three months ended June 30,
2006. The Company used the proceeds from the new issuance to retire its original
junior subordinated debenture on June 27, 2007, at its first call date. The new
issuance and retirement of the original junior subordinated debenture will
result in an approximate pre-tax annual savings of $90,000 to the Company.
For the six months ended June 30, 2007, interest expense increased $770,000 when
compared to the six months ended June 30, 2006. Deposit interest expense for the
comparable periods increased $967,000 or 38%. Average time deposits increased
$23.7 million, combined with a 69 basis point increase to 4.50% from 3.81%.
Average MMDA accounts increased $903,000 million, combined with a 59 basis point
increase to 4.15% from 3.56%. These increases were offset by decreases in
average savings accounts to $54.5 million in 2007 from $61.3 million in 2006 and
average money management accounts to $11.8 million in 2007 from $13.9 million in
2006. Interest expense on borrowings decreased by $197,000, or 36%, from the
prior period. The decrease in interest expense on borrowings was the result of
a $12.9 million, or 36%, decrease in the average balance of borrowed funds.
This decrease was offset by an increase in average junior subordinate debt of
$2.6 million due to a second junior subordinate debt entered into in March 2007.
The original $5.0 million issuance was retired on June 27, 2007. The cost of
funds for the two junior subordinated debentures increased slightly to 8.30% for
the six months ended June 30, 2007 as compared to 8.28% for the six months ended
June 30, 2006.
PROVISION FOR LOAN LOSSES
Provision for loan losses for the quarter ended June 30, 2007 increased to
$75,000 from $1,000 for the same period in 2006. The increased provision is
reflective of a growing loan portfolio and one more heavily weighted to
commercial term and commercial real estate, which have higher inherent risk
characteristics than a consumer real estate portfolio. Offsetting the need for
an increased provision for loan losses from a growing portfolio, is improvement
in asset quality. The Company's ratio of allowance for loan losses to period
end loans has increased slightly to 0.76% at June 30, 2007 from 0.74% at
December 31, 2006 and decreased from 0.86% at June 30, 2006. Non-performing
loans to period end loans have decreased to 0.61% at June 30, 2007 from 0.73% at
June 30, 2006.
NONINTEREST INCOME
The Company's noninterest income is primarily comprised of fees on deposit
account balances and transactions, loan servicing, commissions, and net gains
(losses) on securities, loans and foreclosed real estate.
-15-
The following table sets forth certain information on noninterest income for the
periods indicated:
FOR THE THREE MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS) 2007 2006 $CHANGE % CHANGE
------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 375 $ 350 $ 25 7.1%
Earnings on bank owned life insurance 57 51 6 11.8%
Loan servicing fees 81 58 23 39.7%
Debit card interchange fees 68 47 21 44.7%
Other charges, commissions and fees 103 105 (2) -1.9%
------------------------------------------------------------------------------------------------
Core noninterest income 684 611 73 11.9%
Net losses on sales of investment securities - (7) 7 -100.0%
Net gains on sale of loans and foreclosed real estate 7 2 5 250.0%
------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME $ 691 $ 606 $ 85 14.0%
================================================================================================
FOR THE SIX MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS) 2007 2006 $CHANGE % CHANGE
---------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 708 $ 721 $ (13) -1.8%
Earnings on bank owned life insurance 113 100 13 13.0%
Loan servicing fees 145 105 40 38.1%
Debit card interchange fees 116 89 27 30.3%
Other charges, commissions and fees 203 198 5 2.5%
---------------------------------------------------------------------------------------------------
Core noninterest income 1,285 1,213 72 5.9%
Net losses on sales of investment securities (3) (9) 6 -66.7%
Net losses on sale of loans and foreclosed real estate - (5) 5 -100.0%
---------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME $1,282 $1,199 $ 83 6.9%
===================================================================================================
For the three months ended June 30, 2007, core noninterest income reflected an
increase of $73,000, or 12%, when compared with the three months ended June 30,
2006. The increase in service charges on deposit accounts was primarily
attributable to an increase in the number of deposit accounts and the fees
associated with deposit accounts. The increase in loan servicing fees was
primarily due to an increase in commercial and mortgage loan late charges and a
reduction in the amortization of mortgage servicing rights. The increase in
debit card fees was primarily due to a 17% increase in issued Visa Debit cards
and an increase in the usage from the existing customer base.
For the six months ended June 30, 2007, core noninterest income increased
$72,000 or 6%, when compared with the six months ended June 30, 2006. The
increase in core noninterest income for the six months ended June 30 2007, was
primarily due to an increase in late fees on commercial and mortgage loans and a
reduction in mortgage servicing rights amortization, combined with increased
fees from the volume and usage of the Bank's Visa Debit card and an increase in
the value of bank owned life insurance. These increases were offset by a
reduction in service charges on deposit accounts attributable to decreased
utilization of the extended overdraft program during the first quarter of 2007.
-16-
NONINTEREST EXPENSE
The following table sets forth certain information on noninterest expense for
the quarters indicated:
FOR THE THREE MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS) 2007 2006 $CHANGE % CHANGE
-----------------------------------------------------------------------
Salaries and employee benefits $1,274 $1,183 $ 91 7.7%
Building occupancy 312 306 6 2.0%
Data processing 352 306 46 15.0%
Professional and other services 226 116 110 94.8%
Amortization of intangible assets 55 55 - 0.0%
Other expenses 308 344 (36) -10.5%
-----------------------------------------------------------------------
TOTAL NONINTEREST EXPENSES $2,527 $2,310 $ 217 9.4%
=======================================================================
FOR THE SIX MONTHS ENDED JUNE 30,
(DOLLARS IN THOUSANDS) 2007 2006 $CHANGE % CHANGE
-----------------------------------------------------------------------
Salaries and employee benefits $2,501 $2,458 $ 43 1.7%
Building occupancy 630 622 8 1.3%
Data processing 694 630 64 10.2%
Professional and other services 463 231 232 100.4%
Amortization of intangible assets 111 111 - 0.0%
Other expenses 586 669 (83) -12.4%
-----------------------------------------------------------------------
TOTAL NONINTEREST EXPENSES $4,985 $4,721 $ 264 5.6%
=======================================================================
Total noninterest expense increased for the three and six months ended June 30,
2007 when compared to the same periods for 2006. The increase in professional
and other services for the three and six month periods was primarily due to
consulting costs associated with preparing for, and implementing the enhanced
internal controls of Section 404 of the Sarbanes Oxley Act and ensuring
compliance with Bank Secrecy Act/Anti-Money Laundering regulations.
Additionally, a direct mailing campaign aimed at attracting new deposit
customers continued through the second quarter of 2007. The increase in
salaries and employee benefits for the three and six months periods primarily
resulted from increased commissions and incentives paid, combined with normal
merit based salary increases. Data processing expenses for the three and six
month periods increased due to volume related Internet banking costs and
customer check processing, ATM processing charges and maintenance charges. These
increases were offset by a decrease in other expenses for both periods primarily
due to a reduction in costs associated with foreclosed real estate properties as
the number of properties decreased to 7 from 13 in the comparable quarter of
2006. Additionally, audit and exam expenses and travel and training expenses
were lower when compared to the first two quarters of 2006.
INCOME TAX EXPENSE
Income taxes decreased $34,000 for the quarter ended June 30, 2007 as compared
to the same period in 2006. The decrease in income tax expense reflected lower
pre-tax income during the comparable quarters. For the six months ended June
30, 2007, income tax expense decreased $32,000. The effective tax rate was
18.7% and 16.6% for the six months ended June 30, 2007 and June 30, 2006,
respectively. The Company continues to strive to reduce its tax rate from the
statutory rate primarily through the ownership of tax-exempt investment
securities, bank owned life insurance and other tax savings strategies.
Enactment of proposed state tax legislation regarding Real Estate Investment
Trusts would increase the state tax rate for the Company.
-17-
CHANGES IN FINANCIAL CONDITION
ASSETS
Total assets increased approximately $3.2 million, or 1%, to $304.6 million at
June 30, 2007, from $301.4 million at December 31, 2006. The increase in total
assets was primarily the result of an increase in investment securities of $7.0
million, or 11%, and an increase of $2.5 million, or 1%, in loans receivable,
offset by a reduction in interest earning deposits of $6.3 million, or 95%. The
growth in investment securities was a result of securities purchases during
January and February 2007 in order to obtain the required collateral for
increased municipal deposit levels. The reduction in interest earning deposits
was primarily due to excess liquidity being utilized to pay off maturing
long-term advances.
At June 30, 2007, the securities balance included a net unrealized loss on
available for sale securities of $1.7 million, versus a net unrealized loss of
$1.4 million at December 31, 2006. These unrealized losses relate principally
to changes in interest rates subsequent to the acquisition of specific
securities. None of the securities in this category had an unrealized loss that
exceeded 8% of book value. The Company has the intent and ability to hold the
individual securities to maturity or market price recovery.
Management has reviewed its loan and mortgage-backed securities portfolios and
determined that no exposure exists to sub-prime or other high-risk residential
mortgages. The Company is not in the practice of investing in, or originating
these types of investments or loans.
LIABILITIES
Total liabilities increased $3.3 million, or 1%, to $283.8 million at June 30,
2007 from $280.5 million at December 31, 2006. Deposits increases of $9.2
million, or 4%, were offset by a net reduction in borrowed funds of $6.0 million
as lower cost deposit funds were used to reduce higher cost advances from the
Federal Home Loan Bank New York.
LOAN AND ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
The following table represents information concerning the aggregate amount of
nonperforming assets:
JUNE 30, DECEMBER 31, JUNE 30,
(DOLLARS IN THOUSANDS) 2007 2006 2006
------------------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate and commercial $ 502 $ 481 $ 376
Consumer 74 125 78
Residential real estate mortgage 689 566 964
------------------------------------------------------------------------------
Total nonaccrual loans 1,265 1,172 1,418
------------------------------------------------------------------------------
Total non-performing loans 1,265 1,172 1,418
Foreclosed real estate 449 471 887
------------------------------------------------------------------------------
Total non-performing assets $1,714 $1,643 $2,305
==============================================================================
Non-performing loans to total loans 0.61% 0.57% 0.73%
Non-performing assets to total assets 0.56% 0.54% 0.78%
==============================================================================
Total nonperforming loans increased 8% at June 30, 2007 when compared to
December 31, 2006. Management believes that adequate reserves exist for any
potential losses that may occur from the remediation process.
-18-
The allowance for loan losses at June 30, 2007 and December 31, 2006 was $1.6
million and $1.5 million, or 0.76% and 0.74% of period end loans, respectively.
CAPITAL
Shareholders' equity at June 30, 2007 was $20.8 million as compared to $20.9
million at December 31, 2006. The Company added $331,000 to retained earnings
through net income, which was offset by cash dividends returned to its
shareholders of $350,000. Additional paid in capital increased $113,000 due to
the exercise of stock options during the first quarter of 2007. The Company's
mutual holding company parent, Pathfinder Bancorp, M.H.C, waived the dividend
for the quarter ended June 30, 2007, payable in July 2007.
Risk-based capital provides the basis for which all banks are evaluated in terms
of capital adequacy. Capital adequacy is evaluated primarily by the use of
ratios which measure capital against total assets, as well as against total
assets that are weighted based on defined risk characteristics. The Company's
goal is to maintain a strong capital position, consistent with the risk profile
of its subsidiary banks that supports growth and expansion activities while at
the same time exceeding regulatory standards. At June 30, 2007, Pathfinder Bank
exceeded all regulatory required minimum capital ratios and met the regulatory
definition of a "well-capitalized" institution, i.e. a leverage capital ratio
exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6% and a total
risk-based capital ratio exceeding 10%.
LIQUIDITY
Liquidity management involves the Company's ability to generate cash or
otherwise obtain funds at reasonable rates to support asset growth, meet deposit
withdrawals, maintain reserve requirements, and otherwise operate the Company on
an ongoing basis. The Company's primary sources of funds are deposits, borrowed
funds, amortization and prepayment of loans and maturities of investment
securities and other short-term investments, and earnings and funds provided
from operations. While scheduled principal repayments on loans are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company manages the pricing of deposits to maintain a desired deposit balance.
In addition, the Company invests excess funds in short-term interest-earning and
other assets, which provide liquidity to meet lending requirements.
The Company's liquidity has been enhanced by its membership in the Federal Home
Loan Bank of New York, whose competitive advance programs and lines of credit
provide the Company with a safe, reliable and convenient source of funds. A
significant decrease in deposits in the future could result in the Company
having to seek other sources of funds for liquidity purposes. Such sources
could include, but are not limited to, additional borrowings, trust preferred
security offerings, brokered deposits, negotiated time deposits, the sale of
"available-for-sale" investment securities, the sale of securitized loans, or
the sale of whole loans. Such actions could result in higher interest expense
costs and/or losses on the sale of securities or loans.
The Company has a number of existing credit facilities available to it. The
combined aggregate amount of credit available in connection with its existing
facilities is approximately $56.6 million at June 30, 2007.
The Asset Liability Management Committees of the Company are responsible for
implementing the policies and guidelines for the maintenance of prudent levels
of liquidity. As of June 30, 2007, management reported to the Board of
Directors that the Company is in compliance with its liquidity policy
guidelines.
-19-
ITEM 3 - CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including our Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this quarterly report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There has been no change in the
Company's internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonable likely to
materially affect, the Company's internal control over financial reporting.
-20-
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
--------------------------
None
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
--------------------------------------------------------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
----------------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
The Company's Annual Meeting of Shareholders was held on April 25, 2007. The
following are the items voted on and the results of the shareholder voting:
1. The election of Janette Resnick, Corte J. Spencer and Steve W. Thomas to
serve as directors of the Company, each for a term of three years or until his
or her successor has been elected and qualified.
Name For Withheld
Janette Resnick 2,381,148 89,651
Corte J. Spencer 2,359,350 111,449
Steven W. Thomas 2,380,398 90,401
Set forth below are the names of the other directors of the Company and
their terms of office.
Name Term Expires
Thomas W. Schneider 2008
Chris R. Burritt 2008
Bruce E. Manwaring 2009
L. William Nelson, Jr. 2009
George P. Joyce 2009
Lloyd "Buddy" Stemple 2009
2. The ratification of the appointment of Beard Miller Company LLP as
auditors for the Company for the year ending December 31, 2007.
For Against Abstain
Number of Votes 2,469,314 1,425 60
ITEM 5 - OTHER INFORMATION
--------------------------
None
-21-
ITEM 6 - EXHIBITS
-----------------
Exhibit No. Description
----------- -----------
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
Officer and Chief Financial Officer
-22-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the small
business issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PATHFINDER BANCORP, INC.
------------------------
(Small business issuer)
August 14, 2007 /s/ Thomas W. Schneider
--------------- -----------------------
Date: Thomas W. Schneider
President, Chief Executive Officer
August 14, 2007 /s/ James A. Dowd
--------------- ----------------
Date: James A. Dowd
Senior Vice President, Chief Financial Officer
-23-
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, certify that:
1. I have reviewed the June 30, 2007 quarterly report on Form 10-QSB of
Pathfinder Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer 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 small
business issuer, 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) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
on such evaluation; and
(c) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred
during the small business issuer's most recent fiscal quarter (the
small business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
August 14, 2007 /s/ Thomas W. Schneider
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Date Thomas W. Schneider
President and Chief Executive Officer
EXHIBIT 31.2
Rule 13a-14(a) / 15d-14(a) Certification of the Chief Financial Officer
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James A. Dowd, certify that:
1. I have reviewed the June 30, 2007 quarterly report on Form 10-QSB of
Pathfinder Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer 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 small
business issuer, 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) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
on such evaluation; and
(c) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred
during the small business issuer's most recent fiscal quarter (the
small business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
August 14, 2007 /s/ James A. Dowd
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Date James A. Dowd
Senior Vice President and Chief Financial Officer
EXHIBIT 32.1
Section 1350 Certification of the Chief Executive and Chief Financial Officer
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Thomas W. Schneider, President and Chief Executive Officer, and James A. Dowd,
Senior Vice President and Chief Financial Officer of Pathfinder Bancorp, Inc.
(the "Company"), each certify in his capacity as an officer of the Company that
he has reviewed the Quarterly Report of the Company on Form 10-QSB for the
quarter ended June 30, 2007 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.
August 14, 2007 /s/ Thomas W. Schneider
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Date Thomas W. Schneider
President and Chief Executive Officer
August 14, 2007 /s/ James A. Dowd
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Date James A. Dowd
Senior Vice President and Chief Financial
Officer