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 September 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
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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 Identification
Incorporation or Organization) 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 the issuer's class of common equity,
as of the latest practicable date: As of November 9, 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 7-9
Item 2. Management's Discussion and Analysis or Plan of 10-19
Operation
Item 3. Controls and Procedures 20
PART II OTHER INFORMATION 21
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 22
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(UNAUDITED)
September 30, December 31,
(Dollars in thousands, except per share data) 2007 2006
---------------------------------------------------------------------------------------------------------
ASSETS
------
Cash and due from banks $ 10,492 $ 7,068
Interest earning deposits 317 6,655
-------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 10,809 13,723
Investment securities, at fair value 65,612 62,640
Federal Home Loan Bank stock, at cost 1,660 1,579
Loans 215,855 203,209
Less: Allowance for loan losses 1,645 1,496
-------------------------------------------------------------------------------------------------------
Loans receivable, net 214,210 201,713
Premises and equipment, net 7,607 7,597
Accrued interest receivable 1,625 1,694
Foreclosed real estate 310 471
Goodwill 3,840 3,840
Intangible asset, net 15 181
Bank owned life insurance 6,381 6,212
Other assets 1,772 1,732
-------------------------------------------------------------------------------------------------------
Total assets $313,841 $301,382
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Interest-bearing $232,296 $225,003
Noninterest-bearing 23,623 20,582
-------------------------------------------------------------------------------------------------------
Total deposits 255,919 245,585
Short-term borrowings 9,000 0
Long-term borrowings 19,010 26,360
Junior subordinated debentures 5,155 5,155
Other liabilities 3,701 3,432
-------------------------------------------------------------------------------------------------------
Total liabilities 292,785 280,532
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 21,340 21,307
Accumulated other comprehensive loss (1,711) (1,770)
Treasury stock, at cost; 487,287 shares (6,502) (6,502)
-------------------------------------------------------------------------------------------------------
Total shareholders' equity 21,056 20,850
-------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $313,841 $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
September 30, 2007 September 30, 2006
-------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans, including fees $ 3,546 $ 3,222
Debt securities:
Taxable 623 561
Tax-exempt 42 98
Dividends 83 82
Other 6 4
-------------------------------------------------------------------------------------------------------------
Total interest income 4,300 3,967
-------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 1,734 1,368
Interest on short-term borrowings 99 78
Interest on long-term borrowings 314 456
-------------------------------------------------------------------------------------------------------------
Total interest expense 2,147 1,902
-------------------------------------------------------------------------------------------------------------
Net interest income 2,153 2,065
Provision for loan losses 155 -
-------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,998 2,065
-------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 366 330
Earnings on bank owned life insurance 56 50
Loan servicing fees 72 55
Net gains on sales of investment securities 111 -
Net gains (losses) on sales of loans and foreclosed real estate 11 (29)
Debit card interchange fees 62 49
Other charges, commissions and fees 114 81
-------------------------------------------------------------------------------------------------------------
Total noninterest income 792 536
-------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,263 1,307
Building occupancy 305 291
Data processing expenses 339 328
Professional and other services 130 121
Amortization of intangible asset 55 55
Other expenses 320 289
-------------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,412 2,391
-------------------------------------------------------------------------------------------------------------
Income before income taxes 378 210
Provision for income taxes 72 40
-------------------------------------------------------------------------------------------------------------
NET INCOME $ 306 $ 170
=============================================================================================================
NET INCOME PER SHARE - BASIC $ 0.12 $ 0.07
=============================================================================================================
NET INCOME PER SHARE - DILUTED $ 0.12 $ 0.07
=============================================================================================================
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 nine For the nine
months ended months ended
September 30, 2007 September 30, 2006
------------------- --------------------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans, including fees $ 10,393 $ 9,416
Debt securities:
Taxable 1,937 1,828
Tax-exempt 128 294
Dividends 249 210
Other 199 16
-----------------------------------------------------------------------------------------------------------------
Total interest income 12,906 11,764
-----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 5,215 3,886
Interest on short-term borrowings 111 263
Interest on long-term borrowings 1,178 1,344
-----------------------------------------------------------------------------------------------------------------
Total interest expense 6,504 5,493
-----------------------------------------------------------------------------------------------------------------
Net interest income 6,402 6,271
Provision for loan losses 280 23
----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 6,122 6,248
-----------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 1,060 1,041
Earnings on bank owned life insurance 169 150
Loan servicing fees 186 160
Net gains (losses) on sales of investment securities 108 (9)
Net gains (losses) on sales of loans and foreclosed real estate 42 (34)
Debit card interchange fees 178 138
Other charges, commissions and fees 317 279
-----------------------------------------------------------------------------------------------------------------
Total noninterest income 2,060 1,725
-----------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 3,764 3,765
Building occupancy 935 913
Data processing expenses 1,033 958
Professional and other services 593 352
Amortization of intangible asset 166 166
Other expenses 906 958
-----------------------------------------------------------------------------------------------------------------
Total noninterest expenses 7,397 7,112
-----------------------------------------------------------------------------------------------------------------
Income before income taxes 785 861
Provision for income taxes 148 148
-----------------------------------------------------------------------------------------------------------------
NET INCOME $ 637 $ 713
=================================================================================================================
NET INCOME PER SHARE - BASIC $ 0.26 $ 0.29
=================================================================================================================
NET INCOME PER SHARE - DILUTED $ 0.26 $ 0.29
=================================================================================================================
DIVIDENDS PER SHARE $ 0.3075 $ 0.3075
=================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006
(Unaudited)
Accumulated
Additional Other Com-
Common Stock Paid in Retained prehensive Treasury
Shares Amount Capital Earnings Loss Stock Total
----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
BALANCE, DECEMBER 31, 2006 2,953,619 $ 29 $ 7,786 $ 21,307 $ (1,770) $(6,502) $20,850
Comprehensive income
Net income 637 637
Other comprehensive income, net of tax
Unrealized net gains on securities 59 59
--------
Total Comprehensive income 696
Stock options exercised 17,200 1 113 114
Dividends declared ($.3075 per share) (604) (604)
----------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2007 2,970,819 $ 30 $ 7,899 $ 21,340 $ (1,711) $(6,502) $21,056
============================================================================================================================
BALANCE, DECEMBER 31, 2005 2,950,419 $ 29 $ 7,721 $ 20,965 $ (1,285) $(6,502) $20,928
Comprehensive income
Net income 713 713
Other comprehensive income, net of tax
Unrealized net gains on securities 308 308
--------
Total Comprehensive income 1,021
Stock options exercised 1,400 - 11 11
Dividends declared ($.3075 per share) (595) (595)
----------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2006 2,951,819 $ 29 $ 7,732 $ 21,083 $ (977) $(6,502) $21,365
============================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine For the nine
months ended months ends
September 30, September 30,
2007 2006
-----------------------------------------------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES
Net income $ 637 $ 713
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 280 23
Proceeds from sales of loans 3,000 -
Originations of loans held-for-sale (2,973) -
Realized (gains) losses on sale of:
Foreclosed real estate (15) 34
Loans (27) -
Available-for-sale investment securities (108) 9
Premises and equipment - (13)
Depreciation 559 561
Amortization of intangible asset 166 166
Amortization of deferred financing costs 15 23
Amortization of mortgage servicing rights 37 77
Increase in value of bank owned life insurance (169) (150)
Net amortization of premiums and discounts on investment securities 78 116
Decrease in accrued interest receivable 69 42
Net change in other assets and liabilities (18) 63
------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,531 1,664
------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (17,352) (10,985)
Net (purchase) redemption of Federal Home Loan Bank stock (81) 33
Proceeds from maturities and principal reductions of
investment securities available-for-sale 14,150 15,792
Proceeds from sale:
Available-for-sale investment securities 359 771
Real estate acquired through foreclosure 276 456
Premises and equipment 33 145
Net increase in loans (12,886) (7,114)
Purchase of premises and equipment (602) (275)
------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (16,103) (1,177)
------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts
savings accounts, money market deposit accounts, MMDA
accounts and escrow deposits 7,351 (10,226)
Net increase in time deposits 2,983 11,770
Net proceeds from short term borrowings 9,000 1,300
Payments on long-term borrowings (11,350) (2,000)
Proceeds from long-term borrowings 4,000 -
Proceeds from trust preferred obligation 5,000 -
Payments on trust preferred obligation (5,000) -
Proceeds from exercise of stock options 114 11
Cash dividends paid (440) (433)
------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,658 422
------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,914) 909
Cash and cash equivalents at beginning of period 13,723 7,895
------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,809 $ 8,804
============================================================================================================
NON-CASH INVESTING ACTIVITY
Conversion of Holding Company advance to loan receivable $ - $ 1,101
Transfer of loans to foreclosed real estate 109 249
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
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.
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 nine months ended September 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 nine months ended September 30, 2007 and 2006, using 2,483,532 and 2,463,482
weighted average common shares outstanding for the three months ended and
2,482,886 and 2,463,250 for the nine months ended, respectively. Diluted
earnings per share for the three months and nine months ended September 30, 2007
and 2006 have been computed using 2,487,732 and 2,483,465 for the three months
ended and 2,489,292 and 2,482,069 for the nine 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.
-6-
(3) PENSION BENEFITS
The composition of net periodic benefit plan cost for the three months and nine
months ended September 30, is as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(IN THOUSANDS) 2007 2006 2007 2006
------------------------------------------------------------------------------
Service cost $ 49 $ 48 $ 147 $ 144
Interest cost 68 63 204 189
Expected return on plan assets (98) (92) (294) (276)
Amortization of net losses 22 28 66 84
------------------------------------------------------------------------------
NET PERIODIC COST $ 41 $ 47 $ 123 $ 141
==============================================================================
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 September 30, 2007, $136,000 had been contributed
to the pension plan.
(4) OTHER COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects are as
follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
(IN THOUSANDS) 2007 2006 2007 2006
----------------------------------------------------------------------------------------
Gross change in unrealized gains
on securities available for sale $ 516 $ 1,430 $ 206 $ 513
Reclassification adjustment for
(gains) losses included in net income (111) - (108) 9
-----------------------------------------------------------------------------------------
405 1,430 98 522
Tax effect (162) (572) (39) (214)
-----------------------------------------------------------------------------------------
NET OF TAX AMOUNT $ 243 $ 858 $ 59 $ 308
=========================================================================================
The components of other comprehensive income and related tax effects are as
follows:
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 2007 2006
--------------------------------------------------- --------------- --------------
Unrealized losses on available for sale securities $ (790) $ (849)
Unrecognized pension and other postretirement
benefit losses (921) (921)
------------------------------------------------------------------------------------
$ (1,711) $ (1,770)
====================================================================================
-7-
(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 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 $1.7 million of standby letters of credit as of September 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 September 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 provisions of
FIN 48 and FSP FIN 48-1 are effective 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
-8-
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.
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.
-9-
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 September 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 September
30, 2007 and the results of operations for the three months and nine months
ended September 30, 2007 and September 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 accrued 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
-10-
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 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 September 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 $306,000, or $0.12 per diluted share, for the three months ended
September 30, 2007, as compared to $170,000, or $0.07 per diluted share, for the
same period in 2006. During the third 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
-11-
balance basis, total commercial loans comprised 32.3% of the total gross loan
portfolio for the quarter ended September 30, 2007, as compared to 28.3% of the
portfolio for the year ended December 31, 2006. For the nine months ended
September 30, 2007, the Company reported net income of $637,000, or $0.26 per
diluted share as compared to $713,000, or $0.29 per diluted share, for the same
period in 2006.
On March 22, 2007, the Company issued 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.
Short-term borrowings increased $9.0 million, or 100%, when compared to December
31, 2006, which provided the bank some liquidity and to pay off long-term
borrowings, which decreased $7.4 million, or 28%, when compared to December 31,
2006.
RESULTS OF OPERATIONS
The return on average assets and return on average shareholders' equity were
0.39% and 5.80%, respectively, for the three months ended September 30, 2007,
compared with 0.23% and 3.21%, respectively, for the three months ended
September 30, 2006. During the third quarter of 2007, when compared to the
third quarter of 2006, net interest income and core noninterest income increased
$88,000 and $105,000, respectively, offset by increases in provision for loan
losses and noninterest expenses of $155,000 and $21,000, respectively.
For the nine months ended September 30, 2007, net interest income increased
$131,000 and core noninterest income increased $142,000 when compared to the
nine months ended September 30, 2006. These increases were offset by increased
provisions for loan losses and noninterest expenses of $257,000 and $285,000,
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 increased $74,000 to $2.2 million
for the three months ended September 30, 2007 from $2.1 million for the same
period of 2006. The Company's net interest margin for the third quarter of 2007
decreased to 3.10% from 3.12% when compared to the same quarter in 2006.
Management anticipates some easing in the margin compression that the Company
has been experiencing as short-term deposit product pricing and federal funds
borrowing costs are reduced to reflect recent reductions totaling 75 basis
points by the Federal Reserve in its benchmark interest-rate. Average
interest-earning assets increased 5% to $282.5 million for the three months
ended September 30, 2007 as compared to $270.3 million for the three months
ended September 30, 2006 and the yield on interest-earning assets increased 19
basis points to 6.13% from 5.94% for the comparable periods. The increase in
average interest-earning assets was primarily attributable to a $16.2 million,
or 8.3%, increase in loans receivable, offset by a $4.0 million decrease in
investment securities. For the three months ended September 30, 2007, average
interest-bearing liabilities increased $8.5 million, or 3%, and the cost of
funds increased 26 basis points
-12-
to 3.28% from 3.02% for the same period in 2006. The increase in the average
balance of interest-bearing liabilities resulted primarily from an $18.0
million, or 9%, increase in deposits, offset by a $9.6 million, or 24%,
reduction in borrowed funds.
For the nine months ended September 30, 2007, net interest income, on a
tax-equivalent basis, increased slightly to $6.5 million, compared to $6.4
million for the same period of 2006. Net interest margin decreased 9 basis
points, to 3.04% at September 30, 2007 from 3.13% at September 30, 2006. Average
interest-earning assets increased 4% to $284.6 million for the nine months ended
September 30, 2007 as compared to $273.1 million for the nine months ended
September 30, 2006, and the yield on interest-earning assets increased 27 basis
points to 6.08% from 5.81% for the comparable period. The increase in average
interest-earning assets was primarily attributable to a $13.8 million, or 7.1%,
increase in loans receivable and a $4.7 million increase in interest earning
deposits, partially offset by a $6.9 million decrease in investment securities.
Average interest-bearing liabilities increased $6.5 million and the cost of
funds increased 44 basis points to 3.29% for the nine months ended September 30,
2007, from 2.85% for the same period in 2006. The increase in the average
balance of interest-bearing liabilities resulted primarily from a $16.5 million,
or 8%, increase in average deposits, partially offset by a $10.1 million, or
25%, reduction in borrowed funds.
INTEREST INCOME
Total interest income, on a tax-equivalent basis, for the quarter ended
September 30, 2007, increased $318,000, or 8%, to $4.3 million from $4.0 million
for the quarter ended September 30, 2006.
The average balance of loans increased $16.2 million to $211.0 million, with
yields increasing 11 basis points to 6.75% for the third quarter of 2007.
Average commercial real estate loans increased $9.8 million, while the yield on
those loans decreased to 7.64% from 7.77% from the year earlier period. Average
commercial loans increased $3.0 million, and experienced a decrease in the yield
of 12 basis points, to 8.47% for the quarter ended September 30, 2007, from
8.59%, in the quarter ended September 30, 2006. The decrease in the yield on
commercial loans was primarily the result of new commercial loan origination
activity taking place at yields slightly lower than the average yield on the
existing commercial loan portfolio. Average consumer loans increased $3.5
million, or 17%, while the average yield decreased by 13 basis points. The
Company's municipal loan portfolio increased $518,000, or 20%, when comparing
the third quarter of 2007 to the same period in 2006. The average tax equivalent
yield on the municipal loan portfolio increased to 6.55% in the third quarter of
2007 from 5.87% for the same period in 2006. Offsetting the above increases, was
a $544,000, or 1%, decrease in the average balance of residential real estate
loans.
Average investment securities (taxable and tax-exempt) for the quarter ended
September 30, 2007 decreased by $4.0 million, with a decrease in tax-equivalent
interest income from investments of $12,000, or 2%, when compared to the third
quarter of 2006. The average tax-equivalent yield of the portfolio increased 16
basis points, to 4.29% from 4.13%. The decrease in average investment securities
was primarily due to the scheduled maturity of short-term investments that were
acquired during the first quarter of 2007 in connection with the
collateralization of increasing municipal deposit levels.
Total interest income, on a tax-equivalent basis, for the nine months ended
September 30, 2007 increased $1.1 million, or 9%, when compared to the nine
months ended September 30, 2006.
-13-
Average loans increased $13.8 million, with yields increasing 20 basis points to
6.74% from 6.54% for the nine months ended September 30, 2007. The average
balance of commercial real estate loans increased $8.8 million, with yields
decreasing slightly to 7.71% from 7.72%, average commercial loans increased $4.0
million, with yields increasing to 8.48% from 8.16% and average consumer loans
increased $2.5 million, with yields increasing to 8.33% from 8.06% for the nine
months ended September 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 $1.2 million.
For the nine months ended September 30, 2007, tax-equivalent interest income
from investment securities decreased $80,000, or 3%, compared to the same period
in 2006. The average tax-equivalent yield of the portfolio increased 24 basis
points, to 4.30% from 4.06%, offset by a $6.9 million decrease in the average
balance of investment securities, due to the scheduled maturities of investment
securities mentioned above.
For the nine months ended September 30, 2007, interest income on interest
earning deposits increased $187,000, as the average balance of interest earning
deposits increased $4.7 million and the yield on those deposits increased to
5.21% from 4.57%, 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.
INTEREST EXPENSE
Total interest expense increased $245,000 for the three months ended September
30, 2007 compared to the same quarter in 2006, as the cost of funds increased 26
basis points to 3.28% in 2007 from 3.02% in 2006. Average time deposits
increased $18.6 million, combined with a 41 basis point increase in the cost of
funds to 4.58% from 4.17%. Average MMDA accounts increased $4.4 million,
combined with a 4 basis point increase in the cost of funds to 3.93% from 3.89%.
These increases were offset by decreases in average money management accounts to
$11.3 million in 2007 from $13.0 million in 2006, and average savings accounts
to $53.1 million in 2007 from $57.4 million in 2006. Interest expense on
borrowings decreased by $121,000, or 23%, from the prior period. The decrease
in interest expense on borrowings was the result of a $9.6 million decrease in
the average balance of borrowed funds, combined with a 168 basis point decrease
in the cost of funds on the junior subordinated debenture that resulted from the
new issuance of subordinated debentures and retirement of the old higher rate
issuance.
For the nine months ended September 30, 2007, interest expense increased $1.0
million when compared to the nine months ended September 30, 2006. Deposit
interest expense for the comparable periods increased $1.3 million, or 34%.
Average time deposits increased $22.0 million, combined with a 59 basis point
increase in the related cost of funds to 4.51% from 3.92%. Average MMDA accounts
increased $2.1 million, combined with a 43 basis point increase to 4.09% from
3.66%. These increases were offset by decreases in average savings accounts to
$54.1 million in 2007 from $60.7 million in 2006 and average money management
accounts to $11.6 million in 2007 from $13.6 million in 2006. Interest expense
on borrowings decreased by $318,000, or 20%, from the prior period. The decrease
in interest expense on borrowings was the result of an $11.8 million, or 33%,
decrease in the average balance of borrowed funds. This decrease was offset by
an increase in average junior subordinated debt of $1.7 million due to a second
junior subordinated 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 decreased to 7.98% for the nine months ended September
30, 2007 as compared to 8.49% for the nine months ended September 30, 2006.
-14-
PROVISION FOR LOAN LOSSES
Provision for loan losses for the quarter ended September 30, 2007 increased
$155,000 from 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, combined with an increase in general
nonperforming loan totals. The Company's ratio of allowance for loan losses to
period end loans increased to 0.76% at September 30, 2007 as compared to 0.74%
at December 31, 2006. Nonperforming loans to period end loans have increased
to 0.94% at September 30, 2007 from 0.57% at December 31, 2006, primarily due to
the nonperforming status of two commercial loans. Management believes that the
existing reserves provided on these loans are sufficient to cover any
anticipated losses.
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.
The following table sets forth certain information on noninterest income for the
periods indicated:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 2007 2006 $CHANGE % CHANGE
---------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 366 $ 330 $ 36 10.9%
Earnings on bank owned life insurance 56 50 6 12.0%
Loan servicing fees 72 55 17 30.9%
Debit card interchange fees 62 49 13 26.5%
Other charges, commissions and fees 114 81 33 40.7%
--------------------------------------------------------------------------------------------------
Core noninterest income 670 565 105 18.6%
Net gains on sales of investment securities 111 - 111 -
Net gains (losses) on sale of loans and foreclosed real estate 11 (29) 40 -137.9%
--------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME $ 792 $ 536 $ 256 47.8%
==================================================================================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 2007 2006 $CHANGE % CHANGE
---------------------------------------------------------------------------------------------------
Service charges on deposit accounts $1,060 $1,041 $ 19 1.8%
Earnings on bank owned life insurance 169 150 19 12.7%
Loan servicing fees 186 160 26 16.3%
Debit card interchange fees 178 138 40 29.0%
Other charges, commissions and fees 317 279 38 13.6%
---------------------------------------------------------------------------------------------------
Core noninterest income 1,910 1,768 142 8.0%
Net gains (losses) on sales of investment securities 108 (9) 117 -1300.0%
Net gains (losses) on sale of loans and foreclosed real estate 42 (34) 76 -223.5%
---------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME $2,060 $1,725 $ 335 19.4%
===================================================================================================
For the three months ended September 30, 2007, core noninterest income reflected
an increase of $105,000, or 18%, when compared with the three months ended
September 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 capitalized mortgage servicing rights. The
-15-
increase in debit card fees was primarily due to an increase in issued Visa
Debit cards and an increase in the usage from the existing customer base. The
increase in other charges, commissions and fees was primarily due to an increase
in internal investment services activity and related revenue.
For the nine months ended September 30, 2007, core noninterest income increased
$142,000 or 8%, when compared with the nine months ended September 30, 2006.
The increase in core noninterest income for the nine months ended September 30
2007, was primarily due to an increase in deposit account fees as deposit
related charges were increased to be more in line with local competition,
increased revenue from in-house investment services, increased late fees on
commercial and mortgage loans and a reduction in capitalized mortgage servicing
rights amortization, combined with increased fees from the volume and usage of
the Bank's Visa debit card and an increase in earnings on bank owned life
insurance.
NONINTEREST EXPENSE
The following table sets forth certain information on noninterest expense for
the quarters indicated:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 2007 2006 $CHANGE % CHANGE
------------------------------------------------------------------------
Salaries and employee benefits $1,263 $1,307 $ (44) -3.4%
Building occupancy 305 291 14 4.8%
Data processing 339 328 11 3.4%
Professional and other services 130 121 9 7.4%
Amortization of intangible assets 55 55 - 0.0%
Other expenses 320 289 31 10.7%
------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSES $2,412 $2,391 $ 21 0.9%
========================================================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS) 2007 2006 $CHANGE % CHANGE
-----------------------------------------------------------------------
Salaries and employee benefits $3,764 $3,765 $ (1) 0.0%
Building occupancy 935 913 22 2.4%
Data processing 1,033 958 75 7.8%
Professional and other services 593 352 241 68.5%
Amortization of intangible assets 166 166 - 0.0%
Other expenses 906 958 (52) -5.4%
-----------------------------------------------------------------------
TOTAL NONINTEREST EXPENSES $7,397 $7,112 $ 285 4.0%
=======================================================================
Total noninterest expense increased $21,000 and $285,000 for the three and nine
months ended September 30, 2007 when compared to the same periods for 2006,
respectively. The increase in building occupancy for the three and nine month
periods was primarily due to maintenance and landscaping improvements made to
several of the branches during the third quarter of 2007. Data processing
expenses for the three and nine month periods increased due to volume related
Internet banking costs, customer check processing and ATM processing charges.
These increases were partially offset by decreased depreciation expenses. The
increase in professional and other services for the nine month period was
primarily due to consulting costs associated with preparing for, and
implementing the enhanced internal control reporting requirements of Section 404
of the Sarbanes Oxley Act and ensuring compliance with Bank Secrecy
Act/Anti-Money Laundering regulations. The decrease in salaries and employee
benefits for the three month period primarily resulted from deferred
-16-
compensation costs incurred in the third quarter of 2006 that did not recur in
2007 and an increase in the deferred payroll expense directly related to the
increase in loan originations.
INCOME TAX EXPENSE
Income taxes increased $32,000 for the quarter ended September 30, 2007 as
compared to the same period in 2006. The increase in income tax expense
reflected higher pre-tax income during the comparable quarters. For the nine
months ended September 30, 2007, income tax expense remained constant at
$148,000, despite lower levels of pre-tax income. The effective tax rate was
18.9% and 17.2% for the nine months ended September 30, 2007 and September 30,
2006, respectively. Although 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, the increase in the effective tax rate is the result of less tax
exempt interest income due to a less favorable tax-free yield curve.
CHANGES IN FINANCIAL CONDITION
ASSETS
Total assets increased approximately $12.5 million, or 4%, to $313.8 million at
September 30, 2007, from $301.4 million at December 31, 2006. The increase in
total assets was primarily the result of an increase of $12.5 million, or 6%, in
net loans receivable and an increase in investment securities of $3.0 million,
or 5%, offset by a reduction in interest earning deposits of $6.3 million, or
95%. The loan portfolio growth is being driven by increased small business
commercial loan originations occurring both inside and outside the Company's
direct market areas. The Company continues to transform its traditional thrift
balance sheet toward that of a community bank with a more diverse mix of
residential, consumer and commercial loans. 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 September 30, 2007, the securities balance included a net unrealized loss on
available for sale securities of $1.3 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 8.1% 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 $12.3 million, or 4%, to $292.8 million at September
30, 2007 from $280.5 million at December 31, 2006. Deposits increased $10.3
million, or 4%, and short-term borrowings increased $9.0 million. These
increases were offset by a reduction in long-term borrowings of $7.4 million, or
28%.
-17-
LOAN AND ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
The following table represents information concerning the aggregate amount of
nonperforming assets:
SEPTEMBER DECEMBER 31, SEPTEMBER
(DOLLARS IN THOUSANDS) 2007 2006 2006
--------------------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate and commercial $ 1,001 $ 481 $ 468
Consumer 143 125 130
Residential real estate mortgage 894 566 749
--------------------------------------------------------------------------------
Total nonaccrual loans 2,038 1,172 1,347
--------------------------------------------------------------------------------
Total non-performing loans 2,038 1,172 1,347
Foreclosed real estate 310 471 497
--------------------------------------------------------------------------------
Total non-performing assets $ 2,348 $ 1,643 $ 1,844
================================================================================
Nonperforming loans to total loans 0.94% 0.57% 0.68%
Nonperforming assets to total assets 0.75% 0.54% 0.62%
================================================================================
Total nonperforming loans increased 74% at September 30, 2007 when compared to
December 31, 2006. The increase in nonperforming loans was primarily the result
of the nonperforming status of two commercial loan relationships. Management
believes that the underlying collateral and associated guarantees, combined with
the existing reserves provided, are adequate to cover any potential losses that
may occur from the remediation process.
The allowance for loan losses at September 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 September 30, 2007 was $21.1 million as compared to
$20.9 million at December 31, 2006. The Company added $637,000 to retained
earnings through net income, which was partially offset by cash dividends of
$604,000. 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, accepted the dividend for the quarter
ended September 30, 2007, payable in October 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 September 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
-18-
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 $49.3 million at September 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 September 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
None
ITEM 5 - OTHER INFORMATION
None
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
-21-
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)
November 14, 2007 /s/ Thomas W. Schneider
----------------- -----------------------
Date: Thomas W. Schneider
President, Chief Executive Officer
November 14, 2007 /s/ James A. Dowd
----------------- ----------------
Date: James A. Dowd
Senior Vice President, Chief Financial Officer
-22-
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 September 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.
November 14, 2007 /s/ Thomas W. Schneider
----------------- -----------------------
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 September 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.
November 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 September 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.
November 14, 2007 /s/ Thomas W. Schneider
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Date Thomas W. Schneider
President and Chief Executive Officer
November 14, 2007 /s/ James A. Dowd
----------------- -----------------
Date James A. Dowd
Senior Vice President and Chief Financial
Officer