SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTER ENDED SEPTEMBER 30, 2005
SEC Exchange Act No. 000-23601
Pathfinder Bancorp, Inc.
(Exact name of Company as specified in its charter)
Federal
(State or jurisdiction of incorporation or organization)
16-1540137
(I.R.S. Employer Identification Number)
214 W. 1st Street
Oswego, New York 13126
--------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Company's telephone number, including area code: (315) 343-0057
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2Q of the Act). Yes No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: There were 2,463,132 shares
of the Company's common stock outstanding as of November 10, 2005.
PATHFINDER BANCORP, INC.
INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Condition 1
Consolidated Statements of Income 2-3
Consolidated Statements Changes in
Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 18-19
Item 4. Control 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
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
SEPTEMBER 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
2005 2004
-----------------------------------------------------------------------------------------------------
ASSETS
------------------------------------
(Dollars in thousands)
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,078 $ 6,741
Interest earning deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 685 7,584
-----------------------------------------------------------------------------------------------------
Total cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . 8,763 14,325
Investment securities, at fair value . . . . . . . . . . . . . . . . . . . . . . 84,510 75,069
Federal Home Loan Bank stock, at cost. . . . . . . . . . . . . . . . . . . . . . 1,636 1,768
Mortgage loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . 0 2,159
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,459 186,952
Less: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . 1,801 1,827
-----------------------------------------------------------------------------------------------------
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,658 185,125
Premises and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,011 7,580
Accrued interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,644 1,505
Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935 798
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,840 3,840
Intangible asset, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461 627
Bank owned life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,901 5,768
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,717 3,473
-----------------------------------------------------------------------------------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $303,076 $302,037
======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $220,915 $217,513
Noninterest-bearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,937 19,159
-----------------------------------------------------------------------------------------------------
Total deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,852 236,672
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 1,000
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,360 34,360
Junior subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . 5,155 5,155
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,131 3,024
-----------------------------------------------------------------------------------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281,498 280,211
Shareholders' equity:
Preferred stock, authorized shares 1,000,000; no shares issued or outstanding
Common stock, par value $.01; authorized 10,000,000 shares;
2,950,419 and 2,937,419 shares issued; and 2,463,132 and 2,450,132
shares outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . 29 29
Additional paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . 7,594 7,453
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,092 21,186
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . (635) (307)
Unearned ESOP shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 (33)
Treasury Stock, at cost; 487,287 shares . . . . . . . . . . . . . . . . . . . (6,502) (6,502)
-----------------------------------------------------------------------------------------------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . 21,578 21,826
-----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity. . . . . . . . . . . . . . . . . $303,076 $302,037
======================================================================================================
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, 2005 September 30, 2004
---------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees. . . . . . . . . . . . . . . . . . . . . . . . $ 3,006 $ 2,898
Debt securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 621 580
Tax-exempt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 63
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 36
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 18
---------------------------------------------------------------------------------------------------------------
Total interest income. . . . . . . . . . . . . . . . . . . . . 3,829 3,595
INTEREST EXPENSE:
Interest on deposits. . . . . . . . . . . . . . . . . . . . . . . . 1,061 920
Interest on short-term borrowings . . . . . . . . . . . . . . . . . 107 1
Interest on long-term borrowings. . . . . . . . . . . . . . . . . . 459 471
---------------------------------------------------------------------------------------------------------------
Total interest expense . . . . . . . . . . . . . . . . . . . . 1,627 1,392
---------------------------------------------------------------------------------------------------------------
Net interest income . . . . . . . . . . . . . . . . . . . . 2,202 2,203
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . 91 112
---------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses . . . . 2,111 2,091
---------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts . . . . . . . . . . . . . . . . 356 251
Loan servicing fees . . . . . . . . . . . . . . . . . . . . . . . . 61 66
Increase in value of bank owned life insurance. . . . . . . . . . . 44 48
Net (loss)/gains on sales and impairments of investment securities. (192) 85
Net gains on sales of loans and foreclosed real estate. . . . . . . 42 128
Other charges, commissions & fees . . . . . . . . . . . . . . . . . 138 137
---------------------------------------------------------------------------------------------------------------
Total other income. . . . . . . . . . . . . . . . . . . . . 449 715
---------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits. . . . . . . . . . . . . . . . . . . 1,290 1,201
Building occupancy. . . . . . . . . . . . . . . . . . . . . . . . . 306 289
Data processing expenses. . . . . . . . . . . . . . . . . . . . . . 315 249
Professional and other services . . . . . . . . . . . . . . . . . . 184 165
Amortization of intangible asset. . . . . . . . . . . . . . . . . . 55 55
Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 343 361
---------------------------------------------------------------------------------------------------------------
Total other expenses. . . . . . . . . . . . . . . . . . . . 2,493 2,320
---------------------------------------------------------------------------------------------------------------
Income before income taxes. . . . . . . . . . . . . . . . . . . . . . 67 486
(Benefit) provision for income taxes. . . . . . . . . . . . . . . . . (49) 126
---------------------------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116 $ 360
================================================================================================================
NET INCOME PER SHARE - BASIC . . . . . . . . . . . . . . . . . . $ 0.05 $ 0.15
================================================================================================================
NET INCOME PER SHARE - DILUTED . . . . . . . . . . . . . . . . . $ 0.05 $ 0.15
================================================================================================================
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, 2005 September 30, 2004
-------------------- -------------------
(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees. . . . . . . . . . . . . . . . . . . . . . . . $ 8,824 $ 8,869
Debt securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,884 1,637
Tax-exempt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376 170
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 107
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 55
---------------------------------------------------------------------------------------------------------------
Total interest income. . . . . . . . . . . . . . . . . . . . . 11,314 10,838
INTEREST EXPENSE:
Interest on deposits. . . . . . . . . . . . . . . . . . . . . . . . 3,122 2,687
Interest on short-term borrowings . . . . . . . . . . . . . . . . . 156 17
Interest on long-term borrowings. . . . . . . . . . . . . . . . . . 1,374 1,441
---------------------------------------------------------------------------------------------------------------
Total interest expense . . . . . . . . . . . . . . . . . . . . 4,652 4,145
---------------------------------------------------------------------------------------------------------------
Net interest income . . . . . . . . . . . . . . . . . . . . 6,662 6,693
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . 229 407
---------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses . . . . 6,433 6,286
---------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts . . . . . . . . . . . . . . . . 949 713
Loan servicing fees . . . . . . . . . . . . . . . . . . . . . . . . 146 184
Increase in value of bank owned life insurance. . . . . . . . . . . 133 144
Net (loss)/gains on sales and impairments of investment securities. (192) 569
Net gains on sales of loans and foreclosed real estate. . . . . . . 30 249
Other charges, commissions & fees . . . . . . . . . . . . . . . . . 418 386
---------------------------------------------------------------------------------------------------------------
Total other income. . . . . . . . . . . . . . . . . . . . . 1,484 2,245
---------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits. . . . . . . . . . . . . . . . . . . 3,807 3,584
Building occupancy. . . . . . . . . . . . . . . . . . . . . . . . . 878 897
Data processing expenses. . . . . . . . . . . . . . . . . . . . . . 928 703
Professional and other services . . . . . . . . . . . . . . . . . . 608 493
Amortization of intangible asset. . . . . . . . . . . . . . . . . . 166 167
Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,036 1,053
---------------------------------------------------------------------------------------------------------------
Total other expenses. . . . . . . . . . . . . . . . . . . . 7,423 6,897
---------------------------------------------------------------------------------------------------------------
Income before income taxes. . . . . . . . . . . . . . . . . . . . . . 494 1,634
(Benefit) Provision for income taxes. . . . . . . . . . . . . . . . . (5) 429
---------------------------------------------------------------------------------------------------------------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 499 $ 1,205
================================================================================================================
NET INCOME PER SHARE - BASIC . . . . . . . . . . . . . . . . . . $ 0.20 $ 0.50
================================================================================================================
NET INCOME PER SHARE - DILUTED . . . . . . . . . . . . . . . . . $ 0.20 $ 0.49
================================================================================================================
DIVIDENDS PER SHARE. . . . . . . . . . . . . . . . . . . . . . . $ 0.3075 $ 0.3025
================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
2005 2004
--------------------------------------------------------------------------------------------
(Dollars in thousands)
OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 499 $ 1,205
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . 229 407
ESOP and other stock-based compensation earned. . . . . . 88 99
Deferred income tax expense . . . . . . . . . . . . . . . 133 60
Proceeds from sale of loans . . . . . . . . . . . . . . . 8,897 10,885
Originations of loans held-for-sale . . . . . . . . . . . - (8,430)
Realized loss/(gain) on:
Sale of real estate through foreclosure . . . . . . . . 7 (79)
Loans . . . . . . . . . . . . . . . . . . . . . . . . . (37) (170)
Available-for-sale investment securities. . . . . . . . 192 (569)
Depreciation. . . . . . . . . . . . . . . . . . . . . . . 518 434
Amortization of intangible. . . . . . . . . . . . . . . . 166 167
Amortization of deferred financing costs. . . . . . . . . 23 23
Amortization of mortgage servicing rights . . . . . . . . 22 32
Increase in surrender value of life insurance . . . . . . (133) (144)
Net amortization of premiums on investment securities . . 279 256
Increase in interest receivable . . . . . . . . . . . . . (139) (232)
Net change in other assets and liabilities. . . . . . . . (259) (853)
--------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . 10,485 3,091
--------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale. . . (21,734) (31,459)
Proceeds from maturities and principal reductions of
investment securities available-for-sale. . . . . . . . 11,406 7,134
Proceeds from sale:
Real estate acquired through foreclosure. . . . . . . . 414 352
Available-for-sale investment securities. . . . . . . . - 6,353
Purchase of life insurance. . . . . . . . . . . . . . . . - (1,100)
Net (increase) decrease in loans. . . . . . . . . . . . . (6,021) 376
Purchase of premises and equipment. . . . . . . . . . . . (949) (980)
--------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . (16,884) (19,324)
--------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in demand deposits, NOW accounts
savings accounts, money market deposit accounts
and escrow deposits . . . . . . . . . . . . . . . . . . (4,641) 30,498
Net increase in time deposits . . . . . . . . . . . . . . 8,821 (661)
Increase (decrease) from short term borrowings. . . . . . 1,000 (2,100)
Payments on long-term borrowings. . . . . . . . . . . . . (4,000) (4,500)
Proceeds from long-term borrowings. . . . . . . . . . . . - 1,000
Proceeds from exercise of stock options . . . . . . . . . 86 125
Cash dividends paid . . . . . . . . . . . . . . . . . . . (429) (414)
--------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . 837 23,948
--------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. . . . (5,562) 7,715
Cash and cash equivalents at beginning of period . . . . 14,325 8,714
--------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . $ 8,763 $ 16,429
============================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
-4-
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004
(unaudited)
Additional
Common Stock Paid in Retained
-----------------------
Shares Amount Capital Earnings
---------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
BALANCE, DECEMBER 31, 2004. . . . . . . . . . 2,937,419 $ 29 $ 7,453 $ 21,186
Comprehensive income
Net income. . . . . . . . . . . . . . . . . . 499
Other comprehensive loss, net of tax
Unrealized net losses on securities
Total Comprehensive Income
ESOP shares earned. . . . . . . . . . . . . . 55
Stock option exercised. . . . . . . . . . . . 13,000 - 86
Dividends declared ($.3075 per share) . . . . (593)
---------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2005 . . . . . . . . . 2,950,419 $ 29 $ 7,594 $ 21,092
=============================================================================================
BALANCE, DECEMBER 31, 2003. . . . . . . . . . 2,919,386 $ 29 $ 7,225 $ 20,747
Comprehensive income
Net income. . . . . . . . . . . . . . . . . . 1,205
Other comprehensive loss, net of tax
Unrealized net losses on securities
Total Comprehensive income
ESOP shares earned. . . . . . . . . . . . . . 65
Stock option exercised. . . . . . . . . . . . 16,033 0 125
Dividends declared ($.3025 per share) . . . . (580)
---------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004 . . . . . . . . . 2,935,419 $ 29 $ 7,415 $ 21,372
=============================================================================================
Accumulated
Other Com- Unearned
prehensive ESOP Treasury
Income (Loss) Shares Stock Total
-------------- ---------- ---------- -------
BALANCE, DECEMBER 31, 2004. . . . . . . $ (307) $ (33) $ (6,502) $21,826
Comprehensive income
Net income. . . . . . . . . . . . . . . 499
Other comprehensive loss, net of tax
Unrealized net losses on securities . . (328) (328)
--------
Total Comprehensive loss. . . . . . . . 171
ESOP shares earned. . . . . . . . . . . 33 88
Stock option exercised. . . . . . . . . 86
Dividends declared ($.3075 per share) . (593)
---------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2005 . . . . . . $ (635) $ - $ (6,502) $21,578
=============================================================================================
BALANCE, DECEMBER 31, 2003. . . . . . . $ 364 $ (78) $ (6,502) $21,785
Comprehensive income
Net income. . . . . . . . . . . . . . . 1,205
Other comprehensive income, net of tax
Unrealized net losses on securities . . (681) (681)
--------
Total Comprehensive income. . . . . . . 524
ESOP shares earned. . . . . . . . . . . 34 99
Stock option exercised. . . . . . . . . 125
Dividends declared ($.3025 per share) . (580)
Dividends declared ($.3075 per share) . (593)
---------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004 . . . . . . $ (317) $ (44) $ (6,502) $21,953
=============================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
-5-
PATHFINDER BANCORP, INC.
Notes to Financial Statements
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements were prepared in accordance with
the instructions for Form 10-Q and Regulation S-X and, therefore, do not include
information for footnotes necessary for a complete presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The following material under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" 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 of Financial Condition and Results of Operations as of December 31,
2004 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, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005.
(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, 2005 and 2004, using 2,461,328 and 2,438,796
weighted average common shares outstanding for the three months ended, and
2,453,744 and 2,433,264 for the nine months ended, respectively. Diluted
earnings per share for the three months and nine months ended September 30, 2005
and 2004 have been computed using 2,488,418 and 2,478,377 for the three months
ended and 2,487,478 and 2,477,521 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.
(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,
2005 2004 2005 2004
------------------------------------------------------------------------------
(In thousands)
Service cost. . . . . . . . . . $ 38 $ 36 $ 114 $ 122
Interest cost . . . . . . . . . 57 52 171 156
Expected return on plan assets. (71) (63) (213) (189)
Amortization of net losses. . . 24 23 72 71
------------------------------------------------------------------------------
Net periodic benefit cost . . . $ 48 $ 48 $ 144 $ 160
==============================================================================
The Company previously disclosed in its financial statements for the year ended
December 31, 2004, that it expected to contribute $190,000 to its pension plan
in 2005. As of September 30, 2005, $670,000 had been contributed to the pension
plan. The Company contributed more than expected to avoid a PGBC (Pension
Benefit Guaranty Corporation) variable rate premium.
-6-
(4) DIVIDEND RESTRICTIONS
The Company maintains a restricted capital account with a $1.4 million balance,
representing Pathfinder Bancorp, MHC's portion of dividends waived as of
September 30, 2005.
(5) COMPREHENSIVE INCOME
The components of other comprehensive (loss) income and related tax effects for
the three month and nine month periods ended September 30, 2005 and 2004 are as
follows:
For the three months For the nine months
ended September ended September
2005 2004 2005 2004
---------------------------------------------------------------------------------------------
(In thousands)
Gross change in unrealized gains on
securities available for sale . . . . . . . . $ 209 $ 1,316 $(355) $ (567)
Reclassification adjustment for (gains) losses
included in net income. . . . . . . . . . . . 192 (85) 192 (569)
---------------------------------------------------------------------------------------------
17 1,231 (547) (1,136)
Tax effect. . . . . . . . . . . . . . . . . . . (7) (492) 219 455
---------------------------------------------------------------------------------------------
Net of tax amount . . . . . . . . . . . . . . . $ 10 $ 739 $(328) $ (681)
=============================================================================================
(6) 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 $865,000 of standby letters of credit as of
September 30, 2005. 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 payment required under the corresponding
guarantees. The current amount of the liability as of September 30, 2005 for
guarantees under standby letters of credit issued is not material.
(7) NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123(R), "Share-Based Payment." Statement No. 123(R) revised
Statement No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. Statement No. 123(R) will require compensation costs
related to share-based payment transactions to be recognized in the financial
statements (with limited exceptions). The amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period that
an employee provides service in exchange for the award.
On April 14, 2005, the Securities and Exchange Commission ("SEC") adopted a rule
that amends the compliance dates for Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"). Under the rule, the Company is required to adopt
SFAS No. 123R in the first annual period beginning after June 15, 2005. Since
the Company's options are fully granted and vested, the Company does not
anticipate the adoption will have any impact on the consolidated financial
statements.
-7-
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No. 107"),
"Share-Based Payment", providing guidance on option valuation methods, the
accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123(R), and the disclosures in MD&A subsequent to the
adoption. The Company will provide SAB No. 107 required disclosures upon
adoption of SFAS No. 123(R).
In January 2003, the FASB's Emerging Issues Task Force (EITF) issued EITF Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investors" ("EITF 03-1"), and in March 2004, the EITF issued an update.
EITF 03-1 addresses the meaning of other-than-temporary impairment and its
application to certain debt and equity securities. EITF 03-1 aids in the
determination of impairment of an investment and gives guidance as to the
measurement of impairment loss and the recognition and disclosures of
other-than-temporary investments. EITF 03-1 also provides a also provides a
model to determine other-than-temporary impairment using evidence-based judgment
about the recovery of the fair value up to the cost of the investment by
considering the severity and duration of the impairment in relation to the
forecasted recovery of the fair value. In July 2005, FASB adopted the
recommendation of its staff to nullify key parts of EITF 03-1. The staff's
recommendations were to nullify the guidance on the determination of whether an
investment is impaired as set forth in paragraphs 10-18 of Issue 03-1 and not to
provide additional guidance on the meaning of other-than-temporary impairment.
Instead, the staff recommends entities recognize other-than-temporary
impairments by applying existing accounting literature such as paragraph 16 of
SFAS 115.
In July 2005, the FASB issued a proposed interpretation of FAS 109, "Accounting
for Income Taxes", to clarify certain aspects of accounting for uncertain tax
positions, including issues related to the recognition and measurement of those
tax positions. If adopted as proposed, the interpretation would be effective in
the fourth quarter of 2005, and any adjustments required to be recorded as a
result of adopting the interpretation would be reflected as a cumulative effect
from a change in accounting principle. We are currently in the process of
determining the impact of adoption of the interpretation as proposed on our
financial position or results of operations.
In October 2005, the FASB issued FASB Staff Position FAS 13-1 ("FSP FAS 13-1"),
which requires companies to expense rental costs associated with ground or
building operating leases that are incurred during a construction period. As a
result, companies that are currently capitalizing these rental costs are
required to expense them beginning in its first reporting period beginning after
December 15, 2005. FSP FAS 13-1 is effective for our Company as of the first
quarter of 2006. We evaluated the provisions of FSB FAS 13-1 and do not believe
that its adoption will have a material impact on our Company's financial
condition or results of operations.
-8-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Throughout the Management's Discussion and Analysis ("MD&A") the term, "the
Company", refers to the consolidated entity of Pathfinder Bancorp, Inc.
Pathfinder Bank and Pathfinder Statutory Trust I are wholly owned subsidiaries
of Pathfinder Bancorp, Inc. Pathfinder Commercial Bank, Pathfinder REIT, Inc.
and Whispering Oaks Development Corp. represent wholly owned subsidiaries of
Pathfinder Bank. At September 30, 2005, Pathfinder Bancorp, M.H.C., the
Company's mutual holding company parent, held 64.3% of the Company's common
stock and the public held 35.7%. Pathfinder Bancorp, M.H.C's operations and
financial condition are not consolidated with the Company.
The following discussion reviews the Company's financial condition at September
30, 2005 and the results of operations for the three and nine months ended
September 30, 2005 and September 30, 2004.
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 rates tends to be highly cyclical.
-9-
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow
practices within the banking industry. Application of these principles requires
management to make estimates, assumptions and judgments that affect the amounts
reported in the financial statements and accompanying notes. These estimates,
assumptions and judgments are based on information available as of the date of
the financial statements; accordingly, as this information changes, the
financial statements could reflect different estimates, assumptions and
judgments. Certain policies inherently have a greater reliance on the use of
estimates, assumptions and judgments and as such have a greater possibility of
producing results that could be materially different than originally reported.
Estimates, assumptions and judgments are necessary when assets and liabilities
are required to be recorded at fair value or when an asset or liability needs to
be recorded contingent upon a future event. Carrying assets and liabilities at
fair value inherently results in more financial statement volatility. The fair
values and information used to record valuation adjustments for certain assets
and liabilities are based on quoted market prices or are provided by other
third-party sources, when available. When third party information is not
available, valuation adjustments are estimated in good faith by management.
The most significant accounting policies followed by the Company are presented
in Note 1 to the consolidated financial statements included in the 2004 Annual
Report on Form 10-K ("the Consolidated Financial Statements"). These policies,
along with the disclosures presented in the other financial statement notes and
in this discussion, provide information on how significant assets and
liabilities are valued in the financial statements and how those values are
determined. Based on the valuation techniques used and the sensitivity of
financial statement amounts to the methods, assumptions and estimates underlying
those amounts, management has identified the determination of the allowance for
loan losses to be the accounting area that requires the most subjective and
complex judgments, and as such could be the most subject to revision as new
information becomes available.
The allowance for loan losses represents management's estimate of probable loan
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant 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, 2005, the Company did not
hold any security that had a fair value decline that is currently expected to be
other than temporary. During the third quarter of 2005, management deemed an
equity holding in FNMA to be other than temporarily impaired resulting in a
$116,000 reduction in earnings, net of taxes. Consequently, any declines in a
specific security's fair value below amortized cost have not been provided for
in the 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.
EXECUTIVE SUMMARY
Net income was $116,000, or $0.05 per share, for the three months ended
September 30, 2005 as compared to $360,000, or $0.15 per share, for the same
-10-
period in 2004. For the nine months ended September 30, 2005, the Company
reported net income of $499,000, or $0.20 per share, compared to $1.2 million,
or $0.50 per share, for the same period in 2004. The reduction in earnings
reflects a reduction in gains on sales of securities and loans and foreclosed
real estate combined with higher operating expenses, primarily related to the
new branch which opened in the second quarter of 2005, and the addition of a
Business Development Officer in the first quarter of 2005 to stimulate
commercial loan growth. Additionally, the write-down of an equity holding in
the third quarter of 2005 reduced earnings by $116,000. Earnings are being
challenged by a flattening yield curve, an expanding delivery system, and
increased regulatory costs. Over the past year, the Company has focused on
enhancing fee income sources and improving asset quality. The Company is
developing strategies to streamline operations and reduce our administrative
costs while not impacting our service standards.
RESULTS OF OPERATIONS
The return on average assets and return on shareholders' equity were 0.15% and
2.16%, respectively, for the three months ended September 30, 2005, compared
with 0.48% and 6.62%, respectively, for the three months ended September 30,
2004. During the third quarter of 2005 when compared to the third quarter of
2004, net interest income remained relatively consistent while net gains on the
sale of securities and loans/real estate decreased by $363,000 and other
expenses increased $173,000, or 8%, partially offset by a decrease in the
provision for loan losses by 19%, or $21,000 and an increase in other income,
exclusive of net gains on sales of securities and loans/real estate, by
$97,0000, or 19%.
For the nine months ended September 30, 2005, net income was $499,000, a
decrease of $706,000, or 59%, as compared to net income of $1.2 million in 2004.
The decrease in net income was primarily a result of a decrease in net gains on
the sale of securities and loans and foreclosed real estate of $980,000 and an
increase in other expenses of $526,000, partially offset by a reduction of
$178,000, or 44%, in loan loss provision, a $434,000, or 101%, reduction in
income taxes and an increase in other income, exclusive of net gains on sales of
securities and loans/real estate, by $219,000, or 15%. Basic earnings per share
decreased to $0.20 per share for the nine months ended September 30, 2005 from
$0.50 for the same period in 2004. The return on average assets and return on
shareholders' equity were 0.22% and 3.10%, respectively for the nine months
ended September 30, 2005, compared with 0.54% and 7.40% for the same period in
2004.
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 interest-earning deposits, loans 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
$2.2 million for the three months ended September 30, 2005 when compared to the
same period of 2004. The Company's net interest margin for the third quarter of
2005 decreased to 3.21% from 3.28%. Management expects continued margin
compression to adversely impact earnings over the near term. The flattening of
the yield curve continues to have a negative impact on net interest margin as
longer-term assets reprice at relatively static rates while shorter-term
deposits and borrowings reprice at higher rates. Average interest-earning
assets increased 3% to $279.6 million at September 30, 2005 as compared to
$271.6 million at September 30, 2004. The increase in average earning assets is
primarily attributable to a $11.3 million increase in investment securities and
a $2.1 million increase in loans, partially offset by a $5.5 million decrease in
interest-earning deposits. Average interest-bearing liabilities increased $4.6
million, and the cost of funds increased 33 basis points to 2.49% from 2.16%
for the same period in 2004. The increase in the average balance of
-11-
interest-bearing liabilities resulted primarily from a $7.0 million increase in
borrowed funds, partially offset by a $2.4 million decrease in deposits.
Short-term borrowings funded the temporary outflow of deposits and the increase
in commercial loan demand during the period. The decrease in deposits was
primarily due to a reduction in the average balance of NOW accounts, MMDA
accounts and Savings accounts of 18%, 11%, an 5%, respectively. These
reductions were offset by an 11% increase in time deposits.
For the nine months ended September 30, 2005, net interest income, on a
tax-equivalent basis, remained relatively consistent at $6.8 million as compared
to the same period during 2004. Net interest margin decreased 5 basis points,
to 3.24% at September 30, 2005 from 3.29% at September 30, 2004. Average
interest-earning assets increased 2% to $280.3 million at September 30, 2005
as compared to $274.2 million at September 30, 2004, while the yield on
interest earning assets increased 14 basis points to 5.45% from 5.31% for the
comparable periods. The increase in average earning assets is primarily
attributable to an $10.5 million increase in investment securities, partially
offset by a $4.2 million decrease in interest-earning deposits. Average
interest-bearing liabilities increased $11.6 million and the cost of funds
increased 16 basis points to 2.34% from 2.18% for the same period in 2004.
The increase in the average balance of interest-bearing liabilities
resulted primarily from a $11.9 million increase in average deposits.
INTEREST INCOME
Total interest income, on a tax-equivalent basis, for the quarter ended
September 30, 2005 increased $253,000, or 7%, to $3.9 million from $3.6 million
at the quarter ended September 30, 2004. Average loans increased $2.2 million,
to $189.7 million, with average yields also increasing 17 basis points to 6.36%
for the second quarter of 2005. Average commercial loans increased $1.8
million, or 14%, and experienced an increased average yield of 236 basis points
to 8.40% from 6.04% in 2004. Average consumer loans increased $1.7 million, or
9%, and experienced an increase in average yield of 77 basis points. The
increase in the yield on consumer loans resulted primarily from the effect of
the 200 basis point increase in the Bank's prime rate on the adjustable rate
home equity products. Average municipal loans increased $1.1 million with an
increase in the average tax-equivalent yield to 4.32% from 2.91% in 2004.
Increases in the average balance of consumer, commercial and municipal loan
portfolios were offset by a decrease in the average balance of the commercial
real estate loan portfolio. The average balance of the commercial real estate
portfolio decreased $2.0 million, or 7%, while the average yield increased 20
basis points to 7.30% in 2005.
Average investment securities for the quarter ended September 30, 2005 increased
by $11.3 million, compared to the same period a year ago, with an increase in
tax-equivalent interest income from investments of $153,000, or 22%, compared to
the third quarter of 2004. The average tax-equivalent yield of the portfolio
increased 24 basis points, to 3.82% from 3.58%. The increase in the average
balance of investment securities is a result of the investment of excess
liquidity into the securities portfolio in light of the slower loan portfolio
growth in the first six months of 2005.
Total interest income, on a tax-equivalent basis, for the nine months ended
September 30, 2005 increased $543,000, or 5%, when compared to the nine months
ended September 30, 2004. Average loans decreased slightly to $188.3 million
from $188.4 million at September 2004, with average yields declining 2 basis
points to 6.27% from 6.29%. The average residential and commercial real estate
loan portfolios decreased $1.9 million and $2.2 million, respectively. These
decreases were offset by an increase in consumer loans of $3.8 million, or 18%.
For the nine months ended September 30, 2005, tax-equivalent interest income
from investment securities increased $575,000, or 29%, compared to the same
period in 2004. The average tax-equivalent yield of the portfolio increased 46
basis points, to 3.84% from 3.38% combined with a $10.5 million increase in the
average balance of investment securities.
-12-
INTEREST EXPENSE
Total interest expense increased $235,000 for the three months ended September
30, 2005, when compared to the same quarter in 2004. Deposit expense for the
comparable periods increased $141,000, or 15%, as the average rate paid on
higher earning money management accounts increased 69 basis points to 2.06% in
2005 from 1.37% in 2004, offset by a $4.7 million decrease in the average
balance of money management accounts. The average cost of time deposits
increased 34 basis points as existing time deposits matured and repriced into
higher rates, combined with an 11% increase in the average balance of time
deposit accounts to $92.2 million in 2005 from $82.7 million in 2004. The cost
of other interest-bearing deposits decreased 20 basis points, to 0.50% from
0.70% combined with an 8%, or $7.1 million, decrease in the average balance of
these deposits resulted in a $57,000 decrease in the cost of funds on NOW and
savings accounts. Interest expense on borrowings increased by $95,000, or 20%,
from the prior period, resulting from a $7.0 million, or 17%, increase in the
average balance of borrowed funds, combined with an increase in the average cost
of borrowed funds to 4.75% to 4.63%. The increase in the cost of borrowings
primarily resulted from an increase in the average cost of the LIBOR (London
Interbank Offered Rate) based junior subordinated debentures to 6.91% from
4.89%.
For the nine months ended September 30, 2005, interest expense increased
$435,000, or 16%, to $3.1 million from $2.7 million for the same period in 2004.
The average deposit balance increased $11.9 million, combined with a 17 basis
point increase in the average cost of deposits to 1.88% from 1.71%. The average
cost of borrowed funds increased 25 basis points to 4.71% from 4.46%, offset
slightly by a $300,000 decrease in the average balance of borrowed funds.
PROVISION FOR LOAN LOSSES
Provision for loan losses for the quarter ended September 30, 2005 decreased to
$91,000 from $112,000 for the same period in 2004, primarily as a result of
improved asset quality and stable loan balances. The Company's ratio of
allowance for loan losses to period end loans has decreased to 0.97% at
September 30, 2005 from 0.98% at December 31, 2004. Nonperforming loans to
period end loans decreased to 0.88% at September 30, 2005 from 0.99% at December
31, 2004.
For the nine months ended September 30, 2005, the provision for loan losses was
$229,000 as compared to $407,000 for the same period in 2004 primarily resulting
from improved asset quality and flat loan growth, as provision and loan growth
move in lockstep. Net charge-offs exceeded the provision for loan losses by
$26,000, as a portion of the charge-offs relating to commercial credits were
previously provided for during 2004.
OTHER INCOME
The Company's other income is primarily comprised of fees on deposit account
balances and transactions, loan servicing, commissions, and net gains on
securities, loans and foreclosed real estate.
-13-
The following table sets forth certain information on other income for the
periods indicated:
Three Months Nine Months
Ended September 30, Ended September 30,
-----------------------------------------------------------------------------------------------------------------------
2005 2004 Change 2005 2004 Change
-----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service charges on deposit accounts. . . . . . . . $ 356 $ 251 $ 105 41.8% $ 949 $ 713 $ 236 33.1%
Loan servicing fees. . . . . . . . . . . . . . . . 61 66 (5) -7.6% 146 184 (38) -20.7%
Increase in value of bank owned life insurance . . 44 48 (4) -8.3% 133 144 (11) -7.6%
Net gains on sale of loans/foreclosed real estate. 42 128 (86) -67.2% 30 249 (219) -88.0%
Other operating income . . . . . . . . . . . . . . 138 137 1 0.7% 418 386 32 8.3%
-----------------------------------------------------------------------------------------------------------------------
Core noninterest income. . . . . . . . . . . . . . 641 630 11 1.7% 1,676 1,676 - 0.0%
Net gain on sales of securities. . . . . . . . . . (192) 85 (277) -325.9% (192) 569 (761) -133.7%
-----------------------------------------------------------------------------------------------------------------------
Total other income . . . . . . . . . . . . . . . . $ 449 $ 715 $ (266) -37.2% $1,484 $ 2,245 $(761) -33.9%
=======================================================================================================================
For the three months ended September 30, 2005, income from service charges on
deposit accounts increased as the number of deposit accounts increased as the
new Central Square branch became fully operational in June 2005, combined with
an increase in fees associated with deposit accounts. The decrease in the net
gain on sale of loans/foreclosed real estate is primarily due to fewer gains
recognized on loan sales due to the decrease in the volume of loans sold into
the secondary market and a $16,000 loss recognized on the sale of foreclosed
real estate.
For the nine months ended September 30, 2005 service charges on deposit accounts
increased $236,000 due to an enhanced deposit account fee program which was
implemented in the second quarter of 2005, combined with increased number of new
deposit accounts at the new branch location. The decrease in loan servicing fees
was primarily due to fewer gains recognized on loan sales due to the decrease in
the volume of loans sold into the secondary market. The decrease in net gains
on sale of loans/foreclosed real estate was primarily due to a loss on
foreclosed real estate in the second and third quarters of 2005, fewer gains
recognized on loan sales due to the decrease in the volume of loans sold into
the secondary market and a $74,000 gain recognized on a Whispering Oaks
Development Inc. lot sale in 2004, which did not recur in 2005. Other income
increased primarily as a result of increased foreign ATM fees and debit card
usage fees.
The increase in other income for the nine months ended September 30, 2005, was
primarily due to recognition of grant income for the Leadership Training
program. This income was offset by corresponding expenses reflected in
professional fees.
The decrease in the net gains on sales of investment securities for the three
and nine month period was the result of a $192,000 write down of an impaired
security, combined with the gains recognized in the first and third quarters of
2004 on the sale of corporate stock and mortgage-backed securities.
OTHER EXPENSES
The following table sets forth certain information on other expenses for the
quarters indicated:
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------------------------------------------------------------------------------
2005 2004 Change 2005 2004 Change
----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Salaries and employee benefits . . $1,290 $1,201 $ 89 7.41% $3,807 $ 3,584 $223 6.22%
Building occupancy . . . . . . . . 306 289 17 5.88% 878 897 (19) -2.12%
Data processing. . . . . . . . . . 315 249 66 26.51% 928 703 225 32.01%
Professional and other services. . 184 165 19 11.52% 608 493 115 23.33%
Amortization of intangible assets. 55 55 - 0.00% 166 167 (1) -0.60%
Other operating. . . . . . . . . . 343 361 (18) -4.99% 1,036 1,053 (17) -1.61%
-----------------------------------------------------------------------------------------------------
Total noninterest expense. . . . . $2,493 $2,320 $ 173 7.46% $7,423 $ 6,897 $526 7.63%
=====================================================================================================
-14-
For the three months and nine months ended September 30, 2005, salaries and
employee benefits increased as a result of increases associated with an
expanding commercial lending sales force, the opening of a new branch in June
2005, and decreases in deferred payroll expense as a result of fewer loan
originations. The Company had 110 full time equivalent employees at September
30, 2005 compared to 106 at September 30, 2004.
The increase in building occupancy expenses for the three month period primarily
resulted from banking house and furniture/fixture depreciation, expenses
incurred with the sealing of all branch parking lots and utility/property taxes
at the new branch. The nine month decrease was due to decreased machine
maintenance expenses and a significant reduction in snow removal costs which
occurred in the first quarter of 2004. These decreases were offset by increased
depreciation expense and operating costs at the new branch.
The increase in data processing charges for the three and nine month period was
primarily due to depreciation and maintenance expense resulting from system
hardware and software acquisitions and increased check processing and internet
banking charges due to increased customer volume. These increases were offset
by a reduction in ATM related expenses as the number of ATM's currently in place
has decreased.
The increase in professional and other services for the three and nine month
period was primarily due to consulting expenses associated with a fee
enhancement program, a leadership training program, strategic planning,
advertising and promotional expenses associated with the opening of a new
branch, and a capital market analysis. A portion of the expenses associated
with the leadership training program was offset by corresponding grant income
recorded in other income.
The reduction in other operating expenses for the three and nine month period
ending September 30, 2005, was primarily due to decreased postage expense
associated with the Nyberg checking account acquisition program in 2004 and a
reduction in home equity no cost closing costs and mortgage recording tax due to
a lower volume of home equity loans originated.
INCOME TAX EXPENSE
Income taxes decreased $175,000 for the quarter ended September 30, 2005 as
compared to the same period in 2004, which was attributable to a decrease in the
Company's pre-tax income combined with an increase in tax-exempt interest
income. The effective tax rate was -1.0% for the nine months ended September
30, 2005, compared to 26.3% for the nine months ended September 30, 2004. The
decrease in the effective tax rate resulted primarily from an increase in
tax-exempt interest income in proportion to total taxable income. The Company
has reduced 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.
CHANGES IN FINANCIAL CONDITION
ASSETS
Total assets increased approximately $1.0 million to $303.1 million at September
30, 2005, from $302.0 million at December 31, 2004. The increase in total assets
was primarily the result of an increase in investment securities of $9.4
million, or 13%, offset by a $5.6 million, or 39%, decrease in cash and cash
equivalents, a $2.2 million decrease in mortgage loans held for sale and a $1.5
million decrease in net loans receivable. The growth in investment securities
was primarily funded with liquidity resulting from deposit growth outpacing net
loan originations.
At September 30, 2005, the securities balance included a net unrealized loss on
available for sale securities of $548,000, net of taxes, versus a net unrealized
loss of $306,000, net of taxes at December 31, 2004. The increase in interest
-15-
rates during 2005 and 2004 led to the decline in the fair value of securities
during 2005. Management has determined that the declines in fair value are not
other than temporary. During the third quarter of 2005, management deemed an
equity holding in Federal National Mortgage Association to be other than
temporarily impaired and wrote down the holding to its fair value, reducing
earnings by $116,0000, net of taxes.
LIABILITIES
Total liabilities increased $1.3 million to $281.5 million at September 30, 2005
from $280.2 million at December 31, 2004. The increase in liabilities is
primarily due to a $4.2 and $1.0 million increase in deposits and short-term
borrowings, respectively, offset by a $4.0 million reduction in long-term
borrowings. The increase in deposits was primarily due to new deposit accounts
associated with the opening of the Central Square branch in June 2005. The
increase in short-term borrowings is a result of cyclical declines in the
deposit balances of certain large municipal customers during the second quarter.
These deposit outflows caused the organization to rely on short-term wholesale
borrowings for liquidity needs.
LOAN AND ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
The following table represents information concerning the aggregate amount of
nonperforming assets:
For the Period Ending
-----------------------------------------------------------------------------------------------------------
(In thousands) September 30, December 31, September 30,
2005 2004 2004
-----------------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial . . . . . . . . . . . . . . . . . . . . $ 336 $ 776 $ 2,135
Consumer . . . . . . . . . . . . . . . . . . . . . 126 122 117
Real estate - Construction. . . . . . . . . . . . 0 0 0
Mortgage . . . . . . . . . . . 1,179 953 699
-----------------------------------------------------------------------------------------------------------
Total nonaccrual loans . . . . . . . . . . . . . . 1,641 1,851 2,951
Loans past due 90 days or more and still accruing. 0 0 0
-----------------------------------------------------------------------------------------------------------
Total non-performing loans . . . . . . . . . . . . 1,641 1,851 2,951
Foreclosed real estate . . . . . . . . . . . . . . 935 798 247
-----------------------------------------------------------------------------------------------------------
Total non-performing assets. . . . . . . . . . . . 2,576 2,649 3,198
-----------------------------------------------------------------------------------------------------------
Non-performing loans to total loans. . . . . . . . 0.88% 0.98% 1.57%
Non-performing assets to total assets. . . . . . . 0.85% 0.88% 1.06%
-----------------------------------------------------------------------------------------------------------
Total nonperforming loans and foreclosed real estate at September 30, 2005
decreased 11% when compared to December 31, 2004. Nonperforming loans continue
to be addressed primarily through increased collection efforts and foreclosure
proceedings. Management believes that adequate reserves exist for any potential
losses that may occur from the remediation process.
The allowance for loan losses at September 30, 2005 was $1.8 million, or 0.97%
of period end loans, compared to 0.98% of period end loans at December 31, 2004.
CAPITAL
Shareholders' equity decreased $248,000, or 1%, to $21.6 million at September
30, 2005. The decrease in shareholders' equity primarily resulted from a
$328,000 increase in accumulated other comprehensive loss and a $94,000
reduction in retained earnings, partially offset by a $141,000 increase in
additional paid in capital and a $33,000 increase in unearned ESOP shares. The
Company added $499,000 to retained earnings through net income and returned
$593,000 to its shareholders in the form of cash dividends. The Company's
-16-
mutual holding company parent, Pathfinder Bancorp, M.H.C, accepted the dividend
for the quarter ended September 30, 2005. (See Footnote 4).
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, 2005, 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 and reduce
assets to meet deposit withdrawals, to maintain reserve requirements, and to
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 mortgage backed securities 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, and utilizes
short-term borrowings as a source of liquidity when necessary.
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 Asset Liability Management Committee (ALCO) of the Company is responsible
for implementing the policies and guidelines for the maintenance of prudent
levels of liquidity. As of September 30, 2005, management reported to the Board
of Directors that the Company is in compliance with its liquidity policy
guidelines.
-17-
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company continues to aggressively pursue delinquent loan relationships.
While this aggressive pursuit, combined with conservative provisioning, has
improved the overall quality of the loan portfolio, it has resulted in a
temporary increase in foreclosed real estate. The Company's risk of loss
arising from adverse changes in the fair value of financial instruments, or
market risk, is composed primarily of interest rate risk. The management of
interest rate sensitivity seeks to avoid fluctuating net interest margins and to
provide consistent net interest income through periods of changing interest
rates. The primary objective of the Company's asset-liability management
activities is to maximize net interest income while maintaining acceptable
levels of interest rate risk. The Company has an Asset-Liability Management
Committee (ALCO) which is responsible for establishing policies to limit
exposure to interest rate risk, and to ensure procedures are established to
monitor compliance with those policies. Those procedures include reviewing the
Company's assets and liability policies, setting prices and terms on
rate-sensitive products, and monitoring and measuring the impact of interest
rate changes on the Company's earnings and capital. The Company's Board of
Directors reviews the guidelines established by ALCO.
Since June of 2004, the Federal Reserve has raised its key short-term interest
rate 300 basis points. Management anticipates that the Federal Reserve will
continue to raise its target interest rate over the foreseeable future. Net
interest margin compression has resulted as the yield curve flattens from sharp
increases in short-term interest rate while longer-term rates have remained
relatively stable. Management will continue to seek to minimize any reduction in
net interest income in a period of rising short-term interest rates to the
extent that it can resist raising its cost of funds during this period. The
Company is continuing to explore transactions and strategies to both increase
its net interest income and minimize its interest rate risk.
GAP ANALYSIS. At September 30, 2005, the total interest bearing liabilities
maturing or repricing within one year exceeded total interest-earning assets
maturing or repricing in the same period by $48.0 million, representing a
cumulative one-year gap ratio of a negative 15.85%.
EARNINGS AT RISK AND VALUE AT RISK. Management believes the simulation of net
interest income (Earnings at Risk) and net portfolio value (Value at Risk) in
different interest rate environments provides a more meaningful measure of
interest rate risk. Income simulation analysis captures both the potential of
all assets and liabilities to mature or reprice and the probability that they
will do so. Income simulation also attends to the relative interest rate
sensitivities of these items, and projects their behavior over an extended
period of time. Finally, income simulation permits management to assess the
probable effects on the balance sheet not only of changes in interest rates, but
also of proposed strategies for responding to them. Net portfolio value
represents the fair value of net assets (determined as the market value of
assets minus the market value of liabilities using a discounted cash flow
technique).
-18-
The following table measures the Company's interest rate risk exposure in terms
of the percentage change in its net interest income and net portfolio value as a
result of hypothetical changes in 100 basis point increments in market interest
rates. The table quantifies the changes in net interest income and net
portfolio value to parallel shifts in the yield curve. The column "Percentage
Change in Net Interest Income" measures the change to the next twelve month's
projected net interest income, due to parallel shifts in the yield curve. The
column "Percentage Change in Net Portfolio Value" measures changes in the
current fair value of assets and liabilities to parallel shifts in the yield
curve. The column "NPV Capital Ratio" measures the ratio of the fair value of
net assets to the fair value of total assets at the base case and in 100 basis
point incremental interest rate shocks. Currently, the Company's model projects
a 300 basis point increase and a 200 basis point decrease during the next year.
Given the current interest rate environment, the Company's ALCO believed it was
a better measure of current risk assuming a minus 200 point scenario, as a minus
300 basis point reduction would be unlikely given that current short-term market
interest rates remain at low levels since the beginning of 2003. The Company
uses these percentage changes as a means to measure interest rate risk exposure
and quantifies those changes against guidelines set by the Board of Directors as
part of the Company's Interest Rate Risk policy.
Change in NPV
Interest Capital Earnings Value
Rates Ratio at Risk as Risk
--------- -------- --------- --------
300 . . . 7.64% -16.29% -34.46%
200 . . . 8.75% -10.70% -22.82%
100 . . . 9.83% -5.24% -10.90%
0 10.74% ---- ----
-100. . . 11.17% 3.82% 6.22%
-200. . . 10.96% 2.86% 6.28%
-19-
ITEM 4 - 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
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
PATHFINDER BANCORP, INC.
--------------------------
November 14, 2005 /s/ Thomas W. Schneider
---------------------------------------------------------------
Date: Thomas W. Schneider
President, Chief Executive Officer
November 14, 2005 /s/ James A. Dowd
---------------------------------------------------------------
Date: James A. Dowd
Vice President, Chief Financial Officer
-21-
EXHIBIT 31.1
Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Thomas W. Schneider, President and Chief Executive Officer, certify
that:
1. I have reviewed the September 30, 2005 quarterly report on Form 10-Q of
Pathfinder Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
November 14, 2005 /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, Vice President and Chief Financial Officer, certify that:
1. I have reviewed the September 30, 2005 quarterly report on Form 10-Q of
Pathfinder Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
November 14, 2005 /s/ James A. Dowd
-----------------------------------------------------------------------------
Date James A. Dowd
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,
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-Q for the quarter
ended September 30, 2005 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, 2005 /s/ Thomas W. Schneider
------------------------------------------------------------------------
Date Thomas W. Schneider
President and Chief Executive Officer
November 14, 2005 /s/ James A. Dowd
-----------------------------------------------------------------------------
Date James A. Dowd
Vice President and Chief Financial Officer