UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending March 31, 2008
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 Company as Specified in its Charter)
FEDERAL 16-1540137
- ----------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
214 West First Street, Oswego, NY 13126
---------------------------------------
(Address of Principal Executive Office) (Zip Code)
(315) 343-0057
--------------
(Issuer's Telephone Number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer
Smaller reporting company X
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). YES NO X
As of May 14, 2008, there were 2,971,019 shares issued and 2,483,732 shares
outstanding of the Registrant's Common Stock.
PATHFINDER BANCORP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Financial Statements
Consolidated Statements of Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in
Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 19
Item 4T. Controls and Procedures 19
PART II OTHER INFORMATION 20
Item 1. Legal proceedings
Item 1A. Risk Factors
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 21
EXHIBITS 22
PART I FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
MARCH 31, DECEMBER 31,
(In thousands, except share data) 2008 2007
- -------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 11,571 $ 9,908
Interest earning deposits 3,476 305
- -------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 15,047 10,213
Investment securities, at fair value 76,176 65,010
Federal Home Loan Bank stock, at cost 1,943 2,128
Loans 223,390 222,749
Less: Allowance for loan losses 1,851 1,703
Loans receivable, net 221,539 221,046
- -------------------------------------------------------------------------------------------------------
Premises and equipment, net 7,641 7,807
Accrued interest receivable 1,631 1,673
Foreclosed real estate 815 865
Goodwill 3,840 3,840
Bank owned life insurance 6,504 6,437
Other assets 2,009 1,672
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TOTAL ASSETS $337,145 $320,691
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest-bearing $246,610 $228,319
Noninterest-bearing 24,766 22,766
- -------------------------------------------------------------------------------------------------------
Total deposits 271,376 251,085
Short-term borrowings 8,000 18,400
Long-term borrowings 26,310 20,010
Junior subordinated debentures 5,155 5,155
Other liabilities 4,332 4,337
- -------------------------------------------------------------------------------------------------------
Total liabilities 315,173 298,987
=======================================================================================================
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; 2,971,019 shares
issued and 2,483,732 shares outstanding 30 30
Additional paid-in-capital 7,900 7,900
Retained earnings 21,763 21,734
Accumulated other comprehensive loss (1,219) (1,458)
Treasury stock, at cost; 487,287 shares (6,502) (6,502)
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity 21,972 21,704
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $337,145 $320,691
=======================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
- 3 -
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
(In thousands, except per share data) MARCH 31, 2008 MARCH 31, 2007
- --------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Loans, including fees $ 3,638 $ 3,413
Debt securities:
Taxable 680 638
Tax-exempt 23 44
Dividends 115 81
Federal funds sold and interest earning deposits 44 93
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Total interest income 4,500 4,269
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INTEREST EXPENSE:
Interest on deposits 1,599 1,730
Interest on short-term borrowings 134 -
Interest on long-term borrowings 355 413
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Total interest expense 2,088 2,143
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Net interest income 2,412 2,126
PROVISION FOR LOAN LOSSES 145 50
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Net interest income after provision for loan losses 2,267 2,076
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NONINTEREST INCOME:
Service charges on deposit accounts 379 328
Earnings on value of bank owned life insurance 67 56
Loan servicing fees 90 64
Net losses on sales of investment securities - (3)
Net gains (losses) on sales of loans and foreclosed real estate 6 (7)
Debit card interchange fees 66 48
Other charges, commissions and fees 96 100
- --------------------------------------------------------------------------------------------------
Total noninterest income 704 586
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NONINTEREST EXPENSE:
Salaries and employee benefits 1,337 1,227
Building occupancy 346 318
Data processing expenses 309 342
Professional and other services 219 237
Amortization of intangible asset - 56
Other expenses 314 278
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Total noninterest expense 2,525 2,458
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Income before income taxes 446 204
Provision for income taxes 114 39
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Net income $ 332 $ 165
==================================================================================================
Net income per share - basic $ 0.13 $ 0.07
==================================================================================================
Net income per share - diluted $ 0.13 $ 0.07
==================================================================================================
Dividends per share $ 0.1025 $ 0.1025
==================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
- 4 -
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2008 AND MARCH 31, 2007
(UNAUDITED)
Accumulated
Common Stock Issued Additional Other Com-
------------------- Paid in Retained prehensive Treasury
(In thousands, except share data) Shares Amount Capital Earnings Loss Stock
- -----------------------------------------------------------------------------------------------------------------------------
Balance January 1, 2008 2,971,019 $ 30 $ 7,900 $ 21,734 $(1,458) $(6,502)
Cumulative effect of a change in accounting
principle upon the change in defined
employee benefit plans' measurement date
under SFAS 158 (net of $8 tax expense) (48) 13
Other comprehensive income, net of tax:
Net income 332
Unrealized holding gains on securities
available for sale (net of $150 tax expense) 226
Total Comprehensive income
Dividends declared ($0.1025 per share) (255)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2008 2,971,019 $ 30 $ 7,900 $ 21,763 $(1,219) $(6,502)
=============================================================================================================================
Balance, January 1, 2007 2,953,619 $ 29 $ 7,786 $ 21,307 $(1,770) $(6,502)
Comprehensive income:
Net income 165
Other comprehensive income, net of tax:
Unrealized holding gains on securities
available for sale (net of $40 tax expense) 60
Total Comprehensive Income
Stock options exercised 17,200 1 113
Dividends declared ($0.1025 per share) (257)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2007 2,970,819 $ 30 $ 7,899 $ 21,215 $(1,710) $(6,502)
=============================================================================================================================
(In thousands, except share data) Total
- ------------------------------------------------------------
Balance, January 1, 2008 $21,704
Cumulative effect of a change in accounting
principle upon the change in defined
employee benefit plans' measurement date
under SFAS 158 (net of $8 tax expense) (35)
------
Other comprehensive income, net of tax:
Net income 332
Unrealized holding gains on securities
available for sale (net of $150 tax expense) 226
-----
Total Comprehensive income 558
-----
Dividends declared ($0.1025 per share) (255)
- ------------------------------------------------------------
Balace, March 31, 2008 $21,972
============================================================
Balance, January 1, 2007 $20,850
Comprehensive income:
Net income 165
Other comprehensive income, net of tax:
Unrealized holding gains on securities
available for sale (net of $40 tax expense) 60
-----
Total Comprehensive Income 225
-----
Stock options exercised 114
Dividends declared ($0.1025 per share) (257)
- ------------------------------------------------------------
Balance, March 31, 2007 $20,932
============================================================
The accompanying notes are an integral part of the consolidated financial
statements.
- 5 -
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
(In thousands) MARCH 31, 2008 MARCH 31, 2007
- ------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 332 $ 165
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses 145 50
Proceeds from sale of loans - 781
Originations of loans held-for-sale - (784)
Realized (gains)/losses on sales of:
Foreclosed real estate (6) 4
Loans - 3
Available-for-sale investment securities - 3
Depreciation 180 195
Amortization of intangible asset - 56
Amortization of deferred financing costs - 8
Amortization of mortgage servicing rights 8 13
Earnings on bank owned life insurance (67) (56)
Net amortization of premiums and discounts on investment securities 21 29
Decrease (increase) in interest receivable 42 (38)
Net change in other assets and liabilities (698) (532)
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Net cash used in operating activities (43) (103)
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INVESTING ACTIVITIES:
Purchase of investment securities available-for-sale (18,489) (13,226)
Net redemption of Federal Home Loan Bank stock 185 196
Proceeds from maturities and principal reductions of investment
securities available-for-sale 7,679 1,600
Proceeds from sale of real estate acquired through foreclosure 168 102
Net increase in loans (750) (1,547)
Purchase of premises and equipment (14) (141)
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Net cash used in investing activities (11,221) (13,016)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, saving accounts,
money market deposit accounts, MMDA accounts, escrow deposits 13,919 11,081
Net increase in time deposits 6,372 3,795
Net repayments on short-term borrowings (10,400) -
Payments on long-term borrowings (1,700) (4,350)
Proceeds from long-term borrowings 8,000 -
Proceeds from junior subordinated debentures - 5,155
Proceeds from exercise of stock options - 114
Cash dividends paid (93) (90)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,098 15,705
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Increase in cash and cash equivalents 4,834 2,586
Cash and cash equivalents at beginning of period 10,213 13,723
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 15,047 $ 16,309
===================================================================================================================
NON-CASH INVESTING ACTIVITY:
Transfer of loans to foreclosed real estate $ 112 $ -
The accompanying notes are an integral part of the consolidated financial
statements.
- 6 -
PATHFINDER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Pathfinder
Bancorp, Inc. and its wholly owned subsidiaries have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information, the instructions for Form 10-Q and Article 10
of Regulation S-X. 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 2007 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
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, 2007 and for the two 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 months ended March 31, 2008, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2008.
(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
ended March 31, 2008 and 2007, using 2,483,732 and 2,481,572 weighted average
common shares outstanding, respectively. Diluted earnings per share for the
three months ended March 31, 2008 and 2007, have been computed using 2,488,927
and 2,490,053 weighted average common shares outstanding, 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 AND POSTRETIREMENT BENEFITS
On January 1, 2008, the Company recorded a $48,000 charge to retained earnings,
representing the cumulative effect adjustment upon adopting the measurement date
transition rule for the Company's pension plan and post retirement benefit plan.
In accordance with SFAS 158, Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans, measurement date provisions, plan assets and
obligations are to be measured as of the employer's balance sheet date. The
Company previously measured its pension plan as of October 1 of each year. As a
result of the measurement date provisions, the Company decreased its pension
plan asset with a corresponding charge to retained earnings, representing the
net periodic benefit cost for the period between the October 1, 2007 measurement
date and January 1, 2008.
- 7 -
The composition of net periodic benefit plans cost for the three months ended
March 31, is as follows:
- -----------------------------------------------------
(In thousands) 2008 2007
- -----------------------------------------------------
Service cost $ 54 $ 50
Interest cost 84 73
Expected return on plan assets (112) (98)
Amortization of net losses 16 21
Amortization of transition obligation 5 5
- ------------------------------------------------------
Net periodic benefit cost $ 47 $ 51
=====================================================
The Company previously disclosed in its consolidated financial statements for
the year ended December 31, 2007, that it expected to contribute $233,000 to its
pension plan in 2008. For the three months ended March 31, 2008, $54,000 has
been contributed to the plans.
(4) COMPREHENSIVE INCOME
Accounting principles generally accepted in the United States of America,
require that recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as unrealized
gains and losses on available-for-sale securities, and unrecognized gains and
losses, prior service costs and transition assets or obligations for defined
benefit pension and post-retirement plans are reported as a separate component
of the shareholders' equity section of the consolidated statements of condition,
such items, along with net income, are components of comprehensive income.
The components of other comprehensive income and related tax effects for the
three months ended March 31, are as follows:
- ----------------------------------------------------------------------------------
(In thousands) 2008 2007
- ----------------------------------------------------------------------------------
Unrealized holding gains on securities available for sale:
Unrealized holding gains arising during the year $ 376 $ 97
Reclassification adjustment for losses included in net income - 3
- -----------------------------------------------------------------------------------
Net unrealized gains on securities available for sale 376 100
Tax effect (150) (40)
- -----------------------------------------------------------------------------------
Other comprehensive income $ 226 $ 60
===================================================================================
The components of accumulated other comprehensive loss and related tax effects
for the periods indicated are as follows:
<CAPTION
- ---------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(In thousands) 2008 2007
- ---------------------------------------------------------------------------------------
Unrealized losses on securities available for sale
(net of tax benefit 2008 - $291; 2007 - $441) $ (436) $ (662)
Net pension losses and past service liability
(net of tax benefit 2008 - $488; 2007 - $495) (732) (742)
Net post-retirement losses and past service liability
(net of tax benefit 2008 - $34; 2007 - $36) (51) (54)
- ---------------------------------------------------------------------------------------
$(1,219) $(1,458)
=======================================================================================
- 8 -
(5) GUARANTEES
The Company does not issue any guarantees that would require liability
recognition or disclosure, other than its standby letters of credit. Standby
letters of credit written are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Generally, all
letters of credit, when issued have expiration dates within one year. The
credit risk involved in issuing letters of credit is essentially the same as
those that are involved in extending loan facilities to customers. The Company
generally holds collateral and/or personal guarantees supporting these
commitments. The Company had $1.7 million of standby letters of credit as of
March 31, 2008. 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 March 31,
2008, for guarantees under standby letters of credit issued is not material.
(6) FAIR VALUE MEASUREMENTS
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. SFAS 157 establishes a fair value hierarchy about the assumptions
used to measure fair value and clarifies assumptions about risk and the effect
of a restriction on the sale or use of an asset. The standard became effective
for the Company January 1, 2008, including interim periods. In February 2008,
the FASB issued FASB Staff Position (FSP) No. FAS 157-2, "Effective Date of FASB
Statement No. 157." This FSP delays the effective date of FAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to January 1, 2009. This delay relates to non-financial assets and liabilities
that are not measured at fair value on an ongoing basis, but are subject to fair
value adjustments in certain circumstances (for example, when there is evidence
of impairment).
SFAS 157 specifies a hierarchy of valuation techniques based on whether the
inputs to those valuation techniques are observable or unobservable. Observable
inputs reflect market data obtained from independent sources, while unobservable
inputs reflect our market assumptions. In accordance with SFAS 157, these two
types of inputs have created the following fair value hierarchy:
- Level 1 - Quoted prices (unadjusted) for identical assets or
liabilities in active markets, that the entity has the ability to
access as of the measurement date.
- Level 2 - Quoted prices for similar assets and liabilities in
active markets; quoted prices for identical or similar assets or
liabilities in markets that are not active; and model-derived
valuations in which all significant inputs and significant value
drivers are observable in active markets.
- Level 3 - Model derived valuations in which one or more
significant inputs or significant value drivers are unobservable.
The Company used the following methods and significant assumptions to estimate
fair value:
Investment securities: The fair values of securities available for sale are
determined by obtaining quoted prices on nationally recognized securities
exchanges (Level 1) or matrix pricing, which is a mathematical technique used
widely in the industry to value debt securities without relying exclusively on
quoted prices for specific securities but rather by relying on the securities
relationship to other benchmark quoted securities (Level 2).
Impaired loans: Impaired loans are those that are accounted for under SFAS 114,
Accounting by Creditors for Impairment of a Loan, in which the Company has
measured impairment generally based on the fair value of the loan's collateral.
Fair value is generally determined based upon independent third party appraisals
of the properties, or discounted cash flows based upon expected proceeds. These
assets are included as Level 3 fair values, based upon the lowest level of input
- 9 -
that is significant to the fair value measurements. The fair value consists of
loan balances less its valuation allowance as determined under SFAS 114.
Assets and liabilities measured at fair value on a recurring basis, are
summarized below:
Fair Value Measurements, Using
-------------------------------------------------------
Quoted Prices Significant Sigificant
In Active Markets Other Observable Unobservable
For Identical Assets Inputs Inputs
(In thousands) March 31, 2008 (Level 1) (Level 2) (Level 3)
- ----------------------------------------------------------------------------------------------------------------------
Assets:
Investment securities available-for-sale: $ 76,176 $ - $ 76,176 $ -
Changes in the fair value of available-for-sale securities are recorded on the
balance sheet under accumulated-other-comprehensive income, while gains and
losses from sales are recognized as income.
Assets and liabilities measured at fair value on a nonrecurring basis, are
summarized below:
From time to time, certain assets may be recorded at fair value on a
non-recurring basis. These non-recurring fair value adjustments typically are a
result of the application of lower of cost or market accounting or a write-down
occurring during the period. The following is a description of the valuation
methodologies used for certain assets that are recorded at fair value as of
March 31, 2008.
Fair Value Measurements, Using
----------------------------------------------------------
Quoted Prices Significant Sigificant
In Active Markets Other Observable Unobservable
For Identical Assets Inputs Inputs
(In thousands) March 31, 2008 (Level 1) (Level 2) (Level 3)
- --------------------------------------------------------------------------------------------
Assets:
Impaired loans: $ 1,748 $ - $ - $ 1,748
Impaired loans, which are measured for impairment using the fair value of the
collateral for collateral dependent loans, had a carrying amount of $1.9
million, with a valuation allowance of $152,000. There was no additional
provision for loan losses resulting from this valuation during the period.
(7) NEW ACCOUNTING PRONOUNCEMENTS
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 with an option
to choose to measure selected financial assets and liabilities 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 FASB's
stated objective in issuing this standard is as follows: "to improve financial
reporting by providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions." The fair value
option established by SFAS 159 permits all entities to choose to measure
eligible items at fair value at specified election dates. SFAS 159 is effective
for the Company as of January 1, 2008. The Company did not elect the fair value
option for any financial assets or financial liabilities as of January 1, 2008.
In December 2007, the FASB issued Statement No. 141 (R), Business Combinations.
This Statement establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The Statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. The guidance will become
effective for the Company January 1, 2009. This new pronouncement will impact
the Company's accounting for business combinations completed beginning January
1, 2009.
- 10 -
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51. This Statement
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
become effective for the Company January 1, 2009. The Company does not expect
the adoption of SFAS No.160 to have a material impact on its consolidated
financial statements.
Staff Accounting Bulletin No. 109 (SAB 109), "Written Loan Commitments Recorded
at Fair Value Through Earnings" expresses the views of the staff regarding
written loan commitments that are accounted for at fair value through earnings
under generally accepted accounting principles. To make the staff's views
consistent with current authoritative accounting guidance, the SAB revises and
rescinds portions of SAB No. 105, "Application of Accounting Principles to Loan
Commitments." Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
adoption of SAB 109 did not have a material impact on the Company's financial
statements.
In February 2008, the FASB issued a FASB Staff Position (FSP) FAS 140-3,
"Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions." This FSP addresses the issue of whether or not these transactions
should be viewed as two separate transactions or as one "linked" transaction.
The FSP includes a "rebuttable presumption" that presumes linkage of the two
transactions unless the presumption can be overcome by meeting certain criteria.
The FSP will be effective for fiscal years beginning after November 15, 2008 and
will apply only to original transfers made after that date; early adoption will
not be allowed. The Company is currently evaluating the potential impact the new
pronouncement will have on its consolidated financial statements.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133 (SFAS
161). SFAS 161 requires entities that utilize derivative instruments to provide
qualitative disclosures about their objectives and strategies for using such
instruments, as well as any details of credit-risk-related contingent features
contained within derivatives. SFAS 161 also requires entities to disclose
additional information about the amounts and location of derivatives located
within the financial statements, how the provisions of SFAS 133 has been
applied, and the impact that hedges have on an entity's financial position,
financial performance, and cash flows. SFAS 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early application
encouraged. The Company is currently evaluating the potential impact the new
pronouncement will have on its consolidated financial statements.
- 11 -
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Throughout Management's Discussion and Analysis ("MD&A") the term "the Company",
refers to the consolidated entity of Pathfinder Bancorp, Inc. Pathfinder Bank
and Pathfinder Statutory Trust I are wholly owned subsidiaries of Pathfinder
Bancorp, Inc., however, Pathfinder Statutory Trust I is not consolidated for
reporting purposes. Pathfinder Commercial Bank, Pathfinder REIT, Inc. and
Whispering Oaks Development Corp. represent wholly owned subsidiaries of
Pathfinder Bank. At March 31, 2008, 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 outstanding common stock and the public held 36.3%.
The following discussion reviews the Company's financial condition at March 31,
2008 and the results of operations for the three months ended March 31, 2008 and
March 31, 2007.
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 results 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
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
- 12 -
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 2007 Annual
Report on Form 10-K ("the Consolidated Financial Statements"). Beginning with
its 2007 Annual Report, the Company has elected to file its Exchange Act reports
under the rules and regulations applicable to smaller reporting companies.
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 March 31, 2008, 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 $332,000, or $0.13 per basic and diluted share, for the three
months ended March 31, 2008, as compared to $165,000, or $0.07 per basic and
diluted share, for the same period in 2007. During the first quarter of 2008,
the Company continued its efforts toward transforming its more traditional
thrift balance sheet with mostly residential loans as earning assets, toward
that of a community bank with a more diverse mix of residential, consumer and
commercial loans. On an average balance basis, total commercial loans comprised
31.6% of the total gross loan portfolio for the quarter ended March 31, 2008.
On March 22, 2007, the Company entered into a junior subordinated debenture for
$5.2 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 $5.2 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 resulted in an approximate pre-tax
savings of $29,000 to the Company in 2007. 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 during 2008.
Short-term borrowings decreased $10.4 million, or 57%, when compared to December
31, 2007. Long-term borrowings increased $6.3 million, or 32%, when compared to
December 31, 2007.
- 13 -
RESULTS OF OPERATIONS
The return on average assets and return on average shareholders' equity were
0.40% and 5.94%, respectively, for the three months ended March 31, 2008,
compared with 0.21% and 3.13%, respectively, for the three months ended March
31, 2007. During the first quarter of 2008, when compared to the first quarter
of 2007, net interest income increased $286,000 and core noninterest income
increased $102,000. These increases were offset by increased provisions for
loan losses and noninterest expenses of $95,000 and $67,000, 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 to $2.5 million for the
three months ended March 31, 2008, from $2.2 million for the three months ended
March 31, 2007. The Company's net interest margin for the first quarter of 2008
increased to 3.21% from 3.02% when compared to the same quarter in 2007. Recent
reductions in short-term interest rates have resulted in a positively sloped
yield curve. Significant reductions in the Company's cost of funds, combined
with efforts to maintain the current levels of earning asset yields have
resulted in an expansion of the Company's net interest margin. The increase in
net interest income is attributable to a decrease of 28 basis points in the
average cost of interest bearing liabilities, and was offset by a decrease of 10
basis points in the average yield earned on earning assets. Average
interest-earning assets increased 7% to $305.8 million at March 31, 2008, as
compared to $284.6 million at March 31, 2007. The increase in average earning
assets is primarily attributable to an $18.6 million increase in loans
receivable, a $1.5 million increase in average investment securities and a $1.0
million increase in interest earning deposits. Average interest-bearing
liabilities increased $17.6 million to $282.9 million from $265.3 million at
March 31, 2007. The increase in the average balance of interest-bearing
liabilities resulted primarily from a $10.4 million increase in borrowings and a
$7.3 million increase in average deposits.
INTEREST INCOME
Total interest income, on a tax-equivalent basis, for the quarter ended March
31, 2008, increased $245,000, or 6%, to $4.5 million from $4.3 million for the
quarter ended March 31, 2007.
The average balance of loans increased $18.6 million to $223.5 million, with
yields decreasing 14 basis points to 6.55% for the first quarter of 2008.
Average residential real estate loans increased $8.4 million, or 7%, and
experienced an increase in the average yield to 5.85% from 5.77% in the
comparable quarter of 2007. Average commercial real estate loans increased
$4.7 million, while the average yield on those loans decreased slightly to 7.58%
from 7.60% from the year earlier period. Average commercial loans remained
consistent at $21.5 million and experienced a decrease in the average yield of
143 basis points, to 7.11% for the quarter ended March 31, 2008, from 8.54%, in
the quarter ended March 31, 2007. The decrease in the average yield on
commercial loans was primarily the result of new commercial loan origination
activity taking place at yields lower than the average yield on the existing
commercial loan portfolio. Average consumer loans increased $4.8 million, or
23%, while the average yield decreased by 62 basis points. The Company's
municipal loan portfolio increased $630,000, or 23%, when comparing the first
quarter of 2008 to the same period in 2007. The average tax equivalent yield on
the municipal loan portfolio increased to 6.94% in the first quarter of 2008
from 6.35% for the same period in 2007.
Average investment securities (taxable and tax-exempt) for the quarter ended
March 31, 2008, increased by $1.5 million, with an increase in tax-equivalent
interest income from investments of $60,000, or 8%, when compared to the first
quarter of 2007. The average tax-equivalent yield of the portfolio increased 24
basis points, to 4.52% from 4.28%. The increase in average investment securities
was primarily due to the purchase of $8.0 million of mortgage-backed securities
- 14 -
that were acquired with excess liquidity resulting from retail deposit growth
outpacing loan portfolio growth during the first quarter. The security activity
was also a result of a pre-funding strategy whereby securities were acquired in
advance of significant scheduled maturity activity anticipated over the next 9
to 12 months. These purchases were offset by 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.
INTEREST EXPENSE
Total interest expense decreased $55,000 for the three months ended March 31,
2008, compared to the same quarter in 2007, as the cost of funds decreased 28
basis points to 2.95% in 2008 from 3.23% in 2007. Average money management
accounts decreased $2.1 million, combined with a 15 basis point reduction in the
cost of funds. This decrease was offset by an increase in the average balance
of NOW accounts to $22.9 million from $21.5 million in 2007. Additionally, the
average balance of money market demand accounts increased to $33.1 million at
March 31, 2008 from $25.0 million at March 31, 2007 and was offset by a decrease
in the cost of funds to 2.61% from 4.17%. Interest expense on borrowings
increased by $76,000, or 18%, from the prior period as a result of a $10.8
million increase in the average balance of borrowed funds, offset by a 258 basis
point decrease in the cost of funds on the junior subordinated debenture that
resulted from a reduction in its index rate which is based on 3-month LIBOR,
combined with a reduction in the spread to the index, 1.65% compared to 3.45%,
that occurred with the new issuance and retirement of the original subordinated
debentures during March 2007.
PROVISION FOR LOAN LOSSES
Provision for loan losses for the quarter ended March 31, 2008 increased $95,000
from the same period in 2007. 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, as well as a general weakening in economic
conditions. The Company's ratio of allowance for loan losses to period end
loans increased to 0.83% at March 31, 2008 as compared to 0.76% at December 31,
2007. Nonperforming loans to period end loans increased to 0.96% at March 31,
2008 from 0.71% at December 31, 2007. The increase in total non-performing loans
is primarily the result of delinquencies of three commercial loan relationships.
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.
- 15 -
The following table sets forth certain information on noninterest income for the
quarters indicated:
THREE MONTHS ENDED MARCH 31,
- ----------------------------------------------------------------------------------------------------
(In thousands) 2008 2007 CHANGE
- ----------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 379 $ 328 $ 51 15.5%
Earnings on bank owned life insurance 67 56 11 19.6%
Loan servicing fees 90 64 26 40.6%
Debit card interchange fees 66 48 18 37.5%
Other charges, commissions and fees 96 100 (4) -4.0%
- ----------------------------------------------------------------------------------------------------
Core noninterest income 698 596 102 17.1%
Net losses on sales of investment securities - (3) 3 -100.0%
Net gains (losses) on sale of loans and foreclosed real estate 6 (7) 13 -185.7%
- ----------------------------------------------------------------------------------------------------
Total noninterest income $ 704 $ 586 $ 118 20.1%
====================================================================================================
For the three months ended March 31, 2008, core noninterest income increased
$102,000, or 17%, when compared with the three months ended March 31, 2007. The
increase in service charges on deposit accounts was primarily attributable to an
increase in the number of deposit accounts. The increase in loan servicing fees
was primarily due to an increase in commercial and mortgage loan late charges,
combined with a reduction in the amortization of capitalized mortgage servicing
rights. The 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 decrease in other charges, commissions and fees was primarily due to
a decrease in internal investment services activity and related revenue, and was
offset by increased fees associated with ATM usage. The increase in net
gains/(losses) on sale of loans and foreclosed real estate was due to the gain
recognized on the sale of one foreclosed property during the first quarter of
2008.
NONINTEREST EXPENSE
The following table sets forth certain information on noninterest expense for
the quarters indicated:
THREE MONTHS ENDED MARCH 31,
- ----------------------------------------------------------------------
(In thousands) 2008 2007 CHANGE
- -----------------------------------------------------------------------
Salaries and employee benefits $ 1,337 $1,227 $ 110 9.0%
Building occupancy 346 318 28 8.8%
Data processing 309 342 (33) -9.6%
Professional and other services 219 237 (18) -7.6%
Amortization of intangible assets - 56 (56) -100.0%
Other expenses 314 278 36 12.9%
- -----------------------------------------------------------------------
Total noninterest expenses $ 2,525 $2,458 $ 67 2.7%
=======================================================================
Total noninterest expense increased $67,000 for the three months ended March 31,
2008 when compared to the same period for 2007, respectively. The increase in
salaries and employee benefits was primarily due to normal merit increases and
incentive based compensation costs. The increase in building occupancy expenses
was primarily due to increases in property taxes, communication charges and ATM
maintenance. A $36,000 increase in other expenses was primarily the result of
higher costs associated with foreclosed real estate properties as the number of
properties increased to eight from five in the comparable quarter of 2007.
Additionally, audits and exams expense increased as a result of year-end
external audit travel related expenses. Offsetting these increases were
reductions of $56,000 in amortization expense as the core deposit intangibles
became fully amortized in October 2007. Data processing expenses were $33,000
- 16 -
lower than the comparable quarter of 2007 as a result of lower depreciation and
maintenance costs on equipment. An $18,000 reduction in professional and other
services was primarily due to consulting charges for the SOX 404 review process
being lower in the first quarter of 2008 when compared to the first quarter of
2007. The reduction in SOX 404 compliance costs was partially offset by
increased legal fees and investment management expenses.
INCOME TAX EXPENSE
Income taxes increased $75,000 for the quarter ended March 31, 2008, as compared
to the same period in 2007. The effective tax rate was 25.6% and 19.1% for the
three months ended March 31, 2008 and March 31, 2007, respectively. The
increase in income tax expense and effective tax rate in 2008 in comparison to
2007, resulted from a higher pretax income of $242,000, combined with a
reduction of income earned on tax-exempt investment securities. 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 saving
strategies.
CHANGES IN FINANCIAL CONDITION
ASSETS
Total assets increased approximately $16.5 million, or 5%, to $337.1 million at
March 31, 2008, from $320.7 million at December 31, 2007. The increase in total
assets was primarily the result of an increase of $11.0 million, or 16%, in
investment securities, a $4.8 million increase in cash and cash equivalents and
a $493,000 increase in net loans receivable. Investment securities portfolio
growth is being driven by purchases of mortgage-backed securities, corporate
bonds and a $2.0 million certificate of deposit invested with a large money
center financial institution. The loan portfolio increase primarily reflects
small business commercial loan originations. 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 increase in cash
and cash equivalents was primarily the result of interest earning deposits held
at the Federal Home Loan Bank and higher end of month balances at correspondent
bank accounts and in process accounts.
The Company presently holds in its investment portfolio a $3.7 million
investment purchased initially in 1993, with dividends being reinvested
annually, in a no-load mutual fund which invests primarily in mortgage-related
instruments. The fund holds mortgage-backed bonds and securities issued by
government-sponsored mortgage entities and by private companies. The underlying
assets are comprised of variable rate, adjustable rate and fixed-rate
residential mortgage and home equity loans, but do not include any sub-prime
loans. As a result of the recent problems in the real estate and mortgage
securities markets, the value of the fund has declined and, accordingly, the
current fair value of the Company's investment in the fund has declined below
its cost basis by approximately $139,000, or 4%, as of March 31, 2008.
Management is currently considering various options with respect to this
investment. It is possible that the Company will recognize a loss on this
investment absent improvement in the real estate and mortgage securities
markets, as a result of the sale of the investment or in connection with a
write-down of the value of the investment if we determine that the investment is
other than temporarily impaired.
Management has reviewed its loan and mortgage-backed securities portfolios and
determined that, to the best of its knowledge, little or no exposure exists to
sub-prime or other high-risk residential mortgages. The Company is not in the
practice of investing in, or originating these types of investments or loans.
LIABILITIES
Total liabilities increased $16.2 million, or 5%, to $315.2 million at March 31,
2008, from $299.0 million at December 31, 2007. Deposits increased $20.3
million, or 8%, and long-term borrowings increased $6.3 million. These
increases were offset by a reduction in short-term borrowings of $10.4 million,
or 57%. The increase in deposits was the result of an increase of $10.9 million
in municipal customer deposits, combined with an $8.7 million increase in retail
deposits. The municipal deposit increase was driven by the receipt of tax
revenues by our municipal customers. The increase in retail deposits was the
direct result of the sale of one commercial customer's business where the net
proceeds were deposited into the Company.
- 17 -
LOAN AND ASSET QUALITY AND ALLOWANCE FOR LOAN LOSSES
The following table represents information concerning the aggregate amount of
nonperforming assets:
MARCH 31, DECEMBER 31,
(Dollars in thousands) 2008 2007
- ----------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate and commercial $ 1,267 $ 521
Consumer 186 150
Residential real estate 682 920
- ----------------------------------------------------------------------
Total nonaccrual loans $ 2,135 $1,591
- ----------------------------------------------------------------------
Total non-performing loans $ 2,135 $1,591
Foreclosed real estate $ 815 $ 865
- ----------------------------------------------------------------------
Total non-performing assets $ 2,950 $2,456
======================================================================
Non-performing loans to total loans 0.96% 0.71%
======================================================================
Non-performing assets to total assets 0.87% 0.77%
======================================================================
Total nonperforming loans increased 34% at March 31, 2008, when compared to
December 31, 2007. The increase in nonperforming loans was primarily the result
of the nonperforming status of three commercial loan relationships. Management
believes that the underlying collateral and associated guarantees, combined with
the existing reserves provided, are adequate to cover potential losses that may
occur from the remediation process.
The allowance for loan losses at March 31, 2008 and December 31, 2007 was $1.9
million and $1.7 million, or 0.83% and 0.76% of period end loans, respectively.
CAPITAL
Shareholders' equity at March 31, 2008, was $22.0 million as compared to $21.7
million at December 31, 2007. The Company added $332,000 to retained earnings
through net income, which was partially offset by cash dividends declared of
$255,000 and the $35,000 cumulative effect adjustment to reflect the change in
measurement date under SFAS 158. In addition, shareholders' equity increased by
$226,000 due to unrealized holding gains on securities available for sale, net
of tax. The Company's mutual holding company parent, Pathfinder Bancorp, M.H.C,
accepted the aggregate cash dividend of $162,000 for the quarter ended March 31,
2008, payable in April 2008.
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 March 31, 2008, Pathfinder
Bank exceeded all regulatory required minimum capital ratios and met the
regulatory definition of a "well-capitalized" institution, i.e. a leverage
capital ratio exceeding 5%, a Tier 1 risk-based capital ratio exceeding 6% and a
total risk-based capital ratio exceeding 10%.
LIQUIDITY
Liquidity management involves the Company's ability to generate cash or
otherwise obtain funds at reasonable rates to support asset growth, meet deposit
withdrawals, maintain reserve requirements, and otherwise operate the Company on
an ongoing basis. The Company's primary sources of funds are deposits, borrowed
funds, amortization and prepayment of loans and maturities of investment
securities and other short-term investments, and earnings and funds provided
from operations. While scheduled principal repayments on loans are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
- 18 -
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 $75.0 million at March 31, 2008.
The Asset Liability Management Committee of the Company is responsible for
implementing the policies and guidelines for the maintenance of prudent levels
of liquidity. As of March 31, 2008, management reported to the Board of
Directors that the Company is in compliance with its liquidity policy
guidelines.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A smaller reporting company is not required to provide the information relating
to this item.
ITEM 4T - 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.
- 19 -
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 1A - RISK FACTORS
A smaller reporting company is not required to provide the information relating
to this item.
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
- 20 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PATHFINDER BANCORP, INC.
May 15, 2008 /s/ Thomas W. Schneider
- ------------ -----------------------
Date: Thomas W. Schneider
President and Chief Executive Officer
May 15, 2008 /s/ James A. Dowd
- ------------ ----------------
Date: James A. Dowd
Senior Vice President and 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 this 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting, to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) 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
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
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.
May 15, 2008 /s/ Thomas W. Schneider
--------------------------
Thomas W. Schneider
President and Chief Executive Officer
- 22 -
EXHIBIT 31.2: RULE 13A-14(A) / 15D-14(A) CERTIFICATION OF THE CHIEF FINANCIAL
OFFICER
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James A. Dowd, Senior Vice President and Chief Financial Officer, certify
that:
1. I have reviewed this 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting, to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) 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
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
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.
May 15, 2008 /s/ James A. Dowd
--------------------
James A. Dowd
Senior Vice President and Chief Financial Officer
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EXHIBIT 32.1 SECTION 1350 CERTIFICATION OF THE CHIEF EXECUTIVE AND CHIEF
FINANCIAL OFFICER
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Thomas W. Schneider, President and Chief Executive Officer, and James A. Dowd,
Senior Vice President and Chief Financial Officer of Pathfinder Bancorp, Inc.
(the "Company"), each certify in his capacity as an officer of the Company that
he has reviewed the Quarterly Report of the Company on Form 10-Q for the quarter
ended March 31, 2008 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.
May 15, 2008 /s/ Thomas W. Schneider
--------------------------
Thomas W. Schneider
President and Chief Executive Officer
May 15, 2008 /s/ James A. Dowd
--------------------
James A. Dowd
Senior Vice President and Chief Financial Officer
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